Document ID: SEC-2016-1456-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-08-17T04:00Z

[Federal Register Volume 81, Number 159 (Wednesday, August 17, 2016)]
[Notices]
[Pages 54901-54904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19587]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78557; File No. SR-FINRA-2016-015]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change Amending Rule 12904 
(Awards) of the Code of Arbitration Procedure for Customer Disputes and 
Rule 13904 (Awards) of the Code of Arbitration Procedure for Industry 
Disputes To Permit Award Offsets in Arbitration, as Modified by 
Amendment No. 1

August 11, 2016.

I. Introduction

    On May 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 provide that absent 
specification to the contrary in an arbitration award, when arbitrators 
order opposing parties to pay each other damages, the monetary awards 
shall offset, and the party that owes the larger amount shall pay the 
net difference.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on May 23, 2016.\3\ The public comment period closed on June 
13, 2016. On July 1, 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 August 19, 2016. The 
Commission received nine comment letters in response to the Notice.\4\ 
On July 15, 2016, FINRA responded to the comment letters received in 
response to the Notice and filed an amendment to the proposed rule 
change (``Amendment No. 1'').\5\
---------------------------------------------------------------------------

    \3\ See Exchange Act Release No. 77844 (May 17, 2016), 81 FR 
32359 (May 23, 2016) (File No. SR-FINRA-2016-015) (``Notice'').
    \4\ See Letters from Leonard Steiner, Steiner & Libo, dated May 
9, 2016 (``Steiner Letter''); Steven B. Caruso, Maddox Hargett 
Caruso, P.C., dated May 18, 2016 (``Caruso Letter''); George H. 
Friedman, Adjunct Professor of Law, Fordham Law School, and 
immediate past FINRA Director of Arbitration, dated May 23, 2016 
(``Friedman Letter''); James L. Komie, Schuyler, Roche and Crisham, 
P.C., dated June 7, 2016 (``Komie Letter''); Thomas E. Wall, 
Attorney at Law and Public Arbitrator for FINRA, dated June 11, 2016 
(``Wall Letter''); Kevin Carroll, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association, dated June 13, 2016 (``SIFMA Letter''); David T. 
Bellaire, Executive Vice President and General Counsel, Financial 
Services Institute, dated June 13, 2016 (``FSI Letter''); Hugh 
Berkson, President, Public Investors Arbitration Bar Association, 
dated June 13, 2016 (``PIABA Letter''); Bev Kennedy, Oakville, 
Ontario, Canada, dated June 26, 2016 (``Kennedy Letter''). Comment 
letters are available at www.sec.gov.
    \5\ See Letter from Margo A. Hassan, Associate Chief Counsel, 
FINRA, to the Commission, dated July 15, 2016 (``FINRA Letter''). 
The FINRA Letter and the text of Amendment No. 1 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 http://www.sec.gov/rules/sro/finra/2015/34-75655.pdf, and at the Commission's Public Reference 
Room.
---------------------------------------------------------------------------

    This order provides notice of filing of Amendment No. 1 and 
approves the proposal, as modified by Amendment No. 1, on an 
accelerated basis.

II. Description of the Proposed Rule Change

Original Proposal

    FINRA Rule 12904 (Awards) of the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and Rule 13904 (Awards) of the 
Code of Arbitration Procedure for Industry Disputes (``Industry Code'') 
(together, ``Codes'') address awards issued by arbitrators at the FINRA 
Office of Dispute Resolution forum. Currently, these rules provide, 
among other matters, that awards must be in writing and signed by a 
majority of the arbitrators or as required by applicable law. The rules 
itemize required elements of awards, including a statement of the 
damages awarded, and provide that all monetary awards shall be paid 
within 30 days of receipt unless a motion to vacate has been filed in a 
court of competent jurisdiction.\6\ Rules 12904 and 13904 do not, 
however, require arbitrators to specify whether opposing parties in a 
case should offset amounts awarded to each other.
---------------------------------------------------------------------------

    \6\ See Notice at 32359.
---------------------------------------------------------------------------

    Accordingly, FINRA has stated that when arbitrators order opposing 
parties in a case to pay each other monetary damages, but do not 
specify whether the party that owes the higher amount must pay the net 
difference, the lack of clarity has resulted in parties asking 
arbitrators to revise an award after a case has closed or in post-award 
litigation.\7\ For example, arbitrators may award damages to a firm 
because an associated person failed to pay money owed on a promissory 
note and award a lesser amount to the associated person on a 
counterclaim. If the arbitrators do not specify that awards should be 
offset, the firm may be required to pay the

[[Page 54902]]

counterclaim even if the associated person refuses or is unable to pay 
the larger amount.\8\ FINRA states that the offset issue could also 
arise in customer cases, such as those involving margin account 
disputes.\9\
---------------------------------------------------------------------------

    \7\ See id.
    \8\ See id. See also, e.g., UBS Financial Services, Inc. (UBS) 
v. Thomas A. Mann (Mann), No. 2:2014cv10621, 2014 WL 1746249 (E.D. 
Mich. Apr. 30, 2014).
    \9\ See Notice at 32359.
---------------------------------------------------------------------------

    FINRA is proposing to amend Rules 12904(j) and 13904(j) to provide 
that, absent specification to the contrary in an award, when 
arbitrators order opposing parties to pay each other damages, the 
monetary awards shall offset, and the party that owes the larger amount 
shall pay the net difference.\10\
---------------------------------------------------------------------------

    \10\ See id.
---------------------------------------------------------------------------

    FINRA is also proposing to replace the bullets in Rules 12904 and 
13904 with numbers in order to make it easier to identify and cite 
subparts of the rule.\11\
---------------------------------------------------------------------------

    \11\ See id.
---------------------------------------------------------------------------

Proposal as Modified by Amendment No. 1

    In response to comments \12\ (discussed below), FINRA is proposing 
to amend proposed Rules 12904(j) and 13904(j), to provide that, absent 
specification to the contrary in an award, when arbitrators order 
opposing parties to make payments to one another, the monetary awards 
shall offset, and the party assessed the larger amount shall pay the 
net difference. The proposed amendment would effectively replace the 
word ``damages'' with ``payments'' in order to capture those portions 
of awards attributable to amounts other than damages (e.g., costs and 
fees).
---------------------------------------------------------------------------

    \12\ See SIFMA Letter at 2.
---------------------------------------------------------------------------

III. Comment Summary and FINRA's Response

    As noted above, the Commission received nine comment letters on the 
proposed rule change \13\ and a response letter from FINRA.\14\ As 
discussed in more detail below, six of the nine commenters expressed 
support for the proposal; \15\ two of the nine commenters expressed 
opposition to the proposed rule change; \16\ and, one commenter did not 
address the subject matter of the proposal.\17\
---------------------------------------------------------------------------

    \13\ See supra note 4.
    \14\ See supra note 5.
    \15\ See Caruso Letter, Friedman Letter, Komie Letter, SIFMA 
Letter, FSI Letter, and PIABA Letter.
    \16\ See Steiner Letter and Wall Letter.
    \17\ See Kennedy Letter.
---------------------------------------------------------------------------

Default Favoring Award Offsets

    Six commenters supported a default in favor of award offsets,\18\ 
stating, among other things, that the proposal ``is a fair, equitable 
and reasonable approach,'' \19\ ``would . . . provide useful guidance 
to parties in . . . drafting their pleading,'' \20\ ``would promote the 
finality of arbitration awards by reducing the need for post-award 
court litigation seeking to modify awards to provide for offset,'' \21\ 
``is a positive step forward in enhancing and improving the FINRA 
Dispute Resolution Process,'' \22\ ``is fair and appropriate and offers 
an important clarification,'' \23\ and ``makes common sense.'' \24\
---------------------------------------------------------------------------

    \18\ See supra note 15.
    \19\ Caruso Letter.
    \20\ Friedman Letter.
    \21\ Komie Letter.
    \22\ FSI Letter.
    \23\ SIFMA Letter.
    \24\ PIABA Letter.
---------------------------------------------------------------------------

    Two commenters opposed providing a default in favor of award 
offsets on the basis that parties already have the ability to request, 
and do request, that panels ``offset the competing claims in rendering 
their final awards.'' \25\ In addition, one of these commenters stated 
that ``[i]f the panel decides not to do an offset, it is not for FINRA 
to mandate one.'' \26\
---------------------------------------------------------------------------

    \25\ See Steiner Letter; see also Wall Letter.
    \26\ Steiner Letter.
---------------------------------------------------------------------------

    In its response, FINRA stated its belief ``that the proposed rule 
change will eliminate ambiguity and reduce the risk of post-award 
disputes.'' \27\ FINRA further responded that the proposed change 
``would likely reduce legal expenses to the party owed greater damages 
by eliminating the need to apply for the reopening of the case or going 
to court to seek award offsets, or seek other redress.'' \28\ Finally, 
FINRA noted that the ``proposed rule does not override arbitrator 
discretion'' and stated that if the proposal is approved, ``FINRA will 
alert arbitrators to the amendment and will revise the Award 
Information Sheet to inform arbitrators of the offset default when 
arbitrators are silent on the issue.'' \29\
---------------------------------------------------------------------------

    \27\ See FINRA Letter at 2.
    \28\ See id.
    \29\ See id.
---------------------------------------------------------------------------

Amendment Requests

    Two of the six commenters supporting FINRA's proposal suggested 
that FINRA also address additional related concerns.\30\ One commenter 
generally in support of the proposal urged FINRA to also address the 
issue of unpaid arbitration awards for investors by implementing a 
national recovery pool.\31\ In response to this suggestion, FINRA 
stated that the ``issue of unpaid awards is beyond the scope of the 
proposed rule change.'' \32\ Another commenter ``strongly supported'' 
the proposal, but noted that the proposal as drafted would have the 
effect of limiting the default in favor of offset to only those awards 
specifically characterized by arbitrators as ``damages.'' \33\ The 
commenter noted that arbitration awards, in addition to damages, may 
``consist of, and be characterized as, damages, costs, fees, etc.'' 
\34\ The commenter expressed its belief that the ``[p]roposal was never 
intended to be strictly limited to `damages' offsets,'' and therefore 
requested that FINRA revise the proposal ``so that it is not 
susceptible to such a narrow reading'' by: (i) Replacing the phrase 
``pay each other damages'' in the proposal with ``make payments to one 
another,'' and (ii) replacing the phrase ``that owes'' with 
``assessed.'' \35\ In its response, FINRA agreed ``that the proposal 
was not intended to be strictly limited to `damages' offsets'' and 
proposed to amend the proposed rule change ``for purposes of clarity'' 
as set forth in the previous sentence.\36\
---------------------------------------------------------------------------

    \30\ See PIABA Letter and SIFMA Letter.
    \31\ See PIABA Letter at 3.
    \32\ See FINRA Letter at 2.
    \33\ See SIFMA Letter at 2.
    \34\ See id.
    \35\ See id.
    \36\ See FINRA Letter at 3-4.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review of the proposed rule change, as modified by 
Amendment No. 1, the comment letters, and FINRA's response to the 
comments, the Commission finds that the proposal, as modified by 
Amendment No. 1, is consistent with the requirements of the Exchange 
Act and the rules and regulations thereunder that are applicable to a 
national securities association.\37\ Specifically, the Commission finds 
that the rule change is consistent with section 15A(b)(6) of the 
Exchange Act,\38\ 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.
---------------------------------------------------------------------------

    \37\ 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).
    \38\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    As stated in the Notice, FINRA believes that ``providing a default 
in favor of offset when arbitrators fail to address the issue in an 
award would benefit forum users by eliminating ambiguity and reducing 
the risk of post-

[[Page 54903]]

award disputes.'' \39\ More specifically, FINRA believes that the 
proposed rule change will ``mitigate the risk of failure to pay by an 
opposing party that may arise when multiple parties in a dispute are 
found to owe non-equivalent awards simultaneously.'' \40\ Consequently, 
FINRA believes that the proposal would ``likely reduce legal expenses 
to the party owed greater damages by eliminating the need to apply for 
the reopening of the case or going to court to seek award offsets, or 
seek other redress.'' \41\
---------------------------------------------------------------------------

    \39\ Notice at 32360.
    \40\ Id.
    \41\ Id.
---------------------------------------------------------------------------

    The Commission notes that six commenters were generally supportive 
of the proposal. One of those commenters recommended FINRA amend the 
proposal to clarify the intent of the proposal--that it was meant to 
address all payments ordered made to opposing parties in an arbitration 
and not just damages \42\--and FINRA agreed.\43\ The Commission further 
notes that one of the commenters that generally supported the proposal 
also recommended that FINRA implement a national recovery pool for 
unpaid arbitration awards,\44\ which the Commission believes is outside 
the scope of the current proposal.
---------------------------------------------------------------------------

    \42\ See SIFMA Letter.
    \43\ See FINRA Letter.
    \44\ See PIABA Letter.
---------------------------------------------------------------------------

    The Commission recognizes two commenters' objections to the 
proposal on the basis that a default in favor of award offsets is not 
necessary because the parties may already request offsets.\45\ The 
Commission also recognizes, however, FINRA's belief that the proposal 
will ``eliminate ambiguity,'' ``reduce the risk of post-award 
disputes,'' and ``likely reduce legal expenses to the party owed 
greater damages by eliminating the need to apply for the reopening of 
the case or going to court to seek award offsets, or seek other 
redress.'' \46\ The Commission further recognizes, as FINRA pointed out 
in its response, that the proposal ``does not override arbitrator 
discretion.'' \47\ Arbitrators are thus still free to decline to offset 
awards if they deem it inappropriate.
---------------------------------------------------------------------------

    \45\ See Steiner Letter; see also Wall Letter.
    \46\ See FINRA Letter at 2.
    \47\ See id.
---------------------------------------------------------------------------

    Taking into consideration the comments and FINRA's response and 
proposed amendment, 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 
streamlining the payment of arbitration awards in instances where 
parties are ordered to make payments to one another, without overriding 
arbitrator discretion. The Commission further believes that FINRA's 
response, as discussed in more detail above, appropriately addressed 
commenters' concerns and adequately explained its reasons for modifying 
its proposal to clarify that the default in favor of award offsets 
would apply to all awards however characterized by the arbitrator. 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. For these reasons, the 
Commission finds that the proposed rule change is consistent with the 
Exchange Act and the rules and regulations thereunder.

V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal, as 
modified by Amendment No. 1, is consistent with the Exchange Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2016-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2016-015. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549-1090, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filing will also be 
available for inspection and copying at the principal office of FINRA. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2016-015 
and should be submitted on or before September 7, 2016.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the amended proposal in the 
Federal Register. The revisions made to the proposal in Amendment No. 1 
changed how amounts ordered by arbitrators to be paid to opposing 
parties would be calculated for purposes of offsetting payments to one 
another. In particular, the proposed amendment would effectively 
replace the word ``damages'' with ``payments'' in order to capture 
those portions of awards attributable to amounts other than damages 
(e.g., costs and fees).\48\ The Commission believes that this 
modification responds to one of the primary concerns raised by 
commenters on the proposal that the proposal was never intended to be 
strictly limited to offsetting ``damages.'' \49\ Therefore, the 
Commission believes that the proposed amendment clarifies the intent of 
the proposal.
---------------------------------------------------------------------------

    \48\ See FINRA Letter; see also proposed FINRA Rules 12904(j) 
and 13904(j).
    \49\ See SIFMA Letter; see all FINRA Letters.
---------------------------------------------------------------------------

    Accordingly, the Commission finds good cause, pursuant to section 
19(b)(2) of the Exchange Act,\50\ to approve the proposed rule change, 
as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VII. Conclusion

    IT IS THEREFORE ORDERED pursuant to section 19(b)(2) \51\ of the 
Exchange Act that the proposal (SR-FINRA-2016-015), as modified by 
Amendment No. 1, be and hereby is approved on an accelerated basis.
---------------------------------------------------------------------------

    \51\ Id.

[[Page 54904]]

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

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
---------------------------------------------------------------------------

    \52\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19587 Filed 8-16-16; 8:45 am]
 BILLING CODE 8011-01-P