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FINRA Responds to Comments on Proposal To Merge FINRA-DR into FINRA Regulation
Posted on Categories News, Other FINRA Rulemaking, RulemakingTags , , ,

This proposal (SR-FINRA-2015-034), first filed on September 15 (see SAA 2015-35), has taken an interesting procedural path – one that now appears to be moving to a close.

After its filing by FINRA, the SEC quickly (SAA 2015-38) published the proposal (SEC Rel. 34-76082, dtd. 10/6/15) in the Federal Register, seeking public comment with a deadline of November 3. PIABA objected (SAA 2015-41) that the process was moving too quickly for such a serious undertaking and asked the SEC to permit more time for its members and others to comment. PIABA did comment within the allotted time – as did several of its members (SAA 2015-42) – and, then, the SEC seemingly responded by setting a new deadline for action in January 2016 (SAA 2015-43). Technically, though, the extension was not of the comment period, but of the time in which the SEC has to act on the proposal. That time was extended from November 27, 2015 to January 11, 2016 by SEC Rel. 34-76444.

FINRA has now filed a response to the comments that were filed within the initial comment period, in a letter from FINRA Assistant General Counsel Meredith Cordisco to SEC Secretary, Brent J. Fields, dated December 1, 2015. That letter may be viewed as closing off further comment from the public. Indeed, FINRA states, as concluding remarks, that “interested parties” have had “sufficient time to consider the proposed merger” and objects to PIABA’s extension request. On the other hand, since FINRA itself has commented after the close of the initial comment period, the SEC extension may effectively mean that the Commission will consider further comment letters, if filed between now and the January deadline for action.

FINRA’s Response to Comments

No further public comment letters have been filed since the initial five. Ms. Cordisco’s letter characterizes four of the five (PIABA, Rhoades, Gross, Jacobson) as opposing the merger and views the American Association for Justice (ed: formerly ATLA) as neither opposing nor supporting the proposal (ed: just as a point of disclosure, we understood the letter as voicing opposition – SAA 2015-42). FINRA disagrees with the perception voiced by commenters that the merger will “in any way impact the continued operation of its dispute resolution forum as a fair, efficient, and economical alternative to costly and complex litigation….” Nor will there be any “practical impact on the current governance or oversight that ensures the forum’s fairness and effectiveness.” The proposed merger’s purpose is designed to “reduce the considerable administrative duplication,” with a view to “achieving organizational operational efficiencies…. The merger would allow FINRA to lower its operating expenses and more efficiently use staff resources.”

Addressing PIABA’s Concerns

The letter answers PIABA’s essential question, “What’s changed?” since the turn of the Millennium, when FINRA established a separate dispute resolution subsidiary in the belief that it would “further strengthen the independence and credibility” of the facility. FINRA simply answers that it “does not need to maintain separate corporate entities” to achieve those purposes. It insists, as it did in the rule filing, that “FINRA Dispute Resolution remains financially dependent on” its parent “at current cost levels,” without speaking to prior years’ returns, when arbitration volume was much higher.

Finally, FINRA points out that the FINRA subsidiaries already interact and operate as a single entity. FINRA-DR cooperates with FINRA Regulation to detect misconduct and disciplinary proceedings promote member compliance with the payment of FINRA-DR Awards. Governance would continue to be shared after a merger, regulatory oversight of the forum would continue as before, and “[a]s an operational matter, FINRA’s dispute resolution program would continue to function as a separate department within FINRA Regulation.” No impact on the “public perception of fairness of the forum” will result from the merger and no “cost-benefit analysis,” as suggested by PIABA, is necessary to prove that which is apparent from the efficiencies of consolidation.

(ed: This merger is going to happen, just as the spin-off back in 1999 sailed through the Commission. Our reservations with the plan relate to: (1) an old gripe – that FINRA-DR made big changes to its fee structure on the premise that it needed to be self-sustaining, and has never reported publicly anything since, except it top-line annual revenues – so that we could know its true profitability; and, (2) a conceptual rejection of the regulatory need to “deputize” arbitrators and make arbitration part of the regulatory machinery, in order to protect investors. Arbitration promotes “investor protection” differently, i.e., by providing an affordable and efficient avenue of civil redress that ensures swift justice for investors and, with that, their continued participation in the nation’s markets.) (SAC Ref. No. 2015-45-01)

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