Document ID: SEC-2018-1621-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-10-18T04:00Z

[Federal Register Volume 83, Number 202 (Thursday, October 18, 2018)]
[Notices]
[Pages 52857-52860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22681]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84418; File No. SR-FINRA-2018-026]

Self-Regulatory Organizations; Financial Industry Regulatory 

Authority, Inc.; Order Approving a Proposed Rule Change To Amend the 

Arbitrator Payment Rule To Pay Each Arbitrator a $200 Honorarium To 

Decide Without a Hearing Session a Contested Subpoena Request or a 

Contested Order for Production or Appearance

October 12, 2018.

I. Introduction

    On July 13, 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 Rule 12214(c) of 

the Code of Arbitration Procedure for Customer Disputes (``Customer 

Code'') and FINRA Rule 13214(c) through (e) of the Code of Arbitration 

Procedure for Industry Disputes (``Industry Code'' and together, 

``Codes''), to provide that FINRA will pay each arbitrator a $200 

honorarium to decide without a hearing session a contested subpoena 

request or a contested order for production or appearance.

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    \1\ 15 U.S.C. 78s(b)(1).

    \2\ 17 CFR 240.19b-4.

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    The proposed rule change was published for comment in the Federal 

Register on July 30, 2018.\3\ The public comment period closed on 

August 20, 2018. The Commission received four comment letters in 

response to the Notice, all supporting the proposed rule change.\4\ On 

October 5, 2018, FINRA responded to the comment letters received in 

response to the Notice.\5\ On August 23, 2018, FINRA extended the time 

period in which the Commission must approve the proposed rule change, 

disapprove the proposed rule change, or institute proceedings to 

determine whether to approve or disapprove the proposed rule change to 

October 26, 2018.\6\ This order approves the proposed rule change.

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    \3\ See Exchange Act Release No. 83699 (Jul. 24, 2018), 83 FR 

36647 (Jul. 30, 2018) (File No. SR-FINRA-2018-026) (``Notice'').

    \4\ See Letter from Steven B. Caruso, Maddox Hargett Caruso, 

P.C., dated July 25, 2018 (``Caruso Letter''); letter from Ryan K. 

Bakhtiari, Aidikoff, Uhl and Bakhtiari, dated July 31, 2018 

(``Bakhtiari Letter''); letter from Glenn S. Gitomer, McCausland, 

Keen and Buckman, dated August 1, 2018 (``Gitomer Letter''); and 

letter from Andrew Stoltmann, President, Public Investors 

Arbitration Bar Association (``PIABA''), dated August 15, 2018 

(``PIABA Letter''). Comment letters are available on the 

Commission's website at https://www.sec.gov.

    \5\ See Letter from Mignon McLemore, Assistant Chief Counsel, 

FINRA, to Mr. Brent J. Fields, Secretary, U.S. Securities and 

Exchange Commission, dated October 5, 2018 (``FINRA Letter''). The 

FINRA Letter is available on FINRA's website at http://www.finra.org, at the principal office of FINRA, at the Commission's 

website at http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2018-026-response-to-comments.pdf, and at 

the Commission's Public Reference Room.

    \6\ See Letter from Mignon McLemore, Assistant Chief Counsel, 

FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales 

Practices, Division of Trading and Markets, Securities and Exchange 

Commission, dated August 23, 2018.

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II. Description of the Proposed Rule Change \7\

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    \7\ The subsequent description of the proposed rule change is 

substantially excerpted from FINRA's description in the Notice. See 

Notice, 83 FR at 36648-36649.

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Background

    Parties to an arbitration typically exchange documents and 

information with each other to prepare for the arbitration through the 

discovery process.\8\ If one party objects to a discovery request, the 

party seeking the documents or information, or appearance may file a 

motion requesting that the arbitrator issue a subpoena \9\ or an order 

compelling discovery.\10\ The opposing party may oppose the filing 

party's motion, contesting the request for a subpoena \11\ or order 

compelling discovery.

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    \8\ See FINRA Rules 12505 and 13505.

    \9\ See FINRA Rules 12512 and 13512.

    \10\ See FINRA Rules 12513 and 13513.

    \11\ See FINRA Rules 12512(c) and 13512(c).

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Subpoena for Appearance

    Currently, under FINRA Rule 12214(d),\12\ each arbitrator who 

decides one or more contested subpoenas without a hearing session 

receives a one-time honorarium of $250 during the life of the 

arbitration case.\13\ The rule caps the total amount that the parties 

could pay the arbitrators to decide contested subpoena requests without 

a hearing in any one case at $750.\14\ The panel allocates the cost of 

the honorarium to the parties in the award.\15\ Arbitrators do not 

receive an honorarium for deciding unopposed requests to issue a 

subpoena.\16\

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    \12\ See also FINRA Rule 13214(d).

    \13\ See FINRA Rules 12214(d)(1) and 13214(d)(1).

     If a hearing session is required to decide the motion, each 

arbitrator who participates in the hearing session will receive a 

$300 honorarium instead. See FINRA Rules 12214(a) and 13214(a).

    \14\ See FINRA Rules 12214(d)(1) and 13214(d)(1). The 

chairperson of a three-person panel will decide the contested 

subpoena request without a hearing session, for which the 

chairperson would be paid $250. The honorarium for contested 

subpoena requests could increase in $250 increments, if, for 

example, the chairperson recuses or withdraws from the panel and the 

replacement chairperson must decide another contested subpoena 

request without a hearing session. In this instance, the replacement 

chairperson would receive a $250 honorarium for this work. In no 

event would the parties be charged more than $750 per case. See 

Notice at 36648, note 14.

    \15\ See FINRA Rules 12214(d)(3) and 13214(d)(3).

    \16\ See Notice at 36648.

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Order for Production or Appearance

    The Codes do not expressly provide an honorarium for arbitrators 

who decide requests for orders for production or appearance without a 

hearing session. FINRA does, however, provide arbitrators a $200 

honorarium to decide discovery-related motions without a hearing. \17\ 

Accordingly, FINRA categorizes requests to issue orders for production 

as discovery-related motions and pays $200 honorarium for each 

arbitrator deciding

[[Page 52858]]

the order, regardless of whether it is contested. FINRA does not pay 

the honorarium, however, for an order for appearance, regardless of 

whether it is contested or unopposed.\18\

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    \17\ FINRA Rules 12214(c) and 13214(c) provide that FINRA will 

pay each arbitrator an honorarium of $200 to decide a discovery-

related motion without a hearing session.

    \18\ See Notice at 36648-36649.

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Proposed Rule Change

    FINRA is proposing to amend FINRA Rules 12214(c) and 13214(c) to 

provide that FINRA would pay each arbitrator an honorarium of $200 to 

decide, without a hearing session: (i) A discovery-related motion; \19\ 

(ii) a motion that contains one or more contested subpoena requests 

\20\ or contested orders for production or appearance; or (iii) a 

motion that contains one or more contested subpoena requests and 

contested orders for production or appearance.\21\

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    \19\ Under the proposed rule change, FINRA would add a contested 

subpoena request and a contested order for production or appearance 

to the discovery-related motions rule; however, FINRA would not 

change the rule language explaining what constitutes a discovery-

related motion. See Notice at 36649, note 27.

    \20\ The proposal would retain what constitutes a contested 

subpoena by moving the description from FINRA Rule 12214(d)(2) to 

FINRA Rule 12214(c)(2)(ii). See Notice at 36649, note 28.

    \21\ See Notice at 36649.

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Contested Subpoena

    Specifically, the proposed rule change would reduce the honorarium 

that an arbitrator receives to decide a contested subpoena request from 

$250 to $200; however, it would also remove the per-case cap on these 

payments. Thus, under the proposed rule change, an arbitrator would 

receive a $200 honorarium for each contested subpoena request that he 

or she decides.\22\

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    \22\ See id. As is current practice, arbitrators would not 

receive an honorarium for an unopposed subpoena request. See Notice 

at 36649, note 29.

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Contested Orders for Production or Appearance

    In addition, the proposed rule change would now expressly provide a 

$200 honorarium for arbitrators deciding a contested order for 

production or appearance without a hearing session. Specifically, FINRA 

would not need to categorize requests to issue orders for production as 

discovery-related motions. Similarly, arbitrators would receive an 

honorarium for deciding without a hearing session, a contested 

arbitrator order for appearance as well as for production. Under the 

proposal, however, arbitrators would no longer receive an honorarium 

for deciding unopposed requests to issue an order for production.\23\

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    \23\ See Notice at 36649.

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    The proposed rule change would describe what constitutes a 

contested order for production or appearance by modeling the 

description on that of a contested subpoena request. Specifically, 

proposed FINRA Rule 12214(c)(2)(iii) would provide that a contested 

order for production or appearance shall include a motion requesting 

the issuance of an order for production or appearance, a written 

objection from the party opposing the issuance of the order, and any 

other documents supporting a party's position.\24\

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    \24\ Id.

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    Moreover, like a contested subpoena request, a party would be 

permitted to request the issuance of one or more orders in one 

motion,\25\ and if one or all of the arbitrator orders become 

contested, each arbitrator who decides the motion would receive one 

honorarium payment of $200.\26\

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    \25\ The proposed rule change would also permit parties to 

request the issuance of one or more subpoenas in the same motion or 

a combination of subpoena and order requests. See Notice at 36649, 

note 30.

    \26\ See Notice at 36649.

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Additional Proposed Changes

    The proposed rule change would also amend Rules 12214(a) and 

13214(a) to make a few non-substantive changes.\27\

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    \27\ See id.

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III. Comment Summary

Supportive Comments

    As noted above, the Commission received four comment letters on the 

proposed rule change, supporting the proposal.\28\ All four commenters 

support the proposal and believe that it represents a fair and 

reasonable approach to helping ensure that arbitrators are compensated 

according to the time and effort they devote to deciding a motion.\29\ 

Specifically, one commenter states that ``removing the per-case cap on 

[honorarium for contested subpoena requests] would provide consistency 

and fairness to the arbitrator payment rules by ensuring that the 

payment arbitrators receive for deciding these requests is commensurate 

with the time and effort spent on each motion.'' \30\ Two other 

commenters believe that the proposal would help FINRA retain and 

recruit qualified arbitrators to its arbitration forum.\31\ In 

particular, one commenter states that ``paying arbitrators fair 

honoraria commensurate with the time and effort required for deciding 

motions tends to encourage qualified arbitrators to serve on cases and 

as Chair.'' \32\

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    \28\ See supra note 4.

    \29\ See Caruso Letter, Bakhtiari Letter, Gitomer Letter, and 

PIABA Letter; see also FINRA Letter.

    \30\ Caruso Letter; see also Gitomer Letter (stating that the 

proposal would provide ``reasonable compensation for the time and 

effort spent in deciding these important requests.'').

    \31\ See Bakhtiari Letter and PIABA Letter.

    \32\ PIABA Letter; see also Bakhtiari Letter (stating that 

``fairly compensate[ing] arbitration Chairpersons for deciding 

contested subpoenas and orders of production and appearance'' would 

help FINRA recruit and retain qualified arbitrators to preside over 

its forum.).

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Additional Guidance

    One commenter also suggests that FINRA take additional action 

regarding the assessment of fees related to discovery-related motions 

for subpoenas and orders. Specifically, the commenter suggests that 

FINRA should ``informally advise arbitrators to consider assessing all 

fees to the non-prevailing party on contested discovery motions, where 

in the arbitrators' view the non-prevailing party's position lacked 

merit.'' \33\ Otherwise, the commenter suggests arbitrators may 

``naturally'' split fees between the parties which could encourage 

``spurious'' motion practice.\34\

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    \33\ PIABA Letter.

    \34\ See id.

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    In response, FINRA states that its arbitration forum already 

provides a mechanism for parties to argue their positions regarding the 

assessments of fees associated with an arbitration proceeding.\35\ 

Specifically, FINRA states that in the absence of an agreement between 

the parties governing the allocation of these fees, FINRA Rules 

12902(c) and 13902(c) give arbitrators discretion to determine how 

these fees should be allocated in an award.\36\ FINRA also states, 

however, that ``[p]arties may argue their positions regarding the 

appropriate assessment of fees and expenses in their motion papers or 

responses thereto the panel.'' \37\ Accordingly, FINRA rejects the 

notion that formal guidance on a panel's authority is necessary.\38\

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    \35\ See supra note 5.

    \36\ See FINRA Letter.

    \37\ FINRA Letter.

    \38\ See FINRA Letter.

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IV. Discussion and Commission Findings

    After careful review of the proposed rule change and the comment 

letters, 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.\39\ Specifically, the

[[Page 52859]]

Commission finds that the proposed rule change is consistent with 

Section 15A(b)(6) of the Exchange Act,\40\ 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 the Exchange 

Act,\41\ 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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    \39\ 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).

    \40\ 15 U.S.C. 78o-3(b)(6).

    \41\ 15 U.S.C. 78o-3(b)(5).

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    The Commission agrees with FINRA and the commenters that the 

proposed rule change would protect investors and the public interest by 

improving the FINRA arbitration forum for the parties that use it and 

the arbitrators who preside over claims.\42\ Currently, the FINRA rules 

governing fees and corresponding honoraria for the resolution of 

discovery-related subpoenas and orders in arbitration vary. As stated 

above, an arbitrator who decides one or more contested subpoenas 

without a hearing receives $250. An arbitrator receives no honorarium, 

however, for: (i) Deciding an unopposed request to issue a subpoena; or 

(ii) deciding requests for orders for appearance without a hearing. 

Furthermore, FINRA states that arbitrators only receive honorarium for 

deciding requests for orders for production without a hearing (for 

which an arbitrator would receive no honorarium) because FINRA 

typically characterizes them as discovery-related motions without a 

hearing so that it can pay $200 honorarium to each arbitrator for 

deciding the motion.\43\

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    \42\ See supra note 28; see also FINRA Letter.

    \43\ See supra notes 17 and 18.

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    The proposal would make the rules more transparent and consistent 

for both parties and arbitrators by providing for payments to each 

arbitrator of an honorarium of $200 to decide, without a hearing 

session: (i) A discovery-related motion; (ii) a motion that contains 

one or more contested subpoena requests or contested orders for 

production or appearance; or (iii) a motion that contains one or more 

contested subpoena requests and contested orders for production or 

appearance.\44\ According to FINRA, the existing structure for payments 

to arbitrators for deciding requests to issue subpoenas or orders 

without a hearing session has been difficult for parties and 

arbitrators to understand due to the differences between when, and 

under what circumstances, arbitrators will receive payments.\45\ For 

example, parties can incur different fees, and arbitrators can receive 

different honoraria, for contested and unopposed requests to issue 

subpoenas and orders.\46\

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    \44\ See Notice at 36649.

    \45\ See Notice at 36650; see also Notice at 36650, note 34.

    \46\ See Notice at 36650.

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    The Commission believes the proposal would also help FINRA retain 

and recruit qualified arbitrators to its forum by helping ensure 

arbitrators are paid honoraria commensurate with the time and effort 

they devote to deciding each request. As stated in the Notice, 

arbitrators must review several documents related to contested 

discovery-related requests: The motions requesting the issuance of the 

order or subpoena; the draft order or subpoena; and, any written 

objections to the motion. Arbitrators must then consider the arguments 

before making decisions on the merits of the request.\47\ Despite the 

similar type and amount of work necessary to decide certain discovery-

related requests for orders and subpoenas without a hearing, the rules 

expressly provide honoraria to arbitrators for deciding a contested 

subpoena but not for deciding a contested order.

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    \47\ See Notice at 36648.

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    The Commission believes that by structuring the arbitrator 

honorarium rules so that arbitrators receive the same amount of 

honorarium for each contested subpoena request or contested request for 

an order for production or appearance they decide without a hearing, 

the proposed rules would align the payment of honoraria to arbitrators 

based on the amount of time and effort required to revolve certain 

discovery-related motions rather than based on the characterization of 

those requests.\48\ The Commission also believes that simplifying the 

rules governing the payment of honorarium would help improve 

arbitrators' understanding of the honorarium structure.

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    \48\ See Notice at 36649.

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    The Commission acknowledges that the proposed rule change could 

increase fees for certain parties. For example, under the proposed rule 

change parties would be subject to fees for contested requests to issue 

orders of appearance without a hearing session; and, the proposal would 

remove the per-case cap on fees for contested subpoena requests so that 

parties would be assessed additional fees if they submit multiple 

contested requests for subpoenas.

    The Commission also acknowledges that the proposed rule change 

could lower fees for certain parties. For example, the proposal would: 

(i) Eliminate payment of honoraria to arbitrators deciding an unopposed 

order for production; and (ii) lower the amount of honoraria paid to 

arbitrators for deciding a contested subpoena request from $250 to 

$200. In addition, the proposal would permit a party or parties to use 

one motion to request the issuance of one or more contested subpoenas 

or orders so that parties could mitigate their fees.\49\ The Commission 

also acknowledges, however, that the proposal would eliminate the per-

case cap honoraria so arbitrators could receive additional payments for 

multiple contested requests for subpoenas.\50\

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    \49\ See Notice at 36649 and 36651.

    \50\ See id.

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    On balance, the Commission believes that the proposed rule change 

is designed to protect investors and the public interest. 

Notwithstanding the potential increase in fees to some parties in 

arbitration, the Commission believes that the proposal would improve 

the FINRA arbitration forum for its users.\51\

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    \51\ The Commission also notes that the proposal would help 

parties mitigate any potential fee increase by allowing parties to 

request one or more contested subpoenas or orders in one motion.

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    In addition, notwithstanding the potential decrease in honoraria in 

some cases, the Commission believes that the proposal would help FINRA 

retain and recruit qualified arbitrators to its forum.\52\ In 

particular the Commission believes that reducing the honoraria for 

contested subpoena requests while removing the per-case cap on these 

payments would help ensure that the honoraria arbitrators receive for 

deciding contested requests for orders and subpoenas without a hearing 

would be more commensurate with their time and effort to consider the 

requests.\53\ Furthermore, the Commission believes that retaining and 

recruiting qualified arbitrators is an essential element to operating 

an effective arbitration forum.\54\

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    \52\ The Commission also notes that the proposal would mitigate 

these decreases by removing the per-case cap on these honorarium 

payments.

    \53\ See supra note 29.

    \54\ See Notice at 36650; see also supra note 32.

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    The Commission acknowledges one commenter's request that FINRA 

provide additional guidance to arbitrators regarding their authority to 

assess all fees to the non-prevailing party on contested discovery 

motions, where in the arbitrators' view the non-prevailing party's 

position lacked

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merit.\55\ However, the Commission notes FINRA's statement that a 

mechanism for checking arbitrators' assessments of fees associated with 

an arbitration proceeding already exists.\56\ Accordingly, the 

Commission acknowledges FINRA's decisions not to provide additional 

formal guidance to its arbitrators.\57\

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    \55\ See supra notes 33 and 34.

    \56\ See supra note 37.

    \57\ See supra note 38.

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V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 

Exchange Act \58\ that the proposal (SR-FINRA-2018-026), be and hereby 

is approved.

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    \58\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 

pursuant to delegated authority.\59\

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    \59\ 17 CFR 200.30-3(a)(12).

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Eduardo A. Aleman,

Assistant Secretary.

[FR Doc. 2018-22681 Filed 10-17-18; 8:45 am]

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