[Federal Register Volume 77, Number 90 (Wednesday, May 9, 2012)]
[Notices]
[Pages 27262-27263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-11130]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66913; File No. SR-FINRA-2012-012]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change Amending FINRA
Rules 12401 (Number of Arbitrators) and 12800 (Simplified Arbitration)
of the Code of Arbitration Procedure for Customer Disputes, and FINRA
Rules 13401 (Number of Arbitrators) and 13800 (Simplified Arbitration)
of the Code of Arbitration Procedure for Industry Disputes, To Raise
the Limit for Simplified Arbitration From $25,000 to $50,000
May 3, 2012.
I. Introduction
On February 9, 2012, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change to amend FINRA's
Customer and Industry Codes of Arbitration Procedure to raise the limit
for simplified arbitration. Specifically, the proposed rule change
would amend FINRA Rules 12401 (Number of Arbitrators) and 12800
(Simplified Arbitration) of the Code of Arbitration Procedure for
Customer Disputes (``Customer Code''), and FINRA Rules 13401 (Number of
Arbitrators) and 13800 (Simplified Arbitration) of the Code of
Arbitration Procedure for Industry Disputes (``Industry Code''), to
raise the limit for simplified arbitration from $25,000 to $50,000. The
proposed rule change was published for comment in the Federal Register
on February 28, 2011.\3\ The Commission received five comment letters
on the proposed rule change,\4\ and a response to comments from
FINRA.\5\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 66442 (Feb. 22, 2012), 77 FR
12092 (Feb. 28, 2012) (``Notice''). The comment period closed on
March 20, 2012.
\4\ See Letter from Steven B. Caruso, Maddox Hargett & Caruso,
P.C., dated March 2, 2012 (``Caruso Letter''); letter from Ryan K.
Bakhtiari, President, Public Investors Arbitration Bar Association,
dated March 16, 2012 (``PIABA Letter''); letter from William A.
Jacobson, Associate Clinical Professor of Law, Cornell University
Law School, and Director, Cornell Securities Law Clinic, and Brenda
Beauchamp, Cornell Law School `13, dated March 20, 2012 (``Cornell
Letter''); letter from Lisa A. Catalano, Director, Christine Lazaro,
Supervising Attorney, and Anna Andreescu, Julia Iodice and Ashley
Morris, Legal Interns, St. John's School of Law Securities
Arbitration Clinic, dated March 20, 2012 (``St. John's Letter'');
and letter from Jill I. Gross, Director, Edward Pekarek, Assistant
Director, and Genavieve Shingle, Student Intern, Investor Rights
Clinic at Pace Law School, dated March 20, 2012 (``PIRC Letter'').
Comment letters are available at http://www.sec.gov.
\5\ See Letter from Margo A. Hassan, Assistant Chief Counsel,
FINRA Dispute Resolution, to Elizabeth M. Murphy, Secretary,
Commission, dated April 19, 2012 (``Response Letter''). The text of
the proposed rule change and FINRA's Response Letter are 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. The text of
the Response Letter is also available on the Commission's Web site
at http://www.sec.gov.
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II. Description of the Proposal
As stated in the Notice, FINRA currently offers streamlined
arbitration procedures for claimants seeking damages of $25,000 or
less. Under FINRA's simplified arbitration rules, one chair-qualified
arbitrator decides the claim and issues an award based on the written
submissions of the parties, unless the customer requests a hearing (if
it is a customer case), or the claimant requests a hearing (if it is an
industry case). FINRA also expedites discovery in these cases.\6\ The
proposed rule change would raise the dollar limit for damages sought in
order to offer simplified arbitration to claimants seeking damages of
$50,000 or less.
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\6\ See FINRA Rule 12800(d).
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Specifically, the proposed rule change would amend FINRA Rules
12401(a) and 13401(a) to provide that if the amount of a claim is
$50,000 or less, exclusive of interest and expenses, the panel would
consist of one arbitrator and the claim would be subject to the
simplified arbitration procedures under FINRA Rules 12800 and 13800
respectively. The proposed rule change also would amend FINRA Rules
12401(b) and 13401(b) to state that if the amount of a claim is more
than $50,000, but not more than $100,000, exclusive of interest and
expenses, the panel would consist of one arbitrator unless the parties
agree in writing to three arbitrators. The proposed rule change would
not amend FINRA Rules 12401(c) and 13401(c), relating to claims of more
than $100,000.
The proposed rule change would also amend FINRA Rules 12800(a) and
13800(a) to provide that the simplified arbitration rules would apply
to claims involving $50,000 or less, exclusive of interest and
expenses. In addition, the proposed rule change would amend FINRA Rules
12800(e) and 13800(e) to state that if any pleading increases the
amount in dispute to more than $50,000, FINRA would no longer
administer the claim under the simplified arbitration rules and the
regular provisions of the Customer Code and Industry Code,
respectively, would apply.
In the Notice, FINRA represented that allowing parties disputing
claims between $25,000 and $50,000 to resolve their disputes based on
the pleadings and other materials submitted by the parties, without a
hearing, would benefit users of FINRA's arbitration forum in many ways,
for example: (1) It would reduce forum fees because more parties could
avoid hearing session fees and hearing process fees; \7\ (2) it would
save parties the time and expense of preparing for, scheduling, and
traveling to hearings; (3) it would provide an alternative for
customers who are unable to retain an attorney and uncomfortable
appearing at a hearing without representation; and (4) it would
expedite cases because the arbitrator and parties would not need to
schedule a hearing.
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\7\ FINRA represented that the $25,000 threshold captured
twenty-one percent of all cases filed with FINRA's arbitration forum
in 1998, but currently captures only ten percent of FINRA's
caseload. FINRA stated that, based on 2011 statistics, raising the
threshold to $50,000 would increase the percentage of claims
administered under simplified arbitration to seventeen percent of
the claims filed with the forum.
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FINRA has indicated that it would announce the effective date of
the proposed rule change in a Regulatory Notice to be published no
later than 60 days following Commission approval, and that the
effective date would be no later than 30 days following publication of
the Regulatory Notice announcing Commission approval.
III. Discussion of Comment Letters
As stated above, the Commission received five comment letters on
the proposed rule change in response to the Notice. All five comment
letters supported one or more aspects of the proposal.\8\ One commenter
suggested an
[[Page 27263]]
amendment to the proposal. None of the commenters opposed the proposal.
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\8\ Supra note 4.
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The Caruso Letter stated that the proposed rule change would
benefit public investors and should be approved.
The PIABA Letter stated that raising the threshold for simplified
arbitration would benefit investors and other participants by
increasing the efficiency of FINRA's arbitration forum, increasing
flexibility to resolve claims through simplified arbitration, and
reducing costs for forum users.
The Cornell Letter took no position on the proposed amendments to
the Industry Code. But the Cornell Letter stated that raising the limit
for simplified arbitration would benefit customers with claims
generally considered ``small'' and make it more likely that they could
obtain legal representation.
The St. John's Letter stated that raising the threshold for
simplified arbitration would benefit investors by removing economic
impediments to bringing claims in arbitration. Specifically, the St.
John's Letter stated that the proposed rule would reduce arbitration-
related expenses, such as hearing fees, legal fees (by facilitating
claims brought on a pro se basis), and travel expenses (associated with
attending arbitration hearings). The St. John's Letter also stated that
brokerage firms would also find the proposed rule change beneficial
because it would reduce their expenses related to preparing for and
appearing at arbitration hearings.\9\ In addition, the St. John's
Letter stated that the proposed rule change would raise the percentage
of cases eligible for simplified arbitration, which the letter
represented has dropped due, in part, to inflation and market
conditions after 1998, when the limit on the amount of damages claimed
in simplified arbitration was last increased.
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\9\ The St. John's Letter cited a firm's willingness to consent
to simplified arbitration to resolve a dispute with an investor
claiming damages greater than $50,000.
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The PIRC Letter stated that the proposed rule change would benefit
investors by enhancing the efficiency and expediency with which claims
could be resolved in FINRA's arbitration forum, and by improving the
environment for pro bono legal services organizations to help more
investors due to the reduced time and resources involved in simplified
arbitration. The PIRC Letter expressed concern, however, about an
arbitrator's ability to resolve a customer dispute solely based on
paper submissions. In particular, the PIRC Letter stated that disputes
involving certain types of issues (e.g., fraud and suitability) require
arbitrators to decide issues of witness credibility. The PIRC Letter
expressed concern that arbitrators might find it difficult to resolve
questions of credibility based solely on written submissions.
Accordingly, the PIRC Letter recommended FINRA amend the proposed rule
to provide customer claimants the option of electing a telephonic
hearing.
In its Response Letter, FINRA stated that it would consider the
feasibility of a telephonic hearing option. But because the
availability of telephonic hearings is not directly related to the
substance of the proposed rule, and parties to an arbitration
proceeding currently can jointly request a telephonic hearing, FINRA
stated that its consideration of telephonic hearings should not delay
the Commission's consideration of the proposed rule change. Therefore,
FINRA declined to amend the proposed rule change to grant customer
claimants the sole option to elect a telephonic hearing.
IV. Commission's Findings
The Commission has carefully reviewed the proposed rule change, the
comments received, and FINRA's Response Letter. Based on its review,
the Commission finds that the proposed rule change is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities association.\10\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Act,\11\ 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.
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\10\ In approving this proposed rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78o-3(b)(6).
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More specifically, the Commission finds that the proposed rule
change to raise the limit for simplified arbitration in FINRA's
arbitration forum from $25,000 to $50,000 would benefit investors and
other participants in the forum by providing increased flexibility to
use simplified arbitration and reducing costs for forum users. While
the Commission appreciates the suggestion regarding telephonic hearings
expressed in the PIRC Letter, we believe that FINRA has responded
adequately to the suggestion and agree with the Response Letter's
position that consideration of a telephonic hearing option should not
delay our consideration of the proposed rule change, particularly given
the Response Letter's representation that FINRA would separately
consider the feasibility of granting customer claimants a telephonic
hearing option.
For the reasons stated above, the Commission finds that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-FINRA-2012-012) be, and it
hereby is, approved.
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\12\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
Kevin M. O'Neill,
Deputy Secretary.
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\13\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2012-11130 Filed 5-8-12; 8:45 am]
BILLING CODE 8011-01-P