Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change to Amend the Codes of Arbitration Procedure to Permit Arbitrators to Make Mid-case Referrals, 58007-58011 [2010-23776]

Download as PDF Federal Register / Vol. 75, No. 184 / Thursday, September 23, 2010 / Notices B. Self-Regulatory Organization’s Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of purposes of the Act. srobinson on DSKHWCL6B1PROD with NOTICES C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others. No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing rule does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, provided that the selfregulatory organization has given the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change or such shorter time as designated by the Commission,8 the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 9 and Rule 19b–4(f)(6) thereunder.10 Under Rule 19b–4(f)(6) of the Act,11 a proposal does not become operative for 30 days after the date of its filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. The Exchange requests that the Commission waive the 30-day operative delay of this filing. The Exchange believes that the proposed rule change does not present any novel or unique issues because the elimination of RG01– 61 merely brings the Exchange’s rules regarding transactions between related entities in line with the requirements in place at other national securities exchanges and the Commission. The Exchange also believes that acceleration of the operative date will allow market participants to realize the benefits of the rule change sooner. The benefits include providing a policy that is consistent with other exchanges’ and Commission requirements, which will reduce unnecessary complexity and confusion. 8 The Exchange fulfilled this requirement. U.S.C. 78s(b)(3)(A). 10 17 CFR 240.19b–4(f)(6). 11 Id. 9 15 VerDate Mar<15>2010 16:52 Sep 22, 2010 Jkt 220001 58007 The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Based on the above, the Commission designates the proposal as operative upon filing.12 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 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 CBOE. 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–CBOE–2010–082 and should be submitted on or before October 14, 2010. 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: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Florence E. Harmon, Deputy Secretary. Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2010–082 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549. All submissions should refer to File Number SR–CBOE–2010–082. This file number should be included on the subject line if e-mail 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 (https://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 website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., 12 For purposes only of waiving the operative delay of this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). See also 17 CFR 200.30–3(a)(59). PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 [FR Doc. 2010–23775 Filed 9–22–10; 8:45 am] BILLING CODE 8010–01–P [Release No. 34–62930; File No. SR–FINRA– 2010–036] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change to Amend the Codes of Arbitration Procedure to Permit Arbitrators to Make Mid-case Referrals September 17, 2010. 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 July 12, 2010, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to broaden an arbitrators’ authority to make referrals during an arbitration proceeding by amending Rule 12104 of the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and by creating new Rule 12902(e) to address the assessment of hearing session fees, costs, and expenses if an arbitrator 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\23SEN1.SGM 23SEN1 58008 Federal Register / Vol. 75, No. 184 / Thursday, September 23, 2010 / Notices makes a referral during a case that results in panel withdrawal. Similarly, the proposal would amend Rule 13104 of the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code’’) to broaden an arbitrators’ authority to make referrals during an arbitration proceeding and create new Rule 13902(e) to address the assessment of hearing session fees, costs and expenses if an arbitrator makes a referral during a case that results in panel withdrawal. The text of the proposed rule change is available on FINRA’s Web site at https://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 srobinson on DSKHWCL6B1PROD with NOTICES Background In light of recent well-publicized securities frauds that resulted in harm to investors, FINRA has reviewed its rule on arbitrator referrals and determined that it should be amended to permit arbitrators to make referrals during an arbitration proceeding—rather than solely at the conclusion of a matter as is currently the case—when the arbitrator has reason to believe there is a serious, ongoing, imminent threat to investors that requires immediate action. Currently, Rule 12104(b) of the Customer Code and Rule 13104(b) of the Industry Code (together, Codes), state, in relevant part, that any arbitrator may refer to FINRA for disciplinary investigation any matter that has come to the arbitrator’s attention during and in connection with the arbitration only at the conclusion of an arbitration (emphasis added). FINRA believes that restricting arbitrators from making referrals until the conclusion of an arbitration may hamper FINRA’s efforts to uncover fraud as early as possible. VerDate Mar<15>2010 16:52 Sep 22, 2010 Jkt 220001 FINRA is proposing, therefore, to broaden the arbitrators’ authority under the Codes to make referrals during the prehearing, discovery, or hearing phase of an arbitration. Specifically, FINRA would amend Rules 12104 and 13104 of the Codes to permit referrals to the Director3 during the prehearing, discovery, or hearing phase of an arbitration proceeding, when the arbitrators have reason to believe that any matter or conduct poses a serious, ongoing, imminent threat to investors that requires immediate action. Further, FINRA would add new Rules 12902(e) and 13902(e) of the Codes to address the assessment of hearing session fees, costs, and expenses when an arbitrator referral during a case results in the withdrawal of the panel. Explanation of the Proposed Rule Change Changes to the Customer Code Rule 12104—Effect of Arbitration on FINRA Regulatory Activities First, FINRA proposes to add the phrase ‘‘Arbitrator Referral During or at Conclusion of Case’’ to the title of Rule 12104 so that it reflects accurately the proposed changes. The new title would read: ‘‘Effect of Arbitration on FINRA Regulatory Activities; Arbitrator Referral During or at Conclusion of Case.’’ Second, the current rule would be rearranged to reflect the order in which an arbitrator may make a referral in an arbitration case. Subparagraph (a) would remain unchanged. The provision in current subparagraph (b) of the rule, which addresses arbitrator referrals made only at the conclusion of the case (hereinafter, ‘‘the post-case referral provision’’), would be amended and moved to new subparagraph (e). In its place, FINRA would insert new rule language in subparagraph (b) to address arbitrator referrals made during the prehearing, discovery, or hearing phase of an arbitration (hereinafter, ‘‘the midcase referral provision’’). New subparagraph (c) would require arbitrator disclosure of a mid-case referral and withdrawal of the panel upon a party’s request. New subparagraph (d) would address the administration of the case using a new panel. And finally, new subparagraph (e) would contain the rule language in current subparagraph (b) with some amendments to address post-case referrals. 3 The term Director means the Director of FINRA Dispute Resolution, and includes FINRA staff to whom the Director has delegated authority. See Rule 12100(k) of the Customer Code and Rule 13100(k) of the Industry Code. PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 Rule 12104(b)—Mid-case Referral Provision Rule 12104(b) would be amended to state that any arbitrator may refer to FINRA any matter or conduct that has come to the arbitrator’s attention during the prehearing, discovery, or hearing phase of a case, which the arbitrator has reason to believe poses a serious, ongoing, imminent threat to investors that requires immediate action. The proposed rule would state further that arbitrators should not make mid-case referrals based solely on allegations in the statement of claim, counterclaim, cross claim, or third party claim. The new language of Rule 12104(b) would provide arbitrators with the express authority to alert the Director during a case when they learn of what they believe to be fraudulent activity that requires immediate action. This aspect of the rule would provide FINRA with a vital tool for detecting and minimizing the effects of potentially fraudulent activity as early as possible.4 Specifically, under the new rule language, arbitrators would be authorized to make mid-case referrals based on what they learn during the prehearing, discovery, or hearing phase of a case. Moreover, arbitrators could not make mid-case referrals based solely on allegations in the statement of claim, counterclaim, cross claim, or third party claim. This means that the mid-case referral would not be based solely on the parties’ pleadings.5 Because Dispute Resolution routinely provides copies of the arbitration claims to FINRA’s Enforcement division, mid-case referrals based only on the pleadings are not necessary to apprise Enforcement of possible wrongdoing.6 But if arbitrators learn of information relating to a serious, ongoing, imminent threat during the pre-hearing, discovery or hearing phase of a case, the new rule would permit any arbitrator to make a mid-case referral to FINRA. This rule would ensure that arbitrators have the discretion to make a mid-case referral at the time they become aware of evidence or other information that they believe poses a serious, ongoing, imminent 4 The proposed rule would not preclude an arbitrator from notifying other departments of FINRA of its findings, as appropriate. 5 A pleading is a statement describing a party’s causes of action or defenses. Documents that are considered pleadings are: A statement of claim, an answer, a counterclaim, a cross claim, a third party claim, and any replies. Rule 12100(s) of the Customer Code and Rule 13100(s) of the Industry Code. 6 Dispute Resolution provides copies of all statement of claims to Enforcement. Staff also provides to Enforcement copies of answers in disputes involving promissory notes, or responses to third party claims, counterclaims or cross claims. E:\FR\FM\23SEN1.SGM 23SEN1 Federal Register / Vol. 75, No. 184 / Thursday, September 23, 2010 / Notices threat to investors. Moreover, by providing that the arbitrators could not make a mid-case referral based solely on the pleadings, the rule would help avoid unnecessary mid-case referrals and the consequent disruption to an ongoing case. The new language of Rule 12104(b) would also require that the matter or conduct that would be the subject of the mid-case referral should pose a serious, ongoing, imminent threat to investors that requires immediate action. Arbitrators should use their judgment in determining whether the matter or conduct poses such a threat before making a mid-case referral. srobinson on DSKHWCL6B1PROD with NOTICES Rule 12104(c)—Arbitrator Disclosure and Withdrawal If any arbitrator makes a mid-case referral under proposed Rule 12104(b), the Director will disclose to the parties the act of making such referral. Further, if a party requests that a referring arbitrator withdraw, the entire panel, at the time of the referral, must withdraw. A party must make the withdrawal request within 10 days of receipt of notice of the referral disclosure. First, after an arbitrator makes a midcase referral, the Director would notify the parties of the referral. The Director will notify the parties of the referral because a referral of a potentially serious, ongoing, imminent threat to investors could cause a party to question the neutrality of the arbitrators going forward. After receiving this notification, any party may request that the panel,7 at the time of the referral, withdraw from the case upon the Director’s disclosure of a mid-case referral. Second, the proposed rule would require that a party make the withdrawal request within 10 days8 of receipt of notice of the disclosure. Once the parties learn of the mid-case referral, they should decide promptly whether to keep the panel or request its withdrawal. Rule 12104(d)—Continuing the Arbitration Case With a New Panel Proposed Rule 12104(d) would address how FINRA would administer the arbitration case if a panel withdraws from the case and a new panel is selected by the parties. FINRA recognizes that the time required to select a new panel after the initial panel makes a mid-case referral could delay the resolution of the 7 Under Rules 12101(g) and 13101(g) of the Codes, the term ‘‘panel’’ means the arbitration panel, whether it consists of one or more arbitrators. 8 Under Rules 12100(j) and 13100(j) of the Codes, the term ‘‘day’’ means calendar day. VerDate Mar<15>2010 16:52 Sep 22, 2010 Jkt 220001 claimants’ case. To minimize potential delays in continuing the case, FINRA Dispute Resolution staff (staff) will endeavor to complete the arbitrator selection process for the new panel, schedule the subsequent Initial Prehearing Conference, and serve the award on an expedited basis.9 In addition, while staff cannot shorten the time requirements set forth in the Codes, parties may agree to modify a provision of the Codes by written agreement of all named parties.10 If the case moves forward, FINRA would administer the case as follows. First, FINRA would not close the case, but instead, would keep the original pleadings (i.e., the statement of claim, answer, and any other pleadings) and proceed with the case after party selection of a new panel under the Neutral List Selection System rules. Second, the new panel would schedule an Initial Prehearing Conference to set discovery, briefing, and motions deadlines, schedule subsequent hearing sessions, and address other preliminary matters.11 At this time, the new panel would also determine whether any orders or rulings from the original panel were still in effect, and these decisions would be final and binding on the parties.12 Third, the new panel would determine whether to permit the introduction of evidence and the record of proceedings from prior hearing sessions in subsequent hearing sessions, pursuant to Rule 12604(a).13 This would provide arbitrators with the discretion to permit access to and use of the record of proceedings from the hearing record, based on the needs of the parties and the relevance of the information in the hearing record. FINRA notes that parties would be permitted to object to the admissibility of this information, but the determination on admissibility would be within the panel’s discretion. The record of proceedings,14 hereinafter referred to as the hearing record, from the first case would not contain references to panel discussions about a mid-case referral. Such arbitrator deliberations are not contained in the hearing record because 9 FINRA launched a voluntary national program in June 2004 to expedite arbitration proceedings in matters involving senior or seriously ill parties. Thus, staff has considerable experience in expediting arbitration cases when necessary. See Notice to Parties—Expedited Proceedings for Senior or Seriously Ill Parties, available at https:// www.finra.org/ArbitrationMediation/Parties/ ArbitrationProcess/NoticesToParties/P009636. 10 See Rules 12105(a) and 13105(a) of the Codes. 11 See Rules 12500(b) and 13500(b) of the Codes. 12 See Rules 12413 and 13413 of the Codes. 13 See also Rule 13604(a) of the Industry Code. 14 See Rules 12606 and 13606 of the Codes. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 58009 arbitrators discuss these types of issues in an executive session which is not recorded or made a part of the hearing record. As a result, the new arbitrators would not learn of the mid-case referral or its rationale from the hearing record of the prior hearing sessions. FINRA’s Assessment of the Mid-case Referral Provision and its Potential Effects on an Arbitration Case The proposed rule would provide an additional tool to strengthen FINRA’s regulation of its members. Though midcase referrals likely would be rare, FINRA recognizes that such a referral would have an impact on an investor’s 15 arbitration case. If an arbitrator makes a mid-case referral and the panel withdraws, the customer’s arbitration case would be delayed until the parties settle, continue, or begin the case anew, as discussed under Rule 12104(d). Further, a customer could incur additional costs as a result of a mid-case referral, such as attorney’s fees. To minimize some of the additional expense that a customer could incur, FINRA is proposing to waive certain fees for the customer.16 Moreover, FINRA understands that the impact would be greatest on those customers whose hearings were almost completed. Thus, FINRA will caution arbitrators, in those instances, to weigh carefully the imminence of a possible threat to investors and the markets against the harm to the customer whose case would be disrupted. In close cases, FINRA suggests that arbitrators consider whether any time saved or harm averted by a mid-case referral warrants disrupting a customer’s arbitration case. If the arbitrators conclude that disruption of the investor’s case is not warranted, a referral at the end of the case may be more appropriate. Rule 12104(e)—Post-case Referral Provision The language in current subparagraph (b) of the Rule 12104, which addresses arbitrator referrals made only at the conclusion of the case, would be amended and moved to new subparagraph (e). The current rule states that ‘‘only at the conclusion of an arbitration, any arbitrator may refer to FINRA for disciplinary investigation any matter that has come to the arbitrator’s attention during and in connection with the arbitration, either from the record of the proceeding or from material or 15 In intra-industry cases, the impact could be on an associated person or on a member that is not the subject of the referral. 16 See infra discussion under Rules 12902(e) and 13902(e). E:\FR\FM\23SEN1.SGM 23SEN1 58010 Federal Register / Vol. 75, No. 184 / Thursday, September 23, 2010 / Notices srobinson on DSKHWCL6B1PROD with NOTICES communications related to the arbitration, which the arbitrator has reason to believe may constitute a violation of NASD or FINRA rules, the federal securities laws, or other applicable rules or laws.’’ The proposal would permit arbitrators to continue making post-case referrals. However, FINRA would amend the rule to permit arbitrators to make a post-case referral to the Director, rather than to FINRA,17 so that the provisions of Rule 12104 are consistent. Further, FINRA would delete the term ‘‘disciplinary’’ to ensure that the scope of potential referrals is not limited to disciplinary findings, and would add the phrase ‘‘or conduct,’’ so that the subject-matter of Rule 12104 is consistent throughout the rule. The rule also would be amended to replace the reference to violations of ‘‘NASD or FINRA rules’’ with ‘‘the rules of FINRA’’ because the current FINRA rulebook consists of FINRA Rules, NASD Rules, and incorporated NYSE Rules. Rule 12902—Assessment of Hearing Session Fees, Costs, and Expenses if an Arbitrator Referral During a Case Results in Panel Withdrawal FINRA is proposing to adopt new Rule 12902(e) to address the assessment of hearing session fees, costs, and expenses if an arbitrator makes a referral during a case that results in panel withdrawal. First, FINRA recognizes the potential impact that the panel’s withdrawal during the course of a hearing would have on the customer. Thus, FINRA is proposing new Rule 12902(e)(1) that would waive the customer’s hearing session fees for the sessions conducted prior to the referral in an effort to reduce the potential financial impact. Second, under proposed new Rule 12902(e)(2), FINRA may waive any hearing session fees assessed against a member for hearing sessions conducted prior to the mid-case referral, if the member is not the subject of the referral. The proposed rule would provide FINRA with discretion to waive any hearing session fees assessed against a member that is named in the arbitration, but is not the subject of the mid-case referral. Last, under proposed new Rule 12902(e)(3), FINRA would postpone any scheduled hearing sessions if a mid-case referral results in the withdrawal of the panel, so that a new panel would have flexibility to schedule new hearing sessions based on its availability. Thus, if any scheduled hearing sessions are postponed, FINRA would waive the 17 See notes 2 and 3. VerDate Mar<15>2010 16:52 Sep 22, 2010 Jkt 220001 postponement fees that would otherwise accrue. Changes to the Industry Code Rule 13104—Effect of Arbitration on FINRA Regulatory Activities FINRA also is proposing to amend Rule 13104 of the Industry Code to broaden the arbitrators’ authority to make referrals during an arbitration proceeding in intra-industry cases. The reasons for the proposed changes to Rule 13104 are the same as those for Rule 12104 of the Customer Code discussed above. Rule 13902—Assessment of Hearing Session Fees, Costs, and Expenses if an Arbitrator Referral During a Case Results in Panel Withdrawal FINRA also is proposing to adopt new Rule 13902(e) to address the assessment of hearing session fees, costs, and expenses on member firms and associated persons if an arbitrator makes a referral during a case that results in panel withdrawal. Under proposed new Rule 13902(e)(1), FINRA would waive the hearing session fees for sessions conducted prior to the referral for associated persons 18 who are not the subject of the referral in order to reduce the potential financial impact on these parties. Further, under proposed new Rule 13902(e)(2), FINRA may waive any hearing session fees assessed against a member for hearing sessions conducted prior to the mid-case referral, if the member is not the subject of the referral. The proposed rule would provide FINRA with discretion to waive any hearing session fees assessed against a member that is named in the arbitration, but is not the subject of the mid-case referral. Finally, under proposed new Rule 13902(e)(3), FINRA would postpone any scheduled hearing sessions if a mid-case referral results in the withdrawal of the panel, so that a new panel would have flexibility to schedule new hearing sessions based on its availability. Thus, if any scheduled hearing sessions are postponed, FINRA would waive the postponement fees that would otherwise accrue. Benefits of the Proposed Rule Change FINRA believes that the benefits of the proposal outweigh the potential burden that a mid-case referral could 18 Under the Industry Code, a dispute must be arbitrated if it arises out of the business activities of a member or an associated person and is between or among members; members and associated persons; or associated persons. Rule 13200(a) of the Industry Code. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 present to the individual investor. For example, if the proposed rule is invoked and arbitrators make a mid-case referral, the proposal would mitigate somewhat the harm to these investors by waiving the hearing session fees for sessions conducted prior to the referral. Moreover, FINRA believes that if arbitrators make a mid-case referral and a serious, ongoing fraud is exposed, it is likely that either the arbitration would cease because of regulatory intervention or the party who is the subject of the referral would attempt to settle, rather than risk continuing with the case. FINRA anticipates that given the rigorous criteria for making a referral under the proposed rule change, midcase referrals will be extremely rare. FINRA notes that arbitrators make a relatively small number of referrals under the current rule, which permits post-case referrals only. However, regardless of the number of mid-case referrals that the proposal may generate, FINRA believes that the consequences of one widespread fraud, which could prove to be financially devastating to many investors, outweigh the potential harm to an individual investor whose arbitration is interrupted. In addition to the benefits of the proposal, FINRA believes that its mission of investor protection and market integrity requires that it review continually its rules with the goal of improving their effectiveness and relevance. As such, FINRA believes that the Codes should not contain a rule that, on its face, requires an arbitrator who has reason to believe that there is a serious, ongoing, imminent threat to investors to wait until a case is concluded before making a referral. In light of the recent well-publicized fraudulent schemes, FINRA believes inaction is antithetical to its mission and is, therefore, proposing this rule to prevent potential harm to investors and the markets. Moreover, FINRA’s effectiveness as a regulator would be enhanced if it could be alerted earlier to a situation indicating the existence of a market manipulation scheme or other ongoing fraud, and it could take earlier action. FINRA believes the proposal would strengthen its regulation of its members and would provide an additional layer of protection to investors and the markets from fraudulent securities market schemes. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,19 which 19 15 E:\FR\FM\23SEN1.SGM U.S.C. 78o–3(b)(6). 23SEN1 Federal Register / Vol. 75, No. 184 / Thursday, September 23, 2010 / Notices 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. The proposed rule change is consistent with FINRA’s statutory obligations under the Act to protect investors and the public interest because the proposal would help FINRA detect potential market manipulation or fraud at an earlier stage, which could minimize the financial losses of investors as well as the effects fraudulent schemes could have on the securities markets. Thus, the proposed rule change would strengthen FINRA’s ability to carry out its regulatory mission and provide another layer of protection to investors and the markets against fraud. 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. 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. srobinson on DSKHWCL6B1PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 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 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. Interested persons are also invited to submit written data, views and arguments concerning an arbitration panel’s withdrawal. Comments may be submitted by any of the following methods: VerDate Mar<15>2010 16:52 Sep 22, 2010 Jkt 220001 58011 Electronic Comments thereunder,2 notice is hereby given that on September 10, 2010, the BATS Y• Use the Commission’s Internet Exchange, Inc. (‘‘BATS Y-Exchange’’ or comment form (https://www.sec.gov/ ‘‘Exchange’’), filed with the Securities rules/sro.shtml); or and Exchange Commission (the • Send an e-mail to rule‘‘Commission’’) copies of a proposed comments@sec.gov. Please include File minor rule violations plan with Number SR–FINRA–2010–036 on the sanctions not exceeding $2,500 which subject line. would not be subject to the provisions Paper Comments of Rule 19d–1(c)(1) of the Act 3 requiring that a self-regulatory organization • Send paper comments in triplicate promptly file notice with the to Elizabeth M. Murphy, Secretary, Commission of any final disciplinary Securities and Exchange Commission, action taken with respect to any person 100 F Street, NE., Washington, DC or organization.4 In accordance with 20549–1090. Rule 19d–1(c)(2) under the Act, the All submissions should refer to File Exchange proposed to designate certain Number SR–FINRA–2010–036. This file specified rule violations as minor rule number should be included on the violations, and requests that it be subject line if e-mail is used. To help the relieved of the reporting requirements Commission process and review your regarding such violations, provided it comments more efficiently, please use gives notice of such violations to the only one method. The Commission will Commission on a quarterly basis. post all comments on the Commission’s BATS Y-Exchange proposes to Internet Web site (https://www.sec.gov/ include in its proposed MRVP the rules/sro.shtml). Comments are also policies and procedures currently available for Web site viewing and included in BATS Y-Exchange Rule 8.15 printing in the Commission’s Public (‘‘Imposition of Fines for Minor Reference Room, 100 F Street, NE., Violation(s) of Rules’’).5 Washington, DC 20549, on official According to the Exchange’s proposed business days between the hours of 10 MRVP, under Rule 8.15, the Exchange a.m. and 3 p.m. Copies of such filing may impose a fine (not to exceed also will be available for inspection and $2,500) on a member or an associated copying at the principal office of person with respect to any rule listed in FINRA. All comments received will be Rule 8.15.01. The Exchange shall serve posted without change; the Commission the person against whom a fine is does not edit personal identifying imposed with a written statement information from submissions. You setting forth the rule or rules violated, should submit only information that the act or omission constituting each you wish to make available publicly. All such violation, the fine imposed, and submissions should refer to File the date by which such determination Number SR–FINRA–2010–036 and becomes final or by which such should be submitted on or before determination must be contested. If the October 14, 2010. person against whom the fine is imposed pays the fine, such payment For the Commission, by the Division of shall be deemed to be a waiver of such Trading and Markets, pursuant to delegated person’s right to a disciplinary authority.20 proceeding and any review of the matter Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–23776 Filed 9–22–10; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–62924; File No. 10–198] Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of Filing of Proposed Minor Rule Violation Plan September 16, 2010. Pursuant to Section 19(d)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19d–1(c)(2) 20 17 1 15 PO 00000 CFR 200.30–3(a)(12). U.S.C. 78s(d)(1). Frm 00125 Fmt 4703 Sfmt 4703 2 17 CFR 240.19d–1(c)(2). CFR 240.19d–1(c)(1). 4 The Commission adopted amendments to paragraph (c) of Rule 19d–1 to allow self-regulatory organizations (‘‘SROs’’) to submit for Commission approval plans for the abbreviated reporting of minor disciplinary infractions. See Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any disciplinary action taken by an SRO against any person for violation of a rule of the SRO which has been designated as a minor rule violation pursuant to such a plan filed with the Commission shall not be considered ‘‘final’’ for purposes of Section 19(d)(1) of the Act if the sanction imposed consists of a fine not exceeding $2,500 and the sanctioned person has not sought an adjudication, including a hearing, or otherwise exhausted his administrative remedies. 5 On August 13, 2010, the Exchange’s application for registration as a national securities exchange, including the rules governing the BATS YExchange, was approved. See Securities Exchange Act Release No. 62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10–198). 3 17 E:\FR\FM\23SEN1.SGM 23SEN1

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[Federal Register Volume 75, Number 184 (Thursday, September 23, 2010)]
[Notices]
[Pages 58007-58011]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-23776]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62930; File No. SR-FINRA-2010-036]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change to Amend the 
Codes of Arbitration Procedure to Permit Arbitrators to Make Mid-case 
Referrals

September 17, 2010.
    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 July 12, 2010, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially 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 broaden an arbitrators' authority to make 
referrals during an arbitration proceeding by amending Rule 12104 of 
the Code of Arbitration Procedure for Customer Disputes (``Customer 
Code'') and by creating new Rule 12902(e) to address the assessment of 
hearing session fees, costs, and expenses if an arbitrator

[[Page 58008]]

makes a referral during a case that results in panel withdrawal. 
Similarly, the proposal would amend Rule 13104 of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code'') to 
broaden an arbitrators' authority to make referrals during an 
arbitration proceeding and create new Rule 13902(e) to address the 
assessment of hearing session fees, costs and expenses if an arbitrator 
makes a referral during a case that results in panel withdrawal.
    The text of the proposed rule change is available on FINRA's Web 
site at https://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
    In light of recent well-publicized securities frauds that resulted 
in harm to investors, FINRA has reviewed its rule on arbitrator 
referrals and determined that it should be amended to permit 
arbitrators to make referrals during an arbitration proceeding--rather 
than solely at the conclusion of a matter as is currently the case--
when the arbitrator has reason to believe there is a serious, ongoing, 
imminent threat to investors that requires immediate action.
    Currently, Rule 12104(b) of the Customer Code and Rule 13104(b) of 
the Industry Code (together, Codes), state, in relevant part, that any 
arbitrator may refer to FINRA for disciplinary investigation any matter 
that has come to the arbitrator's attention during and in connection 
with the arbitration only at the conclusion of an arbitration (emphasis 
added). FINRA believes that restricting arbitrators from making 
referrals until the conclusion of an arbitration may hamper FINRA's 
efforts to uncover fraud as early as possible.
    FINRA is proposing, therefore, to broaden the arbitrators' 
authority under the Codes to make referrals during the prehearing, 
discovery, or hearing phase of an arbitration. Specifically, FINRA 
would amend Rules 12104 and 13104 of the Codes to permit referrals to 
the Director\3\ during the prehearing, discovery, or hearing phase of 
an arbitration proceeding, when the arbitrators have reason to believe 
that any matter or conduct poses a serious, ongoing, imminent threat to 
investors that requires immediate action. Further, FINRA would add new 
Rules 12902(e) and 13902(e) of the Codes to address the assessment of 
hearing session fees, costs, and expenses when an arbitrator referral 
during a case results in the withdrawal of the panel.
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    \3\ The term Director means the Director of FINRA Dispute 
Resolution, and includes FINRA staff to whom the Director has 
delegated authority. See Rule 12100(k) of the Customer Code and Rule 
13100(k) of the Industry Code.
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Explanation of the Proposed Rule Change
    Changes to the Customer Code
Rule 12104--Effect of Arbitration on FINRA Regulatory Activities
    First, FINRA proposes to add the phrase ``Arbitrator Referral 
During or at Conclusion of Case'' to the title of Rule 12104 so that it 
reflects accurately the proposed changes. The new title would read: 
``Effect of Arbitration on FINRA Regulatory Activities; Arbitrator 
Referral During or at Conclusion of Case.''
    Second, the current rule would be rearranged to reflect the order 
in which an arbitrator may make a referral in an arbitration case. 
Subparagraph (a) would remain unchanged. The provision in current 
subparagraph (b) of the rule, which addresses arbitrator referrals made 
only at the conclusion of the case (hereinafter, ``the post-case 
referral provision''), would be amended and moved to new subparagraph 
(e). In its place, FINRA would insert new rule language in subparagraph 
(b) to address arbitrator referrals made during the prehearing, 
discovery, or hearing phase of an arbitration (hereinafter, ``the mid-
case referral provision''). New subparagraph (c) would require 
arbitrator disclosure of a mid-case referral and withdrawal of the 
panel upon a party's request. New subparagraph (d) would address the 
administration of the case using a new panel. And finally, new 
subparagraph (e) would contain the rule language in current 
subparagraph (b) with some amendments to address post-case referrals.
Rule 12104(b)--Mid-case Referral Provision
    Rule 12104(b) would be amended to state that any arbitrator may 
refer to FINRA any matter or conduct that has come to the arbitrator's 
attention during the prehearing, discovery, or hearing phase of a case, 
which the arbitrator has reason to believe poses a serious, ongoing, 
imminent threat to investors that requires immediate action. The 
proposed rule would state further that arbitrators should not make mid-
case referrals based solely on allegations in the statement of claim, 
counterclaim, cross claim, or third party claim.
    The new language of Rule 12104(b) would provide arbitrators with 
the express authority to alert the Director during a case when they 
learn of what they believe to be fraudulent activity that requires 
immediate action. This aspect of the rule would provide FINRA with a 
vital tool for detecting and minimizing the effects of potentially 
fraudulent activity as early as possible.\4\
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    \4\ The proposed rule would not preclude an arbitrator from 
notifying other departments of FINRA of its findings, as 
appropriate.
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    Specifically, under the new rule language, arbitrators would be 
authorized to make mid-case referrals based on what they learn during 
the prehearing, discovery, or hearing phase of a case. Moreover, 
arbitrators could not make mid-case referrals based solely on 
allegations in the statement of claim, counterclaim, cross claim, or 
third party claim. This means that the mid-case referral would not be 
based solely on the parties' pleadings.\5\ Because Dispute Resolution 
routinely provides copies of the arbitration claims to FINRA's 
Enforcement division, mid-case referrals based only on the pleadings 
are not necessary to apprise Enforcement of possible wrongdoing.\6\ But 
if arbitrators learn of information relating to a serious, ongoing, 
imminent threat during the pre-hearing, discovery or hearing phase of a 
case, the new rule would permit any arbitrator to make a mid-case 
referral to FINRA. This rule would ensure that arbitrators have the 
discretion to make a mid-case referral at the time they become aware of 
evidence or other information that they believe poses a serious, 
ongoing, imminent

[[Page 58009]]

threat to investors. Moreover, by providing that the arbitrators could 
not make a mid-case referral based solely on the pleadings, the rule 
would help avoid unnecessary mid-case referrals and the consequent 
disruption to an ongoing case.
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    \5\ A pleading is a statement describing a party's causes of 
action or defenses. Documents that are considered pleadings are: A 
statement of claim, an answer, a counterclaim, a cross claim, a 
third party claim, and any replies. Rule 12100(s) of the Customer 
Code and Rule 13100(s) of the Industry Code.
    \6\ Dispute Resolution provides copies of all statement of 
claims to Enforcement. Staff also provides to Enforcement copies of 
answers in disputes involving promissory notes, or responses to 
third party claims, counterclaims or cross claims.
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    The new language of Rule 12104(b) would also require that the 
matter or conduct that would be the subject of the mid-case referral 
should pose a serious, ongoing, imminent threat to investors that 
requires immediate action. Arbitrators should use their judgment in 
determining whether the matter or conduct poses such a threat before 
making a mid-case referral.
Rule 12104(c)--Arbitrator Disclosure and Withdrawal
    If any arbitrator makes a mid-case referral under proposed Rule 
12104(b), the Director will disclose to the parties the act of making 
such referral. Further, if a party requests that a referring arbitrator 
withdraw, the entire panel, at the time of the referral, must withdraw. 
A party must make the withdrawal request within 10 days of receipt of 
notice of the referral disclosure.
    First, after an arbitrator makes a mid-case referral, the Director 
would notify the parties of the referral. The Director will notify the 
parties of the referral because a referral of a potentially serious, 
ongoing, imminent threat to investors could cause a party to question 
the neutrality of the arbitrators going forward. After receiving this 
notification, any party may request that the panel,\7\ at the time of 
the referral, withdraw from the case upon the Director's disclosure of 
a mid-case referral.
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    \7\ Under Rules 12101(g) and 13101(g) of the Codes, the term 
``panel'' means the arbitration panel, whether it consists of one or 
more arbitrators.
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    Second, the proposed rule would require that a party make the 
withdrawal request within 10 days\8\ of receipt of notice of the 
disclosure. Once the parties learn of the mid-case referral, they 
should decide promptly whether to keep the panel or request its 
withdrawal.
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    \8\ Under Rules 12100(j) and 13100(j) of the Codes, the term 
``day'' means calendar day.
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Rule 12104(d)--Continuing the Arbitration Case With a New Panel
    Proposed Rule 12104(d) would address how FINRA would administer the 
arbitration case if a panel withdraws from the case and a new panel is 
selected by the parties.
    FINRA recognizes that the time required to select a new panel after 
the initial panel makes a mid-case referral could delay the resolution 
of the claimants' case. To minimize potential delays in continuing the 
case, FINRA Dispute Resolution staff (staff) will endeavor to complete 
the arbitrator selection process for the new panel, schedule the 
subsequent Initial Prehearing Conference, and serve the award on an 
expedited basis.\9\ In addition, while staff cannot shorten the time 
requirements set forth in the Codes, parties may agree to modify a 
provision of the Codes by written agreement of all named parties.\10\
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    \9\ FINRA launched a voluntary national program in June 2004 to 
expedite arbitration proceedings in matters involving senior or 
seriously ill parties. Thus, staff has considerable experience in 
expediting arbitration cases when necessary. See Notice to Parties--
Expedited Proceedings for Senior or Seriously Ill Parties, available 
at https://www.finra.org/ArbitrationMediation/Parties/ArbitrationProcess/NoticesToParties/P009636.
    \10\ See Rules 12105(a) and 13105(a) of the Codes.
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    If the case moves forward, FINRA would administer the case as 
follows. First, FINRA would not close the case, but instead, would keep 
the original pleadings (i.e., the statement of claim, answer, and any 
other pleadings) and proceed with the case after party selection of a 
new panel under the Neutral List Selection System rules.
    Second, the new panel would schedule an Initial Prehearing 
Conference to set discovery, briefing, and motions deadlines, schedule 
subsequent hearing sessions, and address other preliminary matters.\11\ 
At this time, the new panel would also determine whether any orders or 
rulings from the original panel were still in effect, and these 
decisions would be final and binding on the parties.\12\
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    \11\ See Rules 12500(b) and 13500(b) of the Codes.
    \12\ See Rules 12413 and 13413 of the Codes.
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    Third, the new panel would determine whether to permit the 
introduction of evidence and the record of proceedings from prior 
hearing sessions in subsequent hearing sessions, pursuant to Rule 
12604(a).\13\ This would provide arbitrators with the discretion to 
permit access to and use of the record of proceedings from the hearing 
record, based on the needs of the parties and the relevance of the 
information in the hearing record. FINRA notes that parties would be 
permitted to object to the admissibility of this information, but the 
determination on admissibility would be within the panel's discretion.
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    \13\ See also Rule 13604(a) of the Industry Code.
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    The record of proceedings,\14\ hereinafter referred to as the 
hearing record, from the first case would not contain references to 
panel discussions about a mid-case referral. Such arbitrator 
deliberations are not contained in the hearing record because 
arbitrators discuss these types of issues in an executive session which 
is not recorded or made a part of the hearing record. As a result, the 
new arbitrators would not learn of the mid-case referral or its 
rationale from the hearing record of the prior hearing sessions.
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    \14\ See Rules 12606 and 13606 of the Codes.
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FINRA's Assessment of the Mid-case Referral Provision and its Potential 
Effects on an Arbitration Case
    The proposed rule would provide an additional tool to strengthen 
FINRA's regulation of its members. Though mid-case referrals likely 
would be rare, FINRA recognizes that such a referral would have an 
impact on an investor's \15\ arbitration case. If an arbitrator makes a 
mid-case referral and the panel withdraws, the customer's arbitration 
case would be delayed until the parties settle, continue, or begin the 
case anew, as discussed under Rule 12104(d). Further, a customer could 
incur additional costs as a result of a mid-case referral, such as 
attorney's fees. To minimize some of the additional expense that a 
customer could incur, FINRA is proposing to waive certain fees for the 
customer.\16\
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    \15\ In intra-industry cases, the impact could be on an 
associated person or on a member that is not the subject of the 
referral.
    \16\ See infra discussion under Rules 12902(e) and 13902(e).
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    Moreover, FINRA understands that the impact would be greatest on 
those customers whose hearings were almost completed. Thus, FINRA will 
caution arbitrators, in those instances, to weigh carefully the 
imminence of a possible threat to investors and the markets against the 
harm to the customer whose case would be disrupted. In close cases, 
FINRA suggests that arbitrators consider whether any time saved or harm 
averted by a mid-case referral warrants disrupting a customer's 
arbitration case. If the arbitrators conclude that disruption of the 
investor's case is not warranted, a referral at the end of the case may 
be more appropriate.
Rule 12104(e)--Post-case Referral Provision
    The language in current subparagraph (b) of the Rule 12104, which 
addresses arbitrator referrals made only at the conclusion of the case, 
would be amended and moved to new subparagraph (e).
    The current rule states that ``only at the conclusion of an 
arbitration, any arbitrator may refer to FINRA for disciplinary 
investigation any matter that has come to the arbitrator's attention 
during and in connection with the arbitration, either from the record 
of the proceeding or from material or

[[Page 58010]]

communications related to the arbitration, which the arbitrator has 
reason to believe may constitute a violation of NASD or FINRA rules, 
the federal securities laws, or other applicable rules or laws.''
    The proposal would permit arbitrators to continue making post-case 
referrals. However, FINRA would amend the rule to permit arbitrators to 
make a post-case referral to the Director, rather than to FINRA,\17\ so 
that the provisions of Rule 12104 are consistent. Further, FINRA would 
delete the term ``disciplinary'' to ensure that the scope of potential 
referrals is not limited to disciplinary findings, and would add the 
phrase ``or conduct,'' so that the subject-matter of Rule 12104 is 
consistent throughout the rule. The rule also would be amended to 
replace the reference to violations of ``NASD or FINRA rules'' with 
``the rules of FINRA'' because the current FINRA rulebook consists of 
FINRA Rules, NASD Rules, and incorporated NYSE Rules.
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    \17\ See notes 2 and 3.
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Rule 12902--Assessment of Hearing Session Fees, Costs, and Expenses if 
an Arbitrator Referral During a Case Results in Panel Withdrawal
    FINRA is proposing to adopt new Rule 12902(e) to address the 
assessment of hearing session fees, costs, and expenses if an 
arbitrator makes a referral during a case that results in panel 
withdrawal.
    First, FINRA recognizes the potential impact that the panel's 
withdrawal during the course of a hearing would have on the customer. 
Thus, FINRA is proposing new Rule 12902(e)(1) that would waive the 
customer's hearing session fees for the sessions conducted prior to the 
referral in an effort to reduce the potential financial impact.
    Second, under proposed new Rule 12902(e)(2), FINRA may waive any 
hearing session fees assessed against a member for hearing sessions 
conducted prior to the mid-case referral, if the member is not the 
subject of the referral. The proposed rule would provide FINRA with 
discretion to waive any hearing session fees assessed against a member 
that is named in the arbitration, but is not the subject of the mid-
case referral.
    Last, under proposed new Rule 12902(e)(3), FINRA would postpone any 
scheduled hearing sessions if a mid-case referral results in the 
withdrawal of the panel, so that a new panel would have flexibility to 
schedule new hearing sessions based on its availability. Thus, if any 
scheduled hearing sessions are postponed, FINRA would waive the 
postponement fees that would otherwise accrue.
Changes to the Industry Code
Rule 13104--Effect of Arbitration on FINRA Regulatory Activities
    FINRA also is proposing to amend Rule 13104 of the Industry Code to 
broaden the arbitrators' authority to make referrals during an 
arbitration proceeding in intra-industry cases. The reasons for the 
proposed changes to Rule 13104 are the same as those for Rule 12104 of 
the Customer Code discussed above.
Rule 13902--Assessment of Hearing Session Fees, Costs, and Expenses if 
an Arbitrator Referral During a Case Results in Panel Withdrawal
    FINRA also is proposing to adopt new Rule 13902(e) to address the 
assessment of hearing session fees, costs, and expenses on member firms 
and associated persons if an arbitrator makes a referral during a case 
that results in panel withdrawal.
    Under proposed new Rule 13902(e)(1), FINRA would waive the hearing 
session fees for sessions conducted prior to the referral for 
associated persons \18\ who are not the subject of the referral in 
order to reduce the potential financial impact on these parties.
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    \18\ Under the Industry Code, a dispute must be arbitrated if it 
arises out of the business activities of a member or an associated 
person and is between or among members; members and associated 
persons; or associated persons. Rule 13200(a) of the Industry Code.
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    Further, under proposed new Rule 13902(e)(2), FINRA may waive any 
hearing session fees assessed against a member for hearing sessions 
conducted prior to the mid-case referral, if the member is not the 
subject of the referral. The proposed rule would provide FINRA with 
discretion to waive any hearing session fees assessed against a member 
that is named in the arbitration, but is not the subject of the mid-
case referral.
    Finally, under proposed new Rule 13902(e)(3), FINRA would postpone 
any scheduled hearing sessions if a mid-case referral results in the 
withdrawal of the panel, so that a new panel would have flexibility to 
schedule new hearing sessions based on its availability. Thus, if any 
scheduled hearing sessions are postponed, FINRA would waive the 
postponement fees that would otherwise accrue.
Benefits of the Proposed Rule Change
    FINRA believes that the benefits of the proposal outweigh the 
potential burden that a mid-case referral could present to the 
individual investor. For example, if the proposed rule is invoked and 
arbitrators make a mid-case referral, the proposal would mitigate 
somewhat the harm to these investors by waiving the hearing session 
fees for sessions conducted prior to the referral. Moreover, FINRA 
believes that if arbitrators make a mid-case referral and a serious, 
ongoing fraud is exposed, it is likely that either the arbitration 
would cease because of regulatory intervention or the party who is the 
subject of the referral would attempt to settle, rather than risk 
continuing with the case.
    FINRA anticipates that given the rigorous criteria for making a 
referral under the proposed rule change, mid-case referrals will be 
extremely rare. FINRA notes that arbitrators make a relatively small 
number of referrals under the current rule, which permits post-case 
referrals only. However, regardless of the number of mid-case referrals 
that the proposal may generate, FINRA believes that the consequences of 
one widespread fraud, which could prove to be financially devastating 
to many investors, outweigh the potential harm to an individual 
investor whose arbitration is interrupted.
    In addition to the benefits of the proposal, FINRA believes that 
its mission of investor protection and market integrity requires that 
it review continually its rules with the goal of improving their 
effectiveness and relevance. As such, FINRA believes that the Codes 
should not contain a rule that, on its face, requires an arbitrator who 
has reason to believe that there is a serious, ongoing, imminent threat 
to investors to wait until a case is concluded before making a 
referral. In light of the recent well-publicized fraudulent schemes, 
FINRA believes inaction is antithetical to its mission and is, 
therefore, proposing this rule to prevent potential harm to investors 
and the markets. Moreover, FINRA's effectiveness as a regulator would 
be enhanced if it could be alerted earlier to a situation indicating 
the existence of a market manipulation scheme or other ongoing fraud, 
and it could take earlier action.
    FINRA believes the proposal would strengthen its regulation of its 
members and would provide an additional layer of protection to 
investors and the markets from fraudulent securities market schemes.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\19\ which

[[Page 58011]]

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. The proposed rule change is 
consistent with FINRA's statutory obligations under the Act to protect 
investors and the public interest because the proposal would help FINRA 
detect potential market manipulation or fraud at an earlier stage, 
which could minimize the financial losses of investors as well as the 
effects fraudulent schemes could have on the securities markets. Thus, 
the proposed rule change would strengthen FINRA's ability to carry out 
its regulatory mission and provide another layer of protection to 
investors and the markets against fraud.
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    \19\ 15 U.S.C. 78o-3(b)(6).
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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.

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 35 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 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. Interested persons are also invited 
to submit written data, views and arguments concerning an arbitration 
panel's withdrawal. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2010-036 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-2010-036. This 
file number should be included on the subject line if e-mail 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 (https://www.sec.gov/rules/sro.shtml). Comments are also 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-2010-036 and should be 
submitted on or before October 14, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-23776 Filed 9-22-10; 8:45 am]
BILLING CODE 8010-01-P
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