[Federal Register Volume 83, Number 151 (Monday, August 6, 2018)]
[Notices]
[Pages 38327-38329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16721]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83752; File No. SR-FINRA-2018-019]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change Creating Fee
and Honorarium for Late Cancellation of a Prehearing Conference
July 31, 2018.
I. Introduction
On May 4, 2018, 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 Rules 12500 and
12501 of the Code of Arbitration Procedure for Customer Disputes
(``Customer Code'') and FINRA Rules 13500 and 13501 of the Code of
Arbitration Procedure for Industry Disputes (``Industry Code'' and
together, ``Codes''), to charge a $100 per-arbitrator fee to parties
who request cancellation of a prehearing conference within three
business days before a scheduled prehearing conference. The proposed
rule change would also amend FINRA Rules 12214(a) and 13214(a) of the
Codes to create a $100 honorarium to pay each arbitrator scheduled to
attend a prehearing conference that was cancelled within three business
days of the prehearing conference.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 38328]]
The proposed rule change was published for comment in the Federal
Register on May 14, 2018.\3\ The public comment period closed on June
8, 2018. The Commission received one comment letter in response to the
Notice, supporting the proposed rule change.\4\ This order approves the
proposed rule change.
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\3\ See Exchange Act Release No. 83227 (May 4, 2018), 83 FR
23306 (May 14, 2018) (File No. SR-FINRA-2018-019 (``Notice'').
\4\ See Letter from Steven B. Caruso, Maddox Hargett Caruso,
P.C., dated May 15, 2018 (``Caruso Letter''), available at https://www.sec.gov.
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II. Description of the Proposed Rule Change \5\
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\5\ The subsequent description of the proposed rule change is
substantially excerpted from FINRA's description in the Notice. See
Notice, 83 FR at 23306-23308.
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Cancellation Fee
Parties to an arbitration typically schedule prehearing conferences
with the arbitrator(s) before the hearing on the merits of the
claim.\6\ During these conferences, the participants set discovery,
briefing and motions deadlines, schedule subsequent hearing sessions,
and address other preliminary matters.\7\ A prehearing conference may
also address other outstanding matters, such as discovery disputes or
substantive motions (e.g., motions to dismiss or motions to amend).\8\
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\6\ See FINRA Rules 12100(w) and 13100(w).
\7\ See FINRA Rules 12500(c) and 13500(c).
\8\ See FINRA Rules 12501(b) and 13501(b).
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FINRA stated that its arbitrators devote considerable time
preparing for prehearing conferences and forgo other opportunities by
reserving time on their schedules.\9\ Currently, however, parties can
cancel prehearing conferences up to, and including, the day of the
conference without penalty.\10\ Consequently, FINRA has found that late
cancellations (in particular, those that occur within three or fewer
business days of a scheduled prehearing conference) have negatively
impacted its roster of arbitrators by creating scheduling
inconveniences for, and uncompensated work by, arbitrators.\11\
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\9\ See Notice, 83 FR at 23309.
\10\ Id.
\11\ In the past, arbitrators have resigned from the roster
because FINRA's dispute resolution forum does not provide a payment
to arbitrators for cancellations of prehearing conferences. FINRA
notes that one reason former arbitrators have given for their
resignation is the lack of compensation for prehearing conferences
that are cancelled on short notice. FINRA has identified 17 separate
complaints relating to 22 arbitrators with respect to the late
cancellations of prehearing conferences. See Notice, 83 FR at 23307,
note 12.
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To help alleviate these burdens, FINRA is proposing to amend FINRA
Rules 12500 and 12501 of the Customer Code and FINRA Rules 13500 and
13501 of the Industry Code,\12\ which govern prehearing conferences, to
provide that if a cancellation \13\ request is agreed to by the parties
or requested by one or more parties within three business days before a
scheduled prehearing conference and granted, the party or parties shall
be charged a fee of $100 per arbitrator scheduled to attend the
prehearing conference (``late cancellation fee'').\14\ The date of the
party's or parties' cancellation request would control whether the fee
is assessed, not the date of the arbitrator or arbitrators' decision on
such a request, if a decision is required.\15\ If the arbitrator(s)
cancel a prehearing conference on their own, the parties would not be
charged.\16\
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\12\ To simplify this explanation, FINRA's discussion of the
proposed changes focuses on changes to the Customer Code. However,
the proposed changes also apply to the Industry Code. See Notice, 83
FR at 23307, note 13.
\13\ References to cancellations of prehearing conferences
include postponements of such conferences. See Notice, 83 FR at
23309, note 29.
\14\ See Notice, 83 FR at 23307.
\15\ A decision would be required if only one party requests
that the prehearing conference be cancelled. See Notice, 83 FR at
23307, note 14.
\16\ See Notice, 83 FR at 23307.
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Under the proposal, if more than one party requests the
cancellation of a prehearing conference, the arbitrator(s) would have
the authority to allocate the fee in the award between or among the
requesting parties.\17\ However, depending on the facts and
circumstances of the request, the arbitrator(s) could assess the fee to
one party or to a non-requesting party or parties if the arbitrator(s)
determine that these parties caused or contributed to the need for the
cancellation.\18\
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\17\ See Notice, 83 FR at 23307.
\18\ See Notice, 83 FR at 23307. See also FINRA Rules
12904(e)(8) and 13904(e)(8); see generally FINRA Rules 12601(b) and
13601(b).
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Under the proposal, however, if an extraordinary circumstance
prevents a party from making a timely cancellation request, the
arbitrator(s) would have the discretion to waive the late cancellation
fee, provided they receive a written explanation of the
circumstance.\19\ FINRA would notify parties and arbitrator(s) that the
prehearing conference was cancelled and remind parties to provide an
explanation, if applicable, before the close of the arbitration
case.\20\ If the fee is waived, the party's or parties' obligation to
pay the fee would be eliminated. FINRA, however, would pay the $100
per-arbitrator honorarium (discussed below) to the arbitrator(s)
scheduled to attend the prehearing conference.\21\
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\19\ See Notice, 83 FR at 23307.
\20\ Id.
\21\ Id.
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Honorarium
In addition, FINRA is proposing to amend FINRA Rules 12214(a) and
13214(a) to provide that FINRA would pay an honorarium of $100 to each
arbitrator scheduled to attend a prehearing conference that was
cancelled within three business days of the prehearing conference by
agreement of the parties or was requested by one or more parties within
three business days of the prehearing conference and granted. As
discussed above, if the arbitrator(s) waive the fee, the obligation to
pay the fee would be eliminated, but FINRA would still pay the $100
per-arbitrator honorarium to the arbitrator(s) scheduled to attend the
prehearing conference.
III. Comment Summary
As noted above, the Commission received one comment letter on the
proposed rule change, supporting the proposal.\22\ The commenter states
that late cancellations often result in scheduling inconvenience for,
and uncompensated work by, arbitrators. The commenter believes that the
proposal represents a ``fair, equitable and reasonable'' solution to
these concerns because the fee and honorarium recognize the
``considerable preparation by arbitrators . . . that is required prior
to a prehearing conference.'' \23\ Accordingly, the commenter believes
that the proposal would ``lead to an improved and expanded roster of
arbitrators.'' \24\
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\22\ See supra note 4.
\23\ Caruso Letter.
\24\ Id.
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IV. Discussion and Commission Findings
After careful review of the proposed rule change and the comment
letter, the Commission finds that the proposal is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder that are applicable to a national securities
association.\25\ Specifically, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Exchange
Act,\26\ which requires, among other things, that FINRA rules 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, and Exchange Act Section
15A(b)(5) of
[[Page 38329]]
the Exchange Act,\27\ which requires, among other things, that FINRA
rules provide for the equitable allocation of reasonable dues, fees and
other charges among members and issuers and other persons using any
facility or system that FINRA operates or controls.
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\25\ 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).
\26\ 15 U.S.C. 78o-3(b)(6).
\27\ 15 U.S.C. 78o-3(b)(5).
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Public Interest
The Commission agrees with FINRA and the commenter that the
proposed rule change would protect investors and the public interest by
improving FINRA's ability to recruit and retain qualified arbitrators
willing to devote the time and effort necessary to consider prehearing
issues, which FINRA asserts is an essential element for it to operate
an effective arbitration forum.\28\ Currently, parties can cancel
prehearing conferences up to, and including, the same day of the
conference without penalty. Late cancellations of prehearing
conferences do, however, penalize the arbitrators who would not receive
compensation for the time and effort devoted to preparing for the
conference, as well as the potential for lost personal or professional
opportunities caused by reserving the scheduled meeting time. These
burdens could negatively impact an arbitrator's decision to remain on
the FINRA arbitrator roster or an individual's decision to join the
roster. The proposed rule change would eliminate these disincentives by
compensating arbitrators in the event of a late cancellation. For these
reasons, the Commission believes the proposed rule change is consistent
with the Section 15A(b)(6) requirement that FINRA rules be designed to
protect the public interest.
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\28\ See Notice, 83 FR at 23308.
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Equitable Allocation of Fees
The Commission also agrees that the proposed rule change represents
an equitable allocation of the fees associated with using the FINRA
arbitration forum.\29\ In particular, the Commission notes the proposed
late cancellation fee would be allocated among those parties
responsible for canceling the meeting within three days of the
prehearing conferences. Even if a party or parties did not request the
cancellation, the proposed rule change would permit arbitrators to
allocate all, or a portion of the fee, to those parties if the
arbitrators determine that they caused or contributed to the late
cancellation.\30\
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\29\ Id. See also Caruso Letter.
\30\ See Notice, 83 FR at 23308.
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The Commission recognizes that the proposed rule change could
increase the cost to parties of using the arbitration forum.\31\
However, the Commission also recognizes that the late cancellation fee
would compensate arbitrators directly inconvenienced by the late
cancellation of a prehearing conference and address a practice that
negatively impacts the roster of arbitrators. In particular, the
Commission notes that FINRA would compensate arbitrators for their
preparation time and opportunity cost associated with reserving a
meeting date when a prehearing conference is cancelled on short
notice.\32\ The Commission believes that it is reasonable to compensate
the inconvenienced arbitrators for the time and opportunity cost.
Furthermore, the Commission notes that parties to an arbitration could
avoid the proposed late termination fee by, among other ways, providing
notice of cancellation more than three business days prior to a
scheduled prehearing conference.\33\ Furthermore, the Commission notes
that the arbitrator(s) could assess the fee to one party or to a non-
requesting party or parties if the arbitrator(s) determine that these
parties caused or contributed to the need for the cancellation.
Finally, if an extraordinary circumstance prevents a party from making
a timely cancellation request, the arbitrator(s) would have the
discretion to waive the late cancellation fee, provided they receive a
written explanation of the circumstance
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\31\ Id.
\32\ Id.
\33\ See Notice, 83 FR at 23308.
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For these reasons, the Commission believes the proposed rule change
is also consistent with the Section 15A(b)(5) requirement that FINRA
rules provide for the equitable allocation of reasonable fees among
persons using any facility or system that FINRA operates or controls.
V. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \34\ that the proposal (SR-FINRA-2018-019), be and hereby
is approved.
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\34\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16721 Filed 8-3-18; 8:45 am]
BILLING CODE 8011-01-P