October 1, 2014.
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 Start Printed Page 60557of 1934 (“Act”) 
and Rule 19b-4 thereunder,
a proposed rule change to amend provisions in the FINRA rulebook to “refine and reorganize the definitions of `non-public arbitrator' and `public arbitrator.' ” 
The proposed rule change was published for comment in the Federal Register on July 3, 2014.
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 proposed rule change.
On September 30, 2014, the Commission received a letter from FINRA responding to the comment letters.
The Commission is publishing this order to institute proceedings pursuant to Section 19(b)(2)(B) of the Act 
to determine whether to approve or disapprove the proposed rule change.
Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to the proposed rule change, nor does it mean that the Commission will ultimately disapprove the proposed rule change. Rather, as discussed below, the Commission seeks additional input from interested parties on the issues presented by the proposal.
II. Description of the Proposed Rule Change
Currently, 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”) define the term “non-public arbitrator;” and FINRA Rule 12100(u) of the Customer Code and Rule 13100(u) of the Industry Code” define the term “public arbitrator.” 
In general, the Codes classify arbitrators as “non-public” or “public” based on their professional and personal affiliations. Individuals affiliated with the financial industry are typically considered “non-public arbitrators.” Individuals unaffiliated with the financial industry are typically considered “public arbitrators.” 
FINRA is now proposing to amend the Codes to revise 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. The amendments would also provide that 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. In addition, you may also find a more detailed description of the proposed rule changes in the Notice of Filing.
III. Summary of Comments
Five of the commenters expressed support for the proposed rule change in its entirety.
Two commenters opposed the proposed rule change in its entirety.
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 (discussed below).
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.
1. Elimination of the Cooling-Off Period
Six commenters supported this provision as providing a workable “bright-line” test that would address criticism regarding bias (perceived or actual) in favor of industry.
Many commenters opposed the elimination of the five-year cooling-off period for Industry Affiliates.
For instance, some 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.
Two other commenters who opposed the proposed elimination of the cooling-off period suggested that FINRA should adopt a proportional cooling-off period for industry employees that would be Start Printed Page 60558proportional to the number of years they were Industry Affiliates.
In its response, 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. It also indicated that its constituents agreed that a cooling off period for financial industry employees would “always leave a perception of unfairness for some advocates.” 
In addition, FINRA stated that it is more workable and preferable to use a bright-line test than a pro rata cooling-off period for industry employees. For these reasons, FINRA declined to amend the proposal as suggested.
2. All Employees, Regardless of Capacity, To Be Categorized 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.
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).
Accordingly, this commenter suggested FINRA amend the definition of the term “associated person” in the proposal to track the language of 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.
In its response letter, 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.” Accordingly, FINRA declined to amend the proposed rule change.
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. Currently, individuals meeting this description are classified as public arbitrators.
Three commenters supported this provision.
Eight commenters opposed this provision.
In general, they stated that the distinction between the public and non-public arbitrators has always been based on whether the arbitrators had industry experience and argued for keeping this distinction.
Similarly, some of these commenters noted that the proposal would create confusion since that U.S. courts, the American Arbitration Association, and the general public generally view professionals who represent investors to be “public arbitrators.” 
One commenter noted that past NASD response letters, as well as the FINRA Web site, also make this distinction.
In its response letter, FINRA noted that industry constituents have expressed concern about the neutrality of the public arbitrator roster because of the presence on the roster of Investor Advocates. Specifically, FINRA stated that these industry constituents believe that Investor Advocates should not serve as public arbitrators. FINRA further stated that it designed the proposal to address this concern by classifying these individuals as non-public arbitrators thereby excluding them from the public arbitrator roster. Accordingly, FINRA declined to amend the proposed rule change.
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”).
Four commenters generally supported this provision as fair and acknowledged the consistency of approach towards professionals representing investors and those representing industry.
One commenter opposed this provision of the proposal.
In particular, this commenter stated that Industry Advocates 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 lengthening it).
In its response letter, 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. It also believes that it needed to take a consistent approach to cooling-off periods for service providers to both investors and the financial industry. Accordingly, FINRA declined to amend the proposed rule change.
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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 amount of time those individuals devoted to representing either the financial industry or investors. One commenter opposed this provision of the proposal.
Specifically, this commenter questioned the appropriateness of classifying individuals as public or non-public arbitrators based on the “amount of time” an individual devotes to a client. Alternatively, this commenter suggested FINRA base this determination on the amount of revenue generated by the professional relationship. The commenter believes 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.
In its response letter, FINRA stated that it discussed this matter with its National Arbitration and Mediation Committee (“NAMC”). FINRA stated that based on these discussions, FINRA believes that using the term “professional time” “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.” 
Accordingly, FINRA declined to amend the proposed rule change.
C. Impact to the Number of Available Public Arbitrators
Four commenters expressed concerns that the proposed rule change would reduce the number of public arbitrators to an amount that would be insufficient to meet future needs.
One of these commenters stated that permanently classifying certain individuals as non-public arbitrators would negatively impact the effective administration of the FINRA arbitration forum.
Two of these commenters expressed concern that the proposal would reduce the supply of available public arbitrators at a time when more claimants are selecting all-public panels.
Another one of these commenters suggested that the potential shortages of public arbitrators may be more concentrated in some locations more than others.
Two of these commenters also suggested that FINRA would need to devote resources to recruit additional public arbitrators.
In its response letter, FINRA stated that, based on a preliminary analysis of its data, including a review of the public arbitrator roster, it estimated that approximately 474 arbitrators (out of 3,567) might be reclassified from public arbitrators to non-public arbitrators under the proposed rule change. FINRA also stated, however, 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.
D. Cost-Benefit/More Data Intensive Analysis
Three 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.
More specifically, two of these commenters expressed concern that the proposal would result in a reduction in the pool of public arbitrators and chair-eligible arbitrators and suggested that FINRA seek additional data to analyze the likelihood of this outcome.
Another one of these commenters suggested FINRA make information about each arbitrator publicly available, particularly to academic researchers.
This commenter stated that this 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 letter, FINRA stated that a cost-benefit analysis would be helpful, but would require a survey of every public arbitrator on its roster and that such a review would be time-intensive. As an interim step, FINRA performed a preliminary analysis of databases currently available to it. FINRA also stated that if the proposal was approved, it would conduct a more robust cost-benefit analysis.
E. General Comments
Two commenters suggested alternatives to characterizing arbitrators as either public or non-public.
Two other commenters objected to broker-dealers' used of pre-dispute mandatory arbitration agreements.
Other commenters suggested ways to improve the quality of arbitration panels.
Another commenter suggested that FINRA's Arbitration Task Force 
should review the proposal.
In its response letter, FINRA stated that each of these suggestions was either outside the scope of, or would cause undue delay to, the proposed rule change. Accordingly, FINRA declined to amend the proposed rule change.
IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-2014-028 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act to determine whether the proposed rule change should be approved or disapproved.
Start Printed Page 60560Institution of such proceedings appears appropriate at this time in view of the legal and policy issues raised by the proposal. As noted above, institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, the Commission seeks and encourages interested persons to comment on the issues presented by the proposed rule change and provide the Commission with arguments to support the Commission's analysis as to whether to approve or disapprove the proposal.
Pursuant to Section 19(b)(2)(B) of the Act,
the Commission is providing notice of the grounds for disapproval under consideration. In particular, Section 15A(b)(6) of the Act 
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. In addition, Section 15A(b)(9) of the Act 
requires that FINRA rules not impose any unnecessary or inappropriate burden on competition.
The Commission believes FINRA's proposed rule change raises questions as to whether it is consistent with the requirements of Sections 15A(b)(6) and 15A(b)(9) of the Act.
V. Request for Written Comments
The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues raised by the proposed rule change. In particular, the Commission invites the written views of interested persons on whether the proposed rule change is inconsistent with Sections 15A(b)(6) and 15A(b)(9), or any other provision, of the Act, or the rules and regulations thereunder.
Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation.
Interested persons are invited to submit written data, views, and arguments by November 6, 2014 concerning whether the proposed rule change should be approved or disapproved. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by November 21, 2014. Comments may be submitted by any of the following methods:
- 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 principle 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 publicly available. All submissions should refer to File Number SR-FINRA-2014-028 and should be submitted on or before November 6, 2014. If comments are received, any rebuttal comments should be submitted by November 21, 2014.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
[FR Doc. 2014-23836 Filed 10-6-14; 8:45 am]
BILLING CODE 8011-01-P