Document ID: SEC-2018-1220-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-08-06T04:00Z

[Federal Register Volume 83, Number 151 (Monday, August 6, 2018)]
[Notices]
[Pages 38327-38329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16721]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83752; File No. SR-FINRA-2018-019]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Creating Fee 
and Honorarium for Late Cancellation of a Prehearing Conference

July 31, 2018.

I. Introduction

    On May 4, 2018, 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 FINRA Rules 12500 and 
12501 of the Code of Arbitration Procedure for Customer Disputes 
(``Customer Code'') and FINRA Rules 13500 and 13501 of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code'' and 
together, ``Codes''), to charge a $100 per-arbitrator fee to parties 
who request cancellation of a prehearing conference within three 
business days before a scheduled prehearing conference. The proposed 
rule change would also amend FINRA Rules 12214(a) and 13214(a) of the 
Codes to create a $100 honorarium to pay each arbitrator scheduled to 
attend a prehearing conference that was cancelled within three business 
days of the prehearing conference.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 38328]]

    The proposed rule change was published for comment in the Federal 
Register on May 14, 2018.\3\ The public comment period closed on June 
8, 2018. The Commission received one comment letter in response to the 
Notice, supporting the proposed rule change.\4\ This order approves the 
proposed rule change.
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    \3\ See Exchange Act Release No. 83227 (May 4, 2018), 83 FR 
23306 (May 14, 2018) (File No. SR-FINRA-2018-019 (``Notice'').
    \4\ See Letter from Steven B. Caruso, Maddox Hargett Caruso, 
P.C., dated May 15, 2018 (``Caruso Letter''), available at https://www.sec.gov.
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II. Description of the Proposed Rule Change \5\
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    \5\ The subsequent description of the proposed rule change is 
substantially excerpted from FINRA's description in the Notice. See 
Notice, 83 FR at 23306-23308.
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Cancellation Fee

    Parties to an arbitration typically schedule prehearing conferences 
with the arbitrator(s) before the hearing on the merits of the 
claim.\6\ During these conferences, the participants set discovery, 
briefing and motions deadlines, schedule subsequent hearing sessions, 
and address other preliminary matters.\7\ A prehearing conference may 
also address other outstanding matters, such as discovery disputes or 
substantive motions (e.g., motions to dismiss or motions to amend).\8\
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    \6\ See FINRA Rules 12100(w) and 13100(w).
    \7\ See FINRA Rules 12500(c) and 13500(c).
    \8\ See FINRA Rules 12501(b) and 13501(b).
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    FINRA stated that its arbitrators devote considerable time 
preparing for prehearing conferences and forgo other opportunities by 
reserving time on their schedules.\9\ Currently, however, parties can 
cancel prehearing conferences up to, and including, the day of the 
conference without penalty.\10\ Consequently, FINRA has found that late 
cancellations (in particular, those that occur within three or fewer 
business days of a scheduled prehearing conference) have negatively 
impacted its roster of arbitrators by creating scheduling 
inconveniences for, and uncompensated work by, arbitrators.\11\
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    \9\ See Notice, 83 FR at 23309.
    \10\ Id.
    \11\ In the past, arbitrators have resigned from the roster 
because FINRA's dispute resolution forum does not provide a payment 
to arbitrators for cancellations of prehearing conferences. FINRA 
notes that one reason former arbitrators have given for their 
resignation is the lack of compensation for prehearing conferences 
that are cancelled on short notice. FINRA has identified 17 separate 
complaints relating to 22 arbitrators with respect to the late 
cancellations of prehearing conferences. See Notice, 83 FR at 23307, 
note 12.
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    To help alleviate these burdens, FINRA is proposing to amend FINRA 
Rules 12500 and 12501 of the Customer Code and FINRA Rules 13500 and 
13501 of the Industry Code,\12\ which govern prehearing conferences, to 
provide that if a cancellation \13\ request is agreed to by the parties 
or requested by one or more parties within three business days before a 
scheduled prehearing conference and granted, the party or parties shall 
be charged a fee of $100 per arbitrator scheduled to attend the 
prehearing conference (``late cancellation fee'').\14\ The date of the 
party's or parties' cancellation request would control whether the fee 
is assessed, not the date of the arbitrator or arbitrators' decision on 
such a request, if a decision is required.\15\ If the arbitrator(s) 
cancel a prehearing conference on their own, the parties would not be 
charged.\16\
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    \12\ To simplify this explanation, FINRA's discussion of the 
proposed changes focuses on changes to the Customer Code. However, 
the proposed changes also apply to the Industry Code. See Notice, 83 
FR at 23307, note 13.
    \13\ References to cancellations of prehearing conferences 
include postponements of such conferences. See Notice, 83 FR at 
23309, note 29.
    \14\ See Notice, 83 FR at 23307.
    \15\ A decision would be required if only one party requests 
that the prehearing conference be cancelled. See Notice, 83 FR at 
23307, note 14.
    \16\ See Notice, 83 FR at 23307.
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    Under the proposal, if more than one party requests the 
cancellation of a prehearing conference, the arbitrator(s) would have 
the authority to allocate the fee in the award between or among the 
requesting parties.\17\ However, depending on the facts and 
circumstances of the request, the arbitrator(s) could assess the fee to 
one party or to a non-requesting party or parties if the arbitrator(s) 
determine that these parties caused or contributed to the need for the 
cancellation.\18\
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    \17\ See Notice, 83 FR at 23307.
    \18\ See Notice, 83 FR at 23307. See also FINRA Rules 
12904(e)(8) and 13904(e)(8); see generally FINRA Rules 12601(b) and 
13601(b).
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    Under the proposal, however, if an extraordinary circumstance 
prevents a party from making a timely cancellation request, the 
arbitrator(s) would have the discretion to waive the late cancellation 
fee, provided they receive a written explanation of the 
circumstance.\19\ FINRA would notify parties and arbitrator(s) that the 
prehearing conference was cancelled and remind parties to provide an 
explanation, if applicable, before the close of the arbitration 
case.\20\ If the fee is waived, the party's or parties' obligation to 
pay the fee would be eliminated. FINRA, however, would pay the $100 
per-arbitrator honorarium (discussed below) to the arbitrator(s) 
scheduled to attend the prehearing conference.\21\
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    \19\ See Notice, 83 FR at 23307.
    \20\ Id.
    \21\ Id.
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Honorarium

    In addition, FINRA is proposing to amend FINRA Rules 12214(a) and 
13214(a) to provide that FINRA would pay an honorarium of $100 to each 
arbitrator scheduled to attend a prehearing conference that was 
cancelled within three business days of the prehearing conference by 
agreement of the parties or was requested by one or more parties within 
three business days of the prehearing conference and granted. As 
discussed above, if the arbitrator(s) waive the fee, the obligation to 
pay the fee would be eliminated, but FINRA would still pay the $100 
per-arbitrator honorarium to the arbitrator(s) scheduled to attend the 
prehearing conference.

III. Comment Summary

    As noted above, the Commission received one comment letter on the 
proposed rule change, supporting the proposal.\22\ The commenter states 
that late cancellations often result in scheduling inconvenience for, 
and uncompensated work by, arbitrators. The commenter believes that the 
proposal represents a ``fair, equitable and reasonable'' solution to 
these concerns because the fee and honorarium recognize the 
``considerable preparation by arbitrators . . . that is required prior 
to a prehearing conference.'' \23\ Accordingly, the commenter believes 
that the proposal would ``lead to an improved and expanded roster of 
arbitrators.'' \24\
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    \22\ See supra note 4.
    \23\ Caruso Letter.
    \24\ Id.
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IV. Discussion and Commission Findings

    After careful review of the proposed rule change and the comment 
letter, the Commission finds that the proposal 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 Exchange Act Section 
15A(b)(5) of

[[Page 38329]]

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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Public Interest

    The Commission agrees with FINRA and the commenter that the 
proposed rule change would protect investors and the public interest by 
improving FINRA's ability to recruit and retain qualified arbitrators 
willing to devote the time and effort necessary to consider prehearing 
issues, which FINRA asserts is an essential element for it to operate 
an effective arbitration forum.\28\ Currently, parties can cancel 
prehearing conferences up to, and including, the same day of the 
conference without penalty. Late cancellations of prehearing 
conferences do, however, penalize the arbitrators who would not receive 
compensation for the time and effort devoted to preparing for the 
conference, as well as the potential for lost personal or professional 
opportunities caused by reserving the scheduled meeting time. These 
burdens could negatively impact an arbitrator's decision to remain on 
the FINRA arbitrator roster or an individual's decision to join the 
roster. The proposed rule change would eliminate these disincentives by 
compensating arbitrators in the event of a late cancellation. For these 
reasons, the Commission believes the proposed rule change is consistent 
with the Section 15A(b)(6) requirement that FINRA rules be designed to 
protect the public interest.
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    \28\ See Notice, 83 FR at 23308.
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Equitable Allocation of Fees

    The Commission also agrees that the proposed rule change represents 
an equitable allocation of the fees associated with using the FINRA 
arbitration forum.\29\ In particular, the Commission notes the proposed 
late cancellation fee would be allocated among those parties 
responsible for canceling the meeting within three days of the 
prehearing conferences. Even if a party or parties did not request the 
cancellation, the proposed rule change would permit arbitrators to 
allocate all, or a portion of the fee, to those parties if the 
arbitrators determine that they caused or contributed to the late 
cancellation.\30\
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    \29\ Id. See also Caruso Letter.
    \30\ See Notice, 83 FR at 23308.
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    The Commission recognizes that the proposed rule change could 
increase the cost to parties of using the arbitration forum.\31\ 
However, the Commission also recognizes that the late cancellation fee 
would compensate arbitrators directly inconvenienced by the late 
cancellation of a prehearing conference and address a practice that 
negatively impacts the roster of arbitrators. In particular, the 
Commission notes that FINRA would compensate arbitrators for their 
preparation time and opportunity cost associated with reserving a 
meeting date when a prehearing conference is cancelled on short 
notice.\32\ The Commission believes that it is reasonable to compensate 
the inconvenienced arbitrators for the time and opportunity cost. 
Furthermore, the Commission notes that parties to an arbitration could 
avoid the proposed late termination fee by, among other ways, providing 
notice of cancellation more than three business days prior to a 
scheduled prehearing conference.\33\ Furthermore, the Commission notes 
that the arbitrator(s) could assess the fee to one party or to a non-
requesting party or parties if the arbitrator(s) determine that these 
parties caused or contributed to the need for the cancellation. 
Finally, if an extraordinary circumstance prevents a party from making 
a timely cancellation request, the arbitrator(s) would have the 
discretion to waive the late cancellation fee, provided they receive a 
written explanation of the circumstance
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    \31\ Id.
    \32\ Id.
    \33\ See Notice, 83 FR at 23308.
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    For these reasons, the Commission believes the proposed rule change 
is also consistent with the Section 15A(b)(5) requirement that FINRA 
rules provide for the equitable allocation of reasonable fees among 
persons using any facility or system that FINRA operates or controls.

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \34\ that the proposal (SR-FINRA-2018-019), be and hereby 
is approved.
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    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16721 Filed 8-3-18; 8:45 am]
 BILLING CODE 8011-01-P