Document ID: SEC-2015-0920-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-05-29T04:00Z

[Federal Register Volume 80, Number 103 (Friday, May 29, 2015)]
[Notices]
[Pages 30740-30746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12971]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75036; File No. SR-FINRA-2015-003]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the Code 
of Arbitration Procedure for Customer Disputes and the Code of 
Arbitration Procedure for Industry Disputes To Increase a Fee for the 
Late Cancellation of a Scheduled Hearing, Lengthen the Notice Period 
for Cancelling a Scheduled Hearing, and Increase the Amount of 
Honoraria Paid to Arbitrators Affected by a Late Cancellation of a 
Scheduled Hearing

May 22, 2015.

I. Introduction

    On February 5, 2015, the 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 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Rules 12214 and 12601 of 
FINRA's Code of Arbitration Procedure for Customer Disputes (``Customer 
Code'') and Rules 12214 and 12601 of its Code of Arbitration Procedure 
for Industry Disputes (``Industry Code'') (together, ``Codes'') to 
increase the fee for the late cancellation or postponement of a 
scheduled hearing, lengthen the notice period for cancelling or 
postponing a scheduled hearing session, and increase the amount of 
honoraria paid to arbitrators affected by the late cancellation or 
postponement of a scheduled hearing session. The proposed rule change 
was published for comment in the Federal Register on February 24, 
2015.\3\ The Commission received twelve comment letters on the 
proposal.\4\ On March 26, 2015, FINRA

[[Page 30741]]

granted the Commission an extension of time, until May 25, 2015, to act 
on the proposal.\5\ FINRA responded to the comment letters on April 24, 
2015.\6\ This order approves the rule change as proposed.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 74289 (Feb. 18, 2015), 80 FR 
9773 (Feb. 24, 2015) (``Notice'').
    \4\ See Letters from Steven B. Caruso, Esq., Maddox Hargett & 
Caruso, P.C., dated February 20, 2015 (``Caruso Letter''); Philip M. 
Aidikoff, Aidikoff, Uhl & Bakhtiari, dated February 24, 2015 
(``Aidikoff Letter''); George H. Friedman, Esq., George H. Friedman 
Consulting, LLC, dated March 1, 2015 (``Friedman Letter''); Joseph 
C. Pfeiffer, President, Public Investors Arbitration Bar Association 
(``PIABA''), dated March 9, 2015 (``PIABA Letter''); Ryan K. 
Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated March 9, 2015 
(``Bakhtiari Letter''); Jasmine Blake-Stewart, Francis Laryea, Jason 
Robinson, and Darius Wood, Student Interns, and Nicole Iannarone, 
Assistant Clinical Professor, Investor Advocacy Clinic, Georgia 
State University College of Law, dated March 13, 2015 (``GSU 
Letter''); Mark R. Harris, dated March 16, 2015 (``Harris Letter''); 
Patrick J. Paul, Student Intern, Elissa Germaine, Supervising 
Attorney, and Jill Gross, Director, Pace Investor Rights Clinic at 
Pace University School of Law, dated March 16, 2015 (``PIRC 
Letter''); Matthew Chan, Student, and William A. Jacobson, Esq., 
Clinical Professor of Law, Cornell Law School, and Director, Cornell 
Securities Law Clinic, dated March 17, 2015 (``CSLC Letter''); Paige 
M. Szymanski, Law Student Clinician, Investor Advocacy Clinic, 
Michigan State University College of Law, dated March 17, 2015 
(``MSU Letter''); Leonard Steiner, Steiner & Libo, dated April 7, 
2015 (``Steiner Letter''); and Richard P. Ryder, Esq., President, 
Securities Arbitration Commentator, Inc., dated April 7, 2015 
(``Ryder Letter'').
    \5\ See Letter from Mignon McLemore, Assistant Chief Counsel, 
FINRA Dispute Resolution, Inc., to Lourdes Gonzalez, Assistant Chief 
Counsel, Sales Practices, Division of Trading and Markets, 
Securities and Exchange Commission, dated March 26, 2015.
    \6\ See Letter from Mignon McLemore, Assistant Chief Counsel, 
FINRA Dispute Resolution, Inc., to Brent J. Fields, Secretary, 
Securities and Exchange Commission, dated April 24, 2015 (``FINRA 
Response Letter'').
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II. Description of the Proposed Rule Change

A. Background

    As stated in the Notice, FINRA is proposing to amend the Codes to 
increase the fee for the late cancellation or postponement of a 
scheduled hearing session for the primary purpose of encouraging 
parties to provide more advance notice of cancellations and 
postponements, or, in the alternative, to compensate arbitrators more 
for lost time and opportunities in the event of a late cancellation or 
postponement.\7\
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    \7\ See Notice, 80 FR at 9774.
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    Under current Rules 12601(b)(2) and 13601(b)(2) of the Codes, each 
arbitrator selected to hear a case receives a $100 honorarium \8\ when 
a hearing is cancelled or postponed within three business days of the 
scheduled hearing date.\9\ In the event a scheduled hearing is 
cancelled or postponed more than three business days in advance of the 
scheduled hearing date, the arbitrators do not receive an 
honorarium.\10\
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    \8\ These honoraria are typically funded by the Late 
Cancellation Fee (defined infra).
    \9\ If the parties settle an arbitration claim, hearings that 
were scheduled to occur after settlement are cancelled and, 
depending on the timing of the cancellation, could result in the 
assessment of a Late Cancellation Fee. See FINRA Rules 12902(d) and 
13902(d). These rules incorporate the fees and costs incurred under 
FINRA Rules 12601 and 13601, and, therefore, would incorporate the 
proposed increase to the Late Cancellation Fee.
    \10\ For each postponement agreed to by the parties, or granted 
upon request of one or more parties, FINRA also assesses an 
additional postponement fee to the parties, equal to the applicable 
hearing session fee (``Postponement Fee''). See FINRA Rules 
12601(b)(1) and 13601(b)(1). The Postponement Fee is paid to FINRA 
and not passed through to the arbitrators. See Notice, 80 FR at 
9774, note 4.
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    FINRA stated that it has ``received many complaints from 
arbitrators concerning the current late cancellation rule,'' noting 
that it is the most frequent complaint Dispute Resolution staff 
receives from arbitrators.\11\ Moreover, when FINRA formed its Dispute 
Resolution Task Force in 2014 to consider possible enhancements to its 
arbitration and mediation forum, it published a request for 
comment.\12\ FINRA stated that the majority of comments it received 
from arbitrators suggested that FINRA address the issue of late 
cancellation of scheduled hearings.\13\ More specifically, FINRA 
reported that it has learned that ``the lack of sufficient notice and 
compensation is frustrating for arbitrators and is a reason some 
arbitrators leave FINRA's roster'' \14\ and that many arbitrators have 
expressed concern that ``the forum's honoraria are too low.'' \15\ In 
addition, FINRA received feedback that ``the current rule is inadequate 
because the three-business-day cancellation window does not provide 
arbitrators . . . with enough time to schedule other income-generating 
opportunities.'' \16\
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    \11\ See Notice, 80 FR at 9774.
    \12\ See id. FINRA's Dispute Resolution Task Force comprises 
individuals from the public and industry sectors who work together 
to suggest strategies to enhance the transparency, impartiality, and 
efficiency of FINRA's securities dispute resolution forum for all 
participants. See FINRA Dispute Resolution Task Force, available at 
http://www.finra.org/ArbitrationAndMediation/FINRADisputeResolution/MoreonFINRADisputeResolution/P600966.
    \13\ See Notice, 80 FR at 9774.
    \14\ Id.
    \15\ Id. at 9775.
    \16\ Id. at 9774. Commenters also noted that the current $100 
honorarium for late cancellations does not adequately compensate 
arbitrators for the time they have spent preparing for a cancelled 
hearing or the income they would have earned for conducting a 
hearing. Id.
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    FINRA stated that it has started addressing these concerns by 
amending its rules to increase the amount of honoraria paid to 
arbitrators to $300 per hearing session in 2014.\17\ In order to 
further respond to arbitrators' concerns, however, FINRA is proposing 
to amend the Codes to require that parties to an arbitration give more 
advance notice before cancelling a hearing, or be assessed a higher 
late cancellation fee if sufficient advance notice is not provided.\18\ 
Specifically, FINRA's proposal would amend Rule 12601(b)(2) to provide 
that if a cancellation request is made by one or more parties within 
ten calendar days before a scheduled hearing session and granted, the 
party or parties making the request shall pay a fee of $600 per 
arbitrator (``Late Cancellation Fee'') in addition to any required 
Postponement Fee.\19\
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    \17\ See id. at 9775. See also Exchange Act Release No. 73245 
(Sept. 29, 2014), 79 FR 59876 (Oct. 3, 2014) (Order Approving File 
No. SR-FINRA-2014-026) (``Honoraria Order'').
    \18\ See Notice, 80 FR at 9774, note 10. The text of the 
proposed rule change is available at the principal office of FINRA, 
on FINRA's Web site at http://www.finra.org, and at the Commission's 
Public Reference Room. For ease of reference, this Order generally 
refers only to rules in the Customer Code. However, the changes and 
discussion would also apply to the same rules of the Industry Code.
    \19\ See id. at 9774-75. See also supra note 10.
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    FINRA believes that these changes would result in fewer late 
cancellations by parties to an arbitration as the higher Late 
Cancellation Fee would incentivize parties to begin settlement 
negotiations earlier in the process.\20\ FINRA also believes that the 
increased Late Cancellation Fee would help address arbitrators' 
concerns about honoraria and compensation for lost time and 
opportunities, thus helping decrease arbitrator turnover.\21\
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    \20\ See Notice, 80 FR at 9775.
    \21\ See id.
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B. Proposed Increase to Late Cancellation Fees and Cancellation 
Timeframe

    The proposal would amend Rules 12601(b)(2) and 13601(b)(2) to 
increase from three business days to ten calendar days the timeframe 
before which parties must request cancellation of hearings in order to 
avoid incurring the proposed Late Cancellation Fee. FINRA believes that 
the increased time would give arbitrators more opportunity to secure 
other income-generating opportunities and potentially save arbitrators 
time lost in preparation for assigned hearings.\22\
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    \22\ See id. (explaining that many hours of reviewing materials 
might be involved depending on the number of parties involved and 
the complexity of the case).
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    The proposed rule change would also increase the amount of 
honoraria paid to arbitrators for late cancellations of hearings from 
$100 to $600 per arbitrator, making the honorarium equal to that which 
arbitrators would have received for one typical day of hearings,\23\ no 
matter how many consecutive days are cancelled.\24\ The

[[Page 30742]]

Late Cancellation Fee would continue to be charged to the party or 
parties making the request, but under Rule 12601(b)(2), arbitrators 
have the authority to allocate all or a portion of the fee to the non-
requesting party if the arbitrators determine that the non-requesting 
party caused or contributed to the cancellation.\25\ Moreover, Rule 
12601(b)(2) also permits the panel to waive the Late Cancellation Fee 
if an extraordinary circumstance prevented a party or parties from 
making a timely cancellation request.\26\ This would not change if the 
Commission approves the proposed rule change.
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    \23\ A hearing is a meeting between the parties and the 
arbitrators of four hours or less to determine the merits of the 
arbitration. See FINRA Rules 12100(m) and 13100(m); see also FINRA 
Rules 12100(n) and 13100(n). A typical day in an arbitration case 
has two hearing sessions. See Notice, 80 FR at 9774, note 7.
    \24\ Under the proposed rule change, the Late Cancellation Fee 
for a three-person arbitration panel would be $1,800, instead of 
$300 under the current rules. FINRA reported in the Notice that it 
found that approximately 80% of arbitration cases were heard by a 
three-person panel based on an analysis of arbitration data from 
September 2013 to August 2014. See Notice, 80 FR at 9774, note 6.
    \25\ See Notice, 80 FR at 9775.
    \26\ See id. (explaining that ``the panel [may] waive the fees . 
. . if the circumstances warrant, like a sudden illness or 
accident'').
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    The proposed rule change would also shift the phrase ``and 
granted'' to the end of the first dependent clause in Rule 12601(b)(2) 
to clarify that the timing of a cancellation request controls whether 
the fee is assessed, not the timing of the arbitrators' decision on the 
request, if a decision is required.\27\
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    \27\ See id. (describing the circumstances when the Late 
Cancellation Fee would not apply when parties jointly request 
cancellation or postponement ten calendar days or more before a 
scheduled hearing date or one party makes a cancellation request).
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    FINRA is also proposing to make conforming changes to Rule 
12214(a), by amending the reference to the Late Cancellation Fee in 
Rule 12214(a).

III. Summary of Comments and FINRA's Response

    As noted above, the Commission received twelve comment letters on 
the proposed rule change \28\ and a response letter from FINRA.\29\ As 
discussed in more detail below, ten of the twelve commenters expressed 
support for FINRA's proposal.\30\ Five of those ten commenters, 
however, also suggested some modifications.\31\ Two of the twelve 
commenters expressed opposition to the proposed rule change.\32\ The 
sections below outline the suggestions or specific concerns raised by 
the commenters suggesting changes or opposed to the proposal as well as 
FINRA's response.
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    \28\ See supra note 4.
    \29\ See supra note 6.
    \30\ See Caruso Letter, Aidikoff Letter, Friedman Letter, 
Bakhtiari Letter, Harris Letter, PIRC Letter, CSLC Letter, MSU 
Letter, PIABA Letter, and Ryder Letter.
    \31\ See PIRC Letter, CSLC Letter, MSU Letter, PIABA Letter, and 
Ryder Letter.
    \32\ See GSU Letter and Steiner Letter.
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A. Effect of Late Cancellation Fees on Customer Claimants

1. Potential Impact on Settlement of Claims
    While a majority of the commenters supported the proposed increase 
in arbitrator honoraria, two commenters opposed the proposed rule 
change stating that the increased Late Cancellation Fee could 
discourage parties from settling their claims and, instead, encourage 
them to arbitrate their claims.\33\ One of these commenters stated that 
the proposal would impose additional costs on customer claimants making 
the arbitration forum less consumer friendly.\34\ The other commenter 
stated that the proposal would negatively impact small investors. In 
this commenter's view, investors asserting ``small'' claims may feel 
pressure to arbitrate even when it is in their best interest to settle 
a claim because of the threat of the increased Late Cancellation 
Fee.\35\
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    \33\ See id.
    \34\ See Steiner Letter.
    \35\ See GSU Letter (noting that the proposal represents a 500% 
increase in the penalty for cancellation and claimants might choose 
to forego settlement to avoid the increased Late Cancellation Fee).
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    In its response, FINRA acknowledged that customers would likely be 
required to pay some of the increased Late Cancellation Fee under the 
proposed rule change.\36\ FINRA also acknowledged that the proposed 
increase could affect settlement negotiations if the potential 
settlement amount is small compared to the Late Cancellation Fee.\37\ 
FINRA noted, however, that ``the Codes provide parties with some cost 
mitigation options, regardless of their claim amount.'' \38\ For 
instance, parties could avoid the Late Cancellation Fee by providing 
sufficient notice when requesting the cancellation of a scheduled 
hearing.\39\ FINRA also stated that if, however, parties settle a claim 
with fewer than ten days remaining to cancel a scheduled hearing,\40\ 
the parties could negotiate (as part of any settlement agreement) the 
allocation of fees.\41\ In addition, FINRA noted that arbitrators have 
the authority under the Codes (i) to allocate all or a portion of the 
Late Cancellation Fee to the party or parties that cause a delay or 
contribute to the need to cancel or otherwise postpone a scheduled 
hearing \42\ or (ii) to waive the Late Cancellation Fee ``in the event 
that an extraordinary circumstance prevents a party or parties from 
making a timely postponement request.'' \43\
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    \36\ See FINRA Response Letter.
    \37\ See id. See also Notice, 80 FR at 9775.
    \38\ See FINRA Response Letter (stating that ``parties would 
avoid the late cancellation fee by providing notice of a 
cancellation 10 or more days prior to the first scheduled hearing 
session'').
    \39\ See id.
    \40\ See GSU Letter (stating that ``many matters settle on the 
eve of arbitration'').
    \41\ See FINRA Response Letter (stating, for example, that if a 
party waits until the day before a hearing to begin settlement 
negotiations in earnest, the party who is not the cause of the delay 
has leverage to negotiate with the other party to pay all, or a 
larger percentage of, the Late Cancellation Fee). See FINRA Rules 
12701(b) and 13701(b) (under Rules 12701(b) and 13701(b), a customer 
may only be responsible for half the proposed Late Cancellation Fee 
if the settlement agreement does not address its allocation).
    \42\ See FINRA Response Letter.
    \43\ Id.
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2. Proposed Exemptions for ``Small'' Claims
    Two commenters suggested that FINRA amend the proposal to create 
exceptions for investors with ``small'' claims.\44\ One of these 
commenters recommended setting an exemption threshold for claims of 
$100,000 or less.\45\ The other commenter, who otherwise supported the 
proposal, also suggested that FINRA amend the proposal to exempt 
investors with claims of $50,000 or less.\46\ This commenter suggested 
that an investor with a claim of $50,000 or less who cancels a hearing 
session less than ten days before the scheduled date would pay more in 
Late Cancellation Fees than he or she would pay in honorarium if the 
hearing took place.\47\ The commenter stated that this may create 
``another roadblock to requesting a hearing.'' \48\ This commenter 
believes that investors with claims of $50,000 or less who cancel a 
scheduled hearing should only be subject to the Postponement Fee,\49\ 
or alternatively, that FINRA should reduce the Late

[[Page 30743]]

Cancellation Fee for small claims to ``an amount that comports with the 
lower compensation rate for Rule 12800 arbitrators.'' \50\
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    \44\ See GSU Letter and Ryder Letter (generally supportive of 
the proposal because it would help FINRA recruit and retain 
arbitrators).
    \45\ See GSU Letter.
    \46\ See Ryder Letter (noting that arbitrators receive a $350 
honorarium under FINRA Rules 12800(a) and 12800(f) when they oversee 
arbitration claims of $50,000 or less. If parties request and 
schedule a hearing, then later cancel the hearing with insufficient 
notice, however, the fees would include the $450 Postponement Fee 
and the $600 Late Cancellation Fee).
    \47\ See id. (stating that ``[c]harging for the late notice more 
than three times ($450 & $600) the amount the Arbitrator is to be 
compensated for service ($350) will erect an unnecessary, unhealthy 
and substantial impediment to aggrieved customers'').
    \48\ See id.
    \49\ See id. (recommending that FINRA pay arbitrators from funds 
collected under the Postponement Fee rather than charging a Late 
Cancellation Fee when a late settlement occurs, which would ``allow 
customers a more realistic choice of a hearing.'').
    \50\ See id.
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    In its response, FINRA noted that claims of $50,000 or less are 
subject to FINRA Rules 12800 and 13800 (``simplified arbitration 
rules'').\51\ Under the simplified arbitration rules, these types of 
claims are usually decided by one arbitrator based on the pleadings 
submitted. In these cases, no hearings are held and, consequently, the 
Late Cancellation Fee would not apply to these investors. The 
simplified arbitration rules, however, permit customers who have claims 
of $50,000 or less to request a hearing.\52\ In that event, the 
provisions of the Code relating to hearings and prehearings, including 
those governing fee, would apply; \53\ accordingly, the customer 
claimant could be subject to the increased Late Cancellation Fee if the 
parties do not request a cancellation or postponement before the point 
when the Late Cancellation Fee would apply. FINRA stated, however, that 
when a customer with a claim of $50,000 or less requests a hearing, 
FINRA pays the arbitrators regular hearing session honoraria pursuant 
to Rule 12214 instead of the $350 honorarium for deciding a claim based 
solely on the pleadings pursuant to FINRA Rules 12800(f).\54\
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    \51\ See FINRA Response Letter.
    \52\ See FINRA Rule 12800(c)(1). The Ryder Letter noted that out 
of approximately 200 small claims awards in 2014, 36 investor 
claimants requested a hearing.
    \53\ See FINRA Rule 12800(c)(2).
    \54\ See FINRA Response Letter.
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    FINRA also stated that it believes that exempting claims of 
$100,000 or less as suggested in the GSU Letter would not address the 
primary goal of the proposed rule change, which is to encourage parties 
to provide earlier notice to cancel a scheduled hearing.\55\ FINRA 
believes that, irrespective of the amount in dispute, the current fee 
does not adequately compensate arbitrators for the amount of time they 
devote to preparing for hearings as well as the opportunity cost 
relating to the time they have set aside for scheduled hearings.\56\
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    \55\ See id.
    \56\ See id.
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    In addition, FINRA believes that small claims customers could 
mitigate the Late Cancellation Fee by, among other things, negotiating 
(as part of any settlement agreement) the allocation of fees, 
requesting that the panel waive the late cancellation fee based on 
extraordinary circumstances, or requesting that the panel or FINRA 
waive the Late Cancellation Fee pursuant Rule 12601(b)(3).\57\
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    \57\ See id. (stating that a ``waiver of the fee by the panel or 
by FINRA would not affect the payment of the honorarium''). See also 
infra note 85 (describing the forum's policy regarding payment of 
the honorarium to the arbitrators in the event the fee is waived).
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    Moreover, FINRA believes that carving out an exception for 
``small'' claims would create a two-tiered fee system and lead to an 
additional burden on FINRA staff.\58\
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    \58\ See FINRA Response Letter. See also infra Section III.D.
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    For the reasons discussed above, FINRA believes that the proposed 
rule change should apply to all scheduled hearings regardless of the 
size of the claim.\59\ Therefore, FINRA declined to modify the proposed 
rule change to exempt parties of $100,000 or less from the Late 
Cancellation Fee.\60\

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    \59\ See FINRA Response Letter.
    \60\ See id.
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B. Eliminate the Cost to Claimants in the Event of a Settlement

    One commenter recommended that FINRA amend the proposal to exempt 
parties from Late Cancellation Fees incurred due to late cancellations 
that are ``necessary to accommodate a mediation (or other settlement 
efforts) or because a case has been settled.'' \61\ This commenter 
stated that the customer claimants cannot control when member firms 
begin to consider settlement \62\ and that the financial impact of the 
increased Late Cancellation Fee would negatively affect customer 
claimants more than broker-dealers.\63\
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    \61\ PIABA Letter.
    \62\ See id. (arguing that ``[s]ince it is respondents that get 
to keep their dollars in their pockets until a given claimant's case 
is over . . . it is respondents that need incentives to `address 
issues earlier in their cases' [citing the Notice]'').
    \63\ See id. (suggesting that it is not fair to make claimants 
equally bear the financial burden due to ``the financial impact of 
the increase in the amount of the per-arbitrator fee in the proposed 
rule change, as between a typical individual claimant and a large 
broker dealer, is too disparate to claimants, who will `feel' the 
impact of the fee much more than broker dealers will'').
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    In the Notice, FINRA acknowledged that customers would likely be 
required to pay some of the increased Late Cancellation Fee under the 
proposed rule change.\64\ FINRA believes, however, that ``the cost of 
arbitration should be borne by users of the forum.'' \65\ FINRA stated 
that since either customers or members may seek to cancel or postpone a 
hearing, it would be inequitable to require industry members to bear 
the entire proposed Late Cancellation Fee.\66\ FINRA also believes that 
both customers and members ``benefit from the forum attracting and 
retaining qualified, dedicated arbitrators . . . and they should share 
in the effort to sustain and improve the forum.'' \67\
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    \64\ See Notice, 80 FR at 9775.
    \65\ FINRA Response Letter.
    \66\ See id. FINRA also stated that as part of the fee increases 
approved in the Honoraria Order, FINRA ``allocated a large portion 
of the arbitration fee increases to members by significantly 
increasing member surcharges and process fees'' and that these fees 
cannot be allocated to other parties. In addition, FINRA noted that 
member firms may also be responsible for the related fees, such as 
filing fees and hearing session fees.
    \67\ Id.
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    For these reasons, FINRA declined to modify its proposal to exempt 
parties from Late Cancellation Fees incurred by parties attempting to 
accommodate mediation or other settlement efforts.

C. Presumption That Only Members Would Pay Late Cancellation Fee

    One commenter expressed concern that the proposed rule change would 
``run counter to FINRA's objective of providing an affordable method to 
resolve disputes'' \68\ and recommended that FINRA create a rebuttable 
presumption that either the member firm or the associated person be 
responsible for the proposed Late Cancellation Fee unless the 
arbitrators determine that the customer caused the need for the 
cancellation or postponement.\69\
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    \68\ CSLC Letter.
    \69\ See id.
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    In its response, FINRA stated that that it does not believe that 
the proposed Late Cancellation Fee would significantly affect the 
affordability of the dispute resolution forum, noting that investors 
``experience substantial savings in arbitration compared to 
litigation.'' \70\ Specifically, FINRA stated that ``the benefits and 
cost of savings of arbitration make filing an arbitration claim a less 
costly option for investors, notwithstanding the potential costs of the 
proposed late cancellation fee.'' \71\ In addition, FINRA stated that 
customers can avoid the proposed new Late Cancellation Fee by 
cancelling or postponing a hearing at least ten calendar days before 
the scheduled hearing date; and, FINRA stated that ``the Codes provide 
parties with some mitigation strategies to use to

[[Page 30744]]

potentially reduce the amount of the fee assessed.'' \72\
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    \70\ FINRA Response Letter (explaining that ``claims in 
arbitration are typically resolved more quickly than claims in 
litigation'' due to limits on discovery and the avoidance of delays 
and costs associated with appeals and that ``[a]ttacks on awards are 
rare and are based on narrow grounds under the Federal Arbitration 
Act'').
    \71\ Id.
    \72\ Id. See also supra note 41.
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    FINRA also believes that amending the proposal to impose a 
rebuttable presumption that the member or associate person be 
responsible for any Late Cancellation Fee would be unfair because there 
are instances in which customers create the need for and request a 
cancellation.\73\ Furthermore, FINRA stated that since both customers 
and FINRA members benefit from the arbitration forum and its ability to 
attract and retain qualified, dedicated arbitrators, ``it would be 
inequitable for industry members to pay 100 percent of the proposed 
late cancellation fee.'' \74\
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    \73\ See FINRA Response Letter.
    \74\ Id.
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    For these reasons, FINRA declined to modify its proposed rule to 
create a presumption that member firms and associated persons pay the 
proposed late cancellation fees.

D. Creation of Late Cancellation Fee Tiers

    Two commenters recommended that FINRA modify the proposed rule to 
create separate tiers of Late Cancellation Fees that would apply based 
on when a request for cancellation or postponement is made.\75\ Under 
these modifications, the earlier a party requests cancellation or 
postponement, the smaller the Late Cancellation Fee.\76\
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    \75\ See GSU Letter (arguing that this modification would 
``lessen the impact on parties who decide to settle closer to the 
arbitration date while still ensuring arbitrators are adequately 
compensated for their lost time and opportunities''); and CSLC 
Letter.
    \76\ The GSU Letter suggested a phased-in Late Cancellation Fee 
that would cost $100 per arbitrator ``if a hearing is cancelled 
between ten and four business days in advance of a hearing, with the 
fee increasing to $600 per arbitrator for a cancellation or 
postponement three business days prior to the scheduled hearing.''
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    FINRA believes adopting a phased-in, or sliding-scale, approach 
would be confusing for parties and more complex and time-consuming for 
staff to implement.\77\ For example, FINRA believes that a tiered 
approach to calculating Late Cancellation Fees may lead to inaccurate 
fee calculations and create an additional burden on its staff 
resources.\78\ In addition, FINRA stated that it does not believe that 
a sliding scale of Late Cancellation Fees ``would provide enough of an 
incentive to encourage parties to change their behavior.'' \79\ 
Moreover, FINRA stated that incorporating the commenters' suggestions 
would delay the implementation of the rule (if approved by the 
Commission) because FINRA would need to ``reprogram its technology 
platforms to implement the changes.'' \80\
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    \77\ See FINRA Response Letter.
    \78\ See id.
    \79\ Id.
    \80\ Id.
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    For these reasons, FINRA declined to modify its proposal to create 
additional tiers of late cancellation fees.\81\
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    \81\ See id.
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E. Arbitrators' Conflict of Interest

    Three commenters expressed concern that the proposed rule change 
would create a conflict of interest for arbitrators considering whether 
to waive the Late Cancellation Fee in the event of an extraordinary 
circumstance as permitted under Rule 12601(b)(2).\82\ Specifically, 
these commenters suggested that the proposed increase to arbitrator 
honoraria would provide arbitrators greater incentive to deny a request 
for waiver because the Late Cancellation Fees are typically used to 
fund their honoraria payments.\83\ In order to neutralize this 
conflict, one commenter recommended revising the proposal to require 
FINRA to ``bear the financial responsibility for the late cancellation 
honoraria in those limited situations where it is appropriate for the 
arbitrators to waive the late cancellation fee.'' \84\
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    \82\ See PIABA Letter; MSU Letter; and CLSC Letter (citing 
support for the issue in the PIABA Letter).
    \83\ See, e.g., MSU Letter (stating that ``the substantial 
increase in the fee granted to each arbitrator could discourage an 
arbitrator from granting the waiver''); and CSLC Letter (noting that 
``the requesting party is asking the arbitrators to waive the 
compensation that the arbitrators themselves would be entitled to'' 
and arguing that the conflict ``is amplified when the late 
cancellation fee is increased as dramatically as proposed'').
    \84\ PIABA Letter.

 The CSLC Letter Proposed the Following Sliding-Scale Late Cancellation
                              Fee Schedule
------------------------------------------------------------------------
                                                           Cancellation
     Calendar days before hearing when notice given           fee per
                                                            arbitrator
------------------------------------------------------------------------
11 or more..............................................              $0
9-10....................................................             100
7-8.....................................................             200
5-6.....................................................             300
4 or fewer..............................................             600
------------------------------------------------------------------------

    In its response, FINRA stated that the forum's policy currently is 
``to pay arbitrators the fee they would have received in the event the 
panel waives the late cancellation fee for the parties'' \85\ and that 
this policy would not change if the proposal is approved by the 
Commission.\86\ Accordingly, FINRA declined to modify its proposal as 
recommended.\87\
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    \85\ FINRA Response Letter (referencing Exchange Act Release No. 
49545 (Apr. 8, 2004), 69 FR 19887 (Apr. 14, 2004) (File No. SR-NASD-
2003-164) (Notice of Filing by NASD, Inc. Relating to the 
Adjournment of a Hearing Within Three Business Days of the First 
Scheduled Hearing Session), at 19889, which states that ``a waiver 
of the fee . . . will not affect the payment of the honorarium'').
    \86\ See FINRA Response Letter.
    \87\ See id.
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F. Additional Arbitrator Training

    One commenter suggested that FINRA provide additional arbitrator 
training on the types of extraordinary circumstances that would be 
appropriate to consider when deciding whether to waive the late 
cancellation fee, as well as how to verify the accuracy of these 
circumstances.\88\
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    \88\ See PIABA Letter (noting that this training would 
``reinforce the need for arbitrators to give appropriate 
consideration of the parties' requests for a waiver of late 
cancellation fees in extraordinary circumstances'' and further 
suggesting that arbitrators be reminded that ``the rules involved 
specifically acknowledge that there can be `extraordinary 
circumstances' that can excuse a late cancellation'').
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    In its response, FINRA stated that while ``it has not received any 
complaints from parties about arbitrators failing to waive late 
cancellation fees in the event of extraordinary circumstances'' it has 
issued guidance on this issue in its Notice to Members 04-53.\89\ The 
guidance states that ``there are some extraordinary circumstances that 
could prevent a party from making an adjournment request in time to 
avoid the additional fee assessment (e.g., a serious accident or sudden 
severe illness).'' \90\ FINRA stated that this guidance would continue 
to apply if the Commission approves the proposal.\91\ FINRA also 
stated, however, that it ``would review the applicable arbitrator 
training modules and scenarios and update them, where necessary'' if 
the Commission approves the proposed rule change.\92\ FINRA also stated 
that it would publish a Regulatory Notice ``explain[ing] how the rule 
would be applied, including any changes to the examples of what FINRA 
considers `extraordinary circumstances.''' \93\
---------------------------------------------------------------------------

    \89\ FINRA Response Letter.
    \90\ Id.
    \91\ See id.
    \92\ Id.
    \93\ Id.
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G. Education for Pro se Claimants About Late Cancellation

    Three commenters expressed concern that the proposed rule change 
may harm investors who represent themselves in the forum (``pro se 
claimants'') because they may be less likely to be aware of the 
increased fee and deadline for

[[Page 30745]]

timely requesting a cancellation.\94\ The commenters recommended that 
FINRA provide additional information and education to pro se claimants 
to help ensure that they are aware of the Late Cancellation Fee and 
timeline.\95\ One of these commenters also recommended that FINRA 
notify pro se claimants with claims under $100,000 by letter 30 days 
before a scheduled hearing to inform them of the fees and the ten-day 
cancellation period.\96\
---------------------------------------------------------------------------

    \94\ See PIABA Letter (noting that ``there will likely be pro se 
claimants that are unaware of the existence of the rule calling for 
late cancellation fees''); PIRC Letter (citing support for the 
position in the PIABA Letter); and MSU Letter (arguing that ``pro se 
claimants need extra protection against incurring unexpected fees in 
a complicated arbitration forum'').
    \95\ See, e.g., PIABA Letter (suggesting that ``FINRA provide 
additional education to pro se claimants so that they can make 
informed decisions about postponing final hearing sessions'').
    \96\ See MSU Letter (noting that a claimant ``could be 
responsible for paying large percentages of her possible settlement 
in fees that she may not know exist'').
---------------------------------------------------------------------------

    In its response, FINRA stated that it believes that ``all parties 
should be reminded of the proposed rule change, so that they are aware 
of the ramifications of postponing or cancelling a scheduled hearing 
inside of the proposed cancellation period.'' \97\ Accordingly, FINRA 
stated that it would train arbitrators to remind the parties of the 
deadline and Late Cancellation Fees at the initial prehearing 
conference (``IPHC''), as well as publish an updated Regulatory Notice 
describing the proposed rule changes.\98\ Furthermore, FINRA stated 
that it would instruct the arbitrators to include this reminder in the 
IPHC Scheduling Order, which is provided to the parties at the outset 
of the dispute, so that parties will be informed of their 
responsibilities.\99\
---------------------------------------------------------------------------

    \97\ FINRA Response Letter.
    \98\ See id.
    \99\ See id.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposal, the comments 
received, and FINRA's response to the comments. Based on its review of 
the record, 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.\100\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(5) of the Act,\101\ which 
requires that FINRA's rules provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and other 
persons using any facility or system which FINRA operates or controls. 
The Commission also finds that the proposed rule change is consistent 
with Section 15A(b)(6) of the Act,\102\ which requires, among other 
things, that FINRA's 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.
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    \100\ In approving the proposed rule change, the Commission has 
also considered the rule change's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \101\ 15 U.S.C. 78o-3(b)(5).
    \102\ 15 U.S.C. 78o-3(b)(6).
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    As discussed above, the proposed rule change would: (i) Increase a 
fee for the late cancellation of a scheduled arbitration hearing, (ii) 
lengthen the notice period for a party to cancel a scheduled hearing 
without incurring the fee, and (iii) increase the amount of honoraria 
paid to arbitrators affected by the late cancellation of a scheduled 
hearing. As stated above, FINRA designed the proposal to, among other 
things: (i) encourage parties to an arbitration to provide more advance 
notice of cancellations and postponements of hearing sessions, and (ii) 
help recruit and arbitrators by better compensating them for their lost 
time and opportunities in the event of a late cancellation or 
postponement.
    The Commission received twelve comment letters on the proposed rule 
change \103\ and FINRA's response to the comments.\104\ The Commission 
notes that most of the commenters generally supported the proposed rule 
change, believing that ``the increase in the late cancellation fee will 
assist the forum in its efforts to retain qualified arbitrators willing 
to devote the time and energy necessary to serve on arbitration 
panels.'' \105\ The Commission also notes that a number of commenters 
believe that the proposal would provide ``a financial incentive for 
parties to begin negotiations and finalize settlements earlier in the 
process.'' \106\ The Commission also notes, however, that some 
commenters opposed the proposal \107\ or recommended FINRA revise 
certain aspects of it.\108\
---------------------------------------------------------------------------

    \103\ See supra note 4.
    \104\ See supra note 6.
    \105\ FINRA Response Letter. See also Friedman Letter (noting 
that ``arbitrator retention is very challenging'' and arguing that 
``anything that can be done, such as the proposed rule change, to 
discourage last-minute settlements should be supported'').
    \106\ FINRA Response Letter. See also supra note 4.
    \107\ See supra note 32.
    \108\ See supra note 31.
---------------------------------------------------------------------------

    While the Commission appreciates the recommendations made by some 
commenters and recognizes that the proposal may result in an increased 
financial burden on some customer claimants, including those with small 
claims, the Commission believes that FINRA responded appropriately to 
their concerns. In particular, the Commission acknowledges the 
safeguards that FINRA has built into its proposal to mitigate the 
impact of the increase Late Cancellation Fee on customer claimants. For 
example, FINRA stated that parties could negotiate (as part of any 
settlement agreements) the allocation of fees, request that an 
arbitration panel waive the Late Cancellation Fee based on 
extraordinary circumstances, or FINRA could waive the Late Cancellation 
Fee.\109\ In addition, FINRA has represented that it would take 
additional steps to help pro se claimants by providing additional 
notice of the proposed increased fee as well as instructions for when 
parties must cancel a hearing in order to avoid the Late Cancellation 
Fee.\110\
---------------------------------------------------------------------------

    \109\ See FINRA Response Letter.
    \110\ See id. (noting that FINRA would publish a Regulatory 
Notice explaining how the rule would be applied, and would train 
arbitrators to advise parties at the IPHC that they would be subject 
to a Late Cancellation Fee if they requested a cancellation of a 
scheduled hearing within ten-business days of the hearing).
---------------------------------------------------------------------------

    Moreover, the Commission agrees with the views of certain 
commenters that the proposed rule ``strike[s] a balance between the 
parties and arbitrators that serve the forum.'' \111\ In addition, the 
Commission agrees with the many commenters who argue that the rule 
proposal would also more adequately compensate arbitrators for lost 
time and opportunities when hearings are cancelled without appropriate 
notice.\112\ Accordingly, the Commission believes that the proposed 
rule change would further the purposes of the Act by providing for the 
equitable allocation of reasonable fees, in this case the Late 
Cancellation Fee, among FINRA members, customers, associated persons, 
or other non-members using FINRA's arbitration forum.\113\
---------------------------------------------------------------------------

    \111\ See Bakhtiari Letter (stating that the proposed rules 
``provide a financial incentive for parties to discuss and 
consummate settlements . . . while providing arbitrators with fair 
compensation when hearings are cancelled at the last minute'').
    \112\ See Harris Letter (arguing that ``[t]he $100 does not come 
close to compensating an arbitrator for the time or energy that he 
or she spent preparing''). See also Aidikoff Letter (stating that 
``waiting until the last minute does great disservice to the 
arbitrator pool in that arbitrators set aside the days that the 
hearing is scheduled and then are not compensated for last minute 
cancellations or postponements'').
    \113\ See 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

    Furthermore, the Commission agrees with FINRA's assessment that the 
proposal would ``encourage parties to

[[Page 30746]]

provide more advance notice of postponements and cancellations, or, in 
the alternative, to compensate arbitrators more than they are currently 
paid for lost time and opportunities in the event of a late 
postponement or cancellation.'' \114\ In addition, the Commission 
believes that increase the amount of honoraria paid to arbitrators 
affected by a late cancellation of a scheduled hearing would help FINRA 
achieve its goal of retaining and recruiting arbitrators to serve in 
its dispute resolution forum. Accordingly, the Commission believes that 
the proposed rule change would further the purposes of the Act as it is 
reasonably designed to protect investors and the public interest.\115\
---------------------------------------------------------------------------

    \114\ See Notice, 80 FR at 9774. See also FINRA Response Letter.
    \115\ See 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    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,\116\ that the proposed rule change (SR-FINRA-2015-003), be, and 
hereby is, approved.
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    \116\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\117\
---------------------------------------------------------------------------

    \117\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12971 Filed 5-28-15; 8:45 am]
 BILLING CODE 8011-01-P