Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to Revisions to the Definitions of Non-Public Arbitrator and Public Arbitrator, 38080-38086 [2014-15607]
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Federal Register / Vol. 79, No. 128 / Thursday, July 3, 2014 / Notices
Investment Management, Inc.,
applicant’s investment adviser.
Filing Date: The application was filed
on March 4, 2014.
Applicant’s Address: 777 108th
Avenue NE., Suite 1200, Bellevue, WA
98004–5135.
Wegener Investment Trust [File No.
811–21860]
Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. On December 30,
2013, applicant made a liquidating
distribution to its shareholders, based
on net asset value. Anticipated expenses
of $50.00 incurred in connection with
the liquidation will be paid by Wegener,
LLC, applicant’s investment adviser.
Filing Dates: The application was
filed on May 14, 2014, and amended on
June 24, 2014.
Applicant’s Address: 3350 Monarch
Ln., Annandale, VA 22003.
Special Value Expansion Fund, LLC
[File No. 811–21629]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. Applicant has
never made a public offering of its
securities and does not propose to make
a public offering. Applicant currently
has fewer than 100 beneficial owners
(within the meaning of section 3(c)(1))
and intends to continue operating as a
private fund in reliance on section
3(c)(1) of the Act. Applicant has notified
its beneficial owners that certain legal
protections afforded to shareholders of
an investment company registered
under the Act will no longer apply.
Filing Dates: The application was
filed on January 6, 2014, and amended
on February 21, 2014, April 7, 2014, and
May 1, 2014.
Applicant’s Address: 2951 28th St.,
Suite 1000, Santa Monica, CA 90405.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72495; File No. SR–CBOE–
2014–026]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change Relating to
Revisions to the Definitions of NonPublic Arbitrator and Public Arbitrator
June 27, 2014.
June 27, 2014.
On March 21, 2014, the Chicago
Board Options Exchange, Incorporated
(the ‘‘Exchange’’ or ‘‘CBOE’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend CBOE
Rule 24.19 to revise several provisions
governing the trading of Multi-Class
Spread Orders. The proposed rule
change was published for comment in
the Federal Register on April 10, 2014.3
On April 10, 2014, the Exchange
submitted Amendment No. 1 to the
proposed rule change. On May 15, 2014
and June 3, 2014, CBOE extended the
time period in which the Commission
must either approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether to disapprove the
proposed rule change to June 13, 2014,
and to June 30, 2014, respectively. The
Commission has not received any
comments on the proposed rule change.
On June 25, 2014, CBOE withdrew the
proposed rule change (SR–CBOE–2014–
026).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.4
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–15609 Filed 7–2–14; 8:45 am]
BILLING CODE 8011–01–P
[FR Doc. 2014–15666 Filed 7–2–14; 8:45 am]
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BILLING CODE 8011–01–P
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 71872
(April 4, 2014), 79 FR 19940.
4 17 CFR 200.30–3(a)(31).
2 17
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[Release No. 34–72491; File No. SR–FINRA–
2014–028]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Withdrawal of
Proposed Rule Change To Amend Rule
24.19
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Jill M. Peterson,
Assistant Secretary.
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SECURITIES AND EXCHANGE
COMMISSION
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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 June 17,
2014, 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
substantially prepared by FINRA. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to refine and
reorganize the definitions of ‘‘nonpublic arbitrator’’ and ‘‘public
arbitrator.’’ The amendments would,
among other matters, provide that
persons who worked in the financial
industry for any duration during their
careers would always be classified as
non-public arbitrators, and persons who
represent investors or the financial
industry as a significant part of their
business would also be classified as
non-public arbitrators, but could
become public arbitrators after a
cooling-off period. The amendments
would also reorganize the definitions to
make it easier for arbitrator applicants
and parties, among others, to determine
the correct arbitrator classification.
The text of the proposed rule change
is available, at the principal office of
FINRA, on FINRA’s Web site at https://
www.finra.org, 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
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 79, No. 128 / Thursday, July 3, 2014 / Notices
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
FINRA classifies arbitrators as ‘‘nonpublic’’ or ‘‘public’’ based on their
professional and/or personal affiliations.
The Code of Arbitration Procedure for
Customer Disputes (‘‘Customer Code’’)
and the Code of Arbitration Procedures
for Industry Disputes (‘‘Industry Code’’)
define these terms. The non-public
arbitrator definition (Rules 12100(p) and
13100(p)) lists financial industry
affiliations that might qualify a person
to serve as a non-public arbitrator in the
forum. Conversely, the public arbitrator
definition (Rules 12100(u) and
13100(u)) itemizes affiliations that
disqualify a person from serving as a
public arbitrator in the forum. In
general, public arbitrators do not have a
significant affiliation with the financial
industry.
FINRA has amended its arbitrator
definitions several times over the years
to address constituent perceptions that
an affiliation might affect an arbitrator’s
neutrality.3 The SEC approved the latest
amendments in 2013 (the ‘‘2013
amendments’’).4 Under the 2013
amendments, FINRA disqualified
persons associated with a mutual fund
or hedge fund from serving as public
arbitrators. The 2013 amendments also
provided that specified individuals
must wait for two years after ending
certain disqualifying affiliations
(‘‘cooling-off period’’) before they may
serve as public arbitrators.
The SEC received several comment
letters on the 2013 amendments.
Commenters recommended that FINRA
increase the proposed two-year coolingoff period, add new categories of
individuals whom FINRA would
disqualify from serving as public
tkelley on DSK3SPTVN1PROD with NOTICES
3 See
Securities Exchange Act Rel. No. 49573
(Apr. 16, 2004), 69 FR 21871 (Apr. 22, 2004) (File
No. SR–NASD–2003–95) and Notice to Members
04–49 (Jun. 2004); Securities Exchange Act Rel. No.
54607 (Oct. 16, 2006), 71 FR 62026 (Oct. 20, 2006)
(File No. SR–NASD–2005–094) and Notice to
Members 06–64 (Nov. 2006); and Securities
Exchange Act Rel. No. 57492 (Mar. 13, 2008), 73 FR
15025 (Mar. 20, 2008) (File No. SR–NASD–2007–
021) and Regulatory Notice 08–22 (May 2008).
4 See Securities Exchange Act Rel. No. 69297
(Apr. 4, 2013), 78 FR 21449 (Apr. 10, 2013) (File
No. SR–FINRA–2013–003) and Regulatory Notice
13–21 (Jun. 2013).
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arbitrators, and add new categories of
individuals to the non-public arbitrator
definition.5 In its response to the
comment letters, FINRA asked the SEC
to approve the proposed rule change as
a significant measure to address
constituent perceptions about the
fairness and neutrality of the public
arbitrator roster. FINRA staff agreed to
conduct a comprehensive review in
consultation with the National
Arbitration and Mediation Committee
(‘‘NAMC’’),6 of both the non-public
arbitrator and public arbitrator
definitions with a view towards
clarifying the definitions and reviewing
the additional issues raised in the
comment letters.7
FINRA staff met with the NAMC
several times to review both arbitrator
definitions. As the result of these
discussions, as well as general
discussions with interested groups over
a period of time, FINRA is proposing to
amend the non-public arbitrator and
public arbitrator definitions. The intent
of the proposed rule change is to
address the concerns about arbitrator
neutrality that were raised by the
commenters on the 2013 amendments.
As noted above, these concerns related
to the cooling-off periods, the categories
of individuals whom FINRA disqualifies
from serving as public arbitrators, and
the categories of individuals whom
FINRA classifies as non-public
arbitrators.
The proposed rule change includes
several substantive changes to the
definitions and an extensive
reorganization of the public arbitrator
definition. In light of extensive
revisions, FINRA is proposing to delete
the definitions in their entirety, and
replace them with new definitions. The
proposed amendments are described
below. For ease of reading, the
discussion only refers to Rule 12100 of
the Customer Code. The proposed
amendments to Rule 13100 of the
Industry Code are identical, and
FINRA’s rationale is the same.
Non-Public Arbitrator Definition
The non-public arbitrator definition
lists financial industry affiliations that
5 See Securities Exchange Act Rel. No. 69297
(Apr. 4, 2013), 78 FR 21449 (Apr. 10, 2013)
Discussion of Comment Letters. The comment
letters are available on the SEC’s Web site at
www.sec.gov.
6 The NAMC, which is composed of investor,
industry, and neutral (arbitrator and mediator)
representatives, provides policy guidance to FINRA
Dispute Resolution staff. A majority of the NAMC
members and its chair are public.
7 See letter from Margo A. Hassan, Assistant Chief
Counsel, FINRA Dispute Resolution, to Elizabeth M.
Murphy, dated March 11, 2013. The letter is
available on FINRA’s Web site at www.finra.org,
and on the SEC’s Web site at www.sec.gov.
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38081
might qualify a person to serve as a nonpublic arbitrator in the forum. The
affiliations relate to individuals who
work in the financial industry, and
individuals who provide services to
industry entities and their employees.
Each qualifying affiliation has a
corresponding disqualification in the
public arbitrator definition. Currently,
FINRA permits individuals who worked
in the financial industry to join the
public arbitrator roster after a coolingoff period so long as they meet other
requirements.
FINRA is proposing to expand the
scope of the non-public arbitrator
definition in three ways. First, the
definition would provide that
individuals who worked in the financial
industry for any duration during their
careers would always be classified as
non-public arbitrators. Second, FINRA
would add new categories of financial
industry personnel who might qualify to
serve as non-public arbitrators. Third,
FINRA would add to the definition
professionals who devote a significant
part of their business to representing or
providing services to parties in disputes
concerning investments or employment
relationships.
Expansion of the non-public arbitrator
definition becomes particularly
significant when parties are selecting
arbitrators in customer cases with three
arbitrators.8 In these cases, FINRA sends
the parties three randomly generated
lists of arbitrators—a list of 10 chairqualified public arbitrators, a list of 10
public arbitrators, and a list of 10 nonpublic arbitrators. The parties select
their panel through a process of striking
and ranking the arbitrators on the lists.
FINRA limits the parties to four strikes
on the chair-qualified public arbitrator
list and four strikes on the public
arbitrator list. However, FINRA gives
parties unlimited strikes on the nonpublic arbitrator list. By expanding the
scope of the non-public arbitrator
definition, parties would have a greater
ability to address their own perceptions
of bias through the use of their
unlimited strikes on the non-public
arbitrator list.
New Rule 12100(p)(1)
Under the current non-public
arbitrator definition, if a person is
currently, or was within the past five
years, affiliated with a securities
industry entity specified in the rule
(e.g., associated with a broker or dealer),
the person may qualify to serve as a
8 Under Rule 12401, one arbitrator hears customer
claims up to $100,000 and three arbitrators hear
customer claims of more than $100,000 or
unspecified claims.
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non-public arbitrator at the forum.9
Subject to two exceptions, FINRA
allows these individuals to join the
public arbitrator roster five years after
ending all industry affiliation. The first
exception to the five-year provision
applies to persons who retired from, or
who spent a substantial part of their
career with, a specified industry
entity.10 FINRA keeps these individuals
on the non-public arbitrator roster for
the duration of their service to the
forum. The second exception applies to
persons who were affiliated for 20 years
or more with a specified industry
entity.11 FINRA also keeps these
arbitrators on the non-public arbitrator
roster for the duration of their service.
Investor representatives raised
concerns about the neutrality of
FINRA’s public arbitrator roster because
they do not believe that former industryaffiliated persons should ever serve as
public arbitrators. In response to these
concerns, FINRA is proposing to adopt
new Rule 12100(p)(1) to eliminate the
five-year cooling-off provision for
persons who work in the financial
industry. Under the new rule, FINRA
would classify persons who are, or
were, affiliated with a specified
financial industry entity at any point in
their careers, for any duration, as nonpublic arbitrators.12 Once FINRA
classifies an arbitrator as non-public,
FINRA would never reclassify the
arbitrator as public. Under the proposed
rule change, there would be no
exceptions to this provision.
9 See current Rule 12100(p)(1). This provision
applies to a person who is, or was within the past
five years:
(A) Associated with, including registered
through, a broker or dealer (including a government
securities broker or dealer or a municipal securities
dealer);
(B) Registered under the Commodities Exchange
Act;
(C) A member of a commodities exchange or a
registered futures association; or
(D) Associated with a person or firm registered
under the Commodity Exchange Act.
10 See current Rule 12100(p)(2).
11 See current Rule 12100(u)(2).
12 See new Rule 12100(p)(1). The financial
industry affiliations enumerated in new Rule
12100(p)(1) relate to a person who is, or was,
associated with, including registered through:
(A) a broker or a dealer (including a government
securities broker or dealer or a municipal securities
broker or dealer); or
(B) a member of, or an entity registered under, the
Commodity Exchange Act, the Commodities Future
Trading Commission, the National Futures
Association, or the Municipal Securities
Rulemaking Board; or
(C) an entity that is organized under or registered
pursuant to the Securities Exchange Act of 1934,
Investment Company Act of 1940, or the Investment
Advisers Act of 1940; or
(D) a mutual fund or a hedge fund; or
(E) an investment adviser.
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specified in the rule and potential
categories of industry professionals that
may be created in the future.
FINRA is also proposing to add two
new categories of financial industry
professionals to new Rule 12100(p)(1)—
persons associated with, including
registered through, a mutual fund or
hedge fund, and persons associated
with, including registered through, an
investment adviser. Currently, FINRA
does not permit these professionals to
serve in any capacity, but if they end
their affiliation, they may serve as
public arbitrators after a two-year
cooling-off period.13 FINRA believes
that these professionals would bring
valuable knowledge and experience to
the forum and that FINRA should
classify them as non-public arbitrators.
Under the proposed rule change, once
FINRA classifies them as non-public
arbitrators, these arbitrators would
remain on the non-public arbitrator
roster for the duration of their service to
the forum.
Finally, FINRA is proposing to add
clarity to new Rule 12100(p)(1) by
revising the references in several ways.
First, instead of referring to a person
registered under the Commodity
Exchange Act, or associated with a
person or firm registered under the
Commodity Exchange Act, or a member
of a commodities exchange, FINRA
would simplify the reference in Rule
12100(p)(1)(B) by referring to a person
who is, or was, associated with,
including registered through, under, or
with (as applicable), the Commodity
Exchange Act or the Commodities
Futures Trading Commission. FINRA is
not proposing any substantive change to
the categories of persons relating to
commodities. Second, instead of
referring to a member of a registered
futures association, FINRA proposes in
Rule 12100(p)(1)(B) to specify the
association by name—the National
Futures Association. FINRA is not
proposing any substantive change to the
category of persons relating to futures.
Third, FINRA is proposing to add in
Rule 12100(p)(1)(B) a reference to a
person who is, or was, associated with,
including registered through, under, or
with (as applicable), the Municipal
Securities Rulemaking Board (‘‘MSRB’’).
While such an individual would be
covered under the current ‘‘municipal
securities broker or dealer,’’ FINRA
believes adding the MSRB would add
clarity to the rule. Fourth, FINRA is
proposing an omnibus reference in Rule
12100(p)(1)(C) to cover industry
affiliated persons not otherwise
New Rule 12100(p)(2)
Under the current non-public
arbitrator definition, attorneys,
accountants, and other professionals
who devoted 20 percent or more of their
professional work in the last two years
to serving specified industry entities
and/or employees, may qualify to serve
as non-public arbitrators at the forum.14
FINRA currently permits these
individuals to join the public arbitrator
roster two years after they stop
providing services to the industry.
However, they are permanently
disqualified from serving as public
arbitrators if they provided services to
the industry for 20 years or more over
the course of their careers.15
FINRA is proposing to adopt new
Rule 12100(p)(2) to broaden the current
provision in two ways. First, the new
rule increases the look-back period from
two years to five years. Second, it
broadens application of the provision to
include services to industry entities and
any persons or entities associated with
those industry entities. The proposed
new public arbitrator definition
provides that persons would be
permanently disqualified from serving
as public arbitrators if they provided the
specified services for 15 calendar years
or more over the course of their careers
(in contrast to the current 20 year
provision).16 The 15 years are a total
number of years—they would not have
to be consecutive years. After 15 years
of service, FINRA would keep these
arbitrators on the non-public arbitrator
roster for the duration of their service to
the forum. FINRA is increasing the lookback period, and decreasing the number
of years before it applies a permanent
disqualification, so that only
individuals who are sufficiently
removed from their industry affiliation
are permitted to serve on the public
arbitrator roster.
Finally, FINRA is proposing to add
clarity to the rule by changing the
phrase ‘‘professional work’’ to
‘‘professional time.’’ FINRA staff
believes that the term ‘‘time’’ is better
because time would be more easily
quantified by the professionals in the
category.
13 These persons may serve as non-public
arbitrators if they are qualified to serve under
another provision (e.g., dually registered as an
investment adviser and an associated person of a
FINRA member).
14 See current Rule 12100(p)(3). The rule applies
to the persons and entities listed in current Rule
12100(p)(1).
15 See current Rule 12100(u)(2).
16 See new Rule 12100(u)(2).
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New Rule 12100(p)(3)
Currently, FINRA permits
professionals who represent or provide
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services to investors in securities
disputes to serve as public arbitrators at
the forum.17 Industry representatives
raised concerns about the neutrality of
the public arbitrator roster, and they do
not believe that these professionals
should serve as public arbitrators. To
address these concerns, FINRA is
proposing to add a new qualifying
affiliation to the non-public arbitrator
definition.
Under new Rule 12100(p)(3), FINRA
would classify as non-public arbitrators,
attorneys, accountants, and other
professionals who devoted 20 percent or
more of their professional time, within
the past five years, to serving parties in
investment or financial industry
employment disputes. FINRA selected
the 20 percent threshold for application
of the provision to keep it consistent
with the threshold in new Rule
12100(p)(2).
FINRA would permit these
individuals to serve as public arbitrators
five years after their business mix
changes. However, if the person
accumulates 15 calendar years of
providing the qualifying services over
the course of a career, FINRA would
keep that arbitrator on the non-public
arbitrator roster for the duration of the
arbitrator’s service to the forum. The 15
years are a total number of years—they
would not have to be consecutive
years.18
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New Rule 12100(p)(4)
FINRA currently classifies as nonpublic arbitrators, persons working in a
bank or other financial institution (e.g.,
a credit union) who execute transactions
in securities or who supervise
employees who execute transactions in
securities.19 This provision covers
persons who are not employed by an
industry entity that falls under current
paragraph (p)(1). When such persons
end their affiliation, they may
immediately apply to serve as public
arbitrators at the forum unless they have
engaged in this type of work for 20 years
or more over the course of their
careers.20
FINRA is proposing to adopt new
Rule 12100(p)(4) to add a five-year lookback period to this provision. The
substance of the qualifying affiliation is
the same. Only the look-back period is
new. Under the new rule, FINRA would
classify as a non-public arbitrator, any
17 These individuals are not qualified under the
non-public arbitrator definition to serve as nonpublic arbitrators, nor are they disqualified from
serving as public arbitrators under the public
arbitration definition.
18 See new Rule 12100(u)(3).
19 See current Rule 12100(p)(4).
20 See current Rule 12100(u)(2).
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person who, within the last five
calendar years, worked in a bank or
other financial institution and executed
transactions in securities or supervised
or monitored compliance with the
securities and commodities laws of
employees who execute transactions in
securities. FINRA would permit these
persons to serve as public arbitrators
five years after they ended their
industry affiliation unless they provided
these services for 15 years or more. As
is the case with proposed new
paragraphs (p)(2) and (p)(3) described
above, the proposed new public
arbitrator definition provides that these
persons would be permanently
disqualified from serving as public
arbitrators if they provided the specified
services for 15 calendar years or more
over the course of their careers.21 Again,
the 15 years are a total number of
years—they would not have to be
consecutive years. After 15 years of
service, FINRA would keep these
arbitrators on the non-public arbitrator
roster for the duration of their service to
the forum.
Public Arbitrator Definition
The public arbitrator definition lists
affiliations that disqualify a person from
serving as a public arbitrator in the
forum. It includes a disqualification that
corresponds to each qualifying
affiliation in the non-public arbitrator
definition. Currently, the definition
reflects these disqualifications by crossreferences to the non-public arbitrator
definition. The public arbitrator
definition includes additional
disqualifiers that do not have a
corresponding qualifier in the nonpublic arbitrator definition. Over the
years, FINRA added these
disqualifications to the public arbitrator
definition to address investors’
perceptions about the neutrality of the
public arbitrator roster.
FINRA is proposing substantive
changes to the public arbitrator
definition that: Add new
disqualifications; amend an existing
disqualification to simplify it; and
revise the cooling-off periods. Under
new Rule 12100(u), FINRA would
subject individuals to a five-year
cooling-off period after they end an
affiliation based on their own activities,
and a two-year cooling-off period after
they end an affiliation based on
someone else’s activities (provided that
another disqualification is not
applicable).
FINRA is also proposing to reorganize
the public arbitrator definition to make
it easier for FINRA staff, arbitrators and
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21 See
potential arbitrators, and parties to
ascertain the correct arbitrator
classification. Under the proposed rule
change, FINRA would remove the crossreferences between the definitions, and
fully describe each disqualification.
FINRA would also separate the
disqualifications into categories of those
that are permanent versus those that are
temporary, and those based on a
person’s own activities versus those
based on the activities of others (e.g.,
others at a person’s firm). FINRA would
repeat some of the disqualifying
affiliations to make it clear that the
affiliations are subject to both a
temporary disqualification and a
permanent disqualification depending
on how many years a person was
engaged in a stated activity.
New Rule 12100(u)(1)
FINRA is proposing to adopt new
Rule 12100(u)(1) to specify the types of
financial industry employment that
disqualify a person from serving as a
public arbitrator.22 Substantively, the
affiliations are identical to those listed
in new Rule 12100(p)(1). None of the
disqualifying affiliations is new—
FINRA currently includes each of them
in the public arbitrator definition.23
Rather, FINRA is proposing to add
clarity to new Rule 12100(u)(1) by
revising the references in a manner
identical to what it is proposing for new
Rule 12100(p)(1).24
22 Under new Rule 12100(u)(1), A person shall
not be designated as a public arbitrator who is, or
was, associated with, including registered through:
(A) a broker or a dealer (including a government
securities broker or dealer or a municipal securities
broker or dealer); or
(B) a member of, or an entity registered under, the
Commodity Exchange Act, the Commodities
Futures Trading Commission, the National Futures
Association, or the Municipal Securities
Rulemaking Board; or
(C) an entity that is organized under or registered
pursuant to the Securities Exchange Act of 1934,
Investment Company Act of 1940, or the Investment
Advisers Act of 1940; or
(D) a mutual fund or a hedge fund; or
(E) an investment adviser.
23 See current Rule 12100(u)(1) and Rule
12100(u)(3).
24 First, instead of referring to a person registered
under the Commodity Exchange Act, or associated
with a person or firm registered under the
Commodity Exchange Act, or a member of a
commodities exchange, FINRA would simplify the
reference in Rule 12100(u)(1)(B) by referring to a
person who is, or was, associated with, including
registered through, under, or with (as applicable),
the Commodity Exchange Act or the Commodities
Futures Trading Commission. FINRA is not
proposing any substantive change to the categories
of persons relating to commodities. Second, instead
of referring to a member of a registered futures
association, FINRA proposes in Rule 12100(u)(1)(B)
to specify the association by name—the National
Futures Association. FINRA is not proposing any
substantive change to the category of persons
new Rule 12100(u)(4).
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Continued
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FINRA currently permits non-public
arbitrators to become public arbitrators
at some point after ending their
affiliations (subject to specified
exceptions). As explained in the above
discussion on new Rule 12100(p)(1),
under the proposed rule change, FINRA
would classify these individuals as nonpublic arbitrators for the duration of
their service to the forum and would
never reclassify them as public
arbitrators. Therefore, anyone
disqualified under new Rule 12100(u)(1)
would be subject to a permanent
disqualification from the public
arbitrator roster.
New Rules 12100(u)(2) and 12100(u)(6)
tkelley on DSK3SPTVN1PROD with NOTICES
Under the current public arbitrator
definition, attorneys, accountants, and
other professionals who devoted 20
percent or more of their professional
work in the last two years to serving
securities industry employees and/or
entities, may not serve as public
arbitrators at the forum.25 These
individuals may join the public
arbitrator roster two years after they stop
providing services to the industry.
However, FINRA permanently
disqualifies them from the public
arbitrator roster if they provided the
services for 20 years or more over the
course of their careers.26
FINRA is proposing to adopt new
Rules 12100(u)(2) and 12100(u)(6) to
expand the current provision. FINRA
would broaden application of the
disqualification to include services to
financial industry entities and any
persons or entities associated with those
financial industry entities.27 In new
Rule 12100(u)(6), FINRA would increase
the cooling-off period in the rule from
two years to five years,28 and in new
Rule 12100(u)(2), FINRA would
decrease the number of years for a
permanent disqualification from 20
relating to futures. Third, FINRA is proposing to
add in Rule 12100(u)(1)(B) a reference to a person
who is, or was, associated with, including
registered through, under, or with (as applicable),
the MSRB. While such an individual would be
covered under the current ‘‘municipal securities
broker or dealer,’’ FINRA believes adding the MSRB
would add clarity to the rule. Fourth, FINRA is
proposing an omnibus reference in Rule
12100(u)(1)(C) to cover industry affiliated persons
not otherwise specified in the rule and potential
categories of industry professionals that may be
created in the future.
25 See current Rule 12100(u)(1), which
incorporates, among other things, current Rule
12100(p)(3).
26 See current Rule 12100(u)(2).
27 See current Rule 12100(p)(3) for content to be
expanded by new Rules 12100(u)(2) and
12100(u)(6).
28 See current Rule 12100(u)(1), referencing
current Rule 12100(p)(3), which includes a two year
look-back period.
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16:53 Jul 02, 2014
Jkt 232001
years to 15 years.29 The 15 years are a
total number of years—they would not
have to be consecutive years. Although
the description of the disqualification in
paragraphs (u)(2) and (u)(6) is identical,
FINRA believes it would add clarity to
the definition to separate out when the
provision results in a permanent
disqualification, and when it results in
a temporary disqualification.
Substantively, new Rules 12100(u)(2)
and 12100(u)(6) are identical to new
Rule 12100(p)(2).
New Rules 12100(u)(3) and 12100(u)(7)
As explained above, FINRA currently
permits professionals who represent or
provide services to investors in
securities disputes to serve as public
arbitrators at the forum. Industry
representatives raised concerns about
the neutrality of the public arbitrator
roster, and they do not believe that these
professionals should serve as public
arbitrators.
To address these concerns, FINRA is
proposing to disqualify from the public
arbitrator roster attorneys, accountants,
expert witnesses, and other
professionals who devote 20 percent or
more of their professional time to
serving parties in investment or
financial industry employment
disputes. Under new Rule 12100(u)(7),
FINRA would apply a five-year coolingoff period to the rule. Under new Rule
12100(u)(3), these persons would be
permanently disqualified from serving
as public arbitrators if they provide the
specified services for 15 calendar years
or more over the course of their careers.
The 15 years are a total number of
years—they would not have to be
consecutive years. The substance of the
disqualification corresponds to the
proposed qualifying affiliation in new
Rule 12100(p)(3). FINRA selected the 20
percent threshold for application of the
provision to keep it consistent with the
thresholds in new Rules 12100(u)(2) and
12100(u)(6).
New Rules 12100(u)(4) and 12100(u)(8)
FINRA currently disqualifies
personnel working in a bank or other
financial institution (e.g., a credit union)
who execute transactions in securities,
or who supervise employees who
execute transactions in securities, from
serving as public arbitrators.30 This
provision applies to persons who are
employed by a financial industry entity
that is not covered by current Rule
12100(p)(1). When these individuals
29 See current Rule 12100(u)(2) which references
a 20 year time period.
30 See current Rule 12100(u)(1) which references
current Rule 12100(p)(4).
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end their affiliation, they may
immediately apply to serve as public
arbitrators at the forum unless they have
engaged in this type of work for 20 years
or more over the course of their
careers.31
FINRA is proposing to adopt new
Rules 12100(u)(4) and 12100(u)(8) to
expand the current provision. In new
Rule 12100(u)(8), FINRA would impose
a five-year cooling-off period in the rule;
and, in new Rule 12100(u)(4), FINRA
would decrease the number of years for
a permanent disqualification from 20
years to 15 years. The 15 years are a
total number of years—they would not
have to be consecutive years. Although
the description of the disqualification in
paragraphs (u)(4) and (u)(8) is identical,
FINRA believes it would add clarity to
the definition to separate out when the
provision results in a permanent
disqualification, and when it results in
a temporary disqualification.
Substantively, new Rules 12100(u)(4)
and 12100(u)(8) are identical to new
Rule 12100(p)(4).
New Rule 12100(u)(5)
FINRA currently disqualifies
individuals employed by, or who are
directors or officers of, an entity that
directly or indirectly controls, is
controlled by, or is under common
control with, any partnership,
corporation, or other organization that is
engaged in the securities business.32
These persons may become public
arbitrators two years after ending their
affiliation.33
FINRA is proposing to adopt new
Rule 12100(u)(5) to expand application
of the provision in two ways. First,
FINRA would expand the
disqualification from an ‘‘organization
that is engaged in the securities
business’’ to an ‘‘organization that is
engaged in the financial industry.’’
Second, FINRA would increase the
cooling-off period from two years to five
years. This disqualification addresses
the perception that employees, officers,
and directors of entities that are
associated with industry entities should
not serve as public arbitrators because
they may favor an industry party in an
arbitration proceeding. The term
‘‘financial industry’’ would replace the
term ‘‘securities business’’ to ensure that
the provision covers all financial
services entities that may raise concerns
about neutrality. The term securities
business may be interpreted too
narrowly to apply only to the affiliations
in current Rule 12100(p)(1).
31 See
current Rule 12100(u)(2).
current Rules 12100(u)(6) and 12100(u)(7).
33 See current Rule 12100(u).
32 See
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tkelley on DSK3SPTVN1PROD with NOTICES
New Rule 12100(u)(9)
Currently, professionals may not serve
as public arbitrators if their firm:
Derived 10 percent or more of its annual
revenue in the past two years from
providing services to the financial
industry; 34 or derived $50,000 or more
in annual revenue in the past two years
from providing services to the securities
industry relating to customer disputes
concerning an investment account or
transaction.35 For example, a real estate
attorney working at a law firm with a
securities practice devoted to serving
the industry is disqualified from serving
as a public arbitrator if the threshold
percentage or dollar figure is met. He or
she may, however, become a public
arbitrator two years after leaving the
firm or two years after the firm no
longer derives annual revenue from the
financial industry or securities industry
exceeding those thresholds.
FINRA is proposing to adopt new
Rule 12100(u)(9) to combine the two
disqualifications into one, and to
simplify the disqualification relating to
the $50,000 threshold. New Rule
12100(u)(9) would provide that
professionals may not serve as public
arbitrators if their firm derived $50,000
or more, or at least 10 percent of its
annual revenue, in any single calendar
year during the course of the past two
calendar years, from: The entities listed
in paragraph (u)(1) and/or to any
persons or entities associated with any
of the entities listed in paragraph (u)(1);
or from a bank or other financial
institution where persons effect
transactions in securities including
government or municipal securities,
commodities, futures, or options. The
cooling-off period of two years would be
the same. FINRA is proposing to remove
the requirement that the $50,000 in
revenue relate to customer disputes
concerning an investment account or
transaction to make it easier for
potential and existing arbitrators to
determine if the disqualification would
apply.
New Rule 12100(u)(10)
FINRA is proposing to adopt new
Rule 12100(u)(10) to disqualify from the
public arbitrator roster, professionals
whose firm derived $50,000 or more, or
at least 10 percent of its annual revenue,
in any single calendar year during the
course of the past two calendar years,
from individual and/or institutional
investors relating to securities matters.
FINRA would apply a two-year coolingoff period to this provision. For
example, a trust and estates attorney
working at a law firm with a securities
practice devoted to serving investors
would be disqualified from serving as a
public arbitrator if the threshold
percentage or dollar figure is met.
New Rule 12100(u)(10) is not based
on an existing disqualification—it is
entirely new. The purpose of this
provision is to address an industry
perception that a professional whose
firm derives significant revenue from
representing investors in securities
matters in not neutral, and should not
be permitted to serve as a public
arbitrator. The revenue thresholds and
cooling-off period are consistent with
proposed new Rule 12100(u)(9).
New Rule 12100(u)(11)
FINRA currently disqualifies
individuals from serving as public
arbitrators if their spouse or immediate
family member is employed by, or is a
director or officer of, an entity that
directly or indirectly controls, is
controlled by, or is under common
control with, any partnership,
corporation, or other organization that is
engaged in the securities business.36
FINRA applies a two-year cooling-off
period to these disqualifications.37 In
addition, if an individual’s spouse or
immediate family member is employed
in a securities industry entity or
provides services to such an entity and/
or the entity’s employees, the person
may not serve as a public arbitrator.38
While the current public arbitrator
definition does not include a cooling-off
period for this disqualification, it has
been FINRA’s practice to make these
individuals wait for five years after their
spouse or immediate family member
ends the disqualifying affiliation before
they may become public arbitrators.
FINRA is proposing to simplify these
disqualifications and add clarity to them
by combining them into one
disqualification with a two-year coolingoff period. New Rule 12100(u)(11)
would provide that a person shall not be
designated as a public arbitrator if his or
her immediate family member is an
individual whom FINRA would
disqualify from serving on the public
arbitrator roster. If the person’s
immediate family member ends the
disqualifying affiliation, or the person
ends the relationship with the
individual so that the individual is no
longer the person’s immediate family
member, the person may, after two
calendar years have passed from the end
of the affiliation or relationship, be
designated as a public arbitrator. FINRA
36 See
34 See
35 See
current Rules 12100(u)(6) and 12100(u)(7).
37 See current Rule 12100(u).
38 See current Rule 12100(u)(8).
current Rule 12100(u)(4).
current Rule 12100(u)(5).
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16:53 Jul 02, 2014
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38085
believes it is appropriate to have a twoyear cooling-off period for all
disqualifications based on the activities
of others.
Immediate Family
In the current public arbitrator
definition, the term spouse appears in
the disqualification text, not in the
description of immediate family
member. The term immediate family
member includes a person’s parent,
stepparent, child, stepchild, or
household member. It also includes an
individual that the person supports
financially,39 and an individual who is
claimed as a dependent for federal tax
purposes. FINRA is proposing to update
the term to reflect current societal
relationships. Under proposed new Rule
12100(u)(11), FINRA would add as
immediate family members a person’s
spouse, partner in a civil union, and
domestic partner.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,40 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 the
proposed rule change would benefit
users of FINRA’s arbitration forum by
addressing concerns raised about the
fairness and neutrality of FINRA’s
public arbitrator roster. FINRA expects
all arbitrators to be fair and neutral, and
believes that they are. However, FINRA
believes that it must address
perceptions about the allegiances or
inclinations of arbitrators that may
erode confidence in the forum.
FINRA believes that classifying any
individual who worked in the financial
industry for any duration as a nonpublic arbitrator would improve
investors’ views about the neutrality of
the public arbitrator roster. FINRA also
believes that classifying professionals
who represent or provide services to
parties in disputes concerning
investment accounts or transactions as
non-public arbitrators would enable all
parties in customer cases with three
arbitrators to address their perceptions
about the neutrality of public arbitrator
roster through the use of strikes during
the panel selection process. Moreover,
FINRA believes that including cooling39 Financial support is defined as providing an
individual with more than 50 percent of his or her
annual income.
40 15 U.S.C. 78o-3(b)(6).
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Federal Register / Vol. 79, No. 128 / Thursday, July 3, 2014 / Notices
off periods in the proposed public
arbitrator definition would help ensure
that potential arbitrators have sufficient
separation from their financial industry
affiliations before FINRA permits them
to serve as public arbitrators.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change would 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 on the proposed
rule change 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
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2014–028 on the subject line.
tkelley on DSK3SPTVN1PROD with NOTICES
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2014–028. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
16:53 Jul 02, 2014
Jkt 232001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.41
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–15607 Filed 7–2–14; 8:45 am]
BILLING CODE 8011–01–P
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:
VerDate Mar<15>2010
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, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
All submissions should refer to File
Number SR–FINRA–2014–028 and
should be submitted on or before July
24, 2014.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72489; File No. SR–
ISEGemini–2014–18]
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Establish New Rule
720A
June 27, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that, on June 24,
2014, ISE Gemini, LLC (the ‘‘Exchange’’
or ‘‘ISE Gemini’’) filed with the
Securities and Exchange Commission
the proposed rule change as described
in Items I, II, and III below, which items
PO 00000
41 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
Frm 00082
Fmt 4703
Sfmt 4703
have been prepared by the selfregulatory organization. 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
ISE Gemini proposes to establish new
procedures to account for erroneous
trades occurring from disruptions and/
or malfunctions of Exchange systems.
The changes described in this proposal
would establish new ISE Gemini Rule
720A. The text of the proposed rule
change is available on the Exchange’s
Web site www.ise.com, 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
self-regulatory organization 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 self-regulatory organization 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
The Exchange proposes to adopt Rule
720A to provide for new procedures to
account for erroneous trades occurring
from disruptions and/or malfunctions of
Exchange systems. Specifically,
proposed new Rule 720A would provide
that any transaction that arises out of a
‘‘verifiable systems disruption or
malfunction’’ in the use or operation of
an Exchange automated quotation,
dissemination, execution, or
communication system may either be
nullified or adjusted by Market
Control.3 Under the rule, Market Control
may act, on its own motion, to review
erroneous transactions. This filing is
based on the rules of NYSE Arca, Inc.
(‘‘NYSE Arca’’).4
3 Market Control consists of designated personnel
in the Exchange’s market control center. See ISE
Gemini Rule 720(a)(3)(ii).
4 See NYSE Arca Rule 6.89. The proposed rule
change is also based in part on NASDAQ OMX
PHLX, LLC (‘‘Phlx’’) Rule 1092(c)(ii)(A), and in
addition is substantially similar to Chicago Board
Options Exchange, Inc. (‘‘CBOE’’) Rule 6.25(a)(3).
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]]>Agencies
[Federal Register Volume 79, Number 128 (Thursday, July 3, 2014)]
[Notices]
[Pages 38080-38086]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15607]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72491; File No. SR-FINRA-2014-028]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to
Revisions to the Definitions of Non-Public Arbitrator and Public
Arbitrator
June 27, 2014.
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 June 17, 2014, 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 substantially 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to refine and reorganize the definitions of
``non-public arbitrator'' and ``public arbitrator.'' The amendments
would, among other matters, provide that persons who worked in the
financial industry for any duration during their careers would always
be classified as non-public arbitrators, and persons who represent
investors or the financial industry as a significant part of their
business would also be classified as non-public arbitrators, but could
become public arbitrators after a cooling-off period. The amendments
would also reorganize the definitions to make it easier for arbitrator
applicants and parties, among others, to determine the correct
arbitrator classification.
The text of the proposed rule change is available, at the principal
office of FINRA, on FINRA's Web site at https://www.finra.org, 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
[[Page 38081]]
may be examined at the places specified in Item IV below. FINRA has
prepared summaries, set forth in sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
FINRA classifies arbitrators as ``non-public'' or ``public'' based
on their professional and/or personal affiliations. The Code of
Arbitration Procedure for Customer Disputes (``Customer Code'') and the
Code of Arbitration Procedures for Industry Disputes (``Industry
Code'') define these terms. The non-public arbitrator definition (Rules
12100(p) and 13100(p)) lists financial industry affiliations that might
qualify a person to serve as a non-public arbitrator in the forum.
Conversely, the public arbitrator definition (Rules 12100(u) and
13100(u)) itemizes affiliations that disqualify a person from serving
as a public arbitrator in the forum. In general, public arbitrators do
not have a significant affiliation with the financial industry.
FINRA has amended its arbitrator definitions several times over the
years to address constituent perceptions that an affiliation might
affect an arbitrator's neutrality.\3\ The SEC approved the latest
amendments in 2013 (the ``2013 amendments'').\4\ Under the 2013
amendments, FINRA disqualified persons associated with a mutual fund or
hedge fund from serving as public arbitrators. The 2013 amendments also
provided that specified individuals must wait for two years after
ending certain disqualifying affiliations (``cooling-off period'')
before they may serve as public arbitrators.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Rel. No. 49573 (Apr. 16, 2004),
69 FR 21871 (Apr. 22, 2004) (File No. SR-NASD-2003-95) and Notice to
Members 04-49 (Jun. 2004); Securities Exchange Act Rel. No. 54607
(Oct. 16, 2006), 71 FR 62026 (Oct. 20, 2006) (File No. SR-NASD-2005-
094) and Notice to Members 06-64 (Nov. 2006); and Securities
Exchange Act Rel. No. 57492 (Mar. 13, 2008), 73 FR 15025 (Mar. 20,
2008) (File No. SR-NASD-2007-021) and Regulatory Notice 08-22 (May
2008).
\4\ See Securities Exchange Act Rel. No. 69297 (Apr. 4, 2013),
78 FR 21449 (Apr. 10, 2013) (File No. SR-FINRA-2013-003) and
Regulatory Notice 13-21 (Jun. 2013).
---------------------------------------------------------------------------
The SEC received several comment letters on the 2013 amendments.
Commenters recommended that FINRA increase the proposed two-year
cooling-off period, add new categories of individuals whom FINRA would
disqualify from serving as public arbitrators, and add new categories
of individuals to the non-public arbitrator definition.\5\ In its
response to the comment letters, FINRA asked the SEC to approve the
proposed rule change as a significant measure to address constituent
perceptions about the fairness and neutrality of the public arbitrator
roster. FINRA staff agreed to conduct a comprehensive review in
consultation with the National Arbitration and Mediation Committee
(``NAMC''),\6\ of both the non-public arbitrator and public arbitrator
definitions with a view towards clarifying the definitions and
reviewing the additional issues raised in the comment letters.\7\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Rel. No. 69297 (Apr. 4, 2013),
78 FR 21449 (Apr. 10, 2013) Discussion of Comment Letters. The
comment letters are available on the SEC's Web site at www.sec.gov.
\6\ The NAMC, which is composed of investor, industry, and
neutral (arbitrator and mediator) representatives, provides policy
guidance to FINRA Dispute Resolution staff. A majority of the NAMC
members and its chair are public.
\7\ See letter from Margo A. Hassan, Assistant Chief Counsel,
FINRA Dispute Resolution, to Elizabeth M. Murphy, dated March 11,
2013. The letter is available on FINRA's Web site at www.finra.org,
and on the SEC's Web site at www.sec.gov.
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FINRA staff met with the NAMC several times to review both
arbitrator definitions. As the result of these discussions, as well as
general discussions with interested groups over a period of time, FINRA
is proposing to amend the non-public arbitrator and public arbitrator
definitions. The intent of the proposed rule change is to address the
concerns about arbitrator neutrality that were raised by the commenters
on the 2013 amendments. As noted above, these concerns related to the
cooling-off periods, the categories of individuals whom FINRA
disqualifies from serving as public arbitrators, and the categories of
individuals whom FINRA classifies as non-public arbitrators.
The proposed rule change includes several substantive changes to
the definitions and an extensive reorganization of the public
arbitrator definition. In light of extensive revisions, FINRA is
proposing to delete the definitions in their entirety, and replace them
with new definitions. The proposed amendments are described below. For
ease of reading, the discussion only refers to Rule 12100 of the
Customer Code. The proposed amendments to Rule 13100 of the Industry
Code are identical, and FINRA's rationale is the same.
Non-Public Arbitrator Definition
The non-public arbitrator definition lists financial industry
affiliations that might qualify a person to serve as a non-public
arbitrator in the forum. The affiliations relate to individuals who
work in the financial industry, and individuals who provide services to
industry entities and their employees. Each qualifying affiliation has
a corresponding disqualification in the public arbitrator definition.
Currently, FINRA permits individuals who worked in the financial
industry to join the public arbitrator roster after a cooling-off
period so long as they meet other requirements.
FINRA is proposing to expand the scope of the non-public arbitrator
definition in three ways. First, the definition would provide that
individuals who worked in the financial industry for any duration
during their careers would always be classified as non-public
arbitrators. Second, FINRA would add new categories of financial
industry personnel who might qualify to serve as non-public
arbitrators. Third, FINRA would add to the definition professionals who
devote a significant part of their business to representing or
providing services to parties in disputes concerning investments or
employment relationships.
Expansion of the non-public arbitrator definition becomes
particularly significant when parties are selecting arbitrators in
customer cases with three arbitrators.\8\ In these cases, FINRA sends
the parties three randomly generated lists of arbitrators--a list of 10
chair-qualified public arbitrators, a list of 10 public arbitrators,
and a list of 10 non-public arbitrators. The parties select their panel
through a process of striking and ranking the arbitrators on the lists.
FINRA limits the parties to four strikes on the chair-qualified public
arbitrator list and four strikes on the public arbitrator list.
However, FINRA gives parties unlimited strikes on the non-public
arbitrator list. By expanding the scope of the non-public arbitrator
definition, parties would have a greater ability to address their own
perceptions of bias through the use of their unlimited strikes on the
non-public arbitrator list.
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\8\ Under Rule 12401, one arbitrator hears customer claims up to
$100,000 and three arbitrators hear customer claims of more than
$100,000 or unspecified claims.
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New Rule 12100(p)(1)
Under the current non-public arbitrator definition, if a person is
currently, or was within the past five years, affiliated with a
securities industry entity specified in the rule (e.g., associated with
a broker or dealer), the person may qualify to serve as a
[[Page 38082]]
non-public arbitrator at the forum.\9\ Subject to two exceptions, FINRA
allows these individuals to join the public arbitrator roster five
years after ending all industry affiliation. The first exception to the
five-year provision applies to persons who retired from, or who spent a
substantial part of their career with, a specified industry entity.\10\
FINRA keeps these individuals on the non-public arbitrator roster for
the duration of their service to the forum. The second exception
applies to persons who were affiliated for 20 years or more with a
specified industry entity.\11\ FINRA also keeps these arbitrators on
the non-public arbitrator roster for the duration of their service.
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\9\ See current Rule 12100(p)(1). This provision applies to a
person who is, or was within the past five years:
(A) Associated with, including registered through, a broker or
dealer (including a government securities broker or dealer or a
municipal securities dealer);
(B) Registered under the Commodities Exchange Act;
(C) A member of a commodities exchange or a registered futures
association; or
(D) Associated with a person or firm registered under the
Commodity Exchange Act.
\10\ See current Rule 12100(p)(2).
\11\ See current Rule 12100(u)(2).
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Investor representatives raised concerns about the neutrality of
FINRA's public arbitrator roster because they do not believe that
former industry-affiliated persons should ever serve as public
arbitrators. In response to these concerns, FINRA is proposing to adopt
new Rule 12100(p)(1) to eliminate the five-year cooling-off provision
for persons who work in the financial industry. Under the new rule,
FINRA would classify persons who are, or were, affiliated with a
specified financial industry entity at any point in their careers, for
any duration, as non-public arbitrators.\12\ Once FINRA classifies an
arbitrator as non-public, FINRA would never reclassify the arbitrator
as public. Under the proposed rule change, there would be no exceptions
to this provision.
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\12\ See new Rule 12100(p)(1). The financial industry
affiliations enumerated in new Rule 12100(p)(1) relate to a person
who is, or was, associated with, including registered through:
(A) a broker or a dealer (including a government securities
broker or dealer or a municipal securities broker or dealer); or
(B) a member of, or an entity registered under, the Commodity
Exchange Act, the Commodities Future Trading Commission, the
National Futures Association, or the Municipal Securities Rulemaking
Board; or
(C) an entity that is organized under or registered pursuant to
the Securities Exchange Act of 1934, Investment Company Act of 1940,
or the Investment Advisers Act of 1940; or
(D) a mutual fund or a hedge fund; or
(E) an investment adviser.
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FINRA is also proposing to add two new categories of financial
industry professionals to new Rule 12100(p)(1)--persons associated
with, including registered through, a mutual fund or hedge fund, and
persons associated with, including registered through, an investment
adviser. Currently, FINRA does not permit these professionals to serve
in any capacity, but if they end their affiliation, they may serve as
public arbitrators after a two-year cooling-off period.\13\ FINRA
believes that these professionals would bring valuable knowledge and
experience to the forum and that FINRA should classify them as non-
public arbitrators. Under the proposed rule change, once FINRA
classifies them as non-public arbitrators, these arbitrators would
remain on the non-public arbitrator roster for the duration of their
service to the forum.
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\13\ These persons may serve as non-public arbitrators if they
are qualified to serve under another provision (e.g., dually
registered as an investment adviser and an associated person of a
FINRA member).
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Finally, FINRA is proposing to add clarity to new Rule 12100(p)(1)
by revising the references in several ways. First, instead of referring
to a person registered under the Commodity Exchange Act, or associated
with a person or firm registered under the Commodity Exchange Act, or a
member of a commodities exchange, FINRA would simplify the reference in
Rule 12100(p)(1)(B) by referring to a person who is, or was, associated
with, including registered through, under, or with (as applicable), the
Commodity Exchange Act or the Commodities Futures Trading Commission.
FINRA is not proposing any substantive change to the categories of
persons relating to commodities. Second, instead of referring to a
member of a registered futures association, FINRA proposes in Rule
12100(p)(1)(B) to specify the association by name--the National Futures
Association. FINRA is not proposing any substantive change to the
category of persons relating to futures. Third, FINRA is proposing to
add in Rule 12100(p)(1)(B) a reference to a person who is, or was,
associated with, including registered through, under, or with (as
applicable), the Municipal Securities Rulemaking Board (``MSRB'').
While such an individual would be covered under the current ``municipal
securities broker or dealer,'' FINRA believes adding the MSRB would add
clarity to the rule. Fourth, FINRA is proposing an omnibus reference in
Rule 12100(p)(1)(C) to cover industry affiliated persons not otherwise
specified in the rule and potential categories of industry
professionals that may be created in the future.
New Rule 12100(p)(2)
Under the current non-public arbitrator definition, attorneys,
accountants, and other professionals who devoted 20 percent or more of
their professional work in the last two years to serving specified
industry entities and/or employees, may qualify to serve as non-public
arbitrators at the forum.\14\ FINRA currently permits these individuals
to join the public arbitrator roster two years after they stop
providing services to the industry. However, they are permanently
disqualified from serving as public arbitrators if they provided
services to the industry for 20 years or more over the course of their
careers.\15\
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\14\ See current Rule 12100(p)(3). The rule applies to the
persons and entities listed in current Rule 12100(p)(1).
\15\ See current Rule 12100(u)(2).
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FINRA is proposing to adopt new Rule 12100(p)(2) to broaden the
current provision in two ways. First, the new rule increases the look-
back period from two years to five years. Second, it broadens
application of the provision to include services to industry entities
and any persons or entities associated with those industry entities.
The proposed new public arbitrator definition provides that persons
would be permanently disqualified from serving as public arbitrators if
they provided the specified services for 15 calendar years or more over
the course of their careers (in contrast to the current 20 year
provision).\16\ The 15 years are a total number of years--they would
not have to be consecutive years. After 15 years of service, FINRA
would keep these arbitrators on the non-public arbitrator roster for
the duration of their service to the forum. FINRA is increasing the
look-back period, and decreasing the number of years before it applies
a permanent disqualification, so that only individuals who are
sufficiently removed from their industry affiliation are permitted to
serve on the public arbitrator roster.
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\16\ See new Rule 12100(u)(2).
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Finally, FINRA is proposing to add clarity to the rule by changing
the phrase ``professional work'' to ``professional time.'' FINRA staff
believes that the term ``time'' is better because time would be more
easily quantified by the professionals in the category.
New Rule 12100(p)(3)
Currently, FINRA permits professionals who represent or provide
[[Page 38083]]
services to investors in securities disputes to serve as public
arbitrators at the forum.\17\ Industry representatives raised concerns
about the neutrality of the public arbitrator roster, and they do not
believe that these professionals should serve as public arbitrators. To
address these concerns, FINRA is proposing to add a new qualifying
affiliation to the non-public arbitrator definition.
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\17\ These individuals are not qualified under the non-public
arbitrator definition to serve as non-public arbitrators, nor are
they disqualified from serving as public arbitrators under the
public arbitration definition.
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Under new Rule 12100(p)(3), FINRA would classify as non-public
arbitrators, attorneys, accountants, and other professionals who
devoted 20 percent or more of their professional time, within the past
five years, to serving parties in investment or financial industry
employment disputes. FINRA selected the 20 percent threshold for
application of the provision to keep it consistent with the threshold
in new Rule 12100(p)(2).
FINRA would permit these individuals to serve as public arbitrators
five years after their business mix changes. However, if the person
accumulates 15 calendar years of providing the qualifying services over
the course of a career, FINRA would keep that arbitrator on the non-
public arbitrator roster for the duration of the arbitrator's service
to the forum. The 15 years are a total number of years--they would not
have to be consecutive years.\18\
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\18\ See new Rule 12100(u)(3).
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New Rule 12100(p)(4)
FINRA currently classifies as non-public arbitrators, persons
working in a bank or other financial institution (e.g., a credit union)
who execute transactions in securities or who supervise employees who
execute transactions in securities.\19\ This provision covers persons
who are not employed by an industry entity that falls under current
paragraph (p)(1). When such persons end their affiliation, they may
immediately apply to serve as public arbitrators at the forum unless
they have engaged in this type of work for 20 years or more over the
course of their careers.\20\
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\19\ See current Rule 12100(p)(4).
\20\ See current Rule 12100(u)(2).
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FINRA is proposing to adopt new Rule 12100(p)(4) to add a five-year
look-back period to this provision. The substance of the qualifying
affiliation is the same. Only the look-back period is new. Under the
new rule, FINRA would classify as a non-public arbitrator, any person
who, within the last five calendar years, worked in a bank or other
financial institution and executed transactions in securities or
supervised or monitored compliance with the securities and commodities
laws of employees who execute transactions in securities. FINRA would
permit these persons to serve as public arbitrators five years after
they ended their industry affiliation unless they provided these
services for 15 years or more. As is the case with proposed new
paragraphs (p)(2) and (p)(3) described above, the proposed new public
arbitrator definition provides that these persons would be permanently
disqualified from serving as public arbitrators if they provided the
specified services for 15 calendar years or more over the course of
their careers.\21\ Again, the 15 years are a total number of years--
they would not have to be consecutive years. After 15 years of service,
FINRA would keep these arbitrators on the non-public arbitrator roster
for the duration of their service to the forum.
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\21\ See new Rule 12100(u)(4).
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Public Arbitrator Definition
The public arbitrator definition lists affiliations that disqualify
a person from serving as a public arbitrator in the forum. It includes
a disqualification that corresponds to each qualifying affiliation in
the non-public arbitrator definition. Currently, the definition
reflects these disqualifications by cross-references to the non-public
arbitrator definition. The public arbitrator definition includes
additional disqualifiers that do not have a corresponding qualifier in
the non-public arbitrator definition. Over the years, FINRA added these
disqualifications to the public arbitrator definition to address
investors' perceptions about the neutrality of the public arbitrator
roster.
FINRA is proposing substantive changes to the public arbitrator
definition that: Add new disqualifications; amend an existing
disqualification to simplify it; and revise the cooling-off periods.
Under new Rule 12100(u), FINRA would subject individuals to a five-year
cooling-off period after they end an affiliation based on their own
activities, and a two-year cooling-off period after they end an
affiliation based on someone else's activities (provided that another
disqualification is not applicable).
FINRA is also proposing to reorganize the public arbitrator
definition to make it easier for FINRA staff, arbitrators and potential
arbitrators, and parties to ascertain the correct arbitrator
classification. Under the proposed rule change, FINRA would remove the
cross-references between the definitions, and fully describe each
disqualification. FINRA would also separate the disqualifications into
categories of those that are permanent versus those that are temporary,
and those based on a person's own activities versus those based on the
activities of others (e.g., others at a person's firm). FINRA would
repeat some of the disqualifying affiliations to make it clear that the
affiliations are subject to both a temporary disqualification and a
permanent disqualification depending on how many years a person was
engaged in a stated activity.
New Rule 12100(u)(1)
FINRA is proposing to adopt new Rule 12100(u)(1) to specify the
types of financial industry employment that disqualify a person from
serving as a public arbitrator.\22\ Substantively, the affiliations are
identical to those listed in new Rule 12100(p)(1). None of the
disqualifying affiliations is new--FINRA currently includes each of
them in the public arbitrator definition.\23\ Rather, FINRA is
proposing to add clarity to new Rule 12100(u)(1) by revising the
references in a manner identical to what it is proposing for new Rule
12100(p)(1).\24\
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\22\ Under new Rule 12100(u)(1), A person shall not be
designated as a public arbitrator who is, or was, associated with,
including registered through:
(A) a broker or a dealer (including a government securities
broker or dealer or a municipal securities broker or dealer); or
(B) a member of, or an entity registered under, the Commodity
Exchange Act, the Commodities Futures Trading Commission, the
National Futures Association, or the Municipal Securities Rulemaking
Board; or
(C) an entity that is organized under or registered pursuant to
the Securities Exchange Act of 1934, Investment Company Act of 1940,
or the Investment Advisers Act of 1940; or
(D) a mutual fund or a hedge fund; or
(E) an investment adviser.
\23\ See current Rule 12100(u)(1) and Rule 12100(u)(3).
\24\ First, instead of referring to a person registered under
the Commodity Exchange Act, or associated with a person or firm
registered under the Commodity Exchange Act, or a member of a
commodities exchange, FINRA would simplify the reference in Rule
12100(u)(1)(B) by referring to a person who is, or was, associated
with, including registered through, under, or with (as applicable),
the Commodity Exchange Act or the Commodities Futures Trading
Commission. FINRA is not proposing any substantive change to the
categories of persons relating to commodities. Second, instead of
referring to a member of a registered futures association, FINRA
proposes in Rule 12100(u)(1)(B) to specify the association by name--
the National Futures Association. FINRA is not proposing any
substantive change to the category of persons relating to futures.
Third, FINRA is proposing to add in Rule 12100(u)(1)(B) a reference
to a person who is, or was, associated with, including registered
through, under, or with (as applicable), the MSRB. While such an
individual would be covered under the current ``municipal securities
broker or dealer,'' FINRA believes adding the MSRB would add clarity
to the rule. Fourth, FINRA is proposing an omnibus reference in Rule
12100(u)(1)(C) to cover industry affiliated persons not otherwise
specified in the rule and potential categories of industry
professionals that may be created in the future.
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[[Page 38084]]
FINRA currently permits non-public arbitrators to become public
arbitrators at some point after ending their affiliations (subject to
specified exceptions). As explained in the above discussion on new Rule
12100(p)(1), under the proposed rule change, FINRA would classify these
individuals as non-public arbitrators for the duration of their service
to the forum and would never reclassify them as public arbitrators.
Therefore, anyone disqualified under new Rule 12100(u)(1) would be
subject to a permanent disqualification from the public arbitrator
roster.
New Rules 12100(u)(2) and 12100(u)(6)
Under the current public arbitrator definition, attorneys,
accountants, and other professionals who devoted 20 percent or more of
their professional work in the last two years to serving securities
industry employees and/or entities, may not serve as public arbitrators
at the forum.\25\ These individuals may join the public arbitrator
roster two years after they stop providing services to the industry.
However, FINRA permanently disqualifies them from the public arbitrator
roster if they provided the services for 20 years or more over the
course of their careers.\26\
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\25\ See current Rule 12100(u)(1), which incorporates, among
other things, current Rule 12100(p)(3).
\26\ See current Rule 12100(u)(2).
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FINRA is proposing to adopt new Rules 12100(u)(2) and 12100(u)(6)
to expand the current provision. FINRA would broaden application of the
disqualification to include services to financial industry entities and
any persons or entities associated with those financial industry
entities.\27\ In new Rule 12100(u)(6), FINRA would increase the
cooling-off period in the rule from two years to five years,\28\ and in
new Rule 12100(u)(2), FINRA would decrease the number of years for a
permanent disqualification from 20 years to 15 years.\29\ The 15 years
are a total number of years--they would not have to be consecutive
years. Although the description of the disqualification in paragraphs
(u)(2) and (u)(6) is identical, FINRA believes it would add clarity to
the definition to separate out when the provision results in a
permanent disqualification, and when it results in a temporary
disqualification. Substantively, new Rules 12100(u)(2) and 12100(u)(6)
are identical to new Rule 12100(p)(2).
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\27\ See current Rule 12100(p)(3) for content to be expanded by
new Rules 12100(u)(2) and 12100(u)(6).
\28\ See current Rule 12100(u)(1), referencing current Rule
12100(p)(3), which includes a two year look-back period.
\29\ See current Rule 12100(u)(2) which references a 20 year
time period.
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New Rules 12100(u)(3) and 12100(u)(7)
As explained above, FINRA currently permits professionals who
represent or provide services to investors in securities disputes to
serve as public arbitrators at the forum. Industry representatives
raised concerns about the neutrality of the public arbitrator roster,
and they do not believe that these professionals should serve as public
arbitrators.
To address these concerns, FINRA is proposing to disqualify from
the public arbitrator roster attorneys, accountants, expert witnesses,
and other professionals who devote 20 percent or more of their
professional time to serving parties in investment or financial
industry employment disputes. Under new Rule 12100(u)(7), FINRA would
apply a five-year cooling-off period to the rule. Under new Rule
12100(u)(3), these persons would be permanently disqualified from
serving as public arbitrators if they provide the specified services
for 15 calendar years or more over the course of their careers. The 15
years are a total number of years--they would not have to be
consecutive years. The substance of the disqualification corresponds to
the proposed qualifying affiliation in new Rule 12100(p)(3). FINRA
selected the 20 percent threshold for application of the provision to
keep it consistent with the thresholds in new Rules 12100(u)(2) and
12100(u)(6).
New Rules 12100(u)(4) and 12100(u)(8)
FINRA currently disqualifies personnel working in a bank or other
financial institution (e.g., a credit union) who execute transactions
in securities, or who supervise employees who execute transactions in
securities, from serving as public arbitrators.\30\ This provision
applies to persons who are employed by a financial industry entity that
is not covered by current Rule 12100(p)(1). When these individuals end
their affiliation, they may immediately apply to serve as public
arbitrators at the forum unless they have engaged in this type of work
for 20 years or more over the course of their careers.\31\
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\30\ See current Rule 12100(u)(1) which references current Rule
12100(p)(4).
\31\ See current Rule 12100(u)(2).
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FINRA is proposing to adopt new Rules 12100(u)(4) and 12100(u)(8)
to expand the current provision. In new Rule 12100(u)(8), FINRA would
impose a five-year cooling-off period in the rule; and, in new Rule
12100(u)(4), FINRA would decrease the number of years for a permanent
disqualification from 20 years to 15 years. The 15 years are a total
number of years--they would not have to be consecutive years. Although
the description of the disqualification in paragraphs (u)(4) and (u)(8)
is identical, FINRA believes it would add clarity to the definition to
separate out when the provision results in a permanent
disqualification, and when it results in a temporary disqualification.
Substantively, new Rules 12100(u)(4) and 12100(u)(8) are identical to
new Rule 12100(p)(4).
New Rule 12100(u)(5)
FINRA currently disqualifies individuals employed by, or who are
directors or officers of, an entity that directly or indirectly
controls, is controlled by, or is under common control with, any
partnership, corporation, or other organization that is engaged in the
securities business.\32\ These persons may become public arbitrators
two years after ending their affiliation.\33\
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\32\ See current Rules 12100(u)(6) and 12100(u)(7).
\33\ See current Rule 12100(u).
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FINRA is proposing to adopt new Rule 12100(u)(5) to expand
application of the provision in two ways. First, FINRA would expand the
disqualification from an ``organization that is engaged in the
securities business'' to an ``organization that is engaged in the
financial industry.'' Second, FINRA would increase the cooling-off
period from two years to five years. This disqualification addresses
the perception that employees, officers, and directors of entities that
are associated with industry entities should not serve as public
arbitrators because they may favor an industry party in an arbitration
proceeding. The term ``financial industry'' would replace the term
``securities business'' to ensure that the provision covers all
financial services entities that may raise concerns about neutrality.
The term securities business may be interpreted too narrowly to apply
only to the affiliations in current Rule 12100(p)(1).
[[Page 38085]]
New Rule 12100(u)(9)
Currently, professionals may not serve as public arbitrators if
their firm: Derived 10 percent or more of its annual revenue in the
past two years from providing services to the financial industry; \34\
or derived $50,000 or more in annual revenue in the past two years from
providing services to the securities industry relating to customer
disputes concerning an investment account or transaction.\35\ For
example, a real estate attorney working at a law firm with a securities
practice devoted to serving the industry is disqualified from serving
as a public arbitrator if the threshold percentage or dollar figure is
met. He or she may, however, become a public arbitrator two years after
leaving the firm or two years after the firm no longer derives annual
revenue from the financial industry or securities industry exceeding
those thresholds.
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\34\ See current Rule 12100(u)(4).
\35\ See current Rule 12100(u)(5).
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FINRA is proposing to adopt new Rule 12100(u)(9) to combine the two
disqualifications into one, and to simplify the disqualification
relating to the $50,000 threshold. New Rule 12100(u)(9) would provide
that professionals may not serve as public arbitrators if their firm
derived $50,000 or more, or at least 10 percent of its annual revenue,
in any single calendar year during the course of the past two calendar
years, from: The entities listed in paragraph (u)(1) and/or to any
persons or entities associated with any of the entities listed in
paragraph (u)(1); or from a bank or other financial institution where
persons effect transactions in securities including government or
municipal securities, commodities, futures, or options. The cooling-off
period of two years would be the same. FINRA is proposing to remove the
requirement that the $50,000 in revenue relate to customer disputes
concerning an investment account or transaction to make it easier for
potential and existing arbitrators to determine if the disqualification
would apply.
New Rule 12100(u)(10)
FINRA is proposing to adopt new Rule 12100(u)(10) to disqualify
from the public arbitrator roster, professionals whose firm derived
$50,000 or more, or at least 10 percent of its annual revenue, in any
single calendar year during the course of the past two calendar years,
from individual and/or institutional investors relating to securities
matters. FINRA would apply a two-year cooling-off period to this
provision. For example, a trust and estates attorney working at a law
firm with a securities practice devoted to serving investors would be
disqualified from serving as a public arbitrator if the threshold
percentage or dollar figure is met.
New Rule 12100(u)(10) is not based on an existing
disqualification--it is entirely new. The purpose of this provision is
to address an industry perception that a professional whose firm
derives significant revenue from representing investors in securities
matters in not neutral, and should not be permitted to serve as a
public arbitrator. The revenue thresholds and cooling-off period are
consistent with proposed new Rule 12100(u)(9).
New Rule 12100(u)(11)
FINRA currently disqualifies individuals from serving as public
arbitrators if their spouse or immediate family member is employed by,
or is a director or officer of, an entity that directly or indirectly
controls, is controlled by, or is under common control with, any
partnership, corporation, or other organization that is engaged in the
securities business.\36\ FINRA applies a two-year cooling-off period to
these disqualifications.\37\ In addition, if an individual's spouse or
immediate family member is employed in a securities industry entity or
provides services to such an entity and/or the entity's employees, the
person may not serve as a public arbitrator.\38\ While the current
public arbitrator definition does not include a cooling-off period for
this disqualification, it has been FINRA's practice to make these
individuals wait for five years after their spouse or immediate family
member ends the disqualifying affiliation before they may become public
arbitrators.
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\36\ See current Rules 12100(u)(6) and 12100(u)(7).
\37\ See current Rule 12100(u).
\38\ See current Rule 12100(u)(8).
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FINRA is proposing to simplify these disqualifications and add
clarity to them by combining them into one disqualification with a two-
year cooling-off period. New Rule 12100(u)(11) would provide that a
person shall not be designated as a public arbitrator if his or her
immediate family member is an individual whom FINRA would disqualify
from serving on the public arbitrator roster. If the person's immediate
family member ends the disqualifying affiliation, or the person ends
the relationship with the individual so that the individual is no
longer the person's immediate family member, the person may, after two
calendar years have passed from the end of the affiliation or
relationship, be designated as a public arbitrator. FINRA believes it
is appropriate to have a two-year cooling-off period for all
disqualifications based on the activities of others.
Immediate Family
In the current public arbitrator definition, the term spouse
appears in the disqualification text, not in the description of
immediate family member. The term immediate family member includes a
person's parent, stepparent, child, stepchild, or household member. It
also includes an individual that the person supports financially,\39\
and an individual who is claimed as a dependent for federal tax
purposes. FINRA is proposing to update the term to reflect current
societal relationships. Under proposed new Rule 12100(u)(11), FINRA
would add as immediate family members a person's spouse, partner in a
civil union, and domestic partner.
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\39\ Financial support is defined as providing an individual
with more than 50 percent of his or her annual income.
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2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\40\ 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 the proposed rule change would
benefit users of FINRA's arbitration forum by addressing concerns
raised about the fairness and neutrality of FINRA's public arbitrator
roster. FINRA expects all arbitrators to be fair and neutral, and
believes that they are. However, FINRA believes that it must address
perceptions about the allegiances or inclinations of arbitrators that
may erode confidence in the forum.
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\40\ 15 U.S.C. 78o-3(b)(6).
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FINRA believes that classifying any individual who worked in the
financial industry for any duration as a non-public arbitrator would
improve investors' views about the neutrality of the public arbitrator
roster. FINRA also believes that classifying professionals who
represent or provide services to parties in disputes concerning
investment accounts or transactions as non-public arbitrators would
enable all parties in customer cases with three arbitrators to address
their perceptions about the neutrality of public arbitrator roster
through the use of strikes during the panel selection process.
Moreover, FINRA believes that including cooling-
[[Page 38086]]
off periods in the proposed public arbitrator definition would help
ensure that potential arbitrators have sufficient separation from their
financial industry affiliations before FINRA permits them to serve as
public arbitrators.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change would 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 on the proposed rule change 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 email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2014-028 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-028. 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, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-FINRA-2014-028 and
should be submitted on or before July 24, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15607 Filed 7-2-14; 8:45 am]
BILLING CODE 8011-01-P
