Document ID: SEC-2016-2017-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-11-17T05:00Z

[Federal Register Volume 81, Number 222 (Thursday, November 17, 2016)]
[Notices]
[Pages 81213-81216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27595]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79285; File No. SR-FINRA-2016-030]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend 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

November 10, 2016.

I. Introduction

    On August 3, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Rules 12504 of the Code 
of Arbitration Procedure for Customer Disputes (``Customer Code'') and 
Rule 13504 of the Code of Arbitration Procedure for Industry Disputes 
(``Industry Code'' and, together with the Customer Code, ``Codes'').\3\ 
The proposed rule change would allow arbitrators to 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See File No. SR-FINRA-2016-030.
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    The proposed rule change was published for comment in the Federal 
Register on August 17, 2016.\4\ The public comment period closed on 
September 7, 2016. The Commission received four (4) comment letters on 
the proposed amendments.\5\ On September 19, 2016, FINRA extended the 
time period in which the Commission must approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule change 
to November 15, 2016.\6\ On October 31, 2016, FINRA responded to the 
comment letters received in response to the Notice.\7\ This order 
approves the proposed rule change.
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    \4\ See Exchange Act Release No. 78553 (Aug. 11, 2016); 81 FR at 
54888 (Aug. 17, 2016) (``Notice'').
    \5\ See Letters from Steven B. Caruso, Maddox Hargett Caruso, 
P.C. (Aug. 11, 2016) (``Caruso Letter''); David T. Bellaire, Esq., 
Executive Vice President & General Counsel, Financial Services 
Institute (Sept. 7, 2016) (``FSI Letter''); Hugh Berkson, President, 
Public Investors Arbitration Bar Association (Sept. 7, 2016) 
(``PIABA Letter''); and William A. Jacobson, Esq., Clinical 
Professor of Law, Cornell Law School, Director, Cornell Securities 
Law Clinic, and Arjun A. Ajjegowda, Student, Cornell Law School 
(Sept. 7, 2016) (``Cornell Letter''). The comment letters are 
available on FINRA's Web site at http://www.finra.org, at the 
principal office of FINRA, at the Commission's Web site at https://www.sec.gov/comments/sr-finra-2016-029/finra2016029.shtml, and at 
the Commission's Public Reference Room.
    \6\ See Letter from Margo A. Hassan, Associate Chief Counsel, 
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales 
Practices, Division of Trading and Markets, Securities and Exchange 
Commission, dated September 19, 2016.
    \7\ See Letter from Margo A. Hassan, Associate Chief Counsel, 
FINRA, to Brent J. Fields, Secretary, Securities and Exchange the 
Commission, dated October 31, 2016 (``FINRA Letter''). The FINRA 
Letter is available on FINRA's Web site at http://www.finra.org, at 
the principal office of FINRA, at the Commission's Web site at 
https://www.sec.gov/comments/sr-finra-2016-029/finra2016029.shtml, 
and at the Commission's Public Reference Room.
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II. Description of the Proposed Rule Change \8\
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    \8\ The subsequent description of the proposed rule change is 
substantially excerpted from FINRA's description in the Notice. See 
Notice, 81 FR at 54889-54889.
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Background

    In 2009, FINRA amended the Codes to adopt 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.\9\ 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. The procedures set forth in the 
Codes significantly limit the use of 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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    \9\ See Exchange Act Release No. 59189 (Dec. 31, 2008), 74 FR 
731 (Jan. 7, 2009) (Order Approving Proposed Rule Change, As 
Modified by Amendment No. 1 Thereto, Relating to Amendment to the 
Code of Arbitration Procedure for Customer Disputes and the Code of 
Arbitration Procedure for Industry Disputes to Address Motions to 
Dismiss and to Amend the Eligibility rule related to Dismissals) 
(File No. SR-FINRA-2007-021) (``2009 Order'').
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    Among other requirements, the Codes require parties to file 
prehearing motions to dismiss in writing, separately from the answer, 
and only after they file the answer.\10\ The full panel of arbitrators 
must decide a motion to dismiss,\11\ and the panel must hold a hearing 
on the motion unless the parties waive the hearing.\12\ If a panel 
grants a motion to dismiss, the decision must be unanimous, and must be 
accompanied by a written explanation.\13\
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    \10\ See FINRA Rules 12504(a)(2) and 13504(a)(2).
    \11\ See FINRA Rules 12504(a)(4) and 13504(a)(4).
    \12\ See FINRA Rules 12504(a)(5) and 13504(a)(5).
    \13\ See FINRA Rules 12504(a)(7) and 13504(a)(7).
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    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,\14\ (2) the moving party was not associated with the account, 
security, or conduct at issue,\15\ or (3) a claim is not eligible for 
arbitration because it does not meet the six-year time limit for 
submitting a claim.\16\
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    \14\ See FINRA Rules 12504(a)(6)(A) and 13504(a)(6)(A).
    \15\ See FINRA Rules 12504(a)(6)(B) and 13504(a)(6)(B).
    \16\ 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 Codes impose sanctions against parties for 
engaging in abusive practices. For instance, 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.\17\ Moreover, if they find 
the motion to be frivolous, they must award reasonable costs and 
attorneys' fees to a party that opposed the motion.\18\ In addition, 
the arbitrators may issue sanctions under the Codes if they determine 
that a party filed a motion under the rule in bad faith.\19\
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    \17\ See FINRA Rules 12504(a)(9) and 13504(a)(9).
    \18\ See FINRA Rules 12504(a)(10) and 13504(a)(10).
    \19\ See FINRA Rules 12504(a)(11) and 13504(a)(11); see also 
FINRA Rules 12212 and 13212 (Sanctions) relating to available 
sanctions.
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Proposed Rule Change

    FINRA is proposing to amend the Codes to add an additional ground 
for

[[Page 81214]]

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, FINRA's Director of Arbitration (``Director'') 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.\20\ FINRA states, however, that 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. FINRA also believes that the proposed rule change would 
deter parties' use of repeated filings as a means of leverage during 
settlement negotiations.
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    \20\ 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 Codes, the subject matter of 
the dispute is inappropriate. FINRA states that the Director rarely 
invokes this authority.
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    Specifically, 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 \21\ against the same party that was fully 
and finally adjudicated on the merits and memorialized in an order, 
judgment, award, or decision. For example, FINRA states that 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.
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    \21\ 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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III. Summary of Comments and FINRA's Response

    As noted above, the Commission received four (4) comment letters on 
the proposed rule change,\22\ and a response letter from FINRA.\23\ As 
discussed in more detail below, two commenters supported the 
proposal,\24\ one generally supported the proposal but recommended 
modifications,\25\ and one opposed the proposal.\26\
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    \22\ See supra note 5.
    \23\ See supra note 7.
    \24\ See Caruso Letter and FSI Letter.
    \25\ See PIABA Letter.
    \26\ See Cornell Letter.
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    Of the two commenters who supported the proposal, one commenter 
stated that the proposed amendments ``would be a fair, equitable and 
reasonable approach and should be approved by the SEC on an expedited 
basis.'' \27\ The other commenter stated that the proposal would 
``appropriately enhance the arbitration process by eliminating claims 
that have already been heard and decided on the merits in another 
forum'' and would consequently ``promote both the integrity and 
fairness of arbitration proceedings.'' \28\
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    \27\ See Caruso Letter.
    \28\ See FSI Letter.
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Scope of the Proposal

    A third commenter generally supported the proposal, stating that 
``a current ground for dismissal under the present rule, that `the non-
moving party previously released the claim(s) in dispute by a signed 
settlement agreement and/or written release,' and the proposed 
additional language are in line with the same reasoning: that a final, 
enforceable resolution has already been reached.'' \29\ This commenter 
suggested, however, that FINRA should continue to discourage motions to 
dismiss prior to the conclusion of a party's case in chief. 
Accordingly, the commenter recommended that FINRA should: (1) Clarify 
that the proposal should be narrowly construed such that it applies to 
``adjudications on the merits where the non[hyphen]moving parties have 
had a full and fair opportunity to argue their claims;'' (2) narrowly 
define the term ``same party'' to mean ``the specific party named in 
the previous arbitration;'' \30\ and (3) stress ``the importance of 
continuing to permit the non[hyphen]moving party to have a full 
opportunity to oppose such motion to dismiss, and to present evidence 
and testimony to the arbitrators on the merits of the motion prior to 
their decision.'' \31\
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    \29\ See PIABA Letter (citing FINRA Rules 12504(a)(6)(A) and 
13504(a)(6)(A)).
    \30\ The commenter argues that ``without clarification, a 
claimant might be improperly precluded from pursuing claims against 
respondents not originally named in an adjudicated case.'' See PIABA 
Letter.
    \31\ See id.
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    In its response, FINRA stated that it drafted the proposed 
amendments narrowly, in continued adherence ``to the principle that 
motions to dismiss a claim prior to the conclusion of a party's case in 
chief are discouraged in arbitration.'' FINRA stated that it would not 
reject a claim initiated against a related, but previously unnamed 
party, and that it would be a moving party's responsibility to 
demonstrate to the arbitrators that such a party is the ``same party'' 
for purposes of the proposed rule change. FINRA also expressed its 
intention to train its arbitrators on the rule change, emphasizing that 
the moving party must demonstrate that the non-moving party brought the 
same dispute against the same party and that the non-moving party had a 
full opportunity to present its claims in the earlier proceeding.\32\
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    \32\ See FINRA Letter.
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Summary Judgment

    One supportive commenter noted that the Codes do not permit a 
claimant to file a motion for summary judgment, and suggested that this 
``disparity'' be corrected ``so that the playing field in the 
securities arbitration arena is level and equal for all of the 
participants in the forum.'' \33\
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    \33\ See Caruso Letter.
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    In its response, FINRA stated that it limited the grounds on which 
motions to dismiss could be filed based on the belief that some 
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.'' FINRA asserted that the rules were ``designed to deter the 
inappropriate use of dispositive motions, not to provide respondents 
with a new vehicle to seek early dismissal of a claimant's claims.'' 
Accordingly, FINRA declined to amend the Codes to permit parties to 
bring motions for summary judgment, as it believes that such an 
amendment would conflict with its goal of limiting dispositive motions 
that curtail the opportunity for parties to fully present their 
cases.\34\
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    \34\ See FINRA Letter.
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Demonstrated Need for the Proposal

    One commenter opposed the proposed rule change, stating that FINRA 
has not demonstrated a need to broaden the scope of the rule, and that 
``FINRA has not provided any statistical evidence as to the frequency 
of repeat claims being brought under circumstances that the Proposed 
Rule Change would remedy.'' \35\ In addition, the commenter asserted 
that courts already provide remedies for the alleged

[[Page 81215]]

problem of repeat filing of claims by enjoining or staying the 
arbitration proceedings and FINRA has failed to demonstrate that the 
court remedy is less effective and fair to all parties.\36\
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    \35\ See Cornell Letter (expressing no position with respect to 
the proposed change to FINRA Rule 13504 of the Industry Code).
    \36\ See id.
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    In its response, FINRA asserted that it had demonstrated a need for 
the proposed rule change. According to FINRA, statistics suggest that 
the proposed rule change would impact a small number of cases.\37\ 
However, FINRA believes that the proposed rule change would reduce both 
parties' costs where these motions are granted at an earlier stage in 
the proceeding, and that the rule change would nevertheless allow 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--thus limiting the risk that arbitrators might act on incomplete 
or insufficient information. FINRA therefore believes that the benefit 
of the cost savings to the impacted parties outweighs the commenter's 
concern regarding the demonstrated need for the proposal.
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    \37\ See SR-FINRA-2016-030 at page 9. FINRA staff provided the 
Task Force with statistics for 2013 and 2014.
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    With regard to the same commenter's suggestion that parties use the 
courts to address the issue of repeat filings, FINRA stated that 
parties ``would be better served by having issues relating to the 
earlier adjudication of a dispute resolved in the forum where the 
claimant chose to initiate the arbitration proceeding.'' According to 
FINRA, ``[t]he moving party should not have to seek a remedy in a 
separate court proceeding, and the non-moving party should not be 
subject to additional litigation costs outside of the arbitration 
forum.'' FINRA stated that ``this is especially important for pro se 
investors,'' who might be unable to argue the law in court without 
counsel. Accordingly, FINRA believes that ``forcing [pro se investors] 
into a court proceeding might preclude them from pursuing their 
claims.'' \38\
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    \38\ See FINRA Letter.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposal, the comments 
received, and FINRA's response to the comments. Based on its review of 
the record, the Commission finds that the proposed rule change is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to a national securities 
association.\39\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\40\ which requires, among other things, that FINRA's rules 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.
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    \39\ In approving the proposed rule change, the Commission has 
also considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \40\ 15 U.S.C. 78o-3(b)(6).
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    As discussed above, the proposal would amend Rules 12504(a)(6) and 
13504(a)(6) to add new paragraph (C), allowing arbitrators to 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 
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.
    The Commission has considered the four (4) comment letters received 
on the proposed rule change,\41\ along with FINRA's response to the 
comments.\42\ The Commission acknowledges commenters' beliefs that the 
proposed rule change ``would be a fair, equitable and reasonable 
approach,'' \43\ that it would promote the ``integrity and fairness of 
arbitration proceedings'' by ``eliminating claims that have already 
been heard and decided on the merits in another forum,'' \44\ and that 
the proposal was in line with the reasoning of the current rule--``that 
a final, enforceable resolution has already been reached.'' \45\ 
However, the Commission also recognizes commenters' concerns and 
opposition to the proposal.\46\
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    \41\ See supra note 5.
    \42\ See supra note 7.
    \43\ See Caruso Letter.
    \44\ See FSI Letter.
    \45\ See PIABA Letter.
    \46\ See supra notes 25-26.
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Scope of the Proposal

    The Commission agrees with a commenter's concern that the proposed 
rule change should be applied narrowly, where a claim has previously 
been adjudicated on the merits against the same party, and the 
non[hyphen]moving party has had a full and fair opportunity to argue 
their claims in opposition to the motion to dismiss.\47\ However, the 
Commission believes that FINRA has drafted the proposed rule change 
narrowly, so as to discourage the filing of motions to dismiss except 
in these limited circumstances. The Commission also recognizes FINRA's 
stated effort to help ensure that claims initiated against related, but 
previously unnamed parties will not be rejected, as well as its stated 
effort to train arbitrators on the rule change. The Commission believes 
that FINRA's response should address the commenter's concerns.\48\
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    \47\ See PIABA Letter.
    \48\ See FINRA Letter.
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Summary Judgment

    The Commission also recognizes a commenter's suggestion that the 
FINRA Codes should permit parties to file motions for summary 
judgment.\49\ The Commission preliminarily believes that such an 
amendment would conflict with FINRA's goal of limiting dispositive 
motions that curtail the opportunity for parties to fully present their 
cases.\50\ The Commission therefore supports FINRA's decision not to 
expand the scope of the rule change to permit motions for summary 
judgment.
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    \49\ See Caruso Letter.
    \50\ See FINRA Letter.
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Demonstrated Need for the Proposal

    The Commission further recognizes a commenter's assertion that 
FINRA has not demonstrated a need for the rule change.\51\ However, 
although few cases might be impacted by the rule change, according to 
FINRA, the Commission agrees with FINRA's belief that, if implemented 
properly, the rule change can benefit those parties by reducing their 
arbitration costs while still allowing the non-moving party to present 
evidence and testimony concerning the merits of the motion.\52\
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    \51\ See Cornell Letter.
    \52\ See FINRA Letter.
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    With regard to the same commenter's suggestion that parties use the 
courts to address the issue of repeat filings,\53\ the Commission 
generally supports FINRA's view that the parties should not be required 
to file a separate court proceeding to seek dismissal of repeat 
filings, and that such matters would be better resolved in the original 
arbitration forum.\54\
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    \53\ See Cornell Letter.
    \54\ See FINRA Letter.
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    To note, the Commission additionally recognizes that the FINRA 
Dispute Resolution Task Force (``Task Force'') reviewed the topic of 
motions to dismiss and recommended that FINRA amend the motions to 
dismiss rule in customer cases to include one additional category

[[Page 81216]]

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.\55\ This amendment is consistent with the 
Task Force's recommendation.
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    \55\ In July 2014, FINRA formed the Task Force to ``suggest 
strategies to enhance the transparency, impartiality, and efficiency 
of FINRA's securities dispute resolution forum for all 
participants.'' See FINRA News Release, FINRA Announces Arbitration 
Task Force, dated July 17, 2014, available at http://www.finra.org/newsroom/2014/finra-announces-arbitration-task-force; see also 
Notice, 81 FR at 54889.
    The Task Force ultimately found that FINRA Rules 12504 and 13504 
appeared to be working as intended to prevent the filing of 
frivolous motions to dismiss, but recommended 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. See FINRA Dispute Resolution Task Force, Final 
Report and Recommendations of the FINRA Dispute Resolution Task 
Force, dated December 16, 2015, available at http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf; see also Notice, 
81 FR at 54889.
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    Taking into consideration the comments and FINRA's responses, the 
Commission believes that the proposal is consistent with the Exchange 
Act. The Commission believes that the proposal will help protect 
investors and the public interest by, among other things, providing an 
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, while preserving the ability of a non-moving party to 
present evidence and testimony to the arbitrators concerning the merits 
of the motion. In addition, the Commission believes that the reasoning 
for the proposed new ground for dismissal is consistent with the 
reasoning for an existing ground for dismissal--that ``the non-moving 
party previously released the claim(s) in dispute by a signed 
settlement agreement and/or written release.'' \56\ Furthermore, the 
Commission believes that FINRA's responses, as discussed in more detail 
above, appropriately addressed commenters' concerns and adequately 
explained FINRA's reasons for declining to modify its proposal. 
Accordingly, the Commission believes that the approach proposed by 
FINRA is appropriate and designed to protect investors and the public 
interest, consistent with Section 15A(b)(6) of the Exchange Act and the 
rules and regulations thereunder.
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    \56\ See FINRA Rule 12504(a)(6)(A); FINRA Rule 13504(a)(6)(A).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\57\ that the proposed rule change (SR-FINRA-2016-030) be, 
and hereby is, approved.
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    \57\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
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    \58\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27595 Filed 11-16-16; 8:45 am]
 BILLING CODE 8011-01-P