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Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to Revisions to the...

July 3, 2014



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

Citation: "79 FR 38080"

Document Number: "Release No. 34-72491; File No. SR-FINRA-2014-028"

Page Number: "38080"

"Notices"

   June 27, 2014.

   Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act") /1/ and Rule 19b-4 thereunder, /2/ notice is hereby given that on June 17, 2014, Financial Industry Regulatory Authority, Inc. ("FINRA") filed with the Securities and Exchange Commission ("SEC" or "Commission") the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

   FOOTNOTE 1 15 U.S.C. 78s(b)(1). END FOOTNOTE

   FOOTNOTE 2 17 CFR 240.19b-4. END FOOTNOTE

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

   FINRA is proposing to refine and reorganize the definitions of "non-public arbitrator" and "public arbitrator." The amendments would, among other matters, provide that persons who worked in the financial industry for any duration during their careers would always be classified as non-public arbitrators, and persons who represent investors or the financial industry as a significant part of their business would also be classified as non-public arbitrators, but could become public arbitrators after a cooling-off period. The amendments would also reorganize the definitions to make it easier for arbitrator applicants and parties, among others, to determine the correct arbitrator classification.

   The text of the proposed rule change is available, at the principal office of FINRA, on FINRA's Web site at http://www.finra.org, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

   In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

Background

   FINRA classifies arbitrators as "non-public" or "public" based on their professional and/or personal affiliations. The Code of Arbitration Procedure for Customer Disputes ("Customer Code") and the Code of Arbitration Procedures for Industry Disputes ("Industry Code") define these terms. The non-public arbitrator definition (Rules 12100(p) and 13100(p)) lists financial industry affiliations that might qualify a person to serve as a non-public arbitrator in the forum. Conversely, the public arbitrator definition (Rules 12100(u) and 13100(u)) itemizes affiliations that disqualify a person from serving as a public arbitrator in the forum. In general, public arbitrators do not have a significant affiliation with the financial industry.

   FINRA has amended its arbitrator definitions several times over the years to address constituent perceptions that an affiliation might affect an arbitrator's neutrality. /3/ The SEC approved the latest amendments in 2013 (the "2013 amendments"). /4/ Under the 2013 amendments, FINRA disqualified persons associated with a mutual fund or hedge fund from serving as public arbitrators. The 2013 amendments also provided that specified individuals must wait for two years after ending certain disqualifying affiliations ("cooling-off period") before they may serve as public arbitrators.

   FOOTNOTE 3 See Securities Exchange Act Rel. No. 49573 (Apr. 16, 2004), 69 FR 21871 (Apr. 22, 2004) (File No. SR-NASD-2003-95) and Notice to Members 04-49 (Jun. 2004); Securities Exchange Act Rel. No. 54607 (Oct. 16, 2006), 71 FR 62026 (Oct. 20, 2006) (File No. SR-NASD-2005-094) and Notice to Members 06-64 (Nov. 2006); and Securities Exchange Act Rel. No. 57492 (Mar. 13, 2008), 73 FR 15025 (Mar. 20, 2008) (File No. SR-NASD-2007-021) and Regulatory Notice 08-22 (May 2008). END FOOTNOTE

   FOOTNOTE 4 See Securities Exchange Act Rel. No. 69297 (Apr. 4, 2013), 78 FR 21449 (Apr. 10, 2013) (File No. SR-FINRA-2013-003) and Regulatory Notice 13-21 (Jun. 2013). END FOOTNOTE

   The SEC received several comment letters on the 2013 amendments. Commenters recommended that FINRA increase the proposed two-year cooling-off period, add new categories of individuals whom FINRA would disqualify from serving as public arbitrators, and add new categories of individuals to the non-public arbitrator definition. /5/ In its response to the comment letters, FINRA asked the SEC to approve the proposed rule change as a significant measure to address constituent perceptions about the fairness and neutrality of the public arbitrator roster. FINRA staff agreed to conduct a comprehensive review in consultation with the National Arbitration and Mediation Committee ("NAMC"), /6/ of both the non-public arbitrator and public arbitrator definitions with a view towards clarifying the definitions and reviewing the additional issues raised in the comment letters. /7/

   FOOTNOTE 5 See Securities Exchange Act Rel. No. 69297 (Apr. 4, 2013), 78 FR 21449 (Apr. 10, 2013) Discussion of Comment Letters. The comment letters are available on the SEC's Web site at www.sec.gov. END FOOTNOTE

   FOOTNOTE 6 The NAMC, which is composed of investor, industry, and neutral (arbitrator and mediator) representatives, provides policy guidance to FINRA Dispute Resolution staff. A majority of the NAMC members and its chair are public. END FOOTNOTE

   FOOTNOTE 7 See letter from Margo A. Hassan, Assistant Chief Counsel, FINRA Dispute Resolution, to Elizabeth M. Murphy, dated March 11, 2013. The letter is available on FINRA's Web site at www.finra.org, and on the SEC's Web site at www.sec.gov. END FOOTNOTE

   FINRA staff met with the NAMC several times to review both arbitrator definitions. As the result of these discussions, as well as general discussions with interested groups over a period of time, FINRA is proposing to amend the non-public arbitrator and public arbitrator definitions. The intent of the proposed rule change is to address the concerns about arbitrator neutrality that were raised by the commenters on the 2013 amendments. As noted above, these concerns related to the cooling-off periods, the categories of individuals whom FINRA disqualifies from serving as public arbitrators, and the categories of individuals whom FINRA classifies as non-public arbitrators.

   The proposed rule change includes several substantive changes to the definitions and an extensive reorganization of the public arbitrator definition. In light of extensive revisions, FINRA is proposing to delete the definitions in their entirety, and replace them with new definitions. The proposed amendments are described below. For ease of reading, the discussion only refers to Rule 12100 of the Customer Code. The proposed amendments to Rule 13100 of the Industry Code are identical, and FINRA's rationale is the same.

Non-Public Arbitrator Definition

   The non-public arbitrator definition lists financial industry affiliations that might qualify a person to serve as a non-public arbitrator in the forum. The affiliations relate to individuals who work in the financial industry, and individuals who provide services to industry entities and their employees. Each qualifying affiliation has a corresponding disqualification in the public arbitrator definition. Currently, FINRA permits individuals who worked in the financial industry to join the public arbitrator roster after a cooling-off period so long as they meet other requirements.

   FINRA is proposing to expand the scope of the non-public arbitrator definition in three ways. First, the definition would provide that individuals who worked in the financial industry for any duration during their careers would always be classified as non-public arbitrators. Second, FINRA would add new categories of financial industry personnel who might qualify to serve as non-public arbitrators. Third, FINRA would add to the definition professionals who devote a significant part of their business to representing or providing services to parties in disputes concerning investments or employment relationships.

   Expansion of the non-public arbitrator definition becomes particularly significant when parties are selecting arbitrators in customer cases with three arbitrators. /8/ In these cases, FINRA sends the parties three randomly generated lists of arbitrators--a list of 10 chair-qualified public arbitrators, a list of 10 public arbitrators, and a list of 10 non-public arbitrators. The parties select their panel through a process of striking and ranking the arbitrators on the lists. FINRA limits the parties to four strikes on the chair-qualified public arbitrator list and four strikes on the public arbitrator list. However, FINRA gives parties unlimited strikes on the non-public arbitrator list. By expanding the scope of the non-public arbitrator definition, parties would have a greater ability to address their own perceptions of bias through the use of their unlimited strikes on the non-public arbitrator list.

   FOOTNOTE 8 Under Rule 12401, one arbitrator hears customer claims up to $100,000 and three arbitrators hear customer claims of more than $100,000 or unspecified claims. END FOOTNOTE

New Rule 12100(p)(1)

   Under the current non-public arbitrator definition, if a person is currently, or was within the past five years, affiliated with a securities industry entity specified in the rule (e.g., associated with a broker or dealer), the person may qualify to serve as a non-public arbitrator at the forum. /9/ Subject to two exceptions, FINRA allows these individuals to join the public arbitrator roster five years after ending all industry affiliation. The first exception to the five-year provision applies to persons who retired from, or who spent a substantial part of their career with, a specified industry entity. /10/ FINRA keeps these individuals on the non-public arbitrator roster for the duration of their service to the forum. The second exception applies to persons who were affiliated for 20 years or more with a specified industry entity. /11/ FINRA also keeps these arbitrators on the non-public arbitrator roster for the duration of their service.

   FOOTNOTE 9 See current Rule 12100(p)(1). This provision applies to a person who is, or was within the past five years:

   (A) Associated with, including registered through, a broker or dealer (including a government securities broker or dealer or a municipal securities dealer);

   (B) Registered under the Commodities Exchange Act;

   (C) A member of a commodities exchange or a registered futures association; or

   (D) Associated with a person or firm registered under the Commodity Exchange Act. END FOOTNOTE

   FOOTNOTE 10 See current Rule 12100(p)(2). END FOOTNOTE

   FOOTNOTE 11 See current Rule 12100(u)(2). END FOOTNOTE

   Investor representatives raised concerns about the neutrality of FINRA's public arbitrator roster because they do not believe that former industry-affiliated persons should ever serve as public arbitrators. In response to these concerns, FINRA is proposing to adopt new Rule 12100(p)(1) to eliminate the five-year cooling-off provision for persons who work in the financial industry. Under the new rule, FINRA would classify persons who are, or were, affiliated with a specified financial industry entity at any point in their careers, for any duration, as non-public arbitrators. /12/ Once FINRA classifies an arbitrator as non-public, FINRA would never reclassify the arbitrator as public. Under the proposed rule change, there would be no exceptions to this provision.

   FOOTNOTE 12 See new Rule 12100(p)(1). The financial industry affiliations enumerated in new Rule 12100(p)(1) relate to a person who is, or was, associated with, including registered through:

   (A) a broker or a dealer (including a government securities broker or dealer or a municipal securities broker or dealer); or

   (B) a member of, or an entity registered under, the Commodity Exchange Act, the Commodities Future Trading Commission, the National Futures Association, or the Municipal Securities Rulemaking Board; or

   (C) an entity that is organized under or registered pursuant to the Securities Exchange Act of 1934, Investment Company Act of 1940, or the Investment Advisers Act of 1940; or

   (D) a mutual fund or a hedge fund; or

   (E) an investment adviser. END FOOTNOTE

   FINRA is also proposing to add two new categories of financial industry professionals to new Rule 12100(p)(1)--persons associated with, including registered through, a mutual fund or hedge fund, and persons associated with, including registered through, an investment adviser. Currently, FINRA does not permit these professionals to serve in any capacity, but if they end their affiliation, they may serve as public arbitrators after a two-year cooling-off period. /13/ FINRA believes that these professionals would bring valuable knowledge and experience to the forum and that FINRA should classify them as non-public arbitrators. Under the proposed rule change, once FINRA classifies them as non-public arbitrators, these arbitrators would remain on the non-public arbitrator roster for the duration of their service to the forum.

   FOOTNOTE 13 These persons may serve as non-public arbitrators if they are qualified to serve under another provision (e.g., dually registered as an investment adviser and an associated person of a FINRA member). END FOOTNOTE

   Finally, FINRA is proposing to add clarity to new Rule 12100(p)(1) by revising the references in several ways. First, instead of referring to a person registered under the Commodity Exchange Act, or associated with a person or firm registered under the Commodity Exchange Act, or a member of a commodities exchange, FINRA would simplify the reference in Rule 12100(p)(1)(B) by referring to a person who is, or was, associated with, including registered through, under, or with (as applicable), the Commodity Exchange Act or the Commodities Futures Trading Commission. FINRA is not proposing any substantive change to the categories of persons relating to commodities. Second, instead of referring to a member of a registered futures association, FINRA proposes in Rule 12100(p)(1)(B) to specify the association by name--the National Futures Association. FINRA is not proposing any substantive change to the category of persons relating to futures. Third, FINRA is proposing to add in Rule 12100(p)(1)(B) a reference to a person who is, or was, associated with, including registered through, under, or with (as applicable), the Municipal Securities Rulemaking Board ("MSRB"). While such an individual would be covered under the current "municipal securities broker or dealer," FINRA believes adding the MSRB would add clarity to the rule. Fourth, FINRA is proposing an omnibus reference in Rule 12100(p)(1)(C) to cover industry affiliated persons not otherwise specified in the rule and potential categories of industry professionals that may be created in the future.

New Rule 12100(p)(2)

   Under the current non-public arbitrator definition, attorneys, accountants, and other professionals who devoted 20 percent or more of their professional work in the last two years to serving specified industry entities and/or employees, may qualify to serve as non-public arbitrators at the forum. /14/ FINRA currently permits these individuals to join the public arbitrator roster two years after they stop providing services to the industry. However, they are permanently disqualified from serving as public arbitrators if they provided services to the industry for 20 years or more over the course of their careers. /15/

   FOOTNOTE 14 See current Rule 12100(p)(3). The rule applies to the persons and entities listed in current Rule 12100(p)(1). END FOOTNOTE

   FOOTNOTE 15 See current Rule 12100(u)(2). END FOOTNOTE

   FINRA is proposing to adopt new Rule 12100(p)(2) to broaden the current provision in two ways. First, the new rule increases the look-back period from two years to five years. Second, it broadens application of the provision to include services to industry entities and any persons or entities associated with those industry entities. The proposed new public arbitrator definition provides that persons would be permanently disqualified from serving as public arbitrators if they provided the specified services for 15 calendar years or more over the course of their careers (in contrast to the current 20 year provision). /16/ The 15 years are a total number of years--they would not have to be consecutive years. After 15 years of service, FINRA would keep these arbitrators on the non-public arbitrator roster for the duration of their service to the forum. FINRA is increasing the look-back period, and decreasing the number of years before it applies a permanent disqualification, so that only individuals who are sufficiently removed from their industry affiliation are permitted to serve on the public arbitrator roster.

   FOOTNOTE 16 See new Rule 12100(u)(2). END FOOTNOTE

   Finally, FINRA is proposing to add clarity to the rule by changing the phrase "professional work" to "professional time." FINRA staff believes that the term "time" is better because time would be more easily quantified by the professionals in the category.

New Rule 12100(p)(3)

   Currently, FINRA permits professionals who represent or provide services to investors in securities disputes to serve as public arbitrators at the forum. /17/ Industry representatives raised concerns about the neutrality of the public arbitrator roster, and they do not believe that these professionals should serve as public arbitrators. To address these concerns, FINRA is proposing to add a new qualifying affiliation to the non-public arbitrator definition.

   FOOTNOTE 17 These individuals are not qualified under the non-public arbitrator definition to serve as non-public arbitrators, nor are they disqualified from serving as public arbitrators under the public arbitration definition. END FOOTNOTE

   Under new Rule 12100(p)(3), FINRA would classify as non-public arbitrators, attorneys, accountants, and other professionals who devoted 20 percent or more of their professional time, within the past five years, to serving parties in investment or financial industry employment disputes. FINRA selected the 20 percent threshold for application of the provision to keep it consistent with the threshold in new Rule 12100(p)(2).

   FINRA would permit these individuals to serve as public arbitrators five years after their business mix changes. However, if the person accumulates 15 calendar years of providing the qualifying services over the course of a career, FINRA would keep that arbitrator on the non-public arbitrator roster for the duration of the arbitrator's service to the forum. The 15 years are a total number of years--they would not have to be consecutive years. /18/

   FOOTNOTE 18 See new Rule 12100(u)(3). END FOOTNOTE

New Rule 12100(p)(4)

   FINRA currently classifies as non-public arbitrators, persons working in a bank or other financial institution (e.g., a credit union) who execute transactions in securities or who supervise employees who execute transactions in securities. /19/ This provision covers persons who are not employed by an industry entity that falls under current paragraph (p)(1). When such persons end their affiliation, they may immediately apply to serve as public arbitrators at the forum unless they have engaged in this type of work for 20 years or more over the course of their careers. /20/

   FOOTNOTE 19 See current Rule 12100(p)(4). END FOOTNOTE

   FOOTNOTE 20 See current Rule 12100(u)(2). END FOOTNOTE

   FINRA is proposing to adopt new Rule 12100(p)(4) to add a five-year look-back period to this provision. The substance of the qualifying affiliation is the same. Only the look-back period is new. Under the new rule, FINRA would classify as a non-public arbitrator, any person who, within the last five calendar years, worked in a bank or other financial institution and executed transactions in securities or supervised or monitored compliance with the securities and commodities laws of employees who execute transactions in securities. FINRA would permit these persons to serve as public arbitrators five years after they ended their industry affiliation unless they provided these services for 15 years or more. As is the case with proposed new paragraphs (p)(2) and (p)(3) described above, the proposed new public arbitrator definition provides that these persons would be permanently disqualified from serving as public arbitrators if they provided the specified services for 15 calendar years or more over the course of their careers. /21/ Again, the 15 years are a total number of years--they would not have to be consecutive years. After 15 years of service, FINRA would keep these arbitrators on the non-public arbitrator roster for the duration of their service to the forum.

   FOOTNOTE 21 See new Rule 12100(u)(4). END FOOTNOTE

Public Arbitrator Definition

   The public arbitrator definition lists affiliations that disqualify a person from serving as a public arbitrator in the forum. It includes a disqualification that corresponds to each qualifying affiliation in the non-public arbitrator definition. Currently, the definition reflects these disqualifications by cross-references to the non-public arbitrator definition. The public arbitrator definition includes additional disqualifiers that do not have a corresponding qualifier in the non-public arbitrator definition. Over the years, FINRA added these disqualifications to the public arbitrator definition to address investors' perceptions about the neutrality of the public arbitrator roster.

   FINRA is proposing substantive changes to the public arbitrator definition that: Add new disqualifications; amend an existing disqualification to simplify it; and revise the cooling-off periods. Under new Rule 12100(u), FINRA would subject individuals to a five-year cooling-off period after they end an affiliation based on their own activities, and a two-year cooling-off period after they end an affiliation based on someone else's activities (provided that another disqualification is not applicable).

   FINRA is also proposing to reorganize the public arbitrator definition to make it easier for FINRA staff, arbitrators and potential arbitrators, and parties to ascertain the correct arbitrator classification. Under the proposed rule change, FINRA would remove the cross-references between the definitions, and fully describe each disqualification. FINRA would also separate the disqualifications into categories of those that are permanent versus those that are temporary, and those based on a person's own activities versus those based on the activities of others (e.g., others at a person's firm). FINRA would repeat some of the disqualifying affiliations to make it clear that the affiliations are subject to both a temporary disqualification and a permanent disqualification depending on how many years a person was engaged in a stated activity.

New Rule 12100(u)(1)

   FINRA is proposing to adopt new Rule 12100(u)(1) to specify the types of financial industry employment that disqualify a person from serving as a public arbitrator. /22/ Substantively, the affiliations are identical to those listed in new Rule 12100(p)(1). None of the disqualifying affiliations is new--FINRA currently includes each of them in the public arbitrator definition. /23/ Rather, FINRA is proposing to add clarity to new Rule 12100(u)(1) by revising the references in a manner identical to what it is proposing for new Rule 12100(p)(1). /24/

   FOOTNOTE 22 Under new Rule 12100(u)(1), A person shall not be designated as a public arbitrator who is, or was, associated with, including registered through:

   (A) a broker or a dealer (including a government securities broker or dealer or a municipal securities broker or dealer); or

   (B) a member of, or an entity registered under, the Commodity Exchange Act, the Commodities Futures Trading Commission, the National Futures Association, or the Municipal Securities Rulemaking Board; or

   (C) an entity that is organized under or registered pursuant to the Securities Exchange Act of 1934, Investment Company Act of 1940, or the Investment Advisers Act of 1940; or

   (D) a mutual fund or a hedge fund; or

   (E) an investment adviser. END FOOTNOTE

   FOOTNOTE 23 See current Rule 12100(u)(1) and Rule 12100(u)(3). END FOOTNOTE

   FOOTNOTE 24 First, instead of referring to a person registered under the Commodity Exchange Act, or associated with a person or firm registered under the Commodity Exchange Act, or a member of a commodities exchange, FINRA would simplify the reference in Rule 12100(u)(1)(B) by referring to a person who is, or was, associated with, including registered through, under, or with (as applicable), the Commodity Exchange Act or the Commodities Futures Trading Commission. FINRA is not proposing any substantive change to the categories of persons relating to commodities. Second, instead of referring to a member of a registered futures association, FINRA proposes in Rule 12100(u)(1)(B) to specify the association by name--the National Futures Association. FINRA is not proposing any substantive change to the category of persons relating to futures. Third, FINRA is proposing to add in Rule 12100(u)(1)(B) a reference to a person who is, or was, associated with, including registered through, under, or with (as applicable), the MSRB. While such an individual would be covered under the current "municipal securities broker or dealer," FINRA believes adding the MSRB would add clarity to the rule. Fourth, FINRA is proposing an omnibus reference in Rule 12100(u)(1)(C) to cover industry affiliated persons not otherwise specified in the rule and potential categories of industry professionals that may be created in the future. END FOOTNOTE

   FINRA currently permits non-public arbitrators to become public arbitrators at some point after ending their affiliations (subject to specified exceptions). As explained in the above discussion on new Rule 12100(p)(1), under the proposed rule change, FINRA would classify these individuals as non-public arbitrators for the duration of their service to the forum and would never reclassify them as public arbitrators. Therefore, anyone disqualified under new Rule 12100(u)(1) would be subject to a permanent disqualification from the public arbitrator roster.

New Rules 12100(u)(2) and 12100(u)(6)

   Under the current public arbitrator definition, attorneys, accountants, and other professionals who devoted 20 percent or more of their professional work in the last two years to serving securities industry employees and/or entities, may not serve as public arbitrators at the forum. /25/ These individuals may join the public arbitrator roster two years after they stop providing services to the industry. However, FINRA permanently disqualifies them from the public arbitrator roster if they provided the services for 20 years or more over the course of their careers. /26/

   FOOTNOTE 25 See current Rule 12100(u)(1), which incorporates, among other things, current Rule 12100(p)(3). END FOOTNOTE

   FOOTNOTE 26 See current Rule 12100(u)(2). END FOOTNOTE

   FINRA is proposing to adopt new Rules 12100(u)(2) and 12100(u)(6) to expand the current provision. FINRA would broaden application of the disqualification to include services to financial industry entities and any persons or entities associated with those financial industry entities. /27/ In new Rule 12100(u)(6), FINRA would increase the cooling-off period in the rule from two years to five years, /28/ and in new Rule 12100(u)(2), FINRA would decrease the number of years for a permanent disqualification from 20 years to 15 years. /29/ The 15 years are a total number of years--they would not have to be consecutive years. Although the description of the disqualification in paragraphs (u)(2) and (u)(6) is identical, FINRA believes it would add clarity to the definition to separate out when the provision results in a permanent disqualification, and when it results in a temporary disqualification. Substantively, new Rules 12100(u)(2) and 12100(u)(6) are identical to new Rule 12100(p)(2).

   FOOTNOTE 27 See current Rule 12100(p)(3) for content to be expanded by new Rules 12100(u)(2) and 12100(u)(6). END FOOTNOTE

   FOOTNOTE 28 See current Rule 12100(u)(1), referencing current Rule 12100(p)(3), which includes a two year look-back period. END FOOTNOTE

   FOOTNOTE 29 See current Rule 12100(u)(2) which references a 20 year time period. END FOOTNOTE

New Rules 12100(u)(3) and 12100(u)(7)

   As explained above, FINRA currently permits professionals who represent or provide services to investors in securities disputes to serve as public arbitrators at the forum. Industry representatives raised concerns about the neutrality of the public arbitrator roster, and they do not believe that these professionals should serve as public arbitrators.

   To address these concerns, FINRA is proposing to disqualify from the public arbitrator roster attorneys, accountants, expert witnesses, and other professionals who devote 20 percent or more of their professional time to serving parties in investment or financial industry employment disputes. Under new Rule 12100(u)(7), FINRA would apply a five-year cooling-off period to the rule. Under new Rule 12100(u)(3), these persons would be permanently disqualified from serving as public arbitrators if they provide the specified services for 15 calendar years or more over the course of their careers. The 15 years are a total number of years--they would not have to be consecutive years. The substance of the disqualification corresponds to the proposed qualifying affiliation in new Rule 12100(p)(3). FINRA selected the 20 percent threshold for application of the provision to keep it consistent with the thresholds in new Rules 12100(u)(2) and 12100(u)(6).

New Rules 12100(u)(4) and 12100(u)(8)

   FINRA currently disqualifies personnel working in a bank or other financial institution (e.g., a credit union) who execute transactions in securities, or who supervise employees who execute transactions in securities, from serving as public arbitrators. /30/ This provision applies to persons who are employed by a financial industry entity that is not covered by current Rule 12100(p)(1). When these individuals end their affiliation, they may immediately apply to serve as public arbitrators at the forum unless they have engaged in this type of work for 20 years or more over the course of their careers. /31/

   FOOTNOTE 30 See current Rule 12100(u)(1) which references current Rule 12100(p)(4). END FOOTNOTE

   FOOTNOTE 31 See current Rule 12100(u)(2). END FOOTNOTE

   FINRA is proposing to adopt new Rules 12100(u)(4) and 12100(u)(8) to expand the current provision. In new Rule 12100(u)(8), FINRA would impose a five-year cooling-off period in the rule; and, in new Rule 12100(u)(4), FINRA would decrease the number of years for a permanent disqualification from 20 years to 15 years. The 15 years are a total number of years--they would not have to be consecutive years. Although the description of the disqualification in paragraphs (u)(4) and (u)(8) is identical, FINRA believes it would add clarity to the definition to separate out when the provision results in a permanent disqualification, and when it results in a temporary disqualification. Substantively, new Rules 12100(u)(4) and 12100(u)(8) are identical to new Rule 12100(p)(4).

New Rule 12100(u)(5)

   FINRA currently disqualifies individuals employed by, or who are directors or officers of, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business. /32/ These persons may become public arbitrators two years after ending their affiliation. /33/

   FOOTNOTE 32 See current Rules 12100(u)(6) and 12100(u)(7). END FOOTNOTE

   FOOTNOTE 33 See current Rule 12100(u). END FOOTNOTE

   FINRA is proposing to adopt new Rule 12100(u)(5) to expand application of the provision in two ways. First, FINRA would expand the disqualification from an "organization that is engaged in the securities business" to an "organization that is engaged in the financial industry." Second, FINRA would increase the cooling-off period from two years to five years. This disqualification addresses the perception that employees, officers, and directors of entities that are associated with industry entities should not serve as public arbitrators because they may favor an industry party in an arbitration proceeding. The term "financial industry" would replace the term "securities business" to ensure that the provision covers all financial services entities that may raise concerns about neutrality. The term securities business may be interpreted too narrowly to apply only to the affiliations in current Rule 12100(p)(1).

New Rule 12100(u)(9)

   Currently, professionals may not serve as public arbitrators if their firm: Derived 10 percent or more of its annual revenue in the past two years from providing services to the financial industry; /34/ or derived $50,000 or more in annual revenue in the past two years from providing services to the securities industry relating to customer disputes concerning an investment account or transaction. /35/ For example, a real estate attorney working at a law firm with a securities practice devoted to serving the industry is disqualified from serving as a public arbitrator if the threshold percentage or dollar figure is met. He or she may, however, become a public arbitrator two years after leaving the firm or two years after the firm no longer derives annual revenue from the financial industry or securities industry exceeding those thresholds.

   FOOTNOTE 34 See current Rule 12100(u)(4). END FOOTNOTE

   FOOTNOTE 35 See current Rule 12100(u)(5). END FOOTNOTE

   FINRA is proposing to adopt new Rule 12100(u)(9) to combine the two disqualifications into one, and to simplify the disqualification relating to the $50,000 threshold. New Rule 12100(u)(9) would provide that professionals may not serve as public arbitrators if their firm derived $50,000 or more, or at least 10 percent of its annual revenue, in any single calendar year during the course of the past two calendar years, from: The entities listed in paragraph (u)(1) and/or to any persons or entities associated with any of the entities listed in paragraph (u)(1); or from a bank or other financial institution where persons effect transactions in securities including government or municipal securities, commodities, futures, or options. The cooling-off period of two years would be the same. FINRA is proposing to remove the requirement that the $50,000 in revenue relate to customer disputes concerning an investment account or transaction to make it easier for potential and existing arbitrators to determine if the disqualification would apply.

New Rule 12100(u)(10)

   FINRA is proposing to adopt new Rule 12100(u)(10) to disqualify from the public arbitrator roster, professionals whose firm derived $50,000 or more, or at least 10 percent of its annual revenue, in any single calendar year during the course of the past two calendar years, from individual and/or institutional investors relating to securities matters. FINRA would apply a two-year cooling-off period to this provision. For example, a trust and estates attorney working at a law firm with a securities practice devoted to serving investors would be disqualified from serving as a public arbitrator if the threshold percentage or dollar figure is met.

   New Rule 12100(u)(10) is not based on an existing disqualification--it is entirely new. The purpose of this provision is to address an industry perception that a professional whose firm derives significant revenue from representing investors in securities matters in not neutral, and should not be permitted to serve as a public arbitrator. The revenue thresholds and cooling-off period are consistent with proposed new Rule 12100(u)(9).

New Rule 12100(u)(11)

   FINRA currently disqualifies individuals from serving as public arbitrators if their spouse or immediate family member is employed by, or is a director or officer of, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business. /36/ FINRA applies a two-year cooling-off period to these disqualifications. /37/ In addition, if an individual's spouse or immediate family member is employed in a securities industry entity or provides services to such an entity and/or the entity's employees, the person may not serve as a public arbitrator. /38/ While the current public arbitrator definition does not include a cooling-off period for this disqualification, it has been FINRA's practice to make these individuals wait for five years after their spouse or immediate family member ends the disqualifying affiliation before they may become public arbitrators.

   FOOTNOTE 36 See current Rules 12100(u)(6) and 12100(u)(7). END FOOTNOTE

   FOOTNOTE 37 See current Rule 12100(u). END FOOTNOTE

   FOOTNOTE 38 See current Rule 12100(u)(8). END FOOTNOTE

   FINRA is proposing to simplify these disqualifications and add clarity to them by combining them into one disqualification with a two-year cooling-off period. New Rule 12100(u)(11) would provide that a person shall not be designated as a public arbitrator if his or her immediate family member is an individual whom FINRA would disqualify from serving on the public arbitrator roster. If the person's immediate family member ends the disqualifying affiliation, or the person ends the relationship with the individual so that the individual is no longer the person's immediate family member, the person may, after two calendar years have passed from the end of the affiliation or relationship, be designated as a public arbitrator. FINRA believes it is appropriate to have a two-year cooling-off period for all disqualifications based on the activities of others.

Immediate Family

   In the current public arbitrator definition, the term spouse appears in the disqualification text, not in the description of immediate family member. The term immediate family member includes a person's parent, stepparent, child, stepchild, or household member. It also includes an individual that the person supports financially, /39/ and an individual who is claimed as a dependent for federal tax purposes. FINRA is proposing to update the term to reflect current societal relationships. Under proposed new Rule 12100(u)(11), FINRA would add as immediate family members a person's spouse, partner in a civil union, and domestic partner.

   FOOTNOTE 39 Financial support is defined as providing an individual with more than 50 percent of his or her annual income. END FOOTNOTE

2. Statutory Basis

   FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act, /40/ which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that the proposed rule change would benefit users of FINRA's arbitration forum by addressing concerns raised about the fairness and neutrality of FINRA's public arbitrator roster. FINRA expects all arbitrators to be fair and neutral, and believes that they are. However, FINRA believes that it must address perceptions about the allegiances or inclinations of arbitrators that may erode confidence in the forum.

   FOOTNOTE 40 15 U.S.C. 78o-3(b)(6). END FOOTNOTE

   FINRA believes that classifying any individual who worked in the financial industry for any duration as a non-public arbitrator would improve investors' views about the neutrality of the public arbitrator roster. FINRA also believes that classifying professionals who represent or provide services to parties in disputes concerning investment accounts or transactions as non-public arbitrators would enable all parties in customer cases with three arbitrators to address their perceptions about the neutrality of public arbitrator roster through the use of strikes during the panel selection process. Moreover, FINRA believes that including cooling- off periods in the proposed public arbitrator definition would help ensure that potential arbitrators have sufficient separation from their financial industry affiliations before FINRA permits them to serve as public arbitrators.

B. Self-Regulatory Organization's Statement on Burden on Competition

   FINRA does not believe that the proposed rule change would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

   Written comments on the proposed rule change were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

   Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

   (A) by order approve or disapprove such proposed rule change, or

   (B) institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

    * Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or

    * Send an email to rule-comments@sec.gov. Please include File Number SR-FINRA-2014-028 on the subject line.

Paper Comments

    * Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2014-028. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

   All submissions should refer to File Number SR-FINRA-2014-028 and should be submitted on or before July 24, 2014.

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. /41/

   FOOTNOTE 41 17 CFR 200.30-3(a)(12). END FOOTNOTE

Kevin M. O'Neill,

Deputy Secretary.

[FR Doc. 2014-15607 Filed 7-2-14; 8:45 am]

BILLING CODE 8011-01-P


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Source: Federal Register


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