Document ID: SEC-2008-1494-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-10-31T04:00Z

[Federal Register: October 31, 2008 (Volume 73, Number 212)]
[Notices]               
[Page 64995-64998]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc08-114]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58862; File No. SR-FINRA-2008-051]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amendments to the Codes of Arbitration Procedure To Require Arbitrators 
To Provide an Explained Decision Upon the Joint Request of the Parties

October 27, 2008.
    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 14, 2008, 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'') the proposed 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 NASD Rules 12214, 12514 and 12904 of 
the Code of Arbitration Procedure for Customer Disputes (``Customer 
Code'') and NASD Rules 13214, 13514 and 13904 of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code,'' and 
together with the Customer Code, the ``Codes'') to require arbitrators 
to provide an explained decision upon the joint request of the parties. 
Below is the text of the proposed rule change. Proposed new language is 
in italics; proposed deletions are in brackets.
* * * * *
Customer Code
12214. Payment of Arbitrators
    (a)-(d) No change.
    (e) Payment for Explained Decisions
    (1) The chairperson who is responsible for writing an explained 
decision pursuant to Rule 12904(g) will receive an additional 
honorarium of $400. The panel will allocate the cost of the honorarium 
under Rule 12904(g) to the parties.
    (2) If the panel decides on its own to write an explained decision, 
then no panel member will receive the additional honorarium of $400.
* * * * *
12514. Pre-hearing Exchange of Documents and Witness Lists [Before 
Hearing], and Explained Decision Requests
    (a)-(c) No change.
    (d) Explained Decision Request
    At least 20 days before the first scheduled hearing date, all 
parties must submit to the panel any joint request for an explained 
decision under Rule 12904(g).
* * * * *
12904. Awards
    (a)-(f) No change.
    (g) Explained Decisions
    (1) This paragraph (g) applies only when all parties jointly 
request an explained decision.
    (2) An explained decision is a fact-based award stating the general 
reason(s) for the arbitrators' decision. Inclusion of legal authorities 
and damage calculations is not required.
    (3) Parties must make any request for an explained decision no 
later than the time for the pre-hearing exchange of documents and 
witness lists under Rule 12514(d).
    (4) The chairperson of the panel will be responsible for writing 
the explained decision.
    (5) The chairperson will receive an additional honorarium of $400 
for writing the explained decision, as required by this paragraph (g). 
The panel will allocate the cost of the chairperson's honorarium to the 
parties as part of the final award.
    (6) This paragraph (g) will not apply to simplified cases decided 
without a hearing under Rule 12800 or to default cases conducted under 
Rule 12801.
    (g)-(i) Renumbered as (h)-(j).
* * * * *
Industry Code
13214. Payment of Arbitrators
    (a)-(d) No change.
    (e) Payment for Explained Decisions
    (1) The chairperson who is responsible for writing an explained 
decision pursuant to Rule 13904(g) will receive an additional 
honorarium of $400. The panel will allocate the cost of the honorarium 
under Rule 13904(g) to the parties.
    (2) If the panel decides on its own to write an explained decision, 
then no panel member will receive the additional honorarium of $400.
* * * * *
13514. Pre-hearing Exchange of Documents and Witness Lists [Before 
Hearing], and Explained Decision Requests
    (a)-(c) No change.
    (d) Explained Decision Request
    At least 20 days before the first scheduled hearing date, all 
parties must submit to the panel any joint request for an explained 
decision under Rule 13904(g).
* * * * *
13904. Awards
    (a)-(f) No change.
    (g) Explained Decisions
    (1) This paragraph (g) applies only when all parties jointly 
request an explained decision.
    (2) An explained decision is a fact-based award stating the general 
reason(s) for the arbitrators' decision. Inclusion of legal authorities 
and damage calculations is not required.
    (3) Parties must make any request for an explained decision no 
later than the time for the pre-hearing exchange of documents and 
witness lists under Rule 13514(d).
    (4) The chairperson of the panel will be responsible for writing 
the explained decision.
    (5) The chairperson will receive an additional honorarium of $400 
for writing the explained decision, as required by this paragraph (g). 
The panel will allocate the cost of the chairperson's honorarium to the 
parties as part of the final award.
    (6) This paragraph (g) will not apply to simplified cases decided 
without a hearing under Rule 13800 or to default cases conducted under 
Rule 13801.
    (g)-(i) Renumbered as (h)-(j).
* * * * *

[[Page 64996]]

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
    FINRA is proposing to amend its Customer Code and Industry Code to 
require arbitrators to provide an explained decision upon the joint 
request of the parties. The explained decision would be a fact-based 
award stating the general reason(s) for the arbitrators' decision; it 
would not be required to include legal authorities and/or damage 
calculations. Under the proposed rule change, parties would be required 
to submit any joint request for an explained decision at least 20 days 
before the first scheduled hearing date.\3\ The chairperson would: (1) 
Be required to write the explained decision; and (2) receive an 
additional honorarium of $400 for writing the decision. The panel would 
allocate the cost of the additional honorarium to the parties as part 
of the final award.
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    \3\ The term ``hearing'' means the hearing of an arbitration 
under Rules 12600 and 13600 (see Rules 12100(m) and 13100(m)).
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    The arbitrators would not be required to provide an explained 
decision in cases resolved without a hearing under simplified 
arbitration Rules 12800 and 13800 or in default cases conducted under 
Rules 12801 and 13801.
    FINRA is not proposing to amend Rules 12904(f) and 13904(f), which 
provide that an award may contain an underlying rationale. This means 
that arbitrators would continue to be permitted to decide, on their 
own, to write an explained decision. Thus, as is currently the case, if 
the panel decides on its own to write an explained decision, FINRA 
would not pay an additional honorarium to any panel member.
Background
    The absence of explanations in awards is a common complaint of non-
prevailing parties in the FINRA forum, especially customers and 
associated persons. In order to address these complaints and increase 
investor confidence in the fairness of the arbitration process, in 
March 2005, FINRA filed a proposed rule change with the SEC that would 
have required arbitrators to provide explained decisions upon the 
request of customers, or of associated persons in industry 
controversies. The SEC published the original proposed rule change for 
comment in July 2005.\4\ The SEC received almost two hundred comment 
letters in response to the original proposed rule change, many of them 
critical.
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    \4\ See Securities Exchange Act Release No. 52009 (July 11, 
2005); 70 FR 41065 (July 15, 2005) (File No. SR-NASD-2005-032).
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    While FINRA was considering its next steps, there have been several 
new developments related to explained decisions in other contexts. 
FINRA filed with the Commission dispositive motions \5\ and expungement 
procedures \6\ proposals, both of which would require arbitrators to 
write an explanation for granting relief. In addition, the Securities 
Industry Conference on Arbitration (SICA) conducted a ``Perceptions of 
Fairness'' arbitration survey of participants in securities arbitration 
proceedings.\7\ The survey results, released in February 2008, indicate 
that 55.5% of customers who responded to the survey would be ``more 
satisfied if they had an explanation in the award.'' In light of the 
comments, and these recent developments, FINRA has withdrawn the 
original proposed rule change as filed in SR-NASD-2005-032 and is 
filing a new proposed rule change. Key provisions of the proposed rule 
change are discussed in more detail below, together with related 
comments from the original proposed rule change.
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    \5\ FINRA filed the proposed dispositive motion rule on November 
2, 2007 (SR-FINRA-2007-021). The proposal was published for comment 
on March 20, 2008 (see Securities Exchange Act Release No. 57497 
(March 14, 2008); 73 FR 15019). FINRA submitted a Response to 
Comments on September 15, 2008.
    \6\ On March 13, 2008, FINRA filed an expungement procedures 
proposal (SR-FINRA-2008-010). This rule would establish procedures 
arbitrators must follow when considering requests for expungement 
relief under Conduct Rule 2130. The proposal was published for 
comment on April 3, 2008 (see Securities Exchange Act Release No. 
57572 (March 27, 2008); 73 FR 18308). FINRA submitted a Response to 
Comments on June 11, 2008, and a Supplemental Response to Comments 
on September 3, 2008.
    \7\ Jill I. Gross and Barbara Black, Perceptions of Fairness of 
Securities Arbitration: An Empirical Study, (February 6, 2008). The 
report can be downloaded at http://digitalcommons.pace.edu/cgi/
viewcontent.cgi?article=1477&context=lawfaculty.
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Parties Must Jointly Request an Explained Decision
    The original proposed rule change would have permitted a customer, 
or an associated person in an intra-industry controversy, to require an 
explained decision. Many commenters objected to the one-sided nature of 
that provision. Under the new proposed rule change, all parties to a 
case would have to agree to an explained decision. While the 
arbitrators will be resolving the entire matter and the explained 
decision would normally address all the claims asserted by the parties, 
the parties may request that an explained decision address only certain 
claims. Requiring the parties' joint agreement to an explained decision 
is consistent with FINRA's general policy to accommodate a joint 
request of the parties.
Parties Must Submit Any Request for an Explained Decision 20 Days 
Before the First Scheduled Hearing Date
    The proposed rule change would provide that parties must submit any 
joint request for an explained decision no later than 20 days prior to 
the first scheduled hearing date. This deadline coincides with the time 
that parties must exchange documents and identify witnesses they intend 
to present at the hearing. This approach would establish a clear 
deadline, give the parties sufficient time to request an explained 
decision, and provide notice to the arbitrators that an explained 
decision will be required before the hearing begins.
The Chairperson Must Write the Explained Decision
    The new proposed rule change would require that the chairperson 
write the explained decision. The original proposed rule change 
contemplated that any of the arbitrators, or all of them, might draft 
the decision. Many commenters on the original proposed rule change were 
concerned that poorly written decisions might harm the public's 
perception of arbitration, or increase the likelihood of a party 
successfully vacating an award. To address these concerns, the rule 
would require that the chairperson write the decision.
    Under the Codes, arbitrators must meet specific experience and 
training criteria to serve as chairpersons in arbitrations.\8\ 
Therefore, chairpersons

[[Page 64997]]

may be more experienced than non-chairpersons and should be better able 
to produce higher quality explained decisions. Further, assigning this 
responsibility to the chairperson would eliminate any confusion over 
who would be responsible for drafting the decision and would streamline 
the decision writing process. Having one arbitrator draft the decision 
after all the arbitrators have been consulted would reduce the time 
required to complete the decision. Once the decision was drafted, the 
arbitrators still would be required to sign the decision as provided in 
Rules 12904(a) and 13904(a).\9\
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    \8\ Pursuant to Rules 12400 and 13400, arbitrators are eligible 
for the chairperson roster if they have completed FINRA chairperson 
training and:
     Have a law degree and are a member of a bar of at least 
one jurisdiction and have served as an arbitrator through award on 
at least two arbitrations administered by a self-regulatory 
organization in which hearings were held; or
     Have served as an arbitrator through award on at least 
three arbitrations administered by a self-regulatory organization in 
which hearings were held.
    On June 23, 2008, the SEC approved a proposal to eliminate the 
Code provision allowing arbitrators to serve as Chairpersons 
provided they have ``substantially equivalent training or 
experience'' in lieu of completing FINRA Dispute Resolution's 
Chairperson training course (see Securities Exchange Act Release No. 
58004 (June 23, 2008); 73 FR 36579 (June 27, 2008) (File No. SR-
FINRA-2008-009). This rule became effective on September 22, 2008.
    \9\ Rules 12904(a) and 13904(a) require all awards to be in 
writing and signed by a majority of the arbitrators or as required 
by applicable law.
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The Explained Decision Must Be Fact-Based
    Under the proposed rule change, the explained decision would be a 
fact-based award stating the general reason(s) for the arbitrators' 
decision.\10\ The award would not be required to include legal 
authorities and damage calculations. FINRA believes that requiring only 
fact-based reasons in explained decisions will reduce the potential for 
misstatements in an award, thereby decreasing the possibility of a 
subsequent vacatur, modification or remand of an award and ensuring the 
continued finality of a FINRA award. FINRA believes the proposed rule 
change would provide the parties with the information they want while 
simultaneously maintaining the expediency, flexibility, and finality of 
arbitration.
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    \10\ While Rules 12604 and 13604 provide that the panel decides 
what evidence to admit and is not required to follow state or 
federal rules of evidence, FINRA intends that, as with current 
arbitration awards, explained decisions will have no precedential 
value in other cases. Thus, arbitrators will not be required to 
follow any findings or determinations that are set forth in prior 
explained decisions. In order to ensure that users of the forum are 
aware of the non-precedential nature of explained awards, FINRA 
plans to revise the template for all awards to include the following 
sentence: ``If the arbitrators have provided an explanation of their 
decision in this award, the explanation is for the information of 
the parties only and is not precedential in nature.''
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Only the Chairperson Will Be Compensated for an Explained Decision
    The original proposed rule change did not address who would have 
been responsible for preparing the explained decision and provided that 
each arbitrator would be paid an additional $200 honorarium for cases 
in which an explained decision was required. Under the new proposed 
rule change, only the chairperson would write the decision, and only 
the chairperson would be paid an additional honorarium. The additional 
honorarium paid to the chairperson would reflect the increased effort 
involved in drafting an explained decision. Under the new proposed rule 
change, the panel may allocate the cost of the honorarium to one party, 
or may allocate it between or among all parties.\11\
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    \11\ Under the Customer and Industry Codes, the panel has the 
authority to assess fees in connection with discovery-related 
motions, contested subpoena requests, and hearing session fees to 
one party, or may split the fees between or among all parties.
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Parties May Not Require Explained Decisions in Some Cases
    Under the proposed rule change, parties would not be able to 
require explained decisions in two types of arbitration proceedings. 
The first is simplified arbitrations that are decided solely upon the 
pleadings and evidence filed by the parties, as described in Rules 
12800 and 13800. The second is arbitrations that are conducted under 
the default procedures provided for in Rules 12801 and 13801. Explained 
decisions would not be appropriate in either of these situations 
because of the abbreviated nature of these arbitration proceedings.
Arbitrators May Choose To Write Explained Decisions in Other 
Circumstances
    Under the proposed rule change, arbitrators would continue to be 
permitted to decide, on their own or upon the motion of one party, to 
write an explained decision. Arbitrators would not receive an 
additional honorarium if the panel issues an explained decision that is 
not required under the proposed rules. The proposed rule change would 
not affect the current rule that permits arbitrators to include a 
rationale in an award, even if the parties have not requested it, and 
would not encourage arbitrators to write an explained decision when 
they are not asked to do so by all the parties.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ 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 proposed rule change would increase investor 
confidence in the fairness of the arbitration process by allowing 
parties jointly to require arbitrators to write an explained decision.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will 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 were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 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 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 e-mail to rule-comments@sec.gov. Please include 
File

[[Page 64998]]

Number SR-FINRA-2008-051 on the subject line.

Paper Comments

     Send paper comments in triplicate to Florence Harmon, 
Acting Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2008-051. This 
file number should be included on the subject line if e-mail 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 inspection 
and copying 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 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-2008-051 
and should be submitted on or before November 21, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-25976 Filed 10-30-08; 8:45 am]

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