Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to Amendments to the Codes of Arbitration Procedure To Require Arbitrators To Provide an Explained Decision Upon the Joint Request of the Parties, 6928-6931 [E9-2775]

Download as PDF 6928 Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / Notices brokers and dealers and among exchange markets, and the practicability of brokers executing investors’ orders in the best market. If CBSX is at quoting at the national best bid or offer (‘‘NBBO’’) when a Trade, Flash and Cancel order is submitted to CBSX, CBSX will execute the incoming order automatically against the published quotation. However, if CBSX is not quoting at the NBBO, the Trade, Flash and Cancel designation initiates a process whereby the order would be electronically exposed to CBSX traders for a period of up to three seconds, rather than routed away to other markets, in accordance with Exchange Rule 52.6(a). CBSX traders will not know the identity or the account type of the party that submitted the Trade, Flash and Cancel order.7 CBSX traders can respond with orders that match or better the NBBO to trade with the Trade, Flash and Cancel order. If no CBSX trader matches or improves on the NBBO by the end of the exposure period, the CBSX system will cancel the Trade, Flash and Cancel order. In no event will an execution result that is inferior to the NBBO.8 Use of the Trade, Flash and Cancel order is strictly voluntary. The Commission believes that the Trade, Flash and Cancel order type is a potentially useful means for order senders to control where their orders are routed and to seek price improvement. Therefore, the Commission believes that the proposal is consistent with the Act. It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR–CBOE–2008– 123) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–2774 Filed 2–10–09; 8:45 am] mstockstill on PROD1PC66 with NOTICES BILLING CODE 8011–01–P 7 See e-mail from Angelo Evangelou, Assistant General Counsel, CBOE, to Michael Gaw, Assistant Director, and Andrew Madar, Special Counsel, Division of Trading and Markets, Commission, dated February 3, 2009. 8 The Exchange stated that, ‘‘If a flash responder attempts to trade against the order by matching the flash price (the NBBO price at the time the order was received by the CBSX System), the order will be executed unless the system determines at the point of execution that the flash price is worse than a revised NBBO in which case the order will be cancelled.’’ See e-mail from Angelo Evangelou, Assistant General Counsel, CBOE, to Michael Gaw, Assistant Director, and Andrew Madar, Special Counsel, Division of Trading and Markets, Commission, dated December 19, 2008. 9 17 CFR 200.30–3(a)(12). VerDate Nov<24>2008 17:58 Feb 10, 2009 Jkt 217001 SECURITIES AND EXCHANGE COMMISSION II. Description of the Proposed Rule Change [Release No. 34–59358; File No. SR–FINRA– 2008–051] FINRA proposed to amend its Customer Code and Industry Code to require arbitrators to provide an explained decision upon the joint request of the parties. The explained decision would be a fact-based award stating the general reason(s) for the arbitrators’ decision; it would not be required to include legal authorities and/or damage calculations. Under the proposed rule change, parties would be required to submit any joint request for an explained decision at least 20 days before the first scheduled hearing date.6 The chairperson would: (1) Be required to write the explained decision; and (2) receive an additional honorarium of $400 for writing the decision. The panel would allocate the cost of the additional honorarium to the parties as part of the final award. The arbitrators would not be required to provide an explained decision in cases resolved without a hearing under simplified arbitration Rules 12800 and 13800 or in default cases conducted under Rules 12801 and 13801. FINRA did not propose to amend Rules 12904(f) and 13904(f), which provide that an award may contain an underlying rationale. This means that arbitrators would continue to be permitted to decide, on their own, to write an explained decision. Thus, as is currently the case, if the panel decides on its own to write an explained decision, FINRA would not pay an additional honorarium to any panel member. Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to Amendments to the Codes of Arbitration Procedure To Require Arbitrators To Provide an Explained Decision Upon the Joint Request of the Parties February 4, 2009. I. Introduction The Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) on October 14, 2008 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend Rules 12214, 12514 and 12904 of the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and Rules 13214, 13514 and 13904 of the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code,’’ and together with the Customer Code, the ‘‘Codes’’) 3 to require arbitrators to provide an explained decision upon the joint request of the parties. The proposed rule change was published for comment in the Federal Register on October 31, 2008.4 The Commission received five comments in response to the proposed rule change.5 This order approves the proposed rule change. Background 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 The former NASD Rule 12000 Series (Customer Code) and 13000 Series (Industry Code) have been adopted as the FINRA 12000 Series (Customer Code) and 13000 Series (Industry Code) in the new consolidated rulebook pursuant to SR–FINRA– 2008–021, which was approved by the Commission. See Securities Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (SR–FINRA–2008–021) (approval order). The FINRA Rule 12000 Series (Customer Code) and 13000 Series (Industry Code), as set forth in SR– FINRA–2008–021, became effective on December 15, 2008. See FINRA Regulatory Notice 08–57 (SEC Approves New Consolidated FINRA Rules) (October 2008). 4 See Securities Exchange Act Release No. 58862 (October 27, 2008), 73 FR 64995 (October 31, 2008), (SR–FINRA–2008–051) (notice). 5 See letter from Kevin Thomas Hoffman, dated November 10, 2008 (‘‘Hoffman letter’’); letter from Barbara Black, Director, Corporate Law Center, University of Cincinnati College of Law, Jill I. Gross, Director, Pace Investor Rights Clinic, Pace University School of Law, and Deborah Sommers, Student Intern, submitted November 20, 2008 (‘‘Black and Gross letter’’); letter from Barry D. Estell, dated November 20, 2008 (‘‘Estell letter’’); PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 The absence of explanations in awards is a common complaint of nonprevailing parties in the FINRA forum, especially customers and associated persons. In order to address these complaints and increase investor confidence in the fairness of the arbitration process, in March 2005, FINRA filed a proposed rule change with the SEC that would have required arbitrators to provide explained decisions upon the request of customers, or of associated persons in industry controversies. The SEC published the original proposed rule letter from Scott R. Shewan, Vice-President, Public Investors Arbitration Bar Association, dated November 21, 2008 (‘‘PIABA letter’’); and letter from Theodore M. Davis, submitted November 21, 2008 (‘‘Davis letter’’). 6 The term ‘‘hearing’’ means the hearing of an arbitration under Rules 12600 and 13600 (see Rules 12100(m) and 13100(m)). E:\FR\FM\11FEN1.SGM 11FEN1 Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / Notices change for comment in July 2005.7 The SEC received almost two hundred comment letters in response to the original proposed rule change, many of which were critical. While FINRA was considering its next steps, there were several new developments related to explained decisions in other contexts. FINRA filed with the Commission dispositive motions 8 and expungement procedures 9 proposals, both of which require arbitrators to write an explanation for granting relief. In addition, the Securities Industry Conference on Arbitration (SICA) conducted a ‘‘Perceptions of Fairness’’ survey of participants in securities arbitration proceedings.10 The survey results, released in February 2008, indicate that 55.5% of customers who responded to the survey would be ‘‘more satisfied if they had an explanation in the award.’’ In light of the comments, and these later developments, FINRA withdrew the original proposed rule change as filed in SR–NASD–2005–032 and filed a new proposed rule change. Key provisions of the proposed rule change are discussed in more detail below, together with related comments from the original proposed rule change. mstockstill on PROD1PC66 with NOTICES Parties Must Jointly Request an Explained Decision The original proposed rule change would have permitted a customer, or an associated person in an intra-industry controversy, to require an explained decision. Many commenters objected to the one-sided nature of that provision. Under the new proposed rule change, all parties to a case would have to agree to an explained decision. Moreover, while the arbitrators will be resolving the entire matter and the explained 7 See Securities Exchange Act Release No. 52009 (July 11, 2005); 70 FR 41065 (July 15, 2005) (SR– NASD–2005–032) (notice). 8 FINRA filed the proposed dispositive motion rule on November 2, 2007 (SR–FINRA–2007–021). The proposal was published for comment on March 20, 2008 (see Securities Exchange Act Release No. 57497 (March 14, 2008); 73 FR 15019). The Commission approved the proposal on December 31, 2008 (see Securities Exchange Act Release No. 59189 (December 31, 2008); 74 FR 731 (January 7, 2009)). 9 FINRA filed an expungement procedures proposal on March 13, 2008 (SR–FINRA–2008– 010). The proposal was published for comment on April 3, 2008 (see Securities Exchange Act Release No. 57572 (March 27, 2008); 73 FR 18308). The Commission approved the proposal on October 30, 2008 (see Securities Exchange Act Release No. 58886 (October 30, 2008); 73 FR 66086 (November 6, 2008)). 10 Jill I. Gross and Barbara Black, Perceptions of Fairness of Securities Arbitration: An Empirical Study, (February 6, 2008). The report can be downloaded at https://digitalcommons.pace.edu/cgi/ viewcontent.cgi?article=1477&context=lawfaculty. VerDate Nov<24>2008 17:58 Feb 10, 2009 Jkt 217001 decision would normally address all the claims asserted by the parties, the parties may request that an explained decision address only certain claims. According to FINRA, requiring the parties’ joint agreement to an explained decision is consistent with FINRA’s general policy to accommodate a joint request of the parties. Parties Must Submit Any Request for an Explained Decision 20 Days Before the First Scheduled Hearing Date The new proposed rule change would provide that parties must submit any joint request for an explained decision no later than 20 days prior to the first scheduled hearing date. This deadline coincides with the time that parties must exchange documents and identify witnesses they intend to present at the hearing. In FINRA’s view, this approach would establish a clear deadline, give the parties sufficient time to request an explained decision, and provide notice to the arbitrators that an explained decision will be required before the hearing begins. The Chairperson Must Write the Explained Decision The new proposed rule change would require that the chairperson write the explained decision. The original proposed rule change contemplated that any of the arbitrators, or all of them, might draft the decision. Many commenters on the original proposed rule change were concerned that poorly written decisions might harm the public’s perception of arbitration, or increase the likelihood of a party successfully vacating an award. To address these concerns, the rule would require that the chairperson write the decision. Under the Codes, arbitrators must meet specific experience and training criteria to serve as chairpersons in arbitrations.11 Therefore, chairpersons 11 Pursuant to Rules 12400 and 13400, arbitrators are eligible for the chairperson roster if they have completed FINRA chairperson training and: • Have a law degree and are a member of a bar of at least one jurisdiction and have served as an arbitrator through award on at least two arbitrations administered by a self-regulatory organization in which hearings were held; or • Have served as an arbitrator through award on at least three arbitrations administered by a selfregulatory organization in which hearings were held. On June 23, 2008, the SEC approved a proposal to eliminate the Code provision allowing arbitrators to serve as Chairpersons provided they have ‘‘substantially equivalent training or experience’’ in lieu of completing FINRA Dispute Resolution’s Chairperson training course (see Securities Exchange Act Release No. 58004 (June 23, 2008); 73 FR 36579 (June 27, 2008) (SR–FINRA–2008–009) (approval order). This rule became effective on September 22, 2008. PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 6929 may be more experienced than nonchairpersons and should be better able to produce higher quality explained decisions. Further, assigning this responsibility to the chairperson would eliminate any confusion over who would be responsible for drafting the decision and would streamline the decision writing process. Having one arbitrator draft the decision after all the arbitrators have been consulted would reduce the time required to complete the decision. Once the decision was drafted, the arbitrators still would be required to sign the decision as provided in Rules 12904(a) and 13904(a).12 The Explained Decision Must Be FactBased Under the new proposed rule change, the explained decision would be a factbased award stating the general reason(s) for the arbitrators’ decision.13 The award would not be required to include legal authorities and damage calculations. FINRA believes that requiring only fact-based reasons in explained decisions will reduce the potential for misstatements in an award, thereby decreasing the possibility of a subsequent vacatur, modification or remand of an award and ensuring the continued finality of a FINRA award. FINRA believes the proposed rule change would provide the parties with the information they want while simultaneously maintaining the expediency, flexibility, and finality of arbitration. Only the Chairperson Will Be Compensated for an Explained Decision The original proposed rule change did not address who would have been responsible for preparing the explained decision and provided that each arbitrator would be paid an additional $200 honorarium for cases in which an explained decision was required. Under the new proposed rule change, only the chairperson would write the decision, 12 Rules 12904(a) and 13904(a) require all awards to be in writing and signed by a majority of the arbitrators or as required by applicable law. 13 While Rules 12604 and 13604 provide that the panel decides what evidence to admit and is not required to follow state or federal rules of evidence, FINRA intends that, as with current arbitration awards, explained decisions will have no precedential value in other cases. Thus, arbitrators will not be required to follow any findings or determinations that are set forth in prior explained decisions. In order to ensure that users of the forum are aware of the non-precedential nature of explained awards, FINRA plans to revise the template for all awards to include the following sentence: ‘‘If the arbitrators have provided an explanation of their decision in this award, the explanation is for the information of the parties only and is not precedential in nature.’’ E:\FR\FM\11FEN1.SGM 11FEN1 6930 Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / Notices and only the chairperson would be paid an additional honorarium. The additional honorarium paid to the chairperson would reflect the increased effort involved in drafting an explained decision. Under the new proposed rule change, the panel may allocate the cost of the honorarium to one party, or may allocate it between or among all parties.14 Parties May Not Require Explained Decisions in Some Cases Under the new proposed rule change, parties would not be able to require explained decisions in two types of arbitration proceedings. The first is simplified arbitrations that are decided solely upon the pleadings and evidence filed by the parties, as described in Rules 12800 and 13800. The second is arbitrations that are conducted under the default procedures provided for in Rules 12801 and 13801. According to FINRA, explained decisions would not be appropriate in either of these situations because of the abbreviated nature of these arbitration proceedings. Arbitrators May Choose To Write Explained Decisions in Other Circumstances Under the new proposed rule change, arbitrators would continue to be permitted to decide, on their own or upon the motion of one party, to write an explained decision. Arbitrators would not receive an additional honorarium if the panel issues an explained decision that is not required under the proposed rules. The new proposed rule change would not affect the current rule that permits arbitrators to include a rationale in an award, even if the parties have not requested it, and would not encourage arbitrators to write an explained decision when they are not asked to do so by all the parties. III. Comment Letters The SEC received five comment letters.15 Three commenters essentially supported the proposal 16 and two mstockstill on PROD1PC66 with NOTICES 14 Under the Customer and Industry Codes, the panel has the authority to assess fees in connection with discovery-related motions, contested subpoena requests, and hearing session fees to one party, or may split the fees between or among all parties. 15 See note 5, supra. 16 See Hoffman, Black and Gross, and Davis letters. The Hoffman letter supported the proposal with reservations. The Davis letter supported the proposed rule change with the caveat that the SEC re-visit FINRA’s chair eligibility rules. FINRA did not propose to amend the chair eligibility rules in this proposal (see Rules 12400(c) and 13400(c)). Therefore, FINRA determined that the chair eligibility issue is outside the scope of the rule proposal and FINRA did not address it in its response to comments. VerDate Nov<24>2008 17:58 Feb 10, 2009 Jkt 217001 opposed it.17 The Commission also received FINRA’s response to comments, which is discussed below.18 One commenter supported the proposal, but asserted that every panel should provide a brief explanation for each award.19 Another commenter supported the proposal but expressed concerns that investors’ perceptions concerning the unfairness of the arbitration process would increase in circumstances in which an industry party blocks an investor’s request for an explained decision.20 One commenter argued that only the investor should be able to request an explained decision.21 FINRA responded to these comments by stating that under FINRA’s original proposal (which has since been withdrawn), arbitrators would have been required to provide explained decisions upon the request of customers, or of associated persons in industry disputes.22 FINRA stated that many commenters on that proposal objected to the one-sided nature of the proposal.23 In addition, FINRA noted that a number of commenters were concerned that the proposal would lead to an increase in motions to vacate based on the arbitrators’ explanations.24 FINRA further asserted that one of the benefits of arbitration is that it is final and binding, and courts rarely vacate awards.25 In light of this, FINRA stated that any risks that may be associated with explained decisions should be borne by the parties only after they have agreed jointly to request an explained decision.26 For these reasons, FINRA declined to amend the provision that requires joint agreement of the parties.27 One commenter stated that the proposal does not provide sufficient guidance to arbitrators.28 The commenter asserted that the rule is ambiguous concerning the extent of the fact-based detail sufficient to constitute an explanation, and that the proposal is silent on whether the explanation would have to address every legal theory presented.29 17 See Estell and PIABA letters. FINRA did not address the concerns raised by the Estell letter, as it viewed those concerns as outside the scope of the rule proposal. 18 Letter from Margo A. Hassan, FINRA, dated December 15, 2008 (‘‘FINRA Letter’’). 19 See Hoffman letter. 20 See Black and Gross letter. 21 See PIABA letter. 22 See FINRA letter. See also note 7, supra. 23 See FINRA letter. 24 Id. 25 Id. 26 Id. 27 Id. 28 See Black and Gross letter. 29 Id. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 FINRA responded by stating that the proposed rule specifies that a fact-based decision includes the general reasons for the arbitrators’ decision, and that arbitrators do not have to include legal authorities or damage calculations.30 FINRA stated that the proposal, as filed, gives the arbitrators the flexibility they need to tailor each award to the specific case being decided.31 FINRA further responded by stating that the proposal requires the chairperson of the panel to write the explained decision.32 Because chairpersons have completed chairperson training and have served as arbitrators through award on at least two arbitrations,33 FINRA stated that requiring the chairperson to write the explained decision will ensure that parties are provided with the information called for in the proposed rule change.34 Therefore, FINRA declined to amend the proposal to add further explanation regarding the content of the fact-based decision.35 One commenter argued that requiring a joint request for an explained decision eliminates the need for the proposal.36 The commenter noted that FINRA already fosters a policy of accommodating parties’ joint requests. Another commenter asked whether, under the current Codes, a panel would be required to write a reasoned decision if the parties made a joint request.37 FINRA responded by stating that the panel currently is not required to accede to a joint request for an explained decision.38 FINRA explained that under current practice, FINRA would forward the parties’ joint request for an explained decision to the arbitrators, but that the arbitrators could decline the parties’ request.39 FINRA further stated that the proposed rule change would make it clear that arbitrators must provide an explained decision upon the joint request of the parties, set a timetable for such requests and provide for compensation for the chairperson’s efforts in writing the explained 30 See FINRA letter. 31 Id. 32 Id. 33 Rules 12400 and 13400 state that an arbitrator is eligible to serve as chairperson if the arbitrator has completed chairperson training and: 1) has a law degree and is a member of a bar of at least one jurisdiction and has served as an arbitrator through award on at least two arbitrations in which hearings were held; or 2) has served as an arbitrator through award on at least three arbitrations in which hearings were held. 34 See FINRA letter. 35 Id. 36 See PIABA letter. 37 See Davis letter. 38 See FINRA letter. 39 Id. E:\FR\FM\11FEN1.SGM 11FEN1 Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / Notices decision.40 Finally, FINRA noted that the proposed rule change also specifies that arbitrators would not be required to provide an explained decision in cases resolved under the simplified or default arbitration rules.41 FINRA concluded by stating that the proposal will increase investor confidence in the fairness of the arbitration process, and should be approved.42 mstockstill on PROD1PC66 with NOTICES IV. Discussion and Findings After careful review of the proposed rule change, the comments, and FINRA’s response to the comments, the Commission finds that the proposed rule change is consistent with the requirements of the Act, and the rules and regulations thereunder that are applicable to a national securities association.43 In particular, the Commission believes the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,44 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. The proposed rule change should address complaints that FINRA has received from non-prevailing parties regarding the absence of explanations in arbitration awards, by providing a framework through which parties could jointly require arbitrators to write an explained decision. In general, the Commission believes that FINRA has responded to the comments adequately and appropriately, and has explained how the proposed rule change is consistent with the requirements of the Act, and the rules and regulations thereunder that are applicable to a national securities association. The Commission’s oversight of the securities arbitration process is directed at ensuring that it is fair and efficient. The Commission shares the concerns expressed by a commenter that the proposal may not increase investors’ perceptions of fairness in circumstances in which an industry party does not agree to an investor’s request for an explained decision. Nevertheless, the Commission believes that the evenhanded approach of providing parties a means of jointly requesting a decision represents a reasonable compromise between the status quo, whereby the Codes offer parties no formal means of requesting an explained decision, and the original proposal, whereby claimants alone would have the right to request an explained decision. Further, the Commission believes that the procedures set forth in FINRA’s proposed rule (including, procedures related to: Deadlines for submitting a request; designating the chairperson as the writer of explained decisions; compensation for writing explained decisions; substance of the explained decision; and eligibility of cases for explained decisions) will contribute to the efficiency of the securities arbitration process by setting forth clear guidelines for parties and arbitrators in instances where parties have jointly requested an explained decision. At the same time, the Commission is concerned that it may be difficult for parties to mutually agree to request an explained decision, because the decision of whether to request an explained decision (or whether to refuse to request an explained decision) may ultimately be a strategic decision. In order to gauge the effectiveness of the proposal, the Commission has requested that FINRA gather statistics for a period of one year from the effective date of this proposal, on the number of joint requests for explained decisions made in arbitration. Further, the Commission has asked FINRA to report on any anecdotal evidence it receives during this one-year period that may shed light on how often parties are unable to agree to request an explained decision. V. Conclusions It is therefore ordered, pursuant to Section 19(b)(2) of the Act,45 that the proposed rule change (SR–FINRA– 2008–051) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.46 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–2775 Filed 2–10–09; 8:45 am] BILLING CODE 8011–01–P 41 Id. 42 Id. VerDate Nov<24>2008 17:58 Feb 10, 2009 Jkt 217001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–59362; File No. SR–Phlx– 2009–10] Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Sponsored Access February 5, 2009. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 29, 2009, NASDAQ OMX PHLX, Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt a sponsored access rule for a pilot period ending on July 29, 2009. The text of the proposed rule change is available on the Exchange’s Website at https:// www.nasdaqtrader.com/ micro.aspx?id=PHLXRulefilings, at the principal office of the Exchange, 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, the self-regulatory organization 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 those statements may be examined at the places specified in Item IV below. The Exchange 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 The purpose of the proposed rule change is to attract additional business by adopting a sponsored access rule 40 Id. 43 In approving this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 17c(f). 44 15 U.S.C. 78o–3(b)(6). 6931 45 15 46 17 PO 00000 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). Frm 00077 Fmt 4703 Sfmt 4703 1 15 2 17 E:\FR\FM\11FEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 11FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 27 (Wednesday, February 11, 2009)]
[Notices]
[Pages 6928-6931]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-2775]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59358; File No. SR-FINRA-2008-051]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change Relating to 
Amendments to the Codes of Arbitration Procedure To Require Arbitrators 
To Provide an Explained Decision Upon the Joint Request of the Parties

 February 4, 2009.

I. Introduction

    The Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/
a National Association of Securities Dealers, Inc. (``NASD'')) filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
on October 14, 2008 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Rules 12214, 12514 and 12904 of the Code 
of Arbitration Procedure for Customer Disputes (``Customer Code'') and 
Rules 13214, 13514 and 13904 of the Code of Arbitration Procedure for 
Industry Disputes (``Industry Code,'' and together with the Customer 
Code, the ``Codes'') \3\ to require arbitrators to provide an explained 
decision upon the joint request of the parties. The proposed rule 
change was published for comment in the Federal Register on October 31, 
2008.\4\ The Commission received five comments in response to the 
proposed rule change.\5\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The former NASD Rule 12000 Series (Customer Code) and 13000 
Series (Industry Code) have been adopted as the FINRA 12000 Series 
(Customer Code) and 13000 Series (Industry Code) in the new 
consolidated rulebook pursuant to SR-FINRA-2008-021, which was 
approved by the Commission. See Securities Exchange Act Release No. 
58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (SR-FINRA-
2008-021) (approval order). The FINRA Rule 12000 Series (Customer 
Code) and 13000 Series (Industry Code), as set forth in SR-FINRA-
2008-021, became effective on December 15, 2008. See FINRA 
Regulatory Notice 08-57 (SEC Approves New Consolidated FINRA Rules) 
(October 2008).
    \4\ See Securities Exchange Act Release No. 58862 (October 27, 
2008), 73 FR 64995 (October 31, 2008), (SR-FINRA-2008-051) (notice).
    \5\ See letter from Kevin Thomas Hoffman, dated November 10, 
2008 (``Hoffman letter''); letter from Barbara Black, Director, 
Corporate Law Center, University of Cincinnati College of Law, Jill 
I. Gross, Director, Pace Investor Rights Clinic, Pace University 
School of Law, and Deborah Sommers, Student Intern, submitted 
November 20, 2008 (``Black and Gross letter''); letter from Barry D. 
Estell, dated November 20, 2008 (``Estell letter''); letter from 
Scott R. Shewan, Vice-President, Public Investors Arbitration Bar 
Association, dated November 21, 2008 (``PIABA letter''); and letter 
from Theodore M. Davis, submitted November 21, 2008 (``Davis 
letter'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    FINRA proposed to amend its Customer Code and Industry Code to 
require arbitrators to provide an explained decision upon the joint 
request of the parties. The explained decision would be a fact-based 
award stating the general reason(s) for the arbitrators' decision; it 
would not be required to include legal authorities and/or damage 
calculations. Under the proposed rule change, parties would be required 
to submit any joint request for an explained decision at least 20 days 
before the first scheduled hearing date.\6\ The chairperson would: (1) 
Be required to write the explained decision; and (2) receive an 
additional honorarium of $400 for writing the decision. The panel would 
allocate the cost of the additional honorarium to the parties as part 
of the final award.
---------------------------------------------------------------------------

    \6\ The term ``hearing'' means the hearing of an arbitration 
under Rules 12600 and 13600 (see Rules 12100(m) and 13100(m)).
---------------------------------------------------------------------------

    The arbitrators would not be required to provide an explained 
decision in cases resolved without a hearing under simplified 
arbitration Rules 12800 and 13800 or in default cases conducted under 
Rules 12801 and 13801.
    FINRA did not propose to amend Rules 12904(f) and 13904(f), which 
provide that an award may contain an underlying rationale. This means 
that arbitrators would continue to be permitted to decide, on their 
own, to write an explained decision. Thus, as is currently the case, if 
the panel decides on its own to write an explained decision, FINRA 
would not pay an additional honorarium to any panel member.

Background

    The absence of explanations in awards is a common complaint of non-
prevailing parties in the FINRA forum, especially customers and 
associated persons. In order to address these complaints and increase 
investor confidence in the fairness of the arbitration process, in 
March 2005, FINRA filed a proposed rule change with the SEC that would 
have required arbitrators to provide explained decisions upon the 
request of customers, or of associated persons in industry 
controversies. The SEC published the original proposed rule

[[Page 6929]]

change for comment in July 2005.\7\ The SEC received almost two hundred 
comment letters in response to the original proposed rule change, many 
of which were critical.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 52009 (July 11, 
2005); 70 FR 41065 (July 15, 2005) (SR-NASD-2005-032) (notice).
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    While FINRA was considering its next steps, there were several new 
developments related to explained decisions in other contexts. FINRA 
filed with the Commission dispositive motions \8\ and expungement 
procedures \9\ proposals, both of which require arbitrators to write an 
explanation for granting relief. In addition, the Securities Industry 
Conference on Arbitration (SICA) conducted a ``Perceptions of 
Fairness'' survey of participants in securities arbitration 
proceedings.\10\ The survey results, released in February 2008, 
indicate that 55.5% of customers who responded to the survey would be 
``more satisfied if they had an explanation in the award.'' In light of 
the comments, and these later developments, FINRA withdrew the original 
proposed rule change as filed in SR-NASD-2005-032 and filed a new 
proposed rule change. Key provisions of the proposed rule change are 
discussed in more detail below, together with related comments from the 
original proposed rule change.
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    \8\ FINRA filed the proposed dispositive motion rule on November 
2, 2007 (SR-FINRA-2007-021). The proposal was published for comment 
on March 20, 2008 (see Securities Exchange Act Release No. 57497 
(March 14, 2008); 73 FR 15019). The Commission approved the proposal 
on December 31, 2008 (see Securities Exchange Act Release No. 59189 
(December 31, 2008); 74 FR 731 (January 7, 2009)).
    \9\ FINRA filed an expungement procedures proposal on March 13, 
2008 (SR-FINRA-2008-010). The proposal was published for comment on 
April 3, 2008 (see Securities Exchange Act Release No. 57572 (March 
27, 2008); 73 FR 18308). The Commission approved the proposal on 
October 30, 2008 (see Securities Exchange Act Release No. 58886 
(October 30, 2008); 73 FR 66086 (November 6, 2008)).
    \10\ Jill I. Gross and Barbara Black, Perceptions of Fairness of 
Securities Arbitration: An Empirical Study, (February 6, 2008). The 
report can be downloaded at https://digitalcommons.pace.edu/cgi/
viewcontent.cgi?article=1477&context=lawfaculty.
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Parties Must Jointly Request an Explained Decision

    The original proposed rule change would have permitted a customer, 
or an associated person in an intra-industry controversy, to require an 
explained decision. Many commenters objected to the one-sided nature of 
that provision. Under the new proposed rule change, all parties to a 
case would have to agree to an explained decision. Moreover, while the 
arbitrators will be resolving the entire matter and the explained 
decision would normally address all the claims asserted by the parties, 
the parties may request that an explained decision address only certain 
claims. According to FINRA, requiring the parties' joint agreement to 
an explained decision is consistent with FINRA's general policy to 
accommodate a joint request of the parties.

Parties Must Submit Any Request for an Explained Decision 20 Days 
Before the First Scheduled Hearing Date

    The new proposed rule change would provide that parties must submit 
any joint request for an explained decision no later than 20 days prior 
to the first scheduled hearing date. This deadline coincides with the 
time that parties must exchange documents and identify witnesses they 
intend to present at the hearing. In FINRA's view, this approach would 
establish a clear deadline, give the parties sufficient time to request 
an explained decision, and provide notice to the arbitrators that an 
explained decision will be required before the hearing begins.

The Chairperson Must Write the Explained Decision

    The new proposed rule change would require that the chairperson 
write the explained decision. The original proposed rule change 
contemplated that any of the arbitrators, or all of them, might draft 
the decision. Many commenters on the original proposed rule change were 
concerned that poorly written decisions might harm the public's 
perception of arbitration, or increase the likelihood of a party 
successfully vacating an award. To address these concerns, the rule 
would require that the chairperson write the decision.
    Under the Codes, arbitrators must meet specific experience and 
training criteria to serve as chairpersons in arbitrations.\11\ 
Therefore, chairpersons may be more experienced than non-chairpersons 
and should be better able to produce higher quality explained 
decisions. Further, assigning this responsibility to the chairperson 
would eliminate any confusion over who would be responsible for 
drafting the decision and would streamline the decision writing 
process. Having one arbitrator draft the decision after all the 
arbitrators have been consulted would reduce the time required to 
complete the decision. Once the decision was drafted, the arbitrators 
still would be required to sign the decision as provided in Rules 
12904(a) and 13904(a).\12\
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    \11\ Pursuant to Rules 12400 and 13400, arbitrators are eligible 
for the chairperson roster if they have completed FINRA chairperson 
training and:
     Have a law degree and are a member of a bar of at least 
one jurisdiction and have served as an arbitrator through award on 
at least two arbitrations administered by a self-regulatory 
organization in which hearings were held; or
     Have served as an arbitrator through award on at least 
three arbitrations administered by a self-regulatory organization in 
which hearings were held.
    On June 23, 2008, the SEC approved a proposal to eliminate the 
Code provision allowing arbitrators to serve as Chairpersons 
provided they have ``substantially equivalent training or 
experience'' in lieu of completing FINRA Dispute Resolution's 
Chairperson training course (see Securities Exchange Act Release No. 
58004 (June 23, 2008); 73 FR 36579 (June 27, 2008) (SR-FINRA-2008-
009) (approval order). This rule became effective on September 22, 
2008.
    \12\ Rules 12904(a) and 13904(a) require all awards to be in 
writing and signed by a majority of the arbitrators or as required 
by applicable law.
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The Explained Decision Must Be Fact-Based

    Under the new proposed rule change, the explained decision would be 
a fact-based award stating the general reason(s) for the arbitrators' 
decision.\13\ The award would not be required to include legal 
authorities and damage calculations. FINRA believes that requiring only 
fact-based reasons in explained decisions will reduce the potential for 
misstatements in an award, thereby decreasing the possibility of a 
subsequent vacatur, modification or remand of an award and ensuring the 
continued finality of a FINRA award. FINRA believes the proposed rule 
change would provide the parties with the information they want while 
simultaneously maintaining the expediency, flexibility, and finality of 
arbitration.
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    \13\ While Rules 12604 and 13604 provide that the panel decides 
what evidence to admit and is not required to follow state or 
federal rules of evidence, FINRA intends that, as with current 
arbitration awards, explained decisions will have no precedential 
value in other cases. Thus, arbitrators will not be required to 
follow any findings or determinations that are set forth in prior 
explained decisions. In order to ensure that users of the forum are 
aware of the non-precedential nature of explained awards, FINRA 
plans to revise the template for all awards to include the following 
sentence: ``If the arbitrators have provided an explanation of their 
decision in this award, the explanation is for the information of 
the parties only and is not precedential in nature.''
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Only the Chairperson Will Be Compensated for an Explained Decision

    The original proposed rule change did not address who would have 
been responsible for preparing the explained decision and provided that 
each arbitrator would be paid an additional $200 honorarium for cases 
in which an explained decision was required. Under the new proposed 
rule change, only the chairperson would write the decision,

[[Page 6930]]

and only the chairperson would be paid an additional honorarium. The 
additional honorarium paid to the chairperson would reflect the 
increased effort involved in drafting an explained decision. Under the 
new proposed rule change, the panel may allocate the cost of the 
honorarium to one party, or may allocate it between or among all 
parties.\14\
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    \14\ Under the Customer and Industry Codes, the panel has the 
authority to assess fees in connection with discovery-related 
motions, contested subpoena requests, and hearing session fees to 
one party, or may split the fees between or among all parties.
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Parties May Not Require Explained Decisions in Some Cases

    Under the new proposed rule change, parties would not be able to 
require explained decisions in two types of arbitration proceedings. 
The first is simplified arbitrations that are decided solely upon the 
pleadings and evidence filed by the parties, as described in Rules 
12800 and 13800. The second is arbitrations that are conducted under 
the default procedures provided for in Rules 12801 and 13801. According 
to FINRA, explained decisions would not be appropriate in either of 
these situations because of the abbreviated nature of these arbitration 
proceedings.

Arbitrators May Choose To Write Explained Decisions in Other 
Circumstances

    Under the new proposed rule change, arbitrators would continue to 
be permitted to decide, on their own or upon the motion of one party, 
to write an explained decision. Arbitrators would not receive an 
additional honorarium if the panel issues an explained decision that is 
not required under the proposed rules. The new proposed rule change 
would not affect the current rule that permits arbitrators to include a 
rationale in an award, even if the parties have not requested it, and 
would not encourage arbitrators to write an explained decision when 
they are not asked to do so by all the parties.

III. Comment Letters

    The SEC received five comment letters.\15\ Three commenters 
essentially supported the proposal \16\ and two opposed it.\17\ The 
Commission also received FINRA's response to comments, which is 
discussed below.\18\
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    \15\ See note 5, supra.
    \16\ See Hoffman, Black and Gross, and Davis letters. The 
Hoffman letter supported the proposal with reservations. The Davis 
letter supported the proposed rule change with the caveat that the 
SEC re-visit FINRA's chair eligibility rules. FINRA did not propose 
to amend the chair eligibility rules in this proposal (see Rules 
12400(c) and 13400(c)). Therefore, FINRA determined that the chair 
eligibility issue is outside the scope of the rule proposal and 
FINRA did not address it in its response to comments.
    \17\ See Estell and PIABA letters. FINRA did not address the 
concerns raised by the Estell letter, as it viewed those concerns as 
outside the scope of the rule proposal.
    \18\ Letter from Margo A. Hassan, FINRA, dated December 15, 2008 
(``FINRA Letter'').
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    One commenter supported the proposal, but asserted that every panel 
should provide a brief explanation for each award.\19\ Another 
commenter supported the proposal but expressed concerns that investors' 
perceptions concerning the unfairness of the arbitration process would 
increase in circumstances in which an industry party blocks an 
investor's request for an explained decision.\20\ One commenter argued 
that only the investor should be able to request an explained 
decision.\21\
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    \19\ See Hoffman letter.
    \20\ See Black and Gross letter.
    \21\ See PIABA letter.
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    FINRA responded to these comments by stating that under FINRA's 
original proposal (which has since been withdrawn), arbitrators would 
have been required to provide explained decisions upon the request of 
customers, or of associated persons in industry disputes.\22\ FINRA 
stated that many commenters on that proposal objected to the one-sided 
nature of the proposal.\23\ In addition, FINRA noted that a number of 
commenters were concerned that the proposal would lead to an increase 
in motions to vacate based on the arbitrators' explanations.\24\
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    \22\ See FINRA letter. See also note 7, supra.
    \23\ See FINRA letter.
    \24\ Id.
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    FINRA further asserted that one of the benefits of arbitration is 
that it is final and binding, and courts rarely vacate awards.\25\ In 
light of this, FINRA stated that any risks that may be associated with 
explained decisions should be borne by the parties only after they have 
agreed jointly to request an explained decision.\26\ For these reasons, 
FINRA declined to amend the provision that requires joint agreement of 
the parties.\27\
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    \25\ Id.
    \26\ Id.
    \27\ Id.
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    One commenter stated that the proposal does not provide sufficient 
guidance to arbitrators.\28\ The commenter asserted that the rule is 
ambiguous concerning the extent of the fact-based detail sufficient to 
constitute an explanation, and that the proposal is silent on whether 
the explanation would have to address every legal theory presented.\29\
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    \28\ See Black and Gross letter.
    \29\ Id.
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    FINRA responded by stating that the proposed rule specifies that a 
fact-based decision includes the general reasons for the arbitrators' 
decision, and that arbitrators do not have to include legal authorities 
or damage calculations.\30\ FINRA stated that the proposal, as filed, 
gives the arbitrators the flexibility they need to tailor each award to 
the specific case being decided.\31\ FINRA further responded by stating 
that the proposal requires the chairperson of the panel to write the 
explained decision.\32\ Because chairpersons have completed chairperson 
training and have served as arbitrators through award on at least two 
arbitrations,\33\ FINRA stated that requiring the chairperson to write 
the explained decision will ensure that parties are provided with the 
information called for in the proposed rule change.\34\ Therefore, 
FINRA declined to amend the proposal to add further explanation 
regarding the content of the fact-based decision.\35\
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    \30\ See FINRA letter.
    \31\ Id.
    \32\ Id.
    \33\ Rules 12400 and 13400 state that an arbitrator is eligible 
to serve as chairperson if the arbitrator has completed chairperson 
training and: 1) has a law degree and is a member of a bar of at 
least one jurisdiction and has served as an arbitrator through award 
on at least two arbitrations in which hearings were held; or 2) has 
served as an arbitrator through award on at least three arbitrations 
in which hearings were held.
    \34\ See FINRA letter.
    \35\ Id.
---------------------------------------------------------------------------

    One commenter argued that requiring a joint request for an 
explained decision eliminates the need for the proposal.\36\ The 
commenter noted that FINRA already fosters a policy of accommodating 
parties' joint requests. Another commenter asked whether, under the 
current Codes, a panel would be required to write a reasoned decision 
if the parties made a joint request.\37\ FINRA responded by stating 
that the panel currently is not required to accede to a joint request 
for an explained decision.\38\ FINRA explained that under current 
practice, FINRA would forward the parties' joint request for an 
explained decision to the arbitrators, but that the arbitrators could 
decline the parties' request.\39\ FINRA further stated that the 
proposed rule change would make it clear that arbitrators must provide 
an explained decision upon the joint request of the parties, set a 
timetable for such requests and provide for compensation for the 
chairperson's efforts in writing the explained

[[Page 6931]]

decision.\40\ Finally, FINRA noted that the proposed rule change also 
specifies that arbitrators would not be required to provide an 
explained decision in cases resolved under the simplified or default 
arbitration rules.\41\
---------------------------------------------------------------------------

    \36\ See PIABA letter.
    \37\ See Davis letter.
    \38\ See FINRA letter.
    \39\ Id.
    \40\ Id.
    \41\ Id.
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    FINRA concluded by stating that the proposal will increase investor 
confidence in the fairness of the arbitration process, and should be 
approved.\42\
---------------------------------------------------------------------------

    \42\ Id.
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IV. Discussion and Findings

    After careful review of the proposed rule change, the comments, and 
FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and the rules and regulations thereunder that are applicable to a 
national securities association.\43\ In particular, the Commission 
believes the proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\44\ 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. The proposed rule change should address complaints 
that FINRA has received from non-prevailing parties regarding the 
absence of explanations in arbitration awards, by providing a framework 
through which parties could jointly require arbitrators to write an 
explained decision.
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    \43\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 17c(f).
    \44\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    In general, the Commission believes that FINRA has responded to the 
comments adequately and appropriately, and has explained how the 
proposed rule change is consistent with the requirements of the Act, 
and the rules and regulations thereunder that are applicable to a 
national securities association.
    The Commission's oversight of the securities arbitration process is 
directed at ensuring that it is fair and efficient. The Commission 
shares the concerns expressed by a commenter that the proposal may not 
increase investors' perceptions of fairness in circumstances in which 
an industry party does not agree to an investor's request for an 
explained decision. Nevertheless, the Commission believes that the 
even-handed approach of providing parties a means of jointly requesting 
a decision represents a reasonable compromise between the status quo, 
whereby the Codes offer parties no formal means of requesting an 
explained decision, and the original proposal, whereby claimants alone 
would have the right to request an explained decision. Further, the 
Commission believes that the procedures set forth in FINRA's proposed 
rule (including, procedures related to: Deadlines for submitting a 
request; designating the chairperson as the writer of explained 
decisions; compensation for writing explained decisions; substance of 
the explained decision; and eligibility of cases for explained 
decisions) will contribute to the efficiency of the securities 
arbitration process by setting forth clear guidelines for parties and 
arbitrators in instances where parties have jointly requested an 
explained decision.
    At the same time, the Commission is concerned that it may be 
difficult for parties to mutually agree to request an explained 
decision, because the decision of whether to request an explained 
decision (or whether to refuse to request an explained decision) may 
ultimately be a strategic decision. In order to gauge the effectiveness 
of the proposal, the Commission has requested that FINRA gather 
statistics for a period of one year from the effective date of this 
proposal, on the number of joint requests for explained decisions made 
in arbitration. Further, the Commission has asked FINRA to report on 
any anecdotal evidence it receives during this one-year period that may 
shed light on how often parties are unable to agree to request an 
explained decision.

V. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\45\ that the proposed rule change (SR-FINRA-2008-051) be, and 
hereby is, approved.
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    \45\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-2775 Filed 2-10-09; 8:45 am]
BILLING CODE 8011-01-P

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