Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Amendments to the Panel Composition Rule, and Related Rules, of the Code of Arbitration Procedure for Customer Disputes, 69481-69484 [2010-28419]

Download as PDF Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION 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–C2–2010–007 on the subject line. Paper Comments mstockstill on DSKH9S0YB1PROD with NOTICES • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. [Release No. 34–63250; File No. SR–FINRA– 2010–053] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Amendments to the Panel Composition Rule, and Related Rules, of the Code of Arbitration Procedure for Customer Disputes November 5, 2010. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder, 2 All submissions should refer to File notice is hereby given that on October Number SR C2–2010–007. This file 25, 2010, the Financial Industry number should be included on the Regulatory Authority, Inc. (‘‘FINRA’’) subject line if e-mail is used. To help the filed with the Securities and Exchange Commission process and review your Commission (‘‘SEC’’ or ‘‘Commission’’) comments more efficiently, please use only one method. The Commission will the proposed rule change as described post all comments on the Commission’s in Items I, II, and III below, which Items have been prepared by FINRA. The Internet Web site (https://www.sec.gov/ Commission is publishing this notice to rules/sro.shtml). Copies of the solicit comments on the proposed rule submission, all subsequent change from interested persons. amendments, all written statements with respect to the proposed rule I. Self-Regulatory Organization’s change that are filed with the Statement of the Terms of Substance of Commission, and all written the Proposed Rule Change communications relating to the proposed rule change between the FINRA is proposing to amend the Commission and any person, other than panel composition rule, and related those that may be withheld from the rules, of the Code of Arbitration public in accordance with the Procedure for Customer Disputes provisions of 5 U.S.C. 552, will be (‘‘Customer Code’’), to provide available for Web site viewing and customers with the option to choose an printing in the Commission’s Public all public arbitration panel in all cases. Reference Room, 100 F Street, NE., The text of the proposed rule change Washington, DC 20549 on official is available on FINRA’s Web site at business days between the hours of 10 https://www.finra.org, at the principal a.m. and 3 p.m. Copies of such filing also will be available for inspection and office of FINRA and at the Commission’s Public Reference Room. copying at the principal office of the Exchange. All comments received will II. Self-Regulatory Organization’s be posted without change; the Statement of the Purpose of, and Commission does not edit personal Statutory Basis for, the Proposed Rule identifying information from Change submissions. You should submit only information that you wish to make In its filing with the Commission, available publicly. All submissions FINRA included statements concerning should refer to File Number SR–C2– the purpose of and basis for the 2010–007 and should be submitted on proposed rule change and discussed any or before December 3, 2010. comments it received on the proposed For the Commission, by the Division of rule change. The text of these statements Trading and Markets, pursuant to delegated may be examined at the places specified authority.19 in Item IV below. FINRA has prepared Florence E. Harmon, summaries, set forth in sections A, B, Deputy Secretary. and C below, of the most significant [FR Doc. 2010–28418 Filed 11–10–10; 8:45 am] aspects of such statements. BILLING CODE 8011–01–P 1 15 19 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:23 Nov 10, 2010 2 17 Jkt 223001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00086 Fmt 4703 Sfmt 4703 69481 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background Under FINRA Dispute Resolution rules, parties in arbitration participate in selecting the arbitrators who serve on their cases. For customer claims of more than $100,000, the Customer Code currently provides for a three arbitrator panel 3 comprised of a chair-qualified public arbitrator, 4 a public arbitrator, 5 and a non-public arbitrator.6 FINRA uses the computerized Neutral List Selection System (‘‘NLSS’’) to generate random lists of 10 arbitrators from each of these categories. The parties select their panel through a process of striking and ranking the arbitrators on the lists generated by NLSS. The Customer Code permits the parties to strike the names of up to four arbitrators from each list. The parties then rank the arbitrators remaining on the lists in order of preference. FINRA appoints the panel from among the names remaining on the lists that the parties return. FINRA is proposing to amend the Customer Code to provide customers with the option to choose between two panel selection methods—the current panel selection method, which would be labeled ‘‘Composition Rules for Majority Public Panel’’ (‘‘Majority Public Panel’’), and a new panel selection method, which would be labeled ‘‘Composition Rules for Optional All Public Panel’’ (‘‘Optional All Public Panel’’). Under the proposed rule change, customers could choose the panel selection method; neither firms nor associated persons could choose the selection method. The Majority Public Panel option would continue to provide for a panel of one chair-qualified public arbitrator, one public arbitrator, and one nonpublic arbitrator, and would retain the current limit of four strikes for each arbitrator list. The new Optional All Public Panel provision, if chosen by the customer, would allow parties to select 3 Rule 12401 provides for a single, chair-qualified public arbitrator if the amount of the claim is not more than $100,000. It provides for a three arbitrator panel if the amount of a claim is more than $100,000, or is unspecified, or if the claim requests non-monetary damages. The parties, in claims of more than $25,000, but not more than $100,000, may agree in writing to have a three arbitrator panel. 4 Rule 12400(c) specifies the criteria for arbitrator inclusion on the chairperson roster. 5 Rule 12100(u) specifies the criteria FINRA uses to classify arbitrators as public. 6 Rule 12100(p) specifies the criteria FINRA uses to classify arbitrators as non-public. E:\FR\FM\12NON1.SGM 12NON1 69482 Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices mstockstill on DSKH9S0YB1PROD with NOTICES an all public arbitration panel. Under this new provision, FINRA would send the parties the same three lists of randomly generated arbitrators that they would have received under the Majority Public Panel option, but FINRA would allow each party to strike any or all of the arbitrators on the non-public arbitrator list. If individually, or collectively, the parties struck all of the non-public arbitrators, FINRA would complete the panel by appointing a public arbitrator. Thus, by striking all the arbitrators on the non-public list, any party could ensure that the panel would have three public arbitrators. The proposed rule change would apply only to customer disputes. It would not apply to arbitrator selection in disputes involving only industry parties. FINRA believes giving customers the option of an all public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process. All customers will have greater freedom in choosing arbitration panels, and any customer will have the power to have his or her case heard by a panel with no industry participants. FINRA’s Public Arbitrator Pilot Program Customer advocates argue that the mandatory inclusion of a non-public arbitrator (often referred to as the ‘‘industry’’ arbitrator) in a three arbitrator case raises a perception that FINRA Dispute Resolution’s current forum is not fair to customers. In order to address this perception, FINRA launched a pilot program (‘‘the Pilot’’) that allows parties to choose a panel of three public arbitrators instead of two public arbitrators and one non-public arbitrator. FINRA designed the Pilot to run for two sequential years, beginning October 6, 2008, and ending October 5, 2010. In Year One, 11 brokerage firms volunteered to participate in the Pilot, each contributing a set number of cases to the Pilot per year for two years. In Year Two, FINRA expanded the number of participating brokerage firms to 14 firms. In addition, several of the original participants increased their respective case commitments for Year Two. Participating firms agreed to extend the Pilot for a third year at the same case levels while the rule making process proceeds. Year Three of the Pilot began October 6, 2010, and ends October 5, 2011, or upon implementation of the proposed rule change, whichever comes first. Under the Pilot, FINRA only permits a customer bringing the arbitration claim to decide whether his or her case should proceed under Pilot rules; the VerDate Mar<15>2010 17:23 Nov 10, 2010 Jkt 223001 participating firms cannot select the Pilot cases. The parties receive the same three lists of proposed arbitrators that parties in non-Pilot cases receive. The difference is that, in the Pilot cases, any party can strike any or all of the arbitrators on the non-public list (as opposed to the four-strike limit for each party). If the parties rank one or more of the non-public arbitrators, FINRA appoints the highest ranked non-public arbitrator to the panel. If the parties strike all of the non-public arbitrators or if they are unable to serve, FINRA returns to the public arbitrator lists (the public list first, followed by the chairqualified public list) to complete the panel. If no public arbitrators remain on the lists, FINRA uses NLSS to appoint randomly an additional public arbitrator. Thus, by striking all proposed non-public arbitrators, any party can choose a panel of three public arbitrators. Reactions from participants in the Pilot indicate that customer representatives strongly support the right of customers to decide whether to select any non-public arbitrator. That feedback has led FINRA to propose amending the panel composition rule for customer cases to allow the customer party to choose between the current panel selection method and the method used in the Pilot. Unlike the Pilot, however, the proposed rule would apply to all customer disputes against any firm and any individual broker. (Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on List),11 and 12411 (Replacement of Arbitrators) enumerate the procedures for selecting, appointing, and replacing arbitrators.12 FINRA is proposing to consolidate these rules into two new rules: New Rule 12402 relating to customer cases with one arbitrator, and new Rule 12403 relating to customer cases with three arbitrators. New Rule 12402 would describe the procedures for selecting, appointing, and replacing the arbitrator in a single arbitrator case. New Rule 12403 would describe the two options that customers have for selecting arbitrators and would include the procedures for appointing and replacing arbitrators. The proposed rule change would apply to all customer cases. FINRA would delete current Rules 12402, 12403, 12404, 12405, 12406, and 12411 in their entirety. FINRA would renumber the remaining rules in the 12400 series so that the numbering would remain consecutive after FINRA consolidated the rules. Details of the Proposed Rule Change Currently, Rule 12402 (Composition of Arbitration Panels) specifies the panel composition for all customer cases.7 Rules 12403 (Generating and Sending Lists to the Parties),8 12404 (Striking and Ranking Arbitrators),9 12405 (Combining Lists),10 12406 New Rule 12403—Cases With Three Arbitrators New Rule 12403 (Cases with Three Arbitrators) would provide customers with two options for panel selection in three arbitrator cases. The first option, the Majority Public Panel, would consist of the panel composition method currently provided in the Customer Code. It would ensure that FINRA appoints one non-public arbitrator on a three arbitrator panel. The second 7 Rule 12402 provides that a single arbitrator panel will consist of a chair-qualified public arbitrator, and that a three arbitrator panel will consist of a chair-qualified public arbitrator, a public arbitrator, and a non-public arbitrator. 8 Rule 12403 provides that if a panel consists of one arbitrator, NLSS will generate a list of 10 chairqualified public arbitrators. If a panel consists of three arbitrators, NLSS will generate a list of 10 chair-qualified public arbitrators, 10 public arbitrators, and 10 non-public arbitrators. Under the rule, NLSS excludes arbitrators from the list based on current known conflicts of interest identified in NLSS. The rule also details how NLSS generates the lists, and how FINRA sends lists to the parties and handles requests for additional information about arbitrators. 9 Rule 12404 states that parties may strike up to four arbitrators from each list, leaving at least six arbitrator names remaining. It also explains the process for ranking arbitrator preferences and returning the lists to FINRA. 10 Rule 12405 explains how FINRA prepares combined ranked lists of arbitrators based on the parties’ numerical rankings. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 New Rule 12402—Cases With One Arbitrator New Rule 12402 (Cases with One Arbitrator) would consolidate the content of current Rules 12402, 12403, 12404, 12405, 12406, and 12411, relating to single arbitrator cases. FINRA is not proposing any substantive changes to the current procedures for selecting, appointing, and replacing arbitrators in cases with one arbitrator. 11 Rule 12406 explains that FINRA appoints the highest ranked available arbitrator from each of the combined lists and describes FINRA’s procedures for appointing an arbitrator when the number of arbitrators available to serve from a combined list is not sufficient to fill the panel. The rule also provides that appointment occurs when FINRA sends notice to the parties of the names of the arbitrators on the panel and that arbitrators must execute FINRA’s arbitrator oath or affirmation before making any decision as an arbitrator or attending a hearing. 12 Rule 12411 provides that if FINRA removes an arbitrator, or an arbitrator becomes otherwise unable or unwilling to serve, FINRA appoints as a replacement arbitrator the arbitrator who is the most highly ranked available arbitrator from the applicable combined list. It also states the procedure for replacing an arbitrator if there aren’t any arbitrators left on a combined list. E:\FR\FM\12NON1.SGM 12NON1 mstockstill on DSKH9S0YB1PROD with NOTICES Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices option, the Optional All Public Panel (based on the Pilot), if selected by the customer, would guarantee that any party could select an all public panel. As stated above, the proposed rule change allows only customers to make the election between the two panel selection methods. If implemented as proposed, FINRA will allow any customer that has not been sent lists of arbitrators to choose between the two panel selection methods. Except as outlined below, FINRA would incorporate into new Rule 12403 the contents of current Rules 12403, 12404, 12405, 12406, and 12411, that are pertinent to three arbitrator cases. Under the proposed rule change, the customers could elect either arbitrator selection method within 35 days from service of the Statement of Claim. If the customers declined to make an affirmative election by the 35-day deadline, FINRA would apply the composition rule for a Majority Public Panel. Under either panel selection option, the parties would receive three lists— i.e., one with 10 chair-qualified public arbitrators, one with 10 public arbitrators, and one with 10 non-public arbitrators. FINRA would permit each party to strike up to four arbitrators on the chair-qualified public and public lists, leaving at least six arbitrator names remaining on each party’s list. However, the process for striking arbitrators on the non-public list would be different for each method, as detailed below. Majority Public Panel—This is the current method for panel composition. Under this method: • Each separately represented party could exercise up to four strikes on the non-public list. • FINRA would appoint the highestranked available non-public arbitrator from the combined rankings. • In cases in which the parties struck all of the arbitrators appearing on the non-public list or when all remaining arbitrators on the non-public list were unable or unwilling to serve for any reason, FINRA would appoint a nonpublic arbitrator selected randomly by NLSS. Optional All Public Panel—Under this method of panel composition: • All parties would have unlimited strikes with respect to the non-public list (meaning that any party may strike up to all names on the non-public list). • FINRA would not appoint a nonpublic arbitrator if the parties (individually or collectively) struck all the arbitrators appearing on the nonpublic list or if all remaining arbitrators on the non-public list were unable or unwilling to serve for any reason. VerDate Mar<15>2010 17:23 Nov 10, 2010 Jkt 223001 • If all non-public arbitrators were stricken or unavailable to serve, FINRA would select the next highest-ranked public arbitrator to complete the panel. • If all public arbitrators were stricken or unavailable to serve, FINRA would select the next highest-ranked arbitrator on the public chair-qualified list. • If all public chair-qualified arbitrators were stricken or unavailable to serve, FINRA would appoint a public arbitrator selected randomly by NLSS. Additional Clarifying Provisions FINRA proposes to add clarity to Rules 12402 and 12403 by stating that parties are not required to send a copy of their ranking list to opposing parties. In addition, under the Optional All Public Panel method, FINRA would appoint a non-public arbitrator to a panel if the Director did not receive a party’s ranked lists within the timeframe for returning lists to FINRA because the Director would proceed as though the party did not want to strike any arbitrator or have any preferences among the listed arbitrators. FINRA proposes to add clarity to the Optional All Public Panel provision by alerting parties that a failure to comply with the required timeframe for returning lists to FINRA may result in the appointment of a panel consisting of two public arbitrators and one non-public arbitrator. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,13 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. FINRA believes that providing customers with choice on the issue of including a non-public arbitrator on the panel deciding their case will enhance customers’ perception of the fairness of FINRA’s rules and of its securities arbitration process. 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. 13 15 PO 00000 U.S.C. 78o–3(b)(6). Frm 00088 Fmt 4703 Sfmt 4703 69483 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FINRA–2010–053 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–2010–053. 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 E:\FR\FM\12NON1.SGM 12NON1 69484 Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2010–053 and should be submitted on or before December 3, 2010. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–28419 Filed 11–10–10; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63255; File Nos. SR–BATS– 2010–025; SR–BX–2010–66; SR–CBOE– 2010–087; SR–CHX–2010–22; SR–FINRA– 2010–049; SR–NASDAQ–2010–115; SR– NSX–2010–12; SR–NYSE–2010–69; SR– NYSEAmex–2010–96; SR–NYSEArca–2010– 83] Self-Regulatory Organizations; BATS Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange, Incorporated; The Chicago Stock Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; The NASDAQ Stock Market LLC; National Stock Exchange, Inc.; New York Stock Exchange LLC; NYSE Amex LLC; NYSE Arca, Inc.; Order Granting Accelerated Approval to Proposed Rule Changes, as Modified by Amendment No. 1, To Enhance the Quotation Standards for Market Makers mstockstill on DSKH9S0YB1PROD with NOTICES November 5, 2010. I. Introduction On September 17, 2010, each of BATS Exchange, Inc. (‘‘BATS’’), NASDAQ OMX BX, Inc. (‘‘BX’’), Chicago Board Options Exchange, Incorporated (‘‘CBOE’’), The Chicago Stock Exchange, Inc. (‘‘CHX’’), The NASDAQ Stock Market LLC (‘‘Nasdaq’’), New York Stock Exchange LLC (‘‘NYSE’’), National Stock 14 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:23 Nov 10, 2010 Jkt 223001 Exchange, Inc. (‘‘NSX’’); NYSE Amex LLC (‘‘NYSE Amex’’); NYSE Arca, Inc. (‘‘NYSE Arca’’), and the Financial Industry Regulatory Authority, Inc. (‘‘FINRA,’’ and together with BATS, BX, CBOE, CHX, Nasdaq, NYSE, NSX, NYSE Amex and NYSE Arca, the ‘‘SROs’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’), and Rule 19b-4 thereunder,2 proposed rule changes to amend certain of their respective rules to enhance minimum quoting standards for market makers registered with the exchange or, in the case of FINRA, market makers that quote on the Alternative Display Facility (‘‘ADF’’). The purpose of these rule changes is to require equity market makers to post continuous two-sided quotations within a designated percentage of the inside market to eliminate market maker ‘‘stub quotes,’’ that are so far away from the prevailing market that they are not intended to be executed (such as an order to buy at a penny or sell at $100,000). The proposed rule changes were published for comment in the Federal Register on September 24 and September 27, 2010.3 In addition, each of the SROs filed an Amendment No. 1 to their respective proposed rule changes.4 The Commission received no 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release Nos. 62945 (September 20, 2010), 75 FR 58460 (September 24, 2010) (SR–BATS–2010–025); 62954 (September 20, 2010), 75 FR 59305 (September 27, 2010) (SR–BX– 2010–66); 62951 (September 20, 2010), 75 FR 59309 (September 27, 2010) (SR–CBOE–2010–087); 62949 (September 20, 2010), 75 FR 59315 (September 27, 2010) (SR–CHX–2010–22); 62953 (September 20, 2010), 75 FR 59300 (September 27, 2010) (SR– FINRA–2010–049); 62950 (September 20, 2010), 75 FR 59311 (September 27, 2010) (SR–NASDAQ– 2010–115); 62952 (September 20, 2010), 75 FR 59316 (September 27, 2010) (SR–NSX–2010–12); 62948 (September 20, 2010), 75 FR 58455 (September 24, 2010) (SR–NYSE–2010–69); 62947 (September 20, 2010), 75 FR 58453 (September 24, 2010) (SR–NYSEAmex–2010–96); 62946 (September 20, 2010), 75 FR 58462 (September 24, 2010) (SR–NYSEArca–2010–83). 4 The SROs filed their respective Amendments No. 1 on November 4, 2010. Each of the Amendments No. 1 modifies the proposals so that a market maker is not expected to enter a quote based on the prior day’s last sale at the commencement of regular trading hours if there is no National Best Bid (‘‘NBB’’) or National Best Offer (‘‘NBO’’). As amended, in such a circumstance, the quoting obligation would commence as soon as there has been a regular-way transaction on the primary listing market in the security, as reported by the responsible single plan processor. In addition, the Amendment modifies the proposals so that a market maker’s quoting obligations shall be suspended during a trading halt, suspension or pause, and shall not re-commence until after the first regular-way transaction on the primary listing market following that halt, suspension or pause, as reported by the responsible single plan processor. 2 17 PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 comments on the proposed rule changes. This order approves the proposed rule changes on an accelerated basis. II. Description of the Proposals On May 6, 2010, the U.S. equity markets experienced a severe disruption.5 Among other things, the prices of a large number of individual securities suddenly declined by significant amounts in a very short time period, before suddenly reversing to prices consistent with their pre-decline levels. This severe price volatility led to a large number of trades being executed at temporarily depressed prices, including many that were more than 60% away from pre-decline prices and subsequently broken. As noted in the May 6 Staff Report, executions against stub quotes represented a significant proportion of broken trades on May 6. To address this aspect of the events of May 6, in coordination with the Commission, the SROs filed proposals to address stub quotes by introducing minimum quoting standards for market makers.6 The proposals require market makers to maintain continuous two-sided quotations throughout the trading day 7 that are within a certain percentage band of the national best bid and offer (‘‘NBBO’’). These requirements apply to all NMS stocks 8 during normal market hours. For stocks subject to the individual stock circuit breaker pilot program (i.e., stocks that are included in Finally, so that the markets may coordinate implementation upon approval of the proposed rule changes, in Amendment No. 1 the SROs stated that the planned implementation date for the proposed rule changes would be December 6, 2010. 5 The events of May 6 are described more fully in the report of the staffs of the Commodity Futures Trading Commission (‘‘CFTC’’) and the Commission, titled Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, ‘‘Findings Regarding the Market Events of May 6, 2010,’’ dated September 30, 2010 (‘‘May 6 Staff Report’’). 6 See supra note 3. 7 As noted, Amendment No. 1 modifies the proposals so that the quoting obligation would commence as soon as there has been a regular-way transaction on the primary listing market in the security, as reported by the responsible single plan processor. The Amendment also modifies that the market maker’s quoting obligations shall be suspended during a trading halt, suspension or pause, and shall not re-commence until the firstregular way print on the primary listing market following that halt, suspension or pause, as reported by the responsible single plan processor. See supra note 4. 8 See 17 CFR 242.600 (defining NMS stock as ‘‘any NMS security other than an option’’ and NMS security as ‘‘any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options’’). E:\FR\FM\12NON1.SGM 12NON1

Agencies

[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69481-69484]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28419]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63250; File No. SR-FINRA-2010-053]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amendments to the Panel Composition Rule, and Related Rules, of the 
Code of Arbitration Procedure for Customer Disputes

November 5, 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 October 25, 2010, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by FINRA. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the panel composition rule, and related 
rules, of the Code of Arbitration Procedure for Customer Disputes 
(``Customer Code''), to provide customers with the option to choose an 
all public arbitration panel in all cases.
    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
    Under FINRA Dispute Resolution rules, parties in arbitration 
participate in selecting the arbitrators who serve on their cases. For 
customer claims of more than $100,000, the Customer Code currently 
provides for a three arbitrator panel \3\ comprised of a chair-
qualified public arbitrator, \4\ a public arbitrator, \5\ and a non-
public arbitrator.\6\ FINRA uses the computerized Neutral List 
Selection System (``NLSS'') to generate random lists of 10 arbitrators 
from each of these categories. The parties select their panel through a 
process of striking and ranking the arbitrators on the lists generated 
by NLSS. The Customer Code permits the parties to strike the names of 
up to four arbitrators from each list. The parties then rank the 
arbitrators remaining on the lists in order of preference. FINRA 
appoints the panel from among the names remaining on the lists that the 
parties return.
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    \3\ Rule 12401 provides for a single, chair-qualified public 
arbitrator if the amount of the claim is not more than $100,000. It 
provides for a three arbitrator panel if the amount of a claim is 
more than $100,000, or is unspecified, or if the claim requests non-
monetary damages. The parties, in claims of more than $25,000, but 
not more than $100,000, may agree in writing to have a three 
arbitrator panel.
    \4\ Rule 12400(c) specifies the criteria for arbitrator 
inclusion on the chairperson roster.
    \5\ Rule 12100(u) specifies the criteria FINRA uses to classify 
arbitrators as public.
    \6\ Rule 12100(p) specifies the criteria FINRA uses to classify 
arbitrators as non-public.
---------------------------------------------------------------------------

    FINRA is proposing to amend the Customer Code to provide customers 
with the option to choose between two panel selection methods--the 
current panel selection method, which would be labeled ``Composition 
Rules for Majority Public Panel'' (``Majority Public Panel''), and a 
new panel selection method, which would be labeled ``Composition Rules 
for Optional All Public Panel'' (``Optional All Public Panel''). Under 
the proposed rule change, customers could choose the panel selection 
method; neither firms nor associated persons could choose the selection 
method.
    The Majority Public Panel option would continue to provide for a 
panel of one chair-qualified public arbitrator, one public arbitrator, 
and one non-public arbitrator, and would retain the current limit of 
four strikes for each arbitrator list. The new Optional All Public 
Panel provision, if chosen by the customer, would allow parties to 
select

[[Page 69482]]

an all public arbitration panel. Under this new provision, FINRA would 
send the parties the same three lists of randomly generated arbitrators 
that they would have received under the Majority Public Panel option, 
but FINRA would allow each party to strike any or all of the 
arbitrators on the non-public arbitrator list. If individually, or 
collectively, the parties struck all of the non-public arbitrators, 
FINRA would complete the panel by appointing a public arbitrator. Thus, 
by striking all the arbitrators on the non-public list, any party could 
ensure that the panel would have three public arbitrators.
    The proposed rule change would apply only to customer disputes. It 
would not apply to arbitrator selection in disputes involving only 
industry parties. FINRA believes giving customers the option of an all 
public panel will enhance confidence in and increase the perception of 
fairness in the FINRA arbitration process. All customers will have 
greater freedom in choosing arbitration panels, and any customer will 
have the power to have his or her case heard by a panel with no 
industry participants.
FINRA's Public Arbitrator Pilot Program
    Customer advocates argue that the mandatory inclusion of a non-
public arbitrator (often referred to as the ``industry'' arbitrator) in 
a three arbitrator case raises a perception that FINRA Dispute 
Resolution's current forum is not fair to customers. In order to 
address this perception, FINRA launched a pilot program (``the Pilot'') 
that allows parties to choose a panel of three public arbitrators 
instead of two public arbitrators and one non-public arbitrator.
    FINRA designed the Pilot to run for two sequential years, beginning 
October 6, 2008, and ending October 5, 2010. In Year One, 11 brokerage 
firms volunteered to participate in the Pilot, each contributing a set 
number of cases to the Pilot per year for two years. In Year Two, FINRA 
expanded the number of participating brokerage firms to 14 firms. In 
addition, several of the original participants increased their 
respective case commitments for Year Two. Participating firms agreed to 
extend the Pilot for a third year at the same case levels while the 
rule making process proceeds. Year Three of the Pilot began October 6, 
2010, and ends October 5, 2011, or upon implementation of the proposed 
rule change, whichever comes first.
    Under the Pilot, FINRA only permits a customer bringing the 
arbitration claim to decide whether his or her case should proceed 
under Pilot rules; the participating firms cannot select the Pilot 
cases. The parties receive the same three lists of proposed arbitrators 
that parties in non-Pilot cases receive. The difference is that, in the 
Pilot cases, any party can strike any or all of the arbitrators on the 
non-public list (as opposed to the four-strike limit for each party). 
If the parties rank one or more of the non-public arbitrators, FINRA 
appoints the highest ranked non-public arbitrator to the panel. If the 
parties strike all of the non-public arbitrators or if they are unable 
to serve, FINRA returns to the public arbitrator lists (the public list 
first, followed by the chair-qualified public list) to complete the 
panel. If no public arbitrators remain on the lists, FINRA uses NLSS to 
appoint randomly an additional public arbitrator. Thus, by striking all 
proposed non-public arbitrators, any party can choose a panel of three 
public arbitrators.
    Reactions from participants in the Pilot indicate that customer 
representatives strongly support the right of customers to decide 
whether to select any non-public arbitrator. That feedback has led 
FINRA to propose amending the panel composition rule for customer cases 
to allow the customer party to choose between the current panel 
selection method and the method used in the Pilot. Unlike the Pilot, 
however, the proposed rule would apply to all customer disputes against 
any firm and any individual broker.
Details of the Proposed Rule Change
    Currently, Rule 12402 (Composition of Arbitration Panels) specifies 
the panel composition for all customer cases.\7\ Rules 12403 
(Generating and Sending Lists to the Parties),\8\ 12404 (Striking and 
Ranking Arbitrators),\9\ 12405 (Combining Lists),\10\ 12406 
(Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on 
List),\11\ and 12411 (Replacement of Arbitrators) enumerate the 
procedures for selecting, appointing, and replacing arbitrators.\12\ 
FINRA is proposing to consolidate these rules into two new rules: New 
Rule 12402 relating to customer cases with one arbitrator, and new Rule 
12403 relating to customer cases with three arbitrators. New Rule 12402 
would describe the procedures for selecting, appointing, and replacing 
the arbitrator in a single arbitrator case. New Rule 12403 would 
describe the two options that customers have for selecting arbitrators 
and would include the procedures for appointing and replacing 
arbitrators. The proposed rule change would apply to all customer 
cases.
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    \7\ Rule 12402 provides that a single arbitrator panel will 
consist of a chair-qualified public arbitrator, and that a three 
arbitrator panel will consist of a chair-qualified public 
arbitrator, a public arbitrator, and a non-public arbitrator.
    \8\ Rule 12403 provides that if a panel consists of one 
arbitrator, NLSS will generate a list of 10 chair-qualified public 
arbitrators. If a panel consists of three arbitrators, NLSS will 
generate a list of 10 chair-qualified public arbitrators, 10 public 
arbitrators, and 10 non-public arbitrators. Under the rule, NLSS 
excludes arbitrators from the list based on current known conflicts 
of interest identified in NLSS. The rule also details how NLSS 
generates the lists, and how FINRA sends lists to the parties and 
handles requests for additional information about arbitrators.
    \9\ Rule 12404 states that parties may strike up to four 
arbitrators from each list, leaving at least six arbitrator names 
remaining. It also explains the process for ranking arbitrator 
preferences and returning the lists to FINRA.
    \10\ Rule 12405 explains how FINRA prepares combined ranked 
lists of arbitrators based on the parties' numerical rankings.
    \11\ Rule 12406 explains that FINRA appoints the highest ranked 
available arbitrator from each of the combined lists and describes 
FINRA's procedures for appointing an arbitrator when the number of 
arbitrators available to serve from a combined list is not 
sufficient to fill the panel. The rule also provides that 
appointment occurs when FINRA sends notice to the parties of the 
names of the arbitrators on the panel and that arbitrators must 
execute FINRA's arbitrator oath or affirmation before making any 
decision as an arbitrator or attending a hearing.
    \12\ Rule 12411 provides that if FINRA removes an arbitrator, or 
an arbitrator becomes otherwise unable or unwilling to serve, FINRA 
appoints as a replacement arbitrator the arbitrator who is the most 
highly ranked available arbitrator from the applicable combined 
list. It also states the procedure for replacing an arbitrator if 
there aren't any arbitrators left on a combined list.
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    FINRA would delete current Rules 12402, 12403, 12404, 12405, 12406, 
and 12411 in their entirety. FINRA would renumber the remaining rules 
in the 12400 series so that the numbering would remain consecutive 
after FINRA consolidated the rules.
New Rule 12402--Cases With One Arbitrator
    New Rule 12402 (Cases with One Arbitrator) would consolidate the 
content of current Rules 12402, 12403, 12404, 12405, 12406, and 12411, 
relating to single arbitrator cases. FINRA is not proposing any 
substantive changes to the current procedures for selecting, 
appointing, and replacing arbitrators in cases with one arbitrator.
New Rule 12403--Cases With Three Arbitrators
    New Rule 12403 (Cases with Three Arbitrators) would provide 
customers with two options for panel selection in three arbitrator 
cases. The first option, the Majority Public Panel, would consist of 
the panel composition method currently provided in the Customer Code. 
It would ensure that FINRA appoints one non-public arbitrator on a 
three arbitrator panel. The second

[[Page 69483]]

option, the Optional All Public Panel (based on the Pilot), if selected 
by the customer, would guarantee that any party could select an all 
public panel. As stated above, the proposed rule change allows only 
customers to make the election between the two panel selection methods. 
If implemented as proposed, FINRA will allow any customer that has not 
been sent lists of arbitrators to choose between the two panel 
selection methods. Except as outlined below, FINRA would incorporate 
into new Rule 12403 the contents of current Rules 12403, 12404, 12405, 
12406, and 12411, that are pertinent to three arbitrator cases.
    Under the proposed rule change, the customers could elect either 
arbitrator selection method within 35 days from service of the 
Statement of Claim. If the customers declined to make an affirmative 
election by the 35-day deadline, FINRA would apply the composition rule 
for a Majority Public Panel.
    Under either panel selection option, the parties would receive 
three lists--i.e., one with 10 chair-qualified public arbitrators, one 
with 10 public arbitrators, and one with 10 non-public arbitrators. 
FINRA would permit each party to strike up to four arbitrators on the 
chair-qualified public and public lists, leaving at least six 
arbitrator names remaining on each party's list. However, the process 
for striking arbitrators on the non-public list would be different for 
each method, as detailed below.
    Majority Public Panel--This is the current method for panel 
composition. Under this method:
     Each separately represented party could exercise up to 
four strikes on the non-public list.
     FINRA would appoint the highest-ranked available non-
public arbitrator from the combined rankings.
     In cases in which the parties struck all of the 
arbitrators appearing on the non-public list or when all remaining 
arbitrators on the non-public list were unable or unwilling to serve 
for any reason, FINRA would appoint a non-public arbitrator selected 
randomly by NLSS.
    Optional All Public Panel--Under this method of panel composition:
     All parties would have unlimited strikes with respect to 
the non-public list (meaning that any party may strike up to all names 
on the non-public list).
     FINRA would not appoint a non-public arbitrator if the 
parties (individually or collectively) struck all the arbitrators 
appearing on the non-public list or if all remaining arbitrators on the 
non-public list were unable or unwilling to serve for any reason.
     If all non-public arbitrators were stricken or unavailable 
to serve, FINRA would select the next highest-ranked public arbitrator 
to complete the panel.
     If all public arbitrators were stricken or unavailable to 
serve, FINRA would select the next highest-ranked arbitrator on the 
public chair-qualified list.
     If all public chair-qualified arbitrators were stricken or 
unavailable to serve, FINRA would appoint a public arbitrator selected 
randomly by NLSS.
Additional Clarifying Provisions
    FINRA proposes to add clarity to Rules 12402 and 12403 by stating 
that parties are not required to send a copy of their ranking list to 
opposing parties.
    In addition, under the Optional All Public Panel method, FINRA 
would appoint a non-public arbitrator to a panel if the Director did 
not receive a party's ranked lists within the timeframe for returning 
lists to FINRA because the Director would proceed as though the party 
did not want to strike any arbitrator or have any preferences among the 
listed arbitrators. FINRA proposes to add clarity to the Optional All 
Public Panel provision by alerting parties that a failure to comply 
with the required timeframe for returning lists to FINRA may result in 
the appointment of a panel consisting of two public arbitrators and one 
non-public arbitrator.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ 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. FINRA believes that providing customers with choice on 
the issue of including a non-public arbitrator on the panel deciding 
their case will enhance customers' perception of the fairness of 
FINRA's rules and of its securities arbitration process.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2010-053 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-2010-053. 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

[[Page 69484]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2010-053 and should be 
submitted on or before December 3, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28419 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P
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