Document ID: SEC-2010-0255-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-02-18T05:00Z

[Federal Register: February 18, 2010 (Volume 75, Number 32)]
[Notices]               
[Page 7297-7299]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18fe10-67]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61505; File No. SR-FINRA-2009-075]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend the 
Postponement Fee and Hearing Session Fee Rules of the Codes of 
Arbitration Procedure for Customer and Industry Disputes

February 4, 2010.

I. Introduction

    On November 4, 2009, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Rules 12601(b) and 12902(a) of the Code 
of Arbitration Procedure for Customer Disputes (``Customer Code'') and 
Rules 13601(b) and 13902(a) of the Code of Arbitration Procedure for 
Industry Disputes (``Industry Code'') (together, the ``Codes'') to 
clarify the applicability of the fee waiver provision of the 
postponement rule and to codify the hearing session fee for an 
unspecified damages claim heard by one arbitrator. The proposed rule 
change was published for comment in the Federal Register on December 1, 
2009.\3\ The Commission received two comment letters on the 
proposal.\4\ FINRA submitted a response to these comments on January 
29, 2010.\5\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 61057 (Nov. 24, 
2009), 74 FR 62855 (``Notice'').
    \4\ See letter from William A. Jacobson, Esq. and Kelly Cardin, 
Cornell Law School, to Elizabeth M. Murphy, Secretary, Commission, 
dated December 16, 2009 (``Cornell Letter''); letter from Scott R. 
Shewan, President, Public Investors Arbitration Bar Association, to 
Elizabeth M. Murphy, Secretary, Commission, dated December 21, 2009 
(``PIABA Letter'').
    \5\ See letter from Mignon McLemore, FINRA Dispute Resolution, 
to Elizabeth M. Murphy, Secretary, Commission, dated January 29, 
2010 (``FINRA Response'').

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[[Page 7298]]

II. Description of the Proposal

Proposed Amendment to Rules 12601(b)(3) and 13601(b)(3)

    The rules of the Codes require arbitration hearings to be postponed 
if the parties agree.\6\ Hearings may also be postponed by the Director 
of FINRA Dispute Resolution (``Director''), by the arbitration panel in 
its own discretion, or by the panel on a motion of a party.\7\ If a 
hearing is postponed, the panel will assess a postponement fee against 
one or more of the parties, which is typically equivalent to the 
applicable hearing session fee that would have been assessed had the 
hearing been held.\8\ If parties request and are granted a hearing 
postponement within three business days of a scheduled hearing session 
(i.e., a late postponement request), the Director will assess a late 
postponement fee of $100 per arbitrator.\9\
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    \6\ See Rules 12601(a)(1) and 13601(a)(1).
    \7\ See Rules 12601(a)(2) and 13601(a)(2).
    \8\ See Rules 12601(b)(1) and 13601(b)(1).
    \9\ See Rules 12601(b)(2) and 13601(b)(2).
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    While the Codes provide for instances in which a postponement fee 
is not assessed against the parties, such as if the parties agree to 
submit a matter to mediation at FINRA,\10\ such provisions do not apply 
to late postponement fees. Nevertheless, FINRA has received complaints 
from arbitrators that parties are misusing the fee waiver provisions. 
Specifically, parties who have made late postponement requests contend 
that, if they agree to mediate their dispute through FINRA, they should 
not be assessed a late postponement fee because Rules 12601(b)(3) and 
12601(b)(3) waive the postponement fee if the parties agree to mediate 
through FINRA.
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    \10\ See Rules 12601(b)(3) and 13601(b)(3).
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    The proposed rule change amends Rules 12601(b)(3) and 13601(b)(3) 
of the Codes to provide that no postponement fee will be charged if a 
hearing is postponed because the parties agree to submit the matter to 
mediation administered through FINRA, except that the parties shall pay 
the additional fees described in Rule 12601(b)(2) or 13601(b)(2), 
respectively, for late postponement requests.

Proposed Amendment to Rules 12902(a)(1) and 13902(a)(1)

    In FINRA's arbitration forum, if the parties and the arbitrator(s) 
meet to discuss the issues giving rise to the arbitration dispute, the 
meeting is called a ``hearing session.'' \11\ The Codes authorize FINRA 
to assess hearing session fees against the parties for each hearing 
session.\12\ The total amount charged for each hearing session is based 
on the amount in dispute.\13\ For claims that do not request or specify 
money damages (i.e., an unspecified damages claim), however, the Codes 
give the Director the discretion to determine the amount of the hearing 
session fee, not to exceed $1,200.\14\
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    \11\ A hearing session can either be an arbitration hearing or a 
prehearing conference. Rule 12100(n) and Rule 13100(n).
    \12\ See Rules 12902(a)(1) and Rule 13902(a)(1).
    \13\ Id.
    \14\ See Rules 12902(a)(2) and 13902(a)(2).
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    Currently, the hearing session fee charged for each hearing session 
in an unspecified damages claim heard by three arbitrators is 
$1,000.\15\ However, for an unspecified damages claim heard by one 
arbitrator, the rules list the hearing session fee as not applicable 
(``N/A'').\16\ While the Codes give the Director the discretion to 
determine the amount of the hearing session fee for an unspecified 
damages claim, FINRA's current practice is to charge parties $450 per 
hearing session for an unspecified damages claim heard by one 
arbitrator.
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    \15\ For hearing sessions involving three arbitrators in which 
parties request damages ranging from $25,000.01 to over $500,000, 
the amount for each hearing session can range from $600 to $1200.
    \16\ See Rules 12902(a)(1) and Rule 13902(a)(1).
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    The proposed rule change amends Rules 12902(a)(1) and 13902(a)(1) 
of the Codes to codify FINRA's current practice of charging $450 per 
hearing session for an unspecified damages claim heard by one 
arbitrator by changing the current amount for an unspecified damages 
claim heard by one arbitrator from N/A to $450. However, while the 
proposal would codify a fee for an unspecified damages claim heard by 
one arbitrator, the Codes would continue to authorize the Director to 
determine whether the hearing session fee should be more or less than 
the amount specified in the fee schedule of the rule.\17\
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    \17\ See Rules 12902(a)(2) and 13902(a)(2).
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III. Summary of Comments

    The Commission received two comments on the proposed rule 
change.\18\ The comments, as well as FINRA's response, are discussed 
below.
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    \18\ See supra, note 4.
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    The Cornell Letter supported the proposed amendments to Rules 
12601(b)(3) and 12902(a)(1) of the Customer Code. With respect to the 
proposed amendments to Rule 12601(b)(3), the Cornell Letter stated that 
the fee would compensate arbitrators for their time and any 
inconvenience resulting from a late hearing postponement, and could 
also provide an incentive for parties to resolve or settle their claims 
earlier in the process.\19\ With respect to the proposed amendment to 
Rule 12902(a)(1), the Cornell Letter stated that codifying the hearing 
session fee for unspecified damage claims heard by one arbitrator will 
assist customers in understanding the fee structure prior to filing a 
claim.\20\
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    \19\ See Cornell Letter at 2.
    \20\ Id.
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    In contrast, the PIABA Letter generally opposed both of the 
proposed amendments to the Codes. Specifically, the PIABA Letter argued 
that the amendments to the fee waiver provisions of the postponement 
rules (Rules 12601(b)(3) and 13601(b)(3)) would improperly link the 
amounts arbitrators are paid with whether the litigants comply with 
FINRA timelines.\21\ The PIABA Letter further contended that the 
amendments would create an impediment to settlement, stating that if 
late postponement fees are imposed at all, they should be assessed 
against the industry respondent.\22\ Additionally, the PIABA Letter 
maintained that postponement fees in general impose an unfair burden on 
the parties to a proceeding and should be abolished altogether.\23\
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    \21\ See PIABA Letter at 1.
    \22\ See PIABA Letter at 2.
    \23\ Id.
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    In response, FINRA noted that the fee waiver provision amendments 
are necessary to achieve the purposes of the late postponement fee 
rule, which are to both provide arbitrators with compensation in the 
event that a scheduled hearing is postponed at the last minute, and to 
curtail delays in arbitration proceedings by minimizing late 
postponement requests through the imposition of additional fees for 
such requests.\24\ With respect to assessing the fees against the 
industry respondent, FINRA explained that the Codes allow arbitrators 
to allocate all or a portion of the late postponement fee to the non-
requesting party or parties if it is determined the party or parties 
caused or contributed to the need for the postponement.\25\ FINRA also 
stated that the arbitrators are in the best position to determine how 
the fee should be allocated.\26\
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    \24\ See FINRA Response at 2-3.
    \25\ Id. at 3.
    \26\ Id.
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    With respect to the proposed amendments regarding the hearing 
session fees, the PIABA Letter challenged the reasonableness of the fee 
charged for an unspecified damages claim before one arbitrator compared 
to

[[Page 7299]]

the fee charged for an unspecified damages claim before three 
arbitrators.\27\
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    \27\ See PIABA Letter at 2 (noting that if the proposed 
amendments were adopted, a hearing session fee of $450 would be 
charged for an unspecified damage claim heard by one arbitrator, but 
that a hearing session fee of $1,000 would apply for an unspecified 
damage claim heard by three arbitrators).
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    FINRA disagreed with this assertion, explaining that the hearing 
session fee is used to not only cover arbitrator honoraria, but also to 
address certain fixed costs that are incurred in scheduling a hearing, 
regardless of the amount in dispute or the number of arbitrators.\28\ 
Moreover, FINRA noted that the Codes authorize the Director to 
determine whether the hearing session fee for an unspecified damages 
claim should be more or less than the amount specified in the fee 
schedule.\29\ Therefore, FINRA indicated that the proposed amendments 
would not change its practice of reducing or waiving the fees in 
documented cases of financial hardship.\30\ FINRA also noted that the 
proposed fee for such unspecified damage claims is the same as the fee 
charged for hearing sessions heard by one arbitrator involving claims 
of $10,000.01 to over $500,000, thus providing case administration with 
a uniform fee structure that is easy to apply.\31\
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    \28\ See FINRA Response at 3-4.
    \29\ Id. at 4.
    \30\ Id.
    \31\ Id.
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    Finally, the PIABA Letter also asserted that both of the proposed 
amendments would result in higher fees to the customer in a FINRA 
arbitration proceeding.\32\ In its response, FINRA noted that the fees 
contemplated by the proposed amendments are not new and do not 
represent an increase in the fees currently charged.\33\ FINRA stated 
that the proposed amendments clarify the fees applicable in these 
situations.\34\
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    \32\ See PIABA Letter at 1.
    \33\ See FINRA Response at 4.
    \34\ Id.
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IV. Discussion and Commission Findings

    After carefully reviewing the proposed rule change, the comments 
and FINRA's response, the Commission finds that the proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\35\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\36\ 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.
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    \35\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \36\ 15 U.S.C. 78o-3(b)(6).
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    More specifically, the Commission believes clarifying the 
applicability of the fee waiver provision of the postponement rule will 
assist in FINRA's efficient administration of the arbitration process 
by ensuring that arbitrators receive some compensation in the event 
that a scheduled hearing session is postponed as a result of a late 
postponement request, and may serve as an incentive to parties to 
settle their disputes earlier to avoid the imposition of additional 
fees.
    The Commission also believes codifying the hearing session fee for 
an unspecified damages claim heard by one arbitrator will ensure 
consistent assessment of fees in FINRA's arbitration forum, will 
provide more transparency in FINRA's fee structure, and will enhance 
the efficiency of the forum by making the rules easier to understand 
and apply.
    Further, the Commission believes that the proposed amendments are 
consistent with Section 15A(b)(5) of the Act, which requires that a 
national securities association have rules that provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
its members and other persons using its facilities.\37\
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    \37\ 15 U.S.C. 78o-3(b)(5).
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    For the reasons discussed above, the Commission finds that the 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,\38\ that the proposed rule change (SR-FINRA-2009-075) be, and it 
hereby is, approved.
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    \38\ 15 U.S.C. 78s(b)(2).
    \39\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-3075 Filed 2-17-10; 8:45 am]
BILLING CODE 8011-01-P