Document ID: SEC-2012-0717-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-05-09T04:00Z

[Federal Register Volume 77, Number 90 (Wednesday, May 9, 2012)]
[Notices]
[Pages 27262-27263]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11130]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66913; File No. SR-FINRA-2012-012]

 Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Amending FINRA 
Rules 12401 (Number of Arbitrators) and 12800 (Simplified Arbitration) 
of the Code of Arbitration Procedure for Customer Disputes, and FINRA 
Rules 13401 (Number of Arbitrators) and 13800 (Simplified Arbitration) 
of the Code of Arbitration Procedure for Industry Disputes, To Raise 
the Limit for Simplified Arbitration From $25,000 to $50,000

May 3, 2012.

I. Introduction

    On February 9, 2012, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to amend FINRA's 
Customer and Industry Codes of Arbitration Procedure to raise the limit 
for simplified arbitration. Specifically, the proposed rule change 
would amend FINRA Rules 12401 (Number of Arbitrators) and 12800 
(Simplified Arbitration) of the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code''), and FINRA Rules 13401 (Number of 
Arbitrators) and 13800 (Simplified Arbitration) of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code''), to 
raise the limit for simplified arbitration from $25,000 to $50,000. The 
proposed rule change was published for comment in the Federal Register 
on February 28, 2011.\3\ The Commission received five comment letters 
on the proposed rule change,\4\ and a response to comments from 
FINRA.\5\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 66442 (Feb. 22, 2012), 77 FR 
12092 (Feb. 28, 2012) (``Notice''). The comment period closed on 
March 20, 2012.
    \4\ See Letter from Steven B. Caruso, Maddox Hargett & Caruso, 
P.C., dated March 2, 2012 (``Caruso Letter''); letter from Ryan K. 
Bakhtiari, President, Public Investors Arbitration Bar Association, 
dated March 16, 2012 (``PIABA Letter''); letter from William A. 
Jacobson, Associate Clinical Professor of Law, Cornell University 
Law School, and Director, Cornell Securities Law Clinic, and Brenda 
Beauchamp, Cornell Law School `13, dated March 20, 2012 (``Cornell 
Letter''); letter from Lisa A. Catalano, Director, Christine Lazaro, 
Supervising Attorney, and Anna Andreescu, Julia Iodice and Ashley 
Morris, Legal Interns, St. John's School of Law Securities 
Arbitration Clinic, dated March 20, 2012 (``St. John's Letter''); 
and letter from Jill I. Gross, Director, Edward Pekarek, Assistant 
Director, and Genavieve Shingle, Student Intern, Investor Rights 
Clinic at Pace Law School, dated March 20, 2012 (``PIRC Letter''). 
Comment letters are available at http://www.sec.gov.
    \5\ See Letter from Margo A. Hassan, Assistant Chief Counsel, 
FINRA Dispute Resolution, to Elizabeth M. Murphy, Secretary, 
Commission, dated April 19, 2012 (``Response Letter''). The text of 
the proposed rule change and FINRA's Response Letter are 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. The text of 
the Response Letter is also available on the Commission's Web site 
at http://www.sec.gov.
---------------------------------------------------------------------------

II. Description of the Proposal

    As stated in the Notice, FINRA currently offers streamlined 
arbitration procedures for claimants seeking damages of $25,000 or 
less. Under FINRA's simplified arbitration rules, one chair-qualified 
arbitrator decides the claim and issues an award based on the written 
submissions of the parties, unless the customer requests a hearing (if 
it is a customer case), or the claimant requests a hearing (if it is an 
industry case). FINRA also expedites discovery in these cases.\6\ The 
proposed rule change would raise the dollar limit for damages sought in 
order to offer simplified arbitration to claimants seeking damages of 
$50,000 or less.
---------------------------------------------------------------------------

    \6\ See FINRA Rule 12800(d).
---------------------------------------------------------------------------

    Specifically, the proposed rule change would amend FINRA Rules 
12401(a) and 13401(a) to provide that if the amount of a claim is 
$50,000 or less, exclusive of interest and expenses, the panel would 
consist of one arbitrator and the claim would be subject to the 
simplified arbitration procedures under FINRA Rules 12800 and 13800 
respectively. The proposed rule change also would amend FINRA Rules 
12401(b) and 13401(b) to state that if the amount of a claim is more 
than $50,000, but not more than $100,000, exclusive of interest and 
expenses, the panel would consist of one arbitrator unless the parties 
agree in writing to three arbitrators. The proposed rule change would 
not amend FINRA Rules 12401(c) and 13401(c), relating to claims of more 
than $100,000.
    The proposed rule change would also amend FINRA Rules 12800(a) and 
13800(a) to provide that the simplified arbitration rules would apply 
to claims involving $50,000 or less, exclusive of interest and 
expenses. In addition, the proposed rule change would amend FINRA Rules 
12800(e) and 13800(e) to state that if any pleading increases the 
amount in dispute to more than $50,000, FINRA would no longer 
administer the claim under the simplified arbitration rules and the 
regular provisions of the Customer Code and Industry Code, 
respectively, would apply.
    In the Notice, FINRA represented that allowing parties disputing 
claims between $25,000 and $50,000 to resolve their disputes based on 
the pleadings and other materials submitted by the parties, without a 
hearing, would benefit users of FINRA's arbitration forum in many ways, 
for example: (1) It would reduce forum fees because more parties could 
avoid hearing session fees and hearing process fees; \7\ (2) it would 
save parties the time and expense of preparing for, scheduling, and 
traveling to hearings; (3) it would provide an alternative for 
customers who are unable to retain an attorney and uncomfortable 
appearing at a hearing without representation; and (4) it would 
expedite cases because the arbitrator and parties would not need to 
schedule a hearing.
---------------------------------------------------------------------------

    \7\ FINRA represented that the $25,000 threshold captured 
twenty-one percent of all cases filed with FINRA's arbitration forum 
in 1998, but currently captures only ten percent of FINRA's 
caseload. FINRA stated that, based on 2011 statistics, raising the 
threshold to $50,000 would increase the percentage of claims 
administered under simplified arbitration to seventeen percent of 
the claims filed with the forum.
---------------------------------------------------------------------------

    FINRA has indicated that it would announce the effective date of 
the proposed rule change in a Regulatory Notice to be published no 
later than 60 days following Commission approval, and that the 
effective date would be no later than 30 days following publication of 
the Regulatory Notice announcing Commission approval.

III. Discussion of Comment Letters

    As stated above, the Commission received five comment letters on 
the proposed rule change in response to the Notice. All five comment 
letters supported one or more aspects of the proposal.\8\ One commenter 
suggested an

[[Page 27263]]

amendment to the proposal. None of the commenters opposed the proposal.
---------------------------------------------------------------------------

    \8\ Supra note 4.
---------------------------------------------------------------------------

    The Caruso Letter stated that the proposed rule change would 
benefit public investors and should be approved.
    The PIABA Letter stated that raising the threshold for simplified 
arbitration would benefit investors and other participants by 
increasing the efficiency of FINRA's arbitration forum, increasing 
flexibility to resolve claims through simplified arbitration, and 
reducing costs for forum users.
    The Cornell Letter took no position on the proposed amendments to 
the Industry Code. But the Cornell Letter stated that raising the limit 
for simplified arbitration would benefit customers with claims 
generally considered ``small'' and make it more likely that they could 
obtain legal representation.
    The St. John's Letter stated that raising the threshold for 
simplified arbitration would benefit investors by removing economic 
impediments to bringing claims in arbitration. Specifically, the St. 
John's Letter stated that the proposed rule would reduce arbitration-
related expenses, such as hearing fees, legal fees (by facilitating 
claims brought on a pro se basis), and travel expenses (associated with 
attending arbitration hearings). The St. John's Letter also stated that 
brokerage firms would also find the proposed rule change beneficial 
because it would reduce their expenses related to preparing for and 
appearing at arbitration hearings.\9\ In addition, the St. John's 
Letter stated that the proposed rule change would raise the percentage 
of cases eligible for simplified arbitration, which the letter 
represented has dropped due, in part, to inflation and market 
conditions after 1998, when the limit on the amount of damages claimed 
in simplified arbitration was last increased.
---------------------------------------------------------------------------

    \9\ The St. John's Letter cited a firm's willingness to consent 
to simplified arbitration to resolve a dispute with an investor 
claiming damages greater than $50,000.
---------------------------------------------------------------------------

    The PIRC Letter stated that the proposed rule change would benefit 
investors by enhancing the efficiency and expediency with which claims 
could be resolved in FINRA's arbitration forum, and by improving the 
environment for pro bono legal services organizations to help more 
investors due to the reduced time and resources involved in simplified 
arbitration. The PIRC Letter expressed concern, however, about an 
arbitrator's ability to resolve a customer dispute solely based on 
paper submissions. In particular, the PIRC Letter stated that disputes 
involving certain types of issues (e.g., fraud and suitability) require 
arbitrators to decide issues of witness credibility. The PIRC Letter 
expressed concern that arbitrators might find it difficult to resolve 
questions of credibility based solely on written submissions. 
Accordingly, the PIRC Letter recommended FINRA amend the proposed rule 
to provide customer claimants the option of electing a telephonic 
hearing.
    In its Response Letter, FINRA stated that it would consider the 
feasibility of a telephonic hearing option. But because the 
availability of telephonic hearings is not directly related to the 
substance of the proposed rule, and parties to an arbitration 
proceeding currently can jointly request a telephonic hearing, FINRA 
stated that its consideration of telephonic hearings should not delay 
the Commission's consideration of the proposed rule change. Therefore, 
FINRA declined to amend the proposed rule change to grant customer 
claimants the sole option to elect a telephonic hearing.

IV. Commission's Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments received, and FINRA's Response Letter. Based on its review, 
the Commission finds that the proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association.\10\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\11\ 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.
---------------------------------------------------------------------------

    \10\ In approving this proposed rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    More specifically, the Commission finds that the proposed rule 
change to raise the limit for simplified arbitration in FINRA's 
arbitration forum from $25,000 to $50,000 would benefit investors and 
other participants in the forum by providing increased flexibility to 
use simplified arbitration and reducing costs for forum users. While 
the Commission appreciates the suggestion regarding telephonic hearings 
expressed in the PIRC Letter, we believe that FINRA has responded 
adequately to the suggestion and agree with the Response Letter's 
position that consideration of a telephonic hearing option should not 
delay our consideration of the proposed rule change, particularly given 
the Response Letter's representation that FINRA would separately 
consider the feasibility of granting customer claimants a telephonic 
hearing option.
    For the reasons stated above, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-FINRA-2012-012) be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2012-11130 Filed 5-8-12; 8:45 am]
BILLING CODE 8011-01-P