[Federal Register Volume 80, Number 197 (Tuesday, October 13, 2015)]
[Notices]
[Pages 61545-61551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25861]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76082; File No. SR-FINRA-2015-034]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Merge 
FINRA Dispute Resolution, Inc. Into and With FINRA Regulation, Inc.

October 6, 2015.
    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 September 29, 2015, 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, 
and II 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 merge its dispute resolution subsidiary, 
FINRA Dispute Resolution, Inc. (``FINRA Dispute Resolution'') into and 
with its regulatory subsidiary, FINRA Regulation, Inc. (``FINRA 
Regulation''). To implement the merger, FINRA would make conforming 
amendments to the Plan of Allocation and Delegation of Functions by 
NASD to Subsidiaries (``Delegation Plan''); amend the By-Laws of FINRA 
Regulation (``FINRA Regulation By-Laws'') to make relevant conforming 
amendments and to incorporate substantive provisions from the By-Laws 
of FINRA Dispute Resolution (``FINRA Dispute Resolution By-Laws'') that 
apply to the dispute resolution forum only; delete the FINRA Dispute 
Resolution By-Laws in their entirety; and make conforming amendments to 
FINRA rules.\3\ The proposed rule change would also amend the FINRA 
Regulation By-Laws to increase the total number of directors who could 
serve on the FINRA Regulation board. FINRA's existing dispute 
resolution program would continue to operate as a separate department 
within FINRA Regulation, and would be referred to as the Office of 
Dispute Resolution.
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    \3\ The current FINRA rulebook consists of: (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from New York Stock Exchange 
LLC (``NYSE'') (``Incorporated NYSE Rules'') (together, the NASD 
Rules and Incorporated NYSE Rules are referred to as the 
``Transitional Rulebook''). While the NASD Rules generally apply to 
all FINRA members, the Incorporated NYSE Rules apply only to those 
members of FINRA that are also members of the NYSE (``Dual 
Members''). The FINRA Rules apply to all FINRA members, unless such 
rules have a more limited application by their terms. For more 
information about the rulebook consolidation process, see 
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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    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.

[[Page 61546]]

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
    FINRA is proposing to merge FINRA Dispute Resolution into FINRA 
Regulation. To undertake the merger, FINRA would make conforming 
amendments to the Delegation Plan, amend the FINRA Regulation By-Laws 
to incorporate substantive and unique provisions from the FINRA Dispute 
Resolution By-Laws and to make other conforming amendments, delete the 
FINRA Dispute Resolution By-Laws in their entirety, and make conforming 
amendments to FINRA rules. The proposed rule change would also amend 
the FINRA Regulation By-Laws to increase the total number of directors 
who could serve on the FINRA Regulation board in order to provide 
additional flexibility to meet the compositional requirements under the 
FINRA Regulation By-Laws.
I. Background
    Prior to 1996, the National Association of Securities Dealers, Inc. 
(``NASD'') Arbitration Department operated the NASD's arbitration and 
mediation programs. In 1996, upon the combined recommendations of two 
committees (the ``Ruder Task Force'' and the ``Rudman Committee'') 
formed by the NASD of individuals with significant securities industry 
and NASD governance experience,\4\ NASD reorganized as a parent 
corporation with two operating subsidiaries: The Nasdaq Stock Market, 
Inc. (``Nasdaq''), which was charged with operating the Nasdaq market, 
and NASD Regulation, Inc. (``NASD Regulation''), focused on regulatory 
and investor protection issues. At the time of the reorganization, the 
Arbitration Department was placed within NASD Regulation. The name of 
the Arbitration Department was subsequently changed to the Office of 
Dispute Resolution (``ODR'') to reflect the broader range of dispute 
resolution services provided.\5\
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    \4\ In September 1994, the NASD established the Ruder Task Force 
to study NASD arbitration and recommend improvements. The Ruder Task 
Force issued a report recommending, among other things, that the 
dispute resolution program be housed either in the NASD parent or in 
NASD Regulation. See The Arbitration Policy Task Force Report--A 
Report Card at 26, available on FINRA's Web site at: http://www.finra.org/sites/default/files/Industry/p036466.pdf. 
Subsequently, [sic] the Rudman Committee recommended that the 
Arbitration Department be placed in NASD Regulation. See Report of 
the NASD Select Committee on Structure and Governance to the NASD 
Board of Governors (``Rudman Report'') at R-8. See also Securities 
Exchange Act Release No. 41971 (September 30, 1999), 64 FR 55793, 
55794 (October 14, 1999) (Order Approving File No. SR-NASD-99-21).
    \5\ See Securities Exchange Act Release No. 41971 (September 30, 
1999), 64 FR 55793, 55794 (October 14, 1999) (Order Approving File 
No. SR-NASD-99-21).
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    In 1999, NASD decided to move ODR into a separate subsidiary, NASD 
Dispute Resolution, Inc., that would focus solely on administering its 
dispute resolution program, which it believed would further strengthen 
the independence and credibility of the arbitration and mediation 
functions. NASD believed that the new dispute resolution subsidiary 
would benefit from the perception that it was separate and distinct 
from other corporate entities.\6\ In 2000, the NASD began a 
restructuring process to separate Nasdaq from NASD. The separation of 
Nasdaq from NASD was completed in 2006.\7\
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    \6\ See supra note 5.
    \7\ On November 21, 2006, the SEC approved the separation of 
Nasdaq from NASD upon the operation of the Nasdaq Exchange as a 
national securities exchange for non-Nasdaq exchange-listed 
securities. See Securities Exchange Act Release No. 54798 (November 
21, 2006), 71 FR 69156 (November 29, 2006) (Order Approving File No. 
SR-NASD-2006-104).
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    FINRA \8\ believes there is no longer a need to maintain separate 
subsidiaries to execute its regulatory and dispute resolution 
functions. The proposed merger would align the corporate legal 
structure with current public perception and organizational practice. 
It would also reduce unnecessary administrative burdens required to 
maintain separate legal entities. Finally, while the proposed rule 
change would change FINRA Dispute Resolution's corporate status, it 
would not affect the services and benefits provided by or costs to use 
the dispute resolution forum, its corporate governance \9\ or 
oversight.
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    \8\ On July 30, 2007, NASD and NYSE consolidated their member 
firm regulation, enforcement and dispute resolution operations into 
a combined organization, FINRA. See Securities Exchange Act Release 
No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007), as amended 
by Securities Exchange Act Release No. 56145A (May 30, 2008), 73 FR 
32377 (June 6, 2008) (Order Approving File No. SR-NASD-2007-023).
    \9\ The proposed rule change would amend the FINRA Regulation 
corporate governance structure to add two board seats. See 
discussion under section II.B., Proposed Rule Change, Amendments to 
the FINRA Regulation By-Laws, Article IV Board of Directors, Number 
of Directors, infra pages 44-45 [sic].
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    The proposed merger would align the legal structure with the 
public's perception of FINRA as well as its operational realities. From 
the public's perspective, FINRA, Inc., FINRA Regulation and FINRA 
Dispute Resolution have the appearance of a single organization. 
FINRA's Annual Report is a consolidated report that includes all FINRA 
operations, and all press releases and communications are issued by 
FINRA.
    Operationally, the three corporate entities largely function as a 
single organization. The entities share many administrative and support 
functions including, for example, Corporate Communications and 
Government Relations, Corporate Real Estate and Corporate Security, 
Finance and Purchasing, Human Resources, Internal Audit, Legal, 
Meetings and Travel, Office of the Corporate Secretary, Office of the 
Ombudsman and Technology. These integrated functions promote efficient 
operations and conserve financial resources. In addition, the 
operational cohesiveness furthers FINRA's mission of protecting 
investors. FINRA Dispute Resolution staff, for example, works with the 
Department of Enforcement to identify misconduct by individuals or 
firms involved in arbitration cases that could justify further action.
    There are also significant shared resources across entities in the 
areas of corporate governance and funding. With respect to governance, 
members of the FINRA Board's Regulatory Policy Committee currently 
serve as the directors of the boards of both FINRA Regulation and FINRA 
Dispute Resolution.\10\ Regarding funding, FINRA Dispute Resolution is 
not self-supporting and fees received from parties who use the 
arbitration and mediation programs are not sufficient to fund the 
forum's arbitration and mediation activities. Under the proposed 
merger, to supplement the fees collected from forum users, FINRA would 
continue to allocate revenues, as

[[Page 61547]]

necessary, from the overall FINRA enterprise, which would include 
revenue derived from member assessments, various fees and charges, and 
disciplinary fines with some exceptions.
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    \10\ See Securities Exchange Act Release No. 61575 (February 23, 
2010), 75 FR 9459, 9460 (March 2, 2010) (Notice of Filing File No. 
SR-FINRA-2010-007). Both boards consist of a majority of public 
directors. See By-Laws of FINRA Dispute Resolution, Inc., Article 
IV, Section 4.3(a) and By-Laws of FINRA Regulation, Inc., Article 
IV, Section 4.3(a).
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    In addition to aligning the corporate structure with operational 
realities, the proposed merger would reduce the considerable 
administrative duplication associated with maintaining the three 
distinct corporate entities. From a regulatory perspective, the three 
corporate entities have separate reporting requirements and Federal and 
state taxes, and are, therefore, treated as individual entities.\11\ By 
merging FINRA Dispute Resolution into FINRA Regulation, FINRA would 
eliminate the need to file numerous tax filings each year, including 
multiple state tax and information returns, sales tax returns 
(including some monthly and quarterly filings), property tax returns, 
and many state registrations and annual reports. Moreover, merging the 
two subsidiaries would eliminate a separate payroll entity, which would 
remove the need for separate compensation and benefit accounting 
protocols. Thus, a merger of the subsidiaries would allow FINRA to 
lower FINRA's expenses and more efficiently use staff resources.
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    \11\ For example, by maintaining separate entities, FINRA has 
been required to submit separate payroll, tax, and compliance 
filings for each corporate entity in many states.
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    Although a merger between FINRA Dispute Resolution and FINRA 
Regulation would change FINRA Dispute Resolution's corporate status, it 
would not affect the services and benefits provided by or the costs to 
use the dispute resolution forum, its corporate governance or 
oversight. Over the past 15 years, FINRA, as a single organization, has 
operated the largest securities dispute resolution forum in the world--
through its arbitration and mediation services--to assist in the 
resolution of monetary and business disputes between and among 
investors, brokerage firms and individual brokers. FINRA's Dispute 
Resolution program provides investors and markets with a fair, 
efficient and economical alternative to costly and complex litigation 
programs, which are often cost-prohibitive for investors with small 
claims.
    The FINRA Dispute Resolution program has several features that 
distinguish it from other private arbitration forums and further 
promote investor protection and market integrity. For example, the 
forum charges significantly lower arbitration fees for investors, gives 
investors the choice of an all-public arbitrator panel, uses an 
investor-friendly discovery guide, and offers 71 hearing locations, 
including at least one in every state, Puerto Rico and London, United 
Kingdom. Also, FINRA has the authority to suspend or cancel the 
membership of firms and suspend registered representatives who fail to 
pay arbitration awards or agreed-upon settlements.\12\ Further, FINRA 
Dispute Resolution continuously recruits qualified individuals to 
improve its arbitrator and mediator rosters, while closely monitoring 
and evaluating the performance of existing arbitrators and mediators. 
These benefits and services, among others, would not be disrupted by 
the merger.
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    \12\ See By-Laws of the Corporation, Article VI, section 3 and 
Rule 9554.
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    Similarly, the merger would not have a practical impact on 
corporate governance involving FINRA Dispute Resolution. Members of the 
FINRA Board's Regulatory Policy Committee currently serve as the 
directors of both the FINRA Regulation and FINRA Dispute Resolution 
boards.\13\ The FINRA Regulation board would continue to consist of a 
majority of public board members.\14\ In addition, FINRA would maintain 
the National Arbitration and Mediation Committee (``NAMC''), which is a 
Board-appointed advisory committee on arbitration matters.\15\ Non-
industry members would continue to compose at least 50 percent of the 
NAMC.\16\
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    \13\ See Securities Exchange Act Release No. 61575 (February 23, 
2010), 75 FR 9459, 9460 (March 2, 2010) (Notice of Filing File No. 
SR-FINRA-2010-007).
    \14\ See By-Laws of FINRA Dispute Resolution, Inc., Article IV, 
section 4.3(a) and By-Laws of FINRA Regulation, Inc., Article IV, 
section 4.3(a).
    \15\ See Rules 12102 and 13102. See also section III(C) of the 
Delegation Plan. FINRA is proposing to transfer current section 
III(C)(1) of the Delegation Plan into section II(C) of the 
Delegation Plan.
    \16\ See supra note 15.
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    Moreover, the dispute resolution forum would continue to be subject 
to the same SEC oversight as other departments of FINRA, which would 
include the requirement to file all By-Law and rule changes with the 
SEC. Thus, the arbitration program and services would continue to be 
governed by the Codes of Arbitration Procedure,\17\ and the mediation 
program and services by the Code of Mediation Procedure.\18\ Further, 
the forum would continue to be subject to inspections by the SEC and by 
the Government Accountability Office, which performs audits at the 
request of the United States Congress.
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    \17\ See Rule 12000 and 13000 Series.
    \18\ See Rule 14000 Series.
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I. [sic] Proposed Rule Change
    FINRA is proposing to merge FINRA Dispute Resolution into FINRA 
Regulation. FINRA would make conforming amendments to the Delegation 
Plan, amend the FINRA Regulation By-Laws to incorporate substantive and 
unique provisions from the FINRA Dispute Resolution By-Laws and to make 
other conforming amendments, delete the FINRA Dispute Resolution By-
Laws, and make conforming amendments to FINRA rules. The proposed rule 
change would also amend the FINRA Regulation By-Laws to increase the 
total number of directors who could serve on the FINRA Regulation 
board.
A. Conforming Amendments to the Delegation Plan
    FINRA is proposing to make conforming amendments throughout the 
Delegation Plan to remove references to ``NASD'' and ``Rules of the 
Association'' and replace them with references to ``FINRA'' and ``FINRA 
rules,'' respectively.\19\ In addition, the proposed rule change would 
change the word ``subsidiaries'' or ``subsidiary'' to ``FINRA 
Regulation'' to indicate that FINRA Regulation would remain at the 
conclusion of the merger. Finally, FINRA is proposing to remove 
references to section III, the section of the Delegation Plan that 
pertains to FINRA Dispute Resolution, as that section will no longer 
exist following the merger.
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    \19\ ``FINRA rules'' means the current FINRA rulebook. See supra 
notes 3 and 8.
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Section I--FINRA, Inc.
    Section I of the Delegation Plan provides responsibility for the 
rules and regulations of the Association and its operation and 
administration to FINRA, Inc. Under section I(B), the proposed rule 
change would remove subsections 5 and 6 because they refer to actions 
taken between FINRA Regulation and FINRA Dispute Resolution. The 
remaining subsections would be re-numbered. In re-numbered subsection 
5, FINRA is proposing to remove the word ``common,'' as FINRA 
Regulation would no longer share overhead and technology with FINRA 
Dispute Resolution as a separate subsidiary. In re-numbered subsection 
6, FINRA is proposing to change the reference to the Office of Internal 
Review to the Office of Internal Audit to reflect a name change.
    In section I(D), the proposed rule change would replace the 
reference to ``4000A'' with ``6200,'' to reflect the transfer and re-
numbering of the rule

[[Page 61548]]

series governing the Alternative Display Facility into the Consolidated 
FINRA Rulebook.\20\
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    \20\ See Securities Exchange Act Release No. 58643 (September 
25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving File Nos. 
SR-FINRA-2008-021; SR-FINRA-2008-022; SR-FINRA-2008-026; SR-FINRA-
2008-028 and SR-FINRA-2008-029).
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Section II--FINRA Regulation, Inc.
Amendments to Transfer Provisions of Section III into Section II
    Section II of the Delegation Plan delegates responsibilities and 
functions to FINRA Regulation. FINRA is proposing to transfer several 
provisions from section III, which pertains to FINRA Dispute 
Resolution, into section II.
    First, under section II(A)(1), FINRA is proposing to amend 
subsection (a) to add ``and dispute resolution programs,'' so that the 
function of establishing and interpreting rules and regulations would 
also apply to dispute resolution programs.
    Second, the proposed rule change would amend subsection (b) to add 
``arbitration, mediation or other resolution of disputes among and 
between FINRA members, associated persons and customers,'' so that 
FINRA Regulation would have the authority to develop and adopt 
appropriate and necessary rule changes related to the dispute 
resolution forum.
    Third, FINRA is proposing to amend section II(A)(1) to add the 
function that would permit FINRA Regulation to ``conduct arbitrations, 
mediations, and other dispute resolution programs.'' The provision 
would be labeled as subsection (n). The remaining subsections would be 
re-numbered.
    Fourth, the proposed rule change would amend re-numbered subsection 
(q), which addresses the function of establishing and assessing fees 
and other charges on FINRA members, persons associated with members, 
and others using the services or facilities of FINRA or FINRA 
Regulation, to add ``which includes the dispute resolution forum.''
    Fifth, the proposed rule change would amend re-numbered subsection 
(r) to explicitly add ``dispute resolution'' to the list of areas in 
which FINRA Regulation may manage external relations.
    Finally, FINRA is proposing to transfer in its entirety current 
section III(C)(1) of the Delegation Plan, which governs the NAMC, into 
section II(C) of the Delegation Plan. Currently, section III(C)(1) of 
the Delegation Plan delegates authority to the NAMC to advise the FINRA 
Dispute Resolution board on issues relating to dispute resolution.\21\ 
Under the Codes of Arbitration Procedure, the NAMC has the authority to 
recommend rules, regulations, procedures and amendments relating to 
arbitration, mediation, and other dispute resolution matters to the 
FINRA Board.\22\ The NAMC also has the authority and responsibility to 
establish and maintain rosters of neutrals composed of persons from 
within and outside of the securities industry.\23\ The NAMC's 
authority, role and its responsibilities would not change under the 
proposed rule change.
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    \21\ See section III(C) of the Plan of Allocation and Delegation 
of Functions by NASD to Subsidiaries.
    \22\ See Rules 12102 and 13102.
    \23\ See supra note 22.
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Other Conforming Amendments to Section II
    Under section II(C)(2)(a)(iii), FINRA is proposing to replace the 
reference to ``Rule 11890'' with ``the Rule 11000 Series.'' The Rule 
11000 Series refers to the Uniform Practice Code and includes the new 
Rule 11890 Series governing clearly erroneous transactions that FINRA 
moved into the Consolidated FINRA Rulebook.\24\
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    \24\ See Securities Exchange Act Release No. 61080 (December 1, 
2009), 74 FR 64117 (December 7, 2009) (Order Approving File No. SR-
FINRA-2009-068).
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Section III--NASD Dispute Resolution, Inc.
    FINRA is proposing to delete section III of the Delegation Plan 
because, as discussed above, the provisions that apply to dispute 
resolution only would be incorporated into amended section II of the 
Delegation Plan.
B. Amendments to the FINRA Regulation By-Laws
    FINRA is proposing to amend the FINRA Regulation By-Laws to 
incorporate substantive and unique provisions from the FINRA Dispute 
Resolution By-Laws. Where differences exist in the FINRA Dispute 
Resolution By-Laws that would not be incorporated into the FINRA 
Regulation By-Laws under the proposed rule change, such differences are 
non-substantive in nature or would not otherwise affect the governance 
or operation of the dispute resolution program.\25\ FINRA would also 
make other conforming amendments to the FINRA Regulation By-Laws.
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    \25\ For example, although minor differences exist between 
sections 4.13(f) of the FINRA Regulation By-Laws and Dispute 
Regulation By-Laws, the proposed rule change would retain the FINRA 
Regulation By-Laws' section relating to the composition of an 
Executive Committee. See By-Laws of FINRA Regulation, Inc., Article 
4, section 4.13(f). This provision of the FINRA Regulation By-Laws 
clarifies that Executive Committee members must be directors and is 
consistent with FINRA's practice and intent. See Securities Exchange 
Act Release No. 62156 (May 24, 2010), 75 FR 30453, 30456 (June 1, 
2010) (Order Approving File No. SR-FINRA-2010-007).
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Article I Definitions
Electronic Transmission
    FINRA is proposing to add the term ``electronic transmission'' to 
Article I of the By-Laws of FINRA Regulation in light of the common 
usage of electronic transmission as a means of communication and 
references to such term in the By-Laws of FINRA Regulation.\26\ The 
proposed rule change would relocate the definition of the term, without 
change, from current section 8.19(a) of the By-Laws of FINRA 
Regulation. Accordingly, the term ``electronic transmission'' would 
mean any form of communication, not directly involving the physical 
transmission of paper, that creates a record that may be retained, 
retrieved and reviewed by a recipient thereof, and that may be directly 
reproduced in paper form by such a recipient through an automated 
process.\27\
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    \26\ The term ``electronic transmission'' would be added as 
proposed Article I(o). Article I(p) through (r) would be re-
numbered. See also sections 4.12, 8.5, 8.19 and 12.3 of the By-Laws 
of FINRA Regulation for references to the term ``electronic 
transmission.''
    \27\ The FINRA Dispute Resolution By-Laws contain a slightly 
different definition of ``electronic transmission''; however, 
because the difference does not have a meaningful impact on the 
application of the term for purposes of the FINRA Regulation By-
Laws, FINRA proposes to retain the definition currently used in the 
FINRA Regulation By-Laws. See By-Laws of FINRA Dispute Resolution 
Inc., Article I(k).
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FINRA Member and Public Member
    FINRA is proposing to expand the term ``FINRA member'' in Article 
I(s) of the By-Laws of FINRA Regulation to incorporate a definition 
that applies to the dispute resolution forum. Specifically, the added 
language would further define a ``FINRA member'' as ``any broker or 
dealer admitted to membership in FINRA, whether or not the membership 
has been terminated or cancelled; and any broker or dealer admitted to 
membership in a self-regulatory organization that, with FINRA consent, 
has required its members to arbitrate pursuant to the Code of 
Arbitration Procedure for Customer Disputes or the Code of Arbitration 
Procedure for Industry Disputes and/or to be treated as members of 
FINRA for purposes of the Codes of Arbitration Procedure, whether or 
not the membership has been terminated or cancelled.'' The SEC

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approved a similar definition that was added to the By-Laws of FINRA 
Dispute Resolution in 2010.\28\ Under the proposed rule change, the 
expanded definition of FINRA member would apply only to the Codes of 
Arbitration Procedure.\29\
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    \28\ See Securities Exchange Act Release No. 62156 (May 24, 
2010), 75 FR 30453, 30454 (June 1, 2010) (Order Approving File No. 
SR-FINRA-2010-007).
    \29\ See Rule 12000 and 13000 Series.
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    The proposed rule change would also amend the definitions of 
Industry Member \30\ and Public Member \31\ under the FINRA Regulation 
By-Laws to reflect unique provisions in the Dispute Resolution By-Laws. 
In 2012, the SEC approved amendments to the FINRA Dispute Resolution 
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.\32\ The purpose of the amendments was to allow mediators, who 
are otherwise qualified, to be eligible to become Public Members of the 
NAMC. The proposed rule change would incorporate these amendments into 
two parts of the definition of Industry Member.\33\ First, Article 
I(x)(4) of the FINRA Regulation By-Laws defines an Industry Member as a 
National Adjudicatory Council (``NAC'') or 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 member or 20 percent or more of the gross revenues received by the 
member's firm or partnership. The proposed rule change would amend the 
definition to clarify that, for purposes of determining membership on 
the NAMC, 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 professional services provided 
to brokers or dealers.
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    \30\ See By-Laws of FINRA Regulation, Inc., Article I(x).
    \31\ See By-Laws of FINRA Regulation, Inc., Article I(hh).
    \32\ See Securities Exchange Act Release No. 68142 (November 2, 
2012), 77 FR 67038 (November 8, 2012) (Order Approving File No. SR-
FINRA-2012-040).
    \33\ The By-Laws define an Industry Member using six criteria. 
The proposal would amend two of them, subsections (4) and (5). See 
supra note 30.
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    Second, Article I(x)(5) of the By-Laws defines an Industry Member 
as a NAC or 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 member or 20 percent or more of 
the gross revenues received by the member's firm or partnership. 
Similar to the change in Article I(x)(4) described in the paragraph 
above, FINRA proposes to amend the definition to clarify that, for 
purposes of determining membership on the NAMC, 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 would not be considered professional services 
provided to such individuals.
    The proposed rule change would also amend the definition of Public 
Member. The FINRA Regulation By-Laws define a Public Member as a NAC or 
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 proposed rule 
change would amend the definition by adding language to the 
parenthetical to clarify that, for the purposes of determining 
membership on the NAMC, 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.
Other Conforming Changes
    The proposed rule change would amend the definitions of Industry 
Director and Public Director in Article I(w) and Article I(gg), 
respectively, to clarify that a director is a member of the board of 
directors of FINRA Regulation. The proposed rule change would also 
delete Article I(r) to eliminate the reference to FINRA Dispute 
Resolution, Inc.
Article II Offices
    The proposed rule change would amend the FINRA Regulation By-Laws 
to reflect a change in the address of FINRA Regulation's registered 
office and its registered agent from Corporate Creations Network Inc., 
3411 Silverside Road, Rodney Building #104, Wilmington, Delaware 19810, 
to Corporation Service Company, 2711 Centerville Road, Suite 400, 
Wilmington, New Castle County, Delaware 19808. The FINRA Board approved 
this change at its February 2015 meeting.
Article IV Board of Directors
Number of Directors
    With respect to governance, as noted above, members of the FINRA 
Board's Regulatory Policy Committee currently serve as the directors of 
the board of FINRA Regulation.\34\ Accordingly, in appointing governors 
of the FINRA Board to the Regulatory Policy Committee, FINRA must 
adhere to the compositional requirements for the Board of Directors of 
FINRA Regulation. In this regard, section 4.3(a) of the FINRA 
Regulation By-Laws provides, among other things, that the FINRA 
Regulation board must consist of at least two and not less than 20 
percent of directors who are Small Firm, Mid-Size Firm or Large Firm 
Governors. In addition, public directors must comprise a majority of 
the FINRA Regulation board.\35\
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    \34\ See supra note 10.
    \35\ See Article IV, section 4.3(a) of the FINRA Regulation By-
Laws.
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    Currently, the number of FINRA Regulation directors may not exceed 
15.\36\ FINRA is proposing to amend section 4.2 of the FINRA Regulation 
By-Laws to increase the total number of directors who could serve on 
the FINRA Regulation board from 15 to 17. FINRA believes that 
increasing the maximum number of FINRA Regulation board seats would 
provide it with additional flexibility to manage its board committee 
assignments and meet the compositional requirements under the FINRA 
Regulation By-Laws. For example, when the FINRA Regulation board is at 
its current maximum limit of 15 directors, if FINRA were to add a new 
industry director to the FINRA Regulation board, it would need to 
remove an existing industry director to maintain a majority of public 
directors on the board. In this example, increasing the maximum number 
of board seats to 17 would enable FINRA to add a public director to the 
FINRA Regulation board rather than remove an existing industry 
director, and thus maintain the required composition of FINRA 
Regulation board members.
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    \36\ See Article IV, section 4.2 of the FINRA Regulation By-
Laws.
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Regulation
    FINRA would amend section 4.10 of the FINRA Regulation By-Laws to 
insert a reference to the Delegation Plan as another governing document 
with which the board must comply when adopting rules, regulations, and 
requirements for the conduct of the business and management of FINRA 
Regulation. This change would conform the language in this section to 
that of

[[Page 61550]]

section 4.10 of the FINRA Dispute Resolution By-Laws.
Conflicts of Interest; Contracts and Transactions Involving Directors
    Under the proposed rule change, FINRA would amend section 4.14(b) 
to remove a reference to FINRA Dispute Resolution.
Article XI Capital Stock
    FINRA is proposing to amend section 11.3(b) to insert the word 
``stock'' in the sentence to clarify the type of certificate to which 
the section refers. This change would conform the language in this 
section of the FINRA Regulation By-Laws to that of section 8.3(b) of 
the FINRA Dispute Resolution By-Laws.
C. Deletion of FINRA Dispute Resolution By-Laws
    As discussed under section II(B), amendments to the FINRA 
Regulation By-Laws, above, FINRA would incorporate substantive and 
unique provisions of the FINRA Dispute Resolution By-Laws into the 
FINRA Regulation By-Laws. As discussed above, where differences exist 
in the FINRA Dispute Resolution By-Laws that would not be incorporated 
into the FINRA Regulation By-Laws under the proposed rule change, such 
differences are non-substantive in nature or would not otherwise affect 
the governance or operation of the dispute resolution program.\37\ The 
FINRA Dispute Resolution By-Laws would be deleted in their entirety.
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    \37\ See supra note 25.
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D. Conforming Amendments to the FINRA Rules
    FINRA is also proposing to amend several FINRA rules to reflect the 
proposed merger. The proposed rule change would amend Rules 0160 
(Definitions) and 0170 (Delegation, Authority and Access) to delete 
references to FINRA Dispute Resolution. In addition, the proposed rule 
change would amend Rule 0160 to add paragraphs (b)(7) and (b)(11) to 
define ``FINRA Regulation'' and ``Office of Dispute Resolution,'' 
respectively, and re-number subparagraphs accordingly. The term 
``Office of Dispute Resolution'' would mean the office within FINRA 
Regulation that assumes the responsibilities and functions relating to 
dispute resolution programs including, but not limited to, the 
arbitration, mediation, or other resolution of disputes among and 
between members, associated persons and customers. Thus, if the 
proposed rule change is approved, FINRA's existing dispute resolution 
programs would continue to operate as a separate department within 
FINRA Regulation, under the name of the Office of Dispute Resolution.
    The proposed rule change would also amend Rules 0170 (Delegation, 
Authority and Access), 6250 (Quote and Order Access Requirements), 6740 
(Termination of TRACE Service), 7180 (Termination of Access), 7280A 
(Termination of Access), 7280B (Termination of Access), 7380 
(Termination of Access), 7530 (Other Services), 9710 (Purpose), 11892 
(Clearly Erroneous Transactions in Exchange-Listed Securities) and 
11893 (Clearly Erroneous Transactions in OTC Equity Securities) to 
change references to ``subsidiaries'' or ``subsidiary'' to ``FINRA 
Regulation.''
    In addition, the proposed rule change would amend Rules 12102 
(National Arbitration and Mediation Committee), 13102 (National 
Arbitration and Mediation Committee) and 14102 (National Arbitration 
and Mediation Committee) to remove references to the section of the 
Delegation Plan that pertains to FINRA Dispute Resolution and to change 
the language to reference FINRA Regulation.
    Because the position of President of FINRA Dispute Resolution would 
no longer exist upon completion of the merger, FINRA is proposing to 
delete references to the President of FINRA Dispute Resolution in Rules 
10312 (Disclosures Required of Arbitrators and Director's Authority to 
Disqualify), 12103 (Director of Dispute Resolution), 12104 (Effect of 
Arbitration on FINRA Regulatory Activities; Arbitrator Referral During 
or at Conclusion of Case), 12203 (Denial of FINRA Forum), 12407 
(Removal of Arbitrator by Director), 13103 (Director of Dispute 
Resolution), 13104 (Effect of Arbitration on FINRA Regulatory 
Activities; Arbitrator Referral During or at Conclusion of Case), 13203 
(Denial of FINRA Forum) and 13410 (Removal of Arbitrator by Director). 
Any authority formerly granted by those rules to the President of FINRA 
Dispute Resolution would be granted to the Director of the Office of 
Dispute Resolution in light of that position's responsibility for 
overseeing the dispute resolution programs, except that in amended 
Rules 12103 (Director of Dispute Resolution) and 13103 (Director of 
Dispute Resolution), as proposed, the authority to appoint an interim 
Director if the Director is unable to perform his or her duties would 
be granted to the President of FINRA Regulation.
    Similarly, FINRA is proposing to amend Rule 10103 (Director of 
Arbitration) to provide that the President of FINRA Regulation would 
have the authority to appoint an interim Director of Arbitration if the 
Director becomes incapacitated, resigned, is removed, or if the 
Director becomes permanently or indefinitely incapable of performing 
the duties and responsibilities of the Director. References to the 
President or Executive Vice President of FINRA Dispute Resolution would 
be removed from the Rule.
    FINRA is proposing to rename FINRA Dispute Resolution as the Office 
of Dispute Resolution. The Office of Dispute Resolution would become a 
separate department within FINRA Regulation that would continue to 
administer independently FINRA's existing dispute resolution programs. 
Accordingly, the proposed rule change would amend Rules 10314 
(Initiation of Proceedings), 12100(k) (Definitions), 12103 (Director of 
Dispute Resolution), 12701 (Settlement), 13100(k) (Definitions), 13103 
(Director of Dispute Resolution), 13701 (Settlement) and 14100(c) 
(Definitions) to replace any remaining references to ``Dispute 
Resolution'' with ``Office of Dispute Resolution.''
    Finally, FINRA is proposing to amend Rules 10102 (National 
Arbitration and Mediation Committee), 12100(c) (Definitions), 13100(c) 
(Definitions), 14100(a) and (f) (Definitions) to replace references to 
``Dispute Resolution'' with ``Regulation.''
    As noted in Item 2 of this filing, if the Commission approves the 
proposed rule change, FINRA anticipates the effective date will be 
December 20, 2015. FINRA will announce the effective date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 30 days following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\38\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest; and section 15A(b)(4) of the Act,\39\ which requires 
that FINRA rules be designed to assure a fair representation of FINRA's 
members in the selection of its directors and administration of its 
affairs.
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    \38\ 15 U.S.C. 78o-3(b)(6).
    \39\ 15 U.S.C. 78o-3(b)(4).
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    FINRA believes that the proposed reorganization would align FINRA's 
corporate organizational structure with its current organizational 
practice, and,

[[Page 61551]]

in the process, would make the organization and its departments more 
efficient. The efficient use of resources enables FINRA to focus on its 
mission of investor protection.
    FINRA emphasizes that the proposed rule change would not affect the 
benefits and services provided to public investors by the dispute 
resolution forum or the costs of any party to use the dispute 
resolution forum. FINRA believes that the proposed rule change reflects 
its continued commitment to providing an effective forum for the 
resolution of disputes, claims, and controversies arising out of or in 
connection with the business of FINRA members, or arising out of the 
employment or termination of employment of associated persons with any 
member. In addition, FINRA believes that increasing the maximum number 
of FINRA Regulation board seats from 15 to 17 would provide it with 
additional flexibility to manage its board committee assignments and 
meet the compositional requirements under the FINRA Regulation By-Laws, 
continuing to assure fair representation of FINRA's members and 
maintaining the numerical dominance of public directors. Thus, FINRA 
believes that the reorganization and its continued commitment to 
dispute resolution would ensure that FINRA continues to protect 
investors and the public interest in an efficient manner.

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 that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA believes that the 
proposed merger of its two subsidiaries would align FINRA's corporate 
organizational structure with its current organizational practice. The 
proposed rule change would allow FINRA to eliminate duplicative tax and 
regulatory filings, which, in turn, would reduce its administrative 
costs and the resources spent generating and submitting these filings. 
Moreover, the proposed rule change would allow FINRA to streamline its 
procedures and re-allocate staff and financial resources to other 
areas, thereby enhancing the efficient operation of the corporation.
    While the proposed rule change would alter FINRA Dispute 
Resolution's corporate status, it would not affect the dispute 
resolution program in any substantive way. As discussed above, it would 
not affect the services and benefits provided by or the costs to use 
the dispute resolution forum. FINRA believes that the proposed rule 
change demonstrates its commitment to providing a dispute resolution 
forum that remains accessible to investors, because the benefits and 
services provided by the dispute resolution forum would continue 
unabated.

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 up to 90 days (i) as the 
Commission may designate 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-2015-034 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-034. 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 
10:00 a.m. and 3:00 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-2015-034, and should 
be submitted on or before November 3, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25861 Filed 10-9-15; 8:45 am]
BILLING CODE 8011-01-P