Document ID: SEC-2015-0315-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-02-24T05:00Z

[Federal Register Volume 80, Number 36 (Tuesday, February 24, 2015)]
[Notices]
[Pages 9773-9776]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-03660]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74289; File No. SR-FINRA-2015-003]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
the Codes of Arbitration Procedure To Increase the Late Cancellation 
Fee

February 18, 2015.
    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 February 5, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed

[[Page 9774]]

rule change as described in Items I, II, and III below, which Items 
have been substantially 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 Rules 12214 and 12601 of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
Rules 13214 and 13601 of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code'') (together, ``Codes'') to require that 
parties give more advance notice before cancelling or postponing a 
hearing, or be assessed a higher late cancellation fee if such notice 
is not provided. The text of the proposed rule change is available at 
the principal office of FINRA, on FINRA's Web site at http://www.finra.org, and at the Commission's Public Reference Room.

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
Introduction
    Under current Rules 12601(b)(2) and 13601(b)(2) of the Codes, each 
arbitrator selected for a case receives a $100 honorarium when a 
hearing is postponed or cancelled \3\ within three business days of the 
scheduled date. However, if the postponement or cancellation occurs 
more than three business days in advance of the scheduled hearing, the 
arbitrators do not receive an honorarium.\4\
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    \3\ If the parties settle an arbitration case, hearings that 
were scheduled to occur after settlement are cancelled, and 
depending on the timing of the cancellation, could result in the 
assessment of a cancellation fee. See Rules 12902(d) and 13902(d). 
These rules incorporate the fees and costs incurred under Rules 
12601 and 13601, and, therefore, would incorporate the proposed rule 
change to the late cancellation fee.
    \4\ For each postponement agreed to by the parties, or granted 
upon request of one or more parties, FINRA assesses a postponement 
fee to the parties, equal to the applicable hearing session fee 
(``Postponement Fee''). See Rules 12601(b)(1) and 13601(b)(1). This 
fee is paid to FINRA and not passed through to the arbitrators.
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    FINRA is proposing to amend Rules 12601(b)(2) and 13601(b)(2) \5\ 
to require that if a postponement or cancellation request is made by 
one or more parties within ten calendar days before a scheduled hearing 
session and granted, the party or parties making the request would pay 
a fee of $600 per arbitrator (``Late Cancellation Fee''). Under the 
proposed rule change, therefore, the Late Cancellation Fee for a three-
person arbitration panel would be $1,800, instead of $300 under the 
current rules.\6\ The primary purpose of the proposed rule change is to 
encourage parties to provide more advance notice of postponements and 
cancellations, or, in the alternative, to compensate arbitrators more 
than they are currently paid for lost time and opportunities in the 
event of a late postponement or cancellation.
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    \5\ FINRA would also amend the Late Cancellation Fee reference 
(defined infra) in Rules 12214(a) and 13214(a).
    \6\ Pursuant to an analysis of FINRA's data, for the period from 
September 1, 2013 to August 31, 2014, approximately 80 percent of 
arbitration cases were heard by a three-person panel. The number of 
arbitrators that the parties may select for a case typically depends 
on the amount of the claim. See Rules 12401 and 13401 (describing, 
among other things, the parameters for when panels may consist of 
three arbitrators).
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    Under the proposed rule change, the Late Cancellation Fee would be 
assessed if a hearing is postponed or cancelled within ten calendar 
days before a scheduled hearing session. To simplify the discussion, 
the following explanation will use the term ``cancellation'' or a 
variation thereof to describe either scenario.
Background
    In FINRA arbitration, once the parties select arbitrators, they 
hold an initial pre-hearing conference with the parties, usually over 
the telephone, to discuss procedural issues, the mediation alternative, 
discovery, and scheduling of hearings.\7\ In many cases, the hearing 
dates are selected months in advance, thus requiring arbitrators to 
reserve these dates and forego other opportunities that would result in 
a conflict with the scheduled dates. FINRA has received many complaints 
from arbitrators concerning the current late cancellation rule (``Late 
Cancellation Rule''),\8\ which applies when parties postpone, settle in 
advance of, or otherwise cancel a scheduled hearing session within 
three business days of its start date. It is the most frequent 
complaint Dispute Resolution staff receives from arbitrators.
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    \7\ A hearing is a meeting between the parties and the 
arbitrators of four hours or less to determine the merits of the 
arbitration. See Rules 12100(m) and 13100(m); see also Rules 
12100(n) and 13100(n). A typical day in an arbitration case has two 
hearing sessions.
    \8\ See Rules 12601(b)(2) and 13601(b)(2).
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    In fact, when FINRA formed the Dispute Resolution Task Force 
(``Task Force'') in 2014 to consider possible enhancements to its 
arbitration and mediation forum, the majority of arbitrator responses 
to the Task Force's request for comments suggested that FINRA should 
address the issue of late hearing cancellation requests.\9\ According 
to feedback received by FINRA, the current rule is inadequate because 
the three-business-day cancellation window does not provide 
arbitrators, who have committed to dates to hear a case, with enough 
time to schedule other income-generating opportunities. Moreover, the 
$100 honorarium for these late cancellations does not adequately 
compensate arbitrators for the preparation time expended and the income 
that would have been earned from conducting a hearing. FINRA has 
learned that the lack of sufficient notice and compensation is 
frustrating for arbitrators and is a reason some arbitrators leave 
FINRA's roster.
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    \9\ The Task Force comprises individuals from the public and 
industry sectors, who work together to suggest strategies to enhance 
the transparency, impartiality, and efficiency of FINRA's securities 
dispute resolution forum for all participants. See FINRA Dispute 
Resolution Task Force, available at http://www.finra.org/ArbitrationAndMediation/FINRADisputeResolution/MoreonFINRADisputeResolution/P600966.
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Proposal To Increase Late Cancellation Fees and Cancellation Timeframe
    FINRA is proposing, therefore, to amend the Codes \10\ to require 
that parties give more advance notice before cancelling a hearing, or 
be assessed a higher Late Cancellation Fee if such notice is not 
provided. Specifically, FINRA would amend Rule 12601(b)(2) to require 
that if a cancellation request is made by one or more parties within 
ten calendar days before a scheduled hearing session and granted, the 
party or parties making the request shall pay a

[[Page 9775]]

fee of $600 per arbitrator in addition to the Postponement Fee.
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    \10\ FINRA is proposing to amend Rules 12601 and 12214 of the 
Customer Code and Rules 13601 and 13214 of the Industry Code. To 
simplify the explanation, FINRA's discussion of the proposed rule 
changes focuses on changes to the Customer Code rules. However, the 
proposed rule changes, and, thus, the discussion also apply to the 
Industry Code rules.
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    First, the proposed rule change would move from three business days 
to ten calendar days the timeframe within which parties must cancel 
hearings to avoid incurring the proposed Late Cancellation Fee.\11\ 
This change would provide arbitrators with more advance notice than 
they currently receive, which could give them an opportunity to secure 
other income-generating opportunities. Further, it could help them 
minimize the time lost in preparing for their assigned arbitration 
hearings, which, depending on the number of parties involved and the 
complexity of the case, could involve many hours of reviewing 
materials. For example, parties sometimes submit detailed exhibits and 
legal briefs to support their positions and theories of the case for 
arbitrators to review in advance of the hearings. Other than the 
honoraria funded by the Late Cancellation Fee, FINRA does not 
compensate arbitrators for their preparation time in the event the 
hearings are cancelled.
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    \11\ The proposed rule change would make the calculation of 
deadlines consistent under the Codes. Under the Codes, ``day'' is 
defined as a calendar day, not a business day. See Rules 12100(j) 
and 13100(j).
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    Second, the proposed rule change would increase the honorarium for 
late cancellations from $100 to $600 per arbitrator. The proposal would 
make the honorarium equal to that which arbitrators would have received 
for one typical day of hearings,\12\ no matter how many consecutive 
days are cancelled.\13\ The Late Cancellation Fee would be charged to 
the party or parties making the request.\14\ However, Rule 12601(b)(2) 
provides that the arbitrators may allocate all or a portion of the fee 
to the non-requesting party if the arbitrators determine that the non-
requesting party caused or contributed to the cancellation. If an 
extraordinary circumstance prevents a party or parties from making a 
timely cancellation request, arbitrators may use their discretion to 
waive the fee.
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    \12\ An arbitrator receives an honorarium payment for each 
hearing session in which the arbitrator participates. If two hearing 
sessions are conducted in one day, an arbitrator would receive $300 
for each session or a total of $600 for the day. See supra note 7. 
On September 29, 2014, the SEC approved a proposal to increase the 
amount of honoraria paid to an arbitrator for participation in a 
hearing session to $300 per session; the $300 rate became effective 
on December 15, 2014 for all cases filed on or after the approval 
date. See Securities Exchange Act Release No. 73245 (Sept. 29, 
2014), 79 FR 59876 (Oct. 3, 2014) (Order Approving File No. SR-
FINRA-2014-026) (``Honoraria Increase Proposal'').
    \13\ See Notice to Members 04-53 (Arbitrator Hearing 
Adjournments), July 2004, available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p006140.pdf.
    \14\ If the parties cannot agree on the allocation, the 
arbitrators typically split the fee among the parties.
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    FINRA notes that there are some mitigation strategies that parties 
could employ to avoid incurring a Late Cancellation Fee. As the 
objective of the proposal is to encourage parties to address issues 
earlier in their cases, parties could provide notice of a cancellation 
ten or more calendar days prior to the first scheduled hearing session. 
Further, if the parties agree to cancel the hearing inside the ten-day 
window, then they could negotiate which party pays this fee or a 
percentage of the fee. In addition the rules permit the panel to waive 
the fees, and they may do so, if the circumstances warrant, like a 
sudden illness or accident.
    Third, the proposed rule change would shift the phrase ``and 
granted'' to the end of the first dependent clause in Rule 12601(b)(2) 
to clarify that the timing of the parties' cancellation request 
controls whether the fee is assessed, not the timing of the 
arbitrators' decision on such request, if a decision is required. For 
example, the parties may jointly request cancellation of a hearing. A 
joint request means that the parties to the arbitration agree to cancel 
the hearing and, thus, the arbitrator or panel is not required to 
decide the request. Under the proposed rule change, if the parties make 
such a request ten calendar days or more before a scheduled hearing, 
they would not be assessed a Late Cancellation Fee.\15\ Further, one 
party may make a cancellation request without the agreement of other 
parties to the arbitration; in such a case, the arbitrator or panel 
would be required to decide the party's motion. Under the proposed rule 
change, if the party makes such a motion ten calendar days or more 
before a scheduled hearing, the party would not be assessed a Late 
Cancellation Fee, regardless of when the arbitrators act on the 
request.
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    \15\ See Rules 12601(a)(1) and 13601(a)(1).
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    Fourth, FINRA notes that the Late Cancellation Fee is revenue-
neutral to FINRA; it is currently passed through to the arbitrators. 
This practice would not change under the proposed rule change.
    Last, FINRA is proposing to make conforming changes to Rule 
12214(a), by amending the reference to the Late Cancellation Fee in 
Rule 12214(a).
    The proposed rule change would address further a concern raised by 
many FINRA arbitrators--that the forum's honoraria are too low. FINRA 
began the process of increasing arbitrator honoraria by filing the 
Honoraria Increase Proposal with the SEC in June 2014, which proposed 
increasing the amount that arbitrators receive for one hearing session, 
among other things. On September 29, 2014, the SEC approved FINRA's 
proposal.\16\ While approval of the honoraria increases was an 
important step, FINRA also believes that changes are needed to the Late 
Cancellation Rule to further compensate arbitrators for lost 
opportunity costs as well as time spent in preparing for arbitration 
hearings that do not take place. Given arbitrators' numerous 
responsibilities in preparing for, managing, and conducting 
arbitrations, FINRA believes the proposed changes to the Late 
Cancellation Rule as well as the other recently-implemented honoraria 
increases would better compensate the arbitrators for their time 
commitments and their service to the forum.
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    \16\ See supra note 12.
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    FINRA acknowledges that customers are likely to pay at least some 
of the increased Late Cancellation Fee under the proposed rule change. 
As a result, the proposed rule change might have an effect on 
settlement negotiations, especially if the potential settlement amount 
is small compared to the Late Cancellation Fee. For example, in cases 
where negotiations extend past the ten-calendar-day deadline, the 
increased cost of cancellation, under the proposed rule change, may 
affect the amount agreed upon in settlement or even the probability of 
settlement. FINRA notes that the forum's rules are designed to help 
parties resolve their disputes fairly and efficiently. Parties pursue 
settlement when they believe it is in their financial interest to do 
so. The proposed fee increase would be another factor that parties 
would weigh in determining when or whether to settle or to proceed to 
hearing.
    FINRA believes, however, that the proposed changes would result in 
fewer late cancellations by the parties, as the higher Late 
Cancellation Fee would provide parties with an incentive to consider 
and begin settlement negotiations earlier in the process, if such an 
approach is in their interests. In addition, FINRA believes that the 
proposed rule change could help it minimize arbitrator turnover by 
addressing arbitrators' concerns that the current honoraria funded by 
the Late Cancellation Fee does not adequately compensate them for time 
spent and opportunities lost.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions

[[Page 9776]]

of Section 15A(b)(6) of the Act,\17\ 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. FINRA also believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(5) of the Act,\18\ 
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. FINRA believes that the proposed rule 
change appropriately allocates the proposed fee increase among those 
parties that cancel hearings on short notice. The Late Cancellation Fee 
would be paid by the parties, and passed through to the arbitrators to 
provide them with more compensation for preparation time expended and 
lost opportunities in the event of a cancellation on short notice. 
FINRA believes, therefore, that the proposed Late Cancellation Rule 
represents an equitable allocation of a reasonable fee to use the 
forum. While arbitrators would typically allocate the Late Cancellation 
Fee to the requesting party or parties, FINRA rules permit the 
arbitrators to allocate all, or a portion of the fee, to the non-
requesting party, if the arbitrators determine that the non-requesting 
party caused or contributed to the late cancellation. Moreover, the 
Late Cancellation Fee can be avoided altogether if the parties provide 
ten or more calendar days advance notice of such a cancellation.
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    \17\ 15 U.S.C. 78o-3(b)(6).
    \18\ 15 U.S.C. 78o-3(b)(5).
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    Finally, FINRA believes that the proposed rule change will protect 
investors and the public interest by improving FINRA's ability to 
retain qualified arbitrators willing to devote the time and effort 
necessary to consider thoroughly all arbitration issues presented, 
which, FINRA believes, is an essential element for FINRA to achieve its 
mission of investor protection and market integrity.

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

    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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change 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-2015-003 on the 
subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-003. 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 Web site (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 Web site 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-FINRA-2015-003 and 
should be submitted on or before March 17, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-03660 Filed 2-23-15; 8:45 am]
BILLING CODE 8011-01-P