Daily Rules, Proposed Rules, and Notices of the Federal Government
FINRA is proposing to amend the By-Laws of FINRA Dispute Resolution, Inc. (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.
The text of the proposed rule change is available on FINRA's Web site at
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.
FINRA believes that mediators who are otherwise qualified should be eligible to become Public Members of the National Arbitration and Mediation Committee (NAMC), a committee appointed by the Board of Directors of FINRA Dispute Resolution, Inc. (FINRA DR). Currently, they cannot because of the definitions of Industry Member
In a FINRA mediation, all parties agree on the selection of a mediator, agree on the compensation of the mediator, and agree on how to allocate the mediator's compensation among the parties. Thus, a mediator receives part of the compensation in each case from an industry party. However, for mediations to which investors are parties, mediators represent neither the investors nor the FINRA-registered individuals or entities. Similarly, for mediations involving industry parties only, mediators represent neither the FINRA-registered individuals nor entities. In both types of mediations, FINRA believes that the revenue mediators receive from FINRA-registered individuals or firms for their mediation activity should not prevent mediators from being classified as Public Members under the By-Laws.
Pursuant to the Plan of Allocation and Delegation of Functions by FINRA to Subsidiaries (Delegation Plan), the NAMC has the powers and authority pursuant to FINRA's Rules to advise the FINRA DR Board on the development and maintenance of an equitable and efficient system of dispute resolution that will equally serve the needs of public investors and FINRA members, to monitor rules and procedures governing the conduct of dispute resolution, and to have such other powers and authority as is necessary to effectuate the purposes of FINRA's Rules.
Currently, under the By-Laws, a mediator could be classified as an Industry Member rather than a Public Member for purposes of Committee participation because of the services provided by a mediator to an industry party. Mediators are neutrals and do not represent any party in the mediation. In FINRA's mediation forum, mediators are retained only by agreement of all parties to a dispute rather than by any one party. Further, the parties compensate mediators jointly pursuant to that agreement. While mediators derive some of their revenue from brokers or dealers, FINRA does not believe the compensation earned in the capacity as a mediator compromises the mediator's neutrality. As such, FINRA believes that the unique role played by mediators should be recognized in the By-Laws. Further, FINRA believes that mediation activity in cases involving industry parties should not prevent individuals from being classified as Public Members under the By-Laws.
FINRA is, therefore, proposing to amend the definitions of Industry Members
FINRA is proposing to amend the definitions of Industry Member
The proposal would amend two parts of the definition of Industry Member.
Second, Article I(s)(5) of the By-Laws defines an Industry Member as a 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 Director or member or 20 percent or more of the gross revenues received by the Director's or member's firm or partnership. Similar to the change in Article I(s)(4) described in the paragraph above, FINRA proposes to amend the definition to exempt any 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 from being considered professional services provided to such individuals.
The proposed revisions to the definition of Industry Member would establish that 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 services provided to brokers or dealers or affiliated individuals for purposes of measuring the professional revenues received by the NAMC member. FINRA believes the proposed amendments to the Industry Member definition would acknowledge the capacity in which mediators derive revenue from parties, including industry parties, yet recognize that the revenue earned in the capacity would not compromise the person's neutrality.
The proposal would also amend the definition of Public Member. The By-Laws define a Public Member as a 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 proposal would amend the definition by adding language to the parenthetical to clarify that 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. FINRA believes that the proposed amendment to the Public Member definition would recognize that a mediator's service as a mediator would not, in itself, create any relationships with the securities industry that could compromise the mediator's independent judgment or decision-making.
Moreover, the proposed revisions to the By-Law definitions would incorporate current rule language from the definitions of non-public and public arbitrators found in the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes. In 2005, the SEC approved the then-NASD's new Interpretive Material (IM) 10308 which stated, among other things, that mediation fees received by mediators who are also arbitrators shall not be included in the definition of "revenue" for purposes of Rule 10308(a)(5)(A)(iv), so long as the mediator is acting in the capacity of a mediator and is not representing a party in the mediation.
FINRA believes that the proposed rule change is consistent with the provisions of Section 15A of the Act, including Section 15A(b)(2) of the Act, in that it provides for the organization of FINRA and FINRA Dispute Resolution in a manner that will permit FINRA to carry
FINRA does not believe that the proposed rule change will result in any burden on competition or capital formation that is not necessary or appropriate in furtherance of the purposes of the Act, as amended.
Written comments were neither solicited nor received.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
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:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.