Document ID: SEC-2009-0173-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-02-06T05:00Z

[Federal Register: February 6, 2009 (Volume 74, Number 24)]
[Notices]               
[Page 6335-6338]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06fe09-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59340; File No. SR-FINRA-2008-047]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the 
Codes of Arbitration Procedure To Raise the Amount in Controversy Heard 
by a Single Chair-Qualified Arbitrator to $100,000

February 2, 2009.

I. Introduction

    The Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/
a National Association of Securities Dealers, Inc. (``NASD'')) filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
on September 18, 2008, pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934

[[Page 6336]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend the Code of Arbitration Procedure for Customer Disputes 
(``Customer Code'') and the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code,'' and together with the Customer Code, the 
``Codes'') to raise the amount in controversy that will be heard by a 
single chair-qualified arbitrator to $100,000.\3\ The proposed rule 
change was published for comment in the Federal Register on October 2, 
2008.\4\ The Commission received seven comments in response to the 
proposed rule change.\5\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The former NASD Rule 12000 Series (Customer Code) and 13000 
Series (Industry Code) have been adopted as the FINRA 12000 Series 
(Customer Code) and 13000 Series (Industry Code) in the new 
consolidated rulebook pursuant to SR-FINRA-2008-021, which was 
approved by the Commission. See Securities Exchange Act Release No. 
58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (SR-FINRA-
2008-021) (approval order). The FINRA Rule 12000 Series (Customer 
Code) and 13000 Series (Industry Code), as set forth in SR-FINRA-
2008-021, became effective on December 15, 2008. See FINRA 
Regulatory Notice 08-57 (SEC Approves New Consolidated FINRA Rules) 
(October 2008).
    \4\ See Securities Exchange Act Release No. 58651 (September 25, 
2008), 73 FR 57391 (October 2, 2008) (SR-FINRA-2008-047) 
(``Rulemaking Notice'').
    \5\ See Stephen B. Caruso, Esq., dated October 9, 2008 (``Caruso 
Letter''); Barry D. Estell, Esq., dated October 20, 2008 (``Estell 
Letter''); Laurence S. Schultz, Esq., Public Investors Arbitration 
Bar Association, dated October 20, 2008 (``PIABA Letter''); David P. 
Neuman, Esq., dated October 23, 2008 (``Neuman Letter''); William A. 
Jacobsen, Esq. and Seth M. Nadler, Cornell Securities Law Clinic, 
dated October 23, 2008 (``Cornell Securities Law Clinic Letter''); 
Gregory M. Scanlon, Esq., Charles Schwab & Co., Inc., dated October 
23, 2008 (``Charles Schwab Letter''); and Jill Gross, Esq. and 
Stephanie Myers, John Jay Legal Services, Inc., dated October 23, 
2008 (``John Jay Legal Services Letter'').
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II. Description of the Proposed Rule Change

    FINRA proposed to amend its Customer Code and Industry Code to 
raise the amount in controversy that would be heard by a single 
arbitrator to $100,000, exclusive of interest and expenses.\6\ The 
arbitrator would be selected from the roster of arbitrators who are 
qualified to serve as chairpersons. This means that investors' claims 
for up to $100,000 would be heard by a public, chair-qualified 
arbitrator.
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    \6\ See proposed amendments to Rules 12401(b) and 13401(b).
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    Under the proposal, parties would be permitted to request a panel 
of three arbitrators for claims of more than $25,000, but not more than 
$100,000, if all parties agreed in writing to the request.\7\ Claims of 
more than $100,000, or claims that do not specify any amount in 
controversy, would continue to be heard by three arbitrators unless the 
parties agree in writing to one arbitrator.\8\
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    \7\ Id.
    \8\ See proposed amendments to Rules 12401(c) and 13401(c).
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    Currently, if the amount of a claim is $25,000 or less, a single 
arbitrator is appointed to resolve the matter. If the amount of a claim 
is more than $25,000, but not more than $50,000, a single arbitrator is 
appointed, unless a party asks for three arbitrators in its initial 
pleading. Claims for over $50,000, or claims that do not specify any 
amount in controversy, are heard by a panel of three arbitrators.\9\
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    \9\ See Rules 12401 and 13401. The current threshold for 
appointing one or three arbitrators has been in effect since 1998. 
See Securities Exchange Act Release No. 38635 (May 14, 1997), 62 FR 
27819 (May 21, 1997) (SR-NASD-97-22) (approval order) and NASD 
Notice to Members 98-90. Customer disputes are resolved by a single, 
chair-qualified public arbitrator or a majority-public panel 
consisting of a public arbitrator, a chair-qualified public 
arbitrator, and a non-public arbitrator. Industry disputes are 
resolved by a public panel or a non-public panel depending upon the 
parties to the controversy and the nature of the claims asserted 
(see Rules 13402 and 13802).
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    FINRA also proposed to remove the current option for one party 
unilaterally to require three arbitrators in certain cases with claims 
for more than $25,000.\10\ FINRA believes this is not an efficient use 
of resources, as it requires other parties to incur higher hearing 
session costs and additional delays caused by scheduling three 
arbitrators instead of one. Therefore, the proposed rule would mandate 
a single arbitrator in all such cases unless all parties agree, in 
writing, to request a three-person panel.
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    \10\ See proposed amendments to Rules 12401(b) and 13401(b).
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    In FINRA's view, raising the threshold for claims heard by a single 
arbitrator would increase efficiencies and decrease costs for parties 
and FINRA. Parties would experience reduced case processing times 
because of the flexibility associated with scheduling conference calls 
and hearing dates with one arbitrator as opposed to three. Parties 
would save time in the arbitrator selection process because they would 
receive only one list of eight names from which to choose their 
arbitrator, rather than three lists of eight names.\11\ This means they 
would only research the disclosures and histories of eight proposed 
arbitrators instead of 24.
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    \11\ For example, for customer cases, if the panel consists of 
one arbitrator, the Neutral List Selection System (``the System'') 
generates a list of eight public arbitrators from the chairperson 
roster. If the panel consists of three arbitrators, the System 
generates a list of eight public arbitrators from the chairperson 
roster, a list of eight arbitrators from the public roster, and a 
list of eight arbitrators from the non-public roster. FINRA sends 
the lists to the parties along with each arbitrator's employment 
history for the prior 10 years and other background information (see 
Rules 12403 and 13403).
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    Parties would also benefit from reduced hearing session fees. For 
claims between $25,000.01 and $50,000, parties would save $150 per 
hearing session \12\ because hearing session fees would be reduced from 
$600 (for a hearing with three arbitrators) to $450 (for a hearing with 
one arbitrator).\13\ For claims between $50,000.01 and $100,000, the 
savings would be $300 per hearing session because hearing session fees 
would be reduced from $750 (for a hearing with three arbitrators) to 
$450 (for a hearing with one arbitrator). The parties' cost for 
photocopying pleadings and exhibits would be reduced by two-thirds. 
FINRA would benefit from a more efficient use of its arbitrator roster 
since cases for $100,000 or less would use only one arbitrator instead 
of three. FINRA's photocopying costs and mailing expenses would also be 
reduced.
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    \12\ The term ``hearing session'' means any meeting between the 
parties and arbitrator(s) of four hours or less, including a hearing 
or a pre-hearing conference. See Rules 12100(n) and 13100(n). For 
full day hearings, the savings would be $300 for claims between 
$25,000.01 and $50,000, and $600 for claims between $50,000.01 and 
$100,000.
    \13\ See Rules 12902 and 13902.
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III. Comment Letters

    The Commission received seven comments on the proposal, as well as 
FINRA's response to comments \14\, all of which are discussed below.
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    \14\ Letter from Margo A. Hassan, FINRA, dated December 2, 2008 
(``FINRA Letter'').
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    Most commenters, particularly securities claimants' attorneys and 
legal clinics representing claimants, generally supported the 
proposal.\15\ Some commenters supported the proposal in part.\16\ One 
commenter, a registered broker-dealer, opposed the entire proposal.\17\ 
Six commenters \18\ supported increasing the monetary threshold under 
which disputes would be heard by a single arbitrator; four commenters 
\19\ supported requiring the consent of all parties for a three-
arbitrator panel for claims under $100,000; and three commenters \20\ 
opposed requiring single arbitrators to

[[Page 6337]]

be chair-qualified. One commenter noted that the proposed rule change 
did not mention any change to the filing fees that investors would pay 
to bring an arbitration claim.\21\
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    \15\ Caruso, PIABA, Neuman, Cornell Securities Law Clinic, and 
John Jay Legal Services Letters.
    \16\ See Estell Letter.
    \17\ See Charles Schwab Letter.
    \18\ See Caruso, Estell, PIABA, Neuman, Cornell Securities Law 
Clinic, and John Jay Legal Services Letters.
    \19\ See PIABA, Cornell Securities Law Clinic, John Jay Legal 
Services and Neuman Letters.
    \20\ See Estell, PIABA, and Cornell Securities Law Clinic 
Letters.
    \21\ See Caruso Letter.
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Detailed Discussion of Comments and FINRA Response

Increasing the Monetary Threshold Under Which Disputes Would Be Heard 
by a Single Arbitrator

    Proposed amendments to Rules 12401(b) and 13401(b) would raise the 
amount in controversy that would be heard by a single arbitrator to 
$100,000, exclusive of interest and expenses. Most commenters supported 
increasing the monetary threshold under which disputes would be heard 
by a single arbitrator.\22\ These commenters generally agreed with 
statements in the Rulemaking Notice that the increased threshold would 
reduce arbitration costs and increase efficiency for arbitration 
participants by saving them time and money.\23\ Some commenters 
suggested increasing the threshold for one-arbitrator panels to 
$200,000 \24\ or $250,000.\25\ One commenter opposed expanding the 
availability of single-arbitrator panels, stating that the maximum 
savings of $600 per day of hearings estimated by FINRA (or $300 per 
party per day) are insufficient to justify the rule change.\26\ This 
commenter also stated that smaller hearing panels will degrade the 
decision making process for FINRA awards, because, under the current 
rule, decision making is a collaborative process in which all 
arbitrators benefit from one another's viewpoints. Moreover, this 
commenter opined that in some cases, one arbitrator's inaccurate view 
can be nullified by the arbitrator's colleagues' majority ruling.\27\
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    \22\ See Caruso, Estell, PIABA, Neuman, Cornell Securities Law 
Clinic, and John Jay Legal Services Letters.
    \23\ See Caruso, PIABA, Neuman, and Cornell Securities Law 
Clinic Letters.
    \24\ See John Jay Legal Services Letter.
    \25\ See Caruso and PIABA Letters. The PIABA Letter supported 
raising the amount in controversy at the option of the investor.
    \26\ See Charles Schwab Letter.
    \27\ Id.
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    FINRA responded to these comments by indicating that it believes 
that the proposal, as filed, strikes the right balance between offering 
users an efficient and cost effective forum and providing three-
arbitrator panels for disputes that involve greater amounts in 
controversy or that do not specify an amount in controversy. By raising 
the threshold as proposed, FINRA would be restoring the proportion of 
cases heard by a single arbitrator--roughly a third--to what it was 
when the single arbitrator threshold was last increased in 1998. In 
particular, FINRA expects that the proposal would double the percentage 
of single-arbitrator cases from approximately 17 percent to 34 percent. 
In addition, by eliminating the option for one party unilaterally to 
request three arbitrators in cases with claims of more than $25,000, 
FINRA stated that all parties will benefit by increased efficiencies 
and cost savings. For these reasons, FINRA declined to amend the 
proposed single arbitrator threshold.\28\
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    \28\ See FINRA Letter.
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Consent of All Parties for a Three-Arbitrator Panel for Claims Under 
$100,000

    Proposed amendments to Rules 12401(b) and 13401(b) would provide 
that a panel of three arbitrators would hear claims of more than 
$25,000, but not more than $100,000, if all parties agreed in writing 
to the request. Most commenters either specifically supported requiring 
the consent of all parties for a three-arbitrator panel for claims 
under $100,000,\29\ or implicitly supported it by expressing support 
for the entire proposed rule change.\30\ One commenter supported this 
provision, and to guarantee its effectiveness, urged FINRA to clarify 
that a party may only unilaterally procure a three-arbitrator panel if 
at least one of the parties asserts aggregate claims in excess of 
$100,000.\31\ This commenter also expressed concern that the proposed 
rule could be interpreted to permit a single party to compel a three-
arbitrator panel if multiple parties' claims exceed $100,000 when 
aggregated, even if no single party's claims exceed $100,000.\32\
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    \29\ See PIABA, Cornell Securities Law Clinic, and John Jay 
Legal Services Letters.
    \30\ See Neuman Letter.
    \31\ See Cornell Securities Law Clinic Letter.
    \32\ Id.
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    FINRA responded that it does not intend to change its current 
practice with respect to aggregating claims. Currently, upon receipt of 
a statement of claim and an answer thereto, FINRA staff determines the 
total amount claimed by claimants and the total amount claimed by 
respondents, and appoints the number of arbitrators required by Rules 
12401 and 13401. In doing so, FINRA staff only aggregates a claimant's 
claim with another claimant's claim, or a respondent's claim with 
another respondent's claim. FINRA staff does not aggregate all of the 
parties' claims (e.g., claimants' claims with respondents' claims). 
FINRA stated that it will explain in the Regulatory Notice announcing 
the rule change how the $100,000 threshold will be applied and declined 
to revise the proposal as requested.\33\
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    \33\ See FINRA Letter.
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Requiring Single Arbitrators To Be Chair-Qualified

    Several commenters opposed the requirement that single arbitrators 
be chair-qualified.\34\ One commenter noted that the chair-
qualification requirement would make it more difficult for arbitrators 
to get the required ``service'' to become chair-qualified, and would 
reduce the pool of available chair-qualified arbitrators.\35\ Another 
commenter posited that this requirement would produce a small, 
insulated pool of repeat arbitrators and undercut efforts to ensure 
non-biased hearings through random selection of arbitrators.\36\ One 
commenter called this requirement ``a further erosion of investor 
rights,'' and expressed concern that chair-qualified arbitrators may be 
biased towards member firms.\37\ The commenter also estimated, without 
explanation, that under the proposed rule change, it could take ten or 
more years for an otherwise qualified neutral arbitrator to become 
chair-qualified.\38\
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    \34\ See Estell, PIABA, and Cornell Securities Law Clinic 
Letters.
    \35\ See PIABA Letter. FINRA Rule 13400 requires an arbitrator 
to have served in a minimum number of cases to be eligible to be 
chair-qualified.
    \36\ See Cornell Securities Law Clinic Letter.
    \37\ See Estell Letter.
    \38\ See Estell Letter.
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    FINRA responded by noting that it is not proposing to amend the 
rules relating to the chairperson rosters or the composition of 
arbitration panels. FINRA stated that it understands that raising the 
threshold for a single chair-qualified arbitrator will result in fewer 
arbitrators serving on certain cases. FINRA believes that appointing 
chair-qualified arbitrators to resolve claims up to $100,000 would 
ensure that parties have experienced arbitrators resolving their 
disputes. FINRA also noted that, in addition to completing FINRA's 
chairperson training, chair-qualified arbitrators must either (i) have 
a law degree and have served as an arbitrator through award on at least 
two cases, or (ii) have served as an arbitrator through award on at 
least three cases.\39\
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    \39\ See FINRA Letter.
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Filing Fees That Investors Would Pay To Bring an Arbitration Claim

    One commenter noted that the proposed rule change did not mention 
any change to the filing fees that investors would pay to bring an

[[Page 6338]]

arbitration claim.\40\ This commenter suggested that the economic 
benefits that will inure to FINRA from reduced arbitration costs should 
be passed through to public investors in terms of reduced filing 
fees.\41\
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    \40\ See Caruso Letter.
    \41\ Id.
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    FINRA responded by stating that it considered the effect of the 
proposal on all fees imposed by the forum. FINRA indicated that the 
significant cost savings for hearing sessions with a single arbitrator 
represent the greatest impact of the proposal to users of the forum. 
For example, under the proposal the forum fees for a dispute involving 
$75,000 will decrease from $750 to $450 per four-hour hearing session. 
FINRA has not proposed to amend the initial filing fees, which are 
already based on the amount in dispute, and which may be reallocated by 
the panel at the end of the case. The Codes will continue to provide 
that the Director of Arbitration may defer payment of all or part of 
the filing fee if a claimant has demonstrated a financial hardship. 
Moreover, parties will continue to be able to request that the panel 
consider assessing all or part of any filing fee on other parties in 
the case. For these reasons, FINRA declined to revise the forum's 
filing fees.\42\
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    \42\ See FINRA Letter.
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IV. Discussion and Findings

    After careful review of the proposed rule change, the comments, and 
FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and the rules and regulations thereunder that are applicable to a 
national securities association.\43\ In particular, the Commission 
believes the proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\44\ 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. The Commission believes that the proposed rule change 
will reduce costs for participants in FINRA arbitration proceedings 
with claims of greater than $25,000 but no more than $100,000 who have 
their matters heard before a single arbitrator, while preserving the 
parties' ability to agree to have their case heard by a panel of three 
arbitrators.
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    \43\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \44\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that FINRA has responded adequately to the 
comments regarding increasing the monetary threshold under which 
disputes would be heard by a single arbitrator. The Commission agrees 
that the proposal, as filed, balances offering users an efficient and 
cost-effective forum for disputes of $100,000 or less and providing 
three-arbitrator panels for disputes that involve greater amounts or 
that do not specify an amount in controversy. The Commission also 
agrees that parties in these cases will experience reduced case 
processing times because of the flexibility associated with scheduling 
conference calls and hearing dates with one arbitrator rather than 
three, and that FINRA would benefit from a more efficient use of its 
arbitrator roster.
    The Commission also believes that FINRA has adequately responded to 
comments regarding the aggregation of claims in calculating whether the 
$100,000 threshold has been met. The Commission notes that FINRA is not 
changing its current practice with respect to aggregating claims, and 
clarifying this practice in the Regulatory Notice announcing the rule 
change should help to resolve any ambiguity about how FINRA will 
determine whether a matter may be heard by a single arbitrator.
    The Commission also believes that FINRA has adequately responded to 
comments regarding the requirement that single arbitrators be chair-
qualified arbitrators. The Commission agrees that appointing chair-
qualified arbitrators to resolve claims up to $100,000 would ensure 
that parties have experienced arbitrators resolving their disputes.
    The Commission also believes that FINRA has adequately responded to 
comments regarding filing fees that investors would pay to bring a 
claim. The Commission agrees that parties will realize cost savings for 
hearing sessions with a single arbitrator.

V. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\45\ that the proposed rule change (SR-FINRA-2008-047) be, and 
hereby is, approved.
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    \45\ 15 U.S.C. 78s(b)(2).
    \46\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-2531 Filed 2-5-09; 8:45 am]

BILLING CODE 8011-01-P