83 FR 23959 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change Relating to Simplified Arbitration
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 100 (May 23, 2018)
Federal Register Volume 83, Issue 100 (May 23, 2018)
| Page Range | 23959-23963 | |
| FR Document | 2018-10977 |
[Federal Register Volume 83, Number 100 (Wednesday, May 23, 2018)] [Notices] [Pages 23959-23963] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-10977] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83276; File No. SR-FINRA-2018-003] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change Relating to Simplified Arbitration May 17, 2018. I. Introduction On January 29, 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'') and Rule 19b-4 thereunder, proposed amendments to FINRA Rules 12600 and 12800 of the Code of Arbitration Procedure for Customer Disputes (``Customer Code'') and 13600 and 13800 of the Code of Arbitration Procedure for Industry Disputes (``Industry Code,'' and together with the Customer Code, the ``Codes''), to amend the hearing provisions to provide an additional hearing option for parties in arbitration with claims of $50,000 or less, excluding interest and expenses. The proposed rule change was published for comment in the Federal Register on February 16, 2018.\1\ The public comment period closed on March 9, 2018. On March 28, 2018, FINRA extended the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to May 17, 2018. The Commission received 12 comment letters in response to the Notice.\2\ On May 7, 2018, FINRA responded to the comment letters received in response to the Notice.\3\ --------------------------------------------------------------------------- \1\ See Exchange Act Release No. 34-82693 (February 12, 2018), 83 FR 7086 (February 16, 2018) (``Notice''). \2\ See Letters from Steven B. Caruso, Maddox Hargett & Caruso, P.C., dated February 13, 2018 (``Caruso Letter''); Andrew Stoltmann, President, Public Investors Arbitration Bar Association, dated March 6, 2018 (``PIABA Letter''); Eric Duhon and Paige Foley, Student Attorneys, Investor Protection Clinic, William S. Boyd School of Law, University of Nevada, Las Vegas, dated March 6, 2018 (``UNLV Letter''); Katherine Kokotos, Amrita Maitlall, and Sumaya Restagno, Legal Interns, and Christine Lazaro, Director of the Securities Arbitration Clinic and Professor of Clinical Legal Education, St. John's University School of Law, dated March 6, 2018 (``SJU Letter''); Daniel P. Guernsey, Student Intern and Teresa J. Verges, Director, University of Miami School of Law Investor Rights Clinic, dated March 6, 2018 (``MIRC Letter''); Jill I. Gross, Professor of Law, Elisabeth Haub School of Law, Pace University, dated march 8, 2018 (``Gross Letter''); William A. Jacobson, Clinical Professor of Law and Director, Cornell Securities Law Clinic, and Sam Wildman, Cornell University Law School, dated March 8, 2018 (``Cornell Letter''); Kevin M. Carroll, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated March 8, 2018 (``SIFMA Letter''); Barbara Black, Professor of Law, University of Cincinnati College of Law (Retired), dated March 8, 2018 (``Black Letter''); John Ripoli, Simon Halper, and Mark Sarno, Student Interns, and Elissa Germaine, Director, Investor Rights Clinic at the Elisabeth Haub School of Law, Pace University, dated March 8, 2018 (``PIRC Letter''); Abigail Howd, Eric Peters, and Dowdy White, Student Interns, and Nicole G. Iannarone, Assistant Clinical Professor, Investor Advocacy Clinic, Georgia State University College of Law, dated March 9, 2018 (``GSU Letter''); and Mark D. Norych, President and General Counsel, Arbitration Resolution Services, Inc., dated March 9, 2018 (``ARS Letter''). \3\ See Letter from Margo A. Hassan, Associate Chief Counsel, FINRA Office of Dispute Resolution, to the Commission, dated May 7, 2018 (``FINRA Letter''). The FINRA Letter is available on FINRA's website at http://www.finra.org, at the principal office of FINRA, at the Commission's website at https://www.sec.gov/comments/sr-finra-2018-003/finra2018003-3590730-162342.pdf, and at the Commission's Public Reference Room. --------------------------------------------------------------------------- This order approves the proposal. II. Description of the Proposed Rule Change The Codes provide two methods for administering arbitration cases with claims involving $50,000 or less, excluding interest and expenses. The default method is a decision by a single arbitrator based on the parties' pleadings and other materials submitted by the parties. The alternative method involves a full hearing with a single arbitrator. Under the Customer Code, a customer may request a hearing (regardless of whether the customer is a claimant or respondent),\4\ and under the Industry Code, the claimant may request a hearing.\5\ If a hearing is requested, it is generally held in-person, and there are no limits on the number of hearing sessions that can take place. --------------------------------------------------------------------------- \4\ See FINRA Rule 12800(c). \5\ See FINRA Rule 13800(c). --------------------------------------------------------------------------- FINRA believes that forum users with claims involving $50,000 or less would benefit by having an additional, intermediate form of adjudication that would provide them with an opportunity to argue their cases before an arbitrator in a shorter, limited telephonic hearing format. Therefore, FINRA is proposing to amend the Codes to include a Special Proceeding for Simplified Arbitration (``Special Proceeding''). The Special Proceeding would be limited to two hearing sessions, exclusive of prehearing conferences,\6\ with parties being given time limits for their presentations. As discussed above, parties with claims involving $50,000 or less are currently limited to a decision based on the pleadings and other materials submitted by the parties, or a full hearing that typically takes place in-person and is not limited in duration. While a party might wish for an opportunity to present his or her case to an arbitrator, the travel and expenses associated with a full hearing might prevent that party from requesting one. In addition, the prospect of cross-examination by an opposing party might act as a deterrent for parties seeking to avoid a direct confrontation with their opponents. FINRA noted that these concerns particularly impact pro se, senior, and seriously ill parties. --------------------------------------------------------------------------- \6\ See FINRA Rules 12100 and 13100 (Definitions). Under these rules, ``hearing'' means the hearing on the merits of an arbitration and a ``hearing session'' is defined as any meeting between the parties and arbitrator(s) of four hours or less, including a hearing or a prehearing conference. --------------------------------------------------------------------------- The suggestion to propose an intermediate form of adjudication originated from the FINRA Dispute Resolution Task Force (``Task Force'').\7\ The Task Force observed that customers whose cases were decided on the papers were the least satisfied of any group of forum users. They also noted that, from the arbitrator's perspective, it is more [[Page 23960]] difficult to assess crucial issues of credibility when deciding cases on the papers. The Task Force recommended that the goal of the intermediate process should be to give the claimant personal contact with the arbitrator deciding the case and to give each party the opportunity to argue its case, to ask questions, and to respond to contentions from the other side. The Task Force also recommended that the intermediate process should allow the arbitrator to probe contentions in the papers in an interactive format.\8\ --------------------------------------------------------------------------- \7\ The Task Force was formed in 2014 to suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA's securities dispute resolution forum. On December 16, 2015, the Task Force issued its Final Report and Recommendations, available at http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf. \8\ Id. at 29. --------------------------------------------------------------------------- FINRA considered the Task Force's recommendations and questions in developing the format for an intermediate form of adjudication.\9\ Accordingly, FINRA is proposing to amend Rules 12800(c) and 13800(c) to provide that parties that opt for a hearing must select between two hearing options. Option One would be the current hearing option that provides for the regular provisions of the Codes relating to prehearings and hearings, including all fee provisions. If the parties choose Option One, they would continue to have in-person hearings without time limits, and they would continue to be permitted to question opposing parties' witnesses. --------------------------------------------------------------------------- \9\ The Task Force provided the following questions for FINRA to consider in developing an intermediate form of adjudication: (1) Whether parties appearing should be able to amplify positions taken in their papers and to answer questions posed by the arbitrator; (2) whether fact witnesses should be permitted to tell their stories to the arbitrator; (3) whether there should be a clear boundary between the informal, expedited adjudication and a full-blown hearing; (4) whether witnesses should be subject to cross-examination by adverse counsel; (5) whether parties should be able to compel the attendance of particular witnesses, and if so, should there be a limit; (6) what arrangements should be made for parties who are not appearing in person; and (7) whether arbitrators should use the session as an opportunity to press the parties to settle. --------------------------------------------------------------------------- Option Two would be the new Special Proceeding subject to the regular provisions of the Code relating to prehearings and hearings, including all fee provisions, with several limiting conditions. The conditions are intended to ensure that the parties have an opportunity to present their case to an arbitrator in a convenient and cost effective manner without being subject to cross-examination by an opposing party. Specifically:A Special Proceeding would be held by telephone unless the parties agree to another method of appearance; \10\ --------------------------------------------------------------------------- \10\ The Task Force recommended allowing parties with claims involving $50,000 or less to be able to appear in whatever manner they prefer: In person, by phone or by videoconference. FINRA determined that it is in the best interest of the parties to hold hearings by telephone because this method is the most expeditious and inexpensive format for hearings. As stated above, FINRA is proposing that parties can agree to other methods of appearance, including appearing in person or by videoconference. --------------------------------------------------------------------------- the claimants, collectively, would be limited to two hours to present their case and \1/2\ hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions; the respondents, collectively, would be limited to two hours to present their case and \1/2\ hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions; notwithstanding the abovementioned conditions, the arbitrator would have the discretion to cede his or her allotted time to the parties; in no event could a Special Proceeding exceed two hearing sessions, exclusive of prehearing conferences, to be completed in one day; the parties would not be permitted to question the opposing parties' witnesses; the Customer Code would provide that a customer could not call an opposing party, a current or former associated person of a member party, or a current or former employee of a member party as a witness, and members and associated persons could not call a customer of a member party as a witness; and the Industry Code would provide that members and associated persons could not call an opposing party as a witness. Except for the two hearing session time limit for a Special Proceeding, FINRA would not impose any restrictions on the arbitrator's ability to ask the parties questions and has incorporated a substantial amount of time for arbitrator questions. Specifically, since FINRA would limit the parties' combined presentations to five hours, the arbitrator would have up to three hours to ask questions. In addition, under the proposed rule change FINRA would not prohibit the arbitrator from allowing parties additional time for their presentations or witness testimonies, so long as the hearing on the merits is completed within the two hearing session limit.\11\ --------------------------------------------------------------------------- \11\ The Task Force recommended a shorter time limit on each case to enable an arbitrator to hear several cases in a hearing day and to limit the time commitment of the parties. FINRA was concerned that a period shorter than the proposed two hearing session time limit would restrict the parties' presentations and their ability to answer questions posed by the arbitrator. --------------------------------------------------------------------------- FINRA is further proposing to amend Rule 12800(a) to add clarity to the rule by explaining the customer's options earlier in the rule text. FINRA is proposing to amend the sentence in Rule 12800(c) that states that ``[I]f no hearing is held, no initial prehearing conference or other prehearing conference will be held, and the arbitrator will render an award based on the pleadings and other materials submitted by the parties.'' FINRA would replace the first ``held'' in the sentence with the term ``requested'' to better reflect that a hearing would only occur if the customer requested it. FINRA believes the amendment would add clarity to the rule text. FINRA is further proposing to amend Rule 12600(a) that discusses exceptions to when required hearings will be held to specify Rule 12800(c) as one of the exceptions. To add clarity on how arbitrators are paid in cases where the customer requests a hearing, FINRA is proposing to amend Rule 12800(f) to clarify that the regular provisions of the Code relating to arbitrator honoraria would apply in such cases. Since the Special Proceeding would be a new form of adjudication at the forum, FINRA intends to provide substantial training to arbitrators including, but not limited to, updating FINRA's written training materials for arbitrators, posting a Neutral Workshop video on the FINRA website for arbitrators to view on-demand, and including discussions about the Special Proceeding in FINRA's publication for arbitrators and mediators, The Neutral Corner. FINRA would instruct arbitrators that the arbitrator's role in a Special Proceeding might be different than it is in a full hearing because parties would not be permitted to question opposing parties' witnesses. FINRA would emphasize that in a Special Proceeding the arbitrator might need to ask more questions than he or she would ask in a regular hearing to gain clarity on issues and to assess witness credibility. III. Comment Summary and FINRA's Response As noted above, the Commission received 12 comment letters on the proposed rule change and a response letter from FINRA. As discussed in more detail below, 11 commenters supported the proposed rule change, although seven commenters supported it with suggested modifications.\12\ Commenters [[Page 23961]] who supported the proposed rule change stated, among other things, that it would: (1) Facilitate fairness and efficiency in the arbitration forum; \13\ (2) provide access to justice for pro se claimants; \14\ (3) provide an additional option for investors; \15\ (4) result in lower costs, increased representation rates of claimants, and greater participant satisfaction with the arbitration process; \16\ (5) lead to more investor trust in the process; \17\ and (6) improve both procedural and substantive justice.\18\ One commenter did not expressly support or oppose the proposed rule change.\19\ However, one commenter asserted objections to specific aspects of the proposed rule change and made recommendations for modifications.\20\ As referenced above, several commenters suggested modifications to the proposed rule change. --------------------------------------------------------------------------- \12\ See ARS Letter, PIABA Letter, SJU Letter, MIRC Letter, Black Letter, PIRC Letter, and GSU Letter. ARS proposed the creation of a pilot whereby parties could opt in to voluntary expedited online arbitration at its forum. This comment is outside the scope of the proposed rule change. \13\ See, e.g. Caruso Letter, stating that ``the proposed amendments . . . would be a fair, equitable and reasonable approach that would facilitate the fairness and efficiency of the investor participants experience in the FINRA arbitration forum.'' \14\ See, e.g. Gross Letter, stating that ``This simpler, lower cost and faster process provides access to justice especially for pro se claimants, as well as the elderly and disabled.'' \15\ See, e.g. PIABA Letter, stating that ``it is important to have additional options related to simplified arbitration.'' \16\ See, e.g. UNLV Letter, stating that ``Special Proceedings will result in lower costs, increased representation rates of claimants, and greater participant satisfaction with the arbitration process.'' The UNLV Letter also states that ``[a]t present, the private bar may provide less representation in [cases with less than $50,000 in dispute] because of the time required to prepare adequate pleadings or conduct an in-person hearing. An attorney may incur significant costs preparing for and traveling to an in-person arbitration, including the opportunity costs associated with foregoing work on other matters. The proposed Special Proceedings would substantially reduce or even eliminate many of these costs.'' \17\ See MIRC Letter, stating that ``simplifying the hearing process and allowing investors to tell their story gives investors a sense of participation that they do not get when their case is decided on the papers . . . and therefore can lead to more investor trust in the process.'' \18\ See Gross Letter, stating that ``[N]ot only does the proposal offer more choices to small claim claimants, but it also designs a small claims arbitration process that improves both procedural and substantive justice by providing a viable option for disputants to voice their grievances out loud to a third-party neutral.'' \19\ See SIFMA Letter. \20\ Id. --------------------------------------------------------------------------- Cross-Examination One commenter stated that FINRA should permit cross-examination on fairness and due process grounds asserting, among other matters, that ``members and associated persons should have the right to explore, identify, examine, and highlight errors, omissions, and misstatements that bear upon the credibility, accuracy and completeness of a claimant's or witness's testimony.'' \21\ Another commenter urged FINRA to allow limited cross-examination of one or two key witnesses stating that ``cross examination is often one of the most effective means of eliciting evidence during a hearing.'' \22\ Several commenters supported FINRA's prohibition on cross-examination in a Special Proceeding.\23\ Two commenters asserted that trained and experienced FINRA arbitrators have the knowledge and judgment to ask questions and obtain much of the same information that would have been revealed through cross-examination.\24\ Moreover, one of those two commenters stated that ``because formal rules of evidence do not apply in arbitration, cross-examination rarely yields the `gotcha' moment we might see dramatized on television.'' \25\ --------------------------------------------------------------------------- \21\ See SIFMA Letter at 2. \22\ See PIABA Letter at 2. \23\ See Gross Letter, UNLV Letter, SJU Letter, MIRC Letter, Black Letter, and PIRC Letter. \24\ See UNLV Letter at 2 and Gross Letter at 5. \25\ See Gross Letter at 5. --------------------------------------------------------------------------- FINRA noted in the FINRA Letter that the absence of cross- examination is one of the main features that distinguishes a Special Proceeding from the full hearing option.\26\ FINRA believes that the ability to present a case without cross-examination would benefit parties whose testimony could be intimidated by a direct confrontation.\27\ FINRA also believes that the broader role of arbitrators in a Special Proceeding in asking questions of the parties would serve a similar function to cross-examination, such as gaining clarity on issues and assessing witness credibility, but within a potentially less intimidating environment.\28\ Moreover, FINRA is not eliminating the cross-examination feature in the full hearing option. A customer (under the Customer Code), or a claimant (under the Industry Code), would continue to have the option of electing a full hearing if the party believes that cross-examination would be beneficial in a particular case. --------------------------------------------------------------------------- \26\ See FINRA Letter at 3. \27\ Id. \28\ See Id. --------------------------------------------------------------------------- The Right To Request a Special Proceeding Under the Codes One commenter asserted that FINRA should allow firms and their associated persons to request a Special Proceeding.\29\ The FINRA Letter notes that, currently, no hearing will be held in simplified cases unless the customer (under the Customer Code), or a claimant (under the Industry Code), requests a hearing.\30\ FINRA stated that, in developing the proposal, it considered whether to expand the right of firms and associated persons under the Customer Code, and respondents under the Industry Code, to request a Special Proceeding.\31\ FINRA decided not to change the rights of the parties under the Codes relating to the ability to elect a hearing option.\32\ FINRA believes it is in the best interest of investors to continue to allow them to determine how they want to proceed in arbitration. FINRA further believes that giving the firm, generally the party with the most resources, the ability to determine the arbitration method, could create an inappropriate barrier for some investors, particularly if the firm chooses the most expensive arbitration method.\33\ --------------------------------------------------------------------------- \29\ See SIFMA Letter at 2. \30\ See FINRA Letter at 3. \31\ See Id. \32\ See Id. \33\ See Id. --------------------------------------------------------------------------- Additional Mechanisms for Firms and Associated Persons One commenter asserted that in a Special Proceeding, FINRA should allow firms and their associated persons to file a motion to dismiss for failure to state a claim, and if granted, the case should be decided on the papers.\34\ That same commenter stated that because FINRA does not allow motions to dismiss for failure to state a claim in instances where a statement of claim lacks specificity or is drafted poorly, respondents cannot adequately prepare to defend themselves at a hearing.\35\ That commenter also stated that in a Special Proceeding, the claimant should be precluded from raising new issues, claims or evidence not previously raised or referenced in the statement of claim.\36\ FINRA believes that motions to dismiss should be narrowly confined to the grounds outlined in Rules 12504 and 13504,\37\ and notes that parties can [[Page 23962]] use the discovery process to explore the substance of their opponent's case.\38\ Moreover, under the Codes, FINRA requires parties to provide all other parties with copies of all documents and other materials that they intend to use at the hearing that were not already produced as well as a copy of the parties' witness lists.\39\ FINRA stated that it will monitor how the process is working to determine whether it should modify the program in any way.\40\ --------------------------------------------------------------------------- \34\ See SIFMA Letter at 3. \35\ See Id. \36\ See Id. \37\ See FINRA Letter at 3. FINRA Rules 12504(a) and 13504(a) (Motions to Dismiss Prior to Conclusion of Case in Chief) provide that: ``The panel cannot act upon a motion to dismiss a party or claim under paragraph (a) of this rule, unless the panel determines that: (A) The non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; (B) the moving party was not associated with the account(s), security(ies), or conduct at issue; or (C) the non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision.'' Under FINRA Rules 12504(c) and 13504(c) (Motions to Dismiss Based on Eligibility), the panel cannot act upon a motion to dismiss a claim under Rule 12206 (Time Limits), unless the panel determines that the claim is not eligible for arbitration where six years have elapsed from the occurrence or event giving rise to the claim. \38\ FINRA Rules 12800(d) and 13800(d) (Discovery and Additional Evidence) provide that: ``The parties may request documents and other information from each other. All requests for the production of documents and other information must be servced on all other parties, and filed with the Director, within 30 days from the date that the last answer is due. Any response or objection to a discovery request must be served on all other parties and filed with the Director within 10 days of the receipt of the requests. The parties receiving the request must produce the requested documents or information to all other parties by serving the requested documents or information by first-class mail, overnight delivery service, hand delivery, email or facsimile. Parties must not file the documents with the Director. The arbitrator will resolve any discovery disputes. \39\ FINRA Rules 12514(a) and 13514(a) (Documents and Other Materials) provide that: ``At least 20 days before the first scheduled hearing date, all parties must provide all other parties with copies of all documents and other materials in their possession or control that they intend to use at the hearing that have not already been produced. The parties should not file the documents with the Director or the arbitrators before the hearing.'' FINRA Rules 12514(b) and 13514(b) (Witness Lists) provide that: ``At least 20 days before the first scheduled hearing date, all parties must provide each other party with the names and business affiliations of all witnesses they intend to present at the hearing. All parties must file their witness lists with the Director.'' \40\ See FINRA Letter at 4. --------------------------------------------------------------------------- Clarify the Structure of the Special Proceedings One commenter stated that FINRA should allow parties to give their closing statements after each party presents its case and the arbitrator concludes his or her questioning.\41\ FINRA responded by noting that it provides arbitrators with hearing scripts to ensure that parties understand how the hearing will progress.\42\ FINRA stated that it will provide a new hearing script specific to Special Proceedings which will state that absent circumstances indicating the need to hold the hearing in a different order, parties will be allowed to give their closing statements after each party presents its case and the arbitrator concludes his or her questioning.\43\ In addition, FINRA will explain in the Regulatory Notice announcing approval of the proposed rule change, and in its arbitrator training materials, how the hearing will be conducted, including when parties are allowed to make closing statements.\44\ --------------------------------------------------------------------------- \41\ See GSU Letter at 2. \42\ See FINRA Letter at 4. \43\ See FINRA Letter at 4. \44\ See Id. --------------------------------------------------------------------------- Another commenter objected to the time allotments in the rule proposal and recommended allotments made on a percentage or other basis.\45\ According to FINRA, the conditions outlined in the proposed rule change are intended to ensure that the parties have an opportunity to present their case to an arbitrator in a convenient and cost- effective manner.\46\ The time frames are specific and straightforward. FINRA believes that the time frames will help arbitrators and parties stay within the two session maximum for a Special Proceeding.\47\ FINRA stated that it will clearly articulate the time frames in its hearing script.\48\ Moreover, through correspondence and written materials, FINRA currently reminds arbitrators to stay on schedule during the arbitration hearing and avoid reducing the allotted time by starting late or ending early. In addition, FINRA stated that it would emphasize during the arbitrator training on Special Proceedings the importance of ensuring that arbitrators are mindful of the time frames outlined in the rule text.\49\ --------------------------------------------------------------------------- \45\ See SIFMA Letter at 3. \46\ See FINRA Letter at 5. \47\ See Id. \48\ See Id. \49\ See FINRA Letter at 5. --------------------------------------------------------------------------- Other Methods of Appearance One commenter stated that FINRA should encourage the use of videoconferencing because this technology affords the arbitrator a chance to better assess the credibility of witnesses.\50\ Another commenter stated that FINRA should allow customers to choose a hearing by videoconference or in person.\51\ FINRA responded by noting that the proposed rule change allows the parties to agree to other methods of appearance, including appearing in person or by videoconference. FINRA determined that it is in the best interest of the parties to make telephonic hearings the default hearing type because this method is the most widely available, expeditious and inexpensive format for hearings.\52\ --------------------------------------------------------------------------- \50\ See MIRC Letter at 2. \51\ See PIRC Letter at 2. \52\ See FINRA Letter at 5. --------------------------------------------------------------------------- Raise the Dollar Limits on Simplified Arbitration One commenter stated that FINRA should raise the current dollar limit on simplified arbitration from $50,000 to $75,000 and increase the dollar limit of the rule proposal to $100,000.\53\ FINRA stated that it will consider the feasibility of increasing the dollar limits on simplified arbitration after it has gained experience with Special Proceedings.\54\ --------------------------------------------------------------------------- \53\ See SJU Letter at 2. \54\ See FINRA Letter at 5. --------------------------------------------------------------------------- Abridged Discovery Guide Currently, the Customer Code provides that Document Production Lists do not apply to simplified cases. Two commenters recommended that FINRA provide a Discovery Guide (``Guide'') containing a shorter Document Production List for the exchange of documents in all simplified cases.\55\ One of those two commenters further stated that FINRA should provide parties with some additional time for discovery exchange.\56\ FINRA responded by noting that staff is currently studying potential enhancements to the discovery process in simplified arbitration generally that would not impede the expedited nature of simplified cases,\57\ and that FINRA would consider whether any such enhancements would also apply to the Special Proceedings.\58\ --------------------------------------------------------------------------- \55\ See MIRC Letter at 3, GSU Letter at 3. The Guide supplements the discovery rules contained in the Customer Code. It includes an introduction which describes the discovery process generally, and explains how arbitrators should apply the Guide in arbitration proceedings. The introduction is followed by two Document Production Lists, one for firms and associated persons, and one for customers, which enumerate the documents that are presumptively discoverable in customer cases. As presumptively discoverable, parties do not have to expressly request the documents. FINRA expects the parties to exchange the documents without arbitrator or staff intervention. The Guide only applies to customer arbitration proceedings, not to intra-industry cases. \56\ See MIRC Letter at 3. \57\ See FINRA Letter at 5. \58\ See FINRA Letter at 6. --------------------------------------------------------------------------- Specially-Qualified Arbitrator Roster and Mandatory Training Two commenters supported FINRA's intent to provide additional arbitrator training on Special Proceedings.\59\ Two other commenters stated that FINRA should make arbitrator training on Special Proceedings a requirement.\60\ One of those commenters recommended in- person training and also stated that FINRA should require specialized expertise for arbitrators presiding over Special Proceedings.\61\ Two commenters [[Page 23963]] recommended that FINRA establish a special roster of arbitrators to handle Special Proceedings.\62\ One of those two commenters stated that the arbitrators should be chair-qualified and trained to work with pro se claimants.\63\ --------------------------------------------------------------------------- \59\ See SJU Letter at 2, Cornell Letter at 2. \60\ See Black Letter at 1, GSU Letter at 1. \61\ See GSU Letter at 1. \62\ See MIRC Letter at 3, Black Letter at 1. \63\ See MIRC Letter at 3. --------------------------------------------------------------------------- The FINRA Letter noted that all simplified cases are decided by a single chair-qualified public arbitrator who has fulfilled special eligibility requirements and completed chairperson training.\64\ FINRA will provide arbitrator training in Special Proceedings through a Neutral Workshop video on the FINRA website for arbitrators to view on demand, and written training materials for arbitrators including, but not limited to, discussions about the Special Proceeding in FINRA's publication for arbitrators and mediators, The Neutral Corner.\65\ In its training, FINRA would instruct arbitrators that the arbitrator's role in a Special Proceeding might be different than it is in a full hearing because parties would not be permitted to question opposing parties' witnesses.\66\ FINRA would emphasize that in a Special Proceeding the arbitrator might need to ask more questions than he or she would ask in a regular hearing to gain clarity on issues and to assess witness credibility.\67\ FINRA believes it needs time and experience with the new hearing option before it can consider additional qualifications and requirements for arbitrators.\68\ While FINRA will strongly encourage arbitrators to avail themselves of training resources on Special Proceedings, FINRA is concerned about the potential negative impact that additional required training could have on the availability of arbitrators to serve on Special Proceedings.\69\ --------------------------------------------------------------------------- \64\ See FINRA Letter at 6. \65\ See Id. \66\ See Id. \67\ See Id. \68\ See Id. \69\ See FINRA Letter at 6. --------------------------------------------------------------------------- Change the Name of the Simplified Arbitration Process One commenter recommended that FINRA change the name of the simplified arbitration process to ``small claims'' arbitration because their clients believe that their claims are not taken seriously due to the term ``simplified.'' \70\ The FINRA Letter noted the comment, but asserted that using the term ``simplified'' appropriately captures the process and helps distinguish it from the full hearing process.\71\ --------------------------------------------------------------------------- \70\ See GSU Letter at 1. \71\ See FINRA Letter at 6. --------------------------------------------------------------------------- IV. Discussion and Commission Findings After careful review of the proposed rule change, the comment letters, and FINRA's response to the comments, 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.\72\ Specifically, the Commission finds that the rule change is consistent with Section 15A(b)(6) of the Exchange Act,\73\ 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. --------------------------------------------------------------------------- \72\ 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). \73\ 15 U.S.C. 78o-3(b)(6). --------------------------------------------------------------------------- As stated in the Notice, FINRA believes that forum users with claims involving $50,000 or less would benefit by having an additional, intermediate form of adjudication that would provide them with an opportunity to argue their cases before an arbitrator in a shorter, limited telephonic hearing format.\74\ The Commission notes that FINRA's proposal originated from a recommendation of the Task Force, which was charged with suggesting strategies to enhance the transparency, impartiality, and efficiency of FINRA's securities dispute resolution forum for all participants.\75\ The Task Force recommendations were informed by input from individuals representing a broad range of interests in FINRA's dispute resolution forum along with public comments.\76\ The Commission further notes that eleven of the twelve public comments received for this proposal were supportive, in part, because the proposed rule would provide an additional and helpful option for investors seeking arbitration.\77\ --------------------------------------------------------------------------- \74\ Notice at 7087. \75\ See Id. \76\ See Final Report and Recommendations at 4, available at http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf. \77\ See ARS Letter, Black Letter, Cornell Letter, Caruso Letter, PIABA Letter, UNLV Letter, SJU Letter, MIRC Letter, Gross Letter, PIRC Letter, and GSU Letter. --------------------------------------------------------------------------- Taking into consideration the comment letters and the FINRA Letter, the Commission believes that the proposal is consistent with the Exchange Act. The Commission believes that the proposal will help protect investors and the public interest by providing an additional, intermediate form of adjudication that would provide arbitration users with an opportunity to argue their cases before an arbitrator in a convenient, time-efficient, and cost-effective manner without being subject to cross-examination by an opposing party. The Commission further believes that FINRA's response, as discussed in more detail above, appropriately addressed commenters' concerns about arbitrator training and adequately explained its reasons for how this additional, intermediate form of adjudication would better serve some arbitration forum users by leading to more investor trust in the arbitration process, providing greater access to justice for pro se claimants, and facilitating fairness and efficiency. Further, the Commission notes FINRA's intent to monitor how the process is working to determine whether it should consider modifying the program in any way, including by considering the feasibility of increasing the dollar limits on simplified arbitration, and by studying potential enhancements to the discovery process in simplified arbitration generally. The Commission believes that the approach proposed by FINRA is appropriate and designed to protect investors and the public interest, consistent with Section 15A(b)(6) of the Exchange Act. For these reasons, the Commission finds that the proposed rule change is consistent with the Exchange Act and the rules and regulations thereunder. V. Conclusion It is therefore ordered pursuant to Section 19(b)(2) \78\ of the Exchange Act that the proposal (SR-FINRA-2018-003) be and hereby is approved. --------------------------------------------------------------------------- \78\ 15 U.S.C. 78s(b)(2). \79\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\79\ Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-10977 Filed 5-22-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 100 / Wednesday, May 23, 2018 / Notices 23959
public in accordance with the Register on February 16, 2018.1 The involves a full hearing with a single
provisions of 5 U.S.C. 552, will be public comment period closed on March arbitrator. Under the Customer Code, a
available for website viewing and 9, 2018. On March 28, 2018, FINRA customer may request a hearing
printing in the Commission’s Public extended the time period in which the (regardless of whether the customer is a
Reference Room, 100 F Street NE, Commission must approve the proposed claimant or respondent),4 and under the
Washington, DC 20549, on official rule change, disapprove the proposed Industry Code, the claimant may request
business days between the hours of rule change, or institute proceedings to a hearing.5 If a hearing is requested, it
10:00 a.m. and 3:00 p.m. Copies of the determine whether to approve or is generally held in-person, and there
filing also will be available for disapprove the proposed rule change to are no limits on the number of hearing
inspection and copying at the principal May 17, 2018. The Commission received sessions that can take place.
office of the Exchange. All comments 12 comment letters in response to the FINRA believes that forum users with
received will be posted without change. Notice.2 On May 7, 2018, FINRA claims involving $50,000 or less would
Persons submitting comments are responded to the comment letters benefit by having an additional,
cautioned that we do not redact or edit received in response to the Notice.3 intermediate form of adjudication that
personal identifying information from This order approves the proposal. would provide them with an
comment submissions. You should II. Description of the Proposed Rule opportunity to argue their cases before
submit only information that you wish Change an arbitrator in a shorter, limited
to make available publicly. All telephonic hearing format. Therefore,
submissions should refer to File The Codes provide two methods for FINRA is proposing to amend the Codes
Number SR–MRX–2018–15 and should administering arbitration cases with to include a Special Proceeding for
be submitted on or before June 13, 2018. claims involving $50,000 or less, Simplified Arbitration (‘‘Special
excluding interest and expenses. The Proceeding’’). The Special Proceeding
For the Commission, by the Division of default method is a decision by a single
Trading and Markets, pursuant to delegated would be limited to two hearing
arbitrator based on the parties’
authority.14 sessions, exclusive of prehearing
pleadings and other materials submitted
Eduardo A. Aleman, conferences,6 with parties being given
by the parties. The alternative method
Assistant Secretary. time limits for their presentations. As
[FR Doc. 2018–10975 Filed 5–22–18; 8:45 am] 1 See Exchange Act Release No. 34–82693
discussed above, parties with claims
(February 12, 2018), 83 FR 7086 (February 16, 2018) involving $50,000 or less are currently
BILLING CODE 8011–01–P
(‘‘Notice’’). limited to a decision based on the
2 See Letters from Steven B. Caruso, Maddox
pleadings and other materials submitted
Hargett & Caruso, P.C., dated February 13, 2018 by the parties, or a full hearing that
SECURITIES AND EXCHANGE (‘‘Caruso Letter’’); Andrew Stoltmann, President,
COMMISSION Public Investors Arbitration Bar Association, dated typically takes place in-person and is
March 6, 2018 (‘‘PIABA Letter’’); Eric Duhon and not limited in duration. While a party
[Release No. 34–83276; File No. SR–FINRA– Paige Foley, Student Attorneys, Investor Protection might wish for an opportunity to
2018–003] Clinic, William S. Boyd School of Law, University present his or her case to an arbitrator,
of Nevada, Las Vegas, dated March 6, 2018 (‘‘UNLV
Letter’’); Katherine Kokotos, Amrita Maitlall, and the travel and expenses associated with
Self-Regulatory Organizations; Sumaya Restagno, Legal Interns, and Christine a full hearing might prevent that party
Financial Industry Regulatory Lazaro, Director of the Securities Arbitration Clinic from requesting one. In addition, the
Authority, Inc.; Order Granting and Professor of Clinical Legal Education, St. John’s
prospect of cross-examination by an
Approval of a Proposed Rule Change University School of Law, dated March 6, 2018
(‘‘SJU Letter’’); Daniel P. Guernsey, Student Intern opposing party might act as a deterrent
Relating to Simplified Arbitration and Teresa J. Verges, Director, University of Miami for parties seeking to avoid a direct
School of Law Investor Rights Clinic, dated March confrontation with their opponents.
May 17, 2018. 6, 2018 (‘‘MIRC Letter’’); Jill I. Gross, Professor of
Law, Elisabeth Haub School of Law, Pace
FINRA noted that these concerns
I. Introduction University, dated march 8, 2018 (‘‘Gross Letter’’); particularly impact pro se, senior, and
On January 29, 2018, Financial William A. Jacobson, Clinical Professor of Law and seriously ill parties.
Director, Cornell Securities Law Clinic, and Sam The suggestion to propose an
Industry Regulatory Authority, Inc. Wildman, Cornell University Law School, dated
(‘‘FINRA’’) filed with the Securities and March 8, 2018 (‘‘Cornell Letter’’); Kevin M. Carroll, intermediate form of adjudication
Exchange Commission (‘‘Commission’’) Managing Director and Associate General Counsel, originated from the FINRA Dispute
pursuant to Section 19(b)(1) of the Securities Industry and Financial Markets Resolution Task Force (‘‘Task Force’’).7
Association, dated March 8, 2018 (‘‘SIFMA Letter’’); The Task Force observed that customers
Securities Exchange Act of 1934 Barbara Black, Professor of Law, University of
(‘‘Exchange Act’’) and Rule 19b–4 Cincinnati College of Law (Retired), dated March 8, whose cases were decided on the papers
thereunder, proposed amendments to 2018 (‘‘Black Letter’’); John Ripoli, Simon Halper, were the least satisfied of any group of
FINRA Rules 12600 and 12800 of the and Mark Sarno, Student Interns, and Elissa forum users. They also noted that, from
Germaine, Director, Investor Rights Clinic at the the arbitrator’s perspective, it is more
Code of Arbitration Procedure for Elisabeth Haub School of Law, Pace University,
Customer Disputes (‘‘Customer Code’’) dated March 8, 2018 (‘‘PIRC Letter’’); Abigail Howd,
4 See FINRA Rule 12800(c).
and 13600 and 13800 of the Code of Eric Peters, and Dowdy White, Student Interns, and
5 See FINRA Rule 13800(c).
Arbitration Procedure for Industry Nicole G. Iannarone, Assistant Clinical Professor,
Investor Advocacy Clinic, Georgia State University 6 See FINRA Rules 12100 and 13100 (Definitions).
Disputes (‘‘Industry Code,’’ and together College of Law, dated March 9, 2018 (‘‘GSU Under these rules, ‘‘hearing’’ means the hearing on
with the Customer Code, the ‘‘Codes’’), Letter’’); and Mark D. Norych, President and the merits of an arbitration and a ‘‘hearing session’’
to amend the hearing provisions to General Counsel, Arbitration Resolution Services, is defined as any meeting between the parties and
provide an additional hearing option for Inc., dated March 9, 2018 (‘‘ARS Letter’’). arbitrator(s) of four hours or less, including a
daltland on DSKBBV9HB2PROD with NOTICES
3 See Letter from Margo A. Hassan, Associate hearing or a prehearing conference.
parties in arbitration with claims of
Chief Counsel, FINRA Office of Dispute Resolution, 7 The Task Force was formed in 2014 to suggest
$50,000 or less, excluding interest and to the Commission, dated May 7, 2018 (‘‘FINRA strategies to enhance the transparency, impartiality,
expenses. Letter’’). The FINRA Letter is available on FINRA’s and efficiency of FINRA’s securities dispute
The proposed rule change was website at http://www.finra.org, at the principal resolution forum. On December 16, 2015, the Task
published for comment in the Federal office of FINRA, at the Commission’s website at Force issued its Final Report and
https://www.sec.gov/comments/sr-finra-2018-003/ Recommendations, available at http://
finra2018003-3590730-162342.pdf, and at the www.finra.org/sites/default/files/Final-DR-task-
14 17 CFR 200.30–3(a)(12). Commission’s Public Reference Room. force-report.pdf.
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![23960 Federal Register / Vol. 83, No. 100 / Wednesday, May 23, 2018 / Notices
difficult to assess crucial issues of • the claimants, collectively, would FINRA is further proposing to amend
credibility when deciding cases on the be limited to two hours to present their Rule 12800(a) to add clarity to the rule
papers. The Task Force recommended case and 1⁄2 hour for any rebuttal and by explaining the customer’s options
that the goal of the intermediate process closing statement, exclusive of earlier in the rule text. FINRA is
should be to give the claimant personal questions from the arbitrator and proposing to amend the sentence in
contact with the arbitrator deciding the responses to such questions; Rule 12800(c) that states that ‘‘[I]f no
case and to give each party the • the respondents, collectively, hearing is held, no initial prehearing
opportunity to argue its case, to ask would be limited to two hours to conference or other prehearing
questions, and to respond to contentions present their case and 1⁄2 hour for any conference will be held, and the
from the other side. The Task Force also rebuttal and closing statement, arbitrator will render an award based on
recommended that the intermediate exclusive of questions from the the pleadings and other materials
process should allow the arbitrator to arbitrator and responses to such submitted by the parties.’’ FINRA would
probe contentions in the papers in an questions; replace the first ‘‘held’’ in the sentence
interactive format.8 • notwithstanding the with the term ‘‘requested’’ to better
FINRA considered the Task Force’s abovementioned conditions, the reflect that a hearing would only occur
recommendations and questions in arbitrator would have the discretion to if the customer requested it. FINRA
developing the format for an cede his or her allotted time to the believes the amendment would add
intermediate form of adjudication.9 parties; clarity to the rule text. FINRA is further
Accordingly, FINRA is proposing to • in no event could a Special proposing to amend Rule 12600(a) that
amend Rules 12800(c) and 13800(c) to Proceeding exceed two hearing sessions, discusses exceptions to when required
provide that parties that opt for a exclusive of prehearing conferences, to hearings will be held to specify Rule
hearing must select between two be completed in one day; 12800(c) as one of the exceptions.
hearing options. Option One would be • the parties would not be permitted To add clarity on how arbitrators are
the current hearing option that provides to question the opposing parties’ paid in cases where the customer
for the regular provisions of the Codes witnesses; requests a hearing, FINRA is proposing
relating to prehearings and hearings, • the Customer Code would provide to amend Rule 12800(f) to clarify that
including all fee provisions. If the that a customer could not call an the regular provisions of the Code
parties choose Option One, they would opposing party, a current or former relating to arbitrator honoraria would
continue to have in-person hearings associated person of a member party, or apply in such cases. Since the Special
without time limits, and they would a current or former employee of a Proceeding would be a new form of
continue to be permitted to question member party as a witness, and adjudication at the forum, FINRA
opposing parties’ witnesses. members and associated persons could intends to provide substantial training
Option Two would be the new not call a customer of a member party to arbitrators including, but not limited
Special Proceeding subject to the regular as a witness; and to, updating FINRA’s written training
provisions of the Code relating to • the Industry Code would provide materials for arbitrators, posting a
prehearings and hearings, including all that members and associated persons Neutral Workshop video on the FINRA
fee provisions, with several limiting could not call an opposing party as a website for arbitrators to view on-
conditions. The conditions are intended witness. demand, and including discussions
Except for the two hearing session about the Special Proceeding in
to ensure that the parties have an
time limit for a Special Proceeding, FINRA’s publication for arbitrators and
opportunity to present their case to an
FINRA would not impose any mediators, The Neutral Corner. FINRA
arbitrator in a convenient and cost restrictions on the arbitrator’s ability to
effective manner without being subject would instruct arbitrators that the
ask the parties questions and has arbitrator’s role in a Special Proceeding
to cross-examination by an opposing incorporated a substantial amount of
party. might be different than it is in a full
time for arbitrator questions. hearing because parties would not be
Specifically:
• A Special Proceeding would be Specifically, since FINRA would limit permitted to question opposing parties’
held by telephone unless the parties the parties’ combined presentations to witnesses. FINRA would emphasize that
five hours, the arbitrator would have up in a Special Proceeding the arbitrator
agree to another method of
to three hours to ask questions. In might need to ask more questions than
appearance; 10
addition, under the proposed rule he or she would ask in a regular hearing
8 Id.at 29.
change FINRA would not prohibit the to gain clarity on issues and to assess
9 The Task Force provided the following arbitrator from allowing parties
witness credibility.
questions for FINRA to consider in developing an additional time for their presentations
intermediate form of adjudication: (1) Whether or witness testimonies, so long as the III. Comment Summary and FINRA’s
parties appearing should be able to amplify hearing on the merits is completed Response
positions taken in their papers and to answer
questions posed by the arbitrator; (2) whether fact within the two hearing session limit.11 As noted above, the Commission
witnesses should be permitted to tell their stories received 12 comment letters on the
to the arbitrator; (3) whether there should be a clear that it is in the best interest of the parties to hold
boundary between the informal, expedited hearings by telephone because this method is the
proposed rule change and a response
adjudication and a full-blown hearing; (4) whether most expeditious and inexpensive format for letter from FINRA. As discussed in more
witnesses should be subject to cross-examination by hearings. As stated above, FINRA is proposing that detail below, 11 commenters supported
adverse counsel; (5) whether parties should be able parties can agree to other methods of appearance, the proposed rule change, although
to compel the attendance of particular witnesses, including appearing in person or by
seven commenters supported it with
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and if so, should there be a limit; (6) what videoconference.
arrangements should be made for parties who are 11 The Task Force recommended a shorter time suggested modifications.12 Commenters
not appearing in person; and (7) whether arbitrators limit on each case to enable an arbitrator to hear
should use the session as an opportunity to press several cases in a hearing day and to limit the time 12 See ARS Letter, PIABA Letter, SJU Letter, MIRC
the parties to settle. commitment of the parties. FINRA was concerned Letter, Black Letter, PIRC Letter, and GSU Letter.
10 The Task Force recommended allowing parties that a period shorter than the proposed two hearing ARS proposed the creation of a pilot whereby
with claims involving $50,000 or less to be able to session time limit would restrict the parties’ parties could opt in to voluntary expedited online
appear in whatever manner they prefer: In person, presentations and their ability to answer questions arbitration at its forum. This comment is outside the
by phone or by videoconference. FINRA determined posed by the arbitrator. scope of the proposed rule change.
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![Federal Register / Vol. 83, No. 100 / Wednesday, May 23, 2018 / Notices 23961
who supported the proposed rule omissions, and misstatements that bear (under the Customer Code), or a
change stated, among other things, that upon the credibility, accuracy and claimant (under the Industry Code),
it would: (1) Facilitate fairness and completeness of a claimant’s or requests a hearing.30 FINRA stated that,
efficiency in the arbitration forum; 13 (2) witness’s testimony.’’ 21 Another in developing the proposal, it
provide access to justice for pro se commenter urged FINRA to allow considered whether to expand the right
claimants; 14 (3) provide an additional limited cross-examination of one or two of firms and associated persons under
option for investors; 15 (4) result in key witnesses stating that ‘‘cross the Customer Code, and respondents
lower costs, increased representation examination is often one of the most under the Industry Code, to request a
rates of claimants, and greater effective means of eliciting evidence Special Proceeding.31 FINRA decided
participant satisfaction with the during a hearing.’’ 22 Several not to change the rights of the parties
arbitration process; 16 (5) lead to more commenters supported FINRA’s under the Codes relating to the ability
investor trust in the process; 17 and (6) prohibition on cross-examination in a to elect a hearing option.32 FINRA
improve both procedural and Special Proceeding.23 Two commenters believes it is in the best interest of
substantive justice.18 One commenter asserted that trained and experienced investors to continue to allow them to
did not expressly support or oppose the FINRA arbitrators have the knowledge determine how they want to proceed in
proposed rule change.19 However, one and judgment to ask questions and arbitration. FINRA further believes that
commenter asserted objections to obtain much of the same information giving the firm, generally the party with
specific aspects of the proposed rule that would have been revealed through the most resources, the ability to
change and made recommendations for cross-examination.24 Moreover, one of determine the arbitration method, could
modifications.20 As referenced above, those two commenters stated that create an inappropriate barrier for some
several commenters suggested ‘‘because formal rules of evidence do investors, particularly if the firm
modifications to the proposed rule not apply in arbitration, cross- chooses the most expensive arbitration
change. examination rarely yields the ‘gotcha’ method.33
moment we might see dramatized on
Cross-Examination Additional Mechanisms for Firms and
television.’’ 25
One commenter stated that FINRA FINRA noted in the FINRA Letter that Associated Persons
should permit cross-examination on the absence of cross-examination is one One commenter asserted that in a
fairness and due process grounds of the main features that distinguishes a Special Proceeding, FINRA should
asserting, among other matters, that Special Proceeding from the full hearing allow firms and their associated persons
‘‘members and associated persons option.26 FINRA believes that the ability to file a motion to dismiss for failure to
should have the right to explore, to present a case without cross- state a claim, and if granted, the case
identify, examine, and highlight errors, examination would benefit parties should be decided on the papers.34 That
whose testimony could be intimidated same commenter stated that because
13 See, e.g. Caruso Letter, stating that ‘‘the
by a direct confrontation.27 FINRA also FINRA does not allow motions to
proposed amendments . . . would be a fair, believes that the broader role of dismiss for failure to state a claim in
equitable and reasonable approach that would
facilitate the fairness and efficiency of the investor arbitrators in a Special Proceeding in instances where a statement of claim
participants experience in the FINRA arbitration asking questions of the parties would lacks specificity or is drafted poorly,
forum.’’ serve a similar function to cross- respondents cannot adequately prepare
14 See, e.g. Gross Letter, stating that ‘‘This
examination, such as gaining clarity on to defend themselves at a hearing.35
simpler, lower cost and faster process provides That commenter also stated that in a
access to justice especially for pro se claimants, as issues and assessing witness credibility,
well as the elderly and disabled.’’ but within a potentially less Special Proceeding, the claimant should
15 See, e.g. PIABA Letter, stating that ‘‘it is intimidating environment.28 Moreover, be precluded from raising new issues,
important to have additional options related to FINRA is not eliminating the cross- claims or evidence not previously raised
simplified arbitration.’’ or referenced in the statement of
16 See, e.g. UNLV Letter, stating that ‘‘Special
examination feature in the full hearing
Proceedings will result in lower costs, increased option. A customer (under the Customer claim.36 FINRA believes that motions to
representation rates of claimants, and greater Code), or a claimant (under the Industry dismiss should be narrowly confined to
participant satisfaction with the arbitration Code), would continue to have the the grounds outlined in Rules 12504
process.’’ The UNLV Letter also states that ‘‘[a]t option of electing a full hearing if the and 13504,37 and notes that parties can
present, the private bar may provide less
representation in [cases with less than $50,000 in party believes that cross-examination
30 See FINRA Letter at 3.
dispute] because of the time required to prepare would be beneficial in a particular case.
31 See Id.
adequate pleadings or conduct an in-person
hearing. An attorney may incur significant costs The Right To Request a Special 32 See Id.
preparing for and traveling to an in-person Proceeding Under the Codes 33 See Id.
arbitration, including the opportunity costs 34 See SIFMA Letter at 3.
associated with foregoing work on other matters. One commenter asserted that FINRA 35 See Id.
The proposed Special Proceedings would should allow firms and their associated 36 See Id.
substantially reduce or even eliminate many of persons to request a Special 37 See FINRA Letter at 3. FINRA Rules 12504(a)
these costs.’’
17 See MIRC Letter, stating that ‘‘simplifying the
Proceeding.29 The FINRA Letter notes and 13504(a) (Motions to Dismiss Prior to
that, currently, no hearing will be held Conclusion of Case in Chief) provide that: ‘‘The
hearing process and allowing investors to tell their panel cannot act upon a motion to dismiss a party
story gives investors a sense of participation that in simplified cases unless the customer or claim under paragraph (a) of this rule, unless the
they do not get when their case is decided on the panel determines that:
papers . . . and therefore can lead to more investor 21 SeeSIFMA Letter at 2. (A) The non-moving party previously released the
trust in the process.’’ 22 See claim(s) in dispute by a signed settlement
PIABA Letter at 2.
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18 See Gross Letter, stating that ‘‘[N]ot only does
23 See Gross Letter, UNLV Letter, SJU Letter, agreement and/or written release;
the proposal offer more choices to small claim (B) the moving party was not associated with the
MIRC Letter, Black Letter, and PIRC Letter.
claimants, but it also designs a small claims 24 See UNLV Letter at 2 and Gross Letter at 5. account(s), security(ies), or conduct at issue; or
arbitration process that improves both procedural (C) the non-moving party previously brought a
25 See Gross Letter at 5.
and substantive justice by providing a viable option claim regarding the same dispute against the same
26 See FINRA Letter at 3.
for disputants to voice their grievances out loud to party that was fully and finally adjudicated on the
a third-party neutral.’’ 27 Id.
merits and memorialized in an order, judgment,
19 See SIFMA Letter. 28 See Id.
award, or decision.’’
20 Id. 29 See SIFMA Letter at 2. Continued
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![Federal Register / Vol. 83, No. 100 / Wednesday, May 23, 2018 / Notices 23963
recommended that FINRA establish a distinguish it from the full hearing Exchange Act. The Commission believes
special roster of arbitrators to handle process.71 that the proposal will help protect
Special Proceedings.62 One of those two investors and the public interest by
IV. Discussion and Commission
commenters stated that the arbitrators Findings providing an additional, intermediate
should be chair-qualified and trained to form of adjudication that would provide
work with pro se claimants.63 After careful review of the proposed arbitration users with an opportunity to
rule change, the comment letters, and
The FINRA Letter noted that all argue their cases before an arbitrator in
FINRA’s response to the comments, the
simplified cases are decided by a single a convenient, time-efficient, and cost-
Commission finds that the proposal is
chair-qualified public arbitrator who has consistent with the requirements of the effective manner without being subject
fulfilled special eligibility requirements Exchange Act and the rules and to cross-examination by an opposing
and completed chairperson training.64 regulations thereunder that are party. The Commission further believes
FINRA will provide arbitrator training applicable to a national securities that FINRA’s response, as discussed in
in Special Proceedings through a association.72 Specifically, the more detail above, appropriately
Neutral Workshop video on the FINRA Commission finds that the rule change addressed commenters’ concerns about
website for arbitrators to view on is consistent with Section 15A(b)(6) of arbitrator training and adequately
demand, and written training materials the Exchange Act,73 which requires, explained its reasons for how this
for arbitrators including, but not limited among other things, that FINRA rules be additional, intermediate form of
to, discussions about the Special designed to prevent fraudulent and adjudication would better serve some
Proceeding in FINRA’s publication for manipulative acts and practices, to arbitration forum users by leading to
arbitrators and mediators, The Neutral promote just and equitable principles of more investor trust in the arbitration
Corner.65 In its training, FINRA would trade, and, in general, to protect process, providing greater access to
instruct arbitrators that the arbitrator’s investors and the public interest. justice for pro se claimants, and
role in a Special Proceeding might be As stated in the Notice, FINRA facilitating fairness and efficiency.
different than it is in a full hearing believes that forum users with claims Further, the Commission notes FINRA’s
because parties would not be permitted involving $50,000 or less would benefit intent to monitor how the process is
to question opposing parties’ by having an additional, intermediate
working to determine whether it should
witnesses.66 FINRA would emphasize form of adjudication that would provide
consider modifying the program in any
that in a Special Proceeding the them with an opportunity to argue their
cases before an arbitrator in a shorter, way, including by considering the
arbitrator might need to ask more
limited telephonic hearing format.74 feasibility of increasing the dollar limits
questions than he or she would ask in
a regular hearing to gain clarity on The Commission notes that FINRA’s on simplified arbitration, and by
issues and to assess witness proposal originated from a studying potential enhancements to the
credibility.67 FINRA believes it needs recommendation of the Task Force, discovery process in simplified
time and experience with the new which was charged with suggesting arbitration generally.
hearing option before it can consider strategies to enhance the transparency, The Commission believes that the
additional qualifications and impartiality, and efficiency of FINRA’s approach proposed by FINRA is
requirements for arbitrators.68 While securities dispute resolution forum for appropriate and designed to protect
FINRA will strongly encourage all participants.75 The Task Force investors and the public interest,
arbitrators to avail themselves of recommendations were informed by consistent with Section 15A(b)(6) of the
training resources on Special input from individuals representing a Exchange Act. For these reasons, the
Proceedings, FINRA is concerned about broad range of interests in FINRA’s Commission finds that the proposed
the potential negative impact that dispute resolution forum along with rule change is consistent with the
additional required training could have public comments.76 The Commission Exchange Act and the rules and
on the availability of arbitrators to serve further notes that eleven of the twelve regulations thereunder.
on Special Proceedings.69 public comments received for this
proposal were supportive, in part, V. Conclusion
Change the Name of the Simplified because the proposed rule would
Arbitration Process provide an additional and helpful It is therefore ordered pursuant to
option for investors seeking Section 19(b)(2) 78 of the Exchange Act
One commenter recommended that that the proposal (SR–FINRA–2018–
FINRA change the name of the arbitration.77
Taking into consideration the 003) be and hereby is approved.
simplified arbitration process to ‘‘small
comment letters and the FINRA Letter, For the Commission, by the Division of
claims’’ arbitration because their clients
the Commission believes that the Trading and Markets, pursuant to delegated
believe that their claims are not taken
proposal is consistent with the authority.79
seriously due to the term
‘‘simplified.’’ 70 The FINRA Letter noted 71 See
Eduardo A. Aleman,
FINRA Letter at 6.
the comment, but asserted that using the 72 In approving this rule change, the Commission Assistant Secretary.
term ‘‘simplified’’ appropriately has considered the rule’s impact on efficiency, [FR Doc. 2018–10977 Filed 5–22–18; 8:45 am]
captures the process and helps competition, and capital formation. See 15 U.S.C.
BILLING CODE 8011–01–P
78c(f).
73 15 U.S.C. 78o–3(b)(6).
62 See MIRC Letter at 3, Black Letter at 1. 74 Notice at 7087.
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63 See MIRC Letter at 3. 75 See Id.
64 See FINRA Letter at 6.
76 See Final Report and Recommendations at 4,
65 See Id.
66 See Id.
available at http://www.finra.org/sites/default/files/
Final-DR-task-force-report.pdf.
67 See Id.
77 See ARS Letter, Black Letter, Cornell Letter,
68 See Id.
Caruso Letter, PIABA Letter, UNLV Letter, SJU
69 See FINRA Letter at 6. 78 15 U.S.C. 78s(b)(2).
Letter, MIRC Letter, Gross Letter, PIRC Letter, and
70 See GSU Letter at 1. GSU Letter. 79 17 CFR 200.30–3(a)(12).
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Document Created: 2018-05-22 23:48:20
Document Modified: 2018-05-22 23:48:20
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| FR Citation | 83 FR 23959 |
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