SR-FINRA-2017-025

Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to amend FINRA Rule 12100 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and FINRA Rule 13100 of the Code of Arbitration Procedure for Industry Disputes (“Industry Code” and together, “Codes”), to define a non-public arbitrator to mean a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator under the Codes.

43436 Federal Register / Vol. 82, No. 178 / Friday, September 15, 2017 / Notices 25 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Exchange Act Release No. 81196 (July 24, 2017), 82 FR 35248 (July 28, 2017) (File No. SR– FINRA–2017–025) (‘‘Notice’’). 4 See Letters from Steven B. Caruso, Maddox Hargett Caruso, P.C., dated July 24, 2017 (‘‘Caruso Letter’’); Glenn S. Gitomer, McCausland Keen + Buckman, dated August 14, 2017 (‘‘Gitomer Letter’’); Jill Gross, Professor of Law and Former Director, and Elissa Germaine, Supervising Attorney, Adjunct Professor of Law, and Director, Pace Law School’s Investor Rights Clinic, dated August 17, 2017 (‘‘Pace Letter’’); Marnie C. Lambert, President, Public Investors Arbitration Bar Association (‘‘PIABA’’), dated August 18, 2017 (‘‘PIABA Letter’’). Comment letters are available at https://www.sec.gov. 5 See Letter from Margo A. Hassan, Associate Chief Counsel, FINRA, to Brent J. Fields, Secretary, U.S. Securities and Exchange Commission, dated August 30, 2017 (‘‘FINRA Letter’’). The FINRA Letter is available on FINRA’s Web site at http:// www.finra.org, at the principal office of FINRA, at the Commission’s Web site at https://www.sec.gov, and at the Commission’s Public Reference Room. 6 The subsequent description of the proposed rule change is substantially excerpted from FINRA’s description in the Notice. See Notice, 82 FR at 35249. 7 See FINRA Rules 12100(r) and 13100(r). 8 See FINRA Rules 12100(y) and 13100(x). 9 See Exchange Act Rel. No. 74383 (Feb. 26, 2015), 80 FR 11695 (Mar. 4, 2015) (File No. SR– FINRA–2014–028) (‘‘2015 Order’’). 10 See id. (stating that ‘‘the intent of the proposed rule change was to address concerns about arbitrator neutrality raised by forum users’’). 11 See 2015 Order. 12 Unless waived by FINRA at its discretion, arbitrator applicants must have a minimum of five years of paid business and/or professional experience and at least two years of college-level credits. Qualification criteria can be found at http:// www.finra.org/arbitration-and-mediation/finra- arbitrators. See Notice, 82 FR at note 6. 13 See Notice, 82 FR at 35249. 14 Id. 15 Id. 16 See supra note 4. 17 Id. available publicly. All submissions should refer to File Number SR– NYSEAMER–2017–13, and should be submitted on or before October 6, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–19584 Filed 9–14–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81572; File No. SR–FINRA– 2017–025] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to the Definition of Non-Public Arbitrator September 11, 2017. I. Introduction On July 10, 2017, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend FINRA Rule 12100 of the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and FINRA Rule 13100 of the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code’’ and, together with the Customer Code, ‘‘Codes’’). The proposed rule change would permit any person who is disqualified from service as a public arbitrator, but otherwise qualified to serve as an arbitrator, to serve as a non-public arbitrator. The proposed rule change was published for comment in the Federal Register on July 28, 2017. 3 The public comment period closed on August 18, 2017. The Commission received four comment letters in response to the Notice, all of which supported the proposed rule change. 4 On August 30, 2017, FINRA responded to the comment letters received in response to the Notice. 5 This order approves the proposed rule change. II. Description of the Proposed Rule Change 6 FINRA classifies arbitrators under the Codes as either ‘‘non-public’’ or ‘‘public.’’ The non-public arbitrator definition lists affiliations that might qualify a person to serve as a non-public arbitrator at the forum. 7 Conversely, the public arbitrator definition describes criteria that disqualify an applicant from inclusion on the public arbitrator roster. 8 In 2015, the Commission approved amendments to the definitions of non- public arbitrator and public arbitrator in the Codes (‘‘2015 amendments’’). 9 Among other things, the 2015 amendments: (i) Provided that persons who worked in the financial industry for any duration during their careers would always be classified as non- public arbitrators; (ii) added new disqualifications to the public arbitrator definition relating to an arbitrator’s provision of services to parties in securities arbitration and litigation and to revenues earned from the financial industry by an arbitrator’s co-workers; and (iii) broadened the disqualifications to the public arbitrator definition based on the activities or affiliations of an arbitrator’s family members. 10 Under the definitions as revised by the 2015 amendments, the non-public arbitrator roster is composed of individuals who work, or worked, in the financial industry, or provide services to the financial industry or to parties engaged in securities arbitration and litigation. The public arbitrator roster is composed of individuals who do not have any significant affiliation with the financial industry. The public arbitrators have never been employed by the financial industry, do not provide services to the financial industry or to parties engaged in securities arbitration and litigation, and do not have immediate family members or co- workers who do so. 11 However, FINRA believes that the 2015 amendments to the arbitrator definitions also created an ‘‘eligibility gap’’ whereby certain otherwise qualified arbitrators 12 could not serve in any capacity. For example, FINRA states that over 800 public arbitrators were disqualified from the public arbitrator roster under the revised public arbitrator definition. More than 100 of these disqualified arbitrators did not meet any of the criteria outlined in the non-public arbitrator definition for service on the non-public arbitrator roster. Accordingly, FINRA completely removed them from its arbitrator rosters. 13 In addition, FINRA stated that due to the 2015 amendments it had to reject over 140 arbitrator applicants in 2016 who otherwise met FINRA’s minimum arbitrator qualifications. 14 Therefore, FINRA is proposing to amend Rules 12100(r) in the Customer Code and 13100(r) in the Industry Code to delete the specific criteria for inclusion on the non-public arbitrator roster. Specifically, the proposed rule would provide that the term ‘‘non- public arbitrator’’ means a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator. Accordingly, the proposed rule change would allow FINRA to appoint individuals who cannot be classified as public arbitrators to the non-public arbitrator roster if they meet FINRA’s general arbitrator qualification criteria. 15 III. Comment Summary As noted above, the Commission received four comment letters on the proposed rule change, all of which supported the proposal. 16 All four commenters believe that the proposal would expand the pool of arbitrators and provide greater choice of non- public arbitrators for parties during the panel selection process. 17 One VerDate Sep<11>2014 17:07 Sep 14, 2017 Jkt 241001 PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 E:\FR\FM\15SEN1.SGM 15SEN1mstockstill on DSK30JT082PROD with NOTICES

43437 Federal Register / Vol. 82, No. 178 / Friday, September 15, 2017 / Notices 18 Caruso Letter. 19 Pace Letter. 20 PIABA Letter. 21 PIABA Letter; see also Pace Letter. 22 See supra note 8. 23 Pace Letter. 24 See FINRA Letter; see also Notice at 82 FR 35249 (stating that the intent of the proposed rule change was to address concerns about arbitrator neutrality raised by forum users. For example, ‘‘prior to the 2015 amendments, the Codes, with specified exceptions, permitted former financial industry employees who ended their industry affiliations to qualify as public arbitrators five years after leaving the financial industry. Forum users raised concerns about the neutrality of these individuals, and indicated that they did not believe former industry employees should ever serve as public arbitrators. In response to these concerns, the 2015 amendments eliminated the five-year cooling- off period, thereby classifying all former financial industry employees as non-public arbitrators’’). 25 See PIABA Letter. 26 See supra note 12. 27 PIABA Letter. 28 See id. 29 The Neutral Roster Subcommittee of the National Arbitration and Mediation Committee. 30 See FINRA Letter. 31 Id. 32 See PIABA Letter. 33 PIABA Letter. 34 See PIABA Letter. 35 PIABA Letter. 36 Id. 37 FINRA Letter. 38 Id. 39 See FINRA Letter. 40 See FINRA Letter (stating that ‘‘[FINRA r]ecruitment efforts since July 2015 added approximately 596 arbitrators to the public arbitrator roster.... FINRA’s latest arbitrator demographic survey . . . showed that FINRA had particular success in adding women and African- Americans to the roster. In 2016, 33 percent of the arbitrators added were women and 14 percent were African-American. This represents an important improvement from the 2015 survey results which showed that 26 percent of arbitrators added were women and four percent were African-American’’). 41 FINRA Letter at note 2. 42 In approving this rule change, the Commission has considered the rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 43 15 U.S.C. 78o–3(b)(6). commenter stated that the proposal represents ‘‘a fair, equitable and reasonable approach that would facilitate the fairness and efficiency of the participant experience in the FINRA arbitration forum.’’ 18 Another commenter stated that expanding the pool of available arbitrators ‘‘translates to greater party control over the process, [which] increases parties[’] perceptions of the fairness of the forum.’’ 19 Similarly, another commenter stated that ‘‘having as many qualified, fair, and neutral arbitrators as possible will help advance the integrity of the arbitration process.’’ 20 In addition to supporting the proposed rule change, two of these commenters also recommended additional changes to the FINRA arbitration forum designed to ‘‘ensure a fair and efficient arbitration pool.’’ 21 One commenter recommended that FINRA consider simplifying the definition of ‘‘public arbitrator’’ 22 in the Codes, which the commenter thinks is ‘‘also too complicated.’’ 23 In its response, FINRA stated that in 2016 it did reconsider its definition of ‘‘public arbitrator’’ in the Codes but determined not to change it. 24 The second commenter recommended that FINRA amend its policies to lower or eliminate certain educational requirements for individuals to become arbitrators. 25 Currently, unless waived, by FINRA, arbitrators must have at least two years of college-level credits in order to become an arbitrator. 26 The commenter believes that ‘‘[w]hether someone has taken college-level courses does not necessarily mean that such person cannot grasp the concepts being discussed and considered during the arbitration process.’’ 27 Alternatively, the commenter thinks that one’s ability to understand and pass FINRA’s arbitrator training course is sufficient to qualify as an arbitrator. 28 In its response, FINRA highlighted that it has authority to waive the educational requirement in light of, for example, a candidate’s number of years of employment and type of employment (e.g., his or her field of employment and his or her positions held). Notwithstanding its discretion to waive the education requirement, FINRA consulted the subcommittee responsible for reviewing the

35248 Federal Register / Vol. 82, No. 144 / Friday, July 28, 2017 / Notices 48 15 U.S.C. 78q–1(b)(3)(F). 49 17 CFR 240.17Ad–22(e)(4). 50 15 U.S.C. 78q–1(b)(3)(F). 51 17 CFR 240.17Ad–22(e)(4). 52 17 CFR 200.30–3(a)(57). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. instituting proceedings to allow for additional analysis of the Proposed Rule Changes’ consistency with the Act and the rules thereunder. Specifically, the Commission believes that the Proposed Rule Changes raise questions as to whether they are consistent with (i) Section 17A(b)(3)(F) of the Act, 48 which requires, in part, that clearing agency rules be designed to assure the safeguarding of securities in the custody or control of the clearing agency and, in general, protect investors and the public interest, and (ii) Rule 17Ad–22(e)(4) under the Act, which requires, in general, that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to, among other things, effectively identify, measure, monitor, and manage their credit exposures to participants and those arising from its payment, clearing, and settlement processes. 49 As discussed above, pursuant to the Proposed Rule Changes, Clearing Agencies would adopt the Framework, which would procedures for identifying, measuring, monitoring, and managing their credit exposures to members. The Commission solicits comment on whether the Proposed Rule Changes are consistent with Section 17A(b)(3)(F) of the Act 50 and Rule 17Ad–22(e)(4) under the Act.51 IV. Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to issues raised by the Proposed Rule Changes. In particular, the Commission invites the written views of interested persons concerning whether the Proposed Rule Changes are consistent with Sections 17A(b)(3)(F) of the Act and Rules 17Ad– 22(e)(4) under the Act, cited above, or any other provision of the Act, or the rules and regulations thereunder. Interested persons are invited to submit written data, views, and arguments on or before August 14, 2017. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal on or before August 18, 2017. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2017–002 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 Numbers SR–DTC–2017–005, SR–FICC– 2017–009, or SR–NSCC–2017–006. 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 Changes 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 filings also will be available for inspection and copying at the principal office of the Clearing Agencies and on DTCC’s Web site (http://dtcc.com/legal/ sec-rule-filings.aspx). 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 Numbers SR–DTC– 2017–005, SR–FICC–2017–009, or SR– NSCC–2017–006 and should be submitted on or before August 14, 2017. If comments are received, any rebuttal comments should be submitted on or before August 18, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.52 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–15905 Filed 7–27–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81196; File No. SR–FINRA– 2017–025] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to the Definition of Non-Public Arbitrator July 24, 2017. 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 10, 2017, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 12100 of the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and FINRA Rule 13100 of the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code’’ and together, ‘‘Codes’’), to define a non-public arbitrator to mean a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator under the Codes. 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. VerDate Sep<11>2014 18:50 Jul 27, 2017 Jkt 241001 PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 E:\FR\FM\28JYN1.SGM 28JYN1asabaliauskas on DSKBBXCHB2PROD with NOTICES

35249 Federal Register / Vol. 82, No. 144 / Friday, July 28, 2017 / Notices 3 See FINRA Rules 12100(r) and 13100(r) for the definition of non-public arbitrator and Rules 12100(y) and 13100(x) for the definition of public arbitrator. 4 See Securities Exchange Act Rel. No. 74383 (February 26, 2015), 80 FR 11695 (March 4, 2015). 5 Regulatory Notice 15–18 (Definitions of Non- Public and Public Arbitrator) describes the changes made to the arbitrator definitions. 6 Unless waived by FINRA at its discretion, arbitrator applicants must have a minimum of five years of paid business and/or professional experience and at least two years of college-level credits. Qualification criteria can be found at http:// www.finra.org/arbitration-and-mediation/finra- arbitrators. 7 See id. 8 15 U.S.C. 78o–3(b)(6). A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose FINRA classifies arbitrators under the Codes as either ‘‘non-public’’ or ‘‘public.’’ The Codes define these terms. 3 The non-public arbitrator definition lists affiliations that might qualify a person to serve as a non-public arbitrator at the forum. Conversely, the public arbitrator definition enumerates criteria that disqualify an applicant from inclusion on the public arbitrator roster. In 2015, the SEC approved amendments to the definitions of non- public arbitrator and public arbitrator in the Codes. 4 Among other things, the amendments provided that persons who worked in the financial industry for any duration during their careers would always be classified as non-public arbitrators and the amendments added new disqualifications to the public arbitrator definition relating to an arbitrator’s provision of services to parties in securities arbitration and litigation and to revenues earned from the financial industry by an arbitrator’s co-workers. The amendments also broadened the disqualifications based on the activities or affiliations of an arbitrator’s family members. The intent of the proposed rule change was to address concerns about arbitrator neutrality raised by forum users. 5 For example, prior to the 2015 amendments, the Codes, with specified exceptions, permitted former financial industry employees who ended their industry affiliations to qualify as public arbitrators five years after leaving the financial industry. Forum users raised concerns about the neutrality of these individuals, and indicated that they did not believe former industry employees should ever serve as public arbitrators. In response to these concerns, the 2015 amendments eliminated the five-year cooling-off period, thereby classifying all former financial industry employees as non-public arbitrators. Under the definitions as revised in 2015, the non-public arbitrator roster is composed of individuals who work, or worked, in the financial industry, or provide services to the financial industry or to parties engaged in securities arbitration and litigation. The public arbitrator roster is composed of individuals who do not have any significant affiliation with the financial industry. These arbitrators have never been employed by the industry, do not provide services to the industry or to parties engaged in securities arbitration and litigation, and do not have immediate family members or co- workers who do so. Eligibility Gap The 2015 amendments to the arbitrator definitions created an eligibility gap whereby certain otherwise qualified arbitrators 6 could not serve in any capacity. The eligibility gap was created when FINRA narrowed the public arbitrator definition as described above. Over 800 public arbitrators were disqualified from the public arbitrator roster under the revised public arbitrator definition. In addition, more than 100 of these disqualified arbitrators did not meet any of the criteria outlined in the non-public arbitrator definition for service on the non-public arbitrator roster. As a result of this eligibility gap, FINRA removed them from service at the forum. In most instances, the basis for removal from the roster was an affiliation relating to an arbitrator’s family members or co-workers. For example, a real estate attorney in a large law firm that has a securities practice would be disqualified from service as a public arbitrator if the firm derived $50,000 or more in a calendar year from providing services to securities entities. In addition, employment as a real estate attorney would not qualify the arbitrator to serve as a non-public arbitrator under the current definition. Therefore, the arbitrator falls into the eligibility gap. In addition to losing over 100 public arbitrators, the eligibility gap required FINRA to reject over 140 arbitrator applicants in 2016 who met FINRA’s minimum arbitrator qualifications. Proposed Rule Change FINRA is proposing to amend the Codes to allow FINRA to appoint individuals to the non-public arbitrator roster if they meet FINRA’s general arbitrator qualification criteria, 7 but cannot be classified as public arbitrators. FINRA would amend the non-public arbitrator definition to delete the specific criteria for inclusion on the non-public arbitrator roster. Instead, Rules 12100(r) and 13100(r) would provide that the term ‘‘non-public arbitrator’’