Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Amend the Customer and Industry Codes of Arbitration Procedure Relating to Subpoenas and to Arbitrator Authority To Direct the Appearance of Associated Person Witnesses and the Production of Documents Without Subpoenas, 74712-74715 [2012-30273]
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Federal Register / Vol. 77, No. 242 / Monday, December 17, 2012 / Notices
volume-based tiers for Professional
Customers and Broker-Dealers that
transact electronically is equitable and
not unfairly discriminatory because the
change will apply to all participants in
those categories equally and such
participants are free to change the
manner in which they access the
Exchange. The proposed change also
will reward Professional Customers and
Broker-Dealers that bring relatively
higher volumes of trading activity to the
Exchange. Moreover, as noted
previously, these participants have
lower aggregate fees when compared to,
for example, the ATP fees incurred by
a NYSE Amex Market Maker to quote
the entire universe of names traded on
the Exchange. Further, the
establishment of the tiers will enable
Professional Customers and BrokerDealers that transact in sufficient
volumes to obtain a lower per contract
rate on all of their electronic volumes in
a given month. This is equitable and not
unfairly discriminatory given that a
higher volume of marketable orders,
which these volume tiers will
encourage, is beneficial to other
Exchange participants due to the
increased opportunity to trade.
The Exchange notes that it operates in
a highly competitive market in which
market participants can readily favor
competing venues if they determine that
such venues offer more favorable
trading conditions and rates.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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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
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 9 of the Act and
subparagraph (f)(2) of Rule 19b–4 10
thereunder, because it establishes a due,
fee, or other charge imposed by NYSE
MKT.
At any time within 60 days of the
filing of such proposed rule change, the
9 15
U.S.C. 78s(b)(3)(A).
10 17 CFR 240.19b–4(f)(2).
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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.
NYSEMKT–2012–74, and should be
submitted on or before January 7, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Kevin M. O’Neill,
Deputy Secretary.
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:
[FR Doc. 2012–30324 Filed 12–14–12; 8:45 am]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSEMKT–2012–74 on the
subject line.
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change To Amend the
Customer and Industry Codes of
Arbitration Procedure Relating to
Subpoenas and to Arbitrator Authority
To Direct the Appearance of
Associated Person Witnesses and the
Production of Documents Without
Subpoenas
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–NYSEMKT–2012–74. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (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 Web site viewing and
printing in the Commission’s Public
Reference Room on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing also
will be available for inspection and
copying at the NYSE’s principal office
and on its Internet Web site at
www.nyse.com. 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–
PO 00000
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68404; File No. SR–FINRA–
2012–041]
December 11, 2012.
I. Introduction
On August 24, 2012, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and
Rule 19b–4 thereunder,2 a proposed rule
change amending the Customer and
Industry Codes of Arbitration Procedure
(collectively, the ‘‘Codes’’) (1) to provide
that when FINRA member firms and/or
employees or associated persons of
FINRA members who are parties to an
arbitration (collectively, ‘‘Member
Parties’’) seek the appearance of
witnesses by, or the production of
documents from, FINRA members (and
individuals associated with the
member) who are not parties to the
arbitration (collectively, ‘‘Non-Party
Members’’), FINRA arbitrators shall
(unless circumstances dictate otherwise)
issue orders for the appearance of
witnesses or the production of
documents, instead of issuing
subpoenas; (2) to add procedures for any
non-party (Non-Party Member or
otherwise) receiving a subpoena to
object to the subpoena; (3) to provide
that if an arbitrator issues a subpoena to
a Non-Party Member at the request of a
Member Party, the Member Party
making the request is (unless the panel
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 77, No. 242 / Monday, December 17, 2012 / Notices
directs otherwise) responsible for
paying the reasonable costs of the
appearance of witnesses by or the
production of documents from the NonParty Member; (4) to add procedures for
any party to an arbitration to file a
motion requesting arbitrators issue an
order for the appearance of any
employee or associated person of a
FINRA member (collectively,
‘‘Associated Persons’’) or the production
of documents from such Associated
Persons or members; (5) to add
procedures for any party to an
arbitration receiving a motion for an
order and draft order to object to the
order; (6) to add procedures for how the
party to the arbitration that requested
the order must serve the order (if
issued); (7) to add procedures for any
Non-Party Member receiving an order to
object to the order; and (8) to add
procedures for how parties to an
arbitration must share documents
received in response to an order issued
to a Non-Party Member.
The proposed rule change was
published for comment in the Federal
Register on September 13, 2012.3 The
Commission received three comment
letters on the proposed rule change
from: the Securities Arbitration Clinic at
St. John’s University School of Law 4;
the Investor Rights Clinic at Pace Law
School 5; and the Public Investors
Arbitration Bar Association (‘‘PIABA’’).6
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, on the Commission’s
Web site at https://www.sec.gov, and at
the Commission’s Public Reference
Room.
This order approves the proposed rule
change.
II. Description of the Proposed Rule
Change
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A. Subpoena Rules
Currently, the Codes authorize
arbitrators to issue subpoenas for the
production of documents or the
appearance of witnesses.7 Rules 12512
and 13512 of the Codes (the ‘‘Subpoena
Rules’’) set forth procedures for any
party (Member Party or non-member) to
3 See Exchange Act Release No. 67803 (Sept. 7,
2012), 77 FR 56694 (Sept. 13, 2012), (‘‘Notice’’). The
comment period closed on October 4, 2012.
4 See Letter from Shane Malone and others,
Securities Arbitration Clinic, St. John’s University
School of Law, dated September 25, 2012 (the ‘‘St.
John’s Letter’’).
5 See Letter from Jill I. Gross and others, Investor
Rights Clinic, Pace Law School, dated October 4,
2012 (the ‘‘Pace Letter’’).
6 See Letter from Ryan K. Bakhtiari, PIABA, dated
October 4, 2012 (the ‘‘PIABA Letter’’). See also infra
note 21.
7 See FINRA Rules 12512(a) and 13512(a).
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an arbitration to make a motion for a
subpoena. Specifically, the requesting
party must file a written motion with
FINRA’s Director of Arbitration
(‘‘Director’’) (with an additional copy for
the arbitrator) requesting that an
arbitrator issue a subpoena to another
party to the arbitration or to a non-party.
The motion must include a draft
subpoena and the requesting party must
serve the motion and draft subpoena on
each other party to the arbitration at the
same time and in the same manner as
on the Director. The requesting party,
however, may not serve the motion or
draft subpoena on a non-party.8
The Subpoena Rules also detail how
a party to an arbitration receiving a
motion and draft subpoena may object
to the scope or propriety of the
subpoena; how the requesting party may
reply to another party’s objection; and
how the arbitrator rules on the issuance
and scope of the subpoena.9 If the
arbitrator issues a subpoena, however,
the party that requested the subpoena
must serve the subpoena at the same
time and in the same manner on all
other parties to the arbitration and, if
applicable, on any non-party receiving
the subpoena.10 Finally, the Subpoena
Rules describe how parties to an
arbitration must share any documents
they receive in response to a subpoena
service on a non-party.11
The Subpoena Rules do not currently
address, however, who bears the costs of
production under a subpoena issued to
either a party to an arbitration or a nonparty. In the Notice, FINRA states that
in practice arbitrators resolve disputes
between parties to an arbitration, as well
as between parties and non-parties,
relating to costs associated with
complying with a subpoena. In addition,
the Subpoena Rules do not currently
provide a means for non-parties to
object to subpoenas served upon them.
FINRA states that in practice, however,
FINRA permits non-parties to file
objections to subpoenas. And, according
to FINRA, in practice the objections may
include a request for the arbitrators to
determine who pays the costs of
production.
FINRA filed this proposed rule
change, in part, to codify these existing
practices. FINRA proposes new Rules
12512(e) and 13512(e) to the Codes to
provide a mechanism for non-parties to
object to a subpoena that an arbitrator
issues to them. Under the new
provisions, if a non-party receiving a
subpoena objects to the scope or
8 See
FINRA Rules 12512(b) and 13512(b).
FINRA Rules 12512(c) and 13512(c).
10 See FINRA Rules 12512(d) and 13512(d).
11 See FINRA Rules 12512(e) and 13512(e).
9 See
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74713
propriety of the subpoena, the non-party
may, within ten (10) calendar days of
service of the subpoena, file written
objections with the Director. The
Director shall forward a copy of the
written objections to the arbitrator and
all the parties to the arbitration
(including the requesting party). The
party that requested the subpoena may
respond to the objections within ten (10)
calendar days of receipt of the
objections. After considering all
objections, the arbitrator responsible for
issuing the subpoena shall rule
promptly on the objections. FINRA
stated in its Notice that the proposed
amendments would codify FINRA’s
current practice relating to objections.
In addition, the proposed rule change
would add new Rules 12512(g) and
13512(g) to the Codes to address costs
when a Member Party requests a
subpoena directed to a Non-Party
Member. Specifically, if the arbitrators
issue a subpoena to a Non-Party
Member, the Member Party that
requested the subpoena shall pay the
reasonable appearance and/or
production costs related to the NonParty Member’s compliance with
subpoena, unless the panel directs
otherwise. If a dispute arises regarding
who should pay the appearance and/or
production costs and whether a stated
amount is reasonable, the proposed rule
change would allow arbitrators to
determine the reasonable costs and to
assess responsibility for paying them.
FINRA believes that the amendments
would codify the current practice
relating to how FINRA handles such
disputes. FINRA also believes that the
responsibility of a party to an arbitration
to reimburse a non-party for its
appearance and/or production costs
should be the same regardless of
whether the non-party is responding to
a subpoena or an order requested by the
party; to this end, new Rules 12512(g)
and 13512(g) would also eliminate the
current disparity between how the
Subpoena Rules and the Order Rules
(defined below), which expressly
address who bears the costs of
production relating to compliance with
an order, treat such costs.12
B. Order Rules
Rules 12513 and 13513 of the Codes
(the ‘‘Order Rules’’) also currently
12 See FINRA Rules 12513(b) and 13513(b)
(stating that unless the panel directs otherwise, the
party to the arbitration requesting the order for the
appearance of witnesses by or the production of
documents from non-parties under this rule shall
(unless the panel directs otherwise) pay the
reasonable costs related to the appearance of
witnesses or the production of documents done in
response to such order).
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Federal Register / Vol. 77, No. 242 / Monday, December 17, 2012 / Notices
authorize arbitrators to order the
appearance of any Associated Persons or
the production of documents in the
possession or control of an Associated
Person or a FINRA member (including
both parties to an arbitration and nonparties) without using the subpoena
process.13 In fact, as stated in the
Notice, FINRA believes that parties to
an arbitration would be better served by
requesting an arbitrator order instead of
a subpoena because orders offer a more
efficient mechanism for obtaining the
appearance of witnesses and production
of documents from FINRA members
and/or their Associated Persons
(including both parties to an arbitration
and non-parties). For instance, FINRA
states in the Notice that while the Codes
provide an enforcement mechanism for
both subpoenas and arbitrator orders,14
typically, once an arbitrator issues a
subpoena in a dispute, non-compliance
is handled away from the arbitration
forum through the courts. Conversely,
FINRA staff and the arbitrators who are
familiar with the case handle requests
for arbitrator orders. Consequently,
FINRA believes that arbitrator orders are
cost effective for forum users because
parties to the arbitration and non-parties
would avoid the costs and risks
associated with court proceedings.
Moreover, FINRA does not believe that
using arbitration orders instead of
subpoenas in arbitration proceedings
would adversely impact the ability of
parties to an arbitration to obtain
documents and witnesses at the forum.
To this end, FINRA proposed adding
new Rules 12512(a)(2) and 13512(a)(2)
to the Subpoena Rules to provide that
unless circumstances dictate the need
for a subpoena,15 arbitrators shall not
issue subpoenas to Non-Party Members
at the request of Member Parties.
Specifically, the proposal states that if
the arbitrators determine that the
request for the appearance of witnesses
or the production of documents should
be granted, then the arbitrators should
order the appearance of such persons or
the production of documents from such
13 See
FINRA Rules 12513(a) and 13513(a).
states that it may be deemed conduct
inconsistent with just and equitable principles of
trade and a violation of Rule 2010 for a member or
a person associated with a member to fail to appear
or to produce any document in his possession or
control as directed pursuant to provisions of the
Code (see Customer Code of Arbitration Procedure
Part I—Interpretative Material, Definitions,
Organization and Authority).
15 For example, an arbitrator might issue a
subpoena if a firm failed to produce documents
pursuant to an arbitrator order, or if a former
associated person of a FINRA member has left the
industry and the arbitrator believes that an
arbitrator order would not be effective.
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14 IM–12000
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Non-Party Member under the Order
Rules.
With the proposed rules, FINRA also
intends to standardize its procedures
relating to the use of orders and
subpoenas in arbitration by adding to
the Order Rules procedures
substantially similar to those in the
Subpoena Rules. In particular, the
proposed rule would add Rules
12513(b) and 13513(b), setting forth
procedures for any party to an
arbitration to make a motion for an
order for the appearance of Associated
Persons (including both parties to the
arbitration and non-parties) or the
production of documents in the
possession or control of such Associated
Persons of FINRA members (including
both parties to the arbitration and nonparties). Specifically, the requesting
party must file a written motion with
the Director (with an additional copy for
the arbitrator) requesting that an
arbitrator issue the order. The motion
must include a draft order and the
requesting party must serve the motion
and draft order on each other party to
the arbitration at the same time and in
the same manner as on the Director. The
requesting party, however, may not
serve the motion or draft order on a
Non-Party Member. These proposed
procedures are substantially similar to
those procedures used by a party to an
arbitration to make a motion for a
subpoena.16
The proposed rule would add other
provisions substantially similar to
certain Subpoena Rules. Specifically,
new Rules 12513(c) and 13513(c) would
provide a mechanism for a party to an
arbitration receiving a motion and draft
order to object to the scope or propriety
of the order, as well as a mechanism for
the requesting party to reply to another
party’s objection. Under the new
provisions, if party receiving a motion
and draft order objects to the scope or
propriety of the order, the party shall,
within ten (10) calendar days of service
of the motion, file written objections
with the Director (with an additional
copy for the arbitrator) and serve copies
on all other parties to the arbitration at
the same time and in the same manner
as on the Director. The party that
requested the order may respond to the
objections within ten (10) calendar days
of receipt of the objections. After
considering all objections, the arbitrator
responsible for deciding discoveryrelated motions shall rule promptly on
the issuance and scope of the order.
Again, this proposal is substantially
similar to the related provisions in the
Subpoena Rules detailing how a party to
an arbitration receiving a motion and
draft subpoena may object to the scope
or propriety of the subpoena; how the
requesting party may reply to another
party’s objection; and how the arbitrator
rules on the issuance and scope of the
subpoena.17
In addition, under proposed new
Rules 12513(d) and 12513(d), if an
arbitrator ultimately issues the
requested order, the requesting party
must serve the order at the same time
and in the same manner on all other
parties to the arbitration and, if
applicable, on any Non-Party Member
receiving the order. These proposed
new rules also parallel the related rules
in the Subpoena Rules.18
Moreover, the proposed rules would
add new Rules 12513(e) and 13513(e) to
provide a mechanism for Non-Party
Members to object to an order that an
arbitrator issues to them. Under the new
provisions, if a Non-Party Member
receiving an order objects to the scope
or propriety of the order, the Non-Party
Member may, within ten (10) calendar
days of service of the order, file written
objections with the Director. The
Director shall forward a copy of the
written objections to the arbitrator and
all the parties to the arbitration
(including the requesting party). The
party that requested the order may
respond to the objections within ten (10)
calendar days of receipt of the
objections. After considering all
objections, the arbitrator responsible for
issuing the order shall rule promptly on
the objections. These proposed new
rules are substantially similar to the
new rules that that proposal also
proposes adding to the Subpoena Rules.
This would codify FINRA’s current
practice relating to objections.
Finally, the proposed rule change
would add new Rules 12513(f) and
13513(f), describing how parties to an
arbitration must share any documents
they receive in response to an order
served on a non-party (i.e., Non-Party
Members). Specifically, under the new
rules any party to an arbitration
receiving documents in response to an
order served on a Non-Party Member
shall provide notice to all other parties
within five (5) days of receipt of the
documents. Thereafter, any party to the
arbitration may request copies of such
documents, which must be provided
within ten (10) calendar days of receipt
of such request. Again, these proposed
new rules parallel the existing related
provisions in the Subpoena Rules.19
17 See
supra note 9.
supra note 10.
19 See supra note 11.
18 See
16 See
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Federal Register / Vol. 77, No. 242 / Monday, December 17, 2012 / Notices
III. Discussion of Comment Letters
The Commission received three
comment letters on the proposed rule
change in response to the Notice.20 All
three comment letters supported the
proposed rule change. The St. John’s
Letter supported the proposed rule
change noting that St. John’s believes
that encouraging the use of orders
instead of subpoenas would minimize
the involvement of courts in the
arbitration process and, consequently,
maximize efficiency of the arbitration
process. In addition, St. John’s believes
that by codifying existing processes for
non-parties to file objections to a
subpoena, and clarifying the process for
determining responsibility for fees
related to the appearance of witnesses
by and production of documents from
non-parties, the proposal would create
greater certainty for arbitration
participants.
The Pace Letter supported the
proposed rule change, also noting that
encouraging the issuance of orders
instead of subpoenas would minimize
the involvement of litigation in
arbitration and consequently reduce
associated costs and delays. The Pace
Letter also noted that the proposal
would create a unified enforceable
process that enhances efficiency for
resolving disputes.
The PIABA Letter also supported the
proposed rule change because it would
encourage the use of orders rather than
subpoenas for compelling the
appearance of witnesses by and
production of documents from nonparties. In addition, PIABA favors
codifying previously undocumented
processes and making consistent
arbitration procedures governing the use
of orders and subpoenas.21
IV. Discussion and Commission’s
Findings
The Commission has carefully
reviewed the proposed rule change and
the comments received. Based on its
review, the Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
association. In particular, the
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20 See
supra notes 4, 5 and 6.
21 In a telephone conversation on October 22,
2012, among Margo Hassan, Ken Adrichik and
Linda Fienberg of FINRA, Ryan Bakhtiari of PIABA,
and Leila Bham of the Commission, PIABA
confirmed that the entirety of the last paragraph of
the PIABA Letter should be disregarded and
considered deleted. This last paragraph had
expressed concern over FINRA rules regarding
allocation of costs in connection with the use of
subpoenas and orders in FINRA arbitration. As a
result, the PIABA Letter is considered in its entirety
to be supportive of the proposed rule change.
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Commission finds that the proposed
rule change is consistent with the
provisions of Section 15A(b)(6) of the
Act,22 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.
More specifically, the Commission
believes that the proposed amendments
would encourage the use of orders
instead of subpoenas in arbitration,
codify certain existing processes, and
standardize other procedures relating to
subpoenas and arbitrator orders. In
particular, the Commission believes that
the use of orders in the first instance
instead of subpoenas, with respect to
compelling the appearance of witnesses
and production of documents, could
lower discovery costs. The Commission
also believes that by codifying existing
processes and eliminating the disparity
between the Subpoena Rules and the
Order Rules, the proposed rule will
eliminate potential confusion over the
applicability of certain provisions of the
Codes and, consequently, enhance the
efficiency of the arbitration process for
its users.
The Commission has reviewed the
record for the proposed rule change and
believes that the record does not contain
any information to indicate that the
proposed rule would have a significant
effect on efficiency, competition, or
capital formation. In light of the record,
the Commission has considered the
proposed rule’s impact on efficiency,
competition, and capital formation and
has concluded that the proposed rule is
unlikely to have any significant effect.23
For the reasons stated above, the
Commission finds that the rule change
is consistent with the Act and the rules
and regulations thereunder.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,24 that the
proposed rule change (SR–FINRA–
2012–041) be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Kevin O’Neill,
Deputy Secretary.
[FR Doc. 2012–30273 Filed 12–14–12; 8:45 am]
BILLING CODE 8011–01–P
22 15
U.S.C. 78o-3(b)(6).
15 U.S.C. 78c(f).
24 15 U.S.C. 78s(b)(2).
25 17 CFR 200.30–3(a)(12).
23 See
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74715
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68406; File No. SR–Phlx–
2012–138]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Strategies
December 11, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
3, 2012, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) 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 the Exchange. 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
The Exchange proposes to amend the
fee caps applicable to certain strategies
on Multiply Listed Options in Section
II, entitled ‘‘Equity Options Fees.’’ 3 The
Exchange also proposes to apply the fee
caps to transactions on certain reversal 4
and conversion 5 strategies.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://www.nasdaqtrader.com/
micro.aspx?id=PHLXfilings, at the
principal office of the Exchange, 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, the
Exchange 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. The
Exchange has prepared summaries, set
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Section II Equity Options fees include options
overlying equities, ETFs, ETNs and indexes which
are Multiply Listed.
4 Reversals are established by combining a short
stock position with a short put and a long call
position that shares the same strike and expiration.
5 Conversions are established by combining a long
position in the underlying stock with a long put and
a short call position that share the same strike and
expiration.
2 17
E:\FR\FM\17DEN1.SGM
17DEN1
]]>Agencies
[Federal Register Volume 77, Number 242 (Monday, December 17, 2012)]
[Notices]
[Pages 74712-74715]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30273]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68404; File No. SR-FINRA-2012-041]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Amend the
Customer and Industry Codes of Arbitration Procedure Relating to
Subpoenas and to Arbitrator Authority To Direct the Appearance of
Associated Person Witnesses and the Production of Documents Without
Subpoenas
December 11, 2012.
I. Introduction
On August 24, 2012, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change amending the Customer
and Industry Codes of Arbitration Procedure (collectively, the
``Codes'') (1) to provide that when FINRA member firms and/or employees
or associated persons of FINRA members who are parties to an
arbitration (collectively, ``Member Parties'') seek the appearance of
witnesses by, or the production of documents from, FINRA members (and
individuals associated with the member) who are not parties to the
arbitration (collectively, ``Non-Party Members''), FINRA arbitrators
shall (unless circumstances dictate otherwise) issue orders for the
appearance of witnesses or the production of documents, instead of
issuing subpoenas; (2) to add procedures for any non-party (Non-Party
Member or otherwise) receiving a subpoena to object to the subpoena;
(3) to provide that if an arbitrator issues a subpoena to a Non-Party
Member at the request of a Member Party, the Member Party making the
request is (unless the panel
[[Page 74713]]
directs otherwise) responsible for paying the reasonable costs of the
appearance of witnesses by or the production of documents from the Non-
Party Member; (4) to add procedures for any party to an arbitration to
file a motion requesting arbitrators issue an order for the appearance
of any employee or associated person of a FINRA member (collectively,
``Associated Persons'') or the production of documents from such
Associated Persons or members; (5) to add procedures for any party to
an arbitration receiving a motion for an order and draft order to
object to the order; (6) to add procedures for how the party to the
arbitration that requested the order must serve the order (if issued);
(7) to add procedures for any Non-Party Member receiving an order to
object to the order; and (8) to add procedures for how parties to an
arbitration must share documents received in response to an order
issued to a Non-Party Member.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on September 13, 2012.\3\ The Commission received three
comment letters on the proposed rule change from: the Securities
Arbitration Clinic at St. John's University School of Law \4\; the
Investor Rights Clinic at Pace Law School \5\; and the Public Investors
Arbitration Bar Association (``PIABA'').\6\ 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, on the Commission's Web site at
https://www.sec.gov, and at the Commission's Public Reference Room.
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\3\ See Exchange Act Release No. 67803 (Sept. 7, 2012), 77 FR
56694 (Sept. 13, 2012), (``Notice''). The comment period closed on
October 4, 2012.
\4\ See Letter from Shane Malone and others, Securities
Arbitration Clinic, St. John's University School of Law, dated
September 25, 2012 (the ``St. John's Letter'').
\5\ See Letter from Jill I. Gross and others, Investor Rights
Clinic, Pace Law School, dated October 4, 2012 (the ``Pace
Letter'').
\6\ See Letter from Ryan K. Bakhtiari, PIABA, dated October 4,
2012 (the ``PIABA Letter''). See also infra note 21.
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This order approves the proposed rule change.
II. Description of the Proposed Rule Change
A. Subpoena Rules
Currently, the Codes authorize arbitrators to issue subpoenas for
the production of documents or the appearance of witnesses.\7\ Rules
12512 and 13512 of the Codes (the ``Subpoena Rules'') set forth
procedures for any party (Member Party or non-member) to an arbitration
to make a motion for a subpoena. Specifically, the requesting party
must file a written motion with FINRA's Director of Arbitration
(``Director'') (with an additional copy for the arbitrator) requesting
that an arbitrator issue a subpoena to another party to the arbitration
or to a non-party. The motion must include a draft subpoena and the
requesting party must serve the motion and draft subpoena on each other
party to the arbitration at the same time and in the same manner as on
the Director. The requesting party, however, may not serve the motion
or draft subpoena on a non-party.\8\
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\7\ See FINRA Rules 12512(a) and 13512(a).
\8\ See FINRA Rules 12512(b) and 13512(b).
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The Subpoena Rules also detail how a party to an arbitration
receiving a motion and draft subpoena may object to the scope or
propriety of the subpoena; how the requesting party may reply to
another party's objection; and how the arbitrator rules on the issuance
and scope of the subpoena.\9\ If the arbitrator issues a subpoena,
however, the party that requested the subpoena must serve the subpoena
at the same time and in the same manner on all other parties to the
arbitration and, if applicable, on any non-party receiving the
subpoena.\10\ Finally, the Subpoena Rules describe how parties to an
arbitration must share any documents they receive in response to a
subpoena service on a non-party.\11\
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\9\ See FINRA Rules 12512(c) and 13512(c).
\10\ See FINRA Rules 12512(d) and 13512(d).
\11\ See FINRA Rules 12512(e) and 13512(e).
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The Subpoena Rules do not currently address, however, who bears the
costs of production under a subpoena issued to either a party to an
arbitration or a non-party. In the Notice, FINRA states that in
practice arbitrators resolve disputes between parties to an
arbitration, as well as between parties and non-parties, relating to
costs associated with complying with a subpoena. In addition, the
Subpoena Rules do not currently provide a means for non-parties to
object to subpoenas served upon them. FINRA states that in practice,
however, FINRA permits non-parties to file objections to subpoenas.
And, according to FINRA, in practice the objections may include a
request for the arbitrators to determine who pays the costs of
production.
FINRA filed this proposed rule change, in part, to codify these
existing practices. FINRA proposes new Rules 12512(e) and 13512(e) to
the Codes to provide a mechanism for non-parties to object to a
subpoena that an arbitrator issues to them. Under the new provisions,
if a non-party receiving a subpoena objects to the scope or propriety
of the subpoena, the non-party may, within ten (10) calendar days of
service of the subpoena, file written objections with the Director. The
Director shall forward a copy of the written objections to the
arbitrator and all the parties to the arbitration (including the
requesting party). The party that requested the subpoena may respond to
the objections within ten (10) calendar days of receipt of the
objections. After considering all objections, the arbitrator
responsible for issuing the subpoena shall rule promptly on the
objections. FINRA stated in its Notice that the proposed amendments
would codify FINRA's current practice relating to objections.
In addition, the proposed rule change would add new Rules 12512(g)
and 13512(g) to the Codes to address costs when a Member Party requests
a subpoena directed to a Non-Party Member. Specifically, if the
arbitrators issue a subpoena to a Non-Party Member, the Member Party
that requested the subpoena shall pay the reasonable appearance and/or
production costs related to the Non-Party Member's compliance with
subpoena, unless the panel directs otherwise. If a dispute arises
regarding who should pay the appearance and/or production costs and
whether a stated amount is reasonable, the proposed rule change would
allow arbitrators to determine the reasonable costs and to assess
responsibility for paying them. FINRA believes that the amendments
would codify the current practice relating to how FINRA handles such
disputes. FINRA also believes that the responsibility of a party to an
arbitration to reimburse a non-party for its appearance and/or
production costs should be the same regardless of whether the non-party
is responding to a subpoena or an order requested by the party; to this
end, new Rules 12512(g) and 13512(g) would also eliminate the current
disparity between how the Subpoena Rules and the Order Rules (defined
below), which expressly address who bears the costs of production
relating to compliance with an order, treat such costs.\12\
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\12\ See FINRA Rules 12513(b) and 13513(b) (stating that unless
the panel directs otherwise, the party to the arbitration requesting
the order for the appearance of witnesses by or the production of
documents from non-parties under this rule shall (unless the panel
directs otherwise) pay the reasonable costs related to the
appearance of witnesses or the production of documents done in
response to such order).
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B. Order Rules
Rules 12513 and 13513 of the Codes (the ``Order Rules'') also
currently
[[Page 74714]]
authorize arbitrators to order the appearance of any Associated Persons
or the production of documents in the possession or control of an
Associated Person or a FINRA member (including both parties to an
arbitration and non-parties) without using the subpoena process.\13\ In
fact, as stated in the Notice, FINRA believes that parties to an
arbitration would be better served by requesting an arbitrator order
instead of a subpoena because orders offer a more efficient mechanism
for obtaining the appearance of witnesses and production of documents
from FINRA members and/or their Associated Persons (including both
parties to an arbitration and non-parties). For instance, FINRA states
in the Notice that while the Codes provide an enforcement mechanism for
both subpoenas and arbitrator orders,\14\ typically, once an arbitrator
issues a subpoena in a dispute, non-compliance is handled away from the
arbitration forum through the courts. Conversely, FINRA staff and the
arbitrators who are familiar with the case handle requests for
arbitrator orders. Consequently, FINRA believes that arbitrator orders
are cost effective for forum users because parties to the arbitration
and non-parties would avoid the costs and risks associated with court
proceedings. Moreover, FINRA does not believe that using arbitration
orders instead of subpoenas in arbitration proceedings would adversely
impact the ability of parties to an arbitration to obtain documents and
witnesses at the forum.
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\13\ See FINRA Rules 12513(a) and 13513(a).
\14\ IM-12000 states that it may be deemed conduct inconsistent
with just and equitable principles of trade and a violation of Rule
2010 for a member or a person associated with a member to fail to
appear or to produce any document in his possession or control as
directed pursuant to provisions of the Code (see Customer Code of
Arbitration Procedure Part I--Interpretative Material, Definitions,
Organization and Authority).
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To this end, FINRA proposed adding new Rules 12512(a)(2) and
13512(a)(2) to the Subpoena Rules to provide that unless circumstances
dictate the need for a subpoena,\15\ arbitrators shall not issue
subpoenas to Non-Party Members at the request of Member Parties.
Specifically, the proposal states that if the arbitrators determine
that the request for the appearance of witnesses or the production of
documents should be granted, then the arbitrators should order the
appearance of such persons or the production of documents from such
Non-Party Member under the Order Rules.
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\15\ For example, an arbitrator might issue a subpoena if a firm
failed to produce documents pursuant to an arbitrator order, or if a
former associated person of a FINRA member has left the industry and
the arbitrator believes that an arbitrator order would not be
effective.
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With the proposed rules, FINRA also intends to standardize its
procedures relating to the use of orders and subpoenas in arbitration
by adding to the Order Rules procedures substantially similar to those
in the Subpoena Rules. In particular, the proposed rule would add Rules
12513(b) and 13513(b), setting forth procedures for any party to an
arbitration to make a motion for an order for the appearance of
Associated Persons (including both parties to the arbitration and non-
parties) or the production of documents in the possession or control of
such Associated Persons of FINRA members (including both parties to the
arbitration and non-parties). Specifically, the requesting party must
file a written motion with the Director (with an additional copy for
the arbitrator) requesting that an arbitrator issue the order. The
motion must include a draft order and the requesting party must serve
the motion and draft order on each other party to the arbitration at
the same time and in the same manner as on the Director. The requesting
party, however, may not serve the motion or draft order on a Non-Party
Member. These proposed procedures are substantially similar to those
procedures used by a party to an arbitration to make a motion for a
subpoena.\16\
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\16\ See FINRA Rules 12512(b) and 13512(b).
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The proposed rule would add other provisions substantially similar
to certain Subpoena Rules. Specifically, new Rules 12513(c) and
13513(c) would provide a mechanism for a party to an arbitration
receiving a motion and draft order to object to the scope or propriety
of the order, as well as a mechanism for the requesting party to reply
to another party's objection. Under the new provisions, if party
receiving a motion and draft order objects to the scope or propriety of
the order, the party shall, within ten (10) calendar days of service of
the motion, file written objections with the Director (with an
additional copy for the arbitrator) and serve copies on all other
parties to the arbitration at the same time and in the same manner as
on the Director. The party that requested the order may respond to the
objections within ten (10) calendar days of receipt of the objections.
After considering all objections, the arbitrator responsible for
deciding discovery-related motions shall rule promptly on the issuance
and scope of the order. Again, this proposal is substantially similar
to the related provisions in the Subpoena Rules detailing how a party
to an arbitration receiving a motion and draft subpoena may object to
the scope or propriety of the subpoena; how the requesting party may
reply to another party's objection; and how the arbitrator rules on the
issuance and scope of the subpoena.\17\
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\17\ See supra note 9.
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In addition, under proposed new Rules 12513(d) and 12513(d), if an
arbitrator ultimately issues the requested order, the requesting party
must serve the order at the same time and in the same manner on all
other parties to the arbitration and, if applicable, on any Non-Party
Member receiving the order. These proposed new rules also parallel the
related rules in the Subpoena Rules.\18\
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\18\ See supra note 10.
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Moreover, the proposed rules would add new Rules 12513(e) and
13513(e) to provide a mechanism for Non-Party Members to object to an
order that an arbitrator issues to them. Under the new provisions, if a
Non-Party Member receiving an order objects to the scope or propriety
of the order, the Non-Party Member may, within ten (10) calendar days
of service of the order, file written objections with the Director. The
Director shall forward a copy of the written objections to the
arbitrator and all the parties to the arbitration (including the
requesting party). The party that requested the order may respond to
the objections within ten (10) calendar days of receipt of the
objections. After considering all objections, the arbitrator
responsible for issuing the order shall rule promptly on the
objections. These proposed new rules are substantially similar to the
new rules that that proposal also proposes adding to the Subpoena
Rules. This would codify FINRA's current practice relating to
objections.
Finally, the proposed rule change would add new Rules 12513(f) and
13513(f), describing how parties to an arbitration must share any
documents they receive in response to an order served on a non-party
(i.e., Non-Party Members). Specifically, under the new rules any party
to an arbitration receiving documents in response to an order served on
a Non-Party Member shall provide notice to all other parties within
five (5) days of receipt of the documents. Thereafter, any party to the
arbitration may request copies of such documents, which must be
provided within ten (10) calendar days of receipt of such request.
Again, these proposed new rules parallel the existing related
provisions in the Subpoena Rules.\19\
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\19\ See supra note 11.
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[[Page 74715]]
III. Discussion of Comment Letters
The Commission received three comment letters on the proposed rule
change in response to the Notice.\20\ All three comment letters
supported the proposed rule change. The St. John's Letter supported the
proposed rule change noting that St. John's believes that encouraging
the use of orders instead of subpoenas would minimize the involvement
of courts in the arbitration process and, consequently, maximize
efficiency of the arbitration process. In addition, St. John's believes
that by codifying existing processes for non-parties to file objections
to a subpoena, and clarifying the process for determining
responsibility for fees related to the appearance of witnesses by and
production of documents from non-parties, the proposal would create
greater certainty for arbitration participants.
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\20\ See supra notes 4, 5 and 6.
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The Pace Letter supported the proposed rule change, also noting
that encouraging the issuance of orders instead of subpoenas would
minimize the involvement of litigation in arbitration and consequently
reduce associated costs and delays. The Pace Letter also noted that the
proposal would create a unified enforceable process that enhances
efficiency for resolving disputes.
The PIABA Letter also supported the proposed rule change because it
would encourage the use of orders rather than subpoenas for compelling
the appearance of witnesses by and production of documents from non-
parties. In addition, PIABA favors codifying previously undocumented
processes and making consistent arbitration procedures governing the
use of orders and subpoenas.\21\
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\21\ In a telephone conversation on October 22, 2012, among
Margo Hassan, Ken Adrichik and Linda Fienberg of FINRA, Ryan
Bakhtiari of PIABA, and Leila Bham of the Commission, PIABA
confirmed that the entirety of the last paragraph of the PIABA
Letter should be disregarded and considered deleted. This last
paragraph had expressed concern over FINRA rules regarding
allocation of costs in connection with the use of subpoenas and
orders in FINRA arbitration. As a result, the PIABA Letter is
considered in its entirety to be supportive of the proposed rule
change.
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IV. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change and
the comments received. Based on its review, the Commission finds that
the proposed rule change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities association. In particular, the Commission finds that the
proposed rule change is consistent with the provisions of Section
15A(b)(6) of the Act,\22\ 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.
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\22\ 15 U.S.C. 78o-3(b)(6).
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More specifically, the Commission believes that the proposed
amendments would encourage the use of orders instead of subpoenas in
arbitration, codify certain existing processes, and standardize other
procedures relating to subpoenas and arbitrator orders. In particular,
the Commission believes that the use of orders in the first instance
instead of subpoenas, with respect to compelling the appearance of
witnesses and production of documents, could lower discovery costs. The
Commission also believes that by codifying existing processes and
eliminating the disparity between the Subpoena Rules and the Order
Rules, the proposed rule will eliminate potential confusion over the
applicability of certain provisions of the Codes and, consequently,
enhance the efficiency of the arbitration process for its users.
The Commission has reviewed the record for the proposed rule change
and believes that the record does not contain any information to
indicate that the proposed rule would have a significant effect on
efficiency, competition, or capital formation. In light of the record,
the Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation and has concluded that the proposed
rule is unlikely to have any significant effect.\23\
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\23\ See 15 U.S.C. 78c(f).
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For the reasons stated above, the Commission finds that the rule
change is consistent with the Act and the rules and regulations
thereunder.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-FINRA-2012-041) be, and it
hereby is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-30273 Filed 12-14-12; 8:45 am]
BILLING CODE 8011-01-P
