Skip to Content

Notice

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Amend Rule 12403 (Cases With Three Arbitrators) of the Code of Arbitration Procedure for Customer Disputes Relating to the Panel Selection Process in Arbitration

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble Start Printed Page 64564 September 14, 2016.

I. Introduction

On July 1, 2016, Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“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 12403 (Cases with Three Arbitrators) of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) relating to the panel selection process in arbitration. The proposal was published for comment in the Federal Register on July 15, 2016.[3] The comment period closed on August 5, 2016. The Commission received eight (8) comment letters on the proposal.[4] On August 12, 2016, FINRA extended the time, until October 13, 2016, for Commission action on the proposal.[5] FINRA responded to the comment letters on August 18, 2016.[6] This order approves the proposed rule change.

II. Description of the Proposed Rule Change

FINRA allows parties to participate in selecting the arbitrators who serve on their cases. Parties select their arbitration panel from computer generated lists of arbitrators that FINRA sends them. Under current FINRA Rule 12403(a), in customer cases with three arbitrators,[7] FINRA sends the parties three lists: a list of ten (10) chair-qualified public arbitrators, a list of ten (10) public arbitrators, and a list of ten (10) non-public arbitrators.[8] The parties select their panel through a process of striking and ranking the arbitrators on the lists.[9] Under current Rule 12403(c)(2), each party is allowed to strike up to four (4) arbitrators on the chair-qualified public list and four (4) arbitrators on the public list. At least six (6) names must remain on each list. However, Rule 12403(c)(1) provides for unlimited strikes on the non-public list so that any party may select a panel of all public arbitrators in a customer case.[10]

Under the Customer Code, when parties collectively strike all of the non-public arbitrators from the list, FINRA fills all three panel seats from the two 10-person lists of public arbitrators.[11] When parties collectively strike all of the arbitrators appearing on the non-public list, FINRA returns to the public list to select the next highest ranked available arbitrator to fill the seat.[12] If no public arbitrators remain available to fill the vacancy, FINRA returns to the chair-qualified public list to select the next highest ranked public chair.[13] In doing so, there is a likelihood that FINRA will appoint an arbitrator who the parties accepted, but ranked lower on the public or chair-qualified public lists.[14] FINRA believes that where parties collectively strike all the non-public arbitrators (i.e., where they desire an all-public panel), the parties should have greater choice of public arbitrators.[15]

Consequently, FINRA is proposing to amend Rule 12403(a)(1) to increase the number of arbitrators on the public arbitrator list FINRA sends the parties from ten (10) to fifteen (15). FINRA believes this amendment would provide the parties with greater choice of public arbitrators during the panel selection process.[16]

FINRA is also proposing to amend Rule 12403(c)(2) to increase the number of strikes to the public arbitrator list from four (4) to six (6), so that the proportion of strikes is the same under the amended rule as it is under the current rule. FINRA believes that increasing the number of strikes the parties can make to the newly increased public list will improve the likelihood that the parties' preferred arbitrators will be appointed to the panel.[17]

III. Summary of Comments and FINRA's Response

The Commission received eight (8) comment letters on the proposed rule change,[18] and a response letter from FINRA.[19] As discussed in more detail below, six (6) commenters expressed support for the proposal as filed,[20] one (1) commenter generally supported the proposal while expressing additional concerns,[21] and one (1) commenter proposed an alternative approach for panel selection in customer cases.[22] The sections below outline the support, concerns raised and alternatives proposed by commenters, as well as FINRA's response.

Support for the Proposal

Six (6) commenters supported the proposed increase in the number of arbitrators on the public arbitrator list from ten (10) to fifteen (15), as well as the proportional increase from four (4) to six (6) strikes that parties may make to the public arbitrator list. These commenters stated, among other things, that the proposal would provide parties Start Printed Page 64565with a greater choice in the arbitrator selection process, increasing the likelihood that an arbitrator preferred by both parties would be appointed to the panel.[23] Consequently, these commenters generally believe that the proposed rule change “is a fair, equitable and reasonable approach[,]” [24] “is an important step towards protecting the investing public[,]” [25] “will greatly enhance the fairness of the forum to both the investing public and FINRA members[,]” [26] “results in more equitable arbitration proceedings,” [27] and “benefits all parties, with a particularly positive impact on modest-means investors.” [28]

Additional Concerns

One (1) commenter generally supported the proposal, but also expressed concerns about other aspects of the arbitrator selection process.[29] Specifically, this commenter believes that FINRA should address the shortage of local arbitrators by intensifying its efforts to recruit suitable local individuals to serve as public and chair‐qualified arbitrators, particularly in locations with shallow arbitrator pools.[30] In addition, this commenter recommends that FINRA increase the transparency of its list-selection process.[31]

In response, FINRA stated that it believes this commenter's suggestions are outside the scope of the proposal.[32] Therefore, FINRA did not address them in its response.[33]

Alternative Proposal

One (1) commenter did not directly oppose the proposal but did recommend that FINRA adopt an alternative approach for panel selection in customer cases. Among other things, this commenter suggested that FINRA maintain the three current ten-person lists of non-public, chair-public and public arbitrators. Each party could strike all of the names on the non-public list, and four names on each public list. Each party would then submit to FINRA one combined list of ranked chair-public and public arbitrators. FINRA would appoint the highest ranked chair-qualified arbitrator as chair. If the parties collectively struck all of the non-public arbitrators, FINRA would then appoint two public arbitrators from those remaining on the parties' combined list (regardless of whether they are chair-qualified).[34] The commenter believes that this proposal would benefit parties to an arbitration because, among other things, they would not need to vet the proposed additional five public arbitrators.[35]

In its response, FINRA stated that forum users generally prefer greater choice during the arbitrator selection process.[36] FINRA also stated that unlike the commenter's suggestion, the proposed rule change would provide parties greater choice by adding five (5) public arbitrators to the panel selection process.[37] In addition, FINRA believes that the commenter's approach to panel selection would be complex and difficult for parties to navigate, especially parties or party representatives that do not use the forum on a regular basis.[38] Accordingly, FINRA did not amend the proposal to reflect the commenter's recommended amendments.

IV. Discussion and Commission Findings

The Commission has carefully considered the proposal, the comments received, and FINRA's response to the comments. Based on its review of the record, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.[39] In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,[40] 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. FINRA believes, and the Commission agrees, that the proposed rule change would protect investors and the public interest by providing greater choice for parties in customer cases with three arbitrators during the panel selection process.

As discussed above, the proposal would amend Rule 12403(a)(1) to increase the number of arbitrators on the public arbitrator list that FINRA sends the parties from ten (10) to fifteen (15).[41] It would also amend Rule 12403(c)(2) to increase the number of strikes to the public arbitrator list from four (4) to six (6), so that the proportion of strikes is the same under the amended rule as it is under the current rule.[42]

The Commission has considered the eight (8) comment letters received on the proposed rule change,[43] along with FINRA's response to the comments.[44] The Commission notes that most of the commenters support the proposed rule change, expressing the belief that the proposal would increase parties' choice among public arbitrators during the arbitrator selection process,[45] and thereby benefit parties in arbitration and enhance the fairness of the forum.[46] However, the Commission also recognizes commenters' concerns and suggestions.[47]

While the Commission acknowledges that FINRA's proposed amendments to Rule 12403 might result in an increased burden in vetting additional arbitrators, the Commission agrees with FINRA that parties would benefit from having greater choice in selecting public arbitrators, and that the benefits of this greater choice would outweigh the cost of additional vetting.[48] The Commission additionally agrees with FINRA's assessment that the proposed alternative arbitrator selection process suggested by one commenter [49] would not provide the benefit of greater choice and would unnecessarily complicate the arbitrator selection process.[50]

In addition, the Commission agrees with FINRA's assessment that the “shortage of local arbitrators” and the transparency of FINRA's arbitrator list-selection process [51] are outside the scope of the proposal.[52]

For the reasons stated above, the Commission finds that the proposed rule change is consistent with the Act Start Printed Page 64566and the rules and regulations thereunder.

V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[53] that the proposed rule change (SR-FINRA-2016-022) be, and hereby is, approved.

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.54

Start Signature

Robert W. Errett,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 78279 (July 11, 2016), 81 FR 46139 (July 15, 2016) (File No. SR-FINRA-2016-022) (“Notice”).

Back to Citation

4.  See Letter from Steven B. Caruso, Maddox Hargett & Caruso, P.C., dated July 14, 2016 (“Caruso Letter”); Letter from Julius Z. Frager, J.D., M.B.A., dated July 24, 2016 (“Frager Letter”); Letter from Ryan K. Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated July 26, 2016 (“Bakhtiari Letter”); Letter from Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari, dated July 27, 2016 (“Aidikoff Letter”); Letter from Hugh D. Berkson, President, Public Investors Arbitration Bar Association (“PIABA”), dated August 4, 2016 (“PIABA Letter”); Letter from David T. Bellaire, Esq., Executive Vice President and General Counsel, Financial Services Institute (“FSI”), dated August 4, 2016 (“FSI Letter”); Letter from Tyler M. Fiorillo, Student Intern, and Elissa Germaine, Supervising Attorney, Pace Investor Rights Clinic (“PIRC”), dated August 5, 2016 (“PIRC Letter”), and Letter from Glenn S. Gitomer, Chair of Litigation Practice Group, McCausland Keen Buckman, dated August 5, 2016 (“Gitomer Letter”).

Back to Citation

5.  See Letter from Margo A. Hassan, Associate Chief Counsel, Office of Dispute Resolution, FINRA, to Lourdes Gonzalez, Assistant Chief Counsel—Sales Practices, Division of Trading and Markets, Securities and Exchange Commission, dated August 12, 2016.

Back to Citation

6.  See Letter from Margo A. Hassan, Associate Chief Counsel, Office of Dispute Resolution, FINRA, to Brent J. Fields, Secretary, Securities and Exchange Commission, dated August 18, 2016 (“FINRA Response Letter”).

Back to Citation

7.  See FINRA Rule 12401, which provides that if the amount of a claim is more than $100,000, exclusive of interest and expenses, or is unspecified, or if the claim does not request money damages, the panel will consist of three arbitrators, unless the parties agree in writing to one arbitrator.

Back to Citation

8.  Public arbitrators do not have an affiliation with the financial industry. The non-public arbitrator roster includes individuals who: (1) Are employed in the financial industry; (2) provide services to industry entities and their employees; or (3) devote a significant part of their business to representing or providing services to parties in disputes concerning investments or employment relationships. See Notice, 81 FR at 46139; see also Securities Exchange Act Release No 74383 (Feb. 26, 2014), 80 FR 11695 (Mar. 4, 2014) (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).

Back to Citation

9.  See FINRA Rule 12403(c).

Back to Citation

10.  See Notice, 81 FR at 46139.

Back to Citation

11.  See FINRA Rule 12403(d), (e).

Back to Citation

12.  See FINRA Rule 12403(e).

Back to Citation

14.  See Notice, 81 FR at 46139.

Back to Citation

16.  Id. at 46139-40.

Back to Citation

17.  Id. at 46140

Back to Citation

18.  See supra note 4.

Back to Citation

19.  See supra note 6.

Back to Citation

20.  See Caruso Letter; Bakhtiari Letter; Aidikoff Letter; FSI Letter; PIRC Letter; Gitomer Letter.

Back to Citation

21.  See PIABA Letter.

Back to Citation

22.  See Frager Letter.

Back to Citation

23.  See Caruso Letter, Aidikoff Letter, FSI Letter, and PIRC Letter; see also Bakhtiari Letter, Gitmore Letter and PIABA Letter (stating that “having the ability to consider more candidates helps both claimants and respondents.”

Back to Citation

24.  See Caruso Letter; see also Aidikoff Letter and FSI Letter.

Back to Citation

25.  See Bakhtiari Letter.

Back to Citation

26.  See Gitomer Letter.

Back to Citation

27.  See FSI Letter.

Back to Citation

28.  See PIRC Letter.

Back to Citation

29.  See PIABA Letter.

Back to Citation

32.  See FINRA Response Letter.

Back to Citation

34.  See Frager Letter; see also FINRA Response Letter (describing the commenter's proposal).

Back to Citation

35.  See Frager Letter.

Back to Citation

36.  See FINRA Response Letter (stating that forum users have indicated that “the benefits of additional choice outweigh the cost of vetting additional arbitrators”).

Back to Citation

37.  See FINRA Response Letter.

Back to Citation

39.  In approving the proposed rule change, the Commission has also considered its impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

Back to Citation

41.  See Notice, 81 FR at 46139.

Back to Citation

43.  See supra note 4.

Back to Citation

44.  See supra note 6.

Back to Citation

45.  See supra note 23.

Back to Citation

46.  See supra notes 24-28.

Back to Citation

47.  See PIABA Letter and Frager Letter.

Back to Citation

48.  See FINRA Response Letter.

Back to Citation

49.  See Frager Letter.

Back to Citation

50.  See FINRA Response Letter.

Back to Citation

51.  See PIABA Letter.

Back to Citation

52.  See FINRA Response Letter.

Back to Citation

[FR Doc. 2016-22535 Filed 9-19-16; 8:45 am]

BILLING CODE 8011-01-P