[Federal Register Volume 83, Number 33 (Friday, February 16, 2018)]
[Notices]
[Pages 7086-7090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03202]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82693; File No. SR-FINRA-2018-003]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to
Simplified Arbitration
February 12, 2018.
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 January 29, 2018, 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.
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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 FINRA Rules 12600 and 12800 of the Code
of Arbitration Procedure for Customer Disputes (``Customer Code'') and
13600 and 13800 of the Code of Arbitration Procedure for Industry
Disputes (``Industry Code,'' and together with the Customer Code, the
``Codes''), to amend the hearing provisions to provide an additional
hearing option for parties in arbitration with claims of $50,000 or
less, excluding interest and expenses.
The text of the proposed rule change is available on FINRA's
website 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
The Codes provide two methods for administering arbitration cases
with claims involving $50,000 or less, excluding interest and expenses.
The default method is a decision by a single arbitrator based on the
parties' pleadings and other materials submitted by the parties. The
alternative method involves a full hearing with a single arbitrator.
Under the Customer Code, a customer may request a hearing (regardless
of whether the customer is a claimant or respondent),\3\ and under the
Industry Code, the claimant may request
[[Page 7087]]
a hearing.\4\ If a hearing is requested, it is generally held in-
person, and there are no limits on the number of hearing sessions that
can take place.
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\3\ See FINRA Rule 12800(c).
\4\ See FINRA Rule 13800(c).
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FINRA believes that forum users with claims involving $50,000 or
less would benefit by having an additional, intermediate form of
adjudication that would provide them with an opportunity to argue their
cases before an arbitrator in a shorter, limited telephonic hearing
format. Therefore, FINRA is proposing to amend the Codes to include a
Special Proceeding for Simplified Arbitration (``Special Proceeding'').
The Special Proceeding would be limited to two hearing sessions,
exclusive of prehearing conferences,\5\ with parties being given time
limits for their presentations. As discussed above, parties with claims
involving $50,000 or less are currently limited to a decision based on
the pleadings and other materials submitted by the parties, or a full
hearing that typically takes place in-person and is not limited in
duration. While a party might wish for an opportunity to present his or
her case to an arbitrator, the travel and expenses associated with a
full hearing might prevent that party from requesting one. In addition,
the prospect of cross-examination by an opposing party might act as a
deterrent for parties seeking to avoid a direct confrontation with
their opponents. These concerns particularly impact pro se, senior, and
seriously ill parties.
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\5\ See FINRA Rules 12100 and 13100 (Definitions). Under these
rules, ``hearing'' means the hearing on the merits of an arbitration
and a ``hearing session'' is defined as any meeting between the
parties and arbitrator(s) of four hours or less, including a hearing
or a prehearing conference.
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The suggestion to propose an intermediate form of adjudication
originated from the FINRA Dispute Resolution Task Force (``Task
Force'').\6\ The Task Force observed that customers whose cases were
decided on the papers were the least satisfied of any group of forum
users. They also noted that, from the arbitrator's perspective, it is
more difficult to assess crucial issues of credibility when deciding
cases on the papers. The Task Force recommended that the goal of the
intermediate process should be to give the claimant personal contact
with the arbitrator deciding the case and to give each party the
opportunity to argue its case, to ask questions, and to respond to
contentions from the other side. The Task Force also recommended that
the intermediate process should allow the arbitrator to probe
contentions in the papers in an interactive format.\7\
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\6\ The Task Force was formed in 2014 to suggest strategies to
enhance the transparency, impartiality, and efficiency of FINRA's
securities dispute resolution forum. On December 16, 2015, the Task
Force issued its Final Report and Recommendations, available at
http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.
\7\ Id. at 29.
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FINRA considered the Task Force's recommendations and questions in
developing the format for an intermediate form of adjudication.\8\
Accordingly, FINRA is proposing to amend Rules 12800(c) and 13800(c) to
provide that parties that opt for a hearing must select between two
hearing options. Option One would be the current hearing option that
provides for the regular provisions of the Codes relating to
prehearings and hearings, including all fee provisions. If the parties
choose Option One, they would continue to have in-person hearings
without time limits, and they would continue to be permitted to
question opposing parties' witnesses.
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\8\ The Task Force provided the following questions for FINRA to
consider in developing an intermediate form of adjudication: (1)
Whether parties appearing should be able to amplify positions taken
in their papers and to answer questions posed by the arbitrator; (2)
whether fact witnesses should be permitted to tell their stories to
the arbitrator; (3) whether there should be a clear boundary between
the informal, expedited adjudication and a full-blown hearing; (4)
whether witnesses should be subject to cross-examination by adverse
counsel; (5) whether parties should be able to compel the attendance
of particular witnesses, and if so, should there be a limit; (6)
what arrangements should be made for parties who are not appearing
in person; and (7) whether arbitrators should use the session as an
opportunity to press the parties to settle.
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Option Two would be the new Special Proceeding subject to the
regular provisions of the Code relating to prehearings and hearings,
including all fee provisions, with several limiting conditions. The
conditions are intended to ensure that the parties have an opportunity
to present their case to an arbitrator in a convenient and cost
effective manner without being subject to cross-examination by an
opposing party.
Specifically:
A Special Proceeding would be held by telephone unless the
parties agree to another method of appearance; \9\
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\9\ The Task Force recommended allowing parties with claims
involving $50,000 or less to be able to appear in whatever manner
they prefer: in person, by phone or by videoconference. FINRA
determined that it is in the best interest of the parties to hold
hearings by telephone because this method is the most expeditious
and inexpensive format for hearings. As stated above, FINRA is
proposing that parties can agree to other methods of appearance,
including appearing in person or by videoconference.
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the claimants, collectively, would be limited to two hours
to present their case and \1/2\ hour for any rebuttal and closing
statement, exclusive of questions from the arbitrator and responses to
such questions;
the respondents, collectively, would be limited to two
hours to present their case and \1/2\ hour for any rebuttal and closing
statement, exclusive of questions from the arbitrator and responses to
such questions;
notwithstanding the abovementioned conditions, the
arbitrator would have the discretion to cede his or her allotted time
to the parties;
in no event could a Special Proceeding exceed two hearing
sessions, exclusive of prehearing conferences, to be completed in one
day;
the parties would not be permitted to question the
opposing parties' witnesses;
the Customer Code would provide that a customer could not
call an opposing party, a current or former associated person of a
member party, or a current or former employee of a member party as a
witness, and members and associated persons could not call a customer
of a member party as a witness; and
the Industry Code would provide that members and
associated persons could not call an opposing party as a witness.
Except for the two hearing session time limit for a Special
Proceeding, FINRA would not impose any restrictions on the arbitrator's
ability to ask the parties questions and has incorporated a substantial
amount of time for arbitrator questions. Specifically, since FINRA
would limit the parties' combined presentations to five hours, the
arbitrator would have up to three hours to ask questions. In addition,
under the proposed rule change FINRA would not prohibit the arbitrator
from allowing parties additional time for their presentations or
witness testimonies, so long as the hearing on the merits is completed
within the two hearing session limit.\10\
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\10\ The Task Force recommended a shorter time limit on each
case to enable an arbitrator to hear several cases in a hearing day
and to limit the time commitment of the parties. FINRA was concerned
that a period shorter than the proposed two hearing session time
limit would restrict the parties' presentations and their ability to
answer questions posed by the arbitrator.
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FINRA is further proposing to amend Rule 12800(a) to add clarity to
the rule by explaining the customer's options earlier in the rule text.
FINRA is proposing to amend the sentence in Rule 12800(c) that states
that ``[I]f no hearing is held, no initial prehearing conference or
other prehearing
[[Page 7088]]
conference will be held, and the arbitrator will render an award based
on the pleadings and other materials submitted by the parties.'' FINRA
would replace the first ``held'' in the sentence with the term
``requested'' to better reflect that a hearing would only occur if the
customer requested it. FINRA believes the amendment would add clarity
to the rule text. FINRA is further proposing to amend Rule 12600(a)
that discusses exceptions to when required hearings will be held to
specify Rule 12800(c) as one of the exceptions.
To add clarity on how arbitrators are paid in cases where the
customer requests a hearing, FINRA is proposing to amend Rule 12800(f)
to clarify that the regular provisions of the Code relating to
arbitrator honoraria would apply in such cases. Since the Special
Proceeding would be a new form of adjudication at the forum, FINRA
intends to provide substantial training to arbitrators including, but
not limited to, updating FINRA's written training materials for
arbitrators, posting a Neutral Workshop video on the FINRA website for
arbitrators to view on-demand, and including discussions about the
Special Proceeding in FINRA's publication for arbitrators and
mediators, The Neutral Corner. FINRA would instruct arbitrators that
the arbitrator's role in a Special Proceeding might be different than
it is in a full hearing because parties would not be permitted to
question opposing parties' witnesses. FINRA would emphasize that in a
Special Proceeding the arbitrator might need to ask more questions than
he or she would ask in a regular hearing to gain clarity on issues and
to assess witness credibility.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of 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. As discussed above, the Task Force recommended that
FINRA provide the claimant with an additional cost effective option for
personal contact with the arbitrator deciding the case and give each
party the opportunity to argue its case, to ask questions, and to
respond to contentions from the other side. FINRA believes that the
proposed rule change aligns with the Task Force's recommendations.
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\11\ 15 U.S.C. 78o-3(b)(6).
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In addition, FINRA believes that the proposed rule change is
consistent with the provisions of the Act because it would provide
parties with claims of $50,000 or less with an additional, cost
effective, hearing option for resolving disputes. FINRA believes that
the proposed rule change would limit the potential costs of a hearing
and provide parties with the opportunity to present their case without
cross-examination from their opponents. The ability to present their
case without cross-examination may benefit those who believe that a
direct confrontation could intimidate their testimony. FINRA believes
that the broader role of arbitrators for a Special Proceeding in asking
questions of the parties would serve a similar function to cross-
examination, such as gaining clarity on issues and assessing witness
credibility, but within a potentially less intimidating environment.
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.
Economic Impact Assessment
(a) Need for the Rule
As noted above, the Code currently provides two methods for
administering arbitration cases with claims involving $50,000 or less,
excluding interest and expenses. The default method is based
exclusively on the parties' pleadings and other materials submitted by
the parties, and the alternative method involves a full hearing.
Although a full hearing provides the parties a more complete
opportunity to present their cases to an arbitrator, for the reasons
discussed above, the parties sometimes forego a full hearing. The
proposal provides an additional method for administering these
arbitration cases that would allow for oral testimony while limiting
the costs of the proceedings.
(b) Economic Baseline
The economic baseline for the proposal is the two current methods
for administering arbitration cases with claims involving $50,000 or
less. The proposal is expected to affect customers, either as claimant
or respondent, with a claim involving $50,000 or less; industry
parties, as claimant, with a claim involving $50,000 or less; and
industry parties as respondents to these claims. The proposal is also
expected to affect FINRA arbitrators.
The parties today that opt for a decision on the pleadings or for a
full hearing face trade-offs between the two choices. A decision on the
pleadings is dependent solely on the parties' pleadings and other
submitted materials, and the cost to parties is generally limited to
filing fees and the legal fees and expenses to submit the materials. On
the other hand, a full hearing is dependent on the pleadings and
submitted materials as well as oral testimony and arguments. In
addition to filing fees and legal fees to submit the materials, parties
can also incur arbitration hearing session fees, travel and lodging
expenses, lost income, and other costs associated with the time spent
at the hearings such as accommodations for dependent care. These costs
increase with the number of hearings and are also dependent on the
characteristics of the parties. For example, parties that live further
away from the hearing site or that are less able to travel will incur
higher travel costs than parties that live closer to the hearing site
or that are more able to travel.\12\ In addition, the costs associated
with the time spent at hearings may be greater for some parties than
for other parties.
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\12\ In customer cases, the hearing location will generally be
the location (of FINRA's designated hearing locations) closest to
the investor's residence at the time of the events giving rise to
the dispute. Investors may also seek to change the hearing location
by obtaining the other party's consent or by requesting a change
from FINRA. In industry cases, the hearing location will generally
be the location closest to where the associated person was employed
at the time of the events giving rise to the dispute. FINRA's
hearing locations can be found at: Dispute Resolution Regional
Offices and Hearing Locations.
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The costs of a full hearing are greater and more uncertain at the
outset than the costs of a decision on the pleadings. Among other
factors, parties selecting the arbitration format will weigh the
potential benefits of providing testimony and arguments at a full
hearing relative to its higher and more uncertain costs. The greater
and more uncertain costs of a full hearing may cause parties to forego
providing oral testimony and arguments and instead opt for a decision
on the pleadings. Parties also may forego providing oral testimony and
arguments to avoid cross-examination.
The parties not selecting the arbitration format may instead prefer
a decision on the pleadings. A decision on the pleadings is likely to
minimize their costs and prevents the potential influence of oral
testimony on the award decision. Alternatively, in a full hearing,
these parties are likely to incur greater costs and have exposure to
the potential
[[Page 7089]]
persuasive influence of oral testimony and arguments on the award
decision. In either instance, the parties not selecting the arbitration
format would have incentive to settle a dispute and forego arbitration
if the settlement amount and the costs of settling a dispute are less
than the expected arbitration award and the costs of arbitrating the
dispute.
For arbitration cases with close dates from January 2016 to
December 2016, FINRA staff is able to identify 194 arbitration cases
that had an amount of compensatory relief requested of less than or
equal to $50,000 and were closed through a decision on the pleadings
(154) or by hearing (40).\13\ Of the 40 arbitrations that FINRA staff
identifies as closed by a full hearing, 29 had one or two hearing
sessions, and 11 had three or more hearing sessions. The maximum number
of hearing sessions was eight.
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\13\ The 194 arbitration cases were out of a total of 625 that
FINRA staff identified as being closed through a decision on the
pleadings or closed by hearings from January 2016 to December 2016.
Approximately two-thirds of the 194 claims involved a customer as
either a claimant or respondent, but typically as a claimant, and
the remaining one-third of these claims involved a dispute among
industry parties. Among the 40 cases that were closed by a hearing,
approximately one-third involved a customer.
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(c) Economic Impact
The Special Proceeding would provide a new third option for
administering arbitration cases with claims involving $50,000 or less,
and would not remove the ability of parties to choose either a decision
on the pleadings or a full hearing. A primary benefit of this new third
option is the increase in the ability of customers and intra-industry
claimants to provide oral testimony but with fewer costs, including the
provision of oral testimony without cross-examination, and with greater
certainty of its length than in a full hearing. In general, a Special
Proceeding would increase the number of options available to customers
and intra-industry claimants in choosing the method which would provide
the most benefits relative to its costs, and would therefore increase
the overall net benefits of the forum to these parties.
A Special Proceeding would provide customers and intra-industry
claimants the benefit of providing oral testimony to an arbitrator but
subject to several conditions.\14\ These conditions not only limit the
potential costs of the forum (see below), but also provide parties the
opportunity to present their case without cross-examination from their
opponents. The ability to present their case without cross-examination
may benefit those who believe that a direct confrontation could
intimidate their testimony. As a result, arbitrators may play a broader
role in a Special Proceeding in asking questions of the parties that
would serve a similar function to cross-examination, such as gaining
clarity on issues and assessing witness credibility, but within a
potentially less intimidating environment. Arbitrators would need to
spend time and incur any associated costs related to reviewing the
additional training materials for a Special Proceeding.
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\14\ A limit to the number of hearings would not only affect the
arbitration fees that parties could incur but also the travel and
lodging expenses, lost income, and other costs associated with the
time spent at the hearings.
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Parties to the Special Proceeding are expected to incur lower costs
to participate in the forum than parties to a full hearing,
particularly if the parties proceed by telephonic conference.\15\ The
magnitude of the cost reduction to the parties would be dependent on
their ability to attend hearing sessions in person; parties that reside
further away from a hearing site or that have difficulty traveling
would incur greater costs of an in-person hearing than parties that
reside closer to a hearing site or that have less difficulty traveling.
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\15\ FINRA believes that most hearings would proceed by
telephonic conference, thereby saving time and expenses.
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A Special Proceeding would also limit the number of hearings, and
the arbitration fees, including hearing session fees, would be based on
the current fee schedule.\16\ The limit on the number of hearing
sessions requires the claimants and respondents to present their case
within the span of one day. As discussed above, 11 of the 40
arbitrations with compensatory damages of less than $50,000 that FINRA
staff identified as closed by a full hearing had three or more hearing
sessions. These arbitrations therefore would have required one or more
days of hearings. Parties to the Special Proceeding would not be
subject to additional days of hearings and its related costs (i.e.,
legal fees and expenses, arbitration fees, lost income, and other costs
associated with the time spent at the hearings), and parties to the
arbitration would also not be subject to the potential delays related
to the scheduling of additional hearings. Relative to a decision on the
pleadings, however, parties would incur additional costs to participate
in a Special Proceeding including legal fees and expenses, arbitration
and hearing session fees, and time.
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\16\ The filing fees for claims are the same regardless of the
method chosen to resolve the dispute and are dependent on claim
size. Hearing session fees currently range from $50, for claims up
to $2,500, to $450, for claims greater than $10,000. Parties that
opt for a Special Proceeding or full hearing, in lieu of a decision
on the pleadings, would also incur the other types of arbitration
fees including pre-hearing session fees.
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The extent to which the benefits and costs associated with the
forum increase or decrease for claims of $50,000 or less is dependent
on what the parties would have chosen absent this new option. Customers
and intra-industry claimants would have a greater ability to choose the
method based on the trade-off between the potential value of providing
oral testimony and arguments with a corresponding increase in forum
costs.
The costs incurred by the parties not selecting the arbitration
format could increase or decrease depending on the method that would
have been chosen absent the new option. If the customer or intra-
industry claimant would have chosen a decision on the pleadings, then
the costs to these parties such as arbitration and hearing session fees
would likely increase under a Special Proceeding. They would also have
exposure to the potential influence of oral testimony and arguments on
the award decision. A decision to conduct a Special Proceeding in lieu
of a full hearing would potentially decrease the costs incurred by
these parties through lower hearing session fees and lower costs to
participate in the hearings. To the extent that the Special Proceeding
increases the expected costs of parties not selecting the arbitration
format to participate in the forum and their exposure to the potential
influence of oral testimony, these parties could have additional
impetus to consider settlement.
(d) Alternatives Considered
FINRA considered a range of alternatives during this process. The
alternatives to the proposal include more or less restrictive limiting
conditions for a Special Proceeding, and providing the new option to a
broader range of claims such as those with higher dollar amounts. As
discussed above, the Task Force recommended allowing parties with
claims involving $50,000 or less to be able to appear in whatever
manner they prefer: In person, by phone or by videoconference. FINRA
determined that it is in the best interest of the parties to hold
hearings by telephone because this method is the most expeditious and
inexpensive format for hearings. As stated above, FINRA is proposing
that parties can agree to other methods of appearance, including
appearing in person or by videoconference. The Task Force also
recommended a shorter time limit on
[[Page 7090]]
each case to enable an arbitrator to hear several cases in a hearing
day and to limit the time commitment of the parties. FINRA was
concerned that a period shorter than the proposed two hearing session
time limit would restrict the parties' presentations and their ability
to answer questions posed by the arbitrator. The proposal reflects the
changes that FINRA believes were the most appropriate to propose for
the reasons discussed herein.
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-2018-003 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-2018-003. 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 website (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 website 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 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. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2018-003 and should be submitted on or before March 9, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03202 Filed 2-15-18; 8:45 am]
BILLING CODE 8011-01-P