Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving 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, 11157-11162 [2020-03771]
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Federal Register / Vol. 85, No. 38 / Wednesday, February 26, 2020 / Notices
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca-2019–60 on the subject line.
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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–NYSEArca–2019–60. 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
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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–NYSEArca–2019–60 and
should be submitted on or before March
18, 2020.
V. Accelerated Approval of the
Proposed Rule Change, as Modified by
Amendment No. 4
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 4, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 4 in the Federal
Register. The Commission notes that
Amendment No. 4 clarified the
investments of the Fund and the
application of NYSE Arca Rule 8.600–E,
Commentary .01 to the Fund’s
investments. Amendment No. 4 also
provided other clarifications and
additional information related to the
proposed rule change. The changes and
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additional information in Amendment
No. 4 assist the Commission in
evaluating the Exchange’s proposal and
in determining that it is consistent with
the Act. Accordingly, the Commission
finds good cause, pursuant to Section
19(b)(2) of the Act,57 to approve the
proposed rule change, as modified by
Amendment No. 4, on an accelerated
basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,58 that the
proposed rule change (SR–NYSEArca–
2019–60), as modified by Amendment
No. 4, be, and it hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.59
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020–03774 Filed 2–25–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88254; File No. SR–FINRA–
2019–027]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving 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
February 20, 2020.
I. Introduction
On November 5, 2019, Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change 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
57 15
U.S.C. 78s(b)(2).
58 Id.
59 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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11157
would allow customers to amend
pleadings, postpone hearings, request
default proceedings, and receive a
refund of filing fees in these situations.
The proposed rule change was
published for comment in the Federal
Register on November 22, 2019.3 The
public comment period closed on
December 13, 2019. The Commission
received five comment letters in
response to the Notice.4 On February 11,
2020, FINRA responded to the comment
letters received in response to the
Notice.5 On December 18, 2019, FINRA
extended the time period in which the
Commission must approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to approve or
disapprove the proposed rule change to
February 20, 2020.6 This order approves
the proposed rule change.
II. Description of the Proposed Rule
Change 7
Background
Firms and individuals whose FINRA
registration has been terminated,
suspended, cancelled, or revoked, or
who have been expelled from FINRA 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
3 See Exchange Act Release No. 87577 (Nov. 18,
2019), 84 FR 64581 (Nov. 22, 2019) (File No. SR–
FINRA–2019–027) (‘‘Notice’’).
4 See Letter from Steven B. Caruso, Maddox
Hargett Caruso, P.C., dated November 19, 2019
(‘‘Caruso Letter’’); letter from Benjamin P. Edwards,
Associate Professor of Law, University of Nevada,
Las Vegas, December 11, 2019 (‘‘Edwards Letter’’);
letter from Kevin M. Carroll, Managing Director and
Associate General Counsel, SIFMA, December 12,
2019 (‘‘SIFMA Letter’’); letter from Samuel B.
Edwards, President, Public Investors Arbitration
Bar Association (‘‘PIABA’’), December 13, 2019
(‘‘PIABA Letter’’); and letter from Robin M. Traxler,
Senior Vice President, Policy & Deputy General
Counsel, Financial Services Institute (‘‘FSI’’),
December 13, 2019 (‘‘FSI Letter’’). Comment letters
are available on the Commission’s website at
https://www.sec.gov.
5 See Letter from Mignon McLemore, Assistant
General Counsel, Office of General Counsel, FINRA,
to Vanessa Countryman, Secretary, U.S. Securities
and Exchange Commission, dated February 11,
2020 (‘‘FINRA Letter’’). The FINRA Letter is
available on FINRA’s website at https://
www.finra.org, at the principal office of FINRA, at
the Commission’s website at https://www.sec.gov/
comments/sr-finra-2019-027/srfinra20190276796335-208356.pdf, and at the Commission’s
Public Reference Room.
6 See Letter from Mignon McLemore, Assistant
General Counsel, FINRA, to Lourdes Gonzalez,
Assistant Chief Counsel, Division of Trading and
Markets, U.S. Securities and Exchange Commission,
dated December 18, 2019.
7 The subsequent description of the proposed rule
change is substantially excerpted from FINRA’s
description in the Notice. See Notice, 83 FR at
64581–64583.
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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 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.8
Current FINRA arbitration rules
provide options 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.
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Proposed Rule Change
FINRA is proposing to amend the
Customer Code 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. In
particular, FINRA is 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.
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
otherwise defunct, is ineligible for
arbitration unless the customer agrees in
writing to arbitrate after the claim
8 See FINRA Rule 9554 (Failure to Comply with
an Arbitration Award or Related Settlement or an
Order of Restitution or Settlement Providing for
Restitution).
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arises.9 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 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, as amended
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.10
FINRA believes that 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 proposed to define an ‘‘inactive
member’’ as a member whose
membership is terminated, suspended,
cancelled or revoked, that has been
9 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.
10 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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expelled or barred 11 from FINRA, or
that is otherwise defunct.12
Under the proposed rule change, 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, or
whose registration has been terminated
for a minimum of 365 days.13 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 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 further believes that the
proposed requirement would allow
enough time for those associated
persons who may have temporarily left
the industry to return before the
arbitration closes.14
B. Amending Pleadings
Currently, 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. Current 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.
11 FINRA is proposing to add ‘‘or barred’’ to the
definition of an ‘‘inactive member’’ to capture that
a member may be inactive due to a bar.
12 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. FINRA believes the
proposed changes would make the definition of
‘‘member’’ consistent in the FINRA rules that apply
to FINRA’s arbitration forum.
13 See Proposed Rule 12100(r).
14 As stated in the Notice, termination, in some
cases, may be a voluntary action that can be of short
duration. For instance, in FINRA’s 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. See Notice at note 25.
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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.15
C. Postponing Hearings
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Currently, FINRA Rule 12601
(Postponement of Hearings) addresses
when a scheduled hearing date can be
postponed. Specifically, the parties can
agree to postpone a hearing. In addition,
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. FINRA believes that 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 currently assesses
postponement fees against the parties
for each postponement agreed to by the
parties, or granted upon the request of
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.16
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
15 Proposed 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.
16 See FINRA Rule 12214 (Payment of
Arbitrators).
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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
also is proposing to amend FINRA Rule
12214 to provide 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
Currently, 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 17 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.18 The claimants
must present a sufficient basis to
support the making of an award.19 The
arbitrator may not issue an award based
solely on the nonappearance of a
party.20
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.
17 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).
18 See FINRA Rule 12801(b)(2)(B). No hearings
are held in default proceedings unless the customer
requests one. See FINRA Rule 12801(c).
19 See FINRA Rule 12801(e)(1).
20 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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11159
E. Refunding Filing Fees
Currently, 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
FINRA is proposing to amend the
Code to update cross-references and
make other non-substantive, technical
changes to the rules impacted by the
proposal.
III. Comment Summary
The Commission received five
comment letters on the proposed rule
change.21 One commenter fully
supported the proposed rule change.22
Three of the commenters generally
supported the proposed rule change, but
suggested further changes to address
unpaid arbitration awards and other
matters.23 The fifth commenter did not
support the proposal, stating that the
proposal did not do enough to address
the issue of unpaid arbitration awards.24
Supporting the Proposal
Four commenters supported the
proposed rule change as expanding the
options available to customers in
arbitration proceedings.25 One
commenter believes that the
amendments in the proposed rule
change ‘‘address a scenario that is not
currently addressed in FINRA rules and,
as such, brings important clarity to the
arbitration process.’’ 26 Another
commenter generally supported the
proposed amendments ‘‘to allow
21 See
supra note 4.
Caruso Letter.
23 See FSI Letter, SIFMA Letter, and PIABA
Letter.
24 See Edwards Letter.
25 See Caruso Letter, FSI Letter, SIFMA Letter,
and PIABA Letter.
26 FSI Letter.
22 See
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customers to withdraw a claim, amend
pleadings, postpone hearings, invoke
expedited default proceedings, and
receive a refund of filing fees’’ as ‘‘an
appropriate expansion of claimant
protections.’’ 27 Another commenter
believes the amendments would
‘‘expand options for customers in
pursuing and attempting to collect
money awarded to them against
industry respondents in arbitration
proceedings,’’ although it described
these amendment as addressing ‘‘minor
problems.’’ 28 Finally, one commenter
believes that ‘‘the proposed rule filing
would enhance the ability of customers
to evaluate the likelihood of collecting
on an award and to make an informed
decision whether to proceed in
arbitration, to file the claim in court or
to take no action.’’ 29
In addition, two commenters
supported the proposed rule change
because they believe it will help address
unpaid arbitration awards.30 One
commenter noted that ‘‘the proposed
amendments recognize that most unpaid
customer arbitration awards are
rendered against firms or individuals
whose FINRA registrations have either
been terminated, suspended, cancelled
or revoked, or who have been expelled
from FINRA.’’ 31 The commenter
believes that addressing this recognition
‘‘clearly serves to protect investors and
the public interest by expanding the
options available to customers with
claims against brokerage firms and
individual brokers who are unlikely to
pay arbitration awards that may be
issued against them.’’ 32 Another
commenter stated that its support of the
proposed rule change was ‘‘predicated
on FINRA’s stated purpose of the
Proposal—namely, to facilitate ‘dealing
with those member firms or associated
persons who are responsible for most
unpaid awards—firms and associated
persons who are no longer in business
either at the time the claim is filed or
at the time of the award.’ ’’ 33 That
commenter also stated that it ‘‘agree[s]
that the Proposal would probably help
address the issue of unpaid arbitration
awards.’’ 34
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Proposal Is Insufficient
Three commenters stated that the
proposal does not address the problem
of unpaid arbitration awards in a
meaningful way and urged FINRA to
27 SIFMA
Letter.
Letter.
29 Caruso Letter.
30 See Caruso Letter and SIFMA Letter.
31 Caruso Letter.
32 Id.
33 SIFMA Letter.
34 Id.
28 PIABA
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take further action.35 One of these
commenters stated that the proposal
‘‘fails to address the major problem
faced by victims of thinly capitalized
broker-dealer firms: That judgements
against them are often rendered
valueless’’ 36 and recommended FINRA
establish a national recovery pool.37
Another commenter claimed that the
proposal ‘‘nibble[s] around the edge of
the issue’’ and fails to ‘‘require firms to
acquire insurance to bear the costs of
their operations or to maintain
significant capital reserves.’’ 38 A third
commenter believed that the proposal
does not ‘‘improve investors’ ability to
collect arbitration awards against
inactive FINRA members or reduce
instances of unpaid arbitration awards
by inactive FINRA members.’’ 39
In response, FINRA stated that the
proposed rule change is ‘‘intended to
expand the options available to a
customer when dealing with those
members or associated persons that are
inactive at the time a claim is filed or
become inactive during a pending
arbitration.’’ 40 Accordingly, FINRA
believes that a commenter’s
recommendation to create a national
recovery pool is outside the scope of
this proposal.41 However, FINRA also
stated that the proposal represents just
‘‘one of the ways it is proceeding to
implement additional steps to
strengthen its rules relating to the
important but complex topic of
customer recovery.’’ 42 FINRA noted
that, in a separate proposed rule change,
it is proposing amendments to its
Membership Application Program
(‘‘MAP’’) rules ‘‘to create further
incentives for the timely payment of
awards.’’ 43 Specifically, the MAP
proposal would, among other things,
‘‘prevent a member firm with
substantial arbitration claims from
avoiding payment of the claims should
they go to award or result in a
settlement by shifting its assets, which
are typically customer accounts, or its
managers or owners, to another firm and
closing down.’’ 44
In addition, FINRA stated it welcomes
continued dialogue about ‘‘addressing
the challenges of customer recovery
across the financial services industry
while directly informing the further
enhancement of recovery in FINRA’s
forum[.]’’ 45 For example, FINRA cited
to its 2018 White Paper and ‘‘additional
data regarding the circumstances under
which awards may be unpaid, along
with a discussion of potential regulatory
and legislative responses.’’ 46
For these reasons, FINRA declined to
amend the proposal in response to these
commenters.
Expand Proposal to Industry Code
One commenter recommended FINRA
expand the proposed rule change to
apply not only to customer cases but
also to intra-industry cases (i.e.,
disputes between or among members
and associated persons).47 The
commenter stated that unpaid
arbitration awards result from both
customer and intra-industry cases and,
therefore, ‘‘the same arguments that
FINRA makes in favor of expanding the
options available to a customer claimant
when dealing with inactive firms and
associated persons apply equally to
industry claimants.’’ 48
In response, FINRA acknowledged the
commenter’s concern but stated that at
this time it has decided to focus its
attention on customer cases and
believes that ‘‘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.’’ 49 Accordingly, FINRA
declined to amend the proposal in
response to the commenter.
44 FINRA
Letter at note 18.
Letter.
46 FINRA Letter. See FINRA’s White Paper
entitled FINRA Perspectives on Customer Recovery
(February 8, 2018), https://www.finra.org/sites/
default/files/finra_perspectives_on_customer_
recovery.pdf and https://www.finra.org/arbitrationmediation/statistics-unpaid-customer-awards-finraarbitration. In addition, FINRA has published a list
of firms and associated persons responsible for
unpaid arbitration awards. See https://
www.finra.org/arbitration-mediation/member-firmsand-associated-persons-unpaid-customerarbitration-awards. This information also appears
on a firm’s or individual’s BrokerCheck record.
47 See SIFMA Letter; see also FINRA Rule 13000
Series (Industry Code).
48 SIFMA Letter.
49 FINRA Letter. FINRA also noted, that it
welcomes further discussions regarding the
circumstances under which awards may be unpaid,
along with potential solutions. See FINRA Letter;
see also supra note 46 and accompanying text.
45 FINRA
35 See FSI Letter, PIABA Letter, and Edwards
Letter.
36 PIABA Letter.
37 See PIABA Letter.
38 Edwards Letter (urging the Commission to
require FINRA to propose ‘‘meaningful reforms’’
regarding unpaid arbitration). Although the
Commission acknowledges that this commenter and
others are concerned that the proposed rule change
does not sufficiently address the issue of unpaid
arbitration awards, we note that FINRA is
continuing to consider this issue as well as possible
responses to further enhance customer recovery.
See FINRA Letter.
39 FSI Letter.
40 FINRA Letter.
41 See FINRA Letter.
42 Id.
43 FINRA Letter. See Exchange Act Release No.
87810 (Dec. 20, 2019), 84 FR 72088 (Dec. 30, 2019)
(Notice of Filing of File No. SR–FINRA–2019–030).
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Federal Register / Vol. 85, No. 38 / Wednesday, February 26, 2020 / Notices
Proposal Creates Imbalance Between
Claimants and Respondents
One commenter stated that the
proposed rule change creates an
imbalance between claimants and
respondents. Specifically, the
commenter expressed concern that
because the proposal permits a claimant
to amend its pleading to add a claim or
party without the need for pre-approval
by an arbitrator or panel, any newly
added party would not be able to
participate in the arbitrator panel
selection process.50 Similarly, the
commenter stated that ‘‘requiring an
arbitrator or panel to grant a motion to
add a party serves the important
purpose of providing the party to be
added with an opportunity to object to
being added.’’ 51 For these reasons, the
commenter opposed the elimination of
the existing motion requirement for
adding a party or amending a
pleading.52
In response, FINRA stated that the
proposal would not change the panel
selection process under the current
rules.53 Specifically, ‘‘[i]f a panel grants
a motion to amend a pleading to add a
new party, the party to be added
[currently] does not get to participate in
the panel selection process.’’ 54
However, FINRA would provide
arbitrator disclosure reports of the
sitting panelists 55 to any party added
after a member or associated person
becomes inactive; 56 and, if the party
discovers a conflict, the party may file
a motion to recuse the arbitrator.57
In addition, FINRA believes that ‘‘it is
appropriate to remove the requirement
that a customer file a motion to amend
a pleading after panel appointment if a
respondent member firm or associated
person has become inactive to help
avoid additional costs and delay to the
customer.’’ 58 FINRA stated that the
proposal would not change a party’s
50 See
FSI Letter.
Letter.
52 See FSI Letter.
53 See FINRA Letter.
54 FINRA Letter. See generally Part IV of the
Customer Code (Appointment, Disqualification, and
Authority of Arbitrators); see also Arbitrator
Selection, https://www.finra.org/arbitration-andmediation/arbitrator-selection. See FINRA Letter at
note 8.
55 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. Whenever a
party is added to a claim, the panelists must update
their disclosures or review them to ensure that
further updates are not warranted. See FINRA Letter
at notes 9 and 10; see also FINRA Rule 12405
(Disclosures Required of Arbitrator).
56 See FINRA Letter.
57 See FINRA Letter; see also FINRA Rule 12406
(Arbitrator Recusal).
58 FINRA Letter.
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ability to respond to an amended
pleading by filing an answer and raising
any available defenses under the current
rules.59 Accordingly, a party added
under the proposal would still be able
to respond to a pleading.
For these reasons, FINRA declined to
amend the proposal in response to the
commenter.
IV. Discussion and Commission
Findings
After careful review of the proposed
rule change and the comment letters,
the Commission finds that the proposal
is consistent with the requirements of
the Exchange Act and the rules and
regulations thereunder that are
applicable to a national securities
association.60 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Exchange Act,61 which
requires, among other things, that
FINRA rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
Public Interest
The Commission agrees with FINRA
and those commenters that support the
proposed rule change that it will
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. Specifically, the proposed
rule change would make several
modifications to FINRA’s rules to
address the situation where a member
firm becomes inactive during a pending
arbitration, allowing customers to
amend pleadings, postpone hearings,
request default proceedings, and receive
a refund of filing fees in that situation.
In addition, the proposed rule change
would expand customers’ options with
respect to claims brought against
associated persons. Specifically, the
proposal would provide customers the
same options during a case against
inactive associated persons as they
would have in a case against inactive
members. It 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. As noted above,
the Commission agrees that, similar to
59 See FINRA Letter; see also FINRA Rule 12303
(Answering the Statement of Claim).
60 In approving this rule change, the Commission
has considered the rule’s impact on efficiency,
competition, and capital formation. See 15 U.S.C.
78c(f).
61 15 U.S.C. 78o–3(b)(6).
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11161
the current rules and procedures
relating to claims filed against inactive
members, these proposed changes
would allow customers 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.
With respect to one commenter’s
concern that the proposed rule change
does not apply to intra-industry cases,62
the Commission notes that FINRA
welcomes continued dialogue about the
challenges of addressing issues related
to collecting unpaid arbitration awards
in its forum.63
Similarly, the Commission
acknowledges commenter’s concern that
the proposed rule change will create an
imbalance in the arbitration process
between claimants and respondents by:
(1) Denying a newly added respondent
the opportunity to participate in the
arbitrator panel selection process, and
(2) precluding a newly added
respondent the opportunity to object to
being added.64 The Commission notes
FINRA’s belief that the proposed rule
change does not create such an
imbalance because existing rules
already provide procedures that offer
sufficient protections for respondents
added to an arbitration after the panel
is appointed, including respondents
who would be added as a result of the
proposed rule change. In particular,
FINRA notes that under existing FINRA
rules a newly added respondent would
receive reports summarizing the
arbitrators’ backgrounds and provide
respondent with the opportunity to seek
recusal of any arbitrator with a conflict
of interest. In addition, FINRA notes
that the proposed rule change does not
change a party’s ability to respond to an
amended pleading by filing an answer
and raising any available defenses.65
The Commission acknowledges the
commenter’s concern that these are
insufficient alternatives to respondents
participating in the arbitrator selection
process or having the ability to respond
to a motion prior to being added as a
party.66 The Commission believes,
62 See
SIFMA Letter.
FINRA Letter.
64 See FSI Letter (stating ‘‘Providing arbitrator
disclosure reports of the sitting panelists to an
added party and permitting an added party to raise
any conflicts they find with the panel is not
equivalent to participating in the panel selection
process. . . . Permitting a claimant to submit a
response to an amended pleading is not equivalent
to providing an opportunity to be heard in response
to a motion prior to being added as a party.’’).
65 See FINRA Letter.
66 See FSI Letter.
63 See
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Federal Register / Vol. 85, No. 38 / Wednesday, February 26, 2020 / Notices
however, that despite any potential
imbalance it is important that claimants
be able to add respondents upon
learning that the member or associated
person against which she bought the
claim is inactive to help ensure that the
claimant is able to collect should the
claim go to award.67 In addition,
notwithstanding any potential
imbalance, the Commission notes
FINRA’s position that the existing
FINRA rules would provide respondents
procedural protections in the limited
circumstances in which such
respondents would be added under to
the proposal.
Finally, the Commission
acknowledges several commenters’
concerns that the proposed rule change
will not, in their view, effectively
resolve the problems related to unpaid
arbitration awards and their proposed
enhancements to the proposal, such as
requiring a national recovery pool 68 or
requiring firms to acquire insurance.69
As FINRA noted, this the proposal
represents only one step in the ongoing
process of addressing these issues and
that FINRA continues to evaluate
further action.
Accordingly, because the proposed
rule change will expand the options
available to customers in pending
arbitrations with claims against
respondents who are unlikely to be able
to pay, and promote consistency under
FINRA’s rules, the Commission believes
that the proposed rule change is
designed to protect investors and the
public interest.
V. Conclusion
It is therefore ordered pursuant to
Section 19(b)(2) of the Exchange Act 70
that the proposal (SR–FINRA–2019–
027), be and hereby is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.71
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020–03771 Filed 2–25–20; 8:45 am]
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BILLING CODE 8011–01–P
67 See PIABA Letter (Supporting the aspect of the
proposed rule change that would permit an
amendment of the statement of claim, without leave
of the arbitration panel because it would permit a
customer claimant to pursue claims against
potentially collectible respondents.
68 See PIABA Letter.
69 See Edwards Letter.
70 15 U.S.C. 78s(b)(2).
71 17 CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88248; File No. SR–LTSE–
2020–04]
Self-Regulatory Organizations; LongTerm Stock Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to the
Annual Membership Fee
February 20, 2020.
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 February
10, 2020, Long-Term Stock Exchange,
Inc. (‘‘LTSE’’ or ‘‘Exchange’’) 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 the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
LTSE proposes a rule change to
establish an Annual Membership Fee.
The text of the proposed rule change
is available at the Exchange’s website at
https://longtermstockexchange.com/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to
establish an Annual Membership Fee for
1 15
2 17
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CFR 240.19b–4.
Frm 00118
Fmt 4703
Sfmt 4703
Members 3 of the Exchange of $10,000.
The Annual Membership Fee is
proposed to be assessed on a calendaryear basis and will be due on or before
December 31 of the prior year. For
example, the Annual Membership Fee
for calendar year 2021 will be due on or
before December 31, 2020.
However, if a Member is pending a
voluntary termination of rights as a
Member pursuant to Rule 2.190 prior to
the date any Annual Membership Fee
for a given year will be due (i.e.,
December 31) and the Member does not
utilize the facilities of the Exchange
while such voluntary termination of
rights is pending, then the Member will
not be obligated to pay the Annual
Membership Fee for the upcoming
calendar year. The Exchange believes
this to be appropriate because there is
ordinarily a 30-day waiting period
before such resignation shall take effect.
The Annual Membership Fee for a
firm that becomes a Member during a
calendar year is proposed to be prorated
(starting with the next calendar month)
based upon the date the firm becomes
a Member. For example, if a firm is
approved as a Member on July 15, the
prorated Annual Membership Fee
assessed on such new Member would
cover the months of August through
December, i.e., five months at $833 for
a total of $4,165. Any Annual
Membership Fees that are paid are
proposed to be non-refundable.
As an inducement for firms to become
Members of the Exchange as the
Exchange completes the build-out of its
trading platform and finalizes
compliance with the conditions set forth
in the Exchange’s approval order,4 the
Exchange proposes to waive the 2020
Annual Membership Fee for any firm
that submits its completed membership
application prior to the commencement
of trading operations. Additional
information regarding the Exchange’s
readiness to commence trading
operations and the anticipated start of
trading will be announced on its
website at
www.longtermstockexchange.com.
The Exchange does not presently
contemplate proposing any application
3 The term ‘‘Member’’ means any registered
broker or dealer that has been admitted to
membership in the Exchange. A Member has the
status of a Member of the Exchange as that term is
defined in Section 3(a)(3) of the Act. Membership
may be granted to a sole proprietor, partnership,
corporation, limited liability company, or other
organization that is a registered broker or dealer
pursuant to Section 15 of the Act, and which has
been approved by the Exchange. See LTSE Rule
1.160(w).
4 See Securities Exchange Act Release No. 34–
85828 (May 10, 2019), 84 FR 21841 (May 15, 2019)
(File No. 10–234).
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]]>Agencies
[Federal Register Volume 85, Number 38 (Wednesday, February 26, 2020)]
[Notices]
[Pages 11157-11162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03771]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88254; File No. SR-FINRA-2019-027]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving 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
February 20, 2020.
I. Introduction
On November 5, 2019, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on November 22, 2019.\3\ The public comment period closed on
December 13, 2019. The Commission received five comment letters in
response to the Notice.\4\ On February 11, 2020, FINRA responded to the
comment letters received in response to the Notice.\5\ On December 18,
2019, FINRA extended the time period in which the Commission must
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change to February 20, 2020.\6\ This order approves
the proposed rule change.
---------------------------------------------------------------------------
\3\ See Exchange Act Release No. 87577 (Nov. 18, 2019), 84 FR
64581 (Nov. 22, 2019) (File No. SR-FINRA-2019-027) (``Notice'').
\4\ See Letter from Steven B. Caruso, Maddox Hargett Caruso,
P.C., dated November 19, 2019 (``Caruso Letter''); letter from
Benjamin P. Edwards, Associate Professor of Law, University of
Nevada, Las Vegas, December 11, 2019 (``Edwards Letter''); letter
from Kevin M. Carroll, Managing Director and Associate General
Counsel, SIFMA, December 12, 2019 (``SIFMA Letter''); letter from
Samuel B. Edwards, President, Public Investors Arbitration Bar
Association (``PIABA''), December 13, 2019 (``PIABA Letter''); and
letter from Robin M. Traxler, Senior Vice President, Policy & Deputy
General Counsel, Financial Services Institute (``FSI''), December
13, 2019 (``FSI Letter''). Comment letters are available on the
Commission's website at https://www.sec.gov.
\5\ See Letter from Mignon McLemore, Assistant General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
U.S. Securities and Exchange Commission, dated February 11, 2020
(``FINRA Letter''). The FINRA Letter is available on FINRA's website
at https://www.finra.org, at the principal office of FINRA, at the
Commission's website at https://www.sec.gov/comments/sr-finra-2019-027/srfinra2019027-6796335-208356.pdf, and at the Commission's
Public Reference Room.
\6\ See Letter from Mignon McLemore, Assistant General Counsel,
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel, Division of
Trading and Markets, U.S. Securities and Exchange Commission, dated
December 18, 2019.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change \7\
---------------------------------------------------------------------------
\7\ The subsequent description of the proposed rule change is
substantially excerpted from FINRA's description in the Notice. See
Notice, 83 FR at 64581-64583.
---------------------------------------------------------------------------
Background
Firms and individuals whose FINRA registration has been terminated,
suspended, cancelled, or revoked, or who have been expelled from FINRA
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
[[Page 11158]]
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 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.\8\
---------------------------------------------------------------------------
\8\ See FINRA Rule 9554 (Failure to Comply with an Arbitration
Award or Related Settlement or an Order of Restitution or Settlement
Providing for Restitution).
---------------------------------------------------------------------------
Current FINRA arbitration rules provide options 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 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. In particular, FINRA is 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.
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 otherwise defunct, is ineligible for arbitration
unless the customer agrees in writing to arbitrate after the claim
arises.\9\ 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 a claim against an associated person who becomes inactive
before the customer files a claim or during a pending arbitration.
---------------------------------------------------------------------------
\9\ 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.
---------------------------------------------------------------------------
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, as amended 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.\10\
---------------------------------------------------------------------------
\10\ 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.
---------------------------------------------------------------------------
FINRA believes that 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 proposed
to define an ``inactive member'' as a member whose membership is
terminated, suspended, cancelled or revoked, that has been expelled or
barred \11\ from FINRA, or that is otherwise defunct.\12\
---------------------------------------------------------------------------
\11\ FINRA is proposing to add ``or barred'' to the definition
of an ``inactive member'' to capture that a member may be inactive
due to a bar.
\12\ 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. FINRA believes the proposed changes would make the definition
of ``member'' consistent in the FINRA rules that apply to FINRA's
arbitration forum.
---------------------------------------------------------------------------
Under the proposed rule change, 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, or whose registration has been terminated for a
minimum of 365 days.\13\ 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.
---------------------------------------------------------------------------
\13\ See Proposed Rule 12100(r).
---------------------------------------------------------------------------
FINRA believes 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 further believes that the proposed
requirement would allow enough time for those associated persons who
may have temporarily left the industry to return before the arbitration
closes.\14\
---------------------------------------------------------------------------
\14\ As stated in the Notice, termination, in some cases, may be
a voluntary action that can be of short duration. For instance, in
FINRA's 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. See Notice at note 25.
---------------------------------------------------------------------------
B. Amending Pleadings
Currently, 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. Current 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.
[[Page 11159]]
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.\15\
---------------------------------------------------------------------------
\15\ Proposed 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
Currently, FINRA Rule 12601 (Postponement of Hearings) addresses
when a scheduled hearing date can be postponed. Specifically, the
parties can agree to postpone a hearing. In addition, 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. FINRA believes that 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 currently assesses postponement fees against the
parties for each postponement agreed to by the parties, or granted upon
the request of 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.\16\
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\16\ See FINRA Rule 12214 (Payment of Arbitrators).
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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
also is proposing to amend FINRA Rule 12214 to provide 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
Currently, 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 \17\ 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.\18\ The claimants must present a
sufficient basis to support the making of an award.\19\ The arbitrator
may not issue an award based solely on the nonappearance of a
party.\20\
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\17\ 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).
\18\ See FINRA Rule 12801(b)(2)(B). No hearings are held in
default proceedings unless the customer requests one. See FINRA Rule
12801(c).
\19\ See FINRA Rule 12801(e)(1).
\20\ 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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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.
E. Refunding Filing Fees
Currently, 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
FINRA is proposing to amend the Code to update cross-references and
make other non-substantive, technical changes to the rules impacted by
the proposal.
III. Comment Summary
The Commission received five comment letters on the proposed rule
change.\21\ One commenter fully supported the proposed rule change.\22\
Three of the commenters generally supported the proposed rule change,
but suggested further changes to address unpaid arbitration awards and
other matters.\23\ The fifth commenter did not support the proposal,
stating that the proposal did not do enough to address the issue of
unpaid arbitration awards.\24\
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\21\ See supra note 4.
\22\ See Caruso Letter.
\23\ See FSI Letter, SIFMA Letter, and PIABA Letter.
\24\ See Edwards Letter.
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Supporting the Proposal
Four commenters supported the proposed rule change as expanding the
options available to customers in arbitration proceedings.\25\ One
commenter believes that the amendments in the proposed rule change
``address a scenario that is not currently addressed in FINRA rules
and, as such, brings important clarity to the arbitration process.''
\26\ Another commenter generally supported the proposed amendments ``to
allow
[[Page 11160]]
customers to withdraw a claim, amend pleadings, postpone hearings,
invoke expedited default proceedings, and receive a refund of filing
fees'' as ``an appropriate expansion of claimant protections.'' \27\
Another commenter believes the amendments would ``expand options for
customers in pursuing and attempting to collect money awarded to them
against industry respondents in arbitration proceedings,'' although it
described these amendment as addressing ``minor problems.'' \28\
Finally, one commenter believes that ``the proposed rule filing would
enhance the ability of customers to evaluate the likelihood of
collecting on an award and to make an informed decision whether to
proceed in arbitration, to file the claim in court or to take no
action.'' \29\
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\25\ See Caruso Letter, FSI Letter, SIFMA Letter, and PIABA
Letter.
\26\ FSI Letter.
\27\ SIFMA Letter.
\28\ PIABA Letter.
\29\ Caruso Letter.
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In addition, two commenters supported the proposed rule change
because they believe it will help address unpaid arbitration
awards.\30\ One commenter noted that ``the proposed amendments
recognize that most unpaid customer arbitration awards are rendered
against firms or individuals whose FINRA registrations have either been
terminated, suspended, cancelled or revoked, or who have been expelled
from FINRA.'' \31\ The commenter believes that addressing this
recognition ``clearly serves to protect investors and the public
interest by expanding the options available to customers with claims
against brokerage firms and individual brokers who are unlikely to pay
arbitration awards that may be issued against them.'' \32\ Another
commenter stated that its support of the proposed rule change was
``predicated on FINRA's stated purpose of the Proposal--namely, to
facilitate `dealing with those member firms or associated persons who
are responsible for most unpaid awards--firms and associated persons
who are no longer in business either at the time the claim is filed or
at the time of the award.' '' \33\ That commenter also stated that it
``agree[s] that the Proposal would probably help address the issue of
unpaid arbitration awards.'' \34\
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\30\ See Caruso Letter and SIFMA Letter.
\31\ Caruso Letter.
\32\ Id.
\33\ SIFMA Letter.
\34\ Id.
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Proposal Is Insufficient
Three commenters stated that the proposal does not address the
problem of unpaid arbitration awards in a meaningful way and urged
FINRA to take further action.\35\ One of these commenters stated that
the proposal ``fails to address the major problem faced by victims of
thinly capitalized broker-dealer firms: That judgements against them
are often rendered valueless'' \36\ and recommended FINRA establish a
national recovery pool.\37\ Another commenter claimed that the proposal
``nibble[s] around the edge of the issue'' and fails to ``require firms
to acquire insurance to bear the costs of their operations or to
maintain significant capital reserves.'' \38\ A third commenter
believed that the proposal does not ``improve investors' ability to
collect arbitration awards against inactive FINRA members or reduce
instances of unpaid arbitration awards by inactive FINRA members.''
\39\
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\35\ See FSI Letter, PIABA Letter, and Edwards Letter.
\36\ PIABA Letter.
\37\ See PIABA Letter.
\38\ Edwards Letter (urging the Commission to require FINRA to
propose ``meaningful reforms'' regarding unpaid arbitration).
Although the Commission acknowledges that this commenter and others
are concerned that the proposed rule change does not sufficiently
address the issue of unpaid arbitration awards, we note that FINRA
is continuing to consider this issue as well as possible responses
to further enhance customer recovery. See FINRA Letter.
\39\ FSI Letter.
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In response, FINRA stated that the proposed rule change is
``intended to expand the options available to a customer when dealing
with those members or associated persons that are inactive at the time
a claim is filed or become inactive during a pending arbitration.''
\40\ Accordingly, FINRA believes that a commenter's recommendation to
create a national recovery pool is outside the scope of this
proposal.\41\ However, FINRA also stated that the proposal represents
just ``one of the ways it is proceeding to implement additional steps
to strengthen its rules relating to the important but complex topic of
customer recovery.'' \42\ FINRA noted that, in a separate proposed rule
change, it is proposing amendments to its Membership Application
Program (``MAP'') rules ``to create further incentives for the timely
payment of awards.'' \43\ Specifically, the MAP proposal would, among
other things, ``prevent a member firm with substantial arbitration
claims from avoiding payment of the claims should they go to award or
result in a settlement by shifting its assets, which are typically
customer accounts, or its managers or owners, to another firm and
closing down.'' \44\
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\40\ FINRA Letter.
\41\ See FINRA Letter.
\42\ Id.
\43\ FINRA Letter. See Exchange Act Release No. 87810 (Dec. 20,
2019), 84 FR 72088 (Dec. 30, 2019) (Notice of Filing of File No. SR-
FINRA-2019-030).
\44\ FINRA Letter at note 18.
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In addition, FINRA stated it welcomes continued dialogue about
``addressing the challenges of customer recovery across the financial
services industry while directly informing the further enhancement of
recovery in FINRA's forum[.]'' \45\ For example, FINRA cited to its
2018 White Paper and ``additional data regarding the circumstances
under which awards may be unpaid, along with a discussion of potential
regulatory and legislative responses.'' \46\
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\45\ FINRA Letter.
\46\ FINRA Letter. See FINRA's White Paper entitled FINRA
Perspectives on Customer Recovery (February 8, 2018), https://www.finra.org/sites/default/files/finra_perspectives_on_customer_recovery.pdf and https://www.finra.org/arbitration-mediation/statistics-unpaid-customer-awards-finra-arbitration. In addition, FINRA has published a list of
firms and associated persons responsible for unpaid arbitration
awards. See https://www.finra.org/arbitration-mediation/member-firms-and-associated-persons-unpaid-customer-arbitration-awards.
This information also appears on a firm's or individual's
BrokerCheck record.
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For these reasons, FINRA declined to amend the proposal in response
to these commenters.
Expand Proposal to Industry Code
One commenter recommended FINRA expand the proposed rule change to
apply not only to customer cases but also to intra-industry cases
(i.e., disputes between or among members and associated persons).\47\
The commenter stated that unpaid arbitration awards result from both
customer and intra-industry cases and, therefore, ``the same arguments
that FINRA makes in favor of expanding the options available to a
customer claimant when dealing with inactive firms and associated
persons apply equally to industry claimants.'' \48\
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\47\ See SIFMA Letter; see also FINRA Rule 13000 Series
(Industry Code).
\48\ SIFMA Letter.
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In response, FINRA acknowledged the commenter's concern but stated
that at this time it has decided to focus its attention on customer
cases and believes that ``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.'' \49\ Accordingly, FINRA declined to amend the proposal in
response to the commenter.
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\49\ FINRA Letter. FINRA also noted, that it welcomes further
discussions regarding the circumstances under which awards may be
unpaid, along with potential solutions. See FINRA Letter; see also
supra note 46 and accompanying text.
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[[Page 11161]]
Proposal Creates Imbalance Between Claimants and Respondents
One commenter stated that the proposed rule change creates an
imbalance between claimants and respondents. Specifically, the
commenter expressed concern that because the proposal permits a
claimant to amend its pleading to add a claim or party without the need
for pre-approval by an arbitrator or panel, any newly added party would
not be able to participate in the arbitrator panel selection
process.\50\ Similarly, the commenter stated that ``requiring an
arbitrator or panel to grant a motion to add a party serves the
important purpose of providing the party to be added with an
opportunity to object to being added.'' \51\ For these reasons, the
commenter opposed the elimination of the existing motion requirement
for adding a party or amending a pleading.\52\
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\50\ See FSI Letter.
\51\ FSI Letter.
\52\ See FSI Letter.
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In response, FINRA stated that the proposal would not change the
panel selection process under the current rules.\53\ Specifically,
``[i]f a panel grants a motion to amend a pleading to add a new party,
the party to be added [currently] does not get to participate in the
panel selection process.'' \54\ However, FINRA would provide arbitrator
disclosure reports of the sitting panelists \55\ to any party added
after a member or associated person becomes inactive; \56\ and, if the
party discovers a conflict, the party may file a motion to recuse the
arbitrator.\57\
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\53\ See FINRA Letter.
\54\ FINRA Letter. See generally Part IV of the Customer Code
(Appointment, Disqualification, and Authority of Arbitrators); see
also Arbitrator Selection, https://www.finra.org/arbitration-and-mediation/arbitrator-selection. See FINRA Letter at note 8.
\55\ 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.
Whenever a party is added to a claim, the panelists must update
their disclosures or review them to ensure that further updates are
not warranted. See FINRA Letter at notes 9 and 10; see also FINRA
Rule 12405 (Disclosures Required of Arbitrator).
\56\ See FINRA Letter.
\57\ See FINRA Letter; see also FINRA Rule 12406 (Arbitrator
Recusal).
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In addition, FINRA believes that ``it is appropriate to remove the
requirement that a customer file a motion to amend a pleading after
panel appointment if a respondent member firm or associated person has
become inactive to help avoid additional costs and delay to the
customer.'' \58\ FINRA stated that the proposal would not change a
party's ability to respond to an amended pleading by filing an answer
and raising any available defenses under the current rules.\59\
Accordingly, a party added under the proposal would still be able to
respond to a pleading.
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\58\ FINRA Letter.
\59\ See FINRA Letter; see also FINRA Rule 12303 (Answering the
Statement of Claim).
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For these reasons, FINRA declined to amend the proposal in response
to the commenter.
IV. Discussion and Commission Findings
After careful review of the proposed rule change and the comment
letters, the Commission finds that the proposal is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder that are applicable to a national securities
association.\60\ Specifically, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Exchange
Act,\61\ which requires, among other things, that FINRA rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest.
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\60\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\61\ 15 U.S.C. 78o-3(b)(6).
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Public Interest
The Commission agrees with FINRA and those commenters that support
the proposed rule change that it will 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. Specifically, the proposed rule change would make several
modifications to FINRA's rules to address the situation where a member
firm becomes inactive during a pending arbitration, allowing customers
to amend pleadings, postpone hearings, request default proceedings, and
receive a refund of filing fees in that situation. In addition, the
proposed rule change would expand customers' options with respect to
claims brought against associated persons. Specifically, the proposal
would provide customers the same options during a case against inactive
associated persons as they would have in a case against inactive
members. It 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. As noted above, the Commission agrees that,
similar to the current rules and procedures relating to claims filed
against inactive members, these proposed changes would allow customers
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.
With respect to one commenter's concern that the proposed rule
change does not apply to intra-industry cases,\62\ the Commission notes
that FINRA welcomes continued dialogue about the challenges of
addressing issues related to collecting unpaid arbitration awards in
its forum.\63\
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\62\ See SIFMA Letter.
\63\ See FINRA Letter.
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Similarly, the Commission acknowledges commenter's concern that the
proposed rule change will create an imbalance in the arbitration
process between claimants and respondents by: (1) Denying a newly added
respondent the opportunity to participate in the arbitrator panel
selection process, and (2) precluding a newly added respondent the
opportunity to object to being added.\64\ The Commission notes FINRA's
belief that the proposed rule change does not create such an imbalance
because existing rules already provide procedures that offer sufficient
protections for respondents added to an arbitration after the panel is
appointed, including respondents who would be added as a result of the
proposed rule change. In particular, FINRA notes that under existing
FINRA rules a newly added respondent would receive reports summarizing
the arbitrators' backgrounds and provide respondent with the
opportunity to seek recusal of any arbitrator with a conflict of
interest. In addition, FINRA notes that the proposed rule change does
not change a party's ability to respond to an amended pleading by
filing an answer and raising any available defenses.\65\
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\64\ See FSI Letter (stating ``Providing arbitrator disclosure
reports of the sitting panelists to an added party and permitting an
added party to raise any conflicts they find with the panel is not
equivalent to participating in the panel selection process. . . .
Permitting a claimant to submit a response to an amended pleading is
not equivalent to providing an opportunity to be heard in response
to a motion prior to being added as a party.'').
\65\ See FINRA Letter.
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The Commission acknowledges the commenter's concern that these are
insufficient alternatives to respondents participating in the
arbitrator selection process or having the ability to respond to a
motion prior to being added as a party.\66\ The Commission believes,
[[Page 11162]]
however, that despite any potential imbalance it is important that
claimants be able to add respondents upon learning that the member or
associated person against which she bought the claim is inactive to
help ensure that the claimant is able to collect should the claim go to
award.\67\ In addition, notwithstanding any potential imbalance, the
Commission notes FINRA's position that the existing FINRA rules would
provide respondents procedural protections in the limited circumstances
in which such respondents would be added under to the proposal.
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\66\ See FSI Letter.
\67\ See PIABA Letter (Supporting the aspect of the proposed
rule change that would permit an amendment of the statement of
claim, without leave of the arbitration panel because it would
permit a customer claimant to pursue claims against potentially
collectible respondents.
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Finally, the Commission acknowledges several commenters' concerns
that the proposed rule change will not, in their view, effectively
resolve the problems related to unpaid arbitration awards and their
proposed enhancements to the proposal, such as requiring a national
recovery pool \68\ or requiring firms to acquire insurance.\69\ As
FINRA noted, this the proposal represents only one step in the ongoing
process of addressing these issues and that FINRA continues to evaluate
further action.
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\68\ See PIABA Letter.
\69\ See Edwards Letter.
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Accordingly, because the proposed rule change will expand the
options available to customers in pending arbitrations with claims
against respondents who are unlikely to be able to pay, and promote
consistency under FINRA's rules, the Commission believes that the
proposed rule change is designed to protect investors and the public
interest.
V. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \70\ that the proposal (SR-FINRA-2019-027), be and hereby
is approved.
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\70\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\71\
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\71\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03771 Filed 2-25-20; 8:45 am]
BILLING CODE 8011-01-P
