Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 12000 Series To Expand Options Available to Customers if a Firm or Associated Person Is or Becomes Inactive, 64581-64589 [2019-25324]
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Federal Register / Vol. 84, No. 226 / Friday, November 22, 2019 / Notices
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–25316 Filed 11–21–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87557; File No. SR–FINRA–
2019–027]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule 12000 Series To Expand
Options Available to Customers if a
Firm or Associated Person Is or
Becomes Inactive
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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 November
5, 2019, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rules 12100, 12202, 12214, 12309,
12400, 12601, 12702, 12801, and 12900
of the Code of Arbitration Procedure for
Customer Disputes (‘‘Customer Code’’ or
‘‘Code’’) to expand a customer’s options
to withdraw an arbitration claim if a
member or an associated person
becomes inactive before a claim is filed
or during a pending arbitration. In
addition, the proposed amendments
would allow customers to amend
pleadings, postpone hearings, request
default proceedings and receive a
refund of filing fees in these situations.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
November 18, 2019.
25 17
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
Background
Most unpaid customer arbitration
awards are rendered against firms or
individuals whose FINRA registration
has been terminated, suspended,
cancelled, or revoked, or who have been
expelled from FINRA. These firms and
individuals are generally referred to as
‘‘inactive,’’ and are no longer FINRA
members or associated with a FINRA
member, although they may continue to
operate in another area of the financial
services industry where FINRA
registration is not required. Firms and
individuals can become inactive prior to
PO 00000
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Fmt 4703
Sfmt 4703
64581
an arbitration claim being filed, during
an arbitration proceeding, or subsequent
to an arbitration award, and this status
can be caused by FINRA’s action, such
as when a firm or individual is
suspended for failing to pay an award,
or by the firm’s or individual’s own
voluntary action.
FINRA has implemented a number of
changes to its arbitration program that
expand the options available to a
customer when dealing with those
members or associated persons that are
inactive either at the time the claim is
filed or at the time of the award. For
example, when a customer claimant first
files an arbitration claim, FINRA alerts,
by letter, the customer claimant if the
respondent, whether a member or an
associated person, is inactive. FINRA
also informs the claimant that awards
against such members or associated
persons have a much higher incidence
of non-payment and that FINRA has
limited disciplinary leverage over
inactive members or associated persons
that fail to pay arbitration awards. Thus,
the customer knows before pursuing the
claim in arbitration that collection of an
award may be more difficult. In
addition, upon learning that the member
or associated person is inactive, a
customer may determine to amend his
or her claim to add other respondents
from whom the customer may be able to
collect should the claim go to award.
Proposed Rule Change
FINRA is proposing to amend the
Customer Code 3 to expand further the
options available to customers in
situations where a firm becomes
inactive during a pending arbitration, or
where an associated person becomes
inactive either before a claim is filed or
during a pending arbitration. FINRA is
also proposing to amend the Code to
allow customers to amend pleadings,
postpone hearings, request default
proceedings and receive a refund of
filing fees if the customer withdraws the
claim under these situations.4
A. Arbitrating Claims Against Inactive
Members and Associated Persons
Currently, under FINRA Rule 12202
(Claims Against Inactive Members), a
customer’s claim against a firm whose
membership is terminated, suspended,
cancelled or revoked, or that has been
expelled from FINRA, or that is
3 While unpaid awards occur in intra-industry
cases (i.e., disputes between or among members and
associated persons), the proposed amendments
would apply to customer cases only.
4 FINRA is also proposing to amend the Code to
update cross-references and make other nonsubstantive, technical changes to rules impacted by
the proposed rule change.
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otherwise defunct, is ineligible for
arbitration unless the customer agrees in
writing to arbitrate after the claim arises.
In these situations, the customer is able
to evaluate the likelihood of collecting
on an award and make an informed
decision whether to proceed in
arbitration, to file the claim in court or
to take no action, regardless of whether
the customer signed a predispute
arbitration agreement.5 Accordingly,
claims against inactive firms proceed in
arbitration only at the customer’s
option.
The Code does not address situations,
however, where a member firm becomes
inactive during a pending arbitration. In
addition, the Code does not provide
specific procedures for a customer to
withdraw, and file in court, a claim
against an associated person who
becomes inactive before the customer
files a claim or during a pending
arbitration.
Accordingly, FINRA is proposing to
amend FINRA Rule 12202 to expand a
customer’s option to withdraw a claim
to situations where a member becomes
inactive during a pending arbitration, or
where an associated person becomes
inactive either before a claim is filed or
during a pending arbitration. Under the
proposal, FINRA Rule 12202 would
specify that a customer’s claim against
an associated person who is inactive at
the time the claim is filed is ineligible
for arbitration unless the customer
agrees in writing to arbitrate after the
claim arises. In addition, FINRA Rule
12202 would specify that if a member or
an associated person becomes inactive
during a pending arbitration, FINRA
would notify the customer of the status
change, and provide the customer with
60 days to withdraw the claim(s) with
or without prejudice.6
Similar to the current rules and
procedures relating to claims filed
against inactive members, the proposed
amendments would allow the customer
to evaluate the likelihood of collecting
on an award and make an informed
5 If the customer notifies FINRA in writing that
he or she does not want to proceed against the
inactive member in FINRA’s forum, FINRA deems
the customer’s agreement to submit to arbitration
rescinded and sends the customer a full refund of
any filing fee remitted.
6 FINRA Rule 12702 (Withdrawal of Claims)
provides that before a party answers a statement of
claim, the claimant can withdraw the claim with or
without prejudice. However, after a party submits
an answer, the claimant can only withdraw the
claim with prejudice unless the panel or the parties
agree otherwise. FINRA is proposing to make a
conforming change to FINRA Rule 12702 to provide
that a customer can withdraw a claim without
prejudice if the party that submitted an answer is
an inactive member or inactive associated person.
Withdrawal without prejudice would allow the
customer to re-file the arbitration at a later date.
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decision whether to proceed in
arbitration, to file the claim in court or
to take no action, regardless of whether
the customer signed a predispute
arbitration agreement.
In addition, FINRA is proposing to
amend FINRA Rule 12100 (Definitions)
to add definitions of ‘‘inactive member’’
and ‘‘inactive associated person.’’
Consistent with current Rule 12202,
FINRA is proposing to define an
‘‘inactive member’’ as a member whose
membership is terminated, suspended,
cancelled or revoked; that has been
expelled or barred 7 from FINRA, or that
is otherwise defunct.8
An ‘‘inactive associated person’’
would be defined as a person associated
with a member whose registration is
revoked, cancelled, or suspended, who
has been expelled or barred from
FINRA,9 or whose registration has been
terminated for a minimum of 365 days.
Thus, if an associated person’s
registration is not revoked, cancelled, or
suspended, the person has not been
expelled or barred from FINRA, and the
individual’s registration has been
terminated for less than one year, the
individual would not be classified as
terminated and, therefore, would not be
deemed inactive.
FINRA believes the 365-day minimum
termination 10 requirement for
associated persons would help ensure
that enough time has elapsed to assume
reasonably that the associated person
has permanently left the securities
industry. The requirement would allow
enough time for those associated
persons who may have temporarily left
the industry to return before the
arbitration closes.11
7 FINRA is adding ‘‘or barred’’ to the definition
of an ‘‘inactive member’’ to capture that a member
may be inactive due to a bar.
8 The proposed rule change would amend the
definition of ‘‘member’’ under the Customer Code,
the Code of Arbitration Procedure for Industry
Disputes (‘‘Industry Code’’), and in Article I of the
By-Laws of FINRA Regulation, Inc. to conform the
definition to the proposed definition of an ‘‘inactive
member’’ as discussed below. The proposed
changes would make the definition of ‘‘member’’
consistent in the FINRA rules that apply to FINRA’s
arbitration forum.
9 In Regulatory Notice 17–33 (October 2017),
discussed infra, FINRA proposed to define an
‘‘inactive associated person’’ as a person associated
with a member whose registration is revoked or
suspended, or whose registration has been
terminated for a minimum of 365 days. FINRA is
proposing to add ‘‘expelled or barred from FINRA’’
and ‘‘whose registration is cancelled’’ to this
definition to capture other ways in which an
individual could be categorized as inactive.
10 Termination, in some cases, may be a voluntary
action that can be of short duration.
11 In its analysis of 2,054 customer cases closed
by hearing, on the papers, or by stipulated award
from 2014 to 2018, FINRA identified 78 cases where
an associated person was not in the industry while
the arbitration was pending but returned to the
industry in fewer than 365 days.
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B. Amending Pleadings
FINRA Rule 12309 (Amending
Pleadings) limits a party’s ability to
amend a statement of claim, among
other pleadings, after FINRA has
appointed a panel to the case.
Specifically, once FINRA appoints a
panel to a case, a party can amend a
pleading only if the arbitrators grant a
party’s motion to do so. FINRA Rule
12309 also provides that a party cannot
add a new party to the case after
arbitrator ranking lists are due to the
Director of Arbitration until FINRA
appoints the panel and the arbitrators
grant a party’s motion to add the new
party.
FINRA believes that a customer
should be able to change his or her
litigation strategy during a pending case
once the customer learns that a firm or
an associated person has become
inactive. Accordingly, FINRA is
proposing to amend FINRA Rule 12309
to provide that if FINRA notifies a
customer that a firm or an associated
person has become inactive during a
pending arbitration, the customer may
amend a pleading, including adding a
new party, within 60 days of receiving
such notice.12
C. Postponing Hearings
FINRA Rule 12601 (Postponement of
Hearings) addresses when a scheduled
hearing date can be postponed. The
parties can agree to postpone a hearing.
Absent an agreed upon postponement, a
hearing can be postponed by FINRA in
extraordinary circumstances, by the
arbitrators at their discretion, or by the
arbitrators upon a party’s motion.
FINRA is proposing to amend FINRA
Rule 12601 to provide that if FINRA
notifies a customer that a firm or an
associated person has become inactive
and the scheduled hearing date is
within 60 days of the date the customer
receives the notice from FINRA, the
customer may postpone the hearing
date. Since the proposed amendment
would provide a customer with 60 days
to determine how to proceed after
FINRA notifies the customer of the
status change to inactive, it would be
appropriate to allow the customer to
postpone a scheduled hearing that falls
within that time period.
In addition, FINRA assesses
postponement fees against the parties
for each postponement agreed to by the
parties, or granted upon the request of
12 FINRA Rule 12309(d) would permit any party
to file a response to an amended pleading, provided
the response is filed and served within 20 days of
receipt of the amended pleading, unless the panel
determines otherwise. Thus, the newly-added party
could file a response to the amended pleading for
the panel or arbitrator to consider.
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one or more parties. FINRA also charges
an additional fee of $600 per arbitrator
if a postponement takes place within 10
days of a scheduled hearing date. The
additional $600 per arbitrator fee is paid
to the arbitrators to compensate them for
the late adjournment.13 FINRA is
proposing to amend FINRA Rule 12601
to provide that if FINRA notifies a
customer that a firm or an associated
person has become inactive and the
scheduled hearing date is within 60
days of the date the customer receives
the notice from FINRA, FINRA would
not charge the customer a postponement
fee or an additional fee of $600 per
arbitrator if a customer chooses to
postpone a scheduled hearing.
FINRA is also proposing to amend
FINRA Rule 12214 to make it clear that
it would continue to pay the $600
honoraria to the arbitrators to
compensate them for their time if a
customer chooses to postpone a
scheduled hearing within 10 days before
it is scheduled because the customer
learns that the firm or associated person
has become inactive.
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D. Default Proceedings
FINRA Rule 12801 (Default
Proceedings) permits a claimant to
request default proceedings against any
respondent whose registration is
terminated, revoked or suspended, and
who failed to file an answer 14 to a claim
within the time provided in the Code.
A single arbitrator will decide the case
based on the claimant’s pleadings and
other documentation.15 The claimants
must present a sufficient basis to
support the making of an award.16 The
arbitrator may not issue an award based
solely on the nonappearance of a
party.17
As noted, the proposed amendments
would define an inactive associated
person as a person associated with a
member whose registration is revoked,
cancelled, or suspended, who has been
expelled or barred from FINRA, or
whose registration has been terminated
for a minimum of 365 days. In the
context of a default proceeding, FINRA
13 See FINRA Rule 12214 (Payment of
Arbitrators).
14 A respondent must serve each party with a
signed and dated Submission Agreement and
answer specifying the relevant facts and available
defenses to the statement of claim within 45 days
of receipt of the statement of claim. See FINRA Rule
12303(a).
15 See FINRA Rule 12801(b)(2)(B). No hearings
are held in default proceedings unless the customer
requests one. See FINRA Rule 12801(c).
16 See FINRA Rule 12801(e)(1).
17 Id. If the defaulting respondent files an answer
before an award has been issued, the proceedings
against this respondent will be terminated and the
claim will proceed under the regular provisions of
the Code. See FINRA Rule 12801(f).
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believes that it would be appropriate to
continue to allow a customer to request
default proceedings against any
terminated associated person who fails
to answer a claim, regardless of how
long the associated person has been
terminated, consistent with the existing
rule. Accordingly, FINRA is proposing
to amend FINRA Rule 12801(a) to
specify that a claimant may request a
default proceeding against a terminated
associated person who fails to file an
answer within the time provided in the
Code regardless of the number of days
since termination.18
E. Refunding Filing Fees
FINRA Rule 12900 (Fees Due When a
Claim is Filed) specifies that if a claim
is settled or withdrawn more than 10
days before the date that the hearing is
scheduled to begin, a party paying a
filing fee will receive a partial refund of
the filing fee. The rule also provides that
FINRA will not refund any portion of
the filing fee if a claim is settled or
withdrawn within 10 days of the date
that the hearing is scheduled to begin.
FINRA is proposing to amend FINRA
Rule 12900 to provide that FINRA
would refund a customer’s full filing fee
if FINRA notifies a customer that a firm
or an associated person has become
inactive during a pending arbitration,
and the customer withdraws the case
against all parties within 60 days of the
notification. FINRA would refund the
filing fee even if the customer
withdraws the case within 10 days of
the date that the hearing is scheduled to
begin.
F. Non-Substantive Changes
In addition to amending FINRA Rules
12100, 12202, 12214, 12309, 12400,
12601, 12702, 12801, and 12900 to
expand a customer’s options to
withdraw an arbitration claim if a
member or an associated person
becomes inactive before a claim is filed
or during a pending arbitration, FINRA
is also proposing to amend the Code to
update cross-references and make other
non-substantive, technical changes to
the rules impacted by the proposal.
If the Commission approves the
proposed rule change, FINRA will
announce the effective date of the
proposed rule change in a Regulatory
Notice to be published no later than 60
days following Commission approval.
The effective date will be no later than
90 days following publication of the
Regulatory Notice announcing
Commission approval.
18 See
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supra note 10.
Frm 00131
Fmt 4703
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,19 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest.
FINRA believes that the proposed rule
change would protect investors and the
public interest by expanding the options
available to customers with claims
against respondents who are unlikely to
be able to pay. The proposed rule
change would extend the concept of
what it means to be inactive to expressly
include associated persons, so that
customers would have the same options
during a case against inactive associated
persons as they would against inactive
members. The proposed change,
therefore, would add consistency to
FINRA rules.
Further, FINRA believes that the
proposed amendments would provide
customers with expanded options and
flexibility to change case strategy if
FINRA notifies them that a member or
associated person has become inactive
during a pending arbitration. In
particular, the proposed rule change
would permit a customer to amend his
or her pleading or to add parties without
arbitrator intervention. FINRA rules,
however, permit the newly-added party
to respond to the amended pleading and
to have the panel or arbitrator consider
any objections.
The proposed rule change would also
clarify the default rule to include an
inactive associated person who does not
answer a claim, regardless of the
number of days since termination.
FINRA believes that the proposed rule
change would add consistency to
FINRA’s default rule so that the
procedures would apply to inactive
members and inactive associated
persons equally. As a result, investors
would know that they have the same
options and rights in default
proceedings against any inactive
respondent under the Customer Code.
FINRA believes this could help expedite
these arbitration cases, as any ambiguity
about how the rule should be applied
would be removed. Moreover, FINRA
believes that exempting the minimumday termination requirement would
prevent an associated person from using
the 365-day requirement as a shield to
delay the arbitration case.
19 15
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FINRA believes that the proposed
amendments provide customers with
more options and flexibility in how they
choose to resolve claims against
respondents who are unlikely to pay,
and, thus, give them more control over
the arbitration case when they are
notified that a member or associated
person has become inactive. Moreover,
by eliminating the postponement fees
and refunding filing fees in certain
circumstances, the proposed
amendments eliminate these costs as a
potential barrier for customers who may
opt to pursue their claims in other
forums. For these reasons, FINRA
believes that the proposed rule change
protects investors and the public
interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed amendments will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. A discussion
of the economic impacts of the proposed
amendments follows.
Economic Impact Assessment
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(a) Regulatory Need
The Code addresses situations where
customers bring claims against inactive
members. The Code does not address
situations, however, where a member
firm becomes inactive during a pending
arbitration or where an associated
person becomes inactive before a claim
is filed or during a pending arbitration.
This may limit the options available to
customers to seek redress, as well as
their ability to collect an award.
(b) Economic Baseline
The economic baseline for the
proposed amendments is the current
rules under the Code that address
customer disputes in arbitration. The
proposed amendments are expected to
affect the parties to an arbitration,
including customers, member firms,
associated persons, and arbitrators.
FINRA is able to identify 2,054
customer cases closed by hearing, on the
papers, or by stipulated award from
2014 to 2018. Among these cases,
FINRA is able to identify 128 cases (six
percent) where a member firm would
have been defined as inactive (under the
proposed amendments) before an
arbitration. In these instances, the
current rules under the Code provide
customers the option to proceed in
arbitration, to file the claim in court, or
to take no action regardless of whether
the customer signed a pre-dispute
arbitration agreement. Customers are
therefore able to evaluate the likelihood
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The proposed amendments would
expand customers’ options under the
Code where a member becomes inactive
during a pending arbitration or where
an associated person becomes inactive
before a claim is filed or during a
pending arbitration. The benefits and
costs of the proposed amendments are
discussed below.
In general, the benefits of the
proposed amendments arise from the
expansion of customer options under
the Code when a member becomes
inactive during a pending arbitration, or
when an associated person becomes
inactive before a claim is filed or during
a pending arbitration. In these instances,
the proposed amendments would
increase the flexibility of customers to
determine whether and how to proceed
in arbitration. Customers would exercise
the options under the proposed
amendments if they believe it would
increase their ability to seek redress,
and may increase the amount of
monetary compensation they expect to
receive.
The expansion of customer options
under the Code would arise from the
reduction of the restrictions and
penalties to alter their litigation strategy
in arbitration or to withdraw their
claims from arbitration. For example,
customers who proceed in arbitration
may amend a pleading without
arbitrators granting the motion. This
includes the addition of a new
respondent from whom the customer
may be able to collect should the claim
go to award. Customers who proceed in
arbitration may also postpone a
scheduled hearing without penalty to
assess the options and gain additional
time to prepare.21 Customers may also
withdraw their claim without prejudice
if the party that submitted an answer is
an inactive member or inactive
associated person. Customers who
withdraw their claims against all parties
within the allotted time would also
receive a full refund of the filing fee.
Customers who exercise the options
under the proposed amendments, and
the member firms and associated
persons who are also parties to the
arbitration, may incur additional costs.
For example, if customers withdraw
their claims from arbitration and restart
the case in another venue, then the
parties may incur additional legal
expense and time to resolve the dispute.
If instead customers amend their
pleadings but remain in arbitration, the
parties (including member firms and
associated persons who are newlynamed in the amended pleadings) may
also incur additional legal expense to
alter their litigation strategy, time to
resolve the dispute, and forum fees (e.g.,
hearing session fees).22 Parties may also
incur additional time to resolve the
dispute if customers postpone
scheduled hearings. Customers have the
option to incur these additional
expenses, and would likely incur them
only if they believe the costs would
increase the amount of monetary
compensation they may expect to
receive.
The proposed amendments would
provide no significant benefits and
impose no material costs on customers
who would not change their behavior
when notified of an associated person’s
or firm’s change of status during
arbitration in the presence of the
amendments, nor on the members and
associated persons who are party to
their claims. In FINRA’s experience,
customers typically proceed in
arbitration when notified that a member
is inactive at the time of filing, and
typically remain in arbitration when a
member or an associated person leaves
20 In the 427 cases, the total amount of
compensatory damages sought by customers was
$580.3 million, and customers were awarded
compensatory damages of $96.0 million. For the
347 cases that closed from 2014 through 2017, 126
relate to an award that went unpaid, and the
member firms or associated persons responsible for
the unpaid awards would have been identified as
inactive under the proposed amendments. The total
amount of awards relating to these cases that went
unpaid was $55.9 million. The respondents that
would have been identified as inactive were
responsible for nearly all of the awards that went
unpaid.
21 Among the 2,054 customer cases in the baseline
sample, FINRA is able to identify 240 (12 percent)
cases where a member or an associated person
would have been identified as inactive after
arbitrator ranking lists were due or FINRA
appointed a panel. FINRA is also able to identify
119 (six percent) cases where a member or an
associated person would have been identified as
inactive within 60 days of a scheduled hearing.
22 FINRA does not believe, however, that the
proposed amendments would cause member firms
and associated persons to be named without having
a connection to the case. See discussion in Section
II.C.
of collecting on an award and to choose
the forum in which to proceed.
FINRA is also able to identify 427
cases (21 percent of 2,054) where a firm
became inactive during a pending
arbitration, or where an associated
person would have been identified as
inactive (under the proposed
amendments) either before or during a
pending arbitration. The current rules
do not provide similar options to
customers in these instances, and
customers may be less able to choose
the forum in which to proceed or to
change their litigation strategy during a
pending case.20
(c) Economic Impact
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the industry while the arbitration is
pending.23 One reason customers
remain in arbitration when a member or
an associated person leaves the industry
may be the additional costs of restarting
a case in another venue. Another reason
may be the expectation that another
forum would not result in a higher
likelihood of redress.
Based on this experience, FINRA
believes that few customers would
withdraw claims from the forum in the
presence of the proposed rules, but
would instead remain in arbitration.
Customers are, therefore, more likely to
exercise their new options under the
proposed amendments to amend
pleadings or to postpone hearings. The
benefits and costs of the proposed
amendments, therefore, may result more
from the amendment of pleadings or the
rescheduling of hearings than the
withdrawal of claims.
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(d) Alternatives Considered
FINRA exercised discretion in setting
the minimum number of days for a
terminated associated person to be
considered inactive (365). FINRA also
exercised discretion when setting the
maximum number of days for customers
to exercise the options under the
proposed amendments after they receive
notification of the inactive status of a
member or an associated person (60).
The minimum-day requirement for a
terminated associated person to be
considered inactive affects the length of
time that customers must wait before
being able to exercise the options under
the proposed amendments. A longer
minimum-day requirement decreases
the number of customers who may have
access to the options under the
proposed amendments, and therefore
decreases their ability to seek redress.24
A longer minimum-day requirement,
however, also decreases the likelihood
that an associated person returns to the
industry after being identified as
inactive.25 Customers may therefore be
23 Among the 2,054 customer cases in the baseline
sample, FINRA is able to identify 297 (14 percent)
cases where a member firm or an associated person
would have been identified as inactive during a
pending arbitration.
24 For example, a longer minimum-day
requirement would increase the number of
associated persons who left the industry as of the
close of the arbitration but not considered inactive.
In these instances, customers would not have access
to the options because the associated persons would
not have been considered inactive while the
arbitration is pending. Among the 2,054 customer
cases in the baseline sample, FINRA is able to
identify 23 cases where an associated person had
left the industry as of the close of the arbitration
but for 60 days or fewer. The number of cases
increases to 36 for 120 days, 58 for 180 days, and
129 for 365 days.
25 With a longer minimum-day requirement,
fewer associated persons would be deemed inactive
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less likely to exercise the options under
the proposed amendments only for the
inactive associated person to return to
the industry, and parties may be less
likely to incur the associated costs
unnecessarily. A shorter minimum-day
requirement, on the other hand, may
increase the ability of customers to seek
redress, but also may increase the costs
parties may incur unnecessarily. FINRA
believes that the 365-day minimum
requirement would provide customers
access to the options under the
proposed amendments and help ensure
that the associated person had
permanently left the securities industry.
The 60-day maximum requirement for
customers after receiving notice that a
firm or an associated person has become
inactive to withdraw their claims
without prejudice or to amend a
pleading would also limit their ability to
exercise the options and decrease its
associated benefits. The requirement,
however, would also limit the effect of
an inactive member or associated person
on a pending arbitration, and provide
certainty that the arbitration would
continue after the time period had
elapsed. FINRA believes that the 60-day
maximum requirement would reduce
the potential number of disruptions to
the arbitration process, while still
providing customers access to the
proposed options.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
On October 18, 2017, FINRA
published Regulatory Notice 17–33
(‘‘Notice’’) to solicit comment on the
proposed amendments to the Code that
would expand a customer’s options to
withdraw an arbitration claim if a
member or an associated person
becomes inactive before a claim is filed
or during a pending arbitration as well
as allow customers to amend pleadings,
postpone hearings and receive a refund
of filing fees in these situations.26
FINRA received eight comments on the
Notice.27 While all of the commenters
as defined under the proposed amendments and
then return to the industry. Fewer customers would
therefore exercise the options under the proposed
amendments only for the associated person to
return to the industry. For example, among the
2,054 customer cases in the baseline sample, FINRA
is able to identify 59 cases where an associated
person was not in the industry while the arbitration
was pending but returned to the industry in 60 days
or fewer. The number of cases increases to 66 cases
for 120 days, 69 cases for 180 days, and 78 cases
for 365 days.
26 Available at https://www.finra.org/industry/
notices/17-33.
27 See letters to Marcia E. Asquith including:
Steven B. Caruso, Attorney, Maddox Hargett &
Caruso, P.C., dated November 20, 2017 (‘‘Caruso’’);
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supported the proposed rule change
discussed in the Notice, some stated that
the proposed amendments did not go far
enough,28 and six commenters
suggested modifications.29 Commenters
who supported the proposed rule
change, in general, described it as ‘‘a
good faith effort to partially address
some of the predicates that cause
unpaid awards’’ 30 as well as a proposal
that would provide customers with
additional options and flexibility to
alter their litigation strategy.31 Several
commenters specifically noted their
support for the proposed amendments
to FINRA Rule 12100 (Definitions of
Inactive Member and Inactive
Associated Person),32 FINRA Rule
12202 (Claims Against Inactive
Members and Inactive Associated
Persons),33 FINRA Rule 12309
(Amending Pleadings),34 FINRA Rule
Gregory M. Curley, Senior Litigation Counsel,
Advisor Group, dated December 1, 2017 (‘‘Advisor
Group’’); William A. Jacobson, Clinical Professor of
Law and Tina Davis, Law School Student, Cornell
University School of Law, dated December 7, 2017
(‘‘Cornell’’); Kevin M. Carroll, Managing Director
and Associate General Counsel, Securities Industry
and Financial Markets Association, dated December
15, 2017 (‘‘SIFMA’’); Andrew Stoltmann, President,
Public Investors Arbitration Bar Association, dated
December 18, 2017 (‘‘PIABA’’); Justin M. Daley,
Legal Intern, St. John’s University School of Law,
dated December 18, 2017 (‘‘SJU’’); Robin M. Traxler,
Vice President, Regulatory Affairs & Associate
General Counsel, Financial Services Institute, dated
December 18, 2017 (‘‘FSI’’); and Joseph Borg,
President, North American Securities
Administrators Association, Inc., dated December
20, 2017 (‘‘NASAA’’).
28 See Caruso, FSI, NASAA, and PIABA.
29 See Advisor Group, Cornell, FSI, PIABA,
SIFMA, and SJU.
30 See Caruso.
31 See Cornell and NASAA.
32 See FSI and SJU. FSI noted that ‘‘the proposed
amendments address a scenario that is not currently
addressed in FINRA rules and, as such, brings
important clarity to the arbitration process.’’ SJU
suggested that the proposed changes ‘‘offer an
important protection to customers . . . by
providing them with ‘‘the same options available
with respect to individuals who are unregistered
associated persons which they now have with
respect to firms that are unregistered members.’’
33 See Cornell, FSI, PIABA, and SJU. FSI
suggested that requiring FINRA to notify customers
when a member or an associated person becomes
inactive during a pending arbitration would ensure
that customers are promptly informed of the change
in the firm’s or the associated person’s status.
PIABA supported this change as it ‘‘would allow a
customer to withdraw filed claims without
prejudice (or in the case of inactive associated
persons, never submit the claim to FINRA
Arbitration in the first place), and file a claim in
court, regardless of whether the customer signed a
predispute arbitration agreement.’’ SJU supported
‘‘requiring the written consent of a customer in
proceeding with an arbitration claim with a member
or an associated person who is no longer registered
. . . because it is essential that customers be given
a fair opportunity to reconsider their arbitration
strategies.’’
34 See Caruso, Cornell and PIABA.
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12601 (Postponement of Hearings),35
FINRA Rule 12801 (Default
Proceedings) 36 and FINRA Rule 12900
(Fees Due When a Claim Is Filed).37
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Effectiveness of the Proposed
Amendments
Four commenters stated that the
proposed rule change is not as effective
as it could be.38 FSI suggested that
instead of directly addressing the issue
of unpaid awards, the proposed rule
change amends the arbitration process
in ways that would bias the process in
favor of one party’s subsequent recovery
efforts. FINRA’s primary role in the
arbitration process is to administer cases
brought to the forum in a neutral,
efficient and fair manner. In its capacity
as a neutral administrator of the forum,
FINRA must also ensure that its rules
are not used to hinder a party’s recovery
efforts. Moreover, once customers are
notified of a member’s or associated
person’s status change during the
arbitration case, they should be
permitted to assess the collectability of
their claims and change strategy during
the case without penalty. FINRA
believes that, rather than creating bias in
the process against a particular group,
the proposed rule change instead would
provide customers with options under
the rules to pursue claims against
inactive respondents.
NASAA stated that when awards go
unpaid, members and associated
persons are not held responsible for
their misconduct and investors are left
without recourse. Under the Code, a
respondent must pay a monetary award
within 30 days of receipt.39 In order to
incentivize member firms or associated
persons to pay customer awards, and
restrict those who do not, FINRA expels
or suspends from the brokerage industry
35 See Caruso, Cornell, and SJU. SJU stated that
‘‘any additional costs involving arbitration could
persuade customers to drop otherwise justifiable
claims,’’ thus, ‘‘the rules should not put undue
financial burdens on customers.’’
36 See Cornell, PIABA, and SJU.
37 See Caruso and Cornell.
38 See supra note 30.
39 See FINRA Rule 12904(j). An associated person
or firm has four available defenses to FINRA
disciplinary measures for non-payment in customer
cases: (1) The firm or associated person paid the
award in full; (2) the parties have agreed to
installment payments or have otherwise settled the
matter; (3) the firm or associated person has filed
a timely motion to vacate or modify the award and
such motion has not been denied; and (4) the firm
or associated person has filed a petition in
bankruptcy and the bankruptcy proceeding is
pending or the award has been discharged by the
bankruptcy court. See Notice to Members 00–55
(August 2000). In July 2010, FINRA eliminated the
‘‘bona fide inability to pay’’ defense in the
expedited suspension proceedings it initiates when
a firm or associated person fails to pay an
arbitration award to a customer. See Regulatory
Notice 10–31 (June 2010).
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any member firm or associated person
who fails to pay an arbitration award. If
a member firm or associated person fails
to comply with an arbitration award or
a settlement agreement related to an
arbitration, FINRA notifies such firm or
associated person in writing that the
failure to comply within 21 days of
service of the notice will result in a
suspension or cancellation of
membership or a suspension from
associating with any member.40 If the
threat of suspension is not effective in
compelling payment of an award or
settlement, FINRA notes that an
investor-claimant may take an award to
court and have it converted to a
judgment. The claimant may then
attempt to collect on the judgment using
the court’s collection procedures.41
The remaining two commenters in
this group advocated for FINRA to
create a monetary solution to address
unpaid awards. PIABA stated that
FINRA should establish a national
investor recovery pool. Caruso
suggested a ‘‘viable economic solution,’’
stating ‘‘very few investors would be
able to actually recover their losses’’
under the proposed amendments.42
Although these comments are outside
the scope of the proposed rule change,
FINRA notes that in its Discussion
Paper on Customer Recovery,43 FINRA
has identified a number of alternative
approaches that could be taken to
further address the issue of unpaid
customer arbitration awards, and FINRA
continues to focus on this important
issue.44
As noted above, six commenters
suggested modifications to the proposed
amendments.45 FINRA addresses these
suggestions in the following discussion.
Amendment To Add a Party
Three commenters stated that FINRA
should revise the proposed amendment
to FINRA Rule 12309(c) to require that
a customer’s right to add parties to an
arbitration case should be subject to the
arbitration panel’s approval.46 Advisor
Group suggested that the proposed
amendment would prejudice the rights
of member firms to participate in the
40 See
FINRA Rule 9554(a).
investor-claimant in the FINRA arbitration
forum would be in a similar position as a claimant
who had brought an action in court and had been
awarded the same amount of damages.
42 Caruso also suggested that FINRA convene a
group to consider the extent of the unpaid awards
problem and develop solutions to address it.
43 See Discussion Paper, FINRA Perspectives on
Customer Recovery (February 8, 2018), https://
www.finra.org/sites/default/files/finra_
perspectives_on_customer_recovery.pdf.
44 See Discussion Paper at 16–18.
45 See supra note 26.
46 See Advisor Group, FSI, and SIFMA.
41 An
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arbitrator selection process 47 by
requiring them to enter the arbitration
case after the parties had selected an
arbitrator or a panel. FSI suggested that
allowing a claimant to add a new party
without prior arbitrator or panel
approval could cause a party to incur
costs in defending against potentially
meritless claims. SIFMA stated that
allowing a customer claimant to amend
his or her pleading after learning that a
respondent firm or associated person
has become inactive could prejudice the
other active respondents remaining in
the case by eliminating their right to
review the proposed amended pleading,
respond in writing, and if there is a
claim of prejudice, obtain a ruling on
the amended pleading from the panel.
Currently, FINRA Rule 12309 permits
a party to amend a pleading any time
before the panel is appointed.48 Once a
panel is appointed, however, the party
must receive the panel’s approval prior
to amending a pleading.49 The rule also
requires that, if a panel has been
selected, a party must request approval
from the panel prior to adding a new
party.50 Under the proposed
amendments, if FINRA notifies a
customer that a member or associated
person has become inactive, proposed
FINRA Rules 12309(b) and (c) would
make it easier to amend pleadings to
add a claim or party by eliminating the
need for pre-approval by an arbitrator or
panel. If the amended pleading to add
a party occurs after panel appointment,
the newly-added party would not be
able to participate in the arbitration
selection process.
In this scenario, FINRA would
provide the arbitrator disclosure
reports 51 of the sitting panelists to the
parties and permit the parties to raise
any conflicts they find with the panel.52
47 Arbitrator selection is the process in which the
parties receive lists of potential arbitrators and
select the panel to hear their case. The number of
arbitrators who hear a case is determined by the
amount of the claim. See generally Part IV
(Appointment, Disqualification, and Authority of
Arbitrators) of the Code. See also Arbitrator
Selection, https://www.finra.org/arbitration-andmediation/arbitrator-selection.
48 See FINRA Rule 12309(a).
49 See FINRA Rule 12309(b).
50 See FINRA Rule 12309(c).
51 An arbitrator disclosure report is a summary of
the arbitrator’s background and is provided to the
parties to help them make informed decisions
during the arbitrator selection process.
52 Arbitrators must make a reasonable effort to
learn of, and must disclose to the Director, any
circumstances which might preclude the arbitrator
from rendering an objective and impartial
determination in the proceeding, including, for
example, any existing or past financial, business,
professional, family, social, or other relationships or
circumstances with any party, any party’s
representative, or anyone who the arbitrator is told
may be a witness in the proceeding, that are likely
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If a party discovers a conflict, the party
may file a motion to recuse the
arbitrator.53 The arbitrator who is the
subject of the motion to recuse would
consider whether to withdraw 54 from
the case and rule on the motion.55 The
party may also request removal of the
arbitrator by the Director, under certain
circumstances.56
FINRA does not believe that the
proposed amendments would encourage
claimants to add members or associated
persons who have no nexus to the
arbitration case as some commenters
fear. While the proposed amendments to
FINRA Rule 12309 would remove the
requirement for arbitrator or panel
approval prior to adding a claim or
party, FINRA Rule 12309(d) permits any
party, whether existing or newly-added,
to respond to an amended pleading after
it is filed by filing an answer and raising
any available defenses.57 Thus, if the
claim or party to be added has no
connection to the arbitration case, the
respondents would have an opportunity
to make that argument to the arbitrator
or panel.58 It would not be in the
to affect impartiality or might reasonably create an
appearance of partiality or bias. See FINRA Rule
12405(a). The duty to disclose any relationship,
experience and background information that may
affect, or even appear to affect, the arbitrator’s
ability to be impartial and the parties’ belief that the
arbitrator will be able to render a fair decision, is
an ongoing duty. See FINRA Rule 12405(b). Thus,
if a party is added under proposed FINRA Rule
12309(c)(2), the panelists must update their
disclosures or review them to ensure that further
updates are not warranted.
53 See FINRA Rule 12406.
54 The Code of Ethics for Arbitrators in
Commercial Disputes (‘‘Canon of Ethics’’) applies to
arbitrators on FINRA’s arbitrator rosters. See Canon
of Ethics, https://www.finra.org/arbitration-andmediation/code-ethics-arbitrators-commercialdisputes. Canon II provides that if an arbitrator is
requested to withdraw by less than all of the parties
because of alleged partiality, the arbitrator should
withdraw except in two circumstances. In one such
circumstance, the arbitrator could consider the
matter, determine that the reason for the challenge
is not substantial, and that he or she can
nevertheless act and decide the case impartially and
fairly. See Canon II (An Arbitrator Should Disclose
Any Interest Or Relationship Likely To Affect
Impartiality Or Which Might Create An Appearance
Of Partiality), Section G.
55 See FINRA Rule 12406.
56 The rule states, in relevant part, that before the
first hearing session begins, the Director will grant
a party’s request to remove an arbitrator if it is
reasonable to infer, based on information known at
the time of the request, that the arbitrator is biased,
lacks impartiality, or has a direct or indirect interest
in the outcome of the arbitration. The interest or
bias must be definite and capable of reasonable
demonstration, rather than remote or speculative.
See FINRA Rule 12407(a)(1). After the first hearing
session begins, the Director may remove an
arbitrator based only on information required to be
disclosed under Rule 12405 that was not previously
known by the parties. See FINRA Rule 12407(b).
57 See FINRA Rule 12303(a).
58 After the newly-added party files an answer,
the party could seek to have the claim dismissed
prior to the conclusion of the case in chief, on the
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claimant’s interest, therefore, to add
frivolous claims or unnecessary parties,
as doing so would likely increase a
claimant’s costs in supporting the
amended pleading and would delay the
outcome of the case.
FSI suggested that if the arbitrator or
panel no longer has the right to approve
adding a new claim or new parties, the
proposed amendments could result in
orphaned accounts. FSI commented that
FSI’s members may no longer accept
customer accounts from inactive firms
to minimize service interruptions
because the proposed amendments
would ‘‘make it easier for, and likely
encourage, customers to pursue claims
against the firm that accepts the
customer accounts.’’
FINRA believes it is unlikely that a
customer would add the firm that
accepted his or her accounts from an
inactive firm as a party to an arbitration
case against the inactive firm because
the rules permit the customer to add
new parties without pre-approval of the
arbitrator or panel. If the customer’s
new firm has no connection to the
dispute involving the inactive firm, yet
the customer adds the new firm to the
case, the customer risks jeopardizing the
business relationship with the new firm,
increasing his or her costs to support a
frivolous claim, and alienating the panel
by adding a member that was not
associated with the account or conduct
at issue 59 until after the named
respondent had gone out of business.
FINRA believes, therefore, that these
risks outweigh any benefit to the
customer who might consider adding a
party that has no connection to the
arbitration case.
Length of Termination Period for
Associated Persons
In the Notice, FINRA proposed to
define an ‘‘inactive associated person’’
as a person associated with a member
whose registration is revoked or
suspended, or whose registration has
been terminated for a minimum of 365
days. Three commenters stated that the
timeframe should be shortened to 6
months,60 120 days,61 or 60 days.62
FINRA recognizes the commenters’
concerns, but believes that the 365-day
minimum termination requirement for
associated persons would help ensure
that enough time has elapsed to assume
reasonably that the associated person
has permanently left the securities
industry. FINRA believes the
requirement would benefit those
customers who would exercise the
option to withdraw the case from the
arbitration forum and move it to an
alternate venue, because they would
have more certainty that the associated
person would not return to the
securities industry to exercise his or her
rights under the predispute arbitration
agreement. Further, the 365-day
requirement could reduce potential
costs to these customers, as they would
save money on filing fees and avoid
procedural delays, such as staying the
case in an alternate venue and restarting it in FINRA’s arbitration forum,
which could result if the associated
person is only temporarily out of the
industry.
Length of Time To Decide Whether To
Withdraw Claim
Under the proposed amendments to
FINRA Rule 12202(b), if a member or an
associated person becomes inactive
during a pending arbitration, FINRA
would notify the customer about the
status change. The customer would be
permitted to withdraw the claim against
the inactive member or inactive
associated person with or without
prejudice within 60 days of receiving
notice of a status change.63 SJU
suggested that the 60-day period should
be increased to 90 days to provide the
customer with additional time to decide
whether to pursue the claim in court
(and consult with and secure
appropriate counsel), to continue with
the arbitration, and to amend pleadings.
FINRA believes that once a customer is
notified of a member’s or associated
person’s inactive status, the proposed
60-day timeframe is a reasonable
amount of time for the customer to
60 See
SJU.
Cornell, stating that ‘‘FINRA should
consider the average time it takes to find new
employment, and the economic costs to parties
having to pursue a claim when the associated
person has left the industry permanently but has
not yet hit the 365-day minimum requirement.’’
62 See PIABA, stating that ‘‘a shorter window
simply provides the customer with more options
regarding amendment and/or withdrawal of the
claims without prejudice.’’
63 Within the same 60-day period, the customer
would also be permitted to amend a pleading or add
a party without pre-approval from the arbitrator or
panel, under the proposed amendments to FINRA
Rules 12309(b)(2) and (c)(2).
61 See
basis that the moving party was not associated with
the account(s), security(ies), or conduct at issue. See
FINRA Rules 12504(a)(2) and (a)(6).
59 After the member responds to the amended
claim, the member could then file a motion to
dismiss prior to the conclusion of the customer’s
case on the ground that the member was not
associated with the account(s), security(ies), or
conduct at issue. See FINRA Rule 12504(a)(6)(B).
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decide whether to withdraw the claim,
amend the claim or add a party. FINRA
believes the 60-day timeframe provides
customers with enough time to make
informed decisions on how to proceed
in the case, while still keeping the case
on track for timely resolution, which
could improve the customer’s chances
at recovery, if an arbitrator or panel
issued an award.
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Extend the Proposed Amendments to
Intra-Industry Cases
The proposed amendments would
apply to customer cases only. SIFMA
contended that the proposed
amendments should apply also to intraindustry cases (i.e., disputes between or
among members and associated
persons).64 SIFMA stated that ‘‘all of the
arguments and justifications that FINRA
makes in favor of expanding the options
available to a customer claimant when
dealing with those member firms or
associated persons who are responsible
for most unpaid awards apply equally to
industry claimants when dealing with
those same member firms and
associated persons.’’
FINRA acknowledges SIFMA’s
concerns. At this time, however, FINRA
has decided to apply the proposed
amendments to customer cases only
because providing customers with more
control over the arbitration process
when faced with a respondent that
likely will not be able to pay an award
furthers FINRA’s goal of investor
protection.
Related Claims Should Be Litigated in
Same Forum
Under the proposed amendments to
FINRA Rule 12202, claims against
inactive firms or inactive associated
persons would not be eligible for
arbitration, unless the customer agrees
in writing to arbitrate after the claim
arises. FSI expressed concern that,
under the proposed rule change,
customers could proceed against a
member in arbitration and an associated
person in court. In this scenario, FSI
stated that the discovery in the
customer’s case against the associated
person in court could reveal additional
facts that the customer could use against
the firm in its arbitration case. FSI
suggested that the member would not
have the opportunity to seek
comparable information from the
customer during the arbitration case.
FSI requested, therefore, that FINRA
clarify in the proposed amendments that
customers be required to pursue related
claims (i.e., a claim against the firm and
a claim against the associated person
64 See
FINRA Rule 13000 Series.
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that arise from the same facts and
alleged misconduct) in the same forum.
FINRA notes that the goal of the
proposed amendments is to provide
customers with the same options against
an associated person who is inactive at
the time of filing as those that currently
exist against an inactive member. By
providing a customer with the option to
pursue his or her claim in court against
an inactive associated person, the
proposed amendments could result in
customers filing claims based on the
same facts and circumstances in FINRA
arbitration and in court at the same
time. FINRA notes that this approach
would increase the parties’ costs, but
would have little effect on a member’s
access to information during its case
with the customer.
FINRA provides the Discovery Guide
for customer cases only, which outlines
documents that the parties should
exchange without arbitrator
intervention. The Discovery Guide
contains two document production lists
of presumptively discoverable
documents: one for the firm/associated
persons to produce and one for the
customer to produce.65 Thus, at the
outset of the arbitration, the member
would be permitted to seek information
from the customer that is in the
customer’s possession or control and is
relevant to the member’s case. In
addition, under the Customer Code, the
member would be permitted to request
additional documents or information
from any party in arbitration,66 and
arbitrators have the authority to issue
subpoenas 67 or orders 68 compelling
discovery if the subject of the request
fails to comply with a request. If the
customer learns of information during
the court proceeding that he or she
intends to use during the arbitration
proceeding, the customer must provide
copies of all documents and materials in
customer’s possession or control that
have not already been produced at the
20-day exchange deadline.69 For these
reasons, FINRA declines to amend the
proposed rule change as suggested.
Request for Additional FINRA Data
PIABA requested that FINRA release
the data and other statistical
information FINRA used to support the
proposed amendments. FINRA has
made available data on which it relied
in its discussion of the economic
impacts of the proposed amendments.
65 See
Discovery Guide, https://www.finra.org/
arbitration-and-mediation/discovery-guide.
66 See FINRA Rule 12507.
67 See FINRA Rule 12512.
68 See FINRA Rule 12513.
69 See FINRA Rule 12514.
PO 00000
Frm 00136
Fmt 4703
Sfmt 4703
Minimize Delays and Postponements
From Newly-Added Party
PIABA expressed concern that
newly-named respondents may demand
extended delays and postponements of
scheduled hearing dates. PIABA urged
FINRA to consider adopting arbitrator
training and guidelines to instruct
arbitrators to balance carefully the
interests of all the parties to the
arbitration when considering
newly-added respondent requests to
extend deadlines or hearings.
When FINRA receives approval of
proposed rule changes that involve
arbitration practices and procedures,
FINRA’s Office of Dispute Resolution
(‘‘ODR’’) will include articles on the
new rules in The Neutral Corner, an
ODR newsletter for arbitrators and other
neutrals that includes updates on rules
affecting dispute resolution and tips on
how to be a better arbitrator or
mediator.70 In addition, ODR will
develop arbitrator training to explain
how the new rules would work and
provide guidance to arbitrators on their
roles and responsibilities under the new
rules. These informational and training
materials will provide examples of best
practices that arbitrators could use as
guides to assist them when they are
deciding a newly-added respondent’s
request for an extension or
postponement. As is current practice
under the Code, arbitrators would have
the authority under the proposed
amendments to exercise their judgment
when addressing these matters, based
on the facts and circumstances of the
case.
Reporting Mechanisms Should Be
Accurate and Made Available to the
Public
Under the proposed amendments, an
‘‘inactive member’’ would be defined as
a member whose membership has been
terminated, suspended, cancelled,
revoked, the member has been expelled
from FINRA, or the member is otherwise
defunct. An ‘‘inactive associated
person’’ would be defined as a person
whose registration is revoked or
suspended, who has been expelled or
barred from FINRA, or has been
terminated for a minimum of 365 days.
NASAA suggested that the withdrawal
statistic that ODR publishes 71 should be
broken down to reflect the appropriate
subcategory (e.g., terminated,
70 The Neutral Corner, Volume 1—2019, https://
www.finra.org/arbitration-and-mediation/neutralcorner-volume-1-2019-0319. See also the previous
editions at https://www.finra.org/arbitration-andmediation/previous-editions-neutral-corner.
71 Dispute Resolution Statistics, https://
www.finra.org/arbitration-and-mediation/disputeresolution-statistics.
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Federal Register / Vol. 84, No. 226 / Friday, November 22, 2019 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
suspended, canceled, etc.) that
customers use to withdraw their claims.
FINRA cannot commit to publishing
subcategories of withdrawals as
requested, because the programming
costs required to capture that level of
detail would likely be significant.
FINRA agrees, however, that its
withdrawal statistics should distinguish
between a claim (or case) withdrawn
because a claimant exercised rights
under the rules after a respondent
became inactive and claims withdrawn
for other reasons. If the SEC approves
the proposed rule change, FINRA would
assess its technology platforms to
determine what programming changes
would be needed to capture the data
relating to claims or cases withdrawn
due to an inactive respondent.
NASAA also suggested that FINRA
create and make public a separate report
to capture the members and associated
persons who become inactive due to
unpaid arbitration awards or judgments
in favor of customers. NASAA stated
that such a report would provide
transparency on industry participants
that leave the industry due to customer
complaints and would provide
customers with additional information
when making a decision about whether
to work with a specific FINRA member
or associated person.
FINRA is committed to providing
customers with information on the state
of unpaid customer arbitration awards
in the forum, so that they may make
informed decisions about whom to
entrust with their money and, therefore,
has made data on unpaid customer
arbitration awards available on its
website.72 Moreover, FINRA has
published a list of member firms and
associated persons with unpaid
customer arbitration awards.73 This
information will continue to appear on
the firm’s or individual’s
BrokerCheck® 74 report.
72 See Statistics on Unpaid Customer Awards in
FINRA Arbitration, https://www.finra.org/
arbitration-and-mediation/statistics-unpaidcustomer-awards-finra-arbitration. FINRA updates
these data periodically.
73 See Member Firms and Associated Persons
with Unpaid Customer Arbitration Awards, https://
www.finra.org/arbitration-and-mediation/membersfirms-and-associated-persons-unpaid-customerarbitration-awards. FINRA updates these data
periodically.
74 FINRA developed and operates this free tool
under the oversight of the SEC to provide investors
with information regarding a broker’s employment
history, regulatory actions, investment-related
licensing information, arbitrations and complaints.
See BrokerCheck®, https://brokercheck.finra.org.
VerDate Sep<11>2014
16:57 Nov 21, 2019
Jkt 250001
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2019–027 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2019–027. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
Fmt 4703
Sfmt 4703
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.75
Jill M. Peterson,
Assistant Secretary.
BILLING CODE 8011–01–P
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Frm 00137
also will be available for inspection and
copying at the principal office of
FINRA. All comments received will be
posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2019–027 and should be submitted on
or before December 13, 2019.
[FR Doc. 2019–25324 Filed 11–21–19; 8:45 am]
IV. Solicitation of Comments
PO 00000
64589
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87556; File No. SR–
NYSEArca–2019–82]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Permitting the Listing
and Trading of Shares of the
Nationwide Risk-Managed Income ETF
Under NYSE Arca Rule 8.600–E
November 18, 2019.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on
November 5, 2019, NYSE Arca, Inc.
(‘‘NYSE Arca’’ 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 self-regulatory
organization. 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 permit the
listing and trading of shares under
NYSE Arca Rule 8.600–E of the
Nationwide Risk-Managed Income ETF,
a series of ETF Series Solutions,
notwithstanding that the fund does not
meet the requirements of Commentary
.01(d)(2) to Rule 8.600–E. The proposed
rule change is available on the
75 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
E:\FR\FM\22NON1.SGM
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]]>Agencies
[Federal Register Volume 84, Number 226 (Friday, November 22, 2019)]
[Notices]
[Pages 64581-64589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25324]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87557; File No. SR-FINRA-2019-027]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule 12000 Series To Expand Options Available to Customers if a
Firm or Associated Person Is or Becomes Inactive
November 18, 2019.
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 November 5, 2019, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rules 12100, 12202, 12214, 12309,
12400, 12601, 12702, 12801, and 12900 of the Code of Arbitration
Procedure for Customer Disputes (``Customer Code'' or ``Code'') to
expand a customer's options to withdraw an arbitration claim if a
member or an associated person becomes inactive before a claim is filed
or during a pending arbitration. In addition, the proposed amendments
would allow customers to amend pleadings, postpone hearings, request
default proceedings and receive a refund of filing fees in these
situations.
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
Most unpaid customer arbitration awards are rendered against firms
or individuals whose FINRA registration has been terminated, suspended,
cancelled, or revoked, or who have been expelled from FINRA. These
firms and individuals are generally referred to as ``inactive,'' and
are no longer FINRA members or associated with a FINRA member, although
they may continue to operate in another area of the financial services
industry where FINRA registration is not required. Firms and
individuals can become inactive prior to an arbitration claim being
filed, during an arbitration proceeding, or subsequent to an
arbitration award, and this status can be caused by FINRA's action,
such as when a firm or individual is suspended for failing to pay an
award, or by the firm's or individual's own voluntary action.
FINRA has implemented a number of changes to its arbitration
program that expand the options available to a customer when dealing
with those members or associated persons that are inactive either at
the time the claim is filed or at the time of the award. For example,
when a customer claimant first files an arbitration claim, FINRA
alerts, by letter, the customer claimant if the respondent, whether a
member or an associated person, is inactive. FINRA also informs the
claimant that awards against such members or associated persons have a
much higher incidence of non-payment and that FINRA has limited
disciplinary leverage over inactive members or associated persons that
fail to pay arbitration awards. Thus, the customer knows before
pursuing the claim in arbitration that collection of an award may be
more difficult. In addition, upon learning that the member or
associated person is inactive, a customer may determine to amend his or
her claim to add other respondents from whom the customer may be able
to collect should the claim go to award.
Proposed Rule Change
FINRA is proposing to amend the Customer Code \3\ to expand further
the options available to customers in situations where a firm becomes
inactive during a pending arbitration, or where an associated person
becomes inactive either before a claim is filed or during a pending
arbitration. FINRA is also proposing to amend the Code to allow
customers to amend pleadings, postpone hearings, request default
proceedings and receive a refund of filing fees if the customer
withdraws the claim under these situations.\4\
---------------------------------------------------------------------------
\3\ While unpaid awards occur in intra-industry cases (i.e.,
disputes between or among members and associated persons), the
proposed amendments would apply to customer cases only.
\4\ FINRA is also proposing to amend the Code to update cross-
references and make other non-substantive, technical changes to
rules impacted by the proposed rule change.
---------------------------------------------------------------------------
A. Arbitrating Claims Against Inactive Members and Associated Persons
Currently, under FINRA Rule 12202 (Claims Against Inactive
Members), a customer's claim against a firm whose membership is
terminated, suspended, cancelled or revoked, or that has been expelled
from FINRA, or that is
[[Page 64582]]
otherwise defunct, is ineligible for arbitration unless the customer
agrees in writing to arbitrate after the claim arises. In these
situations, the customer is able to evaluate the likelihood of
collecting on an award and make an informed decision whether to proceed
in arbitration, to file the claim in court or to take no action,
regardless of whether the customer signed a predispute arbitration
agreement.\5\ Accordingly, claims against inactive firms proceed in
arbitration only at the customer's option.
---------------------------------------------------------------------------
\5\ If the customer notifies FINRA in writing that he or she
does not want to proceed against the inactive member in FINRA's
forum, FINRA deems the customer's agreement to submit to arbitration
rescinded and sends the customer a full refund of any filing fee
remitted.
---------------------------------------------------------------------------
The Code does not address situations, however, where a member firm
becomes inactive during a pending arbitration. In addition, the Code
does not provide specific procedures for a customer to withdraw, and
file in court, a claim against an associated person who becomes
inactive before the customer files a claim or during a pending
arbitration.
Accordingly, FINRA is proposing to amend FINRA Rule 12202 to expand
a customer's option to withdraw a claim to situations where a member
becomes inactive during a pending arbitration, or where an associated
person becomes inactive either before a claim is filed or during a
pending arbitration. Under the proposal, FINRA Rule 12202 would specify
that a customer's claim against an associated person who is inactive at
the time the claim is filed is ineligible for arbitration unless the
customer agrees in writing to arbitrate after the claim arises. In
addition, FINRA Rule 12202 would specify that if a member or an
associated person becomes inactive during a pending arbitration, FINRA
would notify the customer of the status change, and provide the
customer with 60 days to withdraw the claim(s) with or without
prejudice.\6\
---------------------------------------------------------------------------
\6\ FINRA Rule 12702 (Withdrawal of Claims) provides that before
a party answers a statement of claim, the claimant can withdraw the
claim with or without prejudice. However, after a party submits an
answer, the claimant can only withdraw the claim with prejudice
unless the panel or the parties agree otherwise. FINRA is proposing
to make a conforming change to FINRA Rule 12702 to provide that a
customer can withdraw a claim without prejudice if the party that
submitted an answer is an inactive member or inactive associated
person. Withdrawal without prejudice would allow the customer to re-
file the arbitration at a later date.
---------------------------------------------------------------------------
Similar to the current rules and procedures relating to claims
filed against inactive members, the proposed amendments would allow the
customer to evaluate the likelihood of collecting on an award and make
an informed decision whether to proceed in arbitration, to file the
claim in court or to take no action, regardless of whether the customer
signed a predispute arbitration agreement.
In addition, FINRA is proposing to amend FINRA Rule 12100
(Definitions) to add definitions of ``inactive member'' and ``inactive
associated person.'' Consistent with current Rule 12202, FINRA is
proposing to define an ``inactive member'' as a member whose membership
is terminated, suspended, cancelled or revoked; that has been expelled
or barred \7\ from FINRA, or that is otherwise defunct.\8\
---------------------------------------------------------------------------
\7\ FINRA is adding ``or barred'' to the definition of an
``inactive member'' to capture that a member may be inactive due to
a bar.
\8\ The proposed rule change would amend the definition of
``member'' under the Customer Code, the Code of Arbitration
Procedure for Industry Disputes (``Industry Code''), and in Article
I of the By-Laws of FINRA Regulation, Inc. to conform the definition
to the proposed definition of an ``inactive member'' as discussed
below. The proposed changes would make the definition of ``member''
consistent in the FINRA rules that apply to FINRA's arbitration
forum.
---------------------------------------------------------------------------
An ``inactive associated person'' would be defined as a person
associated with a member whose registration is revoked, cancelled, or
suspended, who has been expelled or barred from FINRA,\9\ or whose
registration has been terminated for a minimum of 365 days. Thus, if an
associated person's registration is not revoked, cancelled, or
suspended, the person has not been expelled or barred from FINRA, and
the individual's registration has been terminated for less than one
year, the individual would not be classified as terminated and,
therefore, would not be deemed inactive.
---------------------------------------------------------------------------
\9\ In Regulatory Notice 17-33 (October 2017), discussed infra,
FINRA proposed to define an ``inactive associated person'' as a
person associated with a member whose registration is revoked or
suspended, or whose registration has been terminated for a minimum
of 365 days. FINRA is proposing to add ``expelled or barred from
FINRA'' and ``whose registration is cancelled'' to this definition
to capture other ways in which an individual could be categorized as
inactive.
---------------------------------------------------------------------------
FINRA believes the 365-day minimum termination \10\ requirement for
associated persons would help ensure that enough time has elapsed to
assume reasonably that the associated person has permanently left the
securities industry. The requirement would allow enough time for those
associated persons who may have temporarily left the industry to return
before the arbitration closes.\11\
---------------------------------------------------------------------------
\10\ Termination, in some cases, may be a voluntary action that
can be of short duration.
\11\ In its analysis of 2,054 customer cases closed by hearing,
on the papers, or by stipulated award from 2014 to 2018, FINRA
identified 78 cases where an associated person was not in the
industry while the arbitration was pending but returned to the
industry in fewer than 365 days.
---------------------------------------------------------------------------
B. Amending Pleadings
FINRA Rule 12309 (Amending Pleadings) limits a party's ability to
amend a statement of claim, among other pleadings, after FINRA has
appointed a panel to the case. Specifically, once FINRA appoints a
panel to a case, a party can amend a pleading only if the arbitrators
grant a party's motion to do so. FINRA Rule 12309 also provides that a
party cannot add a new party to the case after arbitrator ranking lists
are due to the Director of Arbitration until FINRA appoints the panel
and the arbitrators grant a party's motion to add the new party.
FINRA believes that a customer should be able to change his or her
litigation strategy during a pending case once the customer learns that
a firm or an associated person has become inactive. Accordingly, FINRA
is proposing to amend FINRA Rule 12309 to provide that if FINRA
notifies a customer that a firm or an associated person has become
inactive during a pending arbitration, the customer may amend a
pleading, including adding a new party, within 60 days of receiving
such notice.\12\
---------------------------------------------------------------------------
\12\ FINRA Rule 12309(d) would permit any party to file a
response to an amended pleading, provided the response is filed and
served within 20 days of receipt of the amended pleading, unless the
panel determines otherwise. Thus, the newly-added party could file a
response to the amended pleading for the panel or arbitrator to
consider.
---------------------------------------------------------------------------
C. Postponing Hearings
FINRA Rule 12601 (Postponement of Hearings) addresses when a
scheduled hearing date can be postponed. The parties can agree to
postpone a hearing. Absent an agreed upon postponement, a hearing can
be postponed by FINRA in extraordinary circumstances, by the
arbitrators at their discretion, or by the arbitrators upon a party's
motion. FINRA is proposing to amend FINRA Rule 12601 to provide that if
FINRA notifies a customer that a firm or an associated person has
become inactive and the scheduled hearing date is within 60 days of the
date the customer receives the notice from FINRA, the customer may
postpone the hearing date. Since the proposed amendment would provide a
customer with 60 days to determine how to proceed after FINRA notifies
the customer of the status change to inactive, it would be appropriate
to allow the customer to postpone a scheduled hearing that falls within
that time period.
In addition, FINRA assesses postponement fees against the parties
for each postponement agreed to by the parties, or granted upon the
request of
[[Page 64583]]
one or more parties. FINRA also charges an additional fee of $600 per
arbitrator if a postponement takes place within 10 days of a scheduled
hearing date. The additional $600 per arbitrator fee is paid to the
arbitrators to compensate them for the late adjournment.\13\ FINRA is
proposing to amend FINRA Rule 12601 to provide that if FINRA notifies a
customer that a firm or an associated person has become inactive and
the scheduled hearing date is within 60 days of the date the customer
receives the notice from FINRA, FINRA would not charge the customer a
postponement fee or an additional fee of $600 per arbitrator if a
customer chooses to postpone a scheduled hearing.
---------------------------------------------------------------------------
\13\ See FINRA Rule 12214 (Payment of Arbitrators).
---------------------------------------------------------------------------
FINRA is also proposing to amend FINRA Rule 12214 to make it clear
that it would continue to pay the $600 honoraria to the arbitrators to
compensate them for their time if a customer chooses to postpone a
scheduled hearing within 10 days before it is scheduled because the
customer learns that the firm or associated person has become inactive.
D. Default Proceedings
FINRA Rule 12801 (Default Proceedings) permits a claimant to
request default proceedings against any respondent whose registration
is terminated, revoked or suspended, and who failed to file an answer
\14\ to a claim within the time provided in the Code. A single
arbitrator will decide the case based on the claimant's pleadings and
other documentation.\15\ The claimants must present a sufficient basis
to support the making of an award.\16\ The arbitrator may not issue an
award based solely on the nonappearance of a party.\17\
---------------------------------------------------------------------------
\14\ A respondent must serve each party with a signed and dated
Submission Agreement and answer specifying the relevant facts and
available defenses to the statement of claim within 45 days of
receipt of the statement of claim. See FINRA Rule 12303(a).
\15\ See FINRA Rule 12801(b)(2)(B). No hearings are held in
default proceedings unless the customer requests one. See FINRA Rule
12801(c).
\16\ See FINRA Rule 12801(e)(1).
\17\ Id. If the defaulting respondent files an answer before an
award has been issued, the proceedings against this respondent will
be terminated and the claim will proceed under the regular
provisions of the Code. See FINRA Rule 12801(f).
---------------------------------------------------------------------------
As noted, the proposed amendments would define an inactive
associated person as a person associated with a member whose
registration is revoked, cancelled, or suspended, who has been expelled
or barred from FINRA, or whose registration has been terminated for a
minimum of 365 days. In the context of a default proceeding, FINRA
believes that it would be appropriate to continue to allow a customer
to request default proceedings against any terminated associated person
who fails to answer a claim, regardless of how long the associated
person has been terminated, consistent with the existing rule.
Accordingly, FINRA is proposing to amend FINRA Rule 12801(a) to specify
that a claimant may request a default proceeding against a terminated
associated person who fails to file an answer within the time provided
in the Code regardless of the number of days since termination.\18\
---------------------------------------------------------------------------
\18\ See supra note 10.
---------------------------------------------------------------------------
E. Refunding Filing Fees
FINRA Rule 12900 (Fees Due When a Claim is Filed) specifies that if
a claim is settled or withdrawn more than 10 days before the date that
the hearing is scheduled to begin, a party paying a filing fee will
receive a partial refund of the filing fee. The rule also provides that
FINRA will not refund any portion of the filing fee if a claim is
settled or withdrawn within 10 days of the date that the hearing is
scheduled to begin.
FINRA is proposing to amend FINRA Rule 12900 to provide that FINRA
would refund a customer's full filing fee if FINRA notifies a customer
that a firm or an associated person has become inactive during a
pending arbitration, and the customer withdraws the case against all
parties within 60 days of the notification. FINRA would refund the
filing fee even if the customer withdraws the case within 10 days of
the date that the hearing is scheduled to begin.
F. Non-Substantive Changes
In addition to amending FINRA Rules 12100, 12202, 12214, 12309,
12400, 12601, 12702, 12801, and 12900 to expand a customer's options to
withdraw an arbitration claim if a member or an associated person
becomes inactive before a claim is filed or during a pending
arbitration, FINRA is also proposing to amend the Code to update cross-
references and make other non-substantive, technical changes to the
rules impacted by the proposal.
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice to be published no later than 60 days following Commission
approval. The effective date will be no later than 90 days following
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\19\ 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.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA believes that the proposed rule change would protect
investors and the public interest by expanding the options available to
customers with claims against respondents who are unlikely to be able
to pay. The proposed rule change would extend the concept of what it
means to be inactive to expressly include associated persons, so that
customers would have the same options during a case against inactive
associated persons as they would against inactive members. The proposed
change, therefore, would add consistency to FINRA rules.
Further, FINRA believes that the proposed amendments would provide
customers with expanded options and flexibility to change case strategy
if FINRA notifies them that a member or associated person has become
inactive during a pending arbitration. In particular, the proposed rule
change would permit a customer to amend his or her pleading or to add
parties without arbitrator intervention. FINRA rules, however, permit
the newly-added party to respond to the amended pleading and to have
the panel or arbitrator consider any objections.
The proposed rule change would also clarify the default rule to
include an inactive associated person who does not answer a claim,
regardless of the number of days since termination. FINRA believes that
the proposed rule change would add consistency to FINRA's default rule
so that the procedures would apply to inactive members and inactive
associated persons equally. As a result, investors would know that they
have the same options and rights in default proceedings against any
inactive respondent under the Customer Code. FINRA believes this could
help expedite these arbitration cases, as any ambiguity about how the
rule should be applied would be removed. Moreover, FINRA believes that
exempting the minimum-day termination requirement would prevent an
associated person from using the 365-day requirement as a shield to
delay the arbitration case.
[[Page 64584]]
FINRA believes that the proposed amendments provide customers with
more options and flexibility in how they choose to resolve claims
against respondents who are unlikely to pay, and, thus, give them more
control over the arbitration case when they are notified that a member
or associated person has become inactive. Moreover, by eliminating the
postponement fees and refunding filing fees in certain circumstances,
the proposed amendments eliminate these costs as a potential barrier
for customers who may opt to pursue their claims in other forums. For
these reasons, FINRA believes that the proposed rule change protects
investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed amendments will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. A discussion of the economic
impacts of the proposed amendments follows.
Economic Impact Assessment
(a) Regulatory Need
The Code addresses situations where customers bring claims against
inactive members. The Code does not address situations, however, where
a member firm becomes inactive during a pending arbitration or where an
associated person becomes inactive before a claim is filed or during a
pending arbitration. This may limit the options available to customers
to seek redress, as well as their ability to collect an award.
(b) Economic Baseline
The economic baseline for the proposed amendments is the current
rules under the Code that address customer disputes in arbitration. The
proposed amendments are expected to affect the parties to an
arbitration, including customers, member firms, associated persons, and
arbitrators.
FINRA is able to identify 2,054 customer cases closed by hearing,
on the papers, or by stipulated award from 2014 to 2018. Among these
cases, FINRA is able to identify 128 cases (six percent) where a member
firm would have been defined as inactive (under the proposed
amendments) before an arbitration. In these instances, the current
rules under the Code provide customers the option to proceed in
arbitration, to file the claim in court, or to take no action
regardless of whether the customer signed a pre-dispute arbitration
agreement. Customers are therefore able to evaluate the likelihood of
collecting on an award and to choose the forum in which to proceed.
FINRA is also able to identify 427 cases (21 percent of 2,054)
where a firm became inactive during a pending arbitration, or where an
associated person would have been identified as inactive (under the
proposed amendments) either before or during a pending arbitration. The
current rules do not provide similar options to customers in these
instances, and customers may be less able to choose the forum in which
to proceed or to change their litigation strategy during a pending
case.\20\
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\20\ In the 427 cases, the total amount of compensatory damages
sought by customers was $580.3 million, and customers were awarded
compensatory damages of $96.0 million. For the 347 cases that closed
from 2014 through 2017, 126 relate to an award that went unpaid, and
the member firms or associated persons responsible for the unpaid
awards would have been identified as inactive under the proposed
amendments. The total amount of awards relating to these cases that
went unpaid was $55.9 million. The respondents that would have been
identified as inactive were responsible for nearly all of the awards
that went unpaid.
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(c) Economic Impact
The proposed amendments would expand customers' options under the
Code where a member becomes inactive during a pending arbitration or
where an associated person becomes inactive before a claim is filed or
during a pending arbitration. The benefits and costs of the proposed
amendments are discussed below.
In general, the benefits of the proposed amendments arise from the
expansion of customer options under the Code when a member becomes
inactive during a pending arbitration, or when an associated person
becomes inactive before a claim is filed or during a pending
arbitration. In these instances, the proposed amendments would increase
the flexibility of customers to determine whether and how to proceed in
arbitration. Customers would exercise the options under the proposed
amendments if they believe it would increase their ability to seek
redress, and may increase the amount of monetary compensation they
expect to receive.
The expansion of customer options under the Code would arise from
the reduction of the restrictions and penalties to alter their
litigation strategy in arbitration or to withdraw their claims from
arbitration. For example, customers who proceed in arbitration may
amend a pleading without arbitrators granting the motion. This includes
the addition of a new respondent from whom the customer may be able to
collect should the claim go to award. Customers who proceed in
arbitration may also postpone a scheduled hearing without penalty to
assess the options and gain additional time to prepare.\21\ Customers
may also withdraw their claim without prejudice if the party that
submitted an answer is an inactive member or inactive associated
person. Customers who withdraw their claims against all parties within
the allotted time would also receive a full refund of the filing fee.
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\21\ Among the 2,054 customer cases in the baseline sample,
FINRA is able to identify 240 (12 percent) cases where a member or
an associated person would have been identified as inactive after
arbitrator ranking lists were due or FINRA appointed a panel. FINRA
is also able to identify 119 (six percent) cases where a member or
an associated person would have been identified as inactive within
60 days of a scheduled hearing.
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Customers who exercise the options under the proposed amendments,
and the member firms and associated persons who are also parties to the
arbitration, may incur additional costs. For example, if customers
withdraw their claims from arbitration and restart the case in another
venue, then the parties may incur additional legal expense and time to
resolve the dispute. If instead customers amend their pleadings but
remain in arbitration, the parties (including member firms and
associated persons who are newly-named in the amended pleadings) may
also incur additional legal expense to alter their litigation strategy,
time to resolve the dispute, and forum fees (e.g., hearing session
fees).\22\ Parties may also incur additional time to resolve the
dispute if customers postpone scheduled hearings. Customers have the
option to incur these additional expenses, and would likely incur them
only if they believe the costs would increase the amount of monetary
compensation they may expect to receive.
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\22\ FINRA does not believe, however, that the proposed
amendments would cause member firms and associated persons to be
named without having a connection to the case. See discussion in
Section II.C.
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The proposed amendments would provide no significant benefits and
impose no material costs on customers who would not change their
behavior when notified of an associated person's or firm's change of
status during arbitration in the presence of the amendments, nor on the
members and associated persons who are party to their claims. In
FINRA's experience, customers typically proceed in arbitration when
notified that a member is inactive at the time of filing, and typically
remain in arbitration when a member or an associated person leaves
[[Page 64585]]
the industry while the arbitration is pending.\23\ One reason customers
remain in arbitration when a member or an associated person leaves the
industry may be the additional costs of restarting a case in another
venue. Another reason may be the expectation that another forum would
not result in a higher likelihood of redress.
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\23\ Among the 2,054 customer cases in the baseline sample,
FINRA is able to identify 297 (14 percent) cases where a member firm
or an associated person would have been identified as inactive
during a pending arbitration.
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Based on this experience, FINRA believes that few customers would
withdraw claims from the forum in the presence of the proposed rules,
but would instead remain in arbitration. Customers are, therefore, more
likely to exercise their new options under the proposed amendments to
amend pleadings or to postpone hearings. The benefits and costs of the
proposed amendments, therefore, may result more from the amendment of
pleadings or the rescheduling of hearings than the withdrawal of
claims.
(d) Alternatives Considered
FINRA exercised discretion in setting the minimum number of days
for a terminated associated person to be considered inactive (365).
FINRA also exercised discretion when setting the maximum number of days
for customers to exercise the options under the proposed amendments
after they receive notification of the inactive status of a member or
an associated person (60).
The minimum-day requirement for a terminated associated person to
be considered inactive affects the length of time that customers must
wait before being able to exercise the options under the proposed
amendments. A longer minimum-day requirement decreases the number of
customers who may have access to the options under the proposed
amendments, and therefore decreases their ability to seek redress.\24\
A longer minimum-day requirement, however, also decreases the
likelihood that an associated person returns to the industry after
being identified as inactive.\25\ Customers may therefore be less
likely to exercise the options under the proposed amendments only for
the inactive associated person to return to the industry, and parties
may be less likely to incur the associated costs unnecessarily. A
shorter minimum-day requirement, on the other hand, may increase the
ability of customers to seek redress, but also may increase the costs
parties may incur unnecessarily. FINRA believes that the 365-day
minimum requirement would provide customers access to the options under
the proposed amendments and help ensure that the associated person had
permanently left the securities industry.
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\24\ For example, a longer minimum-day requirement would
increase the number of associated persons who left the industry as
of the close of the arbitration but not considered inactive. In
these instances, customers would not have access to the options
because the associated persons would not have been considered
inactive while the arbitration is pending. Among the 2,054 customer
cases in the baseline sample, FINRA is able to identify 23 cases
where an associated person had left the industry as of the close of
the arbitration but for 60 days or fewer. The number of cases
increases to 36 for 120 days, 58 for 180 days, and 129 for 365 days.
\25\ With a longer minimum-day requirement, fewer associated
persons would be deemed inactive as defined under the proposed
amendments and then return to the industry. Fewer customers would
therefore exercise the options under the proposed amendments only
for the associated person to return to the industry. For example,
among the 2,054 customer cases in the baseline sample, FINRA is able
to identify 59 cases where an associated person was not in the
industry while the arbitration was pending but returned to the
industry in 60 days or fewer. The number of cases increases to 66
cases for 120 days, 69 cases for 180 days, and 78 cases for 365
days.
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The 60-day maximum requirement for customers after receiving notice
that a firm or an associated person has become inactive to withdraw
their claims without prejudice or to amend a pleading would also limit
their ability to exercise the options and decrease its associated
benefits. The requirement, however, would also limit the effect of an
inactive member or associated person on a pending arbitration, and
provide certainty that the arbitration would continue after the time
period had elapsed. FINRA believes that the 60-day maximum requirement
would reduce the potential number of disruptions to the arbitration
process, while still providing customers access to the proposed
options.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
On October 18, 2017, FINRA published Regulatory Notice 17-33
(``Notice'') to solicit comment on the proposed amendments to the Code
that would expand a customer's options to withdraw an arbitration claim
if a member or an associated person becomes inactive before a claim is
filed or during a pending arbitration as well as allow customers to
amend pleadings, postpone hearings and receive a refund of filing fees
in these situations.\26\ FINRA received eight comments on the
Notice.\27\ While all of the commenters supported the proposed rule
change discussed in the Notice, some stated that the proposed
amendments did not go far enough,\28\ and six commenters suggested
modifications.\29\ Commenters who supported the proposed rule change,
in general, described it as ``a good faith effort to partially address
some of the predicates that cause unpaid awards'' \30\ as well as a
proposal that would provide customers with additional options and
flexibility to alter their litigation strategy.\31\ Several commenters
specifically noted their support for the proposed amendments to FINRA
Rule 12100 (Definitions of Inactive Member and Inactive Associated
Person),\32\ FINRA Rule 12202 (Claims Against Inactive Members and
Inactive Associated Persons),\33\ FINRA Rule 12309 (Amending
Pleadings),\34\ FINRA Rule
[[Page 64586]]
12601 (Postponement of Hearings),\35\ FINRA Rule 12801 (Default
Proceedings) \36\ and FINRA Rule 12900 (Fees Due When a Claim Is
Filed).\37\
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\26\ Available at https://www.finra.org/industry/notices/17-33.
\27\ See letters to Marcia E. Asquith including: Steven B.
Caruso, Attorney, Maddox Hargett & Caruso, P.C., dated November 20,
2017 (``Caruso''); Gregory M. Curley, Senior Litigation Counsel,
Advisor Group, dated December 1, 2017 (``Advisor Group''); William
A. Jacobson, Clinical Professor of Law and Tina Davis, Law School
Student, Cornell University School of Law, dated December 7, 2017
(``Cornell''); Kevin M. Carroll, Managing Director and Associate
General Counsel, Securities Industry and Financial Markets
Association, dated December 15, 2017 (``SIFMA''); Andrew Stoltmann,
President, Public Investors Arbitration Bar Association, dated
December 18, 2017 (``PIABA''); Justin M. Daley, Legal Intern, St.
John's University School of Law, dated December 18, 2017 (``SJU'');
Robin M. Traxler, Vice President, Regulatory Affairs & Associate
General Counsel, Financial Services Institute, dated December 18,
2017 (``FSI''); and Joseph Borg, President, North American
Securities Administrators Association, Inc., dated December 20, 2017
(``NASAA'').
\28\ See Caruso, FSI, NASAA, and PIABA.
\29\ See Advisor Group, Cornell, FSI, PIABA, SIFMA, and SJU.
\30\ See Caruso.
\31\ See Cornell and NASAA.
\32\ See FSI and SJU. FSI noted that ``the proposed amendments
address a scenario that is not currently addressed in FINRA rules
and, as such, brings important clarity to the arbitration process.''
SJU suggested that the proposed changes ``offer an important
protection to customers . . . by providing them with ``the same
options available with respect to individuals who are unregistered
associated persons which they now have with respect to firms that
are unregistered members.''
\33\ See Cornell, FSI, PIABA, and SJU. FSI suggested that
requiring FINRA to notify customers when a member or an associated
person becomes inactive during a pending arbitration would ensure
that customers are promptly informed of the change in the firm's or
the associated person's status. PIABA supported this change as it
``would allow a customer to withdraw filed claims without prejudice
(or in the case of inactive associated persons, never submit the
claim to FINRA Arbitration in the first place), and file a claim in
court, regardless of whether the customer signed a predispute
arbitration agreement.'' SJU supported ``requiring the written
consent of a customer in proceeding with an arbitration claim with a
member or an associated person who is no longer registered . . .
because it is essential that customers be given a fair opportunity
to reconsider their arbitration strategies.''
\34\ See Caruso, Cornell and PIABA.
\35\ See Caruso, Cornell, and SJU. SJU stated that ``any
additional costs involving arbitration could persuade customers to
drop otherwise justifiable claims,'' thus, ``the rules should not
put undue financial burdens on customers.''
\36\ See Cornell, PIABA, and SJU.
\37\ See Caruso and Cornell.
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Effectiveness of the Proposed Amendments
Four commenters stated that the proposed rule change is not as
effective as it could be.\38\ FSI suggested that instead of directly
addressing the issue of unpaid awards, the proposed rule change amends
the arbitration process in ways that would bias the process in favor of
one party's subsequent recovery efforts. FINRA's primary role in the
arbitration process is to administer cases brought to the forum in a
neutral, efficient and fair manner. In its capacity as a neutral
administrator of the forum, FINRA must also ensure that its rules are
not used to hinder a party's recovery efforts. Moreover, once customers
are notified of a member's or associated person's status change during
the arbitration case, they should be permitted to assess the
collectability of their claims and change strategy during the case
without penalty. FINRA believes that, rather than creating bias in the
process against a particular group, the proposed rule change instead
would provide customers with options under the rules to pursue claims
against inactive respondents.
---------------------------------------------------------------------------
\38\ See supra note 30.
---------------------------------------------------------------------------
NASAA stated that when awards go unpaid, members and associated
persons are not held responsible for their misconduct and investors are
left without recourse. Under the Code, a respondent must pay a monetary
award within 30 days of receipt.\39\ In order to incentivize member
firms or associated persons to pay customer awards, and restrict those
who do not, FINRA expels or suspends from the brokerage industry any
member firm or associated person who fails to pay an arbitration award.
If a member firm or associated person fails to comply with an
arbitration award or a settlement agreement related to an arbitration,
FINRA notifies such firm or associated person in writing that the
failure to comply within 21 days of service of the notice will result
in a suspension or cancellation of membership or a suspension from
associating with any member.\40\ If the threat of suspension is not
effective in compelling payment of an award or settlement, FINRA notes
that an investor-claimant may take an award to court and have it
converted to a judgment. The claimant may then attempt to collect on
the judgment using the court's collection procedures.\41\
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\39\ See FINRA Rule 12904(j). An associated person or firm has
four available defenses to FINRA disciplinary measures for non-
payment in customer cases: (1) The firm or associated person paid
the award in full; (2) the parties have agreed to installment
payments or have otherwise settled the matter; (3) the firm or
associated person has filed a timely motion to vacate or modify the
award and such motion has not been denied; and (4) the firm or
associated person has filed a petition in bankruptcy and the
bankruptcy proceeding is pending or the award has been discharged by
the bankruptcy court. See Notice to Members 00-55 (August 2000). In
July 2010, FINRA eliminated the ``bona fide inability to pay''
defense in the expedited suspension proceedings it initiates when a
firm or associated person fails to pay an arbitration award to a
customer. See Regulatory Notice 10-31 (June 2010).
\40\ See FINRA Rule 9554(a).
\41\ An investor-claimant in the FINRA arbitration forum would
be in a similar position as a claimant who had brought an action in
court and had been awarded the same amount of damages.
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The remaining two commenters in this group advocated for FINRA to
create a monetary solution to address unpaid awards. PIABA stated that
FINRA should establish a national investor recovery pool. Caruso
suggested a ``viable economic solution,'' stating ``very few investors
would be able to actually recover their losses'' under the proposed
amendments.\42\ Although these comments are outside the scope of the
proposed rule change, FINRA notes that in its Discussion Paper on
Customer Recovery,\43\ FINRA has identified a number of alternative
approaches that could be taken to further address the issue of unpaid
customer arbitration awards, and FINRA continues to focus on this
important issue.\44\
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\42\ Caruso also suggested that FINRA convene a group to
consider the extent of the unpaid awards problem and develop
solutions to address it.
\43\ See Discussion Paper, FINRA Perspectives on Customer
Recovery (February 8, 2018), https://www.finra.org/sites/default/files/finra_perspectives_on_customer_recovery.pdf.
\44\ See Discussion Paper at 16-18.
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As noted above, six commenters suggested modifications to the
proposed amendments.\45\ FINRA addresses these suggestions in the
following discussion.
---------------------------------------------------------------------------
\45\ See supra note 26.
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Amendment To Add a Party
Three commenters stated that FINRA should revise the proposed
amendment to FINRA Rule 12309(c) to require that a customer's right to
add parties to an arbitration case should be subject to the arbitration
panel's approval.\46\ Advisor Group suggested that the proposed
amendment would prejudice the rights of member firms to participate in
the arbitrator selection process \47\ by requiring them to enter the
arbitration case after the parties had selected an arbitrator or a
panel. FSI suggested that allowing a claimant to add a new party
without prior arbitrator or panel approval could cause a party to incur
costs in defending against potentially meritless claims. SIFMA stated
that allowing a customer claimant to amend his or her pleading after
learning that a respondent firm or associated person has become
inactive could prejudice the other active respondents remaining in the
case by eliminating their right to review the proposed amended
pleading, respond in writing, and if there is a claim of prejudice,
obtain a ruling on the amended pleading from the panel.
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\46\ See Advisor Group, FSI, and SIFMA.
\47\ Arbitrator selection is the process in which the parties
receive lists of potential arbitrators and select the panel to hear
their case. The number of arbitrators who hear a case is determined
by the amount of the claim. See generally Part IV (Appointment,
Disqualification, and Authority of Arbitrators) of the Code. See
also Arbitrator Selection, https://www.finra.org/arbitration-and-mediation/arbitrator-selection.
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Currently, FINRA Rule 12309 permits a party to amend a pleading any
time before the panel is appointed.\48\ Once a panel is appointed,
however, the party must receive the panel's approval prior to amending
a pleading.\49\ The rule also requires that, if a panel has been
selected, a party must request approval from the panel prior to adding
a new party.\50\ Under the proposed amendments, if FINRA notifies a
customer that a member or associated person has become inactive,
proposed FINRA Rules 12309(b) and (c) would make it easier to amend
pleadings to add a claim or party by eliminating the need for pre-
approval by an arbitrator or panel. If the amended pleading to add a
party occurs after panel appointment, the newly-added party would not
be able to participate in the arbitration selection process.
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\48\ See FINRA Rule 12309(a).
\49\ See FINRA Rule 12309(b).
\50\ See FINRA Rule 12309(c).
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In this scenario, FINRA would provide the arbitrator disclosure
reports \51\ of the sitting panelists to the parties and permit the
parties to raise any conflicts they find with the panel.\52\
[[Page 64587]]
If a party discovers a conflict, the party may file a motion to recuse
the arbitrator.\53\ The arbitrator who is the subject of the motion to
recuse would consider whether to withdraw \54\ from the case and rule
on the motion.\55\ The party may also request removal of the arbitrator
by the Director, under certain circumstances.\56\
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\51\ An arbitrator disclosure report is a summary of the
arbitrator's background and is provided to the parties to help them
make informed decisions during the arbitrator selection process.
\52\ Arbitrators must make a reasonable effort to learn of, and
must disclose to the Director, any circumstances which might
preclude the arbitrator from rendering an objective and impartial
determination in the proceeding, including, for example, any
existing or past financial, business, professional, family, social,
or other relationships or circumstances with any party, any party's
representative, or anyone who the arbitrator is told may be a
witness in the proceeding, that are likely to affect impartiality or
might reasonably create an appearance of partiality or bias. See
FINRA Rule 12405(a). The duty to disclose any relationship,
experience and background information that may affect, or even
appear to affect, the arbitrator's ability to be impartial and the
parties' belief that the arbitrator will be able to render a fair
decision, is an ongoing duty. See FINRA Rule 12405(b). Thus, if a
party is added under proposed FINRA Rule 12309(c)(2), the panelists
must update their disclosures or review them to ensure that further
updates are not warranted.
\53\ See FINRA Rule 12406.
\54\ The Code of Ethics for Arbitrators in Commercial Disputes
(``Canon of Ethics'') applies to arbitrators on FINRA's arbitrator
rosters. See Canon of Ethics, https://www.finra.org/arbitration-and-mediation/code-ethics-arbitrators-commercial-disputes. Canon II
provides that if an arbitrator is requested to withdraw by less than
all of the parties because of alleged partiality, the arbitrator
should withdraw except in two circumstances. In one such
circumstance, the arbitrator could consider the matter, determine
that the reason for the challenge is not substantial, and that he or
she can nevertheless act and decide the case impartially and fairly.
See Canon II (An Arbitrator Should Disclose Any Interest Or
Relationship Likely To Affect Impartiality Or Which Might Create An
Appearance Of Partiality), Section G.
\55\ See FINRA Rule 12406.
\56\ The rule states, in relevant part, that before the first
hearing session begins, the Director will grant a party's request to
remove an arbitrator if it is reasonable to infer, based on
information known at the time of the request, that the arbitrator is
biased, lacks impartiality, or has a direct or indirect interest in
the outcome of the arbitration. The interest or bias must be
definite and capable of reasonable demonstration, rather than remote
or speculative. See FINRA Rule 12407(a)(1). After the first hearing
session begins, the Director may remove an arbitrator based only on
information required to be disclosed under Rule 12405 that was not
previously known by the parties. See FINRA Rule 12407(b).
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FINRA does not believe that the proposed amendments would encourage
claimants to add members or associated persons who have no nexus to the
arbitration case as some commenters fear. While the proposed amendments
to FINRA Rule 12309 would remove the requirement for arbitrator or
panel approval prior to adding a claim or party, FINRA Rule 12309(d)
permits any party, whether existing or newly-added, to respond to an
amended pleading after it is filed by filing an answer and raising any
available defenses.\57\ Thus, if the claim or party to be added has no
connection to the arbitration case, the respondents would have an
opportunity to make that argument to the arbitrator or panel.\58\ It
would not be in the claimant's interest, therefore, to add frivolous
claims or unnecessary parties, as doing so would likely increase a
claimant's costs in supporting the amended pleading and would delay the
outcome of the case.
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\57\ See FINRA Rule 12303(a).
\58\ After the newly-added party files an answer, the party
could seek to have the claim dismissed prior to the conclusion of
the case in chief, on the basis that the moving party was not
associated with the account(s), security(ies), or conduct at issue.
See FINRA Rules 12504(a)(2) and (a)(6).
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FSI suggested that if the arbitrator or panel no longer has the
right to approve adding a new claim or new parties, the proposed
amendments could result in orphaned accounts. FSI commented that FSI's
members may no longer accept customer accounts from inactive firms to
minimize service interruptions because the proposed amendments would
``make it easier for, and likely encourage, customers to pursue claims
against the firm that accepts the customer accounts.''
FINRA believes it is unlikely that a customer would add the firm
that accepted his or her accounts from an inactive firm as a party to
an arbitration case against the inactive firm because the rules permit
the customer to add new parties without pre-approval of the arbitrator
or panel. If the customer's new firm has no connection to the dispute
involving the inactive firm, yet the customer adds the new firm to the
case, the customer risks jeopardizing the business relationship with
the new firm, increasing his or her costs to support a frivolous claim,
and alienating the panel by adding a member that was not associated
with the account or conduct at issue \59\ until after the named
respondent had gone out of business. FINRA believes, therefore, that
these risks outweigh any benefit to the customer who might consider
adding a party that has no connection to the arbitration case.
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\59\ After the member responds to the amended claim, the member
could then file a motion to dismiss prior to the conclusion of the
customer's case on the ground that the member was not associated
with the account(s), security(ies), or conduct at issue. See FINRA
Rule 12504(a)(6)(B).
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Length of Termination Period for Associated Persons
In the Notice, FINRA proposed to define an ``inactive associated
person'' as a person associated with a member whose registration is
revoked or suspended, or whose registration has been terminated for a
minimum of 365 days. Three commenters stated that the timeframe should
be shortened to 6 months,\60\ 120 days,\61\ or 60 days.\62\
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\60\ See SJU.
\61\ See Cornell, stating that ``FINRA should consider the
average time it takes to find new employment, and the economic costs
to parties having to pursue a claim when the associated person has
left the industry permanently but has not yet hit the 365-day
minimum requirement.''
\62\ See PIABA, stating that ``a shorter window simply provides
the customer with more options regarding amendment and/or withdrawal
of the claims without prejudice.''
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FINRA recognizes the commenters' concerns, but believes that the
365-day minimum termination requirement for associated persons would
help ensure that enough time has elapsed to assume reasonably that the
associated person has permanently left the securities industry. FINRA
believes the requirement would benefit those customers who would
exercise the option to withdraw the case from the arbitration forum and
move it to an alternate venue, because they would have more certainty
that the associated person would not return to the securities industry
to exercise his or her rights under the predispute arbitration
agreement. Further, the 365-day requirement could reduce potential
costs to these customers, as they would save money on filing fees and
avoid procedural delays, such as staying the case in an alternate venue
and re-starting it in FINRA's arbitration forum, which could result if
the associated person is only temporarily out of the industry.
Length of Time To Decide Whether To Withdraw Claim
Under the proposed amendments to FINRA Rule 12202(b), if a member
or an associated person becomes inactive during a pending arbitration,
FINRA would notify the customer about the status change. The customer
would be permitted to withdraw the claim against the inactive member or
inactive associated person with or without prejudice within 60 days of
receiving notice of a status change.\63\ SJU suggested that the 60-day
period should be increased to 90 days to provide the customer with
additional time to decide whether to pursue the claim in court (and
consult with and secure appropriate counsel), to continue with the
arbitration, and to amend pleadings. FINRA believes that once a
customer is notified of a member's or associated person's inactive
status, the proposed 60-day timeframe is a reasonable amount of time
for the customer to
[[Page 64588]]
decide whether to withdraw the claim, amend the claim or add a party.
FINRA believes the 60-day timeframe provides customers with enough time
to make informed decisions on how to proceed in the case, while still
keeping the case on track for timely resolution, which could improve
the customer's chances at recovery, if an arbitrator or panel issued an
award.
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\63\ Within the same 60-day period, the customer would also be
permitted to amend a pleading or add a party without pre-approval
from the arbitrator or panel, under the proposed amendments to FINRA
Rules 12309(b)(2) and (c)(2).
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Extend the Proposed Amendments to Intra-Industry Cases
The proposed amendments would apply to customer cases only. SIFMA
contended that the proposed amendments should apply also to intra-
industry cases (i.e., disputes between or among members and associated
persons).\64\ SIFMA stated that ``all of the arguments and
justifications that FINRA makes in favor of expanding the options
available to a customer claimant when dealing with those member firms
or associated persons who are responsible for most unpaid awards apply
equally to industry claimants when dealing with those same member firms
and associated persons.''
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\64\ See FINRA Rule 13000 Series.
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FINRA acknowledges SIFMA's concerns. At this time, however, FINRA
has decided to apply the proposed amendments to customer cases only
because providing customers with more control over the arbitration
process when faced with a respondent that likely will not be able to
pay an award furthers FINRA's goal of investor protection.
Related Claims Should Be Litigated in Same Forum
Under the proposed amendments to FINRA Rule 12202, claims against
inactive firms or inactive associated persons would not be eligible for
arbitration, unless the customer agrees in writing to arbitrate after
the claim arises. FSI expressed concern that, under the proposed rule
change, customers could proceed against a member in arbitration and an
associated person in court. In this scenario, FSI stated that the
discovery in the customer's case against the associated person in court
could reveal additional facts that the customer could use against the
firm in its arbitration case. FSI suggested that the member would not
have the opportunity to seek comparable information from the customer
during the arbitration case. FSI requested, therefore, that FINRA
clarify in the proposed amendments that customers be required to pursue
related claims (i.e., a claim against the firm and a claim against the
associated person that arise from the same facts and alleged
misconduct) in the same forum.
FINRA notes that the goal of the proposed amendments is to provide
customers with the same options against an associated person who is
inactive at the time of filing as those that currently exist against an
inactive member. By providing a customer with the option to pursue his
or her claim in court against an inactive associated person, the
proposed amendments could result in customers filing claims based on
the same facts and circumstances in FINRA arbitration and in court at
the same time. FINRA notes that this approach would increase the
parties' costs, but would have little effect on a member's access to
information during its case with the customer.
FINRA provides the Discovery Guide for customer cases only, which
outlines documents that the parties should exchange without arbitrator
intervention. The Discovery Guide contains two document production
lists of presumptively discoverable documents: one for the firm/
associated persons to produce and one for the customer to produce.\65\
Thus, at the outset of the arbitration, the member would be permitted
to seek information from the customer that is in the customer's
possession or control and is relevant to the member's case. In
addition, under the Customer Code, the member would be permitted to
request additional documents or information from any party in
arbitration,\66\ and arbitrators have the authority to issue subpoenas
\67\ or orders \68\ compelling discovery if the subject of the request
fails to comply with a request. If the customer learns of information
during the court proceeding that he or she intends to use during the
arbitration proceeding, the customer must provide copies of all
documents and materials in customer's possession or control that have
not already been produced at the 20-day exchange deadline.\69\ For
these reasons, FINRA declines to amend the proposed rule change as
suggested.
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\65\ See Discovery Guide, https://www.finra.org/arbitration-and-mediation/discovery-guide.
\66\ See FINRA Rule 12507.
\67\ See FINRA Rule 12512.
\68\ See FINRA Rule 12513.
\69\ See FINRA Rule 12514.
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Request for Additional FINRA Data
PIABA requested that FINRA release the data and other statistical
information FINRA used to support the proposed amendments. FINRA has
made available data on which it relied in its discussion of the
economic impacts of the proposed amendments.
Minimize Delays and Postponements From Newly-Added Party
PIABA expressed concern that newly[hyphen]named respondents may
demand extended delays and postponements of scheduled hearing dates.
PIABA urged FINRA to consider adopting arbitrator training and
guidelines to instruct arbitrators to balance carefully the interests
of all the parties to the arbitration when considering
newly[hyphen]added respondent requests to extend deadlines or hearings.
When FINRA receives approval of proposed rule changes that involve
arbitration practices and procedures, FINRA's Office of Dispute
Resolution (``ODR'') will include articles on the new rules in The
Neutral Corner, an ODR newsletter for arbitrators and other neutrals
that includes updates on rules affecting dispute resolution and tips on
how to be a better arbitrator or mediator.\70\ In addition, ODR will
develop arbitrator training to explain how the new rules would work and
provide guidance to arbitrators on their roles and responsibilities
under the new rules. These informational and training materials will
provide examples of best practices that arbitrators could use as guides
to assist them when they are deciding a newly-added respondent's
request for an extension or postponement. As is current practice under
the Code, arbitrators would have the authority under the proposed
amendments to exercise their judgment when addressing these matters,
based on the facts and circumstances of the case.
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\70\ The Neutral Corner, Volume 1--2019, https://www.finra.org/arbitration-and-mediation/neutral-corner-volume-1-2019-0319. See
also the previous editions at https://www.finra.org/arbitration-and-mediation/previous-editions-neutral-corner.
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Reporting Mechanisms Should Be Accurate and Made Available to the
Public
Under the proposed amendments, an ``inactive member'' would be
defined as a member whose membership has been terminated, suspended,
cancelled, revoked, the member has been expelled from FINRA, or the
member is otherwise defunct. An ``inactive associated person'' would be
defined as a person whose registration is revoked or suspended, who has
been expelled or barred from FINRA, or has been terminated for a
minimum of 365 days. NASAA suggested that the withdrawal statistic that
ODR publishes \71\ should be broken down to reflect the appropriate
subcategory (e.g., terminated,
[[Page 64589]]
suspended, canceled, etc.) that customers use to withdraw their claims.
FINRA cannot commit to publishing subcategories of withdrawals as
requested, because the programming costs required to capture that level
of detail would likely be significant. FINRA agrees, however, that its
withdrawal statistics should distinguish between a claim (or case)
withdrawn because a claimant exercised rights under the rules after a
respondent became inactive and claims withdrawn for other reasons. If
the SEC approves the proposed rule change, FINRA would assess its
technology platforms to determine what programming changes would be
needed to capture the data relating to claims or cases withdrawn due to
an inactive respondent.
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\71\ Dispute Resolution Statistics, https://www.finra.org/arbitration-and-mediation/dispute-resolution-statistics.
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NASAA also suggested that FINRA create and make public a separate
report to capture the members and associated persons who become
inactive due to unpaid arbitration awards or judgments in favor of
customers. NASAA stated that such a report would provide transparency
on industry participants that leave the industry due to customer
complaints and would provide customers with additional information when
making a decision about whether to work with a specific FINRA member or
associated person.
FINRA is committed to providing customers with information on the
state of unpaid customer arbitration awards in the forum, so that they
may make informed decisions about whom to entrust with their money and,
therefore, has made data on unpaid customer arbitration awards
available on its website.\72\ Moreover, FINRA has published a list of
member firms and associated persons with unpaid customer arbitration
awards.\73\ This information will continue to appear on the firm's or
individual's BrokerCheck[supreg] \74\ report.
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\72\ See Statistics on Unpaid Customer Awards in FINRA
Arbitration, https://www.finra.org/arbitration-and-mediation/statistics-unpaid-customer-awards-finra-arbitration. FINRA updates
these data periodically.
\73\ See Member Firms and Associated Persons with Unpaid
Customer Arbitration Awards, https://www.finra.org/arbitration-and-mediation/members-firms-and-associated-persons-unpaid-customer-arbitration-awards. FINRA updates these data periodically.
\74\ FINRA developed and operates this free tool under the
oversight of the SEC to provide investors with information regarding
a broker's employment history, regulatory actions, investment-
related licensing information, arbitrations and complaints. See
BrokerCheck[supreg], https://brokercheck.finra.org.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2019-027 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2019-027. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2019-027 and should be submitted on or before December 13, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\75\
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\75\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25324 Filed 11-21-19; 8:45 am]
BILLING CODE 8011-01-P
