81 FR 46139 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a 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

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 136 (July 15, 2016)

Page Range		46139-46140
FR Document		2016-16720
Federal Register, Volume 81 Issue 136 (Friday, July 15, 2016)
[Federal Register Volume 81, Number 136 (Friday, July 15, 2016)]
[Notices]
[Pages 46139-46140]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-16720]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78279; File No. SR-FINRA-2016-022]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a 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

July 11, 2016.
    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 July 1, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Rule 12403 of the Code of Arbitration 
Procedure for Customer Disputes (``Code'') concerning customer cases 
with three arbitrators, to increase the number of public arbitrators on 
the list that FINRA sends parties during the arbitration panel 
selection process from 10 arbitrators to 15 arbitrators. FINRA would 
also increase the number of strikes that parties may make to the public 
list from four to six strikes to keep the proportion of strikes the 
same under the amended rule as it is under the current rule.
    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.

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

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

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

1. Purpose

Background

    FINRA 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 
FINRA Rule 12403(a), in customer cases with three arbitrators,\3\ FINRA 
sends the parties three lists: A list of 10 chair-qualified public 
arbitrators, a list of 10 public arbitrators, and a list of 10 non-
public arbitrators.\4\ The parties select their panel through a process 
of striking and ranking the arbitrators on the lists.\5\ Under Rule 
12403(c)(2), each party is allowed to strike up to four arbitrators on 
the chair-qualified public list and four arbitrators on the public 
list. At least six 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.
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    \3\ 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.
    \4\ 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.
    \5\ See FINRA Rule 12403(c) (Striking and Ranking Arbitrators).
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    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. Specifically, the Code provides that 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. 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. 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.

FINRA Dispute Resolution Task Force

    In 2014, FINRA formed the FINRA Dispute Resolution Task Force 
(``Task Force'') to suggest strategies to enhance the transparency, 
impartiality, and efficiency of FINRA's securities dispute resolution 
forum for all participants. The Task Force discussed panel selection in 
customer cases. During its discussions, the Task Force reviewed 
statistics on how often parties were striking all of the non-public 
arbitrators on the list. The data indicated that between September 30, 
2013 (the effective date of the rule change providing for all public 
panels) and January 16, 2015, claimants struck all non-public 
arbitrators in 69 percent of cases. Given the data on strikes, the Task 
Force concluded that in many cases, the parties are selecting the three 
public arbitrators from the 20 candidates appearing on the public 
lists. The Task Force recommended that in instances where parties 
collectively strike all the non-public arbitrators, FINRA should 
provide a new list of 10 public arbitrators to fill the third public 
arbitrator seat.

Proposed Rule Change

    FINRA agrees with the Task Force that FINRA should provide parties 
with greater choice of public arbitrators in cases with all public 
panels. However, if FINRA waits until the parties collectively strike 
all the non-public arbitrators from the list before it provides the 
parties with additional names of public arbitrators, the panel 
selection process is likely to take at least one additional month to 
complete. Also, FINRA is concerned about the additional time and 
expense the parties would incur in vetting an additional list of 10 
public arbitrators.
    To address the Task Force's recommendation without delaying the 
panel selection process, or unduly burdening the parties, 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 
10 to 15. In doing so, FINRA would provide greater choice of

[[Page 46140]]

public arbitrators during the panel selection process, and minimize the 
burden of vetting additional public arbitrators later in the process.
    FINRA is also proposing to amend Rule 12403(c)(2) to increase the 
number of strikes to the public arbitrator list from four to six, so 
that the proportion of strikes is the same under the amended rule as it 
is under the current rule. Task Force members felt strongly that 
parties wanted additional public arbitrators to choose from because 
they did not want FINRA to appoint lower ranked arbitrators to the 
panel. We are proposing to increase the number of strikes the parties 
can make to the newly increased public list to improve the likelihood 
that FINRA will appoint the parties' preferred arbitrators to the 
panel.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\6\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes the proposed rule change would protect 
investors and the public interest by providing greater choice during 
the panel selection process for the parties in all customer cases with 
three arbitrators.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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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. Current rules permit parties to 
an arbitration to strike a specified number of arbitrators from each 
list of arbitrators that FINRA sends them and require them to rank 
order the remaining arbitrators. The propensity to strike all non-
public arbitrators combined with the current rules for selecting the 
panel has led to concerns that panels may include a party's least 
preferred arbitrator, thereby diminishing a party's overall 
satisfaction with the arbitration process at the forum.
    To remedy this concern, FINRA proposes to expand the number of 
arbitrators on the public arbitrator list. The longer list will 
increase the parties' choice of arbitrators during the panel selection 
process, and will improve the likelihood that FINRA will appoint the 
parties' preferred arbitrators to the panel.
    Forum users are likely to incur costs in vetting the five 
additional public arbitrators on the list FINRA would send them. 
However, forum practitioners have indicated that they would willingly 
incur the additional expense in order to have greater choice in 
selecting arbitrators.

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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2016-022 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2016-022. 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 20549-1090, on official business days between the hours 
of 10 a.m. and 3 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-2016-022 and should be 
submitted on or before August 5, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16720 Filed 7-14-16; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices 46139

For the Commission, by the Division of II. Self-Regulatory Organization’s strike all of the arbitrators appearing on
Trading and Markets, pursuant to delegated Statement of the Purpose of, and the non-public list, FINRA returns to the
authority.20 Statutory Basis for, the Proposed Rule public list to select the next highest
Robert W. Errett, Change ranked available arbitrator to fill the
Deputy Secretary. In its filing with the Commission, seat. If no public arbitrators remain
[FR Doc. 2016–16725 Filed 7–14–16; 8:45 am] FINRA included statements concerning available to fill the vacancy, FINRA
returns to the chair-qualified public list
BILLING CODE 8011–01–P the purpose of and basis for the
to select the next highest ranked public
proposed rule change and discussed any
chair. In doing so, there is a likelihood
comments it received on the proposed
that FINRA will appoint an arbitrator
SECURITIES AND EXCHANGE rule change. The text of these statements
who the parties accepted, but ranked
COMMISSION may be examined at the places specified
lower on the public or chair-qualified
in Item IV below. FINRA has prepared
public lists.
[Release No. 34–78279; File No. SR–FINRA– summaries, set forth in sections A, B,
2016–022] and C below, of the most significant FINRA Dispute Resolution Task Force
aspects of such statements. In 2014, FINRA formed the FINRA
Self-Regulatory Organizations; A. Self-Regulatory Organization’s Dispute Resolution Task Force (‘‘Task
Financial Industry Regulatory Statement of the Purpose of, and Force’’) to suggest strategies to enhance
Authority, Inc.; Notice of Filing of a Statutory Basis for, the Proposed Rule the transparency, impartiality, and
Proposed Rule Change To Amend Rule Change efficiency of FINRA’s securities dispute
12403 (Cases With Three Arbitrators) resolution forum for all participants.
of the Code of Arbitration Procedure 1. Purpose The Task Force discussed panel
for Customer Disputes Relating to the Background selection in customer cases. During its
Panel Selection Process in Arbitration discussions, the Task Force reviewed
FINRA allows parties to participate in statistics on how often parties were
July 11, 2016. selecting the arbitrators who serve on striking all of the non-public arbitrators
Pursuant to Section 19(b)(1) of the their cases. Parties select their on the list. The data indicated that
Securities Exchange Act of 1934 arbitration panel from computer between September 30, 2013 (the
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 generated lists of arbitrators that FINRA effective date of the rule change
notice is hereby given that on July 1, sends them. Under FINRA Rule providing for all public panels) and
2016, Financial Industry Regulatory 12403(a), in customer cases with three January 16, 2015, claimants struck all
Authority, Inc. (‘‘FINRA’’) filed with the arbitrators,3 FINRA sends the parties non-public arbitrators in 69 percent of
Securities and Exchange Commission three lists: A list of 10 chair-qualified cases. Given the data on strikes, the
(‘‘Commission’’) the proposed rule public arbitrators, a list of 10 public Task Force concluded that in many
change as described in Items I, II, and arbitrators, and a list of 10 non-public cases, the parties are selecting the three
III below, which Items have been arbitrators.4 The parties select their public arbitrators from the 20
prepared by FINRA. The Commission is panel through a process of striking and candidates appearing on the public lists.
publishing this notice to solicit ranking the arbitrators on the lists.5 The Task Force recommended that in
comments on the proposed rule change Under Rule 12403(c)(2), each party is instances where parties collectively
from interested persons. allowed to strike up to four arbitrators strike all the non-public arbitrators,
on the chair-qualified public list and FINRA should provide a new list of 10
I. Self-Regulatory Organization’s four arbitrators on the public list. At public arbitrators to fill the third public
Statement of the Terms of Substance of least six names must remain on each arbitrator seat.
the Proposed Rule Change list. However, Rule 12403(c)(1) provides
for unlimited strikes on the non-public Proposed Rule Change
FINRA is proposing to amend Rule list so that any party may select a panel FINRA agrees with the Task Force
12403 of the Code of Arbitration of all public arbitrators in a customer that FINRA should provide parties with
Procedure for Customer Disputes case. greater choice of public arbitrators in
(‘‘Code’’) concerning customer cases When parties collectively strike all of cases with all public panels. However,
with three arbitrators, to increase the the non-public arbitrators from the list, if FINRA waits until the parties
number of public arbitrators on the list FINRA fills all three panel seats from collectively strike all the non-public
that FINRA sends parties during the the two 10-person lists of public arbitrators from the list before it
arbitration panel selection process from arbitrators. Specifically, the Code provides the parties with additional
10 arbitrators to 15 arbitrators. FINRA provides that when parties collectively names of public arbitrators, the panel
would also increase the number of selection process is likely to take at least
strikes that parties may make to the 3 See FINRA Rule 12401 which provides that if
one additional month to complete. Also,
public list from four to six strikes to the amount of a claim is more than $100,000, FINRA is concerned about the
keep the proportion of strikes the same exclusive of interest and expenses, or is
unspecified, or if the claim does not request money additional time and expense the parties
under the amended rule as it is under damages, the panel will consist of three arbitrators, would incur in vetting an additional list
the current rule. unless the parties agree in writing to one arbitrator. of 10 public arbitrators.
The text of the proposed rule change 4 Public arbitrators do not have an affiliation with
To address the Task Force’s
the financial industry. The non-public arbitrator recommendation without delaying the
sradovich on DSK3GMQ082PROD with NOTICES

is available on FINRA’s Web site at roster includes individuals who: (1) Are employed
http://www.finra.org, at the principal in the financial industry; (2) provide services to panel selection process, or unduly
office of FINRA and at the industry entities and their employees; or (3) devote burdening the parties, FINRA is
Commission’s Public Reference Room. a significant part of their business to representing proposing to amend Rule 12403(a)(1) to
or providing services to parties in disputes increase the number of arbitrators on the
concerning investments or employment
20 17 CFR 200.30–3(a)(12). relationships. public arbitrator list FINRA sends the
1 15 U.S.C. 78s(b)(1). 5 See FINRA Rule 12403(c) (Striking and Ranking parties from 10 to 15. In doing so,
2 17 CFR 240.19b–4. Arbitrators). FINRA would provide greater choice of

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Document Created: 2016-07-15 02:53:02
Document Modified: 2016-07-15 02:53:02
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 46139