80 FR 61545 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Merge FINRA Dispute Resolution, Inc. Into and With FINRA Regulation, Inc.
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 80, Issue 197 (October 13, 2015)
Federal Register Volume 80, Issue 197 (October 13, 2015)
| Page Range | 61545-61551 | |
| FR Document | 2015-25861 |
[Federal Register Volume 80, Number 197 (Tuesday, October 13, 2015)] [Notices] [Pages 61545-61551] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-25861] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-76082; File No. SR-FINRA-2015-034] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Merge FINRA Dispute Resolution, Inc. Into and With FINRA Regulation, Inc. October 6, 2015. 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 September 29, 2015, 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, and II below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to merge its dispute resolution subsidiary, FINRA Dispute Resolution, Inc. (``FINRA Dispute Resolution'') into and with its regulatory subsidiary, FINRA Regulation, Inc. (``FINRA Regulation''). To implement the merger, FINRA would make conforming amendments to the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries (``Delegation Plan''); amend the By-Laws of FINRA Regulation (``FINRA Regulation By-Laws'') to make relevant conforming amendments and to incorporate substantive provisions from the By-Laws of FINRA Dispute Resolution (``FINRA Dispute Resolution By-Laws'') that apply to the dispute resolution forum only; delete the FINRA Dispute Resolution By-Laws in their entirety; and make conforming amendments to FINRA rules.\3\ The proposed rule change would also amend the FINRA Regulation By-Laws to increase the total number of directors who could serve on the FINRA Regulation board. FINRA's existing dispute resolution program would continue to operate as a separate department within FINRA Regulation, and would be referred to as the Office of Dispute Resolution. --------------------------------------------------------------------------- \3\ The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from New York Stock Exchange LLC (``NYSE'') (``Incorporated NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules are referred to as the ``Transitional Rulebook''). While the NASD Rules generally apply to all FINRA members, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA members, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice, March 12, 2008 (Rulebook Consolidation Process). --------------------------------------------------------------------------- The text of the proposed rule change is available on FINRA's Web site at http://www.finra.org, at the principal office of FINRA and at the Commission's Public Reference Room. [[Page 61546]] 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 FINRA is proposing to merge FINRA Dispute Resolution into FINRA Regulation. To undertake the merger, FINRA would make conforming amendments to the Delegation Plan, amend the FINRA Regulation By-Laws to incorporate substantive and unique provisions from the FINRA Dispute Resolution By-Laws and to make other conforming amendments, delete the FINRA Dispute Resolution By-Laws in their entirety, and make conforming amendments to FINRA rules. The proposed rule change would also amend the FINRA Regulation By-Laws to increase the total number of directors who could serve on the FINRA Regulation board in order to provide additional flexibility to meet the compositional requirements under the FINRA Regulation By-Laws. I. Background Prior to 1996, the National Association of Securities Dealers, Inc. (``NASD'') Arbitration Department operated the NASD's arbitration and mediation programs. In 1996, upon the combined recommendations of two committees (the ``Ruder Task Force'' and the ``Rudman Committee'') formed by the NASD of individuals with significant securities industry and NASD governance experience,\4\ NASD reorganized as a parent corporation with two operating subsidiaries: The Nasdaq Stock Market, Inc. (``Nasdaq''), which was charged with operating the Nasdaq market, and NASD Regulation, Inc. (``NASD Regulation''), focused on regulatory and investor protection issues. At the time of the reorganization, the Arbitration Department was placed within NASD Regulation. The name of the Arbitration Department was subsequently changed to the Office of Dispute Resolution (``ODR'') to reflect the broader range of dispute resolution services provided.\5\ --------------------------------------------------------------------------- \4\ In September 1994, the NASD established the Ruder Task Force to study NASD arbitration and recommend improvements. The Ruder Task Force issued a report recommending, among other things, that the dispute resolution program be housed either in the NASD parent or in NASD Regulation. See The Arbitration Policy Task Force Report--A Report Card at 26, available on FINRA's Web site at: http://www.finra.org/sites/default/files/Industry/p036466.pdf. Subsequently, [sic] the Rudman Committee recommended that the Arbitration Department be placed in NASD Regulation. See Report of the NASD Select Committee on Structure and Governance to the NASD Board of Governors (``Rudman Report'') at R-8. See also Securities Exchange Act Release No. 41971 (September 30, 1999), 64 FR 55793, 55794 (October 14, 1999) (Order Approving File No. SR-NASD-99-21). \5\ See Securities Exchange Act Release No. 41971 (September 30, 1999), 64 FR 55793, 55794 (October 14, 1999) (Order Approving File No. SR-NASD-99-21). --------------------------------------------------------------------------- In 1999, NASD decided to move ODR into a separate subsidiary, NASD Dispute Resolution, Inc., that would focus solely on administering its dispute resolution program, which it believed would further strengthen the independence and credibility of the arbitration and mediation functions. NASD believed that the new dispute resolution subsidiary would benefit from the perception that it was separate and distinct from other corporate entities.\6\ In 2000, the NASD began a restructuring process to separate Nasdaq from NASD. The separation of Nasdaq from NASD was completed in 2006.\7\ --------------------------------------------------------------------------- \6\ See supra note 5. \7\ On November 21, 2006, the SEC approved the separation of Nasdaq from NASD upon the operation of the Nasdaq Exchange as a national securities exchange for non-Nasdaq exchange-listed securities. See Securities Exchange Act Release No. 54798 (November 21, 2006), 71 FR 69156 (November 29, 2006) (Order Approving File No. SR-NASD-2006-104). --------------------------------------------------------------------------- FINRA \8\ believes there is no longer a need to maintain separate subsidiaries to execute its regulatory and dispute resolution functions. The proposed merger would align the corporate legal structure with current public perception and organizational practice. It would also reduce unnecessary administrative burdens required to maintain separate legal entities. Finally, while the proposed rule change would change FINRA Dispute Resolution's corporate status, it would not affect the services and benefits provided by or costs to use the dispute resolution forum, its corporate governance \9\ or oversight. --------------------------------------------------------------------------- \8\ On July 30, 2007, NASD and NYSE consolidated their member firm regulation, enforcement and dispute resolution operations into a combined organization, FINRA. See Securities Exchange Act Release No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007), as amended by Securities Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 2008) (Order Approving File No. SR-NASD-2007-023). \9\ The proposed rule change would amend the FINRA Regulation corporate governance structure to add two board seats. See discussion under section II.B., Proposed Rule Change, Amendments to the FINRA Regulation By-Laws, Article IV Board of Directors, Number of Directors, infra pages 44-45 [sic]. --------------------------------------------------------------------------- The proposed merger would align the legal structure with the public's perception of FINRA as well as its operational realities. From the public's perspective, FINRA, Inc., FINRA Regulation and FINRA Dispute Resolution have the appearance of a single organization. FINRA's Annual Report is a consolidated report that includes all FINRA operations, and all press releases and communications are issued by FINRA. Operationally, the three corporate entities largely function as a single organization. The entities share many administrative and support functions including, for example, Corporate Communications and Government Relations, Corporate Real Estate and Corporate Security, Finance and Purchasing, Human Resources, Internal Audit, Legal, Meetings and Travel, Office of the Corporate Secretary, Office of the Ombudsman and Technology. These integrated functions promote efficient operations and conserve financial resources. In addition, the operational cohesiveness furthers FINRA's mission of protecting investors. FINRA Dispute Resolution staff, for example, works with the Department of Enforcement to identify misconduct by individuals or firms involved in arbitration cases that could justify further action. There are also significant shared resources across entities in the areas of corporate governance and funding. With respect to governance, members of the FINRA Board's Regulatory Policy Committee currently serve as the directors of the boards of both FINRA Regulation and FINRA Dispute Resolution.\10\ Regarding funding, FINRA Dispute Resolution is not self-supporting and fees received from parties who use the arbitration and mediation programs are not sufficient to fund the forum's arbitration and mediation activities. Under the proposed merger, to supplement the fees collected from forum users, FINRA would continue to allocate revenues, as [[Page 61547]] necessary, from the overall FINRA enterprise, which would include revenue derived from member assessments, various fees and charges, and disciplinary fines with some exceptions. --------------------------------------------------------------------------- \10\ See Securities Exchange Act Release No. 61575 (February 23, 2010), 75 FR 9459, 9460 (March 2, 2010) (Notice of Filing File No. SR-FINRA-2010-007). Both boards consist of a majority of public directors. See By-Laws of FINRA Dispute Resolution, Inc., Article IV, Section 4.3(a) and By-Laws of FINRA Regulation, Inc., Article IV, Section 4.3(a). --------------------------------------------------------------------------- In addition to aligning the corporate structure with operational realities, the proposed merger would reduce the considerable administrative duplication associated with maintaining the three distinct corporate entities. From a regulatory perspective, the three corporate entities have separate reporting requirements and Federal and state taxes, and are, therefore, treated as individual entities.\11\ By merging FINRA Dispute Resolution into FINRA Regulation, FINRA would eliminate the need to file numerous tax filings each year, including multiple state tax and information returns, sales tax returns (including some monthly and quarterly filings), property tax returns, and many state registrations and annual reports. Moreover, merging the two subsidiaries would eliminate a separate payroll entity, which would remove the need for separate compensation and benefit accounting protocols. Thus, a merger of the subsidiaries would allow FINRA to lower FINRA's expenses and more efficiently use staff resources. --------------------------------------------------------------------------- \11\ For example, by maintaining separate entities, FINRA has been required to submit separate payroll, tax, and compliance filings for each corporate entity in many states. --------------------------------------------------------------------------- Although a merger between FINRA Dispute Resolution and FINRA Regulation would change FINRA Dispute Resolution's corporate status, it would not affect the services and benefits provided by or the costs to use the dispute resolution forum, its corporate governance or oversight. Over the past 15 years, FINRA, as a single organization, has operated the largest securities dispute resolution forum in the world-- through its arbitration and mediation services--to assist in the resolution of monetary and business disputes between and among investors, brokerage firms and individual brokers. FINRA's Dispute Resolution program provides investors and markets with a fair, efficient and economical alternative to costly and complex litigation programs, which are often cost-prohibitive for investors with small claims. The FINRA Dispute Resolution program has several features that distinguish it from other private arbitration forums and further promote investor protection and market integrity. For example, the forum charges significantly lower arbitration fees for investors, gives investors the choice of an all-public arbitrator panel, uses an investor-friendly discovery guide, and offers 71 hearing locations, including at least one in every state, Puerto Rico and London, United Kingdom. Also, FINRA has the authority to suspend or cancel the membership of firms and suspend registered representatives who fail to pay arbitration awards or agreed-upon settlements.\12\ Further, FINRA Dispute Resolution continuously recruits qualified individuals to improve its arbitrator and mediator rosters, while closely monitoring and evaluating the performance of existing arbitrators and mediators. These benefits and services, among others, would not be disrupted by the merger. --------------------------------------------------------------------------- \12\ See By-Laws of the Corporation, Article VI, section 3 and Rule 9554. --------------------------------------------------------------------------- Similarly, the merger would not have a practical impact on corporate governance involving FINRA Dispute Resolution. Members of the FINRA Board's Regulatory Policy Committee currently serve as the directors of both the FINRA Regulation and FINRA Dispute Resolution boards.\13\ The FINRA Regulation board would continue to consist of a majority of public board members.\14\ In addition, FINRA would maintain the National Arbitration and Mediation Committee (``NAMC''), which is a Board-appointed advisory committee on arbitration matters.\15\ Non- industry members would continue to compose at least 50 percent of the NAMC.\16\ --------------------------------------------------------------------------- \13\ See Securities Exchange Act Release No. 61575 (February 23, 2010), 75 FR 9459, 9460 (March 2, 2010) (Notice of Filing File No. SR-FINRA-2010-007). \14\ See By-Laws of FINRA Dispute Resolution, Inc., Article IV, section 4.3(a) and By-Laws of FINRA Regulation, Inc., Article IV, section 4.3(a). \15\ See Rules 12102 and 13102. See also section III(C) of the Delegation Plan. FINRA is proposing to transfer current section III(C)(1) of the Delegation Plan into section II(C) of the Delegation Plan. \16\ See supra note 15. --------------------------------------------------------------------------- Moreover, the dispute resolution forum would continue to be subject to the same SEC oversight as other departments of FINRA, which would include the requirement to file all By-Law and rule changes with the SEC. Thus, the arbitration program and services would continue to be governed by the Codes of Arbitration Procedure,\17\ and the mediation program and services by the Code of Mediation Procedure.\18\ Further, the forum would continue to be subject to inspections by the SEC and by the Government Accountability Office, which performs audits at the request of the United States Congress. --------------------------------------------------------------------------- \17\ See Rule 12000 and 13000 Series. \18\ See Rule 14000 Series. --------------------------------------------------------------------------- I. [sic] Proposed Rule Change FINRA is proposing to merge FINRA Dispute Resolution into FINRA Regulation. FINRA would make conforming amendments to the Delegation Plan, amend the FINRA Regulation By-Laws to incorporate substantive and unique provisions from the FINRA Dispute Resolution By-Laws and to make other conforming amendments, delete the FINRA Dispute Resolution By- Laws, and make conforming amendments to FINRA rules. The proposed rule change would also amend the FINRA Regulation By-Laws to increase the total number of directors who could serve on the FINRA Regulation board. A. Conforming Amendments to the Delegation Plan FINRA is proposing to make conforming amendments throughout the Delegation Plan to remove references to ``NASD'' and ``Rules of the Association'' and replace them with references to ``FINRA'' and ``FINRA rules,'' respectively.\19\ In addition, the proposed rule change would change the word ``subsidiaries'' or ``subsidiary'' to ``FINRA Regulation'' to indicate that FINRA Regulation would remain at the conclusion of the merger. Finally, FINRA is proposing to remove references to section III, the section of the Delegation Plan that pertains to FINRA Dispute Resolution, as that section will no longer exist following the merger. --------------------------------------------------------------------------- \19\ ``FINRA rules'' means the current FINRA rulebook. See supra notes 3 and 8. --------------------------------------------------------------------------- Section I--FINRA, Inc. Section I of the Delegation Plan provides responsibility for the rules and regulations of the Association and its operation and administration to FINRA, Inc. Under section I(B), the proposed rule change would remove subsections 5 and 6 because they refer to actions taken between FINRA Regulation and FINRA Dispute Resolution. The remaining subsections would be re-numbered. In re-numbered subsection 5, FINRA is proposing to remove the word ``common,'' as FINRA Regulation would no longer share overhead and technology with FINRA Dispute Resolution as a separate subsidiary. In re-numbered subsection 6, FINRA is proposing to change the reference to the Office of Internal Review to the Office of Internal Audit to reflect a name change. In section I(D), the proposed rule change would replace the reference to ``4000A'' with ``6200,'' to reflect the transfer and re- numbering of the rule [[Page 61548]] series governing the Alternative Display Facility into the Consolidated FINRA Rulebook.\20\ --------------------------------------------------------------------------- \20\ See Securities Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving File Nos. SR-FINRA-2008-021; SR-FINRA-2008-022; SR-FINRA-2008-026; SR-FINRA- 2008-028 and SR-FINRA-2008-029). --------------------------------------------------------------------------- Section II--FINRA Regulation, Inc. Amendments to Transfer Provisions of Section III into Section II Section II of the Delegation Plan delegates responsibilities and functions to FINRA Regulation. FINRA is proposing to transfer several provisions from section III, which pertains to FINRA Dispute Resolution, into section II. First, under section II(A)(1), FINRA is proposing to amend subsection (a) to add ``and dispute resolution programs,'' so that the function of establishing and interpreting rules and regulations would also apply to dispute resolution programs. Second, the proposed rule change would amend subsection (b) to add ``arbitration, mediation or other resolution of disputes among and between FINRA members, associated persons and customers,'' so that FINRA Regulation would have the authority to develop and adopt appropriate and necessary rule changes related to the dispute resolution forum. Third, FINRA is proposing to amend section II(A)(1) to add the function that would permit FINRA Regulation to ``conduct arbitrations, mediations, and other dispute resolution programs.'' The provision would be labeled as subsection (n). The remaining subsections would be re-numbered. Fourth, the proposed rule change would amend re-numbered subsection (q), which addresses the function of establishing and assessing fees and other charges on FINRA members, persons associated with members, and others using the services or facilities of FINRA or FINRA Regulation, to add ``which includes the dispute resolution forum.'' Fifth, the proposed rule change would amend re-numbered subsection (r) to explicitly add ``dispute resolution'' to the list of areas in which FINRA Regulation may manage external relations. Finally, FINRA is proposing to transfer in its entirety current section III(C)(1) of the Delegation Plan, which governs the NAMC, into section II(C) of the Delegation Plan. Currently, section III(C)(1) of the Delegation Plan delegates authority to the NAMC to advise the FINRA Dispute Resolution board on issues relating to dispute resolution.\21\ Under the Codes of Arbitration Procedure, the NAMC has the authority to recommend rules, regulations, procedures and amendments relating to arbitration, mediation, and other dispute resolution matters to the FINRA Board.\22\ The NAMC also has the authority and responsibility to establish and maintain rosters of neutrals composed of persons from within and outside of the securities industry.\23\ The NAMC's authority, role and its responsibilities would not change under the proposed rule change. --------------------------------------------------------------------------- \21\ See section III(C) of the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries. \22\ See Rules 12102 and 13102. \23\ See supra note 22. --------------------------------------------------------------------------- Other Conforming Amendments to Section II Under section II(C)(2)(a)(iii), FINRA is proposing to replace the reference to ``Rule 11890'' with ``the Rule 11000 Series.'' The Rule 11000 Series refers to the Uniform Practice Code and includes the new Rule 11890 Series governing clearly erroneous transactions that FINRA moved into the Consolidated FINRA Rulebook.\24\ --------------------------------------------------------------------------- \24\ See Securities Exchange Act Release No. 61080 (December 1, 2009), 74 FR 64117 (December 7, 2009) (Order Approving File No. SR- FINRA-2009-068). --------------------------------------------------------------------------- Section III--NASD Dispute Resolution, Inc. FINRA is proposing to delete section III of the Delegation Plan because, as discussed above, the provisions that apply to dispute resolution only would be incorporated into amended section II of the Delegation Plan. B. Amendments to the FINRA Regulation By-Laws FINRA is proposing to amend the FINRA Regulation By-Laws to incorporate substantive and unique provisions from the FINRA Dispute Resolution By-Laws. Where differences exist in the FINRA Dispute Resolution By-Laws that would not be incorporated into the FINRA Regulation By-Laws under the proposed rule change, such differences are non-substantive in nature or would not otherwise affect the governance or operation of the dispute resolution program.\25\ FINRA would also make other conforming amendments to the FINRA Regulation By-Laws. --------------------------------------------------------------------------- \25\ For example, although minor differences exist between sections 4.13(f) of the FINRA Regulation By-Laws and Dispute Regulation By-Laws, the proposed rule change would retain the FINRA Regulation By-Laws' section relating to the composition of an Executive Committee. See By-Laws of FINRA Regulation, Inc., Article 4, section 4.13(f). This provision of the FINRA Regulation By-Laws clarifies that Executive Committee members must be directors and is consistent with FINRA's practice and intent. See Securities Exchange Act Release No. 62156 (May 24, 2010), 75 FR 30453, 30456 (June 1, 2010) (Order Approving File No. SR-FINRA-2010-007). --------------------------------------------------------------------------- Article I Definitions Electronic Transmission FINRA is proposing to add the term ``electronic transmission'' to Article I of the By-Laws of FINRA Regulation in light of the common usage of electronic transmission as a means of communication and references to such term in the By-Laws of FINRA Regulation.\26\ The proposed rule change would relocate the definition of the term, without change, from current section 8.19(a) of the By-Laws of FINRA Regulation. Accordingly, the term ``electronic transmission'' would mean any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.\27\ --------------------------------------------------------------------------- \26\ The term ``electronic transmission'' would be added as proposed Article I(o). Article I(p) through (r) would be re- numbered. See also sections 4.12, 8.5, 8.19 and 12.3 of the By-Laws of FINRA Regulation for references to the term ``electronic transmission.'' \27\ The FINRA Dispute Resolution By-Laws contain a slightly different definition of ``electronic transmission''; however, because the difference does not have a meaningful impact on the application of the term for purposes of the FINRA Regulation By- Laws, FINRA proposes to retain the definition currently used in the FINRA Regulation By-Laws. See By-Laws of FINRA Dispute Resolution Inc., Article I(k). --------------------------------------------------------------------------- FINRA Member and Public Member FINRA is proposing to expand the term ``FINRA member'' in Article I(s) of the By-Laws of FINRA Regulation to incorporate a definition that applies to the dispute resolution forum. Specifically, the added language would further define a ``FINRA member'' as ``any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated or cancelled; and any broker or dealer admitted to membership in a self-regulatory organization that, with FINRA consent, has required its members to arbitrate pursuant to the Code of Arbitration Procedure for Customer Disputes or the Code of Arbitration Procedure for Industry Disputes and/or to be treated as members of FINRA for purposes of the Codes of Arbitration Procedure, whether or not the membership has been terminated or cancelled.'' The SEC [[Page 61549]] approved a similar definition that was added to the By-Laws of FINRA Dispute Resolution in 2010.\28\ Under the proposed rule change, the expanded definition of FINRA member would apply only to the Codes of Arbitration Procedure.\29\ --------------------------------------------------------------------------- \28\ See Securities Exchange Act Release No. 62156 (May 24, 2010), 75 FR 30453, 30454 (June 1, 2010) (Order Approving File No. SR-FINRA-2010-007). \29\ See Rule 12000 and 13000 Series. --------------------------------------------------------------------------- The proposed rule change would also amend the definitions of Industry Member \30\ and Public Member \31\ under the FINRA Regulation By-Laws to reflect unique provisions in the Dispute Resolution By-Laws. In 2012, the SEC approved amendments to the FINRA Dispute Resolution By-Laws to clarify that services provided by mediators, when acting in such capacity and not representing parties in mediation, should not cause the individuals to be classified as Industry Members under the By-Laws.\32\ The purpose of the amendments was to allow mediators, who are otherwise qualified, to be eligible to become Public Members of the NAMC. The proposed rule change would incorporate these amendments into two parts of the definition of Industry Member.\33\ First, Article I(x)(4) of the FINRA Regulation By-Laws defines an Industry Member as a National Adjudicatory Council (``NAC'') or committee member who provides professional services to brokers or dealers, and such services constitute 20 percent or more of the professional revenues received by the member or 20 percent or more of the gross revenues received by the member's firm or partnership. The proposed rule change would amend the definition to clarify that, for purposes of determining membership on the NAMC, any services provided in the capacity as a mediator of disputes involving a broker or dealer and not representing any party in such mediations would not be considered professional services provided to brokers or dealers. --------------------------------------------------------------------------- \30\ See By-Laws of FINRA Regulation, Inc., Article I(x). \31\ See By-Laws of FINRA Regulation, Inc., Article I(hh). \32\ See Securities Exchange Act Release No. 68142 (November 2, 2012), 77 FR 67038 (November 8, 2012) (Order Approving File No. SR- FINRA-2012-040). \33\ The By-Laws define an Industry Member using six criteria. The proposal would amend two of them, subsections (4) and (5). See supra note 30. --------------------------------------------------------------------------- Second, Article I(x)(5) of the By-Laws defines an Industry Member as a NAC or committee member who provides professional services to a director, officer, or employee of a broker, dealer, or corporation that owns 50 percent or more of the voting stock of a broker or dealer, and such services relate to the director's, officer's, or employee's professional capacity and constitute 20 percent or more of the professional revenues received by the member or 20 percent or more of the gross revenues received by the member's firm or partnership. Similar to the change in Article I(x)(4) described in the paragraph above, FINRA proposes to amend the definition to clarify that, for purposes of determining membership on the NAMC, services provided in the capacity as a mediator of disputes involving a director, officer, or employee as described in this definition and not representing any party in such mediations would not be considered professional services provided to such individuals. The proposed rule change would also amend the definition of Public Member. The FINRA Regulation By-Laws define a Public Member as a NAC or committee member who has no material business relationship with a broker or dealer or a self-regulatory organization registered under the Act (other than serving as a public director or public member on a committee of such a self-regulatory organization). The proposed rule change would amend the definition by adding language to the parenthetical to clarify that, for the purposes of determining membership on the NAMC, acting in the capacity as a mediator of disputes involving a broker or dealer and not representing any party in such mediations is not considered a material business relationship with a broker or dealer. Other Conforming Changes The proposed rule change would amend the definitions of Industry Director and Public Director in Article I(w) and Article I(gg), respectively, to clarify that a director is a member of the board of directors of FINRA Regulation. The proposed rule change would also delete Article I(r) to eliminate the reference to FINRA Dispute Resolution, Inc. Article II Offices The proposed rule change would amend the FINRA Regulation By-Laws to reflect a change in the address of FINRA Regulation's registered office and its registered agent from Corporate Creations Network Inc., 3411 Silverside Road, Rodney Building #104, Wilmington, Delaware 19810, to Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, New Castle County, Delaware 19808. The FINRA Board approved this change at its February 2015 meeting. Article IV Board of Directors Number of Directors With respect to governance, as noted above, members of the FINRA Board's Regulatory Policy Committee currently serve as the directors of the board of FINRA Regulation.\34\ Accordingly, in appointing governors of the FINRA Board to the Regulatory Policy Committee, FINRA must adhere to the compositional requirements for the Board of Directors of FINRA Regulation. In this regard, section 4.3(a) of the FINRA Regulation By-Laws provides, among other things, that the FINRA Regulation board must consist of at least two and not less than 20 percent of directors who are Small Firm, Mid-Size Firm or Large Firm Governors. In addition, public directors must comprise a majority of the FINRA Regulation board.\35\ --------------------------------------------------------------------------- \34\ See supra note 10. \35\ See Article IV, section 4.3(a) of the FINRA Regulation By- Laws. --------------------------------------------------------------------------- Currently, the number of FINRA Regulation directors may not exceed 15.\36\ FINRA is proposing to amend section 4.2 of the FINRA Regulation By-Laws to increase the total number of directors who could serve on the FINRA Regulation board from 15 to 17. FINRA believes that increasing the maximum number of FINRA Regulation board seats would provide it with additional flexibility to manage its board committee assignments and meet the compositional requirements under the FINRA Regulation By-Laws. For example, when the FINRA Regulation board is at its current maximum limit of 15 directors, if FINRA were to add a new industry director to the FINRA Regulation board, it would need to remove an existing industry director to maintain a majority of public directors on the board. In this example, increasing the maximum number of board seats to 17 would enable FINRA to add a public director to the FINRA Regulation board rather than remove an existing industry director, and thus maintain the required composition of FINRA Regulation board members. --------------------------------------------------------------------------- \36\ See Article IV, section 4.2 of the FINRA Regulation By- Laws. --------------------------------------------------------------------------- Regulation FINRA would amend section 4.10 of the FINRA Regulation By-Laws to insert a reference to the Delegation Plan as another governing document with which the board must comply when adopting rules, regulations, and requirements for the conduct of the business and management of FINRA Regulation. This change would conform the language in this section to that of [[Page 61550]] section 4.10 of the FINRA Dispute Resolution By-Laws. Conflicts of Interest; Contracts and Transactions Involving Directors Under the proposed rule change, FINRA would amend section 4.14(b) to remove a reference to FINRA Dispute Resolution. Article XI Capital Stock FINRA is proposing to amend section 11.3(b) to insert the word ``stock'' in the sentence to clarify the type of certificate to which the section refers. This change would conform the language in this section of the FINRA Regulation By-Laws to that of section 8.3(b) of the FINRA Dispute Resolution By-Laws. C. Deletion of FINRA Dispute Resolution By-Laws As discussed under section II(B), amendments to the FINRA Regulation By-Laws, above, FINRA would incorporate substantive and unique provisions of the FINRA Dispute Resolution By-Laws into the FINRA Regulation By-Laws. As discussed above, where differences exist in the FINRA Dispute Resolution By-Laws that would not be incorporated into the FINRA Regulation By-Laws under the proposed rule change, such differences are non-substantive in nature or would not otherwise affect the governance or operation of the dispute resolution program.\37\ The FINRA Dispute Resolution By-Laws would be deleted in their entirety. --------------------------------------------------------------------------- \37\ See supra note 25. --------------------------------------------------------------------------- D. Conforming Amendments to the FINRA Rules FINRA is also proposing to amend several FINRA rules to reflect the proposed merger. The proposed rule change would amend Rules 0160 (Definitions) and 0170 (Delegation, Authority and Access) to delete references to FINRA Dispute Resolution. In addition, the proposed rule change would amend Rule 0160 to add paragraphs (b)(7) and (b)(11) to define ``FINRA Regulation'' and ``Office of Dispute Resolution,'' respectively, and re-number subparagraphs accordingly. The term ``Office of Dispute Resolution'' would mean the office within FINRA Regulation that assumes the responsibilities and functions relating to dispute resolution programs including, but not limited to, the arbitration, mediation, or other resolution of disputes among and between members, associated persons and customers. Thus, if the proposed rule change is approved, FINRA's existing dispute resolution programs would continue to operate as a separate department within FINRA Regulation, under the name of the Office of Dispute Resolution. The proposed rule change would also amend Rules 0170 (Delegation, Authority and Access), 6250 (Quote and Order Access Requirements), 6740 (Termination of TRACE Service), 7180 (Termination of Access), 7280A (Termination of Access), 7280B (Termination of Access), 7380 (Termination of Access), 7530 (Other Services), 9710 (Purpose), 11892 (Clearly Erroneous Transactions in Exchange-Listed Securities) and 11893 (Clearly Erroneous Transactions in OTC Equity Securities) to change references to ``subsidiaries'' or ``subsidiary'' to ``FINRA Regulation.'' In addition, the proposed rule change would amend Rules 12102 (National Arbitration and Mediation Committee), 13102 (National Arbitration and Mediation Committee) and 14102 (National Arbitration and Mediation Committee) to remove references to the section of the Delegation Plan that pertains to FINRA Dispute Resolution and to change the language to reference FINRA Regulation. Because the position of President of FINRA Dispute Resolution would no longer exist upon completion of the merger, FINRA is proposing to delete references to the President of FINRA Dispute Resolution in Rules 10312 (Disclosures Required of Arbitrators and Director's Authority to Disqualify), 12103 (Director of Dispute Resolution), 12104 (Effect of Arbitration on FINRA Regulatory Activities; Arbitrator Referral During or at Conclusion of Case), 12203 (Denial of FINRA Forum), 12407 (Removal of Arbitrator by Director), 13103 (Director of Dispute Resolution), 13104 (Effect of Arbitration on FINRA Regulatory Activities; Arbitrator Referral During or at Conclusion of Case), 13203 (Denial of FINRA Forum) and 13410 (Removal of Arbitrator by Director). Any authority formerly granted by those rules to the President of FINRA Dispute Resolution would be granted to the Director of the Office of Dispute Resolution in light of that position's responsibility for overseeing the dispute resolution programs, except that in amended Rules 12103 (Director of Dispute Resolution) and 13103 (Director of Dispute Resolution), as proposed, the authority to appoint an interim Director if the Director is unable to perform his or her duties would be granted to the President of FINRA Regulation. Similarly, FINRA is proposing to amend Rule 10103 (Director of Arbitration) to provide that the President of FINRA Regulation would have the authority to appoint an interim Director of Arbitration if the Director becomes incapacitated, resigned, is removed, or if the Director becomes permanently or indefinitely incapable of performing the duties and responsibilities of the Director. References to the President or Executive Vice President of FINRA Dispute Resolution would be removed from the Rule. FINRA is proposing to rename FINRA Dispute Resolution as the Office of Dispute Resolution. The Office of Dispute Resolution would become a separate department within FINRA Regulation that would continue to administer independently FINRA's existing dispute resolution programs. Accordingly, the proposed rule change would amend Rules 10314 (Initiation of Proceedings), 12100(k) (Definitions), 12103 (Director of Dispute Resolution), 12701 (Settlement), 13100(k) (Definitions), 13103 (Director of Dispute Resolution), 13701 (Settlement) and 14100(c) (Definitions) to replace any remaining references to ``Dispute Resolution'' with ``Office of Dispute Resolution.'' Finally, FINRA is proposing to amend Rules 10102 (National Arbitration and Mediation Committee), 12100(c) (Definitions), 13100(c) (Definitions), 14100(a) and (f) (Definitions) to replace references to ``Dispute Resolution'' with ``Regulation.'' As noted in Item 2 of this filing, if the Commission approves the proposed rule change, FINRA anticipates the effective date will be December 20, 2015. FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 30 days following Commission approval. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Act,\38\ 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; and section 15A(b)(4) of the Act,\39\ which requires that FINRA rules be designed to assure a fair representation of FINRA's members in the selection of its directors and administration of its affairs. --------------------------------------------------------------------------- \38\ 15 U.S.C. 78o-3(b)(6). \39\ 15 U.S.C. 78o-3(b)(4). --------------------------------------------------------------------------- FINRA believes that the proposed reorganization would align FINRA's corporate organizational structure with its current organizational practice, and, [[Page 61551]] in the process, would make the organization and its departments more efficient. The efficient use of resources enables FINRA to focus on its mission of investor protection. FINRA emphasizes that the proposed rule change would not affect the benefits and services provided to public investors by the dispute resolution forum or the costs of any party to use the dispute resolution forum. FINRA believes that the proposed rule change reflects its continued commitment to providing an effective forum for the resolution of disputes, claims, and controversies arising out of or in connection with the business of FINRA members, or arising out of the employment or termination of employment of associated persons with any member. In addition, FINRA believes that increasing the maximum number of FINRA Regulation board seats from 15 to 17 would provide it with additional flexibility to manage its board committee assignments and meet the compositional requirements under the FINRA Regulation By-Laws, continuing to assure fair representation of FINRA's members and maintaining the numerical dominance of public directors. Thus, FINRA believes that the reorganization and its continued commitment to dispute resolution would ensure that FINRA continues to protect investors and the public interest in an efficient manner. B. Self-Regulatory Organization's Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. FINRA believes that the proposed merger of its two subsidiaries would align FINRA's corporate organizational structure with its current organizational practice. The proposed rule change would allow FINRA to eliminate duplicative tax and regulatory filings, which, in turn, would reduce its administrative costs and the resources spent generating and submitting these filings. Moreover, the proposed rule change would allow FINRA to streamline its procedures and re-allocate staff and financial resources to other areas, thereby enhancing the efficient operation of the corporation. While the proposed rule change would alter FINRA Dispute Resolution's corporate status, it would not affect the dispute resolution program in any substantive way. As discussed above, it would not affect the services and benefits provided by or the costs to use the dispute resolution forum. FINRA believes that the proposed rule change demonstrates its commitment to providing a dispute resolution forum that remains accessible to investors, because the benefits and services provided by the dispute resolution forum would continue unabated. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments 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 up to 90 days (i) as the Commission may designate 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 CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-FINRA-2015-034 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-FINRA-2015-034. 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-2015-034, and should be submitted on or before November 3, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\40\ --------------------------------------------------------------------------- \40\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2015-25861 Filed 10-9-15; 8:45 am] BILLING CODE 8011-01-P
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The Exchange has included based minimum size requirements with (‘‘Act’’) 1 and Rule 19b–4 thereunder,2
functionalities in SNAP that the a requirement that a SNAP AOO be for notice is hereby given that on
Exchange states are designed to at least: (1) 250 shares and have a September 29, 2015, Financial Industry
deemphasize speed as a key for trading minimum aggregate notional value of Regulatory Authority, Inc. (‘‘FINRA’’)
success. A SNAP Cycle will never be $25,000 based on its corresponding filed with the Securities and Exchange
scheduled ahead of time, and the length SNAP AOO Reference Price; or (2) at Commission (‘‘SEC’’ or ‘‘Commission’’)
of the SNAP Order Acceptance Period least 2,000 shares with no minimum the proposed rule change as described
would be randomized.83 The SNAP also aggregate notional value requirement. in Items I, and II below, which Items
deemphasizes speed advantages because The Exchange states that it received have been prepared by FINRA. The
Participants may submit SNAP AOOs to feedback from certain Participants Commission is publishing this notice to
rest on the SNAP AOO Queue prior to indicating that the original tier-based solicit comments on the proposed rule
a SNAP Cycle, and those AOOs would minimum size requirements were change from interested persons.
maintain priority over SNAP Eligible counter-intuitive and would
Orders submitted during the SNAP unnecessarily complicate the I. Self-Regulatory Organization’s
Cycle.84 The Commission believes that programming of those Participants’ Statement of the Terms of Substance of
the proposal, which is intended to respective systems to automatically the Proposed Rule Change
deemphasize speed advantages during initiate and participate in SNAP Cycles, FINRA is proposing to merge its
the SNAP Cycle, is reasonably designed and that the proposed simplification of dispute resolution subsidiary, FINRA
to help promote just and equitable the minimum size requirements is Dispute Resolution, Inc. (‘‘FINRA
principles of trade and remove designed to address those concerns.86 Dispute Resolution’’) into and with its
impediments and perfect the The Commission finds that Amendment regulatory subsidiary, FINRA
mechanisms of a free and open market. No. 1 is consistent with the protection Regulation, Inc. (‘‘FINRA Regulation’’).
The Commission believes that the SNAP of investors and the public interest, and To implement the merger, FINRA would
may encourage competition among notes that the Commission solicited make conforming amendments to the
trading venues, which may inure to the comments regarding Amendment No. 1 Plan of Allocation and Delegation of
benefit of investors. and no comments have been received.87 Functions by NASD to Subsidiaries
For the above reasons, the Accordingly, the Commission finds (‘‘Delegation Plan’’); amend the By-Laws
Commission finds that the proposed good cause, pursuant to section 19(b)(2) of FINRA Regulation (‘‘FINRA
rule change, as modified by Amendment of the Act,88 to approve the proposed Regulation By-Laws’’) to make relevant
No. 1, is consistent with the rule change, as modified by Amendment conforming amendments and to
requirements of the Act. No. 1, on an accelerated basis. incorporate substantive provisions from
IV. Accelerated Approval of Proposed VI. Conclusion the By-Laws of FINRA Dispute
Rule Change, as Modified by Resolution (‘‘FINRA Dispute Resolution
Amendment No. 1 It is therefore ordered that, pursuant By-Laws’’) that apply to the dispute
to section 19(b)(2) of the Act,89 the resolution forum only; delete the FINRA
The Commission finds good cause to proposed rule change, as modified by
approve the proposed rule change, as Dispute Resolution By-Laws in their
Amendment No. 1, (SR–CHX–2015–03) entirety; and make conforming
modified by Amendment No. 1, prior to be, and hereby is, approved on an
the 30th day after the date of amendments to FINRA rules.3 The
accelerated basis. proposed rule change would also amend
publication of notice of Amendment No.
1 in the Federal Register.85 In For the Commission, by the Division of the FINRA Regulation By-Laws to
Trading and Markets, pursuant to delegated increase the total number of directors
Amendment No. 1, the Exchange authority.90
proposes to amend the minimum size who could serve on the FINRA
Robert W. Errett, Regulation board. FINRA’s existing
requirements for the following: (1) Limit
Deputy Secretary. dispute resolution program would
orders marked Start SNAP for securities
that do not have a special minimum size [FR Doc. 2015–25886 Filed 10–9–15; 8:45 am] continue to operate as a separate
requirement; and (2) SNAP AOOs for BILLING CODE 8011–01–P department within FINRA Regulation,
securities that do not have a special and would be referred to as the Office
minimum size requirement. With of Dispute Resolution.
respect to Start SNAP orders, the SECURITIES AND EXCHANGE The text of the proposed rule change
Exchange proposes to replace the COMMISSION is available on FINRA’s Web site at
previously proposed tier-based [Release No. 34–76082; File No. SR–FINRA– http://www.finra.org, at the principal
minimum size requirements with a 2015–034] office of FINRA and at the
requirement that a Start SNAP order be Commission’s Public Reference Room.
for at least: (1) 2,500 shares and have a Self-Regulatory Organizations;
minimum aggregate notional value of Financial Industry Regulatory 1 15 U.S.C. 78s(b)(1).
$250,000; or (2) 20,000 shares with no Authority, Inc.; Notice of Filing of a 2 17 CFR 240.19b–4.
minimum aggregate notional value Proposed Rule Change To Merge 3 The current FINRA rulebook consists of: (1)
FINRA Dispute Resolution, Inc. Into FINRA Rules; (2) NASD Rules; and (3) rules
requirement. With respect to SNAP incorporated from New York Stock Exchange LLC
AOOs, the Exchange also proposes to and With FINRA Regulation, Inc. (‘‘NYSE’’) (‘‘Incorporated NYSE Rules’’) (together,
replace the previously proposed tier- the NASD Rules and Incorporated NYSE Rules are
October 6, 2015. referred to as the ‘‘Transitional Rulebook’’). While
mstockstill on DSK4VPTVN1PROD with NOTICES
Pursuant to section 19(b)(1) of the the NASD Rules generally apply to all FINRA
of Regulation SHO in connection with certain
SNAP processes. See supra note 68.
Securities Exchange Act of 1934 members, the Incorporated NYSE Rules apply only
to those members of FINRA that are also members
83 See Notice, supra note 7, 80 FR at 54347.
86 See of the NYSE (‘‘Dual Members’’). The FINRA Rules
84 See id. Amendment No. 1 at pgs. 3–4.
87 See
apply to all FINRA members, unless such rules
85 As mentioned above, Amendment No. 1 was Notice, supra note 7. have a more limited application by their terms. For
88 15 U.S.C. 78s(b)(2).
published for comment in the Federal Register on more information about the rulebook consolidation
89 15 U.S.C. 78s(b)(2).
September 9, 2015. Accordingly, the 30th day after process, see Information Notice, March 12, 2008
publication of the Notice is October 9, 2015. 90 17 CFR 200.30–3(a)(12). (Rulebook Consolidation Process).
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II. Self-Regulatory Organization’s reorganized as a parent corporation with the dispute resolution forum, its
Statement of the Purpose of, and two operating subsidiaries: The Nasdaq corporate governance 9 or oversight.
Statutory Basis for, the Proposed Rule Stock Market, Inc. (‘‘Nasdaq’’), which The proposed merger would align the
Change was charged with operating the Nasdaq legal structure with the public’s
In its filing with the Commission, market, and NASD Regulation, Inc. perception of FINRA as well as its
FINRA included statements concerning (‘‘NASD Regulation’’), focused on operational realities. From the public’s
the purpose of and basis for the regulatory and investor protection perspective, FINRA, Inc., FINRA
proposed rule change and discussed any issues. At the time of the reorganization, Regulation and FINRA Dispute
comments it received on the proposed the Arbitration Department was placed Resolution have the appearance of a
rule change. The text of these statements within NASD Regulation. The name of single organization. FINRA’s Annual
may be examined at the places specified the Arbitration Department was Report is a consolidated report that
in Item IV below. FINRA has prepared subsequently changed to the Office of includes all FINRA operations, and all
summaries, set forth in sections A, B, Dispute Resolution (‘‘ODR’’) to reflect press releases and communications are
and C below, of the most significant the broader range of dispute resolution issued by FINRA.
aspects of such statements. services provided.5 Operationally, the three corporate
entities largely function as a single
A. Self-Regulatory Organization’s In 1999, NASD decided to move ODR organization. The entities share many
Statement of the Purpose of, and into a separate subsidiary, NASD administrative and support functions
Statutory Basis for, the Proposed Rule Dispute Resolution, Inc., that would including, for example, Corporate
Change focus solely on administering its dispute Communications and Government
1. Purpose resolution program, which it believed Relations, Corporate Real Estate and
would further strengthen the Corporate Security, Finance and
FINRA is proposing to merge FINRA independence and credibility of the
Dispute Resolution into FINRA Purchasing, Human Resources, Internal
arbitration and mediation functions. Audit, Legal, Meetings and Travel,
Regulation. To undertake the merger, NASD believed that the new dispute
FINRA would make conforming Office of the Corporate Secretary, Office
resolution subsidiary would benefit of the Ombudsman and Technology.
amendments to the Delegation Plan, from the perception that it was separate
amend the FINRA Regulation By-Laws These integrated functions promote
and distinct from other corporate efficient operations and conserve
to incorporate substantive and unique
entities.6 In 2000, the NASD began a financial resources. In addition, the
provisions from the FINRA Dispute
restructuring process to separate Nasdaq operational cohesiveness furthers
Resolution By-Laws and to make other
from NASD. The separation of Nasdaq FINRA’s mission of protecting investors.
conforming amendments, delete the
FINRA Dispute Resolution By-Laws in from NASD was completed in 2006.7 FINRA Dispute Resolution staff, for
their entirety, and make conforming FINRA 8 believes there is no longer a example, works with the Department of
amendments to FINRA rules. The need to maintain separate subsidiaries Enforcement to identify misconduct by
proposed rule change would also amend to execute its regulatory and dispute individuals or firms involved in
the FINRA Regulation By-Laws to resolution functions. The proposed arbitration cases that could justify
increase the total number of directors merger would align the corporate legal further action.
who could serve on the FINRA structure with current public perception There are also significant shared
Regulation board in order to provide and organizational practice. It would resources across entities in the areas of
additional flexibility to meet the also reduce unnecessary administrative corporate governance and funding. With
compositional requirements under the burdens required to maintain separate respect to governance, members of the
FINRA Regulation By-Laws. legal entities. Finally, while the FINRA Board’s Regulatory Policy
proposed rule change would change Committee currently serve as the
I. Background directors of the boards of both FINRA
FINRA Dispute Resolution’s corporate
Prior to 1996, the National Regulation and FINRA Dispute
status, it would not affect the services
Association of Securities Dealers, Inc. Resolution.10 Regarding funding, FINRA
and benefits provided by or costs to use
(‘‘NASD’’) Arbitration Department Dispute Resolution is not self-
operated the NASD’s arbitration and supporting and fees received from
Exchange Act Release No. 41971 (September 30,
mediation programs. In 1996, upon the 1999), 64 FR 55793, 55794 (October 14, 1999)
parties who use the arbitration and
combined recommendations of two (Order Approving File No. SR–NASD–99–21). mediation programs are not sufficient to
committees (the ‘‘Ruder Task Force’’ 5 See Securities Exchange Act Release No. 41971 fund the forum’s arbitration and
and the ‘‘Rudman Committee’’) formed (September 30, 1999), 64 FR 55793, 55794 (October mediation activities. Under the
14, 1999) (Order Approving File No. SR–NASD–99– proposed merger, to supplement the fees
by the NASD of individuals with 21).
significant securities industry and 6 See supra note 5. collected from forum users, FINRA
NASD governance experience,4 NASD 7 On November 21, 2006, the SEC approved the would continue to allocate revenues, as
separation of Nasdaq from NASD upon the
4 In September 1994, the NASD established the operation of the Nasdaq Exchange as a national 9 The proposed rule change would amend the
Ruder Task Force to study NASD arbitration and securities exchange for non-Nasdaq exchange-listed FINRA Regulation corporate governance structure
recommend improvements. The Ruder Task Force securities. See Securities Exchange Act Release No. to add two board seats. See discussion under
issued a report recommending, among other things, 54798 (November 21, 2006), 71 FR 69156 section II.B., Proposed Rule Change, Amendments
that the dispute resolution program be housed (November 29, 2006) (Order Approving File No. to the FINRA Regulation By-Laws, Article IV Board
either in the NASD parent or in NASD Regulation. SR–NASD–2006–104). of Directors, Number of Directors, infra pages 44–
mstockstill on DSK4VPTVN1PROD with NOTICES
See The Arbitration Policy Task Force Report—A 8 On July 30, 2007, NASD and NYSE consolidated 45 [sic].
Report Card at 26, available on FINRA’s Web site their member firm regulation, enforcement and 10 See Securities Exchange Act Release No. 61575
at: http://www.finra.org/sites/default/files/Industry/ dispute resolution operations into a combined (February 23, 2010), 75 FR 9459, 9460 (March 2,
p036466.pdf. Subsequently, [sic] the Rudman organization, FINRA. See Securities Exchange Act 2010) (Notice of Filing File No. SR–FINRA–2010–
Committee recommended that the Arbitration Release No. 56145 (July 26, 2007), 72 FR 42169 007). Both boards consist of a majority of public
Department be placed in NASD Regulation. See (August 1, 2007), as amended by Securities directors. See By-Laws of FINRA Dispute
Report of the NASD Select Committee on Structure Exchange Act Release No. 56145A (May 30, 2008), Resolution, Inc., Article IV, Section 4.3(a) and By-
and Governance to the NASD Board of Governors 73 FR 32377 (June 6, 2008) (Order Approving File Laws of FINRA Regulation, Inc., Article IV, Section
(‘‘Rudman Report’’) at R–8. See also Securities No. SR–NASD–2007–023). 4.3(a).
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![Federal Register / Vol. 80, No. 197 / Tuesday, October 13, 2015 / Notices 61547
necessary, from the overall FINRA an all-public arbitrator panel, uses an I. [sic] Proposed Rule Change
enterprise, which would include investor-friendly discovery guide, and FINRA is proposing to merge FINRA
revenue derived from member offers 71 hearing locations, including at Dispute Resolution into FINRA
assessments, various fees and charges, least one in every state, Puerto Rico and Regulation. FINRA would make
and disciplinary fines with some London, United Kingdom. Also, FINRA conforming amendments to the
exceptions. has the authority to suspend or cancel Delegation Plan, amend the FINRA
In addition to aligning the corporate the membership of firms and suspend Regulation By-Laws to incorporate
structure with operational realities, the registered representatives who fail to substantive and unique provisions from
proposed merger would reduce the pay arbitration awards or agreed-upon the FINRA Dispute Resolution By-Laws
considerable administrative duplication settlements.12 Further, FINRA Dispute and to make other conforming
associated with maintaining the three Resolution continuously recruits amendments, delete the FINRA Dispute
distinct corporate entities. From a qualified individuals to improve its Resolution By-Laws, and make
regulatory perspective, the three arbitrator and mediator rosters, while conforming amendments to FINRA
corporate entities have separate closely monitoring and evaluating the rules. The proposed rule change would
reporting requirements and Federal and performance of existing arbitrators and also amend the FINRA Regulation By-
state taxes, and are, therefore, treated as mediators. These benefits and services, Laws to increase the total number of
individual entities.11 By merging FINRA among others, would not be disrupted directors who could serve on the FINRA
Dispute Resolution into FINRA by the merger. Regulation board.
Regulation, FINRA would eliminate the
need to file numerous tax filings each Similarly, the merger would not have A. Conforming Amendments to the
year, including multiple state tax and a practical impact on corporate Delegation Plan
information returns, sales tax returns governance involving FINRA Dispute FINRA is proposing to make
(including some monthly and quarterly Resolution. Members of the FINRA conforming amendments throughout the
filings), property tax returns, and many Board’s Regulatory Policy Committee Delegation Plan to remove references to
state registrations and annual reports. currently serve as the directors of both ‘‘NASD’’ and ‘‘Rules of the Association’’
Moreover, merging the two subsidiaries the FINRA Regulation and FINRA and replace them with references to
would eliminate a separate payroll Dispute Resolution boards.13 The ‘‘FINRA’’ and ‘‘FINRA rules,’’
entity, which would remove the need FINRA Regulation board would respectively.19 In addition, the proposed
for separate compensation and benefit continue to consist of a majority of rule change would change the word
accounting protocols. Thus, a merger of public board members.14 In addition, ‘‘subsidiaries’’ or ‘‘subsidiary’’ to
the subsidiaries would allow FINRA to FINRA would maintain the National ‘‘FINRA Regulation’’ to indicate that
lower FINRA’s expenses and more Arbitration and Mediation Committee FINRA Regulation would remain at the
efficiently use staff resources. (‘‘NAMC’’), which is a Board-appointed conclusion of the merger. Finally,
Although a merger between FINRA advisory committee on arbitration FINRA is proposing to remove
Dispute Resolution and FINRA matters.15 Non-industry members would references to section III, the section of
Regulation would change FINRA continue to compose at least 50 percent the Delegation Plan that pertains to
Dispute Resolution’s corporate status, it of the NAMC.16 FINRA Dispute Resolution, as that
would not affect the services and section will no longer exist following
Moreover, the dispute resolution
benefits provided by or the costs to use the merger.
forum would continue to be subject to
the dispute resolution forum, its Section I—FINRA, Inc.
the same SEC oversight as other
corporate governance or oversight. Over
departments of FINRA, which would Section I of the Delegation Plan
the past 15 years, FINRA, as a single
include the requirement to file all By- provides responsibility for the rules and
organization, has operated the largest
Law and rule changes with the SEC. regulations of the Association and its
securities dispute resolution forum in
Thus, the arbitration program and operation and administration to FINRA,
the world—through its arbitration and
services would continue to be governed Inc. Under section I(B), the proposed
mediation services—to assist in the
by the Codes of Arbitration Procedure,17 rule change would remove subsections
resolution of monetary and business
and the mediation program and services 5 and 6 because they refer to actions
disputes between and among investors,
brokerage firms and individual brokers. by the Code of Mediation Procedure.18 taken between FINRA Regulation and
FINRA’s Dispute Resolution program Further, the forum would continue to be FINRA Dispute Resolution. The
provides investors and markets with a subject to inspections by the SEC and by remaining subsections would be re-
fair, efficient and economical alternative the Government Accountability Office, numbered. In re-numbered subsection 5,
to costly and complex litigation which performs audits at the request of FINRA is proposing to remove the word
programs, which are often cost- the United States Congress. ‘‘common,’’ as FINRA Regulation would
prohibitive for investors with small no longer share overhead and
claims.
12 See By-Laws of the Corporation, Article VI, technology with FINRA Dispute
The FINRA Dispute Resolution
section 3 and Rule 9554. Resolution as a separate subsidiary. In
13 See Securities Exchange Act Release No. 61575
program has several features that re-numbered subsection 6, FINRA is
(February 23, 2010), 75 FR 9459, 9460 (March 2,
distinguish it from other private 2010) (Notice of Filing File No. SR–FINRA–2010–
proposing to change the reference to the
arbitration forums and further promote 007). Office of Internal Review to the Office
investor protection and market integrity. 14 See By-Laws of FINRA Dispute Resolution, of Internal Audit to reflect a name
mstockstill on DSK4VPTVN1PROD with NOTICES
For example, the forum charges
Inc., Article IV, section 4.3(a) and By-Laws of change.
FINRA Regulation, Inc., Article IV, section 4.3(a). In section I(D), the proposed rule
significantly lower arbitration fees for 15 See Rules 12102 and 13102. See also section
investors, gives investors the choice of III(C) of the Delegation Plan. FINRA is proposing to
change would replace the reference to
transfer current section III(C)(1) of the Delegation ‘‘4000A’’ with ‘‘6200,’’ to reflect the
11 For example, by maintaining separate entities, Plan into section II(C) of the Delegation Plan. transfer and re-numbering of the rule
16 See supra note 15.
FINRA has been required to submit separate
17 See Rule 12000 and 13000 Series.
payroll, tax, and compliance filings for each 19 ‘‘FINRA rules’’ means the current FINRA
corporate entity in many states. 18 See Rule 14000 Series. rulebook. See supra notes 3 and 8.
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in the process, would make the demonstrates its commitment to communications relating to the
organization and its departments more providing a dispute resolution forum proposed rule change between the
efficient. The efficient use of resources that remains accessible to investors, Commission and any person, other than
enables FINRA to focus on its mission because the benefits and services those that may be withheld from the
of investor protection. provided by the dispute resolution public in accordance with the
FINRA emphasizes that the proposed forum would continue unabated. provisions of 5 U.S.C. 552, will be
rule change would not affect the available for Web site viewing and
benefits and services provided to public C. Self-Regulatory Organization’s printing in the Commission’s Public
investors by the dispute resolution Statement on Comments on the Reference Room, 100 F Street NE.,
forum or the costs of any party to use Proposed Rule Change Received From Washington, DC 20549 on official
the dispute resolution forum. FINRA Members, Participants, or Others business days between the hours of
believes that the proposed rule change Written comments were neither 10:00 a.m. and 3:00 p.m. Copies of such
reflects its continued commitment to solicited nor received. filing also will be available for
providing an effective forum for the inspection and copying at the principal
III. Date of Effectiveness of the
resolution of disputes, claims, and office of FINRA. All comments received
controversies arising out of or in Proposed Rule Change and Timing for
will be posted without change; the
connection with the business of FINRA Commission Action
Commission does not edit personal
members, or arising out of the Within 45 days of the date of identifying information from
employment or termination of publication of this notice in the Federal submissions. You should submit only
employment of associated persons with Register or within such longer period information that you wish to make
any member. In addition, FINRA up to 90 days (i) as the Commission may available publicly. All submissions
believes that increasing the maximum designate if it finds such longer period should refer to File Number SR–FINRA–
number of FINRA Regulation board to be appropriate and publishes its 2015–034, and should be submitted on
seats from 15 to 17 would provide it reasons for so finding or (ii) as to which or before November 3, 2015.
with additional flexibility to manage its the self-regulatory organization For the Commission, by the Division of
board committee assignments and meet consents, the Commission will: Trading and Markets, pursuant to delegated
the compositional requirements under (A) by order approve or disapprove authority.40
the FINRA Regulation By-Laws, such proposed rule change, or Robert W. Errett,
continuing to assure fair representation (B) institute proceedings to determine Deputy Secretary.
of FINRA’s members and maintaining whether the proposed rule change
[FR Doc. 2015–25861 Filed 10–9–15; 8:45 am]
the numerical dominance of public should be disapproved.
BILLING CODE 8011–01–P
directors. Thus, FINRA believes that the IV. Solicitation of Comments
reorganization and its continued
commitment to dispute resolution Interested persons are invited to
submit written data, views, and SECURITIES AND EXCHANGE
would ensure that FINRA continues to COMMISSION
protect investors and the public interest arguments concerning the foregoing,
in an efficient manner. including whether the proposed rule [SEC File No. 270–789, OMB Control No.
change is consistent with the Act. 3235–XXXX]
B. Self-Regulatory Organization’s Comments may be submitted by any of
Statement on Burden on Competition the following methods: Submission for OMB Review;
FINRA does not believe that the Comment Request
Electronic Comments
proposed rule change will result in any Upon Written Request Copies Available
burden on competition that is not • Use the Commission’s Internet From: U.S. Securities and Exchange
necessary or appropriate in furtherance comment form (http://www.sec.gov/ Commission, Office of FOIA Services,
of the purposes of the Act. FINRA rules/sro.shtml); or 100 F Street NE., Washington, DC
believes that the proposed merger of its • Send an email to rule-comments@ 20549–2736.
two subsidiaries would align FINRA’s sec.gov. Please include File Number SR–
FINRA–2015–034 on the subject line. New Generic ICR:
corporate organizational structure with
Generic Clearance for the Collection of
its current organizational practice. The Paper Comments Qualitative Feedback on Agency Service
proposed rule change would allow Delivery.
FINRA to eliminate duplicative tax and • Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities ACTION: 30-Day notice of submission of
regulatory filings, which, in turn, would information collection approval from
reduce its administrative costs and the and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090. the Office of Management and Budget
resources spent generating and and request for comments.
submitting these filings. Moreover, the All submissions should refer to File
proposed rule change would allow Number SR–FINRA–2015–034. This file SUMMARY: As part of a Federal
FINRA to streamline its procedures and number should be included on the Government-wide effort to streamline
re-allocate staff and financial resources subject line if email is used. To help the the process to seek feedback from the
to other areas, thereby enhancing the Commission process and review your public on service delivery, the
efficient operation of the corporation. comments more efficiently, please use Securities and Exchange Commission
While the proposed rule change only one method. The Commission will has submitted a Generic Information
mstockstill on DSK4VPTVN1PROD with NOTICES
would alter FINRA Dispute Resolution’s post all comments on the Commission’s Collection Request (Generic ICR):
corporate status, it would not affect the Internet Web site (http://www.sec.gov/ ‘‘Generic Clearance for the Collection of
dispute resolution program in any rules/sro.shtml). Copies of the Qualitative Feedback on Agency Service
substantive way. As discussed above, it submission, all subsequent Delivery’’ to OMB for approval under
would not affect the services and amendments, all written statements the Paperwork Reduction Act (PRA) (44
benefits provided by or the costs to use with respect to the proposed rule U.S.C. 3501 et. seq.).
the dispute resolution forum. FINRA change that are filed with the
believes that the proposed rule change Commission, and all written 40 17 CFR 200.30–3(a)(12).
VerDate Sep<11>2014 21:23 Oct 09, 2015 Jkt 238001 PO 00000 Frm 00218 Fmt 4703 Sfmt 4703 E:\FR\FM\13OCN1.SGM 13OCN1](https://thefederalregister.org/doc/80_FR_61742/page/7.svg)
Document Created: 2018-02-27 08:48:07
Document Modified: 2018-02-27 08:48:07
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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