Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to Revisions to the Definitions of Non-Public Arbitrator and Public Arbitrator, 11695-11706 [2015-04419]

Download as PDF Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices For the Nuclear Regulatory Commission. Annette L. Vietti-Cook, Secretary of the Commission. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–74383; File No. SR–FINRA– 2014–028] [FR Doc. 2015–04490 Filed 3–3–15; 8:45 am] BILLING CODE 7590–01–P Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to Revisions to the Definitions of NonPublic Arbitrator and Public Arbitrator SECURITIES AND EXCHANGE COMMISSION [Release No. 34–74247A; File No. SR– BATS–2015–09] February 26, 2015. Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rules 11.9, 11.12, and 11.13 of BATS Exchange, Inc.; Correction February 26, 2015. Securities and Exchange Commission AGENCY: ACTION: Notice; correction. The Securities and Exchange Commission published a document in the Federal Register on February 18, 2015, concerning a Notice of Filing of a Proposed Rule Change to Amend Rules 11.9, 11.12, and 11.13 of BATS Exchange, Inc.. The document contained a typographical error. SUMMARY: FOR FURTHER INFORMATION CONTACT: Christopher P. Grobbel, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549, (202) 551–5491. Correction In the Federal Register of February 18, 2015 in FR Doc. 2015–3222, on page 8720, in the first and second line in the subheading under the heading ‘‘SECURITIES AND EXCHANGE COMMISSION’’ in the third column, correct the reference to ‘‘File No. SR– BATS–2014–09’’ instead to ‘‘File No. SR–BATS–2015–09.’’ Jill M. Peterson, Assistant Secretary. [FR Doc. 2015–04423 Filed 3–3–15; 8:45 am] mstockstill on DSK4VPTVN1PROD with NOTICES BILLING CODE 8011–01–P VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 I. Introduction On June 17, 2014, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend FINRA Rule 12100(p) of the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and FINRA Rule 13100(p) of the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code’’) (collectively, ‘‘Codes’’), defining the term ‘‘non-public arbitrator;’’ and FINRA Rule 12100(u) of the Customer Code and Rule 13100(u) of the Industry Code, defining the term ‘‘public arbitrator.’’ The proposed rule change was published for comment in the Federal Register on July 3, 2014.3 On August 4, 2014, FINRA extended the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to October 1, 2014. The Commission received three hundred sixteen (316) comment letters in response to the Notice of Filing.4 On 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Exchange Act Release No. 72491 (Jun. 27, 2014), 79 FR 38080 (Jul. 3, 2014) (Notice of Filing of Proposed Rule Change Relating to Revisions to the Definitions of Non-Public Arbitrator and Public Arbitrator) (‘‘Notice of Filing’’). The comment period closed on July 24, 2014. 4 Of the 316 letters, 21 were unique letters, and 295 of the letters followed a form designated as the ‘‘Type A’’ letter, submitted by self-identified independent financial advisors (‘‘independent financial advisors’’) (‘‘Type A Letter’’). The unique letters were submitted by: Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari, dated July 1, 2014 (‘‘Aidikoff Letter’’); Steven B. Caruso, Esq., Maddox Hargett & Caruso, P.C., dated July 1, 2014 (‘‘Caruso July Letter’’); Ryan K. Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated July 2, 2014 (‘‘Bakhtiari July Letter’’); Richard A. Stephens, Attorney at Law, dated July 6, 2014 (‘‘Stephens Letter’’); Daniel E. Bacine, Barrack, Rodos & Bacine, dated July 18, 2014 (‘‘Bacine Letter’’); Blossom Nicinski, dated July 20, 2014 (‘‘Nicinski Letter’’); Christopher L. 2 17 PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 11695 September 30, 2014, the Commission received a letter from FINRA responding to the comment letters.5 On October 1, 2014, the Commission issued an order to institute proceedings pursuant to section 19(b)(2)(B) of the Act 6 to determine whether to approve or disapprove the proposed rule change. The order was published for comment in the Federal Register on October 7, 2014.7 The Commission received fourteen (14) comment letters in response to the Proceedings Order.8 On Mass, dated July 21, 2014 (‘‘Mass Letter’’); Glenn S. Gitomer, McCausland Keen and Buckman, dated July 23, 2014 (‘‘Gitomer July Letter’’); David T. Bellaire, Esq., Executive Vice President & General Counsel, Financial Services Institute, dated July 24, 2014 (‘‘FSI Letter’’); Thomas J. Berthel, CEO, Berthel Fisher & Company, dated July 24, 2014 (‘‘Berthel Letter’’); Kevin M. Carroll, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated July 24, 2014 (‘‘SIFMA July Letter’’); CJ Croll, Student Intern, Elissa Germaine, Supervising Attorney, and Jill I. Gross, Director, Investor Rights Clinic at Pace Law School, dated July 24, 2014 (‘‘PIRC July Letter’’); Jason Doss, President, Public Investors Arbitration Bar Association, dated July 24, 2014 (‘‘PIABA Letter’’); George H. Friedman, Esq., George H. Friedman Consulting, LLC, dated July 24, 2014 (‘‘Friedman July Letter’’); Gary N. Hardiman, dated July 24,2014 (‘‘Hardiman Letter’’); J. Burton LeBlanc, President, American Association for Justice, dated July 24, 2014 (‘‘AAJ Letter’’); Richard P. Ryder, Esq., President, Securities Arbitration Commentator, Inc., dated July 24, 2014 (‘‘SAC July Letter’’); Andrea Seidt, President, North American Securities Administrators Association, and Ohio Securities Commissioner, dated July 24, 2014 (‘‘NASAA July Letter’’); Robert Getman, dated July 28, 2014 (‘‘Getman Letter’’); Barry D. Estell, Attorney at Law (retired), dated August 13, 2014 (‘‘Estell Letter’’); and Walter N. Vernon III, Esq., dated August 21, 2014 (‘‘Vernon Letter’’). Comment letters are available at www.sec.gov. The Commission discussed these comments in the Proceedings Order. See infra note 7. 5 Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated September 30, 2014 (‘‘FINRA September Letter’’). The FINRA September Letter is available at www.sec.gov. 6 15 U.S.C. 78s(b)(2)(B). 7 Exchange Act Release No. 73277 (Oct. 1, 2014), 79 FR 60556 (Oct. 7, 2014) (Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change Relating to Revisions to the Definitions of Non-Public Arbitrator and Public Arbitrator) (‘‘Proceedings Order’’). The comment period closed on November 6, 2014. 8 The comment letters were submitted by: John A. Bender, Esq., Member, Ryan Swanson Cleveland, dated October 10, 2014 (‘‘Bender Letter’’); George H. Friedman, Esquire, George H. Friedman Consulting, LLC, dated October 20, 2014 (‘‘Friedman October Letter’’); Richard P. Ryder, Esq., President, Securities Arbitration Commentator, Inc., dated October 26, 2014 (‘‘SAC October Letter’’); Steven B. Caruso, Esq., Maddox Hargett & Caruso, P.C., dated October 29, 2014 (‘‘Caruso October Letter’’); Ryan K. Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated October 30, 2014 (‘‘Bakhtiari October Letter’’); Glenn S. Gitomer, McCausland Keen and Buckman, dated November 5, 2014 (‘‘Gitomer November Letter’’); William Beatty, President, North American Securities Administrators Association and Washington Securities Administrator, dated E:\FR\FM\04MRN1.SGM Continued 04MRN1 11696 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices November 24, 2014, the Commission received a letter from FINRA responding to the comment letters.9 On December 11, 2014, the Commission received a letter from FINRA supplementing the FINRA November Letter.10 This order approves the proposed rule change. II. Description of the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES In general, FINRA classifies arbitrators as ‘‘non-public’’ or ‘‘public’’ based on their professional and personal affiliations. Currently, FINRA Rule 12100(p) of the Customer Code and FINRA Rule 13100(p) of the Industry Code (defining the term ‘‘non-public arbitrator’’) list financial industry affiliations that might qualify a person to serve as a non-public arbitrator in the FINRA arbitration forum. Conversely, FINRA Rule 12100(u) of the Customer Code and FINRA Rule 13100(u) of the Industry Code (defining the term ‘‘public arbitrator’’) list affiliations that disqualify a person from serving as a public arbitrator in the FINRA arbitration forum. FINRA is proposing to delete the definitions in their entirety, and replace them with new definitions. The proposed amendments are described below. November 6, 2014 (‘‘NASAA November Letter’’); Kevin M. Carroll, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated November 6, 2014 (‘‘SIFMA November Letter’’); Ryan Corbin, Kori Eskridge, and Kristina Ludwig, Student Interns, and Nicole Iannarone, Assistant Clinical Professor, Georgia State University College of Law Investor Advocacy Clinic, dated November 6, 2014 (‘‘GSU Letter’’); CJ Croll and Jeffrey Valacer, Student Interns, Elissa Germaine, Supervising Attorney, and Jill I. Gross, Director, Investor Rights Clinic at Pace Law School, dated November 6, 2014 (‘‘PIRC First November Letter’’); Greg Curley, Senior Litigation Counsel, American International Group, Inc., AIG Advisor Group, Inc., dated November 6, 2014 (‘‘AIG Letter’’); William A. Jacobson, Esq., Clinical Professor of Law and Director, and Nathan F. Baum, Student, Cornell University Law School Securities Law Clinic, dated November 6, 2014 (‘‘CSLC Letter’’); Daniel Wolfe, Legal Intern, and Teresa Verges, Director, University of Miami Investor Rights Clinic, dated November 6, 2014 (‘‘UMIRC Letter’’); and CJ Croll and Jeffrey Valacer, Student Interns, Elissa Germaine, Supervising Attorney, and Jill I. Gross, Director, Investor Rights Clinic at Pace Law School, dated November 21, 2014 (‘‘PIRC Second November Letter’’). Comment letters are available at www.sec.gov. 9 Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated November 24, 2014 (‘‘FINRA November Letter’’). The FINRA November Letter is available at www.sec.gov. 10 Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated December 11, 2014 (‘‘FINRA December Letter’’). The FINRA December Letter is available at www.sec.gov. VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 A. Non-Public Arbitrator Definition 1. Proposed New Rule 12100(p)(1) 11 Under the current non-public arbitrator definition, if a person is currently, or was within the past five years, affiliated with a financial industry entity specified in the rule (a ‘‘specified financial industry entity’’), the person is classified as a non-public arbitrator.12 The rule permits these individuals to be reclassified as public arbitrators five years after ending all financial industry affiliations unless (i) they retired from, or spent a substantial part of their career with, a specified financial industry entity 13 or (ii) they were affiliated for 20 years or more with a specified financial industry entity.14 The individuals subject to these exceptions remain classified as nonpublic arbitrators. New Rule 12100(p)(1) would eliminate the five-year cooling-off provision for persons who work in the financial industry by permanently classifying 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. New Rule 12100(p)(1) would also add two new categories of financial industry professionals who would be permanently classified as non-public arbitrators: (i) Persons associated with, including registered through, a mutual fund or hedge fund, and (ii) persons associated with, including registered through, an investment adviser.15 In addition, new Rule 12100(p)(1) would clarify certain references made in the current rule. For instance, the new rule would replace ‘‘[a person] registered under the Commodity Exchange Act; a member of a commodities exchange . . ., or 11 Where this order refers only to rules in the Customer Code, the changes and discussions also apply to the corresponding rules in the Industry Code. 12 See current Rule 12100(p)(1). This provision applies to a person who is, or was within the past five years: (1) Associated with, including registered through, a broker or dealer (including a government securities broker or dealer or a municipal securities dealer); (2) registered under the Commodities Exchange Act; (3) a member of a commodities exchange or a registered futures association; or (4) associated with a person or firm registered under the Commodities Exchange Act. 13 See current Rule 12100(p)(2). 14 See current Rule 12100(u)(2). 15 Currently, FINRA Rules preclude these individuals from serving as arbitrators in any capacity. See current Rule 12100(p) and (u). If, however, they end their affiliation they may serve as public arbitrators after a two-year cooling-off period. These individuals 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). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 associated with a person or firm registered under the Commodity Exchange Act,’’ 16 with ‘‘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[.]’’ Also, instead of referring to ‘‘a member . . . of a registered futures association,’’ 17 new Rule 12100(p)(1)(B) would identify the association as the National Futures Association. Moreover, new Rule 12100(p)(1)(B) would include a reference to ‘‘[a person] who is, or was, associated with, including registered through, under, or with (as applicable), . . . the Municipal Securities Rulemaking Board.’’ In addition, new Rule 12100(p)(1)(C) would include a provision to cover any entity ‘‘organized under or registered pursuant to the Securities Exchange Act of 1934, Investment Company Act of 1940, or the Investment Advisers Act of 1940.’’ This provision would cover financial industry affiliated persons not otherwise specified in the rule and potential categories of financial industry professionals that may be created in the future. 2. Proposed New Rule 12100(p)(2) Under current Rule 12100(p)(3), attorneys, accountants, and other professionals who devoted 20 percent or more of their professional work in the last two years to serving specified financial industry entities and/or employees, are classified as non-public arbitrators.18 Rule 12100(p)(3) permits these individuals to be reclassified as public arbitrators two years after they stopped providing services to specified financial industry entities, with one exception. A person who provided services for 20 calendar years or more over the course of his or her career is permanently disqualified from serving as a public arbitrator.19 Proposed new Rule 12100(p)(2) would broaden the application of current Rule 12100(p)(3) in three ways: (i) It would increase the look-back period from two years to five years, (ii) it would apply to not only services provided to specified financial industry entities but also to services provided to any persons or entities associated with those specified financial industry entities, and (iii) it would permanently disqualify from serving as public arbitrators persons who provided the specified services for 16 See current FINRA Rule 12100(p)(1)(B)-(D). current FINRA Rule 12100(p)(1)(C). 18 The rule applies to the persons and entities listed in current Rule 12100(p)(1). 19 See current Rule 12100(u)(2). 17 See E:\FR\FM\04MRN1.SGM 04MRN1 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices 15 calendar years or more over the course of their careers (in contrast to the current 20 year provision).20 In addition, the proposal would replace the phrase ‘‘professional work’’ with ‘‘professional time.’’ 3. Proposed New Rule 12100(p)(3) Currently, FINRA rules permit individuals who represent or provide professional services to investors in securities disputes to serve as public arbitrators.21 Under proposed new Rule 12100(p)(3), 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 would be classified as non-public arbitrators. However, Rule 12100(p)(3) would permit these individuals to serve as public arbitrators five years after they stopped devoting 20 percent or more of their professional time to serving parties in investment or financial industry employment disputes with one exception. A person who provided services for 15 calendar years or more over the course of his or her career would be permanently disqualified from serving as a public arbitrator.22 mstockstill on DSK4VPTVN1PROD with NOTICES 4. Proposed New Rule 12100(p)(4) Under current Rule 12100(p)(4), any person who is an employee of a bank or other financial institution who (i) effects transactions in securities, including government or municipal securities, and commodities, futures, or options, or (ii) supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities is classified as a non-public arbitrator. When these individuals end their affiliation, they are immediately reclassified as public arbitrators unless they have engaged in this type of work for 20 years or more over the course of their careers.23 Proposed new Rule 12100(p)(4) would add a five-year look-back period to this provision. Specifically, under proposed new Rule 12100(p)(4), any person who, within the last five calendar years, was an employee of a bank or other financial institution who (i) effects transactions in 20 See proposed new Rule 12100(u)(2). The 15 years are a total number of years—they would not have to be consecutive years. 21 Currently, 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. 22 See proposed new Rule 12100(u)(3). The 15 years are a total number of years—they would not have to be consecutive years. 23 See current Rule 12100(u)(2). VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 securities, including government or municipal securities, commodities, futures, or options, or (ii) supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities would be classified as a non-public arbitrator. However, proposed new Rule 12100(p)(4) would permit these individuals to serve as public arbitrators five years after they ended their industry affiliation unless they provided these services for 15 years or more.24 After 15 years of service, the proposed rules would permanently classify such individuals as non-public arbitrators.25 B. Public Arbitrator Definition 1. Proposed New Rule 12100(u)(1) Current Rules 12100(u)(1) and 12100(u)(3) identify the types of financial industry employment that disqualify a person from serving as a public arbitrator by cross-referencing those activities listed in current Rule 12100(p) (defining ‘‘non-public arbitrators’’). Consequently, these otherwise qualified individuals are classified as non-public arbitrators. Proposed new Rule 12100(u)(1) would retain the types of financial industry employment that would disqualify a person from serving as a public arbitrator with revisions identical to those in proposed new Rule 12100(p)(1). Specifically: (i) Instead of referring to ‘‘[a person] registered under the Commodity Exchange Act; a member of a commodities exchange . . ., or associated with a person or firm registered under the Commodity Exchange Act,’’ proposed new Rule 12100(u)(1)(B) would refer 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;’’ (ii) instead of referring to ‘‘a member . . . of a registered futures association,’’ proposed new Rule 12100(u)(1)(B) would identify the association as the National Futures Association; (iii) proposed new Rule 12100(u)(1)(B) would add a reference to ‘‘[a person] who is, or was, associated with, including registered through, under, or with (as applicable), . . . the Municipal Securities Rulemaking Board;’’ and (iv) proposed new Rule 12100(p)(1)(C) would include a provision to cover any entity ‘‘organized under or registered pursuant to the Securities Exchange Act of 1934, 24 See proposed new Rule 12100(u)(4). The 15 years are a total number of years—they would not have to be consecutive years. 25 See proposed new Rule 12100(u)(4). PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 11697 Investment Company Act of 1940, or the Investment Advisers Act of 1940.’’ This provision would cover financial industry affiliated persons not otherwise specified in the rule and potential categories of financial industry professionals that may be created in the future. As stated above, current FINRA Rule 12100 (p)(1) generally permits individuals classified as non-public arbitrators to become reclassified as public arbitrators five years after ending their affiliations (subject to specified exceptions).26 As explained in the above discussion on proposed new Rule 12100(p)(1), the proposal would eliminate the five-year cooling-off period27 resulting in the permanent classification of these individuals as non-public arbitrators pursuant to new Rule 12100(u)(1). 2. Proposed New Rules 12100(u)(2) and 12100(u)(6)28 Under current Rule 12100(u)(1), attorneys, accountants, and other professionals who devoted 20 percent or more of their professional work in the last two years to serving specified financial industry entities and/or employees listed in current Rule 12100(p)(1), may not be classified as public arbitrators. However, current Rule 12100(u)(1) permits these individuals to be reclassified as public arbitrators two years after they stopped providing those services, with one exception.29 A person who provided services for 20 calendar years or more over the course of his or her career is permanently disqualified from serving as a public arbitrator.30 Proposed new Rules 12100(u)(2) and 12100(u)(6) would broaden the provisions of current Rule 12100(u)(1) in three ways: (i) It would apply to not only services provided to specified financial industry entities but also to services provided to any persons or 26 See supra notes 12, 12, and 13 and their accompanying text. 27 Current Rule 12100(u)(3) subjects investment advisers and persons associated with, including registered through, a mutual fund or hedge fund to a two-year cooling-off period after ending the affiliation. Under proposed new Rule 12100(u)(1), these individuals would also be subject to permanent classification as non-public arbitrators. 28 Although the descriptions of the disqualifications in proposed new Rules 12100(u)(2) and 12100(u)(6) are almost identical, FINRA believes it would add clarity to the definition to distinguish when the provisions would result in a permanent classification, and when they would result in a temporary classification. See Notice of Filing, 79 FR 38080, 38084 (Jul. 3, 2014). 29 See current Rule 12100(u)(1) (incorporating, among other things, current Rule 12100(p)(3)). 30 See current Rule 12100(u)(2) (referencing the 20-year time period). E:\FR\FM\04MRN1.SGM 04MRN1 11698 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices entities associated with those specified financial industry entities;31 (ii) new Rule 12100(u)(2) would decrease the number of years for a permanent disqualification from 20 years to 15 years;32 and (iii) new Rule 12100(u)(6) would increase the cooling-off period from two years to five years.33 In sum, the proposal would permanently disqualify from serving as public arbitrators persons who provided the specified services for 15 calendar years or more over the course of their careers. 3. Proposed New Rules 12100(u)(3) and 12100(u)(7) Under proposed new Rules 12100(u)(3) and 12100(u)(7) attorneys, accountants, expert witnesses, and other professionals who devote 20 percent or more of their professional time annually to representing or providing services to parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry generally would be classified as non-public arbitrators.34 New Rule 12100(u)(7), however, would permit these individuals to be reclassified as public arbitrators five years after the final calendar year in which they devoted 20 percent or more of their professional time providing those services with one exception. A person who provided services for 15 calendar years or more over the course of his or her career would be permanently disqualified from serving as a public arbitrator.35 mstockstill on DSK4VPTVN1PROD with NOTICES 4. Proposed New Rules 12100(u)(4) and 12100(u)(8)36 Under current Rule 12100(u)(1), any person who is an employee of a bank or other financial institution and (i) effects transactions in securities, including government or municipal securities, and commodities, futures, or options, or (ii) supervises or monitors the compliance 31 Cf. current Rule 12100(p)(3) to illustrate the scope of coverage to be expanded by proposed new Rule 12100(u)(2). 32 The 15 years are a total number of years—they would not have to be consecutive years. 33 Substantively, proposed new Rules 12100(u)(2) and 12100(u)(6) are analogous to proposed new Rule 12100(p)(2). 34 The substance of proposed new Rules 12100(u)(3) and 12100(u)(7) corresponds to the substance of proposed new Rule 12100(p)(3). 35 See proposed new Rule 12100(u)(3). The 15 years are a total number of years—they would not have to be consecutive years. 36 Although the descriptions of the disqualifications in proposed new Rules 12100(u)(4) and 12100(u)(8) are almost identical, FINRA believes it would add clarity to the definition to distinguish when the provisions would result in a permanent classification, and when they would result in a temporary classification. See Notice of Filing, 79 FR 38080, 38084 (Jul. 3, 2014). VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 with the securities and commodities laws of employees who engage in such activities is classified as a non-public arbitrator.37 When these individuals end their affiliation, they may immediately be reclassified as public arbitrators unless they have engaged in this type of work for 20 years or more over the course of their careers.38 Proposed new Rules 12100(u)(4) and 12100(u)(8) would broaden the application of provisions of current Rule 12100(u)(1) in two ways: (i) Proposed new Rule 12100(u)(8) would permit these individuals to be reclassified as public arbitrators five years after they ended their affiliation, and (ii) proposed new Rule 12100(u)(4) would decrease the number of years required for a permanent classification as a non-public arbitrator from 20 years to 15 years.39 5. Proposed New Rule 12100(u)(5) Under current Rules 12100(u)(6) and 12100(u)(7), individuals who are employed by,40 or who are directors or officers of,41 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 are classified as nonpublic arbitrators.42 These persons may become public arbitrators two years after ending their affiliation.43 Proposed new Rule 12100(u)(5) would broaden the provisions of current Rules 12100(u)(6) and 12100(u)(7) in two ways: (i) It would expand the scope of the classification by replacing the phrase ‘‘securities business’’ with ‘‘financial industry,’’ and (ii) it would increase the cooling-off period from two years to five years.44 6. Proposed New Rule 12100(u)(9) Under current Rule 12100(u)(4), an attorney, accountant, or other professional whose firm derived 10 37 See current Rule 12100(u)(1), which crossreferences current Rule 12100(p)(4), among other provisions. 38 See current Rule 12100(u)(2). 39 The 15 years are a total number of years—they would not have to be consecutive years. 40 See current Rule 12100(u)(6). 41 See current Rule 12100(u)(7). 42 Under current Rules 12100(u)(6) and 12100(u)(7), a spouse or immediate family member of such individuals would also be classified as a non-public arbitrator. 43 See current Rule 12100(u); see also infra note 49 and accompanying text. 44 Current Rule 12100(u) subjects individuals covered by current Rules 12100(u)(6) and 12100(u)(7) to a two-year cooling-off period after ending the affiliation. The disqualification for spouses and immediate family members is addressed in proposed new Rule 12100(u)(11), which retains a two-year cooling-off period after ending the affiliation or relationship (discussed below). PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 percent or more of its annual revenue in the past two years from providing services to specified financial industry entities is classified as a non-public arbitrator. Similarly, under current Rule 12100(u)(5), any attorney, accountant, or other professional whose firm derived $50,000 or more in annual revenue in the past two years from providing professional services to any specified financial industry entity relating to any customer dispute concerning an investment account or transaction is also classified as a non-public arbitrator. In both instances, however, current Rule 12100(u) permits such individuals to be reclassified as public arbitrators two years after they ended their affiliation with the firm or two years after the firm no longer derived annual revenue from specified financial industry entities that exceeding those thresholds.45 Proposed new Rule 12100(u)(9) would: (i) Merge current Rules 12100(u)(4) and 12100(u)(5), and (ii) remove the requirement that the $50,000 in revenue relate to customer disputes concerning an investment account or transaction. Specifically, under proposed new Rule 12100(u)(9) any person who is an attorney, accountant, or other professional whose firm derived $50,000 or more, or at least 10 percent of its annual revenue, in any single calendar year during the past two calendar years, from (i) the entities listed in proposed new Rule 12100(u)(1) and/or from any persons or entities associated with such listed entities, or (ii) a bank or other financial institution where persons effect transactions in securities including government or municipal securities, commodities, futures, or options would be classified as a non-public arbitrator. Proposed new Rule 12100(u)(9) would, however, permit such individuals to be reclassified as public arbitrators two calendar years after ending their employment with the employing firm. 7. Proposed New Rule 12100(u)(10) Under proposed new Rule 12100(u)(10), attorneys, accountants, and other professionals whose firm derived $50,000 or more, or at least 10 percent of its annual revenue, in any single calendar year during the past two calendar years, from individual and/or institutional investors relating to securities matters generally would be classified as non-public arbitrators. Proposed new Rule 12100(u)(10) would, however, permit such individuals to be 45 Current Rule 12100(u) subjects individuals covered by current Rules 12100(u)(4) and 12100(u)(5) to a two-year cooling-off period after ending the affiliation. E:\FR\FM\04MRN1.SGM 04MRN1 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices reclassified as public arbitrators two calendar years after ending their employment with the employing firm or two years after the firm no longer derived annual revenue from individual and/or institutional investors relating to securities matters that exceeding those thresholds. 8. Proposed New Rule 12100(u)(11) Under current Rules 12100(u)(6) and 12100(u)(7), an individual whose spouse or immediate family member is employed by,46 or is a director or officer of,47 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 is classified as a non-public arbitrator. These persons may become public arbitrators two years after ending their affiliation.48 In addition, under current Rule 12100(u)(8), an individual whose spouse or immediate family member is engaged in the conduct or activities described in current Rule 12100(p)(1)– (4) (i.e., is employed by a specified financial entity or provides services to such an entity and/or the entity’s employees) is classified as a non-public arbitrator.49 Proposed new Rule 12100(u)(11) would: (i) Merge current Rules 12100(u)(6), 12100(7), and 12100(u)(8), and (ii) add a two year cooling-off period. Specifically, under new Rule 12100(u)(11) a person whose immediate family member is an individual whom FINRA would disqualify from serving on the public arbitrator roster would be classified as a non-public arbitrator. However, 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 would be able to be reclassified as a public arbitrator after two calendar years had passed from the end of the affiliation or relationship. 9. Definition of ‘‘Immediate Family Member’’ Current Rule 12100(u) defines the term ‘‘immediate family member’’ to include a person’s parent, stepparent, mstockstill on DSK4VPTVN1PROD with NOTICES 46 See current Rule 12100(u)(6). current Rule 12100(u)(7). 48 See current Rule 12100(u). 49 While current Rule 12100(u) does not include a cooling-off period for this classification, FINRA stated that it has been its practice to make these individuals wait for five years after their spouse or immediate family member ends the disqualifying affiliation before the individuals may be reclassified public arbitrators. See Notice of Filing, 79 FR 38080, 38085 (Jul. 3, 2014). 47 See VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 child, stepchild, member of a person’s household, an individual to whom a person provides financial support of more than 50 percent of his or her annual income, or a person who is claimed as a dependent for federal income tax purposes. Current Rule 12100(u) does not define the term ‘‘spouse.’’ Proposed new Rule 12100(u) would amend the definition of ‘‘immediate family member’’ to add as immediate family members a person’s spouse, partner in a civil union, and domestic partner. 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. A more detailed description of the proposed rule changes is contained in the Notice of Filing and the Proceedings Order.50 III. Comment Summary 51 In response to the Notice of Filing, the Commission received 316 comment letters (including 295 copies of substantially the same letter submitted by self-identified independent financial advisors). Five of the commenters expressed support for the proposed rule change in its entirety.52 Two commenters opposed the proposed rule change in its entirety.53 The other commenters (including the independent financial advisors) generally supported the proposed rule change in part, but raised concerns about various aspects of the proposal. In response to the Proceedings Order, the Commission received fourteen comments.54 Of these comments, four supported the proposal,55 three opposed the proposal,56 and the remainder partially supported or opposed aspects of the proposal.57 50 See supra notes 3 and 7. provisions of the proposed rule change would result in a similar outcome—the permanent classification of certain individuals as non-public arbitrators. Accordingly, where the discussion of comments references specific provisions of the proposal, that discussion may also apply to other provisions in the proposal that would result in similar outcomes. 52 See Aidikoff Letter, Bakhtiari July Letter, Caruso July Letter, Gitomer July Letter, and SIFMA July Letter. 53 See SAC July Letter (stating that the proposed rule change should be disapproved until a costbenefit analysis is provided) and Friedman July Letter (stating that FINRA should ‘‘go back to the drawing board’’). 54 See supra note 8. 55 See Caruso October Letter, Bakhtiari October Letter, Gitomer November Letter, and SIFMA November Letter. 56 See Bender Letter, Friedman October Letter, and SAC October Letter. 57 See UMIRC Letter, GSU Letter, AIG Letter, CSLC Letter, NASAA November Letter, PIRC First 51 Some PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 11699 A. Permanent Classification of Industry Employees as Non-Public Arbitrators In general, the proposal would result in the permanent classification (or reclassification of current public arbitrators) of individuals who worked in the financial industry (a) in any capacity, (b) at any point, and (c) for any duration, (‘‘Industry Affiliates’’) as nonpublic arbitrators. Many commenters opposed the permanent classification of Industry Affiliates as non-public arbitrators for varying reasons.58 1. Elimination of the Cooling-Off Period In general, the proposal would result in the classification (or reclassification of current public arbitrators) of individuals as non-public arbitrators who otherwise would have been classified as public arbitrators. Specifically, individuals who worked in the financial industry for any duration would be permanently classified as nonpublic arbitrators (effectively eliminating the five-year cooling-off period).59 Several commenters supported this provision as providing a workable ‘‘bright-line’’ test that would address criticism regarding bias (perceived or actual) in favor of the financial industry,60 including one that stated that eliminating the five-year cooling-off period would eliminate industry-side potential and perceived bias.61 Many commenters opposed eliminating the five-year cooling-off period for Industry Affiliates.62 Some of these commenters expressed concern that eliminating the cooling-off period could exclude arbitrators with industry experience who could be useful on a panel to, among other things, educate the other panelists on industry practice.63 Another commenter suggested that FINRA classify Industry Affiliates as neither public nor nonpublic arbitrators for a set number of years following the date they end their affiliation with the financial industry.64 November Letter, and PIRC Second November Letter. 58 See, e.g., Type A Letter, FSI Letter, Getman Letter, and Vernon Letter. 59 See proposed new Rules 12100(p)(1) and (u)(1). 60 See Aidikoff Letter; see also Caruso October Letter, Bakhtiari October Letter, Gitomer November Letter, SIFMA November Letter, CSLC Letter Bakhtiari July Letter, SIFMA July Letter, NASAA July Letter, PIABA Letter, and AAJ Letter. 61 See SIFMA November Letter. 62 See Bender Letter, Friedman October Letter, SAC October Letter, Type A Letter, FSI Letter, Getman Letter, Berthel Letter, and Vernon Letter. 63 See Type A Letter and Berthel Letter; see also FSI Letter. 64 See Friedman October Letter; see also PIRC July Letter and FSI Letter (suggesting that FINRA should E:\FR\FM\04MRN1.SGM Continued 04MRN1 11700 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices This commenter also opposed categorizing any industry employee, regardless of capacity, as a non-public arbitrator. For example, this commenter suggested that industry employees who are clerical should be classified as neither public nor non-public arbitrators.65 In its response, FINRA disagreed with the opposing commenters, stating that its constituents agreed that any cooling off period for financial industry employees would ‘‘leave a perception of unfairness for some advocates.’’ 66 In addition, FINRA stated that investor advocates have a stated preference for using expert witnesses and making their own arguments rather than relying on members of the arbitration panel that have industry experience to explain and influence matters.67 FINRA also stated, however, that former industry employees have valuable knowledge and experience, and that completely removing them from arbitrator service would negatively impact the forum.68 Similarly, FINRA stated that if an Industry Affiliate meets FINRA’s qualifications for service as an arbitrator (regardless of the capacity in which she or he served the financial industry), she or he should be classified as a nonpublic arbitrator.69 FINRA stated that parties to an arbitration would continue to have the authority to strike any or all arbitrators on the non-public list.70 Ultimately, FINRA stated that it believes that it is more workable to use a bright-line test than a pro rata coolingoff period for financial industry employees.71 Accordingly, FINRA declined to amend the proposed rule change.72 mstockstill on DSK4VPTVN1PROD with NOTICES 2. All Employees, Regardless of Capacity, To Be Classified as NonPublic Arbitrators Four commenters stated that, as proposed, the rule would improperly characterize certain individuals without true financial industry experience as non-public arbitrators.73 One of these commenters expressed concern that adopt a cooling-off period for industry employees that would be proportional to the number of years they were Industry Affiliates). 65 See Friedman October Letter. 66 See FINRA September Letter. 67 Id. 68 See FINRA November Letter; see also FINRA September Letter. 69 See FINRA November Letter; see also FINRA September Letter. 70 See FINRA November Letter; see also FINRA September Letter. 71 See FINRA September Letter. 72 See FINRA September Letter and FINRA November Letter. 73 See Stephens Letter, FSI Letter, Getman Letter, and Vernon Letter. VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 individuals performing solely clerical or ministerial functions for a financial industry firm would be classified as non-public arbitrators because they would be considered ‘‘associated persons’’ as defined by Rule 12100(p).74 Accordingly, this commenter suggested FINRA amend the definition of the term ‘‘associated person’’ in the proposal to track the definition of the term ‘‘associated person’’ in section 3(a)(18) of the Act, which excludes individuals performing solely clerical or ministerial functions. Another commenter suggested that the proposal should only classify individuals who ‘‘worked for [a financial industry firm] in a capacity for which testing and registration is required’’ as non-public arbitrators to address this concern.75 In its response, FINRA stated that its staff believes that ‘‘investor concerns about the neutrality of the public roster apply to all industry employees, including those who serve in clerical or ministerial positions.’’ 76 In addition, FINRA stated that it believes that if a financial industry affiliate meets FINRA’s qualifications for service as an arbitrator, FINRA should appoint the person to the non-public arbitrator roster.77 Accordingly, FINRA declined to amend the proposed rule change.78 B. Classification of Professionals 1. Classifying Investor Advocates as Non-Public Arbitrators In general, the proposed rule change would classify attorneys, accountants, expert witnesses, or other professionals who (a) devote 20 percent or more of their professional time (b) in any single calendar year within the past five calendar years (c) to representing or providing services to parties in disputes concerning investment accounts or transactions, or employment relationships within the industry (‘‘Investor Advocates’’) as non-public arbitrators.79 Currently, individuals meeting this description are classified as public arbitrators. Several commenters supported this provision,80 including two commenters 74 See Stephens Letter. Vernon Letter (expressing concern that under the proposal [the commenter] could be characterized as a non-public arbitrator based solely on his capacity as a ‘‘trainee’’ for Merrill Lynch in 1983). 76 See FINRA September Letter. 77 See FINRA November Letter. 78 See FINRA September Letter and FINRA November Letter. 79 See proposed new Rule 12100(p)(3). 80 See Caruso October Letter, Bakhtiari October Letter, Gitomer November Letter, SIFMA November Letter, AIG Letter, FSI Letter, Bethel Letter, and SIFMA July Letter. The commenters who used the Type A Letter also supported this provision. 75 See PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 that indicated that this provision is necessary to eliminate potential and perceived investor-side bias.81 Specifically, one of these commenters stated that the rationale for eliminating perceived bias is the same for both public and non-public arbitrators.82 Another commenter stated that eliminating perceived investor-side bias is necessary in light of the implementation of the all-public-panel rule.83 Similarly, one commenter noted that the historical distinction of classifying arbitrators as pubic arbitrators based on their financial industry experience was compelling when FINRA required the presence of someone with financial industry experience on all panels, but is no longer necessary with the advent of the all-public-panel rule.84 Several commenters also opposed the classification of Investor Advocates as non-public arbitrators,85 including some commenters who supported the classification of industry-affiliated persons as non-public arbitrators.86 Many of these commenters stated that including investor representatives in the public arbitrator pool counteracts some of the existing perceived bias in favor of the financial industry in the FINRA arbitration forum.87 One commenter stated that ‘‘[he could not] fathom how this [provision] would further investor protection.’’ 88 Two other commenters stated that there is no evidence supporting the assumption that professionals who serve the investing public have any bias either for or against 81 See SIFMA November Letter and AIG Letter. SIFMA November Letter; see also SIFMA July Letter (stating that the proposal ‘‘strike[s] an appropriate balance in the interests of fairness, perceptions of fairness, and arbitrator neutrality for all parties’’). 83 See AIG Letter. 84 See SIFMA November Letter. 85 See Bender Letter, Friedman October Letter, SAC October Letter, UMIRC Letter, GSU Letter, CSLC Letter, NASAA November Letter, PIRC Second November Letter, NASAA July Letter, PIABA Letter, Stephens Letter, PIRC July Letter, Bacine Letter, Mass Letter, Hardiman Letter, and Friedman July Letter. 86 See, e.g., CSLC Letter and NASAA November Letter; see also NASAA July Letter (arguing that FINRA should classify as non-public arbitrators only persons ‘‘representing or providing services to non-retail parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry’’), Stephens Letter (arguing that FINRA should only classify as non-public arbitrators persons ‘‘. . . representing or providing services to parties in disputes [other than customers] concerning investment accounts . . .’’), and Bacine Letter (arguing that the distinction between public and non-public arbitrators has always been based on whether the arbitrators had industry experience and argued for keeping this distinction). 87 See, e.g., CSLC Letter, NASAA July Letter, and PIABA Letter. 88 See Friedman October Letter. 82 See E:\FR\FM\04MRN1.SGM 04MRN1 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices the financial industry.89 Another commenter stated that it believes that the classification of Investor Advocates as non-public arbitrators is inconsistent with the concept of a ‘‘public’’ arbitrator.90 Two commenters argued that there is a perception that the arbitration system is unfair or always ‘‘stacked against’’ investors and that ‘‘any proposal to change the definitions of public and non-public arbitrator should be focused on mitigating the investing public’s perception of bias, not the industry’s perception of bias.’’ 91 Another commenter asserted that the ‘‘public’’ and ‘‘non-public’’ labels were never intended to account for biases in favor of the investing public but rather to eliminate arbitrators’ perceived and actual bias against customers who are compelled to participate in this forum by the financial industry.92 This commenter also argued that the proposed new classifications would cause confusion because Investor Advocates generally represent the public and would naturally be considered to be associated with the ‘‘public’’ pool.93 In the Notice of Filing, FINRA stated that it proposed the reclassification of arbitrator categories in response to concerns regarding the neutrality of the public arbitrator roster raised by both investor representatives and industry representatives.94 Similarly, in its response FINRA stated that addressing both investor and industry perceptions of bias in the public arbitrator roster would better safeguard the integrity of its arbitration forum.95 FINRA also 89 See GSU Letter and PIABA Letter. NASAA November Letter; see also Mass Letter (asserting that lawyers who represent investors or claimants are public arbitrators because they work on behalf of the public at large against the financial industry), and Hardiman Letter (stating that classifying Investor Advocates as nonpublic arbitrators would be ‘‘burying professionals who represent the investing public in the industry non-public side’’). 91 See CSLC Letter (citing the NASAA July Letter and PIABA Letter) and PIRC Second November Letter. 92 See UMIRC Letter. 93 See UMIRC Letter; see also, e.g., Stephens Letter, NASAA July Letter, PIABA Letter, PIRC July Letter, Bacine Letter (stating that the proposal would create confusion since the U.S. courts, the American Arbitration Association, and the general public generally view professionals who represent investors to be ‘‘public arbitrators’’), and PIRC July Letter (stating that past NASD response letters, as well as the FINRA Web site, also make the distinction that professionals who represent investors are typically public arbitrators). 94 See Notice of Filing, 79 FR 38080, 38081 (Jul. 3, 2014); see also FINRA September Letter (stating that industry constituents have expressed concern about the neutrality of the public arbitrator roster because of the presence on the roster of Investor Advocates). 95 See FINRA November Letter. mstockstill on DSK4VPTVN1PROD with NOTICES 90 See VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 stated that parties would continue to receive extensive disclosure statements on each proposed arbitrator that describe in detail that arbitrator’s background. Accordingly, FINRA believes that under the proposal parties in customer cases would be able to address their own perceptions of bias that may arise under the proposal through the use of their unlimited strikes on the list of non-public arbitrators.96 Thus, FINRA declined to amend the proposed rule change.97 2. Five-Year Cooling-Off Period for Professionals Representing Industry In general, the proposed rule change would extend the cooling-off period from two years to five years for attorneys, accountants, expert witnesses, or other professionals who (a) devote 20 percent or more of their professional time (b) in any single calendar year within the past five calendar years (c) to representing or providing services to financial industry firms (‘‘Industry Advocates’’). Three commenters generally supported this provision as fair and acknowledged the consistency of approach towards professionals representing investors and those representing industry.98 Another commenter generally supported removing Industry Advocates from the public arbitrator roster, but believed that they should be permanently classified as non-public arbitrators like financial industry employees (i.e., the commenter suggested that FINRA eliminate the cooling-off period rather than extend it).99 In its response, FINRA stated that it has drawn a distinction between individuals who work in the financial industry and individuals who provide services to the financial industry. FINRA also stated its belief that to help ensure fairness to all forum users, it needed to take a consistent approach to cooling-off periods for service providers to both investors and the financial industry.100 Accordingly, FINRA declined to amend the proposed rule change.101 3. Using Professional Time To Quantify Professional Work As stated above, the proposal would classify attorneys, accountants, expert witnesses, or other professionals as 96 Id. 97 See FINRA September Letter and FINRA November Letter. 98 See SIFMA July Letter, PIABA Letter, and Berthel Letter. 99 See NASAA July Letter. 100 See FINRA September Letter. 101 Id. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 11701 either public arbitrators or non-public arbitrators depending on, among other things, the percentage of time those individuals devoted to representing either the financial industry or investors.102 Some commenters questioned the appropriateness of classifying individuals as public or nonpublic arbitrators based on the ‘‘amount of time’’ an individual devotes to a client.103 Alternatively, commenters suggested using revenue instead of professional time as the metric to quantify professional work.104 One of these commenters suggested that revenue is a better measurement since not all professionals track their work in terms of time, but all professionals would have a record of revenue.105 Another one of these commenters stated that using professional time as the metric would categorize professors and supervisors in investor advocacy clinics as non-public arbitrators, even though the clinic does not earn any revenues and the primary function of the clinic is educational.106 In its response, FINRA stated that given the purpose of the proposal is to address the perception that professionals who regularly provide services to investors might be biased in favor of investors, it does not believe that it would be appropriate to make an exception for employees of law school investor advocacy clinics.107 FINRA also stated that the proposed rule change regarding ‘‘professional time’’ was specifically discussed by its National Arbitration and Mediation Committee (‘‘NAMC’’) 108 and it agreed that the change ‘‘added clarity to the rule text, was simpler to apply, and would result in more accurate calculations by arbitrator applicants and arbitrators reviewing their business mix.’’ 109 Accordingly, FINRA declined to amend the proposed rule change.110 102 See proposed new Rule 12100(p)(3). UMIRC Letter and PIRC July Letter. 104 See UMIRC Letter and PIRC July Letter. 105 See PIRC July Letter. 106 See UMIRC Letter. 107 See FINRA November Letter. 108 NAMC provides policy guidance to FINRA Dispute Resolution staff. Its members include investors, securities industry professionals, and FINRA arbitrators and mediators. A majority of NAMC’s members and its chair are non-industry representatives. See FINRA Advisory Committees, National Arbitration and Mediation Committee, available at https://www.finra.org/aboutfinra/ leadership/committees/p197363. 109 See FINRA September Letter and FINRA November Letter. 110 See FINRA September Letter and FINRA November Letter. 103 See E:\FR\FM\04MRN1.SGM 04MRN1 11702 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices 4. Impact to the Pool of Public Arbitrators mstockstill on DSK4VPTVN1PROD with NOTICES a. Number of Available Public Arbitrators Since February 1, 2011, customers have been able to choose an arbitration panel composed entirely of public arbitrators (i.e., an ‘‘all-public panel’’).111 One commenter cited statistics that indicated that customers in approximately three-quarters of eligible cases choose an all-public panel.112 Another commenter estimated that public arbitrators account for approximately 85% of those that serve.113 Consequently, several commenters expressed concern that the proposed rule change would negatively impact the number of public arbitrators available to serve in FINRA’s arbitration forum.114 Similarly, some commenters suggested that under the proposed rule change FINRA would need to devote resources to recruit additional public arbitrators.115 Several commenters questioned FINRA’s estimate that the total number of arbitrators that would be reclassified from public arbitrators to non-public arbitrators would be approximately 474 116 out of 3,567 current public arbitrators (approximately 13.3%).117 A number of commenters stated that they believe that FINRA severely underestimated the number of arbitrators that would be reclassified.118 Some commenters estimated that the 111 See Exchange Act Release No. 70442 (Sept. 18, 2013), 78 FR 58580 (Sept. 24, 2013) (order approving a proposed rule change to, among other things, permit all parties to select an all-public panel) and Exchange Act Release No. 63799 (Jan. 31, 2011), 76 FR 6500 (Feb. 4, 2011) (order approving a proposed rule change to provide customers with the option to choose an all-public panel in all cases). 112 See UMIRC Letter (citing Exchange Act Release No. 69762 (Jun. 13, 2013), 78 FR 37267, 37268 (Jun. 20, 2013) (Notice of Filing of Proposed Rule Change Relating to Amendments to the Code of Arbitration Procedure for Customer Disputes Concerning Panel Composition)). 113 See SAC October Letter. 114 See, e.g., Bender Letter, PIRC First November Letter, GSU Letter, SAC October Letter, Friedman October Letter, UMIRC Letter, Friedman July Letter, SAC July Letter, NASAA July Letter, and FSI Letter. 115 See SAC July Letter and NASAA July Letter. 116 In the FINRA September Letter, FINRA estimated that 374 arbitrators would be reclassified from public to non-public arbitrators as a result of having had a Central Registration Depository (‘‘CRD’’) number at some point in their careers or having had an affiliation with a firm with a CRD number. In addition, FINRA estimated that approximately 100 arbitrators would be reclassified from public to non-public as a result of having identified an affiliation with PIABA; see also FINRA November Letter. 117 See FINRA November Letter (basing its estimate on a survey of databases to which FINRA has access); see also FINRA September Letter. 118 See Bender Letter, SAC October Letter, UMIRC Letter, PIRC November Letter, and GSU Letter. VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 number of public arbitrators that would be reclassified is approximately onefourth or 25% of the current public arbitrator pool.119 Consequently, commenters expressed concern that the proposal would result in delays in arbitration proceedings due to an insufficient number of arbitrators.120 Two commenters cited the recent stay in arbitration proceedings in Puerto Rico as an example of the possible outcome if the pool of public arbitrators is drastically reduced in some geographic areas.121 In its response, FINRA acknowledged commenters’ concerns about reducing the number of public arbitrators currently on the public arbitrator roster. FINRA also stated, however, that it believes that addressing users’ perceptions of the neutrality of its public arbitrators outweighs those concerns.122 In addition, FINRA stated that it intends to address commenters’ concerns as well, stating its commitment to aggressively recruiting arbitrators to help ensure that ‘‘the forum has a sufficient number of public arbitrators to serve the needs of forum users in each of its hearing locations.’’ 123 Specifically, FINRA illustrated its ongoing efforts to recruit public arbitrators since the adoption of the all-public panel rule.124 In addition, FINRA expressed its commitment to arbitrator retention, citing its recent rule proposal to increase the amount of honoraria arbitrators receive in connection with serving on a panel.125 In its response, FINRA concluded that despite the temporary decrease in the number of public arbitrators resulting from the proposed rule change, the FINRA forum will have a sufficient 119 See Bender Letter and SAC October Letter. SAC October Letter and UMIRC Letter; see also FSI Letter. 121 See SAC October Letter and UMIRC Letter; see also SAC July Letter (suggesting that the potential shortage of public arbitrators may be more concentrated in some locations than others). 122 See FINRA November Letter. 123 See FINRA November Letter and FINRA December Letter; see also FINRA September Letter. 124 See FINRA November Letter and FINRA December Letter (collectively citing, for example, the Puerto Rico bond fund disputes for which FINRA stated that its staff conducted recruitment activities in Puerto Rico and asked arbitrators in hearing locations in the Southeast Region and Texas if they would be willing to serve in Puerto Rico. FINRA stated that its recruitment efforts have resulted in almost 200 applications from Puerto Rico residents to serve on its roster, and approximately 800 arbitrators currently on its roster who have agreed to hear cases in Puerto Rico). 125 See Exchange Act Release No. 73245 (Sept. 29, 2014), 79 FR 58976 (Oct. 3, 2014) (Order Approving Proposed Rule Change to Amend the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes to Increase Arbitrator Honoraria and Increase Certain Arbitration Fees and Surcharges). 120 See PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 number of public arbitrators to serve the immediate needs of forum users.126 In addition, FINRA stated that if the proposal was approved it would focus its recruiting efforts on the hearing locations most impacted by the rule change and that it would assign additional staff to recruitment as necessary.127 Accordingly, FINRA declined to amend the proposed rule change.128 b. Quality of Public Arbitrator Pool Several commenters expressed concern that the proposed rule change would negatively impact the quality of public arbitrators available to serve in FINRA’s arbitration forum.129 In particular, these commenters were concerned that the classification of Investor Advocates as non-public arbitrators would diminish the number of qualified public arbitrators.130 For example, one commenter stated that the proposal would result in the most highly trained public arbitrators for customer-member cases being reclassified as non-public arbitrators.131 Another commenter stated more generally that the proposal would ‘‘gut the public arbitrator pool of many experienced and knowledgeable arbitrators’’ and result in a ‘‘brain drain’’ of the public arbitrator pool.132 In its response, FINRA stated that the proposed rule change would not reduce the total number of arbitrators available for selection but rather would shift them to another part of the roster. Accordingly, FINRA stated that it does not believe that the proposed rule change would drain from the forum the experience and expertise of those arbitrators being reclassified as nonpublic. FINRA stated that instead, the parties would receive a complete description of the background and experience of each arbitrator on the nonpublic list and could use that information to rank or strike them accordingly. FINRA stated that the proposal would effectively maintain the reclassified individuals in the pool of 126 See FINRA September Letter, FINRA November Letter, and FINRA December Letter. 127 See FINRA December Letter; see also FINRA September Letter (stating that if the proposal was approved, it would conduct a more detailed analysis to determine whether additional arbitrator recruitment efforts were necessary in any particular geographic area and would deploy the necessary resources to avoid any undue delay in the arbitration process). 128 See FINRA September Letter and FINRA November Letter. 129 See, e.g., Bender Letter, PIRC First November Letter, GSU Letter, and SAC October Letter. 130 See, e.g., Bender Letter, PIRC First November Letter, GSU Letter, and SAC October Letter. 131 See Bender Letter. 132 See PIRC First November Letter. E:\FR\FM\04MRN1.SGM 04MRN1 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices arbitrators as non-public arbitrators to be able to continue to utilize their experience and expertise while eliminating the industry’s perception of bias of these arbitrators.133 In addition, FINRA acknowledged the need for aggressive arbitrator recruitment to help ensure that the forum has a sufficient number of qualified public arbitrators 134 and outlined the measures it intends to undertake to fulfill this objective.135 Accordingly, FINRA declined to amend the proposed rule change.136 5. Impact on Qualified Chairpersons Several commenters expressed concern that the proposed rule change would negatively impact the quantity and quality of chairpersons available to serve in FINRA’s arbitration forum.137 Some commenters suggested changes to the qualification requirements for chairpersons in customer cases, such as allowing arbitrators with investor relationships to serve as chairpersons or requiring that the chairperson be a judge or hold a law degree.138 In its response, FINRA stated that allowing arbitrators with investor relationships to serve as chairpersons would nullify the effort to address perceived bias.139 FINRA also noted that more than 75 percent of the public chair-qualified arbitrators are attorneys and therefore stated that it does not believe that changes to the chair qualifications are necessary.140 Accordingly, FINRA declined to amend the proposed rule change.141 6. Cost-Benefit Analysis a. Timing Several commenters stated that the proposed rule change should not be approved until FINRA obtained additional data and published a detailed cost-benefit analysis justifying the proposal.142 In particular, these commenters expressed concern with FINRA November Letter. FINRA November Letter and FINRA December Letter. 135 See FINRA December Letter. 136 See FINRA November Letter. 137 See Stephens Letter and Bacine Letter (expressing concern that classifying professionals who provide services to customers as non-public arbitrators would negatively impact the quality of chairman-eligible arbitrators); see also Bender Letter. 138 See Bacine Letter and Berthel Letter. 139 See FINRA September Letter. 140 Id. 141 Id. 142 See SAC July Letter, Friedman July Letter, Estell Letter, Friedman October Letter, PIRC First November Letter, and SAC October Letter (questioning whether the depletion of public arbitrators resulting from the proposed rule change would lead to delays in hearing claims). FINRA’s commitment 143 to perform a detailed cost-benefit analysis after the proposal was implemented in order to assess its impact and determine where to allocate additional resources for arbitrator recruitment.144 Two of these commenters stated that if FINRA ultimately finds the impact of the proposed rule change unsupportable, forum participants would have to comply with a ‘‘bad’’ rule while proceedings are pending to approve a subsequent rule change.145 One of these commenters also stated that if the effort to conduct a cost-benefit analysis is to be expended in any event, conducting it prior to implementing the proposal could streamline implementation of the proposed rule change.146 In its response, FINRA stated that a cost-benefit analysis, while useful for planning purposes, does not outweigh the imperative of addressing the users’ perception of neutrality in maintaining the integrity of the forum, and that fairness requires FINRA to address the concerns of all forum users.147 Further, FINRA noted that the ‘‘proposed rule change is the culmination of extensive dialogue with FINRA constituents and FINRA filed the proposed rule change at the urging of its constituents.’’ 148 In addition, FINRA stated that performing a cost-benefit analysis would be timeintensive and require a survey of every public arbitrator on its roster.149 In the interim, FINRA performed a preliminary analysis of databases currently available to it to obtain estimates of the potential impact of the proposal (discussed above).150 FINRA also committed to perform a cost-benefit analysis if the proposal is approved.151 b. Potential Forum Delays Three commenters stated that by failing to conduct an in-depth analysis of the impact of the proposed rule change, FINRA failed to weigh the 133 See mstockstill on DSK4VPTVN1PROD with NOTICES 134 See VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 143 See FINRA September Letter. e.g., SAC October Letter and PIRC First November Letter. 145 See SAC October Letter and PIRC First November Letter. 146 See SAC October Letter; see also Estell Letter (suggesting that FINRA make information about each arbitrator publicly available, particularly to academic researchers, and that the data could provide FINRA with statistical proof of bias or lack of bias upon which to base its proposal instead of relying on perceptions of bias). 147 See FINRA November Letter; see also FINRA September Letter. 148 See FINRA November Letter; see also FINRA September Letter. 149 See FINRA September Letter. 150 See FINRA November Letter and FINRA December Letter; see also FINRA September Letter. 151 See FINRA September Letter. 144 See, PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 11703 consequences of its actions.152 For example, one commenter suggested that FINRA may not currently have enough public arbitrators and that this shortage of public arbitrators may be contributing to an increase in overall case turnaround time.153 Similarly, two commenters identified the lack of a costbenefit analysis as a reason that FINRA has underestimated the potential impact of the proposal on the public arbitrator pool.154 Alternatively, one commenter stated that FINRA’s representations that the proposal would not affect a significant number of arbitrators are sufficient.155 This commenter also stated that even if the impact to the public arbitrator pool is greater than anticipated, it is a small price to pay for arbitrator neutrality.156 In its response, FINRA stated that it monitors the amount of time it takes to process a claim in its forum and has not heard from forum users that arbitrator availability is causing delays in processing cases. Instead, FINRA stated that various other factors are more likely to result in delays, including partyinitiated postponements; an increase in the number of hearing sessions per case; concentration of law firms representing the majority of parties; and efforts to verify arbitrators’ disclosures to protect parties from undisclosed arbitrator conflicts.157 Moreover, as discussed above, FINRA stated that it recognizes the need for aggressive arbitrator recruitment to address any potential impact and outlined the steps it expects to take in its aggressive recruitment and retention of public arbitrators.158 7. Consideration of the Proposal by FINRA’s Dispute Resolution Task Force Two commenters suggested that FINRA withdraw the proposal and submit it to its recently formed Arbitration Task Force 159 for 152 See Friedman October Letter, SAC October Letter, and PIRC November Letter. 153 See SAC October Letter; see also Friedman July Letter and SAC July Letter (expressing concern that a decrease in the number of public arbitrators could result in greater delays in arbitrating claims, particularly (1) during declines in the financial markets (when the number of arbitration claims filed increases) or (2) in certain hearing locations with smaller rosters of arbitrators). 154 See Friedman October Letter, SAC October Letter, SAC July Letter, and Friedman July Letter. 155 See SIFMA November Letter. 156 Id. 157 See FINRA November Letter. 158 See FINRA November Letter and FINRA December Letter. 159 See FINRA News Release, FINRA Announces Arbitration Task Force (Jul. 17, 2014), available at https://www.finra.org/Newsroom/NewsReleases/ 2014/P554192 (announcing the formation of an Arbitration Task Force to consider possible enhancements to improve transparency, E:\FR\FM\04MRN1.SGM Continued 04MRN1 11704 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices consideration.160 One of these commenters suggested that the Task Force should be permitted to consider the proposal after a full impact analysis is conducted so that the Task Force would have the benefit of this analysis for its consideration.161 In its response, FINRA stated that it has engaged in a comprehensive process soliciting input from interested groups.162 It also stated that the proposal reflects a balanced approach on classifying arbitrators that would enhance forum users’ perception of fairness of the forum.163 In addition, FINRA stated that while the Task Force is setting its own agenda and is free to discuss the arbitrator definitions, it does not expect to make any recommendations until the fall of 2015, which would make it unlikely for FINRA to file any proposed rule change based on Task Force recommendations until at least 2016.164 FINRA indicated that it does not believe that it would be in the best interests of forum users to delay action on this fully considered proposal.165 mstockstill on DSK4VPTVN1PROD with NOTICES 8. Alternative Solutions Several commenters suggested alternatives to the proposal.166 For example, two commenters suggested that FINRA require arbitrators to disclose additional information about themselves, including their mix of work and the percentage of revenue derived from representation for or against the financial industry, so that parties can make independent determinations about each arbitrator.167 One of these commenters also suggested that FINRA eliminate the labels of public and nonpublic altogether and allow parties to choose from a single pool of arbitrators.168 Another commenter stated that Industry Affiliates should not permanently remain classified as nonpublic arbitrators but rather should be reclassified as being precluded from acting as an arbitrator in any capacity (i.e., a ‘‘no-man’s land’’) for a number of impartiality and efficiency of FINRA’s securities arbitration forum for all participants). 160 See Friedman October Letter and SAC October Letter; see also Friedman July Letter. 161 See SAC October Letter. 162 See FINRA November Letter; see also FINRA September Letter. 163 See FINRA November Letter; see also FINRA September Letter. 164 See FINRA November Letter. 165 See FINRA September Letter and FINRA November Letter. 166 See Bender Letter, NASAA November Letter, PIRC First November Letter, Friedman July Letter, and Nicinski Letter. 167 See Bender Letter and PIRC First November Letter; see also Estell Letter. 168 See PIRC First November Letter; see also Nicinski Letter. VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 years after ceasing their respective affiliation with the financial industry.169 Three other commenters objected to broker-dealers’ use of pre-dispute mandatory arbitration agreements.170 Other commenters suggested ways to improve the quality of arbitration panels.171 As discussed above, FINRA stated that it has engaged in a robust review process, including consultation with its NAMC, interested groups, and other forum constituents, during which it encouraged interested persons to raise their concerns about the definitions and to make suggestions on how to improve them.172 FINRA stated that its NAMC did not recommend that FINRA eliminate the arbitrator classifications.173 In addition, FINRA stated that eliminating the arbitrator classifications would undermine many of its recent changes to arbitrator selection rules, notably its all-public panel rule, which have been positively received by parties. In addition, FINRA stated that the recommended alternatives were either outside the scope of, or would cause undue delay to, the proposed rule change.174 Accordingly, FINRA declined to amend the proposed rule change.175 IV. Discussion The Commission has carefully considered the proposed rule change, the comments received, and FINRA’s responses to the comments. Based on its review of the record, the Commission finds that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.176 In particular, the Commission finds that the proposal is consistent with section 15A(b)(6) of the 169 See Friedman October Letter; see also Friedman July Letter (suggesting that instead of public and non-public, arbitrators should be classified as affiliated with financial industry or not). 170 See AAJ Letter, Estell Letter, and NASAA October Letter. 171 See, e.g., Nicinski Letter (recommending that arbitrators be required to display some knowledge of the investment products likely to be discussed during an arbitration) and Berthel Letter (recommending (1) that every panel include arbitrators with a strong background in securities laws and (2) that the Chair be a judge or hold a law degree). 172 See FINRA September Letter and FINRA November Letter. 173 See FINRA September Letter and FINRA November Letter; see also supra note 109. 174 See FINRA September Letter. 175 See FINRA September Letter and FINRA November Letter. 176 In approving this proposed rule change, the Commission has considered the proposed rule change’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 Act, which requires, among other things, that FINRA’s rules 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.177 As stated above, FINRA classifies arbitrators as ‘‘non-public’’ or ‘‘public’’ based on their professional and personal affiliations. The proposal would, among other things: (1) Permanently classify as ‘‘nonpublic arbitrators’’ individuals with certain affiliations with the financial industry; and (2) classify as non-public arbitrators certain professionals (e.g., accountants and attorneys) who represent or provide services to parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry.178 Consequently, the proposed rule change would, in some instances, require the reclassification of current public arbitrators to non-public arbitrators. As stated in the Notice of Filing, the proposed rule change was designed to address concerns regarding the perceived neutrality of the public arbitrator roster raised by both investor representatives and financial industry representatives.179 Specifically, the classification of individuals affiliated with the financial industry as nonpublic arbitrators responds to concerns of potential bias of arbitrators, whether actual or perceived, in favor of the industry.180 Similarly, the classification of Investor Advocates as non-public arbitrators responds to concerns of potential bias of arbitrators, whether actual or perceived, in favor of investors.181 The Commission believes that the proposed rule change would help to address any perceived bias of public arbitrators by classifying certain individuals with either financial industry experience or significant experience representing investors as non-public arbitrators. Accordingly, the 177 15 U.S.C. 78o–3(b)(6). infra pp. 41–42 for a discussion of other provisions of the proposed rule change. 179 See Notice of Filing, 79 FR 38080, 38081 (Jul. 3, 2014). 180 See SIFMA November Letter and CSLC Letter; see also SIFMA July Letter, Aidikoff Letter, Bakhtiari July Letter, NASAA July Letter, and PIABA Letter. 181 See SIFMA November Letter and AIG Letter; see also SIFMA July Letter, FSI Letter, Berthel Letter, and Type A Form Letters; but see Friedman October Letter, UMIRC Letter, GSU Letter, CSLC Letter, NASAA November Letter, Second PIRC November Letter, NASAA July Letter, PIABA Letter, Stephens Letter, PIRC July Letter, Bacine Letter, Mass Letter, Hardiman Letter, and Friedman July Letter. 178 See E:\FR\FM\04MRN1.SGM 04MRN1 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Commission also believes that the proposal would enhance the perception of neutrality of the entire FINRA arbitration forum. The Commission recognizes commenters’ concerns that classifying Investor Advocates as nonpublic investors may be inconsistent with their historic view of non-public and public arbitrators (i.e., classifying public arbitrators and non-public arbitrators based on their affiliations (or lack thereof) with the financial industry).182 The Commission also recognizes, however, that the public interest would be served by addressing concerns of fairness and neutrality for all forum users.183 The Commission also recognizes the concerns of some commenters that the proposed rule change would require FINRA to reclassify some current public arbitrators as non-public arbitrators and that these reclassifications may temporarily reduce the number and quality of the public arbitrator pool, particularly in light of the implementation of FINRA’s all-publicpanel rules.184 The Commission, however, also recognizes FINRA’s current and proposed future efforts to help ensure the sufficiency of the public arbitrator pool.185 Although FINRA stated that it currently anticipates having a sufficient number of public arbitrators to serve the immediate needs of forum users, it also acknowledged that the proposal may necessitate aggressive arbitrator recruitment.186 Accordingly, FINRA stated that it is committed to help ensure that the forum has a sufficient number of public arbitrators to serve the needs of its forum members in each of its hearing locations.187 For example, FINRA stated that it intends to conduct a detailed survey of its public arbitrators as part of an impact analysis to assist in allocating its resources to recruit public arbitrators in the areas most needed.188 In addition, FINRA stated that it intends to devote its resources to recruiting arbitrators.189 182 See, e.g., CSLC Letter, NASAA November Letter, NASAA July Letter, PIABA Letter, Stephens Letter, PIRC July Letter, Bacine Letter, Friedman July Letter, Hardiman Letter, and Mass Letter. 183 See FINRA September Letter, FINRA November Letter, and FINRA December Letter. 184 See, e.g., Bender Letter, PIRC First November Letter, GSU Letter, SAC October Letter, SAC July Letter, and NASAA July Letter. 185 See FINRA November Letter and FINRA December Letter. 186 See FINRA November Letter and FINRA December Letter. 187 See FINRA November Letter and FINRA December Letter. 188 See FINRA September Letter and FINRA December Letter. 189 See FINRA November Letter and FINRA December Letter. VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 Furthermore, FINRA stated that it has taken steps to enhance arbitrator retention. For example, FINRA stated that it has implemented a new rule to increase the amount of honoraria paid to its arbitrators.190 In addition, FINRA stated that it intends to increase the amount of honoraria paid to arbitrators when a party or parties postpone or cancel hearing sessions on short notice.191 While FINRA acknowledges that the proposed rule change will necessitate aggressive arbitrator recruitment to help ensure that its arbitration forum will continue to have sufficient public arbitrators to prevent delays in all hearing locations,192 the Commission preliminarily believes that FINRA’s plan to mitigate such delays is appropriate, particularly in light of the primary objective of the proposal—improving the perceived neutrality of its arbitrators and integrity of its arbitration forum. In sum, the Commission believes that the proposed rule change would help address forum users’ perceptions of neutrality in, and maintain the integrity of, the arbitration forum. In addition, the Commission believes the potential negative effects (in particular, a temporary decline in the number of available public arbitrators) will be mitigated by FINRA’s proposed recruitment and retention of public arbitrators. The proposed rule change would also: (1) Extend the cooling off period for Industry Affiliates and Investor Advocates to five years, and (2) use professional time to quantify professional work when determining whether a person qualifies as an Industry Affiliate or Investor Advocate. Although some commenters suggested alternatives, such as proportional cooling off periods or using revenue, instead of professional time, to quantify professional work, FINRA stated its belief that a bright-line test is more workable and eases administrative burdens while addressing concerns about potential or perceived bias in the forum. In addition to the amendments discussed above, the proposed rule 190 See supra note 125. e.g., FINRA December Letter; see also Exchange Act Release No. 74289 (Feb. 18, 2015), 80 FR 9773 (Feb. 24, 2015) (Notice of Filing of a Proposed Rule Change to Amend the Codes of Arbitration Procedure to Increase the Late Cancellation Fee) (FINRA proposed rule change to amend Rules 12214 and 12601 of the Customer Code and Rules 13214 and 13601 of the Industry Code to require, among other things, that parties give more advance notice before cancelling or postponing a hearing, or be assessed a higher late cancellation fee if such notice is not provided). 192 See FINRA November Letter. 191 See, PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 11705 change would make several additional changes to the Codes. For instance, the proposal would (1) add new categories of financial industry personnel who would be classified as non-public arbitrators, in particular persons associated with, including registered through, a mutual fund or hedge fund and persons associated with, including registered through, an investment adviser; (2) reduce from 20 to 15, the number of years a person must work over the course of his or her career in specified capacities in order to be permanently classified as a non-public arbitrator; and (3) redefine the definition of ‘‘immediate family member’’ as well as add a two year cooling off period for individuals whose immediate family members engage in specified activities that disqualify them from serving on the public arbitrator roster. The Commission also recognizes some of the other concerns raised by commenters regarding the process FINRA used for proposing this rule. Some commenters expressed concern that FINRA did not perform a costbenefit analysis prior to proposing the rule change.193 Other commenters recommended that FINRA submit the proposal to its Arbitration Task Force prior to proposing it.194 In response, FINRA identified the process it took in developing and considering the proposal, including consultation with its NAMC, interested groups, and other forum users; stated that additional consideration by the Arbitration Task Force is not precluded; and stated its intent to perform future cost-benefit analysis to prevent burdening its arbitrators prior to the effectiveness of the proposed new rule.195 In sum, the Commission believes that FINRA gave due consideration to the proposal and met the requirements of the Exchange Act. However, the Commission will be interested in the results of FINRA’s future cost-benefit analysis and the staff will monitor the consequences of approval of the proposed rule change. For the reasons stated above, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder. 193 See Friedman October Letter, PIRC First November Letter, and SAC October Letter; see also SAC July Letter and Friedman July Letter. 194 See Friedman October Letter and SAC October Letter; see also Friedman July Letter. 195 See FINRA September Letter, FINRA November Letter, and FINRA December Letter. E:\FR\FM\04MRN1.SGM 04MRN1 11706 Federal Register / Vol. 80, No. 42 / Wednesday, March 4, 2015 / Notices V. Conclusion It is therefore ordered pursuant to section 19(b)(2) of the Act 196 that the proposed rule change (SR–FINRA– 2014–028) be and hereby is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.197 Jill M. Peterson, Assistant Secretary. [FR Doc. 2015–04419 Filed 3–3–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–74384; File No. SR–MSRB– 2014–08] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Amendment No. 1 and Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change Consisting of Proposed Amendments to MSRB Rules G–1, on Separately Identifiable Department or Division of a Bank; G–2, on Standards of Professional Qualification; G–3, on Professional Qualification Requirements; and D–13, on Municipal Advisory Activities February 26, 2015. I. Introduction On November 18, 2014, the Municipal Securities Rulemaking Board (the ‘‘MSRB’’ or ‘‘Board’’) filed with the Securities and Exchange Commission (the ‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change consisting of proposed amendments to MSRB Rules G–1, on separately identifiable department or division of a bank; G–2, on standards of professional qualification; G–3, on professional qualification requirements; and D–13, on municipal advisory activities (the ‘‘proposed rule change’’). The proposed rule change was published for comment in the Federal Register on December 5, 2014.3 The Commission received five comment letters on the proposed rule change.4 On February 5, 2015, the mstockstill on DSK4VPTVN1PROD with NOTICES 196 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 73708 (December 1, 2014), 79 FR 72225 (December 5, 2014) (the ‘‘Proposing Release’’). 4 See Letters from Anonymous, dated December 25, 2014; Leslie M. Norwood, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), 197 17 VerDate Sep<11>2014 18:11 Mar 03, 2015 Jkt 235001 MSRB submitted a response to the comments on the proposed rule change 5 and filed Amendment No. 1 (‘‘Amendment No. 1’’).6 The Commission received two comment letters on Amendment No. 1.7 On February 20, 2015, the MSRB submitted a response to the comments on Amendment No.1.8 On February 25, 2015, the MSRB submitted Amendment No. 2 (‘‘Amendment No. 2’’ and together with Amendment No. 1, the ‘‘Amendments’’).9 The Commission is publishing this notice to solicit comments on the Amendments from interested persons and is approving the proposed rule change, as modified by the Amendments, on an accelerated basis. II. Description of the Proposed Rule Change According to the MSRB, the purpose of the proposed rule change is to establish professional qualification requirements for municipal advisors and their associated persons and to make related changes to select MSRB rules.10 A full description of the proposed rule change is contained in the Proposing Release. dated December 26, 2014 (‘‘SIFMA Letter’’); Anonymous Attorney, on behalf of a registered investment advisor and municipal advisor (‘‘Anonymous Attorney’’), dated December 26, 2014 (‘‘Anonymous Letter’’); Tamara K. Salmon, Senior Associate Counsel, Investment Company Institute (‘‘ICI’’), dated December 29, 2014 (‘‘ICI Letter’’); and Terri Heaton, President, National Association of Municipal Advisors (‘‘NAMA’’), dated January 27, 2015 (‘‘NAMA Letter No. 1’’). 5 See Letter to Secretary, Commission, from Lawrence P. Sandor, Deputy General Counsel, MSRB, dated February 5, 2015 (‘‘MSRB Response Letter No. 1’’). 6 See Letter to Secretary, Commission, from Lawrence P. Sandor, Deputy General Counsel, MSRB, dated February 5, 2015. Amendment No. 1 partially amends the text of the proposed rule change to revise Rules G–1(a)(ii)(B), G–3(a)(i)(A)(2) and G–3(b)(i)(B) by deleting the following clause: ‘‘Except to the extent a person must be qualified as a municipal advisor representative to perform such services.’’ The MSRB believes that it would be premature to include such clause until certain foundational rules regarding municipal advisors are approved and effective. 7 See Letters from Dave A. Sanchez Attorney at Law (‘‘Sanchez’’), dated February 12, 2015 (‘‘Sanchez Letter’’); and Terri Heaton, President, NAMA, dated February 12, 2015 (‘‘NAMA Letter No. 2’’). 8 See Letter to Secretary, Commission, from Lawrence P. Sandor, Deputy General Counsel, MSRB, dated February 20, 2015 (‘‘MSRB Response Letter No. 2’’ and together with MSRB Response Letter No. 1, the ‘‘MSRB Response Letters’’). 9 See Letter to Secretary, Commission, from Michael Cowart, Assistant General Counsel, MSRB, dated February 25, 2015. Amendment No. 2 partially amends Amendment No. 1 to correct a technical error in a quotation of rule text. 10 See supra note 3 at 2. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 1. Proposed Amendments to Rule G–1 The proposed amendments to Rule G– 1 includes language to provide that, for purposes of its municipal advisory activities, the term ‘‘separately identifiable department or division of a bank’’ would have the same meaning as used in 17 CFR 240.15Ba1–1(d)(4).11 2. Proposed Amendments to Rule G–2 The proposed amendments to Rule G– 2 add a basic requirement that no municipal advisor shall engage in municipal advisory activities unless such municipal advisor and every natural person associated with such municipal advisor is qualified in accordance with the rules of the Board.12 3. Proposed Amendments to Rule G–3 Apprenticeship MSRB Rule G–3 currently requires a municipal securities representative to serve an apprenticeship period of 90 days before transacting business with any member of the public or receiving compensation for such activities.13 The MSRB believes that dealers and municipal advisors should determine the length and nature of the initial training for newly registered persons, consistent with industry feedback and the approach taken by Financial Industry Regulatory Authority (‘‘FINRA’’).14 Accordingly, the proposed amendments to Rule G–3 eliminate the apprenticeship requirement for municipal securities representatives and, similarly, do not propose an apprenticeship requirement for municipal advisor representatives.15 New Registration Classifications The proposed amendments to Rule G– 3 create two new registration classifications: (i) Municipal advisor representative; and (ii) municipal advisor principal.16 The proposed amendments to Rule G– 3 define a ‘‘municipal advisor representative’’ as a natural person associated with a municipal advisor who engages in municipal advisory activities on the municipal advisor’s behalf, other than a person performing only clerical, administrative, support or similar functions.17 The proposed amendments to Rule G–3 require each municipal advisor representative to take and pass the Municipal Advisor 11 See Exhibit 5 of the Amendments. 12 Id. 13 See supra note 3 at 9. 14 Id. 15 Id. 16 See supra note 11. 17 Id. E:\FR\FM\04MRN1.SGM 04MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 42 (Wednesday, March 4, 2015)]
[Notices]
[Pages 11695-11706]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-04419]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74383; File No. SR-FINRA-2014-028]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Relating to 
Revisions to the Definitions of Non-Public Arbitrator and Public 
Arbitrator

February 26, 2015.

I. Introduction

    On June 17, 2014, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 12100(p) of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
FINRA Rule 13100(p) of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code'') (collectively, ``Codes''), defining the 
term ``non-public arbitrator;'' and FINRA Rule 12100(u) of the Customer 
Code and Rule 13100(u) of the Industry Code, defining the term ``public 
arbitrator.''
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on July 3, 2014.\3\ On August 4, 2014, FINRA extended the time 
period in which the Commission must approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change to 
October 1, 2014. The Commission received three hundred sixteen (316) 
comment letters in response to the Notice of Filing.\4\ On September 
30, 2014, the Commission received a letter from FINRA responding to the 
comment letters.\5\ On October 1, 2014, the Commission issued an order 
to institute proceedings pursuant to section 19(b)(2)(B) of the Act \6\ 
to determine whether to approve or disapprove the proposed rule change. 
The order was published for comment in the Federal Register on October 
7, 2014.\7\ The Commission received fourteen (14) comment letters in 
response to the Proceedings Order.\8\ On

[[Page 11696]]

November 24, 2014, the Commission received a letter from FINRA 
responding to the comment letters.\9\ On December 11, 2014, the 
Commission received a letter from FINRA supplementing the FINRA 
November Letter.\10\
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    \3\ Exchange Act Release No. 72491 (Jun. 27, 2014), 79 FR 38080 
(Jul. 3, 2014) (Notice of Filing of Proposed Rule Change Relating to 
Revisions to the Definitions of Non-Public Arbitrator and Public 
Arbitrator) (``Notice of Filing''). The comment period closed on 
July 24, 2014.
    \4\ Of the 316 letters, 21 were unique letters, and 295 of the 
letters followed a form designated as the ``Type A'' letter, 
submitted by self-identified independent financial advisors 
(``independent financial advisors'') (``Type A Letter''). The unique 
letters were submitted by: Philip M. Aidikoff, Aidikoff, Uhl & 
Bakhtiari, dated July 1, 2014 (``Aidikoff Letter''); Steven B. 
Caruso, Esq., Maddox Hargett & Caruso, P.C., dated July 1, 2014 
(``Caruso July Letter''); Ryan K. Bakhtiari, Aidikoff, Uhl & 
Bakhtiari, dated July 2, 2014 (``Bakhtiari July Letter''); Richard 
A. Stephens, Attorney at Law, dated July 6, 2014 (``Stephens 
Letter''); Daniel E. Bacine, Barrack, Rodos & Bacine, dated July 18, 
2014 (``Bacine Letter''); Blossom Nicinski, dated July 20, 2014 
(``Nicinski Letter''); Christopher L. Mass, dated July 21, 2014 
(``Mass Letter''); Glenn S. Gitomer, McCausland Keen and Buckman, 
dated July 23, 2014 (``Gitomer July Letter''); David T. Bellaire, 
Esq., Executive Vice President & General Counsel, Financial Services 
Institute, dated July 24, 2014 (``FSI Letter''); Thomas J. Berthel, 
CEO, Berthel Fisher & Company, dated July 24, 2014 (``Berthel 
Letter''); Kevin M. Carroll, Managing Director and Associate General 
Counsel, Securities Industry and Financial Markets Association, 
dated July 24, 2014 (``SIFMA July Letter''); CJ Croll, Student 
Intern, Elissa Germaine, Supervising Attorney, and Jill I. Gross, 
Director, Investor Rights Clinic at Pace Law School, dated July 24, 
2014 (``PIRC July Letter''); Jason Doss, President, Public Investors 
Arbitration Bar Association, dated July 24, 2014 (``PIABA Letter''); 
George H. Friedman, Esq., George H. Friedman Consulting, LLC, dated 
July 24, 2014 (``Friedman July Letter''); Gary N. Hardiman, dated 
July 24,2014 (``Hardiman Letter''); J. Burton LeBlanc, President, 
American Association for Justice, dated July 24, 2014 (``AAJ 
Letter''); Richard P. Ryder, Esq., President, Securities Arbitration 
Commentator, Inc., dated July 24, 2014 (``SAC July Letter''); Andrea 
Seidt, President, North American Securities Administrators 
Association, and Ohio Securities Commissioner, dated July 24, 2014 
(``NASAA July Letter''); Robert Getman, dated July 28, 2014 
(``Getman Letter''); Barry D. Estell, Attorney at Law (retired), 
dated August 13, 2014 (``Estell Letter''); and Walter N. Vernon III, 
Esq., dated August 21, 2014 (``Vernon Letter''). Comment letters are 
available at www.sec.gov.
    The Commission discussed these comments in the Proceedings 
Order. See infra note 7.
    \5\ Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA 
Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated 
September 30, 2014 (``FINRA September Letter''). The FINRA September 
Letter is available at www.sec.gov.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ Exchange Act Release No. 73277 (Oct. 1, 2014), 79 FR 60556 
(Oct. 7, 2014) (Order Instituting Proceedings To Determine Whether 
To Approve or Disapprove Proposed Rule Change Relating to Revisions 
to the Definitions of Non-Public Arbitrator and Public Arbitrator) 
(``Proceedings Order''). The comment period closed on November 6, 
2014.
    \8\ The comment letters were submitted by: John A. Bender, Esq., 
Member, Ryan Swanson Cleveland, dated October 10, 2014 (``Bender 
Letter''); George H. Friedman, Esquire, George H. Friedman 
Consulting, LLC, dated October 20, 2014 (``Friedman October 
Letter''); Richard P. Ryder, Esq., President, Securities Arbitration 
Commentator, Inc., dated October 26, 2014 (``SAC October Letter''); 
Steven B. Caruso, Esq., Maddox Hargett & Caruso, P.C., dated October 
29, 2014 (``Caruso October Letter''); Ryan K. Bakhtiari, Aidikoff, 
Uhl & Bakhtiari, dated October 30, 2014 (``Bakhtiari October 
Letter''); Glenn S. Gitomer, McCausland Keen and Buckman, dated 
November 5, 2014 (``Gitomer November Letter''); William Beatty, 
President, North American Securities Administrators Association and 
Washington Securities Administrator, dated November 6, 2014 (``NASAA 
November Letter''); Kevin M. Carroll, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated November 6, 2014 (``SIFMA November Letter''); 
Ryan Corbin, Kori Eskridge, and Kristina Ludwig, Student Interns, 
and Nicole Iannarone, Assistant Clinical Professor, Georgia State 
University College of Law Investor Advocacy Clinic, dated November 
6, 2014 (``GSU Letter''); CJ Croll and Jeffrey Valacer, Student 
Interns, Elissa Germaine, Supervising Attorney, and Jill I. Gross, 
Director, Investor Rights Clinic at Pace Law School, dated November 
6, 2014 (``PIRC First November Letter''); Greg Curley, Senior 
Litigation Counsel, American International Group, Inc., AIG Advisor 
Group, Inc., dated November 6, 2014 (``AIG Letter''); William A. 
Jacobson, Esq., Clinical Professor of Law and Director, and Nathan 
F. Baum, Student, Cornell University Law School Securities Law 
Clinic, dated November 6, 2014 (``CSLC Letter''); Daniel Wolfe, 
Legal Intern, and Teresa Verges, Director, University of Miami 
Investor Rights Clinic, dated November 6, 2014 (``UMIRC Letter''); 
and CJ Croll and Jeffrey Valacer, Student Interns, Elissa Germaine, 
Supervising Attorney, and Jill I. Gross, Director, Investor Rights 
Clinic at Pace Law School, dated November 21, 2014 (``PIRC Second 
November Letter''). Comment letters are available at www.sec.gov.
    \9\ Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA 
Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated 
November 24, 2014 (``FINRA November Letter''). The FINRA November 
Letter is available at www.sec.gov.
    \10\ Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA 
Dispute Resolution, to Brent J. Fields, Secretary, SEC, dated 
December 11, 2014 (``FINRA December Letter''). The FINRA December 
Letter is available at www.sec.gov.
---------------------------------------------------------------------------

    This order approves the proposed rule change.

II. Description of the Proposed Rule Change

    In general, FINRA classifies arbitrators as ``non-public'' or 
``public'' based on their professional and personal affiliations. 
Currently, FINRA Rule 12100(p) of the Customer Code and FINRA Rule 
13100(p) of the Industry Code (defining the term ``non-public 
arbitrator'') list financial industry affiliations that might qualify a 
person to serve as a non-public arbitrator in the FINRA arbitration 
forum. Conversely, FINRA Rule 12100(u) of the Customer Code and FINRA 
Rule 13100(u) of the Industry Code (defining the term ``public 
arbitrator'') list affiliations that disqualify a person from serving 
as a public arbitrator in the FINRA arbitration forum. FINRA is 
proposing to delete the definitions in their entirety, and replace them 
with new definitions. The proposed amendments are described below.

A. Non-Public Arbitrator Definition

1. Proposed New Rule 12100(p)(1) \11\
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    \11\ Where this order refers only to rules in the Customer Code, 
the changes and discussions also apply to the corresponding rules in 
the Industry Code.
---------------------------------------------------------------------------

    Under the current non-public arbitrator definition, if a person is 
currently, or was within the past five years, affiliated with a 
financial industry entity specified in the rule (a ``specified 
financial industry entity''), the person is classified as a non-public 
arbitrator.\12\ The rule permits these individuals to be reclassified 
as public arbitrators five years after ending all financial industry 
affiliations unless (i) they retired from, or spent a substantial part 
of their career with, a specified financial industry entity \13\ or 
(ii) they were affiliated for 20 years or more with a specified 
financial industry entity.\14\ The individuals subject to these 
exceptions remain classified as non-public arbitrators.
---------------------------------------------------------------------------

    \12\ See current Rule 12100(p)(1). This provision applies to a 
person who is, or was within the past five years: (1) Associated 
with, including registered through, a broker or dealer (including a 
government securities broker or dealer or a municipal securities 
dealer); (2) registered under the Commodities Exchange Act; (3) a 
member of a commodities exchange or a registered futures 
association; or (4) associated with a person or firm registered 
under the Commodities Exchange Act.
    \13\ See current Rule 12100(p)(2).
    \14\ See current Rule 12100(u)(2).
---------------------------------------------------------------------------

    New Rule 12100(p)(1) would eliminate the five-year cooling-off 
provision for persons who work in the financial industry by permanently 
classifying 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. New Rule 12100(p)(1) would also 
add two new categories of financial industry professionals who would be 
permanently classified as non-public arbitrators: (i) Persons 
associated with, including registered through, a mutual fund or hedge 
fund, and (ii) persons associated with, including registered through, 
an investment adviser.\15\
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    \15\ Currently, FINRA Rules preclude these individuals from 
serving as arbitrators in any capacity. See current Rule 12100(p) 
and (u). If, however, they end their affiliation they may serve as 
public arbitrators after a two-year cooling-off period. These 
individuals 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).
---------------------------------------------------------------------------

    In addition, new Rule 12100(p)(1) would clarify certain references 
made in the current rule. For instance, the new rule would replace ``[a 
person] registered under the Commodity Exchange Act; a member of a 
commodities exchange . . ., or associated with a person or firm 
registered under the Commodity Exchange Act,'' \16\ with ``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[.]'' Also, instead of referring 
to ``a member . . . of a registered futures association,'' \17\ new 
Rule 12100(p)(1)(B) would identify the association as the National 
Futures Association. Moreover, new Rule 12100(p)(1)(B) would include a 
reference to ``[a person] who is, or was, associated with, including 
registered through, under, or with (as applicable), . . . the Municipal 
Securities Rulemaking Board.'' In addition, new Rule 12100(p)(1)(C) 
would include a provision to cover any entity ``organized under or 
registered pursuant to the Securities Exchange Act of 1934, Investment 
Company Act of 1940, or the Investment Advisers Act of 1940.'' This 
provision would cover financial industry affiliated persons not 
otherwise specified in the rule and potential categories of financial 
industry professionals that may be created in the future.
---------------------------------------------------------------------------

    \16\ See current FINRA Rule 12100(p)(1)(B)-(D).
    \17\ See current FINRA Rule 12100(p)(1)(C).
---------------------------------------------------------------------------

2. Proposed New Rule 12100(p)(2)
    Under current Rule 12100(p)(3), attorneys, accountants, and other 
professionals who devoted 20 percent or more of their professional work 
in the last two years to serving specified financial industry entities 
and/or employees, are classified as non-public arbitrators.\18\ Rule 
12100(p)(3) permits these individuals to be reclassified as public 
arbitrators two years after they stopped providing services to 
specified financial industry entities, with one exception. A person who 
provided services for 20 calendar years or more over the course of his 
or her career is permanently disqualified from serving as a public 
arbitrator.\19\
---------------------------------------------------------------------------

    \18\ The rule applies to the persons and entities listed in 
current Rule 12100(p)(1).
    \19\ See current Rule 12100(u)(2).
---------------------------------------------------------------------------

    Proposed new Rule 12100(p)(2) would broaden the application of 
current Rule 12100(p)(3) in three ways: (i) It would increase the look-
back period from two years to five years, (ii) it would apply to not 
only services provided to specified financial industry entities but 
also to services provided to any persons or entities associated with 
those specified financial industry entities, and (iii) it would 
permanently disqualify from serving as public arbitrators persons who 
provided the specified services for

[[Page 11697]]

15 calendar years or more over the course of their careers (in contrast 
to the current 20 year provision).\20\
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    \20\ See proposed new Rule 12100(u)(2). The 15 years are a total 
number of years--they would not have to be consecutive years.
---------------------------------------------------------------------------

    In addition, the proposal would replace the phrase ``professional 
work'' with ``professional time.''
3. Proposed New Rule 12100(p)(3)
    Currently, FINRA rules permit individuals who represent or provide 
professional services to investors in securities disputes to serve as 
public arbitrators.\21\
---------------------------------------------------------------------------

    \21\ Currently, 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.
---------------------------------------------------------------------------

    Under proposed new Rule 12100(p)(3), 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 would be 
classified as non-public arbitrators. However, Rule 12100(p)(3) would 
permit these individuals to serve as public arbitrators five years 
after they stopped devoting 20 percent or more of their professional 
time to serving parties in investment or financial industry employment 
disputes with one exception. A person who provided services for 15 
calendar years or more over the course of his or her career would be 
permanently disqualified from serving as a public arbitrator.\22\
---------------------------------------------------------------------------

    \22\ See proposed new Rule 12100(u)(3). The 15 years are a total 
number of years--they would not have to be consecutive years.
---------------------------------------------------------------------------

4. Proposed New Rule 12100(p)(4)
    Under current Rule 12100(p)(4), any person who is an employee of a 
bank or other financial institution who (i) effects transactions in 
securities, including government or municipal securities, and 
commodities, futures, or options, or (ii) supervises or monitors the 
compliance with the securities and commodities laws of employees who 
engage in such activities is classified as a non-public arbitrator. 
When these individuals end their affiliation, they are immediately 
reclassified as public arbitrators unless they have engaged in this 
type of work for 20 years or more over the course of their careers.\23\
---------------------------------------------------------------------------

    \23\ See current Rule 12100(u)(2).
---------------------------------------------------------------------------

    Proposed new Rule 12100(p)(4) would add a five-year look-back 
period to this provision. Specifically, under proposed new Rule 
12100(p)(4), any person who, within the last five calendar years, was 
an employee of a bank or other financial institution who (i) effects 
transactions in securities, including government or municipal 
securities, commodities, futures, or options, or (ii) supervises or 
monitors the compliance with the securities and commodities laws of 
employees who engage in such activities would be classified as a non-
public arbitrator. However, proposed new Rule 12100(p)(4) would permit 
these individuals to serve as public arbitrators five years after they 
ended their industry affiliation unless they provided these services 
for 15 years or more.\24\ After 15 years of service, the proposed rules 
would permanently classify such individuals as non-public 
arbitrators.\25\
---------------------------------------------------------------------------

    \24\ See proposed new Rule 12100(u)(4). The 15 years are a total 
number of years--they would not have to be consecutive years.
    \25\ See proposed new Rule 12100(u)(4).
---------------------------------------------------------------------------

B. Public Arbitrator Definition

1. Proposed New Rule 12100(u)(1)
    Current Rules 12100(u)(1) and 12100(u)(3) identify the types of 
financial industry employment that disqualify a person from serving as 
a public arbitrator by cross-referencing those activities listed in 
current Rule 12100(p) (defining ``non-public arbitrators''). 
Consequently, these otherwise qualified individuals are classified as 
non-public arbitrators. Proposed new Rule 12100(u)(1) would retain the 
types of financial industry employment that would disqualify a person 
from serving as a public arbitrator with revisions identical to those 
in proposed new Rule 12100(p)(1). Specifically: (i) Instead of 
referring to ``[a person] registered under the Commodity Exchange Act; 
a member of a commodities exchange . . ., or associated with a person 
or firm registered under the Commodity Exchange Act,'' proposed new 
Rule 12100(u)(1)(B) would refer 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;'' (ii) instead of referring to ``a member . 
. . of a registered futures association,'' proposed new Rule 
12100(u)(1)(B) would identify the association as the National Futures 
Association; (iii) proposed new Rule 12100(u)(1)(B) would add a 
reference to ``[a person] who is, or was, associated with, including 
registered through, under, or with (as applicable), . . . the Municipal 
Securities Rulemaking Board;'' and (iv) proposed new Rule 
12100(p)(1)(C) would include a provision to cover any entity 
``organized under or registered pursuant to the Securities Exchange Act 
of 1934, Investment Company Act of 1940, or the Investment Advisers Act 
of 1940.'' This provision would cover financial industry affiliated 
persons not otherwise specified in the rule and potential categories of 
financial industry professionals that may be created in the future.
    As stated above, current FINRA Rule 12100 (p)(1) generally permits 
individuals classified as non-public arbitrators to become reclassified 
as public arbitrators five years after ending their affiliations 
(subject to specified exceptions).\26\ As explained in the above 
discussion on proposed new Rule 12100(p)(1), the proposal would 
eliminate the five-year cooling-off period\27\ resulting in the 
permanent classification of these individuals as non-public arbitrators 
pursuant to new Rule 12100(u)(1).
---------------------------------------------------------------------------

    \26\ See supra notes 12, 12, and 13 and their accompanying text.
    \27\ Current Rule 12100(u)(3) subjects investment advisers and 
persons associated with, including registered through, a mutual fund 
or hedge fund to a two-year cooling-off period after ending the 
affiliation. Under proposed new Rule 12100(u)(1), these individuals 
would also be subject to permanent classification as non-public 
arbitrators.
---------------------------------------------------------------------------

2. Proposed New Rules 12100(u)(2) and 12100(u)(6)\28\
---------------------------------------------------------------------------

    \28\ Although the descriptions of the disqualifications in 
proposed new Rules 12100(u)(2) and 12100(u)(6) are almost identical, 
FINRA believes it would add clarity to the definition to distinguish 
when the provisions would result in a permanent classification, and 
when they would result in a temporary classification. See Notice of 
Filing, 79 FR 38080, 38084 (Jul. 3, 2014).
---------------------------------------------------------------------------

    Under current Rule 12100(u)(1), attorneys, accountants, and other 
professionals who devoted 20 percent or more of their professional work 
in the last two years to serving specified financial industry entities 
and/or employees listed in current Rule 12100(p)(1), may not be 
classified as public arbitrators. However, current Rule 12100(u)(1) 
permits these individuals to be reclassified as public arbitrators two 
years after they stopped providing those services, with one 
exception.\29\ A person who provided services for 20 calendar years or 
more over the course of his or her career is permanently disqualified 
from serving as a public arbitrator.\30\
---------------------------------------------------------------------------

    \29\ See current Rule 12100(u)(1) (incorporating, among other 
things, current Rule 12100(p)(3)).
    \30\ See current Rule 12100(u)(2) (referencing the 20-year time 
period).
---------------------------------------------------------------------------

    Proposed new Rules 12100(u)(2) and 12100(u)(6) would broaden the 
provisions of current Rule 12100(u)(1) in three ways: (i) It would 
apply to not only services provided to specified financial industry 
entities but also to services provided to any persons or

[[Page 11698]]

entities associated with those specified financial industry 
entities;\31\ (ii) new Rule 12100(u)(2) would decrease the number of 
years for a permanent disqualification from 20 years to 15 years;\32\ 
and (iii) new Rule 12100(u)(6) would increase the cooling-off period 
from two years to five years.\33\ In sum, the proposal would 
permanently disqualify from serving as public arbitrators persons who 
provided the specified services for 15 calendar years or more over the 
course of their careers.
---------------------------------------------------------------------------

    \31\ Cf. current Rule 12100(p)(3) to illustrate the scope of 
coverage to be expanded by proposed new Rule 12100(u)(2).
    \32\ The 15 years are a total number of years--they would not 
have to be consecutive years.
    \33\ Substantively, proposed new Rules 12100(u)(2) and 
12100(u)(6) are analogous to proposed new Rule 12100(p)(2).
---------------------------------------------------------------------------

3. Proposed New Rules 12100(u)(3) and 12100(u)(7)
    Under proposed new Rules 12100(u)(3) and 12100(u)(7) attorneys, 
accountants, expert witnesses, and other professionals who devote 20 
percent or more of their professional time annually to representing or 
providing services to parties in disputes concerning investment 
accounts or transactions, or employment relationships within the 
financial industry generally would be classified as non-public 
arbitrators.\34\ New Rule 12100(u)(7), however, would permit these 
individuals to be reclassified as public arbitrators five years after 
the final calendar year in which they devoted 20 percent or more of 
their professional time providing those services with one exception. A 
person who provided services for 15 calendar years or more over the 
course of his or her career would be permanently disqualified from 
serving as a public arbitrator.\35\
---------------------------------------------------------------------------

    \34\ The substance of proposed new Rules 12100(u)(3) and 
12100(u)(7) corresponds to the substance of proposed new Rule 
12100(p)(3).
    \35\ See proposed new Rule 12100(u)(3). The 15 years are a total 
number of years--they would not have to be consecutive years.
---------------------------------------------------------------------------

4. Proposed New Rules 12100(u)(4) and 12100(u)(8)\36\
---------------------------------------------------------------------------

    \36\ Although the descriptions of the disqualifications in 
proposed new Rules 12100(u)(4) and 12100(u)(8) are almost identical, 
FINRA believes it would add clarity to the definition to distinguish 
when the provisions would result in a permanent classification, and 
when they would result in a temporary classification. See Notice of 
Filing, 79 FR 38080, 38084 (Jul. 3, 2014).
---------------------------------------------------------------------------

    Under current Rule 12100(u)(1), any person who is an employee of a 
bank or other financial institution and (i) effects transactions in 
securities, including government or municipal securities, and 
commodities, futures, or options, or (ii) supervises or monitors the 
compliance with the securities and commodities laws of employees who 
engage in such activities is classified as a non-public arbitrator.\37\ 
When these individuals end their affiliation, they may immediately be 
reclassified as public arbitrators unless they have engaged in this 
type of work for 20 years or more over the course of their careers.\38\
---------------------------------------------------------------------------

    \37\ See current Rule 12100(u)(1), which cross-references 
current Rule 12100(p)(4), among other provisions.
    \38\ See current Rule 12100(u)(2).
---------------------------------------------------------------------------

    Proposed new Rules 12100(u)(4) and 12100(u)(8) would broaden the 
application of provisions of current Rule 12100(u)(1) in two ways: (i) 
Proposed new Rule 12100(u)(8) would permit these individuals to be 
reclassified as public arbitrators five years after they ended their 
affiliation, and (ii) proposed new Rule 12100(u)(4) would decrease the 
number of years required for a permanent classification as a non-public 
arbitrator from 20 years to 15 years.\39\
---------------------------------------------------------------------------

    \39\ The 15 years are a total number of years--they would not 
have to be consecutive years.
---------------------------------------------------------------------------

5. Proposed New Rule 12100(u)(5)
    Under current Rules 12100(u)(6) and 12100(u)(7), individuals who 
are employed by,\40\ or who are directors or officers of,\41\ 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 are classified 
as non-public arbitrators.\42\ These persons may become public 
arbitrators two years after ending their affiliation.\43\
---------------------------------------------------------------------------

    \40\ See current Rule 12100(u)(6).
    \41\ See current Rule 12100(u)(7).
    \42\ Under current Rules 12100(u)(6) and 12100(u)(7), a spouse 
or immediate family member of such individuals would also be 
classified as a non-public arbitrator.
    \43\ See current Rule 12100(u); see also infra note 49 and 
accompanying text.
---------------------------------------------------------------------------

    Proposed new Rule 12100(u)(5) would broaden the provisions of 
current Rules 12100(u)(6) and 12100(u)(7) in two ways: (i) It would 
expand the scope of the classification by replacing the phrase 
``securities business'' with ``financial industry,'' and (ii) it would 
increase the cooling-off period from two years to five years.\44\
---------------------------------------------------------------------------

    \44\ Current Rule 12100(u) subjects individuals covered by 
current Rules 12100(u)(6) and 12100(u)(7) to a two-year cooling-off 
period after ending the affiliation. The disqualification for 
spouses and immediate family members is addressed in proposed new 
Rule 12100(u)(11), which retains a two-year cooling-off period after 
ending the affiliation or relationship (discussed below).
---------------------------------------------------------------------------

6. Proposed New Rule 12100(u)(9)
    Under current Rule 12100(u)(4), an attorney, accountant, or other 
professional whose firm derived 10 percent or more of its annual 
revenue in the past two years from providing services to specified 
financial industry entities is classified as a non-public arbitrator. 
Similarly, under current Rule 12100(u)(5), any attorney, accountant, or 
other professional whose firm derived $50,000 or more in annual revenue 
in the past two years from providing professional services to any 
specified financial industry entity relating to any customer dispute 
concerning an investment account or transaction is also classified as a 
non-public arbitrator. In both instances, however, current Rule 
12100(u) permits such individuals to be reclassified as public 
arbitrators two years after they ended their affiliation with the firm 
or two years after the firm no longer derived annual revenue from 
specified financial industry entities that exceeding those 
thresholds.\45\
---------------------------------------------------------------------------

    \45\ Current Rule 12100(u) subjects individuals covered by 
current Rules 12100(u)(4) and 12100(u)(5) to a two-year cooling-off 
period after ending the affiliation.
---------------------------------------------------------------------------

    Proposed new Rule 12100(u)(9) would: (i) Merge current Rules 
12100(u)(4) and 12100(u)(5), and (ii) remove the requirement that the 
$50,000 in revenue relate to customer disputes concerning an investment 
account or transaction. Specifically, under proposed new Rule 
12100(u)(9) any person who is an attorney, accountant, or other 
professional whose firm derived $50,000 or more, or at least 10 percent 
of its annual revenue, in any single calendar year during the past two 
calendar years, from (i) the entities listed in proposed new Rule 
12100(u)(1) and/or from any persons or entities associated with such 
listed entities, or (ii) a bank or other financial institution where 
persons effect transactions in securities including government or 
municipal securities, commodities, futures, or options would be 
classified as a non-public arbitrator. Proposed new Rule 12100(u)(9) 
would, however, permit such individuals to be reclassified as public 
arbitrators two calendar years after ending their employment with the 
employing firm.
7. Proposed New Rule 12100(u)(10)
    Under proposed new Rule 12100(u)(10), attorneys, accountants, and 
other professionals whose firm derived $50,000 or more, or at least 10 
percent of its annual revenue, in any single calendar year during the 
past two calendar years, from individual and/or institutional investors 
relating to securities matters generally would be classified as non-
public arbitrators. Proposed new Rule 12100(u)(10) would, however, 
permit such individuals to be

[[Page 11699]]

reclassified as public arbitrators two calendar years after ending 
their employment with the employing firm or two years after the firm no 
longer derived annual revenue from individual and/or institutional 
investors relating to securities matters that exceeding those 
thresholds.
8. Proposed New Rule 12100(u)(11)
    Under current Rules 12100(u)(6) and 12100(u)(7), an individual 
whose spouse or immediate family member is employed by,\46\ or is a 
director or officer of,\47\ 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 is classified as a non-public arbitrator. These 
persons may become public arbitrators two years after ending their 
affiliation.\48\
---------------------------------------------------------------------------

    \46\ See current Rule 12100(u)(6).
    \47\ See current Rule 12100(u)(7).
    \48\ See current Rule 12100(u).
---------------------------------------------------------------------------

    In addition, under current Rule 12100(u)(8), an individual whose 
spouse or immediate family member is engaged in the conduct or 
activities described in current Rule 12100(p)(1)-(4) (i.e., is employed 
by a specified financial entity or provides services to such an entity 
and/or the entity's employees) is classified as a non-public 
arbitrator.\49\
---------------------------------------------------------------------------

    \49\ While current Rule 12100(u) does not include a cooling-off 
period for this classification, FINRA stated that it has been its 
practice to make these individuals wait for five years after their 
spouse or immediate family member ends the disqualifying affiliation 
before the individuals may be reclassified public arbitrators. See 
Notice of Filing, 79 FR 38080, 38085 (Jul. 3, 2014).
---------------------------------------------------------------------------

    Proposed new Rule 12100(u)(11) would: (i) Merge current Rules 
12100(u)(6), 12100(7), and 12100(u)(8), and (ii) add a two year 
cooling-off period. Specifically, under new Rule 12100(u)(11) a person 
whose immediate family member is an individual whom FINRA would 
disqualify from serving on the public arbitrator roster would be 
classified as a non-public arbitrator. However, 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 would be 
able to be reclassified as a public arbitrator after two calendar years 
had passed from the end of the affiliation or relationship.
9. Definition of ``Immediate Family Member''
    Current Rule 12100(u) defines the term ``immediate family member'' 
to include a person's parent, stepparent, child, stepchild, member of a 
person's household, an individual to whom a person provides financial 
support of more than 50 percent of his or her annual income, or a 
person who is claimed as a dependent for federal income tax purposes. 
Current Rule 12100(u) does not define the term ``spouse.''
    Proposed new Rule 12100(u) would amend the definition of 
``immediate family member'' to add as immediate family members a 
person's spouse, partner in a civil union, and domestic partner.
    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. A more detailed description of 
the proposed rule changes is contained in the Notice of Filing and the 
Proceedings Order.\50\
---------------------------------------------------------------------------

    \50\ See supra notes 3 and 7.
---------------------------------------------------------------------------

III. Comment Summary \51\
---------------------------------------------------------------------------

    \51\ Some provisions of the proposed rule change would result in 
a similar outcome--the permanent classification of certain 
individuals as non-public arbitrators. Accordingly, where the 
discussion of comments references specific provisions of the 
proposal, that discussion may also apply to other provisions in the 
proposal that would result in similar outcomes.
---------------------------------------------------------------------------

    In response to the Notice of Filing, the Commission received 316 
comment letters (including 295 copies of substantially the same letter 
submitted by self-identified independent financial advisors). Five of 
the commenters expressed support for the proposed rule change in its 
entirety.\52\ Two commenters opposed the proposed rule change in its 
entirety.\53\ The other commenters (including the independent financial 
advisors) generally supported the proposed rule change in part, but 
raised concerns about various aspects of the proposal.
---------------------------------------------------------------------------

    \52\ See Aidikoff Letter, Bakhtiari July Letter, Caruso July 
Letter, Gitomer July Letter, and SIFMA July Letter.
    \53\ See SAC July Letter (stating that the proposed rule change 
should be disapproved until a cost-benefit analysis is provided) and 
Friedman July Letter (stating that FINRA should ``go back to the 
drawing board'').
---------------------------------------------------------------------------

    In response to the Proceedings Order, the Commission received 
fourteen comments.\54\ Of these comments, four supported the 
proposal,\55\ three opposed the proposal,\56\ and the remainder 
partially supported or opposed aspects of the proposal.\57\
---------------------------------------------------------------------------

    \54\ See supra note 8.
    \55\ See Caruso October Letter, Bakhtiari October Letter, 
Gitomer November Letter, and SIFMA November Letter.
    \56\ See Bender Letter, Friedman October Letter, and SAC October 
Letter.
    \57\ See UMIRC Letter, GSU Letter, AIG Letter, CSLC Letter, 
NASAA November Letter, PIRC First November Letter, and PIRC Second 
November Letter.
---------------------------------------------------------------------------

A. Permanent Classification of Industry Employees as Non-Public 
Arbitrators

    In general, the proposal would result in the permanent 
classification (or reclassification of current public arbitrators) of 
individuals who worked in the financial industry (a) in any capacity, 
(b) at any point, and (c) for any duration, (``Industry Affiliates'') 
as non-public arbitrators. Many commenters opposed the permanent 
classification of Industry Affiliates as non-public arbitrators for 
varying reasons.\58\
---------------------------------------------------------------------------

    \58\ See, e.g., Type A Letter, FSI Letter, Getman Letter, and 
Vernon Letter.
---------------------------------------------------------------------------

1. Elimination of the Cooling-Off Period
    In general, the proposal would result in the classification (or 
reclassification of current public arbitrators) of individuals as non-
public arbitrators who otherwise would have been classified as public 
arbitrators. Specifically, individuals who worked in the financial 
industry for any duration would be permanently classified as non-public 
arbitrators (effectively eliminating the five-year cooling-off 
period).\59\
---------------------------------------------------------------------------

    \59\ See proposed new Rules 12100(p)(1) and (u)(1).
---------------------------------------------------------------------------

    Several commenters supported this provision as providing a workable 
``bright-line'' test that would address criticism regarding bias 
(perceived or actual) in favor of the financial industry,\60\ including 
one that stated that eliminating the five-year cooling-off period would 
eliminate industry-side potential and perceived bias.\61\
---------------------------------------------------------------------------

    \60\ See Aidikoff Letter; see also Caruso October Letter, 
Bakhtiari October Letter, Gitomer November Letter, SIFMA November 
Letter, CSLC Letter Bakhtiari July Letter, SIFMA July Letter, NASAA 
July Letter, PIABA Letter, and AAJ Letter.
    \61\ See SIFMA November Letter.
---------------------------------------------------------------------------

    Many commenters opposed eliminating the five-year cooling-off 
period for Industry Affiliates.\62\ Some of these commenters expressed 
concern that eliminating the cooling-off period could exclude 
arbitrators with industry experience who could be useful on a panel to, 
among other things, educate the other panelists on industry 
practice.\63\ Another commenter suggested that FINRA classify Industry 
Affiliates as neither public nor non-public arbitrators for a set 
number of years following the date they end their affiliation with the 
financial industry.\64\

[[Page 11700]]

This commenter also opposed categorizing any industry employee, 
regardless of capacity, as a non-public arbitrator. For example, this 
commenter suggested that industry employees who are clerical should be 
classified as neither public nor non-public arbitrators.\65\
---------------------------------------------------------------------------

    \62\ See Bender Letter, Friedman October Letter, SAC October 
Letter, Type A Letter, FSI Letter, Getman Letter, Berthel Letter, 
and Vernon Letter.
    \63\ See Type A Letter and Berthel Letter; see also FSI Letter.
    \64\ See Friedman October Letter; see also PIRC July Letter and 
FSI Letter (suggesting that FINRA should adopt a cooling-off period 
for industry employees that would be proportional to the number of 
years they were Industry Affiliates).
    \65\ See Friedman October Letter.
---------------------------------------------------------------------------

    In its response, FINRA disagreed with the opposing commenters, 
stating that its constituents agreed that any cooling off period for 
financial industry employees would ``leave a perception of unfairness 
for some advocates.'' \66\ In addition, FINRA stated that investor 
advocates have a stated preference for using expert witnesses and 
making their own arguments rather than relying on members of the 
arbitration panel that have industry experience to explain and 
influence matters.\67\ FINRA also stated, however, that former industry 
employees have valuable knowledge and experience, and that completely 
removing them from arbitrator service would negatively impact the 
forum.\68\ Similarly, FINRA stated that if an Industry Affiliate meets 
FINRA's qualifications for service as an arbitrator (regardless of the 
capacity in which she or he served the financial industry), she or he 
should be classified as a non-public arbitrator.\69\ FINRA stated that 
parties to an arbitration would continue to have the authority to 
strike any or all arbitrators on the non-public list.\70\
---------------------------------------------------------------------------

    \66\ See FINRA September Letter.
    \67\ Id.
    \68\ See FINRA November Letter; see also FINRA September Letter.
    \69\ See FINRA November Letter; see also FINRA September Letter.
    \70\ See FINRA November Letter; see also FINRA September Letter.
---------------------------------------------------------------------------

    Ultimately, FINRA stated that it believes that it is more workable 
to use a bright-line test than a pro rata cooling-off period for 
financial industry employees.\71\ Accordingly, FINRA declined to amend 
the proposed rule change.\72\
---------------------------------------------------------------------------

    \71\ See FINRA September Letter.
    \72\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------

2. All Employees, Regardless of Capacity, To Be Classified as Non-
Public Arbitrators
    Four commenters stated that, as proposed, the rule would improperly 
characterize certain individuals without true financial industry 
experience as non-public arbitrators.\73\ One of these commenters 
expressed concern that individuals performing solely clerical or 
ministerial functions for a financial industry firm would be classified 
as non-public arbitrators because they would be considered ``associated 
persons'' as defined by Rule 12100(p).\74\ Accordingly, this commenter 
suggested FINRA amend the definition of the term ``associated person'' 
in the proposal to track the definition of the term ``associated 
person'' in section 3(a)(18) of the Act, which excludes individuals 
performing solely clerical or ministerial functions. Another commenter 
suggested that the proposal should only classify individuals who 
``worked for [a financial industry firm] in a capacity for which 
testing and registration is required'' as non-public arbitrators to 
address this concern.\75\
---------------------------------------------------------------------------

    \73\ See Stephens Letter, FSI Letter, Getman Letter, and Vernon 
Letter.
    \74\ See Stephens Letter.
    \75\ See Vernon Letter (expressing concern that under the 
proposal [the commenter] could be characterized as a non-public 
arbitrator based solely on his capacity as a ``trainee'' for Merrill 
Lynch in 1983).
---------------------------------------------------------------------------

    In its response, FINRA stated that its staff believes that 
``investor concerns about the neutrality of the public roster apply to 
all industry employees, including those who serve in clerical or 
ministerial positions.'' \76\ In addition, FINRA stated that it 
believes that if a financial industry affiliate meets FINRA's 
qualifications for service as an arbitrator, FINRA should appoint the 
person to the non-public arbitrator roster.\77\ Accordingly, FINRA 
declined to amend the proposed rule change.\78\
---------------------------------------------------------------------------

    \76\ See FINRA September Letter.
    \77\ See FINRA November Letter.
    \78\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------

B. Classification of Professionals

1. Classifying Investor Advocates as Non-Public Arbitrators
    In general, the proposed rule change would classify attorneys, 
accountants, expert witnesses, or other professionals who (a) devote 20 
percent or more of their professional time (b) in any single calendar 
year within the past five calendar years (c) to representing or 
providing services to parties in disputes concerning investment 
accounts or transactions, or employment relationships within the 
industry (``Investor Advocates'') as non-public arbitrators.\79\ 
Currently, individuals meeting this description are classified as 
public arbitrators.
---------------------------------------------------------------------------

    \79\ See proposed new Rule 12100(p)(3).
---------------------------------------------------------------------------

    Several commenters supported this provision,\80\ including two 
commenters that indicated that this provision is necessary to eliminate 
potential and perceived investor-side bias.\81\ Specifically, one of 
these commenters stated that the rationale for eliminating perceived 
bias is the same for both public and non-public arbitrators.\82\ 
Another commenter stated that eliminating perceived investor-side bias 
is necessary in light of the implementation of the all-public-panel 
rule.\83\ Similarly, one commenter noted that the historical 
distinction of classifying arbitrators as pubic arbitrators based on 
their financial industry experience was compelling when FINRA required 
the presence of someone with financial industry experience on all 
panels, but is no longer necessary with the advent of the all-public-
panel rule.\84\
---------------------------------------------------------------------------

    \80\ See Caruso October Letter, Bakhtiari October Letter, 
Gitomer November Letter, SIFMA November Letter, AIG Letter, FSI 
Letter, Bethel Letter, and SIFMA July Letter. The commenters who 
used the Type A Letter also supported this provision.
    \81\ See SIFMA November Letter and AIG Letter.
    \82\ See SIFMA November Letter; see also SIFMA July Letter 
(stating that the proposal ``strike[s] an appropriate balance in the 
interests of fairness, perceptions of fairness, and arbitrator 
neutrality for all parties'').
    \83\ See AIG Letter.
    \84\ See SIFMA November Letter.
---------------------------------------------------------------------------

    Several commenters also opposed the classification of Investor 
Advocates as non-public arbitrators,\85\ including some commenters who 
supported the classification of industry-affiliated persons as non-
public arbitrators.\86\ Many of these commenters stated that including 
investor representatives in the public arbitrator pool counteracts some 
of the existing perceived bias in favor of the financial industry in 
the FINRA arbitration forum.\87\ One commenter stated that ``[he could 
not] fathom how this [provision] would further investor protection.'' 
\88\ Two other commenters stated that there is no evidence supporting 
the assumption that professionals who serve the investing public have 
any bias either for or against

[[Page 11701]]

the financial industry.\89\ Another commenter stated that it believes 
that the classification of Investor Advocates as non-public arbitrators 
is inconsistent with the concept of a ``public'' arbitrator.\90\ Two 
commenters argued that there is a perception that the arbitration 
system is unfair or always ``stacked against'' investors and that ``any 
proposal to change the definitions of public and non-public arbitrator 
should be focused on mitigating the investing public's perception of 
bias, not the industry's perception of bias.'' \91\ Another commenter 
asserted that the ``public'' and ``non-public'' labels were never 
intended to account for biases in favor of the investing public but 
rather to eliminate arbitrators' perceived and actual bias against 
customers who are compelled to participate in this forum by the 
financial industry.\92\ This commenter also argued that the proposed 
new classifications would cause confusion because Investor Advocates 
generally represent the public and would naturally be considered to be 
associated with the ``public'' pool.\93\
---------------------------------------------------------------------------

    \85\ See Bender Letter, Friedman October Letter, SAC October 
Letter, UMIRC Letter, GSU Letter, CSLC Letter, NASAA November 
Letter, PIRC Second November Letter, NASAA July Letter, PIABA 
Letter, Stephens Letter, PIRC July Letter, Bacine Letter, Mass 
Letter, Hardiman Letter, and Friedman July Letter.
    \86\ See, e.g., CSLC Letter and NASAA November Letter; see also 
NASAA July Letter (arguing that FINRA should classify as non-public 
arbitrators only persons ``representing or providing services to 
non-retail parties in disputes concerning investment accounts or 
transactions, or employment relationships within the financial 
industry''), Stephens Letter (arguing that FINRA should only 
classify as non-public arbitrators persons ``. . . representing or 
providing services to parties in disputes [other than customers] 
concerning investment accounts . . .''), and Bacine Letter (arguing 
that the distinction between public and non-public arbitrators has 
always been based on whether the arbitrators had industry experience 
and argued for keeping this distinction).
    \87\ See, e.g., CSLC Letter, NASAA July Letter, and PIABA 
Letter.
    \88\ See Friedman October Letter.
    \89\ See GSU Letter and PIABA Letter.
    \90\ See NASAA November Letter; see also Mass Letter (asserting 
that lawyers who represent investors or claimants are public 
arbitrators because they work on behalf of the public at large 
against the financial industry), and Hardiman Letter (stating that 
classifying Investor Advocates as non-public arbitrators would be 
``burying professionals who represent the investing public in the 
industry non-public side'').
    \91\ See CSLC Letter (citing the NASAA July Letter and PIABA 
Letter) and PIRC Second November Letter.
    \92\ See UMIRC Letter.
    \93\ See UMIRC Letter; see also, e.g., Stephens Letter, NASAA 
July Letter, PIABA Letter, PIRC July Letter, Bacine Letter (stating 
that the proposal would create confusion since the U.S. courts, the 
American Arbitration Association, and the general public generally 
view professionals who represent investors to be ``public 
arbitrators''), and PIRC July Letter (stating that past NASD 
response letters, as well as the FINRA Web site, also make the 
distinction that professionals who represent investors are typically 
public arbitrators).
---------------------------------------------------------------------------

    In the Notice of Filing, FINRA stated that it proposed the 
reclassification of arbitrator categories in response to concerns 
regarding the neutrality of the public arbitrator roster raised by both 
investor representatives and industry representatives.\94\ Similarly, 
in its response FINRA stated that addressing both investor and industry 
perceptions of bias in the public arbitrator roster would better 
safeguard the integrity of its arbitration forum.\95\ FINRA also stated 
that parties would continue to receive extensive disclosure statements 
on each proposed arbitrator that describe in detail that arbitrator's 
background. Accordingly, FINRA believes that under the proposal parties 
in customer cases would be able to address their own perceptions of 
bias that may arise under the proposal through the use of their 
unlimited strikes on the list of non-public arbitrators.\96\ Thus, 
FINRA declined to amend the proposed rule change.\97\
---------------------------------------------------------------------------

    \94\ See Notice of Filing, 79 FR 38080, 38081 (Jul. 3, 2014); 
see also FINRA September Letter (stating that industry constituents 
have expressed concern about the neutrality of the public arbitrator 
roster because of the presence on the roster of Investor Advocates).
    \95\ See FINRA November Letter.
    \96\ Id.
    \97\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------

2. Five-Year Cooling-Off Period for Professionals Representing Industry
    In general, the proposed rule change would extend the cooling-off 
period from two years to five years for attorneys, accountants, expert 
witnesses, or other professionals who (a) devote 20 percent or more of 
their professional time (b) in any single calendar year within the past 
five calendar years (c) to representing or providing services to 
financial industry firms (``Industry Advocates'').
    Three commenters generally supported this provision as fair and 
acknowledged the consistency of approach towards professionals 
representing investors and those representing industry.\98\ Another 
commenter generally supported removing Industry Advocates from the 
public arbitrator roster, but believed that they should be permanently 
classified as non-public arbitrators like financial industry employees 
(i.e., the commenter suggested that FINRA eliminate the cooling-off 
period rather than extend it).\99\
---------------------------------------------------------------------------

    \98\ See SIFMA July Letter, PIABA Letter, and Berthel Letter.
    \99\ See NASAA July Letter.
---------------------------------------------------------------------------

    In its response, FINRA stated that it has drawn a distinction 
between individuals who work in the financial industry and individuals 
who provide services to the financial industry. FINRA also stated its 
belief that to help ensure fairness to all forum users, it needed to 
take a consistent approach to cooling-off periods for service providers 
to both investors and the financial industry.\100\ Accordingly, FINRA 
declined to amend the proposed rule change.\101\
---------------------------------------------------------------------------

    \100\ See FINRA September Letter.
    \101\ Id.
---------------------------------------------------------------------------

3. Using Professional Time To Quantify Professional Work
    As stated above, the proposal would classify attorneys, 
accountants, expert witnesses, or other professionals as either public 
arbitrators or non-public arbitrators depending on, among other things, 
the percentage of time those individuals devoted to representing either 
the financial industry or investors.\102\ Some commenters questioned 
the appropriateness of classifying individuals as public or non-public 
arbitrators based on the ``amount of time'' an individual devotes to a 
client.\103\ Alternatively, commenters suggested using revenue instead 
of professional time as the metric to quantify professional work.\104\ 
One of these commenters suggested that revenue is a better measurement 
since not all professionals track their work in terms of time, but all 
professionals would have a record of revenue.\105\ Another one of these 
commenters stated that using professional time as the metric would 
categorize professors and supervisors in investor advocacy clinics as 
non-public arbitrators, even though the clinic does not earn any 
revenues and the primary function of the clinic is educational.\106\
---------------------------------------------------------------------------

    \102\ See proposed new Rule 12100(p)(3).
    \103\ See UMIRC Letter and PIRC July Letter.
    \104\ See UMIRC Letter and PIRC July Letter.
    \105\ See PIRC July Letter.
    \106\ See UMIRC Letter.
---------------------------------------------------------------------------

    In its response, FINRA stated that given the purpose of the 
proposal is to address the perception that professionals who regularly 
provide services to investors might be biased in favor of investors, it 
does not believe that it would be appropriate to make an exception for 
employees of law school investor advocacy clinics.\107\ FINRA also 
stated that the proposed rule change regarding ``professional time'' 
was specifically discussed by its National Arbitration and Mediation 
Committee (``NAMC'') \108\ and it agreed that the change ``added 
clarity to the rule text, was simpler to apply, and would result in 
more accurate calculations by arbitrator applicants and arbitrators 
reviewing their business mix.'' \109\ Accordingly, FINRA declined to 
amend the proposed rule change.\110\
---------------------------------------------------------------------------

    \107\ See FINRA November Letter.
    \108\ NAMC provides policy guidance to FINRA Dispute Resolution 
staff. Its members include investors, securities industry 
professionals, and FINRA arbitrators and mediators. A majority of 
NAMC's members and its chair are non-industry representatives. See 
FINRA Advisory Committees, National Arbitration and Mediation 
Committee, available at https://www.finra.org/aboutfinra/leadership/committees/p197363.
    \109\ See FINRA September Letter and FINRA November Letter.
    \110\ See FINRA September Letter and FINRA November Letter.

---------------------------------------------------------------------------

[[Page 11702]]

4. Impact to the Pool of Public Arbitrators
a. Number of Available Public Arbitrators
    Since February 1, 2011, customers have been able to choose an 
arbitration panel composed entirely of public arbitrators (i.e., an 
``all-public panel'').\111\ One commenter cited statistics that 
indicated that customers in approximately three-quarters of eligible 
cases choose an all-public panel.\112\ Another commenter estimated that 
public arbitrators account for approximately 85% of those that 
serve.\113\ Consequently, several commenters expressed concern that the 
proposed rule change would negatively impact the number of public 
arbitrators available to serve in FINRA's arbitration forum.\114\ 
Similarly, some commenters suggested that under the proposed rule 
change FINRA would need to devote resources to recruit additional 
public arbitrators.\115\
---------------------------------------------------------------------------

    \111\ See Exchange Act Release No. 70442 (Sept. 18, 2013), 78 FR 
58580 (Sept. 24, 2013) (order approving a proposed rule change to, 
among other things, permit all parties to select an all-public 
panel) and Exchange Act Release No. 63799 (Jan. 31, 2011), 76 FR 
6500 (Feb. 4, 2011) (order approving a proposed rule change to 
provide customers with the option to choose an all-public panel in 
all cases).
    \112\ See UMIRC Letter (citing Exchange Act Release No. 69762 
(Jun. 13, 2013), 78 FR 37267, 37268 (Jun. 20, 2013) (Notice of 
Filing of Proposed Rule Change Relating to Amendments to the Code of 
Arbitration Procedure for Customer Disputes Concerning Panel 
Composition)).
    \113\ See SAC October Letter.
    \114\ See, e.g., Bender Letter, PIRC First November Letter, GSU 
Letter, SAC October Letter, Friedman October Letter, UMIRC Letter, 
Friedman July Letter, SAC July Letter, NASAA July Letter, and FSI 
Letter.
    \115\ See SAC July Letter and NASAA July Letter.
---------------------------------------------------------------------------

    Several commenters questioned FINRA's estimate that the total 
number of arbitrators that would be reclassified from public 
arbitrators to non-public arbitrators would be approximately 474 \116\ 
out of 3,567 current public arbitrators (approximately 13.3%).\117\ A 
number of commenters stated that they believe that FINRA severely 
underestimated the number of arbitrators that would be 
reclassified.\118\ Some commenters estimated that the number of public 
arbitrators that would be reclassified is approximately one-fourth or 
25% of the current public arbitrator pool.\119\ Consequently, 
commenters expressed concern that the proposal would result in delays 
in arbitration proceedings due to an insufficient number of 
arbitrators.\120\ Two commenters cited the recent stay in arbitration 
proceedings in Puerto Rico as an example of the possible outcome if the 
pool of public arbitrators is drastically reduced in some geographic 
areas.\121\
---------------------------------------------------------------------------

    \116\ In the FINRA September Letter, FINRA estimated that 374 
arbitrators would be reclassified from public to non-public 
arbitrators as a result of having had a Central Registration 
Depository (``CRD'') number at some point in their careers or having 
had an affiliation with a firm with a CRD number. In addition, FINRA 
estimated that approximately 100 arbitrators would be reclassified 
from public to non-public as a result of having identified an 
affiliation with PIABA; see also FINRA November Letter.
    \117\ See FINRA November Letter (basing its estimate on a survey 
of databases to which FINRA has access); see also FINRA September 
Letter.
    \118\ See Bender Letter, SAC October Letter, UMIRC Letter, PIRC 
November Letter, and GSU Letter.
    \119\ See Bender Letter and SAC October Letter.
    \120\ See SAC October Letter and UMIRC Letter; see also FSI 
Letter.
    \121\ See SAC October Letter and UMIRC Letter; see also SAC July 
Letter (suggesting that the potential shortage of public arbitrators 
may be more concentrated in some locations than others).
---------------------------------------------------------------------------

    In its response, FINRA acknowledged commenters' concerns about 
reducing the number of public arbitrators currently on the public 
arbitrator roster. FINRA also stated, however, that it believes that 
addressing users' perceptions of the neutrality of its public 
arbitrators outweighs those concerns.\122\ In addition, FINRA stated 
that it intends to address commenters' concerns as well, stating its 
commitment to aggressively recruiting arbitrators to help ensure that 
``the forum has a sufficient number of public arbitrators to serve the 
needs of forum users in each of its hearing locations.'' \123\ 
Specifically, FINRA illustrated its ongoing efforts to recruit public 
arbitrators since the adoption of the all-public panel rule.\124\ In 
addition, FINRA expressed its commitment to arbitrator retention, 
citing its recent rule proposal to increase the amount of honoraria 
arbitrators receive in connection with serving on a panel.\125\ In its 
response, FINRA concluded that despite the temporary decrease in the 
number of public arbitrators resulting from the proposed rule change, 
the FINRA forum will have a sufficient number of public arbitrators to 
serve the immediate needs of forum users.\126\ In addition, FINRA 
stated that if the proposal was approved it would focus its recruiting 
efforts on the hearing locations most impacted by the rule change and 
that it would assign additional staff to recruitment as necessary.\127\ 
Accordingly, FINRA declined to amend the proposed rule change.\128\
---------------------------------------------------------------------------

    \122\ See FINRA November Letter.
    \123\ See FINRA November Letter and FINRA December Letter; see 
also FINRA September Letter.
    \124\ See FINRA November Letter and FINRA December Letter 
(collectively citing, for example, the Puerto Rico bond fund 
disputes for which FINRA stated that its staff conducted recruitment 
activities in Puerto Rico and asked arbitrators in hearing locations 
in the Southeast Region and Texas if they would be willing to serve 
in Puerto Rico. FINRA stated that its recruitment efforts have 
resulted in almost 200 applications from Puerto Rico residents to 
serve on its roster, and approximately 800 arbitrators currently on 
its roster who have agreed to hear cases in Puerto Rico).
    \125\ See Exchange Act Release No. 73245 (Sept. 29, 2014), 79 FR 
58976 (Oct. 3, 2014) (Order Approving Proposed Rule Change to Amend 
the Code of Arbitration Procedure for Customer Disputes and the Code 
of Arbitration Procedure for Industry Disputes to Increase 
Arbitrator Honoraria and Increase Certain Arbitration Fees and 
Surcharges).
    \126\ See FINRA September Letter, FINRA November Letter, and 
FINRA December Letter.
    \127\ See FINRA December Letter; see also FINRA September Letter 
(stating that if the proposal was approved, it would conduct a more 
detailed analysis to determine whether additional arbitrator 
recruitment efforts were necessary in any particular geographic area 
and would deploy the necessary resources to avoid any undue delay in 
the arbitration process).
    \128\ See FINRA September Letter and FINRA November Letter.
---------------------------------------------------------------------------

b. Quality of Public Arbitrator Pool
    Several commenters expressed concern that the proposed rule change 
would negatively impact the quality of public arbitrators available to 
serve in FINRA's arbitration forum.\129\ In particular, these 
commenters were concerned that the classification of Investor Advocates 
as non-public arbitrators would diminish the number of qualified public 
arbitrators.\130\ For example, one commenter stated that the proposal 
would result in the most highly trained public arbitrators for 
customer-member cases being reclassified as non-public 
arbitrators.\131\ Another commenter stated more generally that the 
proposal would ``gut the public arbitrator pool of many experienced and 
knowledgeable arbitrators'' and result in a ``brain drain'' of the 
public arbitrator pool.\132\
---------------------------------------------------------------------------

    \129\ See, e.g., Bender Letter, PIRC First November Letter, GSU 
Letter, and SAC October Letter.
    \130\ See, e.g., Bender Letter, PIRC First November Letter, GSU 
Letter, and SAC October Letter.
    \131\ See Bender Letter.
    \132\ See PIRC First November Letter.
---------------------------------------------------------------------------

    In its response, FINRA stated that the proposed rule change would 
not reduce the total number of arbitrators available for selection but 
rather would shift them to another part of the roster. Accordingly, 
FINRA stated that it does not believe that the proposed rule change 
would drain from the forum the experience and expertise of those 
arbitrators being reclassified as non-public. FINRA stated that 
instead, the parties would receive a complete description of the 
background and experience of each arbitrator on the non-public list and 
could use that information to rank or strike them accordingly. FINRA 
stated that the proposal would effectively maintain the reclassified 
individuals in the pool of

[[Page 11703]]

arbitrators as non-public arbitrators to be able to continue to utilize 
their experience and expertise while eliminating the industry's 
perception of bias of these arbitrators.\133\ In addition, FINRA 
acknowledged the need for aggressive arbitrator recruitment to help 
ensure that the forum has a sufficient number of qualified public 
arbitrators \134\ and outlined the measures it intends to undertake to 
fulfill this objective.\135\ Accordingly, FINRA declined to amend the 
proposed rule change.\136\
---------------------------------------------------------------------------

    \133\ See FINRA November Letter.
    \134\ See FINRA November Letter and FINRA December Letter.
    \135\ See FINRA December Letter.
    \136\ See FINRA November Letter.
---------------------------------------------------------------------------

5. Impact on Qualified Chairpersons
    Several commenters expressed concern that the proposed rule change 
would negatively impact the quantity and quality of chairpersons 
available to serve in FINRA's arbitration forum.\137\ Some commenters 
suggested changes to the qualification requirements for chairpersons in 
customer cases, such as allowing arbitrators with investor 
relationships to serve as chairpersons or requiring that the 
chairperson be a judge or hold a law degree.\138\
---------------------------------------------------------------------------

    \137\ See Stephens Letter and Bacine Letter (expressing concern 
that classifying professionals who provide services to customers as 
non-public arbitrators would negatively impact the quality of 
chairman-eligible arbitrators); see also Bender Letter.
    \138\ See Bacine Letter and Berthel Letter.
---------------------------------------------------------------------------

    In its response, FINRA stated that allowing arbitrators with 
investor relationships to serve as chairpersons would nullify the 
effort to address perceived bias.\139\ FINRA also noted that more than 
75 percent of the public chair-qualified arbitrators are attorneys and 
therefore stated that it does not believe that changes to the chair 
qualifications are necessary.\140\ Accordingly, FINRA declined to amend 
the proposed rule change.\141\
---------------------------------------------------------------------------

    \139\ See FINRA September Letter.
    \140\ Id.
    \141\ Id.
---------------------------------------------------------------------------

6. Cost-Benefit Analysis
a. Timing
    Several commenters stated that the proposed rule change should not 
be approved until FINRA obtained additional data and published a 
detailed cost-benefit analysis justifying the proposal.\142\ In 
particular, these commenters expressed concern with FINRA's commitment 
\143\ to perform a detailed cost-benefit analysis after the proposal 
was implemented in order to assess its impact and determine where to 
allocate additional resources for arbitrator recruitment.\144\ Two of 
these commenters stated that if FINRA ultimately finds the impact of 
the proposed rule change unsupportable, forum participants would have 
to comply with a ``bad'' rule while proceedings are pending to approve 
a subsequent rule change.\145\ One of these commenters also stated that 
if the effort to conduct a cost-benefit analysis is to be expended in 
any event, conducting it prior to implementing the proposal could 
streamline implementation of the proposed rule change.\146\
---------------------------------------------------------------------------

    \142\ See SAC July Letter, Friedman July Letter, Estell Letter, 
Friedman October Letter, PIRC First November Letter, and SAC October 
Letter (questioning whether the depletion of public arbitrators 
resulting from the proposed rule change would lead to delays in 
hearing claims).
    \143\ See FINRA September Letter.
    \144\ See, e.g., SAC October Letter and PIRC First November 
Letter.
    \145\ See SAC October Letter and PIRC First November Letter.
    \146\ See SAC October Letter; see also Estell Letter (suggesting 
that FINRA make information about each arbitrator publicly 
available, particularly to academic researchers, and that the data 
could provide FINRA with statistical proof of bias or lack of bias 
upon which to base its proposal instead of relying on perceptions of 
bias).
---------------------------------------------------------------------------

    In its response, FINRA stated that a cost-benefit analysis, while 
useful for planning purposes, does not outweigh the imperative of 
addressing the users' perception of neutrality in maintaining the 
integrity of the forum, and that fairness requires FINRA to address the 
concerns of all forum users.\147\ Further, FINRA noted that the 
``proposed rule change is the culmination of extensive dialogue with 
FINRA constituents and FINRA filed the proposed rule change at the 
urging of its constituents.'' \148\ In addition, FINRA stated that 
performing a cost-benefit analysis would be time-intensive and require 
a survey of every public arbitrator on its roster.\149\ In the interim, 
FINRA performed a preliminary analysis of databases currently available 
to it to obtain estimates of the potential impact of the proposal 
(discussed above).\150\ FINRA also committed to perform a cost-benefit 
analysis if the proposal is approved.\151\
---------------------------------------------------------------------------

    \147\ See FINRA November Letter; see also FINRA September 
Letter.
    \148\ See FINRA November Letter; see also FINRA September 
Letter.
    \149\ See FINRA September Letter.
    \150\ See FINRA November Letter and FINRA December Letter; see 
also FINRA September Letter.
    \151\ See FINRA September Letter.
---------------------------------------------------------------------------

b. Potential Forum Delays
    Three commenters stated that by failing to conduct an in-depth 
analysis of the impact of the proposed rule change, FINRA failed to 
weigh the consequences of its actions.\152\ For example, one commenter 
suggested that FINRA may not currently have enough public arbitrators 
and that this shortage of public arbitrators may be contributing to an 
increase in overall case turnaround time.\153\ Similarly, two 
commenters identified the lack of a cost-benefit analysis as a reason 
that FINRA has underestimated the potential impact of the proposal on 
the public arbitrator pool.\154\
---------------------------------------------------------------------------

    \152\ See Friedman October Letter, SAC October Letter, and PIRC 
November Letter.
    \153\ See SAC October Letter; see also Friedman July Letter and 
SAC July Letter (expressing concern that a decrease in the number of 
public arbitrators could result in greater delays in arbitrating 
claims, particularly (1) during declines in the financial markets 
(when the number of arbitration claims filed increases) or (2) in 
certain hearing locations with smaller rosters of arbitrators).
    \154\ See Friedman October Letter, SAC October Letter, SAC July 
Letter, and Friedman July Letter.
---------------------------------------------------------------------------

    Alternatively, one commenter stated that FINRA's representations 
that the proposal would not affect a significant number of arbitrators 
are sufficient.\155\ This commenter also stated that even if the impact 
to the public arbitrator pool is greater than anticipated, it is a 
small price to pay for arbitrator neutrality.\156\
---------------------------------------------------------------------------

    \155\ See SIFMA November Letter.
    \156\ Id.
---------------------------------------------------------------------------

    In its response, FINRA stated that it monitors the amount of time 
it takes to process a claim in its forum and has not heard from forum 
users that arbitrator availability is causing delays in processing 
cases. Instead, FINRA stated that various other factors are more likely 
to result in delays, including party-initiated postponements; an 
increase in the number of hearing sessions per case; concentration of 
law firms representing the majority of parties; and efforts to verify 
arbitrators' disclosures to protect parties from undisclosed arbitrator 
conflicts.\157\ Moreover, as discussed above, FINRA stated that it 
recognizes the need for aggressive arbitrator recruitment to address 
any potential impact and outlined the steps it expects to take in its 
aggressive recruitment and retention of public arbitrators.\158\
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    \157\ See FINRA November Letter.
    \158\ See FINRA November Letter and FINRA December Letter.
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7. Consideration of the Proposal by FINRA's Dispute Resolution Task 
Force
    Two commenters suggested that FINRA withdraw the proposal and 
submit it to its recently formed Arbitration Task Force \159\ for

[[Page 11704]]

consideration.\160\ One of these commenters suggested that the Task 
Force should be permitted to consider the proposal after a full impact 
analysis is conducted so that the Task Force would have the benefit of 
this analysis for its consideration.\161\
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    \159\ See FINRA News Release, FINRA Announces Arbitration Task 
Force (Jul. 17, 2014), available at https://www.finra.org/Newsroom/NewsReleases/2014/P554192 (announcing the formation of an 
Arbitration Task Force to consider possible enhancements to improve 
transparency, impartiality and efficiency of FINRA's securities 
arbitration forum for all participants).
    \160\ See Friedman October Letter and SAC October Letter; see 
also Friedman July Letter.
    \161\ See SAC October Letter.
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    In its response, FINRA stated that it has engaged in a 
comprehensive process soliciting input from interested groups.\162\ It 
also stated that the proposal reflects a balanced approach on 
classifying arbitrators that would enhance forum users' perception of 
fairness of the forum.\163\ In addition, FINRA stated that while the 
Task Force is setting its own agenda and is free to discuss the 
arbitrator definitions, it does not expect to make any recommendations 
until the fall of 2015, which would make it unlikely for FINRA to file 
any proposed rule change based on Task Force recommendations until at 
least 2016.\164\ FINRA indicated that it does not believe that it would 
be in the best interests of forum users to delay action on this fully 
considered proposal.\165\
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    \162\ See FINRA November Letter; see also FINRA September 
Letter.
    \163\ See FINRA November Letter; see also FINRA September 
Letter.
    \164\ See FINRA November Letter.
    \165\ See FINRA September Letter and FINRA November Letter.
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8. Alternative Solutions
    Several commenters suggested alternatives to the proposal.\166\ For 
example, two commenters suggested that FINRA require arbitrators to 
disclose additional information about themselves, including their mix 
of work and the percentage of revenue derived from representation for 
or against the financial industry, so that parties can make independent 
determinations about each arbitrator.\167\ One of these commenters also 
suggested that FINRA eliminate the labels of public and non-public 
altogether and allow parties to choose from a single pool of 
arbitrators.\168\ Another commenter stated that Industry Affiliates 
should not permanently remain classified as non-public arbitrators but 
rather should be reclassified as being precluded from acting as an 
arbitrator in any capacity (i.e., a ``no-man's land'') for a number of 
years after ceasing their respective affiliation with the financial 
industry.\169\ Three other commenters objected to broker-dealers' use 
of pre-dispute mandatory arbitration agreements.\170\ Other commenters 
suggested ways to improve the quality of arbitration panels.\171\
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    \166\ See Bender Letter, NASAA November Letter, PIRC First 
November Letter, Friedman July Letter, and Nicinski Letter.
    \167\ See Bender Letter and PIRC First November Letter; see also 
Estell Letter.
    \168\ See PIRC First November Letter; see also Nicinski Letter.
    \169\ See Friedman October Letter; see also Friedman July Letter 
(suggesting that instead of public and non-public, arbitrators 
should be classified as affiliated with financial industry or not).
    \170\ See AAJ Letter, Estell Letter, and NASAA October Letter.
    \171\ See, e.g., Nicinski Letter (recommending that arbitrators 
be required to display some knowledge of the investment products 
likely to be discussed during an arbitration) and Berthel Letter 
(recommending (1) that every panel include arbitrators with a strong 
background in securities laws and (2) that the Chair be a judge or 
hold a law degree).
---------------------------------------------------------------------------

    As discussed above, FINRA stated that it has engaged in a robust 
review process, including consultation with its NAMC, interested 
groups, and other forum constituents, during which it encouraged 
interested persons to raise their concerns about the definitions and to 
make suggestions on how to improve them.\172\ FINRA stated that its 
NAMC did not recommend that FINRA eliminate the arbitrator 
classifications.\173\ In addition, FINRA stated that eliminating the 
arbitrator classifications would undermine many of its recent changes 
to arbitrator selection rules, notably its all-public panel rule, which 
have been positively received by parties. In addition, FINRA stated 
that the recommended alternatives were either outside the scope of, or 
would cause undue delay to, the proposed rule change.\174\ Accordingly, 
FINRA declined to amend the proposed rule change.\175\
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    \172\ See FINRA September Letter and FINRA November Letter.
    \173\ See FINRA September Letter and FINRA November Letter; see 
also supra note 109.
    \174\ See FINRA September Letter.
    \175\ See FINRA September Letter and FINRA November Letter.
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IV. Discussion

    The Commission has carefully considered the proposed rule change, 
the comments received, and FINRA's responses to the comments. Based on 
its review of the record, the Commission finds that the proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\176\ In particular, the Commission finds that the proposal 
is consistent with section 15A(b)(6) of the Act, which requires, among 
other things, that FINRA's rules 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.\177\
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    \176\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \177\ 15 U.S.C. 78o-3(b)(6).
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    As stated above, FINRA classifies arbitrators as ``non-public'' or 
``public'' based on their professional and personal affiliations.
    The proposal would, among other things: (1) Permanently classify as 
``non-public arbitrators'' individuals with certain affiliations with 
the financial industry; and (2) classify as non-public arbitrators 
certain professionals (e.g., accountants and attorneys) who represent 
or provide services to parties in disputes concerning investment 
accounts or transactions, or employment relationships within the 
financial industry.\178\ Consequently, the proposed rule change would, 
in some instances, require the reclassification of current public 
arbitrators to non-public arbitrators.
---------------------------------------------------------------------------

    \178\ See infra pp. 41-42 for a discussion of other provisions 
of the proposed rule change.
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    As stated in the Notice of Filing, the proposed rule change was 
designed to address concerns regarding the perceived neutrality of the 
public arbitrator roster raised by both investor representatives and 
financial industry representatives.\179\ Specifically, the 
classification of individuals affiliated with the financial industry as 
non-public arbitrators responds to concerns of potential bias of 
arbitrators, whether actual or perceived, in favor of the 
industry.\180\ Similarly, the classification of Investor Advocates as 
non-public arbitrators responds to concerns of potential bias of 
arbitrators, whether actual or perceived, in favor of investors.\181\
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    \179\ See Notice of Filing, 79 FR 38080, 38081 (Jul. 3, 2014).
    \180\ See SIFMA November Letter and CSLC Letter; see also SIFMA 
July Letter, Aidikoff Letter, Bakhtiari July Letter, NASAA July 
Letter, and PIABA Letter.
    \181\ See SIFMA November Letter and AIG Letter; see also SIFMA 
July Letter, FSI Letter, Berthel Letter, and Type A Form Letters; 
but see Friedman October Letter, UMIRC Letter, GSU Letter, CSLC 
Letter, NASAA November Letter, Second PIRC November Letter, NASAA 
July Letter, PIABA Letter, Stephens Letter, PIRC July Letter, Bacine 
Letter, Mass Letter, Hardiman Letter, and Friedman July Letter.
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    The Commission believes that the proposed rule change would help to 
address any perceived bias of public arbitrators by classifying certain 
individuals with either financial industry experience or significant 
experience representing investors as non-public arbitrators. 
Accordingly, the

[[Page 11705]]

Commission also believes that the proposal would enhance the perception 
of neutrality of the entire FINRA arbitration forum. The Commission 
recognizes commenters' concerns that classifying Investor Advocates as 
non-public investors may be inconsistent with their historic view of 
non-public and public arbitrators (i.e., classifying public arbitrators 
and non-public arbitrators based on their affiliations (or lack 
thereof) with the financial industry).\182\ The Commission also 
recognizes, however, that the public interest would be served by 
addressing concerns of fairness and neutrality for all forum 
users.\183\
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    \182\ See, e.g., CSLC Letter, NASAA November Letter, NASAA July 
Letter, PIABA Letter, Stephens Letter, PIRC July Letter, Bacine 
Letter, Friedman July Letter, Hardiman Letter, and Mass Letter.
    \183\ See FINRA September Letter, FINRA November Letter, and 
FINRA December Letter.
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    The Commission also recognizes the concerns of some commenters that 
the proposed rule change would require FINRA to reclassify some current 
public arbitrators as non-public arbitrators and that these 
reclassifications may temporarily reduce the number and quality of the 
public arbitrator pool, particularly in light of the implementation of 
FINRA's all-public-panel rules.\184\ The Commission, however, also 
recognizes FINRA's current and proposed future efforts to help ensure 
the sufficiency of the public arbitrator pool.\185\
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    \184\ See, e.g., Bender Letter, PIRC First November Letter, GSU 
Letter, SAC October Letter, SAC July Letter, and NASAA July Letter.
    \185\ See FINRA November Letter and FINRA December Letter.
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    Although FINRA stated that it currently anticipates having a 
sufficient number of public arbitrators to serve the immediate needs of 
forum users, it also acknowledged that the proposal may necessitate 
aggressive arbitrator recruitment.\186\ Accordingly, FINRA stated that 
it is committed to help ensure that the forum has a sufficient number 
of public arbitrators to serve the needs of its forum members in each 
of its hearing locations.\187\ For example, FINRA stated that it 
intends to conduct a detailed survey of its public arbitrators as part 
of an impact analysis to assist in allocating its resources to recruit 
public arbitrators in the areas most needed.\188\ In addition, FINRA 
stated that it intends to devote its resources to recruiting 
arbitrators.\189\
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    \186\ See FINRA November Letter and FINRA December Letter.
    \187\ See FINRA November Letter and FINRA December Letter.
    \188\ See FINRA September Letter and FINRA December Letter.
    \189\ See FINRA November Letter and FINRA December Letter.
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    Furthermore, FINRA stated that it has taken steps to enhance 
arbitrator retention. For example, FINRA stated that it has implemented 
a new rule to increase the amount of honoraria paid to its 
arbitrators.\190\ In addition, FINRA stated that it intends to increase 
the amount of honoraria paid to arbitrators when a party or parties 
postpone or cancel hearing sessions on short notice.\191\
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    \190\ See supra note 125.
    \191\ See, e.g., FINRA December Letter; see also Exchange Act 
Release No. 74289 (Feb. 18, 2015), 80 FR 9773 (Feb. 24, 2015) 
(Notice of Filing of a Proposed Rule Change to Amend the Codes of 
Arbitration Procedure to Increase the Late Cancellation Fee) (FINRA 
proposed rule change to amend Rules 12214 and 12601 of the Customer 
Code and Rules 13214 and 13601 of the Industry Code to require, 
among other things, that parties give more advance notice before 
cancelling or postponing a hearing, or be assessed a higher late 
cancellation fee if such notice is not provided).
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    While FINRA acknowledges that the proposed rule change will 
necessitate aggressive arbitrator recruitment to help ensure that its 
arbitration forum will continue to have sufficient public arbitrators 
to prevent delays in all hearing locations,\192\ the Commission 
preliminarily believes that FINRA's plan to mitigate such delays is 
appropriate, particularly in light of the primary objective of the 
proposal--improving the perceived neutrality of its arbitrators and 
integrity of its arbitration forum.
---------------------------------------------------------------------------

    \192\ See FINRA November Letter.
---------------------------------------------------------------------------

    In sum, the Commission believes that the proposed rule change would 
help address forum users' perceptions of neutrality in, and maintain 
the integrity of, the arbitration forum. In addition, the Commission 
believes the potential negative effects (in particular, a temporary 
decline in the number of available public arbitrators) will be 
mitigated by FINRA's proposed recruitment and retention of public 
arbitrators.
    The proposed rule change would also: (1) Extend the cooling off 
period for Industry Affiliates and Investor Advocates to five years, 
and (2) use professional time to quantify professional work when 
determining whether a person qualifies as an Industry Affiliate or 
Investor Advocate. Although some commenters suggested alternatives, 
such as proportional cooling off periods or using revenue, instead of 
professional time, to quantify professional work, FINRA stated its 
belief that a bright-line test is more workable and eases 
administrative burdens while addressing concerns about potential or 
perceived bias in the forum.
    In addition to the amendments discussed above, the proposed rule 
change would make several additional changes to the Codes. For 
instance, the proposal would (1) add new categories of financial 
industry personnel who would be classified as non-public arbitrators, 
in particular persons associated with, including registered through, a 
mutual fund or hedge fund and persons associated with, including 
registered through, an investment adviser; (2) reduce from 20 to 15, 
the number of years a person must work over the course of his or her 
career in specified capacities in order to be permanently classified as 
a non-public arbitrator; and (3) redefine the definition of ``immediate 
family member'' as well as add a two year cooling off period for 
individuals whose immediate family members engage in specified 
activities that disqualify them from serving on the public arbitrator 
roster.
    The Commission also recognizes some of the other concerns raised by 
commenters regarding the process FINRA used for proposing this rule. 
Some commenters expressed concern that FINRA did not perform a cost-
benefit analysis prior to proposing the rule change.\193\ Other 
commenters recommended that FINRA submit the proposal to its 
Arbitration Task Force prior to proposing it.\194\ In response, FINRA 
identified the process it took in developing and considering the 
proposal, including consultation with its NAMC, interested groups, and 
other forum users; stated that additional consideration by the 
Arbitration Task Force is not precluded; and stated its intent to 
perform future cost-benefit analysis to prevent burdening its 
arbitrators prior to the effectiveness of the proposed new rule.\195\ 
In sum, the Commission believes that FINRA gave due consideration to 
the proposal and met the requirements of the Exchange Act. However, the 
Commission will be interested in the results of FINRA's future cost-
benefit analysis and the staff will monitor the consequences of 
approval of the proposed rule change.
---------------------------------------------------------------------------

    \193\ See Friedman October Letter, PIRC First November Letter, 
and SAC October Letter; see also SAC July Letter and Friedman July 
Letter.
    \194\ See Friedman October Letter and SAC October Letter; see 
also Friedman July Letter.
    \195\ See FINRA September Letter, FINRA November Letter, and 
FINRA December Letter.
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    For the reasons stated above, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder.

[[Page 11706]]

V. Conclusion

    It is therefore ordered pursuant to section 19(b)(2) of the Act 
\196\ that the proposed rule change (SR-FINRA-2014-028) be and hereby 
is approved.
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    \196\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\197\
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    \197\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-04419 Filed 3-3-15; 8:45 am]
BILLING CODE 8011-01-P

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