81 FR 32359 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing 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

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 99 (May 23, 2016)

Page Range		32359-32360
FR Document		2016-12012
Federal Register, Volume 81 Issue 99 (Monday, May 23, 2016)
[Federal Register Volume 81, Number 99 (Monday, May 23, 2016)]
[Notices]
[Pages 32359-32360]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-12012]



[[Page 32359]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77844; File No. SR-FINRA-2016-015]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing 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

May 17, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on May 3, 2016, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by FINRA. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend 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'') 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.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    FINRA Rules 12904 and 13904 address awards issued by arbitrators at 
the FINRA Office of Dispute Resolution forum. They 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.
    Sometimes arbitrators order opposing parties in a case to pay each 
other monetary damages. When arbitrators make such awards, 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. 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. The firm is willing to accept the net payment due. 
However, if the arbitrators do not specify that awards should be 
offset, the firm may be required to pay the counterclaim even if the 
associated person refuses or is unable to pay the larger amount. The 
offset issue could also arise in customer cases, such as those 
involving margin account disputes. Currently, Rules 12904 and 13904 are 
silent on award offsets. Therefore, under the current Codes, FINRA does 
not require arbitrators to specify whether parties should offset 
amounts awarded.
    For example, in UBS Financial Services, Inc. (UBS) v. Thomas A. 
Mann (Mann), No. 2:2014cv10621, 2014 WL 1746249 (E.D. Mich. Apr. 30, 
2014), a federal district court heard a dispute relating to opposing 
awards made by a FINRA arbitration panel involving forgivable loans the 
firm made to Mann, an associated person. The arbitrators awarded UBS 
$217,000 and awarded Mann $150,000 for claims relating to his 
employment. Mann, 2014 WL 1746249 at *1. ``UBS expressed concern it 
would never receive payment from Mann, but still had to pay him.'' Id. 
Under the current Codes, the failure of a firm or person registered 
with FINRA, such as UBS, to pay an award within 30 days could subject 
that firm or person to FINRA disciplinary action, including 
cancellation of membership for the firm or suspension of the firm or 
person. UBS filed a motion to the arbitrators to correct the award 
because it was ambiguous in not providing for an offset. Id. In that 
motion, UBS argued that the award should be $67,000 in its favor, which 
is the difference in the amount of the two awards. Id. The arbitrators 
declined the request. Id. UBS asked the court to provide for an offset 
of the awards. Id. at *2. The court confirmed the award without 
ordering an offset because the arbitrators had an opportunity to review 
UBS' request for an offset and chose not to address it in the award. 
Id. at *3.
Proposed Amendments to Rules 12904(j) and 13904(j)
    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. FINRA is also proposing to replace the 
bullets in Rules 12904 and 13904 with numbers because forum users have 
indicated that for ease of citation, they would prefer that FINRA use 
numbers and letters instead of bullets.
    As noted in Item 2 of this filing, if the Commission approves the 
proposed rule change, FINRA will announce the effective date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 60 days following Commission approval. The effective date will be 
no later than 30 days following publication of the Regulatory Notice 
announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\3\ which requires, among 
other things, that FINRA rules must 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. FINRA believes that providing a default in favor of 
offset when arbitrators fail to address the issue

[[Page 32360]]

in an award would benefit forum users by eliminating ambiguity and 
reducing the risk of post-award disputes.
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    \3\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. 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. Creating a 
presumption that opposing award amounts will be offset will increase 
the likelihood that the arbitrators' purpose in issuing opposing awards 
would be carried out. In addition, the proposed rule would reduce 
instances where the party owed the greater net damages is required to 
make payment even if the opposing party fails to pay its damages. In 
addition, this proposed rule 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.
    The scope of cases affected by offsets is small in comparison to 
the number of cases handled at the forum, but forum users have asked 
FINRA to address the issue. During 2013 and 2014, a total of 8,375 
cases were closed at the forum (predominantly by settlement or award). 
The majority of cases are settled before a hearing takes place. The 
offset issue had the potential to arise in 299 cases (just over 3.5% of 
cases) where there was a claim by both a claimant and a respondent, and 
the case was resolved by arbitrators at a hearing on the merits. In 17 
cases (0.2% of cases), the arbitrators awarded monetary damages to both 
a claimant and a respondent, offering the opportunity for an offset.
    Of these 17 cases, one involved a customer dispute in which a 
member initiated a claim for breach of contract. The arbitrators made a 
monetary award to both the customer and firm and provided for an 
offset. In the remaining 16 intra-industry cases, most of which 
involved promissory notes, the arbitrators made an award to both the 
firm and the associated person. In 8 of the 16 cases, the arbitrators 
ordered award offsets. In the remaining eight cases, the awards were 
silent as to offset.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the 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 [email protected]. 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 a.m. and 3 p.m. Copies of such filing also will 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 June 13, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12012 Filed 5-20-16; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Notices 32359

SECURITIES AND EXCHANGE may be examined at the places specified at *1. ‘‘UBS expressed concern it would
COMMISSION in Item IV below. FINRA has prepared never receive payment from Mann, but
summaries, set forth in sections A, B, still had to pay him.’’ Id. Under the
[Release No. 34–77844; File No. SR–FINRA–
and C below, of the most significant current Codes, the failure of a firm or
2016–015]
aspects of such statements. person registered with FINRA, such as
Self-Regulatory Organizations; UBS, to pay an award within 30 days
A. Self-Regulatory Organization’s
Financial Industry Regulatory could subject that firm or person to
Statement of the Purpose of, and
Authority, Inc.; Notice of Filing of a FINRA disciplinary action, including
Statutory Basis for, the Proposed Rule
Proposed Rule Change Amending Rule cancellation of membership for the firm
Change
12904 (Awards) of the Code of or suspension of the firm or person.
Arbitration Procedure for Customer 1. Purpose UBS filed a motion to the arbitrators to
Disputes and Rule 13904 (Awards) of Background correct the award because it was
the Code of Arbitration Procedure for ambiguous in not providing for an
FINRA Rules 12904 and 13904 offset. Id. In that motion, UBS argued
Industry Disputes To Permit Award address awards issued by arbitrators at
Offsets in Arbitration that the award should be $67,000 in its
the FINRA Office of Dispute Resolution favor, which is the difference in the
May 17, 2016. forum. They provide, among other amount of the two awards. Id. The
Pursuant to Section 19(b)(1) of the matters, that awards must be in writing arbitrators declined the request. Id. UBS
Securities Exchange Act of 1934 and signed by a majority of the asked the court to provide for an offset
(‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule arbitrators or as required by applicable of the awards. Id. at *2. The court
19b–4 thereunder,2 notice is hereby law. The rules itemize required confirmed the award without ordering
given that on May 3, 2016, Financial elements of awards, including a an offset because the arbitrators had an
Industry Regulatory Authority, Inc. statement of the damages awarded, and opportunity to review UBS’ request for
(‘‘FINRA’’) filed with the Securities and provide that all monetary awards shall an offset and chose not to address it in
Exchange Commission (‘‘Commission’’) be paid within 30 days of receipt unless the award. Id. at *3.
the proposed rule change as described a motion to vacate has been filed in a
court of competent jurisdiction. Proposed Amendments to Rules
in Items I, II, and III below, which Items 12904(j) and 13904(j)
have been substantially prepared by Sometimes arbitrators order opposing
FINRA. The Commission is publishing parties in a case to pay each other FINRA is proposing to amend Rules
monetary damages. When arbitrators 12904(j) and 13904(j) to provide that,
this notice to solicit comments on the
make such awards, but do not specify absent specification to the contrary in
proposed rule change from interested
whether the party that owes the higher an award, when arbitrators order
persons.
amount must pay the net difference, the opposing parties to pay each other
I. Self-Regulatory Organization’s lack of clarity has resulted in parties damages, the monetary awards shall
Statement of the Terms of Substance of asking arbitrators to revise an award offset, and the party that owes the larger
the Proposed Rule Change after a case has closed or in post-award amount shall pay the net difference.
FINRA is proposing to amend Rule litigation. For example, arbitrators may FINRA is also proposing to replace the
12904 (Awards) of the Code of award damages to a firm because an bullets in Rules 12904 and 13904 with
Arbitration Procedure for Customer associated person failed to pay money numbers because forum users have
Disputes (‘‘Customer Code’’) and Rule owed on a promissory note and award indicated that for ease of citation, they
13904 (Awards) of the Code of a lesser amount to the associated person would prefer that FINRA use numbers
Arbitration Procedure for Industry on a counterclaim. The firm is willing and letters instead of bullets.
Disputes (‘‘Industry Code’’) (together, to accept the net payment due. As noted in Item 2 of this filing, if the
‘‘Codes’’) to provide that absent However, if the arbitrators do not Commission approves the proposed rule
specification to the contrary in an specify that awards should be offset, the change, FINRA will announce the
award, when arbitrators order opposing firm may be required to pay the effective date of the proposed rule
parties to pay each other damages, the counterclaim even if the associated change in a Regulatory Notice to be
monetary awards shall offset, and the person refuses or is unable to pay the published no later than 60 days
party that owes the larger amount shall larger amount. The offset issue could following Commission approval. The
pay the net difference. also arise in customer cases, such as effective date will be no later than 30
The text of the proposed rule change those involving margin account days following publication of the
is available on FINRA’s Web site at disputes. Currently, Rules 12904 and Regulatory Notice announcing
http://www.finra.org, at the principal 13904 are silent on award offsets. Commission approval.
office of FINRA and at the Therefore, under the current Codes,
FINRA does not require arbitrators to 2. Statutory Basis
Commission’s Public Reference Room.
specify whether parties should offset FINRA believes that the proposed rule
II. Self-Regulatory Organization’s amounts awarded. change is consistent with the provisions
Statement of the Purpose of, and For example, in UBS Financial of Section 15A(b)(6) of the Act,3 which
Statutory Basis for, the Proposed Rule Services, Inc. (UBS) v. Thomas A. Mann requires, among other things, that
Change (Mann), No. 2:2014cv10621, 2014 WL FINRA rules must be designed to
In its filing with the Commission, 1746249 (E.D. Mich. Apr. 30, 2014), a prevent fraudulent and manipulative
federal district court heard a dispute acts and practices, to promote just and
sradovich on DSK3TPTVN1PROD with NOTICES

FINRA included statements concerning
the purpose of and basis for the relating to opposing awards made by a equitable principles of trade, and, in
proposed rule change and discussed any FINRA arbitration panel involving general, to protect investors and the
comments it received on the proposed forgivable loans the firm made to Mann, public interest. FINRA believes that
rule change. The text of these statements an associated person. The arbitrators providing a default in favor of offset
awarded UBS $217,000 and awarded when arbitrators fail to address the issue
1 15 U.S.C. 78s(b)(1). Mann $150,000 for claims relating to his
2 17 CFR 240.19b–4. employment. Mann, 2014 WL 1746249 3 15 U.S.C. 78o–3(b)(6).

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32360 Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Notices

in an award would benefit forum users C. Self-Regulatory Organization’s provisions of 5 U.S.C. 552, will be
by eliminating ambiguity and reducing Statement on Comments on the available for Web site viewing and
the risk of post-award disputes. Proposed Rule Change Received From printing in the Commission’s Public
Members, Participants, or Others Reference Room, 100 F Street NE.,
B. Self-Regulatory Organization’s Washington, DC 20549–1090, on official
Statement on Burden on Competition Written comments were neither
solicited nor received. business days between the hours of 10
FINRA does not believe that the a.m. and 3 p.m. Copies of such filing
III. Date of Effectiveness of the also will be available for inspection and
proposed rule change will result in any
Proposed Rule Change and Timing for copying at the principal office of
burden on competition that is not Commission Action FINRA. All comments received will be
necessary or appropriate in furtherance
Within 45 days of the date of posted without change; the Commission
of the purposes of the Act. FINRA does not edit personal identifying
believes that the proposed rule change publication of this notice in the Federal
Register or within such longer period (i) information from submissions. You
will mitigate the risk of failure to pay by should submit only information that
an opposing party that may arise when as the Commission may designate up to
90 days of such date if it finds such you wish to make available publicly. All
multiple parties in a dispute are found submissions should refer to File
longer period to be appropriate and
to owe non-equivalent awards Number SR–FINRA–2016–015 and
publishes its reasons for so finding or
simultaneously. Creating a presumption should be submitted on or before June
(ii) as to which the self-regulatory
that opposing award amounts will be 13, 2016.
organization consents, the Commission
offset will increase the likelihood that will: For the Commission, by the Division of
the arbitrators’ purpose in issuing (A) By order approve or disapprove Trading and Markets, pursuant to delegated
opposing awards would be carried out. such proposed rule change, or authority.4
In addition, the proposed rule would (B) institute proceedings to determine Robert W. Errett,
reduce instances where the party owed whether the proposed rule change Deputy Secretary.
the greater net damages is required to should be disapproved. [FR Doc. 2016–12012 Filed 5–20–16; 8:45 am]
make payment even if the opposing BILLING CODE 8011–01–P
party fails to pay its damages. In IV. Solicitation of Comments
addition, this proposed rule change Interested persons are invited to
would likely reduce legal expenses to submit written data, views and SECURITIES AND EXCHANGE
the party owed greater damages by arguments concerning the foregoing, COMMISSION
eliminating the need to apply for the including whether the proposed rule
[Release No. 34–77850; File No. SR–NYSE–
reopening of the case or going to court change is consistent with the Act. 2016–22]
to seek award offsets, or seek other Comments may be submitted by any of
redress. the following methods: Self-Regulatory Organizations; New
The scope of cases affected by offsets Electronic Comments York Stock Exchange LLC; Notice of
Filing of Amendment No. 5 to
is small in comparison to the number of • Use the Commission’s Internet Proposed Rule Change Adopting Initial
cases handled at the forum, but forum comment form (http://www.sec.gov/ and Continued Listing Standards for
users have asked FINRA to address the rules/sro.shtml); or the Listing of Equity Investment
issue. During 2013 and 2014, a total of • Send an email to rule-comments@ Tracking Stocks and Adopting Listing
8,375 cases were closed at the forum sec.gov. Please include File Number SR– Fees Specific to Equity Investment
(predominantly by settlement or award). FINRA–2016–015 on the subject line. Tracking Stocks
The majority of cases are settled before
Paper Comments May 17, 2016.
a hearing takes place. The offset issue
had the potential to arise in 299 cases • Send paper comments in triplicate I. Introduction
(just over 3.5% of cases) where there to Secretary, Securities and Exchange
Commission, 100 F Street NE., On April 7, 2016, the New York Stock
was a claim by both a claimant and a
Washington, DC 20549–1090. Exchange LLC (‘‘NYSE’’ or the
respondent, and the case was resolved
‘‘Exchange’’) filed with the Securities
by arbitrators at a hearing on the merits. All submissions should refer to File
and Exchange Commission
In 17 cases (0.2% of cases), the Number SR–FINRA–2016–015. This file
(‘‘Commission’’), pursuant to Section
arbitrators awarded monetary damages number should be included on the
19(b)(1) of the Securities Exchange Act
to both a claimant and a respondent, subject line if email is used. To help the
of 1934 (‘‘Act’’) 1 and Rule 19b–4
offering the opportunity for an offset. Commission process and review your
thereunder,2 a proposed rule change to
comments more efficiently, please use
Of these 17 cases, one involved a adopt initial and continued listing
only one method. The Commission will
customer dispute in which a member standards for the listing of Equity
post all comments on the Commission’s
initiated a claim for breach of contract. Investment Tracking Stocks and to
Internet Web site (http://www.sec.gov/
The arbitrators made a monetary award adopt fees for Equity Investment
rules/sro.shtml). Copies of the
to both the customer and firm and Tracking Stocks. The proposed rule
submission, all subsequent
provided for an offset. In the remaining change was published for comment in
amendments, all written statements
16 intra-industry cases, most of which the Federal Register on April 27, 2016.3
with respect to the proposed rule
sradovich on DSK3TPTVN1PROD with NOTICES

involved promissory notes, the On April 20, 2016, the Exchange filed
change that are filed with the
arbitrators made an award to both the Amendment No. 1 to the proposed rule
Commission, and all written
firm and the associated person. In 8 of communications relating to the 4 17 CFR 200.30–3(a)(12).
the 16 cases, the arbitrators ordered proposed rule change between the 1 15 U.S.C. 78s(b)(1).
award offsets. In the remaining eight Commission and any person, other than 2 17 CFR 240.19b–4.
cases, the awards were silent as to those that may be withheld from the 3 See Securities Exchange Act Release No. 77674

offset. public in accordance with the (April 21, 2016), 81 FR 24919 (April 27, 2016).

VerDate Sep<11>2014 18:25 May 20, 2016 Jkt 238001 PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 E:\FR\FM\23MYN1.SGM 23MYN1
Document Created: 2018-02-07 15:07:48
Document Modified: 2018-02-07 15:07:48
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		81 FR 32359