Document ID: SEC-2020-1708-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-10-26T04:00Z

[Federal Register Volume 85, Number 207 (Monday, October 26, 2020)]
[Notices]
[Pages 67794-67802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23633]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90227; File No. SR-FINRA-2020-035]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
the FINRA Codes of Arbitration Procedure To Increase Arbitrator 
Chairperson Honoraria and Certain Arbitration Fees

October 20, 2020.
    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 October 16, 2020, the 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 the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') (together, 
``Codes'') to increase arbitrator chairperson (``Chair'') honoraria. 
Specifically, the proposed rule change would: (1) Increase the 
additional hearing-day honorarium Chairs receive for each hearing on 
the merits from $125 to $250 and (2) create a new $125 Chair honorarium 
for each prehearing conference in which the Chair participates. Under 
the proposed rule change, these increases would be funded primarily by 
minimal increases to the member surcharge and process fees for claims 
of more than $250,000 or claims for non-monetary or unspecified 
damages. The proposed rule change would also increase filing fees and 
hearing session fees for customers, associated persons and members 
bringing claims of more than $500,000

[[Page 67795]]

or claims for non-monetary or unspecified damage.
    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
(I) Background and Discussion
    FINRA makes arbitrator honoraria payments to its arbitrators for 
the services arbitrators provide to FINRA's dispute resolution forum. 
Currently, under FINRA Rule 12214(a), arbitrators receive $300 for each 
hearing session in which the arbitrator participates.\3\ In recognition 
of their increased experience and the extra responsibilities they must 
perform during an arbitration,\4\ Chairs currently receive an 
additional $125 for serving as Chair during a hearing (``hearing-day 
honorarium'').\5\ The Chair receives the additional honorarium for each 
hearing day, regardless of the number of hearing sessions held per day. 
Currently, Chairs do not receive an additional honorarium for 
prehearing conferences, even though Chairs are required to lead the 
prehearing conferences and perform additional tasks in connection with 
the prehearings, such as setting discovery, briefing, and motion 
deadlines, scheduling subsequent hearing sessions, and drafting 
prehearing orders.\6\
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    \3\ A ``hearing session'' is any meeting between the parties and 
arbitrator(s) of four hours or less, including a hearing or a 
prehearing conference. A typical day has two hearing sessions. See 
FINRA Rules 12100(p) and 13100(p).
    \4\ For example, during a typical arbitration, the Chair 
oversees the discovery process, conducts the initial prehearing 
conference (``IPHC'') and subsequent prehearing conferences as 
needed, drafts rulings and orders, and manages efficient hearings. 
For more information on Chair responsibilities and training, see 
https://www.finra.org/sites/default/files/FINRA_Chairperson_Training.pdf.
    \5\ The term ``hearing'' means the hearing on the merits of an 
arbitration under FINRA Rules 12600 and 13600. See FINRA Rules 
12100(o) and 13100(o).
    \6\ See FINRA Rules 12500(c) and 13500(c).
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    In addition, several hearing locations lack a sufficient number of 
local Chairs. Chairs are often the most experienced arbitrators on 
FINRA's roster and must meet additional requirements to serve as Chair. 
To qualify as a Chair, an arbitrator must complete Chair training and 
have served on at least three arbitrations through award in which 
hearings were held, or be a lawyer who served on at least one 
arbitration through award in which hearings were held.\7\ The low 
number of Chairs in some hearing locations can result in parties being 
presented a list with a majority of non-local Chairs. Parties have 
expressed concern about using non-local arbitrators to complete Chair 
lists. Parties typically prefer arbitrators from the same general 
geographic area to hear their cases because they live in the same 
community as the parties who bring their claims, and are familiar with 
local law and customs. Appointing arbitrators who live outside of the 
local hearing location may result in scheduling delays and requires 
FINRA to pay additional travel expenses.
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    \7\ See FINRA Rules 12400(c) and 13400(c).
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    Chair-eligible arbitrators have indicated that they are not 
interested in completing the required Chair training and serving on the 
Chair roster because of the extra work required compared to the modest, 
additional Chair honorarium currently offered. To provide more of an 
incentive for eligible arbitrators to become Chairs and to more 
adequately compensate Chairs for their additional work, FINRA is 
proposing to increase the current per-day Chair honorarium for hearings 
on the merits and establish a Chair honorarium for prehearing 
conferences.\8\ These increases would be funded primarily by minimal 
increases to the member surcharge and process fees for claims of more 
than $250,000 or claims for non-monetary or unspecified damages.\9\ The 
proposed rule change would also increase filing fees and hearing 
session fees for customers, associated persons and members bringing 
claims of more than $500,000 or claims for non-monetary or unspecified 
damages.\10\
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    \8\ Discovery issues can be particularly time-consuming; among 
other things, the new prehearing honorarium would recognize the 
additional work Chairs put in when ruling on discovery issues. See 
also supra note 4.
    \9\ The FINRA Dispute Resolution Task Force (``Task Force'') 
suggested raising arbitration fees to fund arbitrator honoraria 
increases. The Task Force recommended that the proposed fee 
increases should be consistent with the current arbitration fee 
structure, which assigns a majority of the costs of the forum to 
firms through the member surcharge and process fees. The Task Force 
issued its Final Report and Recommendations, available at https://www.finra.org/arbitration-mediation/finra-dispute-resolution-task-force.
    \10\ In 2014, FINRA increased arbitrator honoraria for the first 
time in 15 years to help retain a roster of high-quality arbitrators 
and attract qualified individuals. See Securities Exchange Act 
Release No. 73245 (September 29, 2014), 79 FR 59876 (October 3, 
2014) (Order Approving File No. SR-FINRA-2014-026). From the end of 
2014 through 2019, FINRA has increased the arbitrator roster by 
1,478. At the end of 2014, there were 6,361 arbitrators on the 
roster, and by the end of 2019, there were 7,839, an increase of 23 
percent.
    FINRA also recently increased the honorarium to Chairs who rule 
on motions or subpoenas without a hearing. See Securities Exchange 
Act Release No. 84418 (October 12, 2018), 83 FR 52857 (October 18, 
2018) (Order Approving File No. SR-FINRA-2018-026).
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    In all, on average the fees for an arbitration case would increase 
by $252, or 2.65 percent. FINRA believes that the cost of arbitration 
should be borne by the users of the forum, without imposing a 
significant barrier to public customers who bring arbitration claims to 
the forum. Thus, the fees are designed to be borne 85 percent by member 
firms and 15 percent by claimants.\11\
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    \11\ The proposed rule change would apply to all members, 
including members that are funding portals or have elected to be 
treated as capital acquisition brokers (``CABs''), given that the 
funding portal and CAB rule sets incorporate the impacted FINRA 
rules by reference.
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(II) Proposed Rule Change

A. Proposed Arbitrator Chair Honoraria Increases

    The proposed rule change would amend FINRA Rules 12214 and 13214 to 
increase the arbitrator Chair honoraria. Specifically, the proposed 
rule change would increase the hearing-day honorarium from $125 to $250 
to better compensate the Chair for the additional training and 
responsibilities required of the position.\12\ In addition, the 
proposed rule change would establish a new honorarium to pay a Chair an 
additional $125 for each prehearing conference in which he or she 
participates. Under the proposed rule change, Chairs would receive this 
additional compensation even if an arbitration case closes without a 
hearing. Thus, if the Chair participates in a prehearing 
conference,\13\ but the parties settle the case (as often occurs),\14\ 
the Chair would

[[Page 67796]]

still receive some compensation for serving as Chair.\15\
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    \12\ From 2014 through 2019, FINRA paid the hearing-day 
honorarium on an average of 2,569 times per year. In order to fund 
the proposed hearing-day honorarium increase from $125 to $250, 
FINRA would need to raise revenue by approximately $368,000 
annually. This estimate is an average of the projected revenue 
required in 2019-2021 to fund the increase to the Chair hearing-day 
honorarium.
    \13\ See FINRA Rules 12500(a) and 13500(a).
    \14\ See FINRA Rules 12701(a) and 13701(a).
    \15\ From 2014 through 2019, FINRA conducted an average of 4,954 
prehearing conferences per year. In order to pay the proposed 
additional Chair prehearing honorarium of $125, FINRA would need to 
raise revenue by approximately $724,000 annually. This estimate is 
an average of the projected revenue required in 2019-2021 to fund 
the new Chair honorarium for prehearing conferences.
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    FINRA recognizes that the proposed increase in the Chair honorarium 
for hearings and the new prehearing honorarium may not meet market 
rates.\16\ FINRA believes, however, these adjustments would better 
compensate Chairs for their important role in the proceedings requiring 
a minimal increase to the fees that customers, associated persons and 
members would be assessed.\17\
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    \16\ In other private arbitration forums like the American 
Arbitration Association (``AAA'') and JAMS, arbitrators set their 
own rates, which can be significantly higher than the honoraria 
FINRA provides. For example, a FINRA Chair would receive $600 for a 
full hearing day (two hearing sessions at $300 each) plus an 
additional $125 for serving as Chair; whereas, a AAA or JAMS 
arbitrator could receive $4,000 ($500/hour) for the same amount of 
time.
    \17\ Together, the changes to the Chair honoraria would add 
approximately $1.1 million to FINRA's annual expenses. See supra 
notes 1212 and 15.
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B. Proposed Increases to Arbitration Fees

    To fund increases in the arbitrator Chair honoraria, FINRA is 
proposing to increase the member surcharge, member process fees, filing 
fees, and hearing session fees that the forum assesses the parties 
during the course of an arbitration case. FINRA believes the proposed 
fee increases would generate sufficient revenue to offset the proposed 
increases in the arbitrator Chair honoraria without placing an undue 
burden on users of the forum, particularly customers and claimants with 
small claims.
(i) Proposed Member Surcharge Increases
    The Codes provide that a surcharge will be assessed against each 
member that: (1) Files a claim, counterclaim, cross claim, or third 
party claim under the Codes; (2) is named as a respondent in a claim, 
counterclaim, cross claim, or third party claim filed and served under 
the Codes; or (3) employed, at the time the dispute arose, an 
associated person who is named as a respondent in a claim, 
counterclaim, cross claim, or third party claim filed and served under 
the Codes.\18\ The member is assessed one surcharge per arbitration 
case.\19\ Member surcharges are intended to allocate the costs of 
administering the arbitration case to the firms that are involved in 
those cases. Thus, each member is assessed a member surcharge, based on 
the aggregate claim amount, when it is brought into the case, whether 
through a claim, counterclaim, cross claim or third party claim. The 
member surcharge is the responsibility of the member party and cannot 
be allocated to any other party (``non-allocable'').\20\
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    \18\ See FINRA Rules 12901 and 13901.
    \19\ See FINRA Rules 12901(a)(6) and 13901(f).
    \20\ See supra note 19.
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    FINRA is proposing to amend FINRA Rules 12901 and 13901 to increase 
the member surcharge for claims of more than $250,000 and claims for 
non-monetary or unspecified damages.
    Table 1 illustrates the proposed dollar and percentage changes for 
each tier.

                                       Table 1--Member Surcharge Schedule
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   Amount of claim (exclusive of interest and         Current                                       Percentage
                    expenses)                        surcharge     Proposed Fee       Change          change
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$.01 to $5,000..................................            $150            $150              $0               0
$5,000.01-$10,000...............................             325             325               0               0
$10,000.01-$25,000..............................             450             450               0               0
$25,000.01-$50,000..............................             750             750               0               0
$50,000.01-$100,000.............................           1,100           1,100               0               0
$100,000.01-$250,000............................           1,700           1,700               0               0
$250,000.01-$500,000............................           1,900           2,025             125               7
$500,000.01-$1,000,000..........................           2,475           2,625             150               6
$1,000,000.01-$5,000,000........................           3,025           3,200             175               6
$5,000,000.01-$10,000,000.......................           3,600           3,850             250               7
Over $10,000,000................................           4,025           4,325             300               7
Non-Monetary/Not Specified......................           1,900           2,000             100               5
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    The member surcharge would remain non-allocable under the proposed 
rule change and, therefore, would not result in any additional costs to 
other parties to the arbitration, including customer claimants.
(ii) Proposed Filing Fee Increases
    Under the Codes, if a customer, associated person, member, or other 
non-member files a claim, counterclaim, cross claim or third party 
claim, they must pay a filing fee to initiate an arbitration.\21\ The 
filing fee is based on the claim amount or type of damages 
requested.\22\
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    \21\ See FINRA Rules 12900(a)(1) and 13900(a)(1).
    \22\ See supra note 21.
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    FINRA is proposing to amend FINRA Rules 12900 and 13900 to increase 
the filing fees for customers, associated persons, other non-members, 
or members bringing claims of more than $500,000 and claims for non-
monetary or unspecified damages.
(1) Proposed Filing Fees Paid by Customers, Associated Persons or Other 
Non-Members
    To minimize the impact of the proposed rule change on customers or 
claimants with small claims, the proposed rule change would amend FINRA 
Rule 12900(a) to increase the filing fees for claims of more than 
$500,000 and claims for non-monetary or unspecified damages.\23\ Table 
2 shows the proposed dollar and percentage changes.
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    \23\ FINRA Rule 13900(a) applies filing fees for claims filed by 
associated persons. The claim amount tiers and filing fee amounts 
are the same as those in Rule 12900(a)(1). The proposed rule change 
would similarly amend Rule 13900(a) to increase the filing fees for 
claims of more than $500,000 and claims for non-monetary or 
unspecified damages.

[[Page 67797]]

              Table 2--Filing Fees for Customers, Associated Persons or Other Non-Member Claimants
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   Amount of claim (exclusive of interest and      Current claim  Proposed claim                    Percentage
                    expenses)                       filing fee      filing fee        Change          change
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$.01 to $1,000..................................             $50             $50              $0               0
$1,000.01-$2,500................................              75              75               0               0
$2,500.01-$5,000................................             175             175               0               0
$5,000.01-$10,000...............................             325             325               0               0
$10,000.01-$25,000..............................             425             425               0               0
$25,000.01-$50,000..............................             600             600               0               0
$50,000.01-$100,000.............................             975             975               0               0
$100,000.01-$500,000............................           1,425           1,425               0               0
$500,000.01-$1,000,000..........................           1,725           1,740              15               1
$1,000,000.01-$5,000,000........................           2,000           2,025              25               1
Over $5,000,000.................................           2,250           2,300              50               2
Non-Monetary/Not Specified......................           1,575           1,600              25               2
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(2) Proposed Filing Fees Paid by Members
    The proposed rule change would also amend FINRA Rules 12900(b) and 
13900(b) to increase the filing fees that members pay for claims of 
more than $500,000 and claims for non-monetary or unspecified damages. 
The filing fee for claims of more than $500,000 would increase by $100 
to $200, and for non-monetary claims, by $100.\24\ Table 3 shows the 
proposed dollar and percentage changes.
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    \24\ The partial refund amounts for settlements or withdrawals 
more than 10 days before the hearing on the merits would remain the 
same. See FINRA Rules 12900(c)(1) and 13900(c)(1).

                                    Table 3--Filing Fees for Member Claimant
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   Amount of claim (exclusive of interest and      Current claim  Proposed claim                    Percentage
                    expenses)                       filing fee      filing fee        Change          change
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$.01 to $1,000..................................            $225            $225              $0               0
$1,000.01-$2,500................................             350             350               0               0
$2,500.01-$5,000................................             525             525               0               0
$5,000.01-$10,000...............................             750             750               0               0
$10,000.01-$25,000..............................           1,050           1,050               0               0
$25,000.01-$50,000..............................           1,450           1,450               0               0
$50,000.01-$100,000.............................           1,750           1,750               0               0
$100,000.01-$500,000............................           2,125           2,125               0               0
$500,000.01-$1,000,000..........................           2,550           2,650             100               4
$1,000,000.01-$5,000,000........................           3,400           3,550             150               4
Over $5,000,000.................................           4,000           4,200             200               5
Non-Monetary/Not Specified......................           1,700           1,800             100               6
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(iii) Proposed Process Fee Increases
    The Codes provide that each member that is a party to an 
arbitration or employed an associated person who is a party to an 
arbitration in which the claim amount is more than $25,000 must pay a 
process fee based on the amount of the claim.\25\ FINRA assesses the 
member the applicable process fee when the parties are sent the 
arbitrator lists or notification of the hearing. Like the member 
surcharge, the process fee is non-allocable to other parties to the 
arbitration.\26\
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    \25\ See FINRA Rules 12903 and 13903. If a claim amount is less 
than $25,000, the member would not be assessed any process fees.
    \26\ See FINRA Rules 12903(d) and 13903(d). See also FINRA Rules 
12701(b) and 13701(b).
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    The proposed rule change would amend FINRA Rules 12903 and 13903 to 
increase the member process fees for claim amounts larger than $250,000 
and for claims for non-monetary or unspecified damages. Table 4 
illustrates the proposed dollar and percentage changes.

                                      Table 4--Member Process Fee Schedule
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   Amount of claim (exclusive of interest and         Current                                       Percentage
                    expenses)                       process fee    Proposed fee       Change          change
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$.01-$25,000....................................              $0              $0              $0               0
$25,000.01-$50,000..............................           1,750               0               0               0
$50,000.01-$100,000.............................           2,250               0               0               0
$100,000.01-$250,000............................           3,250               0               0               0
$250,000.01-$500,000............................           3,750           3,875             125               3
$500,000.01-$1,000,000..........................           5,075           5,225             150               3
$1,000,000.01-$5,000,000........................           6,175           6,375             200               3
$5,000,000.01-$10,000,000.......................           6,800           7,050             250               4
Over $10,000,000................................           7,000           7,300             300               4
Non-Monetary/Not Specified......................           3,750           3,850             100               3
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[[Page 67798]]

    The member process fees would remain non-allocable under the 
proposed rule change and, therefore, would not result in any additional 
costs to other parties to the arbitration, including customer 
claimants.
(iv) Proposed Hearing Session Fee Increases
    FINRA assesses hearing session fees against the parties for each 
hearing and pre-hearing session conducted by a panel.\27\ In the award, 
the panel determines the amount of the hearing session fees that each 
party is required to pay.\28\ The arbitrators may apportion the fees in 
any manner, including assessing the entire amount against one 
party.\29\
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    \27\ See FINRA Rules 12902(a) and 13902(a). See also supra note 
3.
    \28\ The term ``panel'' means the arbitration panel, whether it 
consists of one or more arbitrators. See FINRA Rules 12100(u) and 
13100(s).
    \29\ See FINRA Rules 12902(a)(1) and 13902(a)(1).
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    As the panel can allocate hearing session fees to customer 
claimants, the proposed rule change would amend FINRA Rules 12902 and 
13902 to increase the fees for claims of more than $500,000 and for 
claims for non-monetary or unspecified damages, and would be small, 
ranging from $25 to $75. There are different hearing session fees for 
hearings with one arbitrator versus hearings with three arbitrators. 
Under the proposed rule change, the fees would not change for hearings 
with one arbitrator, so that the forum remains accessible and 
affordable to customer claimants with small claims. Table 5 illustrates 
the proposed dollar and percentage changes.

                        Table 5--Hearing Session Fees for Session With Three Arbitrators
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                                                    Current fee    Proposed fee
   Amount of claim (exclusive of interest and     for session w/  for session w/                    Percentage
                    expenses)                          three           three          Change          change
                                                    arbitrators     arbitrators
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Up to $2,500....................................              NA              NA              NA              NA
$2,500.01-$5,000................................              NA              NA              NA              NA
$5,000.01-$10,000...............................              NA              NA              NA              NA
$10,000.01-$25,000..............................              NA              NA              NA              NA
$25,000.01-$50,000..............................            $600            $600              $0               0
$50,000.01-$100,000.............................             750             750               0               0
$100,000.01-$500,000............................           1,125           1,125               0               0
$500,000.01-$1,000,000..........................           1,300           1,325              25               2
$1,000,000.01-$5,000,000........................           1,400           1,435              35               3
Over $5,000,000.................................           1,500           1,575              75               5
Non-Monetary/Not Specified......................           1,125           1,150              25               2
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    The effects of the proposed hearing session fee increases may be 
minimized under the Codes. For example, if the parties settle the 
arbitration before any hearings are held, the parties will not be 
assessed hearing fees.\30\ During settlement negotiations, parties have 
the opportunity to determine how to share any hearing session fees, if 
hearings are held.\31\ For cases that result in an award, the panel has 
discretion to assess hearing session fees as part of the award,\32\ 
which allows them to consider numerous factors to determine each 
party's appropriate share and assign the costs accordingly. The 
proposed rule change would not change a party's ability to settle or 
arbitrators' discretion to assess the hearing session fees.
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    \30\ The panel will assess a hearing session fee against the 
parties for an IPHC, if one is held, in the award. See FINRA Rules 
12902(b)(1) and 13902(b)(1). See also FINRA Rules 12500(c) and 
13500(c).
    \31\ See FINRA Rules 12701(b) and 13701(b).
    \32\ See FINRA Rules 12902(a)(1) and 13902(a)(1).
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C. Examples of How the Proposed Honoraria and Fee Increases Would Be 
Applied

    The following two examples help illustrate how the proposed fee 
increases would affect a typical arbitration. FINRA notes that the fees 
associated with an arbitration claim depend on multiple factors 
including: The claim amount, the number of arbitrators, the number of 
hearing sessions conducted, how the arbitrators decide to assess the 
fees among the parties, and whether the case is settled or withdrawn.
(i) Claims Alleging Damages of $100,000.01 to $500,000
    For a claim between $100,000.01 and $500,000, the customer would 
pay a filing fee of $1,425 to initiate the claim.\33\ For this claim 
amount tier, there would be no increase to the filing fee. The member 
surcharge assessed against the firm would increase by $125, from $1,900 
to $2,025. The member process fees would also increase by $125, from 
$3,750 to $3,875. In total, the fees members would pay for cases in 
this claim amount tier would be $5,900, an increase of approximately 
four percent. The hearing session fees for this claim amount would 
remain unchanged at $1,125 per hearing session.
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    \33\ Between 2014-2019, FINRA closed on average 830 cases out of 
2,428 customer cases with damages in this range.
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(ii) Claims Alleging Damages Over $1,000,000.01 to $5,000,000
    For a claim between $1,000,000.01 and $5,000,000, the customer 
would pay $2,025, an increase of $25 from $2,000, to initiate the 
claim.\34\ The member surcharge to the firm would increase by $175, 
from $3,025 to $3,200. The member process fees would increase by $200, 
from $6,175 to $6,375. Together, the fees members would pay for cases 
in this claim amount tier would be $9,575, an increase of approximately 
four percent. The proposed hearing session fees for this claim amount 
tier would increase by $35, from $1,400 to $1,435.
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    \34\ Between 2014-2019, FINRA closed on average 283 cases out of 
2,428 customer cases with damages in this range.
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D. Technical Changes

    The proposed rule change would amend FINRA Rules 12901 and 13901 to 
make the formatting more consistent in the fee schedules. In addition, 
the proposed rule change would amend FINRA Rule 12900(c)(3) to change 
the cross-reference in the rule from Rule 12202(c) to Rule 12202.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the

[[Page 67799]]

proposed rule change in a Regulatory Notice to be published no later 
than 60 days following Commission approval. The effective date will be 
no later than 120 days following publication of the Regulatory Notice 
announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\35\ 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, and Section 15A(b)(5) of the Act,\36\ 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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    \35\ 15 U.S.C. 78o-3(b)(6).
    \36\ 15 U.S.C. 78o-3(b)(5).
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    FINRA believes the proposed increase to the hearing-day Chair 
honorarium and the addition of a Chair honorarium for prehearing 
conferences will provide more of an incentive for eligible arbitrators 
to become Chairs and more adequately compensate Chairs for their 
additional work. These changes, in turn, will help FINRA attract both 
new and experienced arbitrators to become Chairs, increasing the number 
of arbitrators on the Chair roster as well as the quality and depth of 
the roster, which is necessary for protecting investors and the public 
interest.
    In addition, the proposed fee increases to the member surcharge, 
member process fees, filing fees, and hearing session fees will enable 
FINRA to cover the proposed changes to arbitrator Chair honoraria while 
helping to ensure that FINRA's arbitration forum remains accessible and 
affordable to parties, particularly customers and claimants with small 
claims.
    FINRA believes the proposed rule change appropriately allocates the 
proposed fee increases among users of the forum by spreading the 
increases among high claim amounts and continuing to ensure that the 
costs of the forum are borne 85 percent by members and 15 percent by 
customers. In particular, the proposed Chair honoraria changes will be 
funded primarily by the minimal increases to the surcharge and process 
fees assessed to member firms for claims of more than $250,000. In 
addition, the filing and hearing session fee increases, which impact 
customer claimants, will apply only to claims of more than $500,000, 
and will be small. For example, the filing fee increases will range 
from $15 to $50. The hearing session fee increases will range from $25 
to $75. Thus, FINRA believes the proposed rule change provides for the 
equitable allocation of reasonable fees for users of the arbitration 
forum, and protects investors and the public interest by keeping the 
forum accessible and affordable for customers.

B. Self-Regulatory Organization's Statement on Burden on Competition 
Economic Impact Assessment

    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the regulatory need for the proposed change, its 
potential economic impacts, including anticipated costs, benefits, and 
competitive effects, relative to the current baseline, and the 
alternatives FINRA considered in assessing how best to meet FINRA's 
regulatory objectives.
Regulatory Need
    The proposed amendments are intended to address the issue of a lack 
of local public Chairs on the roster. As stated earlier, several FINRA 
hearing locations lack a sufficient number of local public Chairs. 
Hearing sites without a sufficient number of local Chairs draw from 
non-local arbitrators. Arbitration parties have reported that they 
prefer local arbitrators to preside over their cases. Appointing Chairs 
who live outside of the local hearing location may also result in 
scheduling delays of hearings and prehearing conferences. Further, non-
local arbitrators who serve on a case incur additional expenses related 
to air, rail, and local ground transportation and hotels, which are 
then reimbursed by FINRA.
Economic Baseline
    The economic baseline for the proposed amendments is the current 
rules under the Codes that address the Chair honoraria and forum fees 
that parties to an arbitration incur. The economic baseline also 
includes the roster of local public Chairs in each hearing location.
    Currently, Chairs receive an additional $125 per day for each 
hearing on the merits (no additional compensation if cases are closed 
by settlement or other means prior to the first hearing on the merits). 
Chairs do not receive an additional honorarium when attending 
prehearing conferences. Anecdotal evidence suggests that the current 
Chair honorarium is not commensurate with the additional work required 
of Chairs in the arbitration process.\37\
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    \37\ The anecdotal evidence is mainly based on feedback that 
FINRA has received from Chair-eligible arbitrators who revealed a 
lack of interest in completing the required Chair training.
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    FINRA collects information detailing the number of open cases and 
public Chairs per hearing location. As of April 30, 2020, across the 69 
domestic hearing locations, there were 4,788 open cases.\38\ 
Additionally, the arbitrator roster included 1,118 local public Chairs, 
and 1,531 non-local public Chairs who served in these locations.\39\ 
The average number of local public Chairs and open cases was 16 and 69, 
respectively; thus, non-local Chairs were used in some cases.\40\
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    \38\ Among the 4,788 open cases, 1,373 of them are in San Juan, 
Puerto Rico due to the downgrade of Puerto Rican bonds to ``junk 
status.''
    \39\ Arbitrators, including Chairs, can serve in multiple 
hearing locations.
    \40\ The median number of local public Chairs and open cases was 
9 and 26, respectively.
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    Hearing locations with fewer than 20 local public Chairs pose a 
particular concern for the forum. FINRA's arbitrator appointment 
process uses the Neutral List Selection System (``NLSS''), a computer 
algorithm, to randomly generate lists of arbitrators from FINRA's 
arbitrator roster. NLSS generates a random list of 10 arbitrators from 
the public Chair roster. Each party in the case receives the list, and 
each separately-represented party may strike up to four names.\41\ The 
system generates the random list from the local Chair roster first. If 
the hearing location does not have at least 20 local Chairs, the system 
will pull in non-local Chairs. The use of non-local Chairs to complete 
the list increases the probability that the final list of 10 Chairs 
will include one or more non-local Chairs.
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    \41\ For example, each separately represented party may strike 
an arbitrator as a potential Chair because of a conflict of 
interest. In some cases, a conflict would preclude an arbitrator 
from even appearing on a list. For example, if an arbitrator has a 
current brokerage account with a party involved in the case, that 
arbitrator would not appear on the list involving the same party.
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    In the sample, 51 out of 69 hearing locations had fewer than 20 
local public Chairs. Among the 43 most active hearing locations (those 
with 20 or more open cases), 25 locations had fewer than 20 local 
public Chairs. The majority of these locations are midsize cities, for 
example, Birmingham (Alabama) with seven local public Chairs and 31 
open cases, and Columbia (South Carolina) with three local public 
Chairs and 72 open cases.\42\ On average, these 25 hearing locations 
had 10 local public

[[Page 67800]]

Chairs and 32 open cases.\43\ This indicates that if FINRA is able to 
fill the gap by recruiting, on average, 10 additional local Chairs in 
these cities, it can greatly decrease the probability that the final 
list of 10 public Chairs presented to arbitration parties will include 
one or more non-local Chairs.
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    \42\ These 25 hearing locations also include San Juan, Puerto 
Rico, which had 1,373 open cases and three local public Chairs. See 
supra note 38.
    \43\ The median number of local public Chairs and open cases 
across these 25 hearing locations was 10 and 89, respectively.
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    FINRA also collects information on the use of non-local public 
Chairs based on closed arbitration cases. During 2019, 3,556 
arbitration cases were closed in which public Chairs were appointed to 
the arbitration panels. Of these 3,556 cases, 2,162 (60 percent) of 
them were customer cases. Forty percent of these arbitration cases and 
48 percent of the customer cases had non-local public Chairs appointed 
on the arbitration panels.
    In the 25 active hearing locations with fewer than 20 local public 
Chairs, 1,296 arbitration cases were closed during 2019 in which public 
Chairs were appointed to the arbitration panels. Of these 1,296 cases, 
980 (76 percent) of them were customer cases. Seventy-nine percent of 
these arbitration cases and 83 percent of the customer cases had non-
local public Chairs appointed on the arbitration panels.
Economic Impact
    The proposed amendments are expected to affect the parties to an 
arbitration such as customers, member firms, and associated persons. 
The proposed rule change is also expected to affect FINRA arbitrators 
and its dispute resolution forum. The proposed amendments would 
increase the honoraria that a Chair receives, increasing the incentives 
of arbitrators to become Chairs or serve as Chairs. The proposed rule 
change would likely increase the pool of arbitrators available to serve 
as Chairs, thereby increasing the probability that more local public 
Chairs would be proposed for selection. FINRA believes that the 
proposed rule change could help retain experienced arbitrators who 
currently serve as Chairs and increase the total number of arbitrators 
on the Chair roster.
    In order to estimate potential increases in Chair honoraria 
following the proposed rule change, FINRA analyzes 3,993 arbitration 
cases in total that were closed during 2019.\44\ FINRA estimates that 
under the proposed rule change, there would have been an aggregate 
increase of $345,500 to $691,000 in hearing-day honoraria, and an 
addition of $649,375 in Chair honoraria for prehearing conferences. 
Together, the aggregate Chair honoraria for these cases would have 
increased by $994,875 to $1,340,375.
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    \44\ There were 2,125 customer cases among the 3,993 arbitration 
cases (or 55 percent).
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    The primary benefits of the proposed rule change would be the 
reduction in travel costs for non-local Chairs as well as the increased 
satisfaction of the parties in the case from having a local Chair due 
to the local Chair's knowledge of local laws and customs. In addition, 
arbitration parties may benefit from fewer scheduling delays of 
hearings and prehearing conferences following the proposed amendments.
    The increase in the number of arbitrators willing to serve in the 
role of a Chair depends on the sensitivity of arbitrator incentives to 
honoraria changes. The impact on the Chair roster may be higher for the 
hearing sites of small and midsize cities than for the hearing sites of 
large cities for two reasons. First, the increase in the incentive of 
arbitrators may be more pronounced in small and midsize cities because 
the cost of living is relatively lower in these locations. Second, 
adding even a few arbitrators to the Chair roster for small and midsize 
cities would likely have a greater impact than for larger cities 
because Chair rosters in these cities tend to be smaller.
    The proposed amendments may not fill the gap of local public Chair 
rosters in the immediate term or in all locations, as some hearing 
locations may lack a sufficient number of Chair-eligible public 
arbitrators. In order to be eligible for the Chair roster, FINRA 
requires an arbitrator to have a minimum amount of arbitration 
experience.\45\ Thus, the immediate increase in the local public Chair 
roster following the proposed rule change would be capped at the number 
of experienced local public arbitrators.\46\ Twenty-four hearing 
locations, for instance, had fewer than 20 local public arbitrators 
through April 30, 2020 in the sample. This suggests that the proposed 
rule change may be less likely to fill the gap of public Chair rosters 
at these locations even if all these public arbitrators, regardless of 
their experience, could become Chairs. The local Chair roster could 
increase over time, however, as the local public arbitrators gain more 
experience.\47\ Taken together, FINRA acknowledges that there is 
limited direct evidence to establish that the proposed rule change will 
have an immediate effect on mitigating the issue of a lack of local 
public Chairs in the most acute locations.
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    \45\ FINRA requires that an arbitrator: (1) Have a law degree 
and be a member of a bar of at least one jurisdiction and have 
served as an arbitrator through award on at least one arbitration 
administered by a self-regulatory organization (``SRO'') in which 
hearings were held; or (2) have served as an arbitrator through 
award on at least three arbitrations administered by a SRO in which 
hearings were held.
    \46\ According to FINRA's estimate, there are 48 Chair-eligible 
public arbitrators who could potentially become Chairs in the 25 
active hearing locations that had fewer than 20 public Chairs in the 
sample. Thus, on average, approximately two additional Chair-
eligible public arbitrators could potentially become Chairs 
immediately following the proposed increases in Chair honoraria. 
Similarly, the median number of Chair-eligible public arbitrators 
who can potentially become Chairs is two across these 25 hearing 
locations.
    \47\ Such an increase in the Chair roster could be significant 
in the next few years as the number of public arbitrators has grown 
significantly in the past two years.
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    The direct costs of the proposed rule change would arise from the 
increase in forum fees that parties to an arbitration would incur. 
Among the 3,993 cases closed in 2019, 1,773 cases (44 percent of all 
cases) with claims of equal to or less than $250,000 would not be 
subject to any increases in forum fees following the proposed rule 
change. The remaining 2,220 cases (56 percent of all cases) would be 
subject to increases in forum fees: 1,662 cases (42 percent of all 
cases) with non-monetary/non-specified claims or claims of greater than 
$500,000 would be subject to higher filing fees, member surcharges and 
process fees, and hearing session fees; 558 cases (14 percent of all 
cases) with claims of larger than $250,000 but smaller than or equal to 
$500,000 would be subject to higher member surcharges and process fees.
    Subject to the proposed rule change, the total forum fees 
associated with the 3,993 cases closed in 2019 would have increased by 
$1,006,365 (a 2.65 percent increase relative to the existing fee 
level).\48\ While 44 percent of the 3,993 cases closed in 2019 would 
not have been subject to any fee increases under the proposed rule 
change, the remaining 2,220 cases would have been subject to an average 
increase of $453 in forum fees. When considering all cases that were 
closed in 2019, total forum fees would have increased around $252 on 
average. Note that this analysis is based on the assumption that 
changes in forum fees would not affect the decisions of arbitration 
parties on whether to file a case, how much to claim in damages, and 
whether to settle a case after the case is filed. FINRA

[[Page 67801]]

acknowledges the possibility that the proposed rule change may affect 
strategic decisions for certain arbitration parties at the margin or 
under certain circumstances. However, FINRA believes that the proposed 
rule change would not significantly impact such decisions for a 
majority of the arbitration parties due to the proposed increases in 
forum fees.
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    \48\ Specifically, the percentage increase in forum fees is 
broken down as follows: 1.28 percent in filing fees (from $6,129,675 
to $6,208,395), 4.72 percent in member surcharges (from $7,652,050 
to $8,012,875), 2.49 percent in member process fees (from 
$14,677,250 to $15,042,000), and 2.13 percent in hearing session 
fees (from $9,495,500 to $9,697,570).
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    Currently, the arbitration fee structure distributes much of the 
costs of the forum to member firms that are party to an arbitration 
proceeding and to parties associated with large claims or non-monetary/
unspecified claims. The proposed rule change would retain this 
approach. FINRA believes its current and proposed fee structures are 
designed to keep its arbitration program accessible and affordable to 
parties, especially customers and claimants with small claims.
    Under the proposed rule change, all members involved in an 
arbitration would be subject to the same new fee schedule. FINRA 
recognizes that increases in forum fees due to the proposed rule change 
could have a bigger impact on small firms where claims are larger or 
non-monetary/unspecified as they may be more resource-constrained 
compared with large members.
    FINRA recognizes that under the proposed rule change, there is 
likely to be a transfer of wealth from those that pay the higher fees 
to those that benefit from the proposed rule change if those parties 
are different. The proposed fee schedule would allocate the majority of 
the costs in customer cases to those with larger claim amounts or those 
with non-monetary/unspecified claims, although customers in cases with 
small claims could still benefit from an expanded public Chair roster. 
Further, most of the benefits would likely accrue to customers in cases 
situated in those locations that are currently lacking a sufficient 
number of local public Chairs by gaining new local public Chairs as a 
result of the proposed rule change. However, customers in cases 
situated in locations not lacking a sufficient number of local public 
Chairs would also likely incur fee increases.
    Similar to customer cases, a majority of the benefits would likely 
accrue to parties to industry disputes that require a public Chair and 
are situated in locations lacking such Chairs. Thus, parties to 
industry disputes that require a non-public Chair would likely not 
benefit from additional local public Chairs due to the proposed 
changes, even though non-public Chairs would be compensated at the 
same, higher rate and these parties would incur the same fee increases 
as parties to customer cases or parties to industry disputes that 
require a public Chair.\49\ FINRA notes, however, that a majority of 
industry disputes filed in the forum require a public Chair, for 
example, those involving a broker as a party. Industry parties to these 
disputes, therefore, could benefit from greater choice of local public 
Chairs if their hearing locations lack such Chairs.
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    \49\ FINRA believes that current hearing locations already have 
a sufficient number of non-public Chairs. As of July 8, 2020, the 
number of non-public Chairs on FINRA's roster was 741, whereas only 
nine open industry disputes in total required a non-public Chair. 
These nine open cases were situated in four different hearing 
locations. For example, New York City had four open industry 
disputes that required a non-public Chair and 119 local non-public 
Chairs; Los Angeles had three open industry disputes that required a 
non-public Chair and 53 local non-public Chairs.
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    FINRA does not believe that the proposed rule change would result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, FINRA does not 
expect that the proposed rule change would impact FINRA's competitive 
position relative to other arbitration forums.\50\
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    \50\ As FINRA arbitrator compensation tends to be significantly 
lower than the rate in other forums, the proposed increases in Chair 
honoraria are not expected to significantly affect other forums in 
attracting and retaining qualified Chairs. See supra note 16.
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Alternatives Considered
    An alternative to the proposed amendments is a higher or lower 
amount of increase in Chair honoraria. A higher amount would further 
incentivize arbitrators to serve as Chair, and FINRA would incur fewer 
expenses reimbursing non-local arbitrators for their travel. A higher 
amount, however, would also increase the fees on the parties to the 
arbitration, potentially making the forum less accessible.
    Parties would incur fewer expenses for a lower amount of increase 
in Chair honoraria. A lower amount, however, may not be able to provide 
sufficient incentives for arbitrators to become a Chair, and FINRA 
would incur a higher level of expense to reimburse non-local 
arbitrators. FINRA believes the proposed level of increase in honoraria 
balances the expected increase in the number of local Chairs with the 
higher fees that would be paid by the parties to an arbitration.

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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2020-035 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-2020-035. 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

[[Page 67802]]

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-2020-035 and 
should be submitted on or before November 16, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23633 Filed 10-23-20; 8:45 am]
BILLING CODE 8011-01-P