Document ID: SEC-2016-1446-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-08-17T04:00Z

[Federal Register Volume 81, Number 159 (Wednesday, August 17, 2016)]
[Notices]
[Pages 54888-54891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19583]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78553; File No. SR-FINRA-2016-030]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Amending 
Rule 12504 of the Code of Arbitration Procedure for Customer Disputes 
and Rule 13504 of the Code of Arbitration Procedure for Industry 
Disputes Relating to Motions To Dismiss in Arbitration

August 11, 2016.
    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 August 3, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission

[[Page 54889]]

(``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 FINRA Rule 12504 of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
FINRA Rule 13504 of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code,'' and together with the Customer Code, the 
``Codes''), to provide that arbitrators may act upon a motion to 
dismiss a party or claim prior to the conclusion of a party's case in 
chief if the arbitrators determine that the non-moving party previously 
brought a claim regarding the same dispute against the same party, and 
the dispute was fully and finally adjudicated on the merits and 
memorialized in an order, judgment, award, or decision.
    The text of the proposed rule change is available on FINRA's Web 
site 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
Background
    In 2009, FINRA amended the Codes to adopt new FINRA Rules 12504 and 
13504 (Motions to Dismiss), and to amend FINRA Rules 12206 and 13206 
(Time Limits), to establish procedures limiting motions to dismiss in 
arbitration.\3\ A motion to dismiss is a request made to the 
arbitrators to remove a party or some or all claims raised by a party 
filing a claim. If the arbitrators grant a motion to dismiss before a 
hearing is held (a prehearing motion), the party bringing the claim 
loses the opportunity to have his or her arbitration case heard in 
whole or in part by the arbitrators. FINRA limited motions to dismiss 
because FINRA believed that respondents were filing prehearing motions 
routinely and repetitively in an effort to delay scheduled hearing 
sessions on the merits, increase investors' costs, and intimidate less 
sophisticated investors.
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    \3\ See Regulatory Notice 09-07 announcing Commission approval 
of new FINRA Rules 12504 and 13504 (Motions to Dismiss) and 
amendments to FINRA Rules 12206 and 13206 (Time Limits).
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    The procedures set forth in the Codes significantly limit the use 
of motions to dismiss. Among other requirements, FINRA requires parties 
to file prehearing motions to dismiss in writing, separately from the 
answer, and only after they file the answer. The full panel of 
arbitrators must decide a motion to dismiss, and the panel must hold a 
hearing on the motion unless the parties waive the hearing. If a panel 
grants a motion to dismiss, the decision must be unanimous, and must be 
accompanied by a written explanation.
    Under the Codes, arbitrators cannot act upon a motion prior to the 
conclusion of the non-moving party's case in chief unless the 
arbitrators determine that: (1) The non-moving party previously 
released the claim in dispute by a signed settlement or written 
release, (2) the moving party was not associated with the account, 
security, or conduct at issue,\4\ or (3) a claim is not eligible for 
arbitration because it does not meet the six-year time limit for 
submitting a claim.\5\
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    \4\ See FINRA Rules 12504 and 13504 (Motions to Dismiss).
    \5\ See FINRA Rules 12206 and 13206 (Time Limits), which provide 
that no claim shall be eligible for submission to arbitration where 
six years have elapsed from the occurrence or event giving rise to 
the claim.
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    Furthermore, the procedures set forth in the Codes impose stringent 
sanctions against parties for engaging in abusive practices. For 
instance, under the motions to dismiss rules, if the arbitrators deny a 
motion to dismiss prior to the conclusion of the non-moving party's 
case in chief, the arbitrators must assess forum fees associated with 
hearing the motion against the moving party, and if they find the 
motion to be frivolous, they must award reasonable costs and attorneys' 
fees to a party that opposed the motion. Moreover, the arbitrators may 
issue other sanctions under the Codes if they determine that a party 
filed a motion under the rule in bad faith.\6\
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    \6\ See FINRA Rules 12212 and 13212 (Sanctions) relating to 
available sanctions.
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FINRA Dispute Resolution Task Force
    In 2014, FINRA formed the FINRA Dispute Resolution Task Force 
(``Task Force'') to suggest strategies to enhance the transparency, 
impartiality, and efficiency of FINRA's securities dispute resolution 
forum for all participants. The Task Force reviewed the topic of 
motions to dismiss and determined that the rule appears to be working 
as intended to prevent frivolous motions to dismiss. However, the Task 
Force reached a consensus that in instances where arbitrations involve 
claims previously adjudicated by a court or arbitrated by an 
arbitration panel, respondents should be able to seek early dismissal. 
The Task Force recommended that FINRA amend the motions to dismiss rule 
in customer cases to include one additional category for which motions 
to dismiss may be made before the conclusion of the case in chief: 
situations where the dispute was previously concluded through 
adjudication or arbitration and memorialized in an order, judgment, 
award, or decision.
Proposed Rule Change
    FINRA agrees with the Task Force recommendation, and believes that 
it would be appropriate to add the additional ground for arbitrators to 
act on motions to dismiss prior to the conclusion of the claimant's 
case in chief in both customer and industry cases. Currently under the 
Codes, the Director of Arbitration can deny use of the forum for 
customer and industry claims if it is clear that a party is bringing 
exactly the same claims against the same parties that were already 
heard at the forum.\7\ However, if there are questions about whether 
the matter concerns a different claim, the Director is likely to deny 
the motion and allow the arbitration to proceed so that the arbitrators 
can decide the merits of the parties' assertions. FINRA believes that 
adding the additional ground for arbitrators to act on motions to 
dismiss is appropriate because parties should not be subject to the 
legal fees associated with arbitrating claims that have been fully 
adjudicated in a prior proceeding. The proposed rule change

[[Page 54890]]

would also act as a deterrent to using repeated filings as a means of 
leverage during settlement negotiations.
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    \7\ See FINRA Rules 12203 and 13303 (Denial of the Forum), which 
provide that the Director may decline to permit the use of the FINRA 
arbitration forum if the Director determines that, given the 
purposes of FINRA and the intent of the Code, the subject matter of 
the dispute is inappropriate. The Director rarely invokes this 
authority.
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    FINRA is proposing to amend FINRA Rules 12504(a)(6) and 13504(a)(6) 
to add new paragraph (c) which would specify that arbitrators can also 
act upon a motion to dismiss a party or claim if they determine that 
the non-moving party previously brought a claim regarding the same 
dispute \8\ against the same party that was fully and finally 
adjudicated on the merits and memorialized in an order, judgment, 
award, or decision. The proposed rule change would allow the 
arbitrators to grant a motion to dismiss relating to a particular 
controversy if they believe the matter was adjudicated fully even in 
instances where a claimant adds a new cause of action, or adds 
additional facts. For example, consider a case where a claimant 
initiated a claim against a firm for $150,000 for suitability based on 
a broker's investment in XYZ stock. The arbitrators dismiss the claim 
after a full hearing. The proposed rule change would allow the 
arbitrators to hear a motion to dismiss if the claimant subsequently 
files an arbitration against the same firm relating to the investment 
in XYZ but in the new case the claimant alleges fraud in inducing the 
claimant to make the purchase.
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    \8\ FINRA Rules 12100 and 13100 provide that ``dispute'' means a 
dispute, claim or controversy, and that it may consist of one or 
more claims.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\9\ 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 believes that the proposed rule change would 
enhance efficiency for forum participants because arbitrators would be 
permitted to dismiss previously adjudicated cases at an earlier point 
in an arbitration proceeding.
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    \9\ 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. Currently, the Codes impose 
significant restrictions on motions to dismiss an arbitration. With 
limited exceptions, in cases where the dispute has been permitted to go 
forward by the Director of Arbitration and a party puts forward a 
motion to dismiss, arbitrators cannot act upon the motion prior to the 
conclusion of the non-moving party's case in chief. Both sides incur 
additional costs related to making and defending the motion. However, a 
successful motion to dismiss could end part or all of the case 
resulting in reduced costs for parties.
    The Task Force reviewed arbitration case data from 2013 and 2014. 
During that time period, the Office of Dispute Resolution (ODR) had an 
average pending caseload of approximately 5,000 cases. ODR recorded 725 
cases (both customer and industry disputes) in which a prehearing 
motion to dismiss was filed by respondents. Of the 725 cases, 249 were 
still pending at the time of the Task Force review, 310 settled or 
closed for other reasons prior to any decision on the motion (i.e., 
bankruptcy, etc.), and 166 closed by award. FINRA reviewed the 166 
cases closed by award to determine the arbitrators' decisions regarding 
a motion to dismiss. The arbitrators granted a prehearing motion to 
dismiss (in whole or part) in 64 of the 166 cases closed by award. In 
addition, arbitrators granted a respondent's motion to dismiss after 
the conclusion of claimant's case in chief in 12 of the 166 cases 
closed by award. These figures suggest that motions to dismiss occur in 
a small but significant number of cases.
    Where arbitrators have sufficient information to determine the 
finding with respect to the motion to dismiss prior to hearing the non-
moving party's case, the proposed rule change will reduce both parties' 
costs where the motion is granted. Where the motion is denied, the 
proposed rule change may impose some costs on the non-moving party due 
to the potential delay and the need to argue the dispute associated 
with the motion prehearing. FINRA expects the costs to be limited 
because hearings on narrow issues such as a single motion are generally 
completed quickly. The rule would continue to permit the non-moving 
party to present evidence and testimony to the arbitrators concerning 
the merits of the motion prior to the decision on the motion, and thus 
would limit the risk that the arbitrators might act on incomplete or 
insufficient information.

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-2016-030 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-2016-030. 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 20549-1090, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing

[[Page 54891]]

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-2016-030 and should be submitted on or before September 7, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19583 Filed 8-16-16; 8:45 am]
 BILLING CODE 8011-01-P