Document ID: SEC-2020-2050-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-12-23T05:00Z

[Federal Register Volume 85, Number 247 (Wednesday, December 23, 2020)]
[Notices]
[Pages 84053-84057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28310]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90705; File No. SR-FINRA-2020-035]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend the 
FINRA Codes of Arbitration Procedure To Increase Arbitrator Chairperson 
Honoraria and Certain Arbitration Fees

December 17, 2020.

I. Introduction

    On October 16, 2020, the 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 the Code of Arbitration 
Procedure for Customer Disputes (``Customer Code'') and the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code'') 
(together, ``Codes'') to increase arbitrator chairperson (``Chair'') 
honoraria. Specifically, the proposed rule change would: (1) Increase 
the additional hearing day honorarium Chairs receive for each hearing 
on the merits from $125 to $250 and (2) create a new $125 Chair 
honorarium for each prehearing conference in which the Chair 
participates. Under the proposed rule change, these increases would be 
funded primarily by certain increases to the member surcharge and 
process fees for claims of more than $250,000 or claims for non-
monetary or unspecified damages. The proposed rule change would also 
increase filing fees and hearing session fees for customers, associated 
persons and members bringing claims of more than $500,000 or claims for 
non-monetary or unspecified damage.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on October 26, 2020.\3\ The public comment period closed on 
November 16, 2020. The Commission received one comment letter in 
response to the Notice.\4\ On December 9, 2020, FINRA consented to an 
extension of 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 December 31, 2020.\5\ This order approves the proposed 
rule change.
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    \3\ Exchange Act Release No. 90227 (Oct. 20, 2020), 85 FR 67794 
(Oct. 26, 2020) (File No. SR-FINRA-2020-035 (``Notice'').
    \4\ Letter from the Steven B. Caruso, Maddox Hargett Caruso, 
P.C., dated October 20, 2020 (``Caruso Letter''), available at 
https://www.sec.gov/comments/sr-finra-2020-035/srfinra2020035-7927147-224628.htm.
    \5\ See letter from Mignon McLemore, Assistant General Counsel, 
Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant 
Chief Counsel, Division of Trading and Markets, Commission, dated 
December 9, 2020.
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II. Description of the Proposed Rule Change

    FINRA makes arbitrator honoraria payments to its arbitrators for 
the services they provide to FINRA's dispute resolution forum. 
Currently, under FINRA Rule 12214(a)(1), arbitrators receive $300 for 
each hearing session in which the arbitrator participates.\6\ In 
recognition of their increased experience and the extra 
responsibilities they must perform during an arbitration,\7\ Chairs 
currently receive an additional $125 for serving as Chair during a 
hearing (``hearing day honorarium'').\8\ The Chair receives the 
additional honorarium for each hearing day, regardless of the number of 
hearing sessions held per day.\9\ Currently, Chairs do not receive an 
additional honorarium for prehearing conferences, which they are 
required to lead and for which they are required to perform additional 
tasks, such as setting discovery, briefing, and motion deadlines, 
scheduling subsequent hearing sessions, and drafting prehearing 
orders.\10\
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    \6\ A ``hearing session'' is any meeting between the parties and 
arbitrator(s) of four hours or less, including a hearing or a 
prehearing conference. See FINRA Rules 12100(p) and 13100(p).
    \7\ For example, during a typical arbitration, the Chair 
oversees the discovery process, conducts the initial prehearing 
conference (``IPHC'') and subsequent prehearing conferences as 
needed, drafts rulings and orders, and manages efficient hearings. 
See Notice at note 4.
    \8\ See FINRA Rule 12214(a)(2). The term ``hearing'' means the 
hearing on the merits of an arbitration under FINRA Rules 12600 and 
13600. See FINRA Rules 12100(o) and 13100(o).
    \9\ A typical day has two hearing sessions. See Notice at note 
3.
    \10\ See FINRA Rules 12500(c) and 13500(c).
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A. Proposed Increases to Arbitrator Chair Honoraria

    The proposed rule change would amend FINRA Rules 12214 and 13214 to 
increase the arbitrator Chair honoraria. Specifically, the proposed 
rule change would increase the hearing day honorarium from $125 to $250 
to better compensate the Chair for the additional training and 
responsibilities required of the position. In addition, the proposed 
rule change would establish a new

[[Page 84054]]

honorarium to pay a Chair an additional $125 for each prehearing 
conference in which he or she participates. Under the proposed rule 
change, Chairs would receive the additional prehearing conference 
compensation even if an arbitration case closes without a hearing. For 
example, if the Chair participates in a prehearing conference,\11\ but 
the parties settle the case, the Chair would still receive some 
compensation for serving as Chair.
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    \11\ See FINRA Rules 12500(a) and 13500(a).
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B. Proposed Increases to Arbitration Fees

    To fund increases in the arbitrator Chair honoraria, the proposed 
rule change would also increase the member surcharge, member process 
fees, filing fees, and hearing session fees that the forum assesses the 
parties during the course of an arbitration case.
1. Proposed Increases to Member Surcharge
    Under FINRA Rules 12901 and 13901, FINRA assesses a surcharge 
against each member that: (1) Files a claim, counterclaim, cross claim, 
or third party claim under the Codes; (2) is named as a respondent in a 
claim, counterclaim, cross claim, or third party claim filed and served 
under the Codes; or (3) employed, at the time the dispute arose, an 
associated person who is named as a respondent in a claim, 
counterclaim, cross claim, or third party claim filed and served under 
the Codes. Member surcharges are intended to allocate the costs of 
administering the arbitration case to the firms that are involved in 
those cases.\12\ Because the cost of administering an arbitration case 
generally is proportional to the aggregate claim amount,\13\ the member 
surcharge increases with the size of the claim amount.\14\ Proposed 
FINRA Rules 12901 and 13901 would increase the member surcharge for 
claims of more than $250,000 and claims for non-monetary or unspecified 
damages. Table 1 illustrates the proposed dollar and percentage changes 
for each tier.\15\
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    \12\ See Notice at 67796. The member surcharge is the 
responsibility of the member party and cannot be allocated to any 
other party (``non-allocable''). See FINRA Rules 12901(a)(6) and 
13901(f).
    \13\ See Notice at 67796.
    \14\ Id.
    \15\ Id.

                                       Member Surcharge Schedule--Table 1
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   Amount of claim (exclusive of interest and         Current                                       Percentage
                    expenses)                        surcharge     Proposed fee       Change        change (%)
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$.01 to $5,000..................................            $150            $150              $0               0
$5,000.01-$10,000...............................             325             325               0               0
$10,000.01-$25,000..............................             450             450               0               0
$25,000.01-$50,000..............................             750             750               0               0
$50,000.01-$100,000.............................           1,100           1,100               0               0
$100,000.01-$250,000............................           1,700           1,700               0               0
$250,000.01-$500,000............................           1,900           2,025             125               7
$500,000.01-$1,000,000..........................           2,475           2,625             150               6
$1,000,000.01-$5,000,000........................           3,025           3,200             175               6
$5,000,000.01-$10,000,000.......................           3,600           3,850             250               7
Over $10,000,000................................           4,025           4,325             300               7
Non-Monetary/Not Specified......................           1,900           2,000             100               5
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2. Proposed Increases to Filing Fee
    Under FINRA Rules 12900(a)(1) and 13900(a)(1), if a customer, 
associated person or other non-member files a claim, counterclaim, 
cross claim, or third party claim, they must pay a filing fee to 
initiate an arbitration. As with member surcharges, the filing fee is 
based on the claim amount or type of damages requested.\16\ The 
proposed rule change would amend FINRA Rules 12900 and 13900 to 
increase the filing fees for customers, associated persons or other 
non-members bringing claims of more than $500,000 and claims for non-
monetary or unspecified damages. Table 2 shows the proposed dollar and 
percentage changes.\17\
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    \16\ See FINRA Rules 12900(a)(1) and 13900(a)(1).
    \17\ See Notice at 67797.

              Filing Fees for Customers, Associated Persons or Other Non-Member Claimants--Table 2
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   Amount of claim (exclusive of interest and      Current claim  Proposed claim                    Percentage
                    expenses)                       filing fee      filing fee        Change        change (%)
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$.01 to $1,000..................................             $50             $50              $0               0
$1,000.01-$2,500................................              75              75               0               0
$2,500.01-$5,000................................             175             175               0               0
$5,000.01-$10,000...............................             325             325               0               0
$10,000.01-$25,000..............................             425             425               0               0
$25,000.01-$50,000..............................             600             600               0               0
$50,000.01-$100,000.............................             975             975               0               0
$100,000.01-$500,000............................           1,425           1,425               0               0
$500,000.01-$1,000,000..........................           1,725           1,740              15               1
$1,000,000.01-$5,000,000........................           2,000           2,025              25               1
Over $5,000,000.................................           2,250           2,300              50               2
Non-Monetary/Not Specified......................           1,575           1,600              25               2
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[[Page 84055]]

    The proposed rule change would also amend FINRA Rules 12900(b) and 
13900(b) to increase the filing fees that members pay for claims of 
more than $500,000 and claims for non-monetary or unspecified damages. 
Table 3 shows the proposed dollar and percentage changes.\18\
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    \18\ Id.

                                    Filing Fees for Member Claimant--Table 3
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   Amount of claim (exclusive of interest and      Current claim  Proposed claim                    Percentage
                    expenses)                       filing fee      filing fee        Change        change (%)
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$.01 to $1,000..................................            $225            $225              $0               0
$1,000.01-$2,500................................             350             350               0               0
$2,500.01-$5,000................................             525             525               0               0
$5,000.01-$10,000...............................             750             750               0               0
$10,000.01-$25,000..............................           1,050           1,050               0               0
$25,000.01-$50,000..............................           1,450           1,450               0               0
$50,000.01-$100,000.............................           1,750           1,750               0               0
$100,000.01-$500,000............................           2,125           2,125               0               0
$500,000.01-$1,000,000..........................           2,550           2,650             100               4
$1,000,000.01-$5,000,000........................           3,400           3,550             150               4
Over $5,000,000.................................           4,000           4,200             200               5
Non-Monetary/Not Specified......................           1,700           1,800             100               6
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3. Proposed Increases to Process Fee
    Under FINRA Rules 12903 and 13903, each member that is a party to 
an arbitration or employed an associated person who is a party to an 
arbitration in which the claim amount is more than $25,000 must pay a 
process fee based on the amount of the claim.\19\ The proposed rule 
change would amend FINRA Rules 12903 and 13903 to increase the member 
process fees for claim amounts larger than $250,000 and for claims for 
non-monetary or unspecified damages. Table 4 illustrates the proposed 
dollar and percentage changes.\20\
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    \19\ Like the member surcharge, the process fee is non-allocable 
to other parties to the arbitration. See FINRA Rules 12903(d) and 
13903(d). See also FINRA Rules 12701(b) and 13701(b).
    \20\ See Notice at 67797.

                                      Member Process Fee Schedule--Table 4
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   Amount of claim (exclusive of interest and         Current                                       Percentage
                    expenses)                       process fee    Proposed fee       Change        change (%)
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$.01-$25,000....................................              $0              $0              $0               0
$25,000.01-$50,000..............................           1,750               0               0               0
$50,000.01-$100,000.............................           2,250               0               0               0
$100,000.01-$250,000............................           3,250               0               0               0
$250,000.01-$500,000............................           3,750           3,875             125               3
$500,000.01-$1,000,000..........................           5,075           5,225             150               3
$1,000,000.01-$5,000,000........................           6,175           6,375             200               3
$5,000,000.01-$10,000,000.......................           6,800           7,050             250               4
Over $10,000,000................................           7,000           7,300             300               4
Non-Monetary/Not Specified......................           3,750           3,850             100               3
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4. Proposed Increases to Hearing Session Fee
    Under FINRA Rules 12902(a) and 13902(a), FINRA assesses hearing 
session fees against the parties for each hearing and pre-hearing 
session conducted by a panel.\21\ In the award, the panel determines 
the amount of the hearing session fees that each party is required to 
pay.\22\ The arbitrators may apportion the fees in any manner, 
including assessing the entire amount against one party.\23\ The 
proposed rule change would amend FINRA Rules 12902 and 13902 to 
increase the fees for claims of more than $500,000 and for claims for 
non-monetary or unspecified damages. There are different hearing 
session fees for hearings with one arbitrator versus hearings with 
three arbitrators. Under the proposed rule change, the fees would not 
change for hearings with one arbitrator. Table 5 illustrates the 
proposed dollar and percentage changes.\24\
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    \21\ See supra note 8.
    \22\ The term ``panel'' means the arbitration panel, whether it 
consists of one or more arbitrators. See FINRA Rules 12100(u) and 
13100(s).
    \23\ See FINRA Rules 12902(a)(1) and 13902(a)(1).
    \24\ See Notice at 67798.

                        Hearing Session Fees for Session With Three Arbitrators--Table 5
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                                                    Current fee    Proposed fee
   Amount of claim (exclusive of interest and     for session w/  for session w/                    Percentage
                    expenses)                          three           three          Change        change (%)
                                                    arbitrators     arbitrators
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Up to $2,500....................................              NA              NA              NA              NA
$2,500.01-$5,000................................              NA              NA              NA              NA

[[Page 84056]]

 
$5,000.01-$10,000...............................              NA              NA              NA              NA
$10,000.01-$25,000..............................              NA              NA              NA              NA
$25,000.01-$50,000..............................            $600            $600              $0               0
$50,000.01-$100,000.............................             750             750               0               0
$100,000.01-$500,000............................           1,125           1,125               0               0
$500,000.01-$1,000,000..........................           1,300           1,325              25               2
$1,000,000.01-$5,000,000........................           1,400           1,435              35               3
Over $5,000,000.................................           1,500           1,575              75               5
Non-Monetary/Not Specified......................           1,125           1,150              25               2
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C. Technical Changes

    The proposed rule change would amend FINRA Rules 12901 and 13901 to 
make the formatting more consistent in the fee schedules. In addition, 
the proposed rule change would amend FINRA Rule 12900(c)(3) to change 
the cross-reference in the rule from Rule 12202(c) to Rule 12202.

III. Discussion and Commission Findings

    After careful review of the proposed rule change and the comment 
letter, the Commission finds that the proposed rule change is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder that are applicable to a national securities 
association.\25\ Specifically, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\26\ which requires, among other things, that FINRA 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, and Section 15A(b)(5) of the 
Exchange Act,\27\ 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.
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    \25\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ 15 U.S.C. 78o-3(b)(5).
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A. Protection of Investors and the Public Interest

    FINRA's proposed rule change aims to address concerns related to 
recruiting and retaining arbitrators for its forum roster, including 
increasing the probability that local public Chairs would be proposed 
for selection. FINRA stated that Chair-eligible arbitrators have 
indicated that they are not interested in completing the required Chair 
training and serving on the Chair roster because of the extra work 
required compared to the modest, additional Chair honorarium currently 
offered.\28\ And forum users have expressed concern with empaneling 
non-local public arbitrators to Chair their proceedings.\29\ FINRA 
believes that increasing the current per-day Chair honorarium for 
hearings on the merits and establishing a Chair honorarium for 
prehearing conferences would provide more of an incentive for eligible 
arbitrators to become Chairs and to more adequately compensate Chairs 
for their additional work.\30\ The commenter agrees with FINRA, stating 
that increasing the additional hearing day honorarium that Chairs 
receive for each hearing on the merits, would ``provide more of an 
incentive for both new and experienced arbitrators to become Chairs, 
would increase the number of arbitrators on the Chair roster and will 
serve to reduce the number of non-local Chair arbitrators all of which 
will expand the quality and depth of the arbitrator roster which is a 
critical component for protecting investors and the public interest.'' 
\31\ The commenter also believes that the proposal rule change would 
``more adequately compensate Chairs for their additional work.'' \32\
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    \28\ See Notice at 67795.
    \29\ Id.
    \30\ See Notice at 67799.
    \31\ Caruso Letter.
    \32\ Id. (stating that the proposed $125 Chair honorarium for 
each prehearing conference in which the Chair participates would 
compensate Chairs who do not currently receive an additional 
honorarium for prehearing conferences, even though Chairs are 
required to lead the prehearing conferences and perform additional 
tasks in connection with the prehearing conferences, such as setting 
discovery, briefing, and motion deadlines, scheduling subsequent 
hearing sessions, drafting prehearing orders, and rendering 
decisions on discovery and other case-related motions).
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    The Commission acknowledges FINRA's concern that fewer Chair-
eligible arbitrators may be taking on the additional burdens of being 
on the Chair roster due to insufficient compensation. The Commission 
believes that increasing the amount that FINRA compensates its Chair-
eligible arbitrators may incentivize them to take on the additional 
training and responsibilities associated with the position.\33\ 
Consequently, FINRA may be able to recruit new, and retain current, 
Chairs for its roster, potentially alleviating the shortage of Chairs 
in certain locations and the concomitant negative impact (e.g., 
dissatisfied parties and scheduling delays).
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    \33\ To qualify as a Chair, an arbitrator must complete Chair 
training and have served on at least three arbitrations through 
award in which hearings were held, or be a lawyer who served on at 
least one arbitration through award in which hearings were held. See 
FINRA Rules 12400(c) and 13400(c); see also supra note 10 and 
accompanying text.
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B. Equitable Allocation of Reasonable Fees

    FINRA stated that the proposed increases to Chair honoraria would 
increase its expenses for operating the forum by approximately $1.1 
million.\34\ To offset these expenses, the proposed rule change would 
increase fees charged to parties for using its arbitration forum. In 
particular, the proposed rule change would increase the member 
surcharge, member process fees, filing fees, and hearing session fees. 
As illustrated above, FINRA would increase the member surcharge and 
process fees for claims of more than $250,000 or claims

[[Page 84057]]

for non-monetary or unspecified damages. The proposed rule change would 
also increase filing fees and hearing session fees for customers, 
associated persons and members bringing claims of more than $500,000 or 
claims for non-monetary or unspecified damages. FINRA believes the 
proposed rule change appropriately allocates the proposed fee increases 
among users of the forum by allocating the increases among high claim 
amounts and continuing its policy that the costs of the forum are borne 
85 percent by members and 15 percent by customers.\35\
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    \34\ From 2014 through 2019, FINRA paid the hearing day 
honorarium on an average of 2,569 times per year. In order to fund 
the proposed hearing day honorarium increase from $125 to $250, 
FINRA would need to raise revenue by approximately $368,000 
annually. See Notice at note 12. From 2014 through 2019, FINRA 
conducted an average of 4,954 prehearing conferences per year. In 
order to pay the proposed additional Chair prehearing honorarium of 
$125, FINRA would need to raise revenue by approximately $724,000 
annually. See Notice at note 15.
    \35\ See Notice at 67799; see also Notice at note 9 (stating 
that the FINRA Dispute Resolution Task Force suggested raising 
arbitration fees to fund arbitrator honoraria increases consistent 
with the current arbitration fee structure, which assigns a majority 
of the costs of the forum to firms through the member surcharge and 
process fees).
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    FINRA also believes the amount of the fee increases are reasonable. 
FINRA believes that the proposed fee increases would generate 
sufficient revenue to offset the proposed increases in the arbitrator 
Chair honoraria without placing an undue burden on users of the forum, 
particularly customers and claimants with small claims.\36\ For 
example, the filing fee increases for non-member claimants will range 
from $15 to $50 (1%-2% increase); \37\ the hearing session fee 
increases will range from $25 to $75 (2%-5% increase); \38\ the 
increases to the member surcharge will range from $100 to $300 (3%-4% 
increase); \39\ and the filing fee increases for member claimants will 
range from $100 to $200 (4%-6% increase).\40\ FINRA believes these 
represent ``minimal'' increases.\41\ Similarly, the commenter believes 
that increasing the filing fees and hearing session fees for customers, 
associated persons, and members bringing claims of more than $500,000 
or claims for non-monetary or unspecified damages, is a fair, equitable 
and reasonable allocation of the costs among people using the forum 
that will be associated with the implementation of the proposed rule 
amendments.\42\
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    \36\ See Notice at 67796.
    \37\ See Table 2 (Filing Fees for Customers, Associated Persons 
or Other Non-Member Claimants) supra; see also Notice at 67797.
    \38\ See Table 5 (Hearing Session Fees for Session with Three 
Arbitrators) supra; see also Notice at 67798.
    \39\ See Table 4 (Member Process Fee Schedule) supra; see also 
Notice at 67797.
    \40\ See Table 3 (Filing Fees for Member Claimant) supra; see 
also Notice at 67797.
    \41\ See Notice at 67794.
    \42\ See Caruso Letter.
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    The Commission believes that increasing the amount of honoraria 
paid to arbitrators who chair hearings and pre-hearing conferences in 
the FINRA forum as proposed here would help improve the arbitration 
process for its users. To offset the costs of this improvement, FINRA 
designed the arbitration fee structure to distribute much of the 
increased costs of the forum to member firms that are parties to an 
arbitration proceeding and to parties associated with large claims or 
non-monetary or unspecified claims. The Commission believes that this 
proposed distribution of fees will help keep the FINRA arbitration 
forum accessible. Otherwise, the Commission believes that increasing 
fees on claimants with small claims could discourage retail investors 
from bringing their claims.\43\ Accordingly, the proposed allocation of 
the fee increases will help ensure that FINRA's arbitration forum 
remains accessible and affordable to parties.
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    \43\ See Notice at 67801.
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    As stated above, the filing fee increases for non-member claimants 
will range from $15 to $50; the hearing session fee increases will 
range from $25 to $75; the increases to the member surcharge will range 
from $100 to $300; and the filing fee increases for member claimants 
range from $100 to $200. Because these increases would only apply to 
claims over $250,000 and, in some instances, over $500,000, they 
represent a small percentage of effected claims (collectively, 1%-6%).
    The Commission believes that the proposed rule change is consistent 
with the Exchange Act. In particular, the Commission believes that the 
proposed rule change is appropriate and designed to protect investors 
and the public interest, consistent with Section 15A(b)(6) of the 
Exchange Act. Specifically, the Commission believes that the proposed 
increase to the hearing day Chair honorarium and the addition of a 
Chair honorarium for prehearing conferences are in the public interest 
because they would help improve the arbitration process for its users, 
including retail investors. Moreover, the Commission believes that the 
proposed fee increases represent an equitable allocation of reasonable 
dues, fees and other charges among members and issuers and other 
persons using any facility, consistent with Section 15A(b)(5). For 
these reasons, the Commission finds that the proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
thereunder.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \44\ that the proposal (SR-FINRA-2020-035), be and hereby 
is approved.
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    \44\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28310 Filed 12-22-20; 8:45 am]
BILLING CODE 8011-01-P