[Federal Register Volume 77, Number 176 (Tuesday, September 11, 2012)]
[Notices]
[Pages 55885-55887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-22219]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67784; File No. SR-FINRA-2012-040]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the
By-Laws of FINRA Dispute Resolution, Inc. To Clarify That Services
Provided by Mediators Should Not Cause Them To Be Classified as
Industry Members Under the By-Laws
September 5, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 23, 2012, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), the proposed rule change as described in Items I,
II and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend the By-Laws of FINRA Dispute
Resolution, Inc. (By-Laws) to clarify that services provided by
mediators, when acting in such capacity and not representing parties in
mediation, should not cause the individuals to be classified as
Industry Members under the By-Laws.
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A, B
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
FINRA believes that mediators who are otherwise qualified should be
eligible to become Public Members of the National Arbitration and
Mediation Committee (NAMC), a committee appointed by the Board of
Directors of FINRA Dispute Resolution, Inc. (FINRA DR). Currently, they
cannot because of the definitions of Industry Member \3\ and Public
Member \4\ in the FINRA Dispute Resolution By-Laws (By-Laws).
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\3\ See Dispute Resolution By-Laws, Article I(s) (Definitions--
Industry Member).
\4\ See Dispute Resolution By-Laws, Article I(x) (Definitions--
Public Member).
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In a FINRA mediation, all parties agree on the selection of a
mediator, agree on the compensation of the mediator, and agree on how
to allocate the mediator's compensation among the parties. Thus, a
mediator receives part of the compensation in each case from an
industry party. However, for mediations to which investors are parties,
mediators represent neither the investors nor the FINRA-registered
individuals or entities. Similarly, for mediations involving industry
parties only, mediators represent neither the FINRA-registered
individuals nor entities. In both types of mediations, FINRA believes
that the revenue mediators receive from FINRA-registered individuals or
firms for their mediation activity should not prevent mediators from
being classified as Public Members under the By-Laws.
Pursuant to the Plan of Allocation and Delegation of Functions by
FINRA to Subsidiaries (Delegation Plan), the NAMC has the powers and
authority pursuant to FINRA's Rules to advise the FINRA DR Board on the
development and maintenance of an equitable and efficient system of
dispute resolution that will equally serve the needs of public
investors and FINRA members, to monitor rules and procedures governing
the conduct of dispute resolution, and to have such other powers and
authority as is necessary to effectuate the purposes of FINRA's
Rules.\5\ The Delegation Plan provides that the FINRA DR Board must
appoint the NAMC, whose membership must
[[Page 55886]]
consist of a majority of Public Members.\6\
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\5\ See Plan of Allocation and Delegation of Functions by FINRA
to Subsidiaries--NASD Dispute Resolution, Sec. III(C)(1)(b).
\6\ Id. See also Rules 12102(a) and 12102(a)(1) of the Code of
Arbitration Procedure for Customer Disputes (``Customer Code'') and
Rules 13102(a) and 13102(a)(1) of the Code of Arbitration Procedure
for Industry Disputes (``Industry Code'').
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Currently, under the By-Laws, a mediator could be classified as an
Industry Member rather than a Public Member for purposes of Committee
participation because of the services provided by a mediator to an
industry party. Mediators are neutrals and do not represent any party
in the mediation. In FINRA's mediation forum, mediators are retained
only by agreement of all parties to a dispute rather than by any one
party. Further, the parties compensate mediators jointly pursuant to
that agreement. While mediators derive some of their revenue from
brokers or dealers, FINRA does not believe the compensation earned in
the capacity as a mediator compromises the mediator's neutrality. As
such, FINRA believes that the unique role played by mediators should be
recognized in the By-Laws. Further, FINRA believes that mediation
activity in cases involving industry parties should not prevent
individuals from being classified as Public Members under the By-Laws.
FINRA is, therefore, proposing to amend the definitions of Industry
Members \7\ and Public Members \8\ in the By-Laws so that services
provided by mediators, while acting in such capacity and not
representing parties in mediation, would not cause these individuals to
be classified as Industry Members.
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\7\ See note 3, supra.
\8\ See note 4, supra.
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Proposal To Amend the By-Laws
FINRA is proposing to amend the definitions of Industry Member \9\
and Public Member \10\ under the By-Laws. These amendments would create
an exception for any services provided by mediators in the capacity as
a mediator of disputes involving a broker or dealer and not
representing any party in such mediations, so that mediators may be
eligible to serve as Public Members of the NAMC if they are not
otherwise disqualified from being classified as Public Members. Parties
in a mediation select their mediator by agreement. The mediators work
with all parties simultaneously to help them resolve a dispute. The
mediator has no power to decide the outcome and does not represent any
party in the matter.
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\9\ See note 3, supra.
\10\ See note 4, supra.
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The proposal would amend two parts of the definition of Industry
Member.\11\ First, Article I(s)(4) of the By-Laws defines an Industry
Member as a committee member who provides professional services to
brokers or dealers, and such services constitute 20 percent or more of
the professional revenues received by the Director or member or 20
percent or more of the gross revenues received by the Director's or
member's firm or partnership. The proposal would amend the definition
to exempt any services provided in the capacity as a mediator of
disputes involving a broker or dealer and not representing any party in
such mediations from being considered professional services provided to
brokers or dealers.
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\11\ The By-Laws define an Industry Member using six criteria.
The proposal would amend two of them, subsections (4) and (5). See
Dispute Resolution By-Laws, Article I(s) (Definitions--Industry
Member).
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Second, Article I(s)(5) of the By-Laws defines an Industry Member
as a committee member who provides professional services to a director,
officer, or employee of a broker, dealer, or corporation that owns 50
percent or more of the voting stock of a broker or dealer, and such
services relate to the director's, officer's, or employee's
professional capacity and constitute 20 percent or more of the
professional revenues received by the Director or member or 20 percent
or more of the gross revenues received by the Director's or member's
firm or partnership. Similar to the change in Article I(s)(4) described
in the paragraph above, FINRA proposes to amend the definition to
exempt any services provided in the capacity as a mediator of disputes
involving a director, officer, or employee as described in this
definition and not representing any party in such mediations from being
considered professional services provided to such individuals.
The proposed revisions to the definition of Industry Member would
establish that any services provided in the capacity as a mediator of
disputes involving a broker or dealer and not representing any party in
such mediations would not be considered services provided to brokers or
dealers or affiliated individuals for purposes of measuring the
professional revenues received by the NAMC member. FINRA believes the
proposed amendments to the Industry Member definition would acknowledge
the capacity in which mediators derive revenue from parties, including
industry parties, yet recognize that the revenue earned in the capacity
would not compromise the person's neutrality.
The proposal would also amend the definition of Public Member. The
By-Laws define a Public Member as a committee member who has no
material business relationship with a broker or dealer or a self-
regulatory organization registered under the Act (other than serving as
a public director or public member on a committee of such a self-
regulatory organization). The proposal would amend the definition by
adding language to the parenthetical to clarify that acting in the
capacity as a mediator of disputes involving a broker or dealer and not
representing any party in such mediations is not considered a material
business relationship with a broker or dealer. FINRA believes that the
proposed amendment to the Public Member definition would recognize that
a mediator's service as a mediator would not, in itself, create any
relationships with the securities industry that could compromise the
mediator's independent judgment or decision-making.
Moreover, the proposed revisions to the By-Law definitions would
incorporate current rule language from the definitions of non-public
and public arbitrators found in the Code of Arbitration Procedure for
Customer Disputes and the Code of Arbitration Procedure for Industry
Disputes. In 2005, the SEC approved the then-NASD's new Interpretive
Material (IM) 10308 which stated, among other things, that mediation
fees received by mediators who are also arbitrators shall not be
included in the definition of ``revenue'' for purposes of Rule
10308(a)(5)(A)(iv), so long as the mediator is acting in the capacity
of a mediator and is not representing a party in the mediation.\12\
FINRA believes that using current rule language to amend its By-Laws,
as proposed, would facilitate the uniform interpretation and
application of its rules.
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\12\ See Securities Exchange Act Rel. No. 51325 (Mar. 7, 2005),
70 FR 12522 (Mar. 14, 2005). The IM was renumbered and the rule
language modified and added to the definitions of non-public and
public arbitrator when FINRA adopted the revisions to the Customer
and Industry Codes. See Securities Exchange Act Rel. No. 55158 (Jan.
24, 2007), 72 FR 4574 (Jan. 31, 2007) (File Nos. SR-NASD-2003-158
and SR-NASD-2004-011).
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2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A of the Act, including Section 15A(b)(2) of
the Act, in that it provides for the organization of FINRA and FINRA
Dispute Resolution in a manner that will permit FINRA to carry
[[Page 55887]]
out the purposes of the Act, to comply with the Act, and to enforce
compliance by FINRA members and persons associated with FINRA members
with the Act, the rules and regulations thereunder, FINRA rules and the
federal securities laws. FINRA further believes that the proposed rule
change is consistent with Section 15A(b)(4) of the Act, which requires,
among other things, that FINRA's rules assure a fair representation of
its members in the selection of its directors and administration of its
affairs and provides that one or more directors shall be representative
of issuers and investors and not be associated with a member of FINRA,
broker or dealer. FINRA believes that the proposal would assure fair
administration of its Dispute Resolution affairs by providing another
source of qualified and experienced candidates from which to select
public members for the NAMC.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition or capital formation that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.\13\
Further, FINRA believes that the proposal will promote efficiency in
the arbitration forum as it will provide another source of qualified
and experienced candidates from which to select public members for the
NAMC.
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\13\ 15 U.S.C. 78c(f).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2012-040 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2012-040. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2012-040 and should be
submitted on or before October 2, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22219 Filed 9-10-12; 8:45 am]
BILLING CODE 8011-01-P