80 FR 30740 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Amend the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes To Increase a Fee for the Late Cancellation of a Scheduled Hearing, Lengthen the Notice Period for Cancelling a Scheduled Hearing, and Increase the Amount of Honoraria Paid to Arbitrators Affected by a Late Cancellation of a Scheduled Hearing

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 103 (May 29, 2015)

Page Range		30740-30746
FR Document		2015-12971

Federal Register, Volume 80 Issue 103 (Friday, May 29, 2015)

[Federal Register Volume 80, Number 103 (Friday, May 29, 2015)]
[Notices]
[Pages 30740-30746]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2015-12971]

=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75036; File No. SR-FINRA-2015-003]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Amend the Code
of Arbitration Procedure for Customer Disputes and the Code of
Arbitration Procedure for Industry Disputes To Increase a Fee for the
Late Cancellation of a Scheduled Hearing, Lengthen the Notice Period
for Cancelling a Scheduled Hearing, and Increase the Amount of
Honoraria Paid to Arbitrators Affected by a Late Cancellation of a
Scheduled Hearing

May 22, 2015.

I. Introduction

On February 5, 2015, 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 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Rules 12214 and 12601 of
FINRA's Code of Arbitration Procedure for Customer Disputes (``Customer
Code'') and Rules 12214 and 12601 of its Code of Arbitration Procedure
for Industry Disputes (``Industry Code'') (together, ``Codes'') to
increase the fee for the late cancellation or postponement of a
scheduled hearing, lengthen the notice period for cancelling or
postponing a scheduled hearing session, and increase the amount of
honoraria paid to arbitrators affected by the late cancellation or
postponement of a scheduled hearing session. The proposed rule change
was published for comment in the Federal Register on February 24,
2015.\3\ The Commission received twelve comment letters on the
proposal.\4\ On March 26, 2015, FINRA

[[Page 30741]]

granted the Commission an extension of time, until May 25, 2015, to act
on the proposal.\5\ FINRA responded to the comment letters on April 24,
2015.\6\ This order approves the rule change as proposed.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 74289 (Feb. 18, 2015), 80 FR
9773 (Feb. 24, 2015) (``Notice'').
\4\ See Letters from Steven B. Caruso, Esq., Maddox Hargett &
Caruso, P.C., dated February 20, 2015 (``Caruso Letter''); Philip M.
Aidikoff, Aidikoff, Uhl & Bakhtiari, dated February 24, 2015
(``Aidikoff Letter''); George H. Friedman, Esq., George H. Friedman
Consulting, LLC, dated March 1, 2015 (``Friedman Letter''); Joseph
C. Pfeiffer, President, Public Investors Arbitration Bar Association
(``PIABA''), dated March 9, 2015 (``PIABA Letter''); Ryan K.
Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated March 9, 2015
(``Bakhtiari Letter''); Jasmine Blake-Stewart, Francis Laryea, Jason
Robinson, and Darius Wood, Student Interns, and Nicole Iannarone,
Assistant Clinical Professor, Investor Advocacy Clinic, Georgia
State University College of Law, dated March 13, 2015 (``GSU
Letter''); Mark R. Harris, dated March 16, 2015 (``Harris Letter'');
Patrick J. Paul, Student Intern, Elissa Germaine, Supervising
Attorney, and Jill Gross, Director, Pace Investor Rights Clinic at
Pace University School of Law, dated March 16, 2015 (``PIRC
Letter''); Matthew Chan, Student, and William A. Jacobson, Esq.,
Clinical Professor of Law, Cornell Law School, and Director, Cornell
Securities Law Clinic, dated March 17, 2015 (``CSLC Letter''); Paige
M. Szymanski, Law Student Clinician, Investor Advocacy Clinic,
Michigan State University College of Law, dated March 17, 2015
(``MSU Letter''); Leonard Steiner, Steiner & Libo, dated April 7,
2015 (``Steiner Letter''); and Richard P. Ryder, Esq., President,
Securities Arbitration Commentator, Inc., dated April 7, 2015
(``Ryder Letter'').
\5\ See Letter from Mignon McLemore, Assistant Chief Counsel,
FINRA Dispute Resolution, Inc., to Lourdes Gonzalez, Assistant Chief
Counsel, Sales Practices, Division of Trading and Markets,
Securities and Exchange Commission, dated March 26, 2015.
\6\ See Letter from Mignon McLemore, Assistant Chief Counsel,
FINRA Dispute Resolution, Inc., to Brent J. Fields, Secretary,
Securities and Exchange Commission, dated April 24, 2015 (``FINRA
Response Letter'').
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II. Description of the Proposed Rule Change

A. Background

As stated in the Notice, FINRA is proposing to amend the Codes to
increase the fee for the late cancellation or postponement of a
scheduled hearing session for the primary purpose of encouraging
parties to provide more advance notice of cancellations and
postponements, or, in the alternative, to compensate arbitrators more
for lost time and opportunities in the event of a late cancellation or
postponement.\7\
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\7\ See Notice, 80 FR at 9774.
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Under current Rules 12601(b)(2) and 13601(b)(2) of the Codes, each
arbitrator selected to hear a case receives a $100 honorarium \8\ when
a hearing is cancelled or postponed within three business days of the
scheduled hearing date.\9\ In the event a scheduled hearing is
cancelled or postponed more than three business days in advance of the
scheduled hearing date, the arbitrators do not receive an
honorarium.\10\
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\8\ These honoraria are typically funded by the Late
Cancellation Fee (defined infra).
\9\ If the parties settle an arbitration claim, hearings that
were scheduled to occur after settlement are cancelled and,
depending on the timing of the cancellation, could result in the
assessment of a Late Cancellation Fee. See FINRA Rules 12902(d) and
13902(d). These rules incorporate the fees and costs incurred under
FINRA Rules 12601 and 13601, and, therefore, would incorporate the
proposed increase to the Late Cancellation Fee.
\10\ For each postponement agreed to by the parties, or granted
upon request of one or more parties, FINRA also assesses an
additional postponement fee to the parties, equal to the applicable
hearing session fee (``Postponement Fee''). See FINRA Rules
12601(b)(1) and 13601(b)(1). The Postponement Fee is paid to FINRA
and not passed through to the arbitrators. See Notice, 80 FR at
9774, note 4.
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FINRA stated that it has ``received many complaints from
arbitrators concerning the current late cancellation rule,'' noting
that it is the most frequent complaint Dispute Resolution staff
receives from arbitrators.\11\ Moreover, when FINRA formed its Dispute
Resolution Task Force in 2014 to consider possible enhancements to its
arbitration and mediation forum, it published a request for
comment.\12\ FINRA stated that the majority of comments it received
from arbitrators suggested that FINRA address the issue of late
cancellation of scheduled hearings.\13\ More specifically, FINRA
reported that it has learned that ``the lack of sufficient notice and
compensation is frustrating for arbitrators and is a reason some
arbitrators leave FINRA's roster'' \14\ and that many arbitrators have
expressed concern that ``the forum's honoraria are too low.'' \15\ In
addition, FINRA received feedback that ``the current rule is inadequate
because the three-business-day cancellation window does not provide
arbitrators . . . with enough time to schedule other income-generating
opportunities.'' \16\
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\11\ See Notice, 80 FR at 9774.
\12\ See id. FINRA's Dispute Resolution Task Force comprises
individuals from the public and industry sectors who work together
to suggest strategies to enhance the transparency, impartiality, and
efficiency of FINRA's securities dispute resolution forum for all
participants. See FINRA Dispute Resolution Task Force, available at
http://www.finra.org/ArbitrationAndMediation/FINRADisputeResolution/MoreonFINRADisputeResolution/P600966.
\13\ See Notice, 80 FR at 9774.
\14\ Id.
\15\ Id. at 9775.
\16\ Id. at 9774. Commenters also noted that the current $100
honorarium for late cancellations does not adequately compensate
arbitrators for the time they have spent preparing for a cancelled
hearing or the income they would have earned for conducting a
hearing. Id.
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FINRA stated that it has started addressing these concerns by
amending its rules to increase the amount of honoraria paid to
arbitrators to $300 per hearing session in 2014.\17\ In order to
further respond to arbitrators' concerns, however, FINRA is proposing
to amend the Codes to require that parties to an arbitration give more
advance notice before cancelling a hearing, or be assessed a higher
late cancellation fee if sufficient advance notice is not provided.\18\
Specifically, FINRA's proposal would amend Rule 12601(b)(2) to provide
that if a cancellation request is made by one or more parties within
ten calendar days before a scheduled hearing session and granted, the
party or parties making the request shall pay a fee of $600 per
arbitrator (``Late Cancellation Fee'') in addition to any required
Postponement Fee.\19\
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\17\ See id. at 9775. See also Exchange Act Release No. 73245
(Sept. 29, 2014), 79 FR 59876 (Oct. 3, 2014) (Order Approving File
No. SR-FINRA-2014-026) (``Honoraria Order'').
\18\ See Notice, 80 FR at 9774, note 10. The text of the
proposed rule change is available at the principal office of FINRA,
on FINRA's Web site at http://www.finra.org, and at the Commission's
Public Reference Room. For ease of reference, this Order generally
refers only to rules in the Customer Code. However, the changes and
discussion would also apply to the same rules of the Industry Code.
\19\ See id. at 9774-75. See also supra note 10.
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FINRA believes that these changes would result in fewer late
cancellations by parties to an arbitration as the higher Late
Cancellation Fee would incentivize parties to begin settlement
negotiations earlier in the process.\20\ FINRA also believes that the
increased Late Cancellation Fee would help address arbitrators'
concerns about honoraria and compensation for lost time and
opportunities, thus helping decrease arbitrator turnover.\21\
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\20\ See Notice, 80 FR at 9775.
\21\ See id.
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B. Proposed Increase to Late Cancellation Fees and Cancellation
Timeframe

The proposal would amend Rules 12601(b)(2) and 13601(b)(2) to
increase from three business days to ten calendar days the timeframe
before which parties must request cancellation of hearings in order to
avoid incurring the proposed Late Cancellation Fee. FINRA believes that
the increased time would give arbitrators more opportunity to secure
other income-generating opportunities and potentially save arbitrators
time lost in preparation for assigned hearings.\22\
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\22\ See id. (explaining that many hours of reviewing materials
might be involved depending on the number of parties involved and
the complexity of the case).
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The proposed rule change would also increase the amount of
honoraria paid to arbitrators for late cancellations of hearings from
$100 to $600 per arbitrator, making the honorarium equal to that which
arbitrators would have received for one typical day of hearings,\23\ no
matter how many consecutive days are cancelled.\24\ The

[[Page 30742]]

Late Cancellation Fee would continue to be charged to the party or
parties making the request, but under Rule 12601(b)(2), arbitrators
have the authority to allocate all or a portion of the fee to the non-
requesting party if the arbitrators determine that the non-requesting
party caused or contributed to the cancellation.\25\ Moreover, Rule
12601(b)(2) also permits the panel to waive the Late Cancellation Fee
if an extraordinary circumstance prevented a party or parties from
making a timely cancellation request.\26\ This would not change if the
Commission approves the proposed rule change.
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\23\ A hearing is a meeting between the parties and the
arbitrators of four hours or less to determine the merits of the
arbitration. See FINRA Rules 12100(m) and 13100(m); see also FINRA
Rules 12100(n) and 13100(n). A typical day in an arbitration case
has two hearing sessions. See Notice, 80 FR at 9774, note 7.
\24\ Under the proposed rule change, the Late Cancellation Fee
for a three-person arbitration panel would be $1,800, instead of
$300 under the current rules. FINRA reported in the Notice that it
found that approximately 80% of arbitration cases were heard by a
three-person panel based on an analysis of arbitration data from
September 2013 to August 2014. See Notice, 80 FR at 9774, note 6.
\25\ See Notice, 80 FR at 9775.
\26\ See id. (explaining that ``the panel [may] waive the fees .
. . if the circumstances warrant, like a sudden illness or
accident'').
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The proposed rule change would also shift the phrase ``and
granted'' to the end of the first dependent clause in Rule 12601(b)(2)
to clarify that the timing of a cancellation request controls whether
the fee is assessed, not the timing of the arbitrators' decision on the
request, if a decision is required.\27\
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\27\ See id. (describing the circumstances when the Late
Cancellation Fee would not apply when parties jointly request
cancellation or postponement ten calendar days or more before a
scheduled hearing date or one party makes a cancellation request).
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FINRA is also proposing to make conforming changes to Rule
12214(a), by amending the reference to the Late Cancellation Fee in
Rule 12214(a).

III. Summary of Comments and FINRA's Response

As noted above, the Commission received twelve comment letters on
the proposed rule change \28\ and a response letter from FINRA.\29\ As
discussed in more detail below, ten of the twelve commenters expressed
support for FINRA's proposal.\30\ Five of those ten commenters,
however, also suggested some modifications.\31\ Two of the twelve
commenters expressed opposition to the proposed rule change.\32\ The
sections below outline the suggestions or specific concerns raised by
the commenters suggesting changes or opposed to the proposal as well as
FINRA's response.
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\28\ See supra note 4.
\29\ See supra note 6.
\30\ See Caruso Letter, Aidikoff Letter, Friedman Letter,
Bakhtiari Letter, Harris Letter, PIRC Letter, CSLC Letter, MSU
Letter, PIABA Letter, and Ryder Letter.
\31\ See PIRC Letter, CSLC Letter, MSU Letter, PIABA Letter, and
Ryder Letter.
\32\ See GSU Letter and Steiner Letter.
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A. Effect of Late Cancellation Fees on Customer Claimants

1. Potential Impact on Settlement of Claims
While a majority of the commenters supported the proposed increase
in arbitrator honoraria, two commenters opposed the proposed rule
change stating that the increased Late Cancellation Fee could
discourage parties from settling their claims and, instead, encourage
them to arbitrate their claims.\33\ One of these commenters stated that
the proposal would impose additional costs on customer claimants making
the arbitration forum less consumer friendly.\34\ The other commenter
stated that the proposal would negatively impact small investors. In
this commenter's view, investors asserting ``small'' claims may feel
pressure to arbitrate even when it is in their best interest to settle
a claim because of the threat of the increased Late Cancellation
Fee.\35\
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\33\ See id.
\34\ See Steiner Letter.
\35\ See GSU Letter (noting that the proposal represents a 500%
increase in the penalty for cancellation and claimants might choose
to forego settlement to avoid the increased Late Cancellation Fee).
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In its response, FINRA acknowledged that customers would likely be
required to pay some of the increased Late Cancellation Fee under the
proposed rule change.\36\ FINRA also acknowledged that the proposed
increase could affect settlement negotiations if the potential
settlement amount is small compared to the Late Cancellation Fee.\37\
FINRA noted, however, that ``the Codes provide parties with some cost
mitigation options, regardless of their claim amount.'' \38\ For
instance, parties could avoid the Late Cancellation Fee by providing
sufficient notice when requesting the cancellation of a scheduled
hearing.\39\ FINRA also stated that if, however, parties settle a claim
with fewer than ten days remaining to cancel a scheduled hearing,\40\
the parties could negotiate (as part of any settlement agreement) the
allocation of fees.\41\ In addition, FINRA noted that arbitrators have
the authority under the Codes (i) to allocate all or a portion of the
Late Cancellation Fee to the party or parties that cause a delay or
contribute to the need to cancel or otherwise postpone a scheduled
hearing \42\ or (ii) to waive the Late Cancellation Fee ``in the event
that an extraordinary circumstance prevents a party or parties from
making a timely postponement request.'' \43\
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\36\ See FINRA Response Letter.
\37\ See id. See also Notice, 80 FR at 9775.
\38\ See FINRA Response Letter (stating that ``parties would
avoid the late cancellation fee by providing notice of a
cancellation 10 or more days prior to the first scheduled hearing
session'').
\39\ See id.
\40\ See GSU Letter (stating that ``many matters settle on the
eve of arbitration'').
\41\ See FINRA Response Letter (stating, for example, that if a
party waits until the day before a hearing to begin settlement
negotiations in earnest, the party who is not the cause of the delay
has leverage to negotiate with the other party to pay all, or a
larger percentage of, the Late Cancellation Fee). See FINRA Rules
12701(b) and 13701(b) (under Rules 12701(b) and 13701(b), a customer
may only be responsible for half the proposed Late Cancellation Fee
if the settlement agreement does not address its allocation).
\42\ See FINRA Response Letter.
\43\ Id.
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2. Proposed Exemptions for ``Small'' Claims
Two commenters suggested that FINRA amend the proposal to create
exceptions for investors with ``small'' claims.\44\ One of these
commenters recommended setting an exemption threshold for claims of
$100,000 or less.\45\ The other commenter, who otherwise supported the
proposal, also suggested that FINRA amend the proposal to exempt
investors with claims of $50,000 or less.\46\ This commenter suggested
that an investor with a claim of $50,000 or less who cancels a hearing
session less than ten days before the scheduled date would pay more in
Late Cancellation Fees than he or she would pay in honorarium if the
hearing took place.\47\ The commenter stated that this may create
``another roadblock to requesting a hearing.'' \48\ This commenter
believes that investors with claims of $50,000 or less who cancel a
scheduled hearing should only be subject to the Postponement Fee,\49\
or alternatively, that FINRA should reduce the Late

[[Page 30743]]

Cancellation Fee for small claims to ``an amount that comports with the
lower compensation rate for Rule 12800 arbitrators.'' \50\
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\44\ See GSU Letter and Ryder Letter (generally supportive of
the proposal because it would help FINRA recruit and retain
arbitrators).
\45\ See GSU Letter.
\46\ See Ryder Letter (noting that arbitrators receive a $350
honorarium under FINRA Rules 12800(a) and 12800(f) when they oversee
arbitration claims of $50,000 or less. If parties request and
schedule a hearing, then later cancel the hearing with insufficient
notice, however, the fees would include the $450 Postponement Fee
and the $600 Late Cancellation Fee).
\47\ See id. (stating that ``[c]harging for the late notice more
than three times ($450 & $600) the amount the Arbitrator is to be
compensated for service ($350) will erect an unnecessary, unhealthy
and substantial impediment to aggrieved customers'').
\48\ See id.
\49\ See id. (recommending that FINRA pay arbitrators from funds
collected under the Postponement Fee rather than charging a Late
Cancellation Fee when a late settlement occurs, which would ``allow
customers a more realistic choice of a hearing.'').
\50\ See id.
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In its response, FINRA noted that claims of $50,000 or less are
subject to FINRA Rules 12800 and 13800 (``simplified arbitration
rules'').\51\ Under the simplified arbitration rules, these types of
claims are usually decided by one arbitrator based on the pleadings
submitted. In these cases, no hearings are held and, consequently, the
Late Cancellation Fee would not apply to these investors. The
simplified arbitration rules, however, permit customers who have claims
of $50,000 or less to request a hearing.\52\ In that event, the
provisions of the Code relating to hearings and prehearings, including
those governing fee, would apply; \53\ accordingly, the customer
claimant could be subject to the increased Late Cancellation Fee if the
parties do not request a cancellation or postponement before the point
when the Late Cancellation Fee would apply. FINRA stated, however, that
when a customer with a claim of $50,000 or less requests a hearing,
FINRA pays the arbitrators regular hearing session honoraria pursuant
to Rule 12214 instead of the $350 honorarium for deciding a claim based
solely on the pleadings pursuant to FINRA Rules 12800(f).\54\
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\51\ See FINRA Response Letter.
\52\ See FINRA Rule 12800(c)(1). The Ryder Letter noted that out
of approximately 200 small claims awards in 2014, 36 investor
claimants requested a hearing.
\53\ See FINRA Rule 12800(c)(2).
\54\ See FINRA Response Letter.
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FINRA also stated that it believes that exempting claims of
$100,000 or less as suggested in the GSU Letter would not address the
primary goal of the proposed rule change, which is to encourage parties
to provide earlier notice to cancel a scheduled hearing.\55\ FINRA
believes that, irrespective of the amount in dispute, the current fee
does not adequately compensate arbitrators for the amount of time they
devote to preparing for hearings as well as the opportunity cost
relating to the time they have set aside for scheduled hearings.\56\
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\55\ See id.
\56\ See id.
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In addition, FINRA believes that small claims customers could
mitigate the Late Cancellation Fee by, among other things, negotiating
(as part of any settlement agreement) the allocation of fees,
requesting that the panel waive the late cancellation fee based on
extraordinary circumstances, or requesting that the panel or FINRA
waive the Late Cancellation Fee pursuant Rule 12601(b)(3).\57\
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\57\ See id. (stating that a ``waiver of the fee by the panel or
by FINRA would not affect the payment of the honorarium''). See also
infra note 85 (describing the forum's policy regarding payment of
the honorarium to the arbitrators in the event the fee is waived).
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Moreover, FINRA believes that carving out an exception for
``small'' claims would create a two-tiered fee system and lead to an
additional burden on FINRA staff.\58\
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\58\ See FINRA Response Letter. See also infra Section III.D.
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For the reasons discussed above, FINRA believes that the proposed
rule change should apply to all scheduled hearings regardless of the
size of the claim.\59\ Therefore, FINRA declined to modify the proposed
rule change to exempt parties of $100,000 or less from the Late
Cancellation Fee.\60\

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\59\ See FINRA Response Letter.
\60\ See id.
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B. Eliminate the Cost to Claimants in the Event of a Settlement

One commenter recommended that FINRA amend the proposal to exempt
parties from Late Cancellation Fees incurred due to late cancellations
that are ``necessary to accommodate a mediation (or other settlement
efforts) or because a case has been settled.'' \61\ This commenter
stated that the customer claimants cannot control when member firms
begin to consider settlement \62\ and that the financial impact of the
increased Late Cancellation Fee would negatively affect customer
claimants more than broker-dealers.\63\
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\61\ PIABA Letter.
\62\ See id. (arguing that ``[s]ince it is respondents that get
to keep their dollars in their pockets until a given claimant's case
is over . . . it is respondents that need incentives to `address
issues earlier in their cases' [citing the Notice]'').
\63\ See id. (suggesting that it is not fair to make claimants
equally bear the financial burden due to ``the financial impact of
the increase in the amount of the per-arbitrator fee in the proposed
rule change, as between a typical individual claimant and a large
broker dealer, is too disparate to claimants, who will `feel' the
impact of the fee much more than broker dealers will'').
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In the Notice, FINRA acknowledged that customers would likely be
required to pay some of the increased Late Cancellation Fee under the
proposed rule change.\64\ FINRA believes, however, that ``the cost of
arbitration should be borne by users of the forum.'' \65\ FINRA stated
that since either customers or members may seek to cancel or postpone a
hearing, it would be inequitable to require industry members to bear
the entire proposed Late Cancellation Fee.\66\ FINRA also believes that
both customers and members ``benefit from the forum attracting and
retaining qualified, dedicated arbitrators . . . and they should share
in the effort to sustain and improve the forum.'' \67\
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\64\ See Notice, 80 FR at 9775.
\65\ FINRA Response Letter.
\66\ See id. FINRA also stated that as part of the fee increases
approved in the Honoraria Order, FINRA ``allocated a large portion
of the arbitration fee increases to members by significantly
increasing member surcharges and process fees'' and that these fees
cannot be allocated to other parties. In addition, FINRA noted that
member firms may also be responsible for the related fees, such as
filing fees and hearing session fees.
\67\ Id.
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For these reasons, FINRA declined to modify its proposal to exempt
parties from Late Cancellation Fees incurred by parties attempting to
accommodate mediation or other settlement efforts.

C. Presumption That Only Members Would Pay Late Cancellation Fee

One commenter expressed concern that the proposed rule change would
``run counter to FINRA's objective of providing an affordable method to
resolve disputes'' \68\ and recommended that FINRA create a rebuttable
presumption that either the member firm or the associated person be
responsible for the proposed Late Cancellation Fee unless the
arbitrators determine that the customer caused the need for the
cancellation or postponement.\69\
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\68\ CSLC Letter.
\69\ See id.
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In its response, FINRA stated that that it does not believe that
the proposed Late Cancellation Fee would significantly affect the
affordability of the dispute resolution forum, noting that investors
``experience substantial savings in arbitration compared to
litigation.'' \70\ Specifically, FINRA stated that ``the benefits and
cost of savings of arbitration make filing an arbitration claim a less
costly option for investors, notwithstanding the potential costs of the
proposed late cancellation fee.'' \71\ In addition, FINRA stated that
customers can avoid the proposed new Late Cancellation Fee by
cancelling or postponing a hearing at least ten calendar days before
the scheduled hearing date; and, FINRA stated that ``the Codes provide
parties with some mitigation strategies to use to

[[Page 30744]]

potentially reduce the amount of the fee assessed.'' \72\
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\70\ FINRA Response Letter (explaining that ``claims in
arbitration are typically resolved more quickly than claims in
litigation'' due to limits on discovery and the avoidance of delays
and costs associated with appeals and that ``[a]ttacks on awards are
rare and are based on narrow grounds under the Federal Arbitration
Act'').
\71\ Id.
\72\ Id. See also supra note 41.
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FINRA also believes that amending the proposal to impose a
rebuttable presumption that the member or associate person be
responsible for any Late Cancellation Fee would be unfair because there
are instances in which customers create the need for and request a
cancellation.\73\ Furthermore, FINRA stated that since both customers
and FINRA members benefit from the arbitration forum and its ability to
attract and retain qualified, dedicated arbitrators, ``it would be
inequitable for industry members to pay 100 percent of the proposed
late cancellation fee.'' \74\
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\73\ See FINRA Response Letter.
\74\ Id.
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For these reasons, FINRA declined to modify its proposed rule to
create a presumption that member firms and associated persons pay the
proposed late cancellation fees.

D. Creation of Late Cancellation Fee Tiers

Two commenters recommended that FINRA modify the proposed rule to
create separate tiers of Late Cancellation Fees that would apply based
on when a request for cancellation or postponement is made.\75\ Under
these modifications, the earlier a party requests cancellation or
postponement, the smaller the Late Cancellation Fee.\76\
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\75\ See GSU Letter (arguing that this modification would
``lessen the impact on parties who decide to settle closer to the
arbitration date while still ensuring arbitrators are adequately
compensated for their lost time and opportunities''); and CSLC
Letter.
\76\ The GSU Letter suggested a phased-in Late Cancellation Fee
that would cost $100 per arbitrator ``if a hearing is cancelled
between ten and four business days in advance of a hearing, with the
fee increasing to $600 per arbitrator for a cancellation or
postponement three business days prior to the scheduled hearing.''
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FINRA believes adopting a phased-in, or sliding-scale, approach
would be confusing for parties and more complex and time-consuming for
staff to implement.\77\ For example, FINRA believes that a tiered
approach to calculating Late Cancellation Fees may lead to inaccurate
fee calculations and create an additional burden on its staff
resources.\78\ In addition, FINRA stated that it does not believe that
a sliding scale of Late Cancellation Fees ``would provide enough of an
incentive to encourage parties to change their behavior.'' \79\
Moreover, FINRA stated that incorporating the commenters' suggestions
would delay the implementation of the rule (if approved by the
Commission) because FINRA would need to ``reprogram its technology
platforms to implement the changes.'' \80\
---------------------------------------------------------------------------

\77\ See FINRA Response Letter.
\78\ See id.
\79\ Id.
\80\ Id.
---------------------------------------------------------------------------

For these reasons, FINRA declined to modify its proposal to create
additional tiers of late cancellation fees.\81\
---------------------------------------------------------------------------

\81\ See id.
---------------------------------------------------------------------------

E. Arbitrators' Conflict of Interest

Three commenters expressed concern that the proposed rule change
would create a conflict of interest for arbitrators considering whether
to waive the Late Cancellation Fee in the event of an extraordinary
circumstance as permitted under Rule 12601(b)(2).\82\ Specifically,
these commenters suggested that the proposed increase to arbitrator
honoraria would provide arbitrators greater incentive to deny a request
for waiver because the Late Cancellation Fees are typically used to
fund their honoraria payments.\83\ In order to neutralize this
conflict, one commenter recommended revising the proposal to require
FINRA to ``bear the financial responsibility for the late cancellation
honoraria in those limited situations where it is appropriate for the
arbitrators to waive the late cancellation fee.'' \84\
---------------------------------------------------------------------------

\82\ See PIABA Letter; MSU Letter; and CLSC Letter (citing
support for the issue in the PIABA Letter).
\83\ See, e.g., MSU Letter (stating that ``the substantial
increase in the fee granted to each arbitrator could discourage an
arbitrator from granting the waiver''); and CSLC Letter (noting that
``the requesting party is asking the arbitrators to waive the
compensation that the arbitrators themselves would be entitled to''
and arguing that the conflict ``is amplified when the late
cancellation fee is increased as dramatically as proposed'').
\84\ PIABA Letter.

The CSLC Letter Proposed the Following Sliding-Scale Late Cancellation
Fee Schedule
------------------------------------------------------------------------
Cancellation
Calendar days before hearing when notice given fee per
arbitrator
------------------------------------------------------------------------
11 or more.............................................. $0
9-10.................................................... 100
7-8..................................................... 200
5-6..................................................... 300
4 or fewer.............................................. 600
------------------------------------------------------------------------

In its response, FINRA stated that the forum's policy currently is
``to pay arbitrators the fee they would have received in the event the
panel waives the late cancellation fee for the parties'' \85\ and that
this policy would not change if the proposal is approved by the
Commission.\86\ Accordingly, FINRA declined to modify its proposal as
recommended.\87\
---------------------------------------------------------------------------

\85\ FINRA Response Letter (referencing Exchange Act Release No.
49545 (Apr. 8, 2004), 69 FR 19887 (Apr. 14, 2004) (File No. SR-NASD-
2003-164) (Notice of Filing by NASD, Inc. Relating to the
Adjournment of a Hearing Within Three Business Days of the First
Scheduled Hearing Session), at 19889, which states that ``a waiver
of the fee . . . will not affect the payment of the honorarium'').
\86\ See FINRA Response Letter.
\87\ See id.
---------------------------------------------------------------------------

F. Additional Arbitrator Training

One commenter suggested that FINRA provide additional arbitrator
training on the types of extraordinary circumstances that would be
appropriate to consider when deciding whether to waive the late
cancellation fee, as well as how to verify the accuracy of these
circumstances.\88\
---------------------------------------------------------------------------

\88\ See PIABA Letter (noting that this training would
``reinforce the need for arbitrators to give appropriate
consideration of the parties' requests for a waiver of late
cancellation fees in extraordinary circumstances'' and further
suggesting that arbitrators be reminded that ``the rules involved
specifically acknowledge that there can be `extraordinary
circumstances' that can excuse a late cancellation'').
---------------------------------------------------------------------------

In its response, FINRA stated that while ``it has not received any
complaints from parties about arbitrators failing to waive late
cancellation fees in the event of extraordinary circumstances'' it has
issued guidance on this issue in its Notice to Members 04-53.\89\ The
guidance states that ``there are some extraordinary circumstances that
could prevent a party from making an adjournment request in time to
avoid the additional fee assessment (e.g., a serious accident or sudden
severe illness).'' \90\ FINRA stated that this guidance would continue
to apply if the Commission approves the proposal.\91\ FINRA also
stated, however, that it ``would review the applicable arbitrator
training modules and scenarios and update them, where necessary'' if
the Commission approves the proposed rule change.\92\ FINRA also stated
that it would publish a Regulatory Notice ``explain[ing] how the rule
would be applied, including any changes to the examples of what FINRA
considers `extraordinary circumstances.''' \93\
---------------------------------------------------------------------------

\89\ FINRA Response Letter.
\90\ Id.
\91\ See id.
\92\ Id.
\93\ Id.
---------------------------------------------------------------------------

G. Education for Pro se Claimants About Late Cancellation

Three commenters expressed concern that the proposed rule change
may harm investors who represent themselves in the forum (``pro se
claimants'') because they may be less likely to be aware of the
increased fee and deadline for

[[Page 30745]]

timely requesting a cancellation.\94\ The commenters recommended that
FINRA provide additional information and education to pro se claimants
to help ensure that they are aware of the Late Cancellation Fee and
timeline.\95\ One of these commenters also recommended that FINRA
notify pro se claimants with claims under $100,000 by letter 30 days
before a scheduled hearing to inform them of the fees and the ten-day
cancellation period.\96\
---------------------------------------------------------------------------

\94\ See PIABA Letter (noting that ``there will likely be pro se
claimants that are unaware of the existence of the rule calling for
late cancellation fees''); PIRC Letter (citing support for the
position in the PIABA Letter); and MSU Letter (arguing that ``pro se
claimants need extra protection against incurring unexpected fees in
a complicated arbitration forum'').
\95\ See, e.g., PIABA Letter (suggesting that ``FINRA provide
additional education to pro se claimants so that they can make
informed decisions about postponing final hearing sessions'').
\96\ See MSU Letter (noting that a claimant ``could be
responsible for paying large percentages of her possible settlement
in fees that she may not know exist'').
---------------------------------------------------------------------------

In its response, FINRA stated that it believes that ``all parties
should be reminded of the proposed rule change, so that they are aware
of the ramifications of postponing or cancelling a scheduled hearing
inside of the proposed cancellation period.'' \97\ Accordingly, FINRA
stated that it would train arbitrators to remind the parties of the
deadline and Late Cancellation Fees at the initial prehearing
conference (``IPHC''), as well as publish an updated Regulatory Notice
describing the proposed rule changes.\98\ Furthermore, FINRA stated
that it would instruct the arbitrators to include this reminder in the
IPHC Scheduling Order, which is provided to the parties at the outset
of the dispute, so that parties will be informed of their
responsibilities.\99\
---------------------------------------------------------------------------

\97\ FINRA Response Letter.
\98\ See id.
\99\ See id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

The Commission has carefully considered the proposal, the comments
received, and FINRA's response to the comments. Based on its review of
the record, 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.\100\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(5) of the Act,\101\ which
requires that FINRA's rules provide for the equitable allocation of
reasonable dues, fees, and other charges among its members and other
persons using any facility or system which FINRA operates or controls.
The Commission also finds that the proposed rule change is consistent
with Section 15A(b)(6) of the Act,\102\ which requires, among other
things, that FINRA's 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.
---------------------------------------------------------------------------

\100\ In approving the proposed rule change, the Commission has
also considered the rule change's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\101\ 15 U.S.C. 78o-3(b)(5).
\102\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

As discussed above, the proposed rule change would: (i) Increase a
fee for the late cancellation of a scheduled arbitration hearing, (ii)
lengthen the notice period for a party to cancel a scheduled hearing
without incurring the fee, and (iii) increase the amount of honoraria
paid to arbitrators affected by the late cancellation of a scheduled
hearing. As stated above, FINRA designed the proposal to, among other
things: (i) encourage parties to an arbitration to provide more advance
notice of cancellations and postponements of hearing sessions, and (ii)
help recruit and arbitrators by better compensating them for their lost
time and opportunities in the event of a late cancellation or
postponement.
The Commission received twelve comment letters on the proposed rule
change \103\ and FINRA's response to the comments.\104\ The Commission
notes that most of the commenters generally supported the proposed rule
change, believing that ``the increase in the late cancellation fee will
assist the forum in its efforts to retain qualified arbitrators willing
to devote the time and energy necessary to serve on arbitration
panels.'' \105\ The Commission also notes that a number of commenters
believe that the proposal would provide ``a financial incentive for
parties to begin negotiations and finalize settlements earlier in the
process.'' \106\ The Commission also notes, however, that some
commenters opposed the proposal \107\ or recommended FINRA revise
certain aspects of it.\108\
---------------------------------------------------------------------------

\103\ See supra note 4.
\104\ See supra note 6.
\105\ FINRA Response Letter. See also Friedman Letter (noting
that ``arbitrator retention is very challenging'' and arguing that
``anything that can be done, such as the proposed rule change, to
discourage last-minute settlements should be supported'').
\106\ FINRA Response Letter. See also supra note 4.
\107\ See supra note 32.
\108\ See supra note 31.
---------------------------------------------------------------------------

While the Commission appreciates the recommendations made by some
commenters and recognizes that the proposal may result in an increased
financial burden on some customer claimants, including those with small
claims, the Commission believes that FINRA responded appropriately to
their concerns. In particular, the Commission acknowledges the
safeguards that FINRA has built into its proposal to mitigate the
impact of the increase Late Cancellation Fee on customer claimants. For
example, FINRA stated that parties could negotiate (as part of any
settlement agreements) the allocation of fees, request that an
arbitration panel waive the Late Cancellation Fee based on
extraordinary circumstances, or FINRA could waive the Late Cancellation
Fee.\109\ In addition, FINRA has represented that it would take
additional steps to help pro se claimants by providing additional
notice of the proposed increased fee as well as instructions for when
parties must cancel a hearing in order to avoid the Late Cancellation
Fee.\110\
---------------------------------------------------------------------------

\109\ See FINRA Response Letter.
\110\ See id. (noting that FINRA would publish a Regulatory
Notice explaining how the rule would be applied, and would train
arbitrators to advise parties at the IPHC that they would be subject
to a Late Cancellation Fee if they requested a cancellation of a
scheduled hearing within ten-business days of the hearing).
---------------------------------------------------------------------------

Moreover, the Commission agrees with the views of certain
commenters that the proposed rule ``strike[s] a balance between the
parties and arbitrators that serve the forum.'' \111\ In addition, the
Commission agrees with the many commenters who argue that the rule
proposal would also more adequately compensate arbitrators for lost
time and opportunities when hearings are cancelled without appropriate
notice.\112\ Accordingly, the Commission believes that the proposed
rule change would further the purposes of the Act by providing for the
equitable allocation of reasonable fees, in this case the Late
Cancellation Fee, among FINRA members, customers, associated persons,
or other non-members using FINRA's arbitration forum.\113\
---------------------------------------------------------------------------

\111\ See Bakhtiari Letter (stating that the proposed rules
``provide a financial incentive for parties to discuss and
consummate settlements . . . while providing arbitrators with fair
compensation when hearings are cancelled at the last minute'').
\112\ See Harris Letter (arguing that ``[t]he $100 does not come
close to compensating an arbitrator for the time or energy that he
or she spent preparing''). See also Aidikoff Letter (stating that
``waiting until the last minute does great disservice to the
arbitrator pool in that arbitrators set aside the days that the
hearing is scheduled and then are not compensated for last minute
cancellations or postponements'').
\113\ See 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

Furthermore, the Commission agrees with FINRA's assessment that the
proposal would ``encourage parties to

[[Page 30746]]

provide more advance notice of postponements and cancellations, or, in
the alternative, to compensate arbitrators more than they are currently
paid for lost time and opportunities in the event of a late
postponement or cancellation.'' \114\ In addition, the Commission
believes that increase the amount of honoraria paid to arbitrators
affected by a late cancellation of a scheduled hearing would help FINRA
achieve its goal of retaining and recruiting arbitrators to serve in
its dispute resolution forum. Accordingly, the Commission believes that
the proposed rule change would further the purposes of the Act as it is
reasonably designed to protect investors and the public interest.\115\
---------------------------------------------------------------------------

\114\ See Notice, 80 FR at 9774. See also FINRA Response Letter.
\115\ See 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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,\116\ that the proposed rule change (SR-FINRA-2015-003), be, and
hereby is, approved.
---------------------------------------------------------------------------

\116\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\117\
---------------------------------------------------------------------------

\117\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12971 Filed 5-28-15; 8:45 am]
BILLING CODE 8011-01-P

30740 Federal Register / Vol. 80, No. 103 / Friday, May 29, 2015 / Notices

Since the publication of NUREG– III. Backfitting and Issue Finality SECURITIES AND EXCHANGE
0654/FEMA–REP–1, Revision 1, in COMMISSION
Issuance of NUREG–0654/FEMA–
1980, four supplemental documents and
REP–1, Revision 2, in final form, would [Release No. 34–75036; File No. SR–FINRA–
one set of addenda have been issued
not constitute backfitting under 10 CFR 2015–003]
that update and modify specific
50.109 and would not otherwise be
planning and procedural elements. Self-Regulatory Organizations;
inconsistent with the issue finality
These documents are available online at Financial Industry Regulatory
provisions in 10 CFR part 52. As
the Federal rulemaking Web site, Authority, Inc.; Order Approving
discussed in section I.B., ‘‘Scope,’’
www.regulations.gov, under Docket ID Proposed Rule Change To Amend the
under the subsection titled ‘‘Use by
FEMA–2012–0026. There have also NRC,’’ of NUREG–0654/FEMA–REP–1, Code of Arbitration Procedure for
been changes to the NRC’s and FEMA’s Revision 2, the NRC has no current Customer Disputes and the Code of
regulations, guidance, and policies, as intention to impose NUREG–0654/ Arbitration Procedure for Industry
well as advances in technology and FEMA–REP–1, Revision 2, on current Disputes To Increase a Fee for the Late
methods for responding to radiological holders of a construction permit, Cancellation of a Scheduled Hearing,
incidents. The NRC and FEMA are operating license, early site permit, or Lengthen the Notice Period for
revising NUREG–0654/FEMA–REP–1, combined license. Cancelling a Scheduled Hearing, and
Revision 1, to incorporate information Increase the Amount of Honoraria Paid
NUREG–0654/FEMA–REP–1,
from the supplements and addenda; to Arbitrators Affected by a Late
Revision 2, if finalized, could be applied
address regulatory, guidance, and policy Cancellation of a Scheduled Hearing
to applications for certain 10 CFR part
changes; and include various emergency
50 operating licenses or construction May 22, 2015.
planning and preparedness lessons
permits and 10 CFR part 52 combined
learned since its initial publication. I. Introduction
licenses and early site permits. Such
The NRC is developing an emergency action would not constitute backfitting On February 5, 2015, the Financial
preparedness handbook (a NUREG as defined in 10 CFR 50.109 or be Industry Regulatory Authority, Inc.
document) in conjunction with the otherwise inconsistent with the (‘‘FINRA’’) filed with the Securities and
revision of NUREG–0654/FEMA–REP–1. applicable issue finality provision in 10 Exchange Commission (‘‘Commission’’),
The handbook will provide amplifying CFR part 52, inasmuch as such pursuant to Section 19(b)(1) of the
guidance on meeting the intent of the applicants are not, with certain Securities Exchange Act of 1934 (‘‘Act’’
NUREG–0654/FEMA–REP–1, Revision 2 exceptions, within the scope of entities or ‘‘Exchange Act’’) 1 and Rule 19b–4
evaluation criteria applicable to protected by 10 CFR 50.109 or the thereunder,2 a proposed rule change to
commercial NPP applicants and relevant issue finality provisions in 10 amend Rules 12214 and 12601 of
licensees, and the level of detail that CFR part 52. This is because neither the FINRA’s Code of Arbitration Procedure
applicant and licensee emergency plans Backfit Rule nor the issue finality for Customer Disputes (‘‘Customer
should provide regarding each provisions under 10 CFR part 52—with Code’’) and Rules 12214 and 12601 of
evaluation criterion. A preliminary draft certain exclusions discussed below— its Code of Arbitration Procedure for
version of the handbook will be was intended to apply to every NRC Industry Disputes (‘‘Industry Code’’)
available for viewing in ADAMS under action that substantially changes the (together, ‘‘Codes’’) to increase the fee
Accession No. ML15140A415 during the expectations of current and future for the late cancellation or
public comment period for NUREG– applicants. The exceptions to the postponement of a scheduled hearing,
0654/FEMA–REP–1, Revision 2; a final general principle are applicable lengthen the notice period for cancelling
draft version of the handbook will be whenever an applicant references a 10 or postponing a scheduled hearing
issued at a later time. CFR part 52 license (e.g., an early site session, and increase the amount of
The NRC and FEMA held two public permit), NRC regulatory approval (e.g., a honoraria paid to arbitrators affected by
meetings on August 22, 2012, and design certification rule), or both, with the late cancellation or postponement of
September 13, 2012, as well as two specified issue finality provisions. The a scheduled hearing session. The
public stakeholder engagement sessions staff does not, at this time, intend to proposed rule change was published for
on October 29–31, 2013, and June 25, impose the positions represented in the comment in the Federal Register on
2014. The public meetings were draft NUREG (if finalized) in a manner February 24, 2015.3 The Commission
conducted in order to: (1) solicit input that is inconsistent with any issue received twelve comment letters on the
from stakeholders and interested finality provisions. If, in the future, the proposal.4 On March 26, 2015, FINRA
members of the public on the scope of staff seeks to impose a position in the
future revisions to NUREG–0654/ draft NUREG (if finalized) in a manner 1 15 U.S.C. 78s(b)(1).

FEMA–REP–1, Revision 1; (2) describe that does not provide issue finality as 2 17 CFR 240.19b–4.
3 See Exchange Act Release No. 74289 (Feb. 18,
described in the applicable issue finality
the proposed timeline for the revisions 2015), 80 FR 9773 (Feb. 24, 2015) (‘‘Notice’’).
provision, then the staff must address
to NUREG–0654/FEMA–REP–1, 4 See Letters from Steven B. Caruso, Esq., Maddox
the criteria for avoiding issue finality as Hargett & Caruso, P.C., dated February 20, 2015
Revision 1; (3) promote transparency,
described in the applicable issue finality (‘‘Caruso Letter’’); Philip M. Aidikoff, Aidikoff, Uhl
public participation, and collaboration
provision. & Bakhtiari, dated February 24, 2015 (‘‘Aidikoff
during the NUREG–0654/FEMA–REP–1, Letter’’); George H. Friedman, Esq., George H.
Revision 1, revision process; and (4) Dated at Rockville, Maryland, this 20th day Friedman Consulting, LLC, dated March 1, 2015
allow direct input from stakeholders of May, 2015. (‘‘Friedman Letter’’); Joseph C. Pfeiffer, President,
Lhorne on DSK2VPTVN1PROD with NOTICES

For the U.S. Nuclear Regulatory Public Investors Arbitration Bar Association
and the public on changes being made (‘‘PIABA’’), dated March 9, 2015 (‘‘PIABA Letter’’);
during the initial writing process. Commission.
Ryan K. Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated
Presentation material and meeting notes Brian E. Holian, March 9, 2015 (‘‘Bakhtiari Letter’’); Jasmine Blake-
are available for review on the Federal Director, Office of Nuclear Security and Stewart, Francis Laryea, Jason Robinson, and Darius
Incident Response. Wood, Student Interns, and Nicole Iannarone,
rulemaking Web site, Assistant Clinical Professor, Investor Advocacy
www.regulations.gov, under Docket ID [FR Doc. 2015–13079 Filed 5–28–15; 8:45 am] Clinic, Georgia State University College of Law,
FEMA–2012–0026. BILLING CODE 7590–01–P dated March 13, 2015 (‘‘GSU Letter’’); Mark R.

VerDate Sep<11>2014 15:17 May 28, 2015 Jkt 235001 PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 E:\FR\FM\29MYN1.SGM 29MYN1

Document Created: 2015-12-15 15:31:12
Document Modified: 2015-12-15 15:31:12

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		80 FR 30740