Federal Register, Volume 79 Issue 192 (Friday, October 3, 2014)

[Federal Register Volume 79, Number 192 (Friday, October 3, 2014)]
[Notices]
[Pages 59876-59884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-23568]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73245; File No. SR-FINRA-2014-026]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Amend the Code
of Arbitration Procedure for Customer Disputes and the Code of
Arbitration Procedure for Industry Disputes To Increase Arbitrator
Honoraria and Increase Certain Arbitration Fees and Surcharges

September 29, 2014.

I. Introduction

On June 13, 2014, the 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend FINRA's Code of Arbitration Procedure for
Customer Disputes (``Customer Code'') and the Code of Arbitration
Procedure for Industry Disputes (``Industry Code'') (together,
``Codes'') to increase certain arbitration filing fees, member
surcharges and process fees, and hearing session fees for the primary
purpose of increasing arbitrator honoraria. The proposed rule change
was published for comment in the Federal Register on July 2, 2014.\3\
The Commission received eight comment letters on the proposal.\4\ On
August 5, 2014, FINRA granted the Commission an extension of time,
until September 30, 2014, to act on the proposal.\5\ FINRA responded to
the comment letters on September 18, 2014.\6\ This order approves the
rule change as proposed.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 72479 (Jun. 26,
2014), 79 FR 37786 (Jul. 2, 2014) (``Notice'').
\4\ See Letters from Steven B. Caruso, Esq., Maddox Hargett &
Caruso, P.C., dated July 1, 2014 (``Caruso Letter''); Ryan K.
Bakhtiari, Aidikoff, Uhl & Bakhtiari, dated July 2, 2014
(``Bakhtiari Letter''); Philip M. Aidikoff, Esq., Aidikoff, Uhl &
Bakhtiari, dated July 2, 2014 (``Aidikoff Letter''); Jason Doss,
President, Public Investors Arbitration Bar Association (``PIBA''),
dated July 22, 2014 (``PIABA Letter''); Ellen Liang, Student Intern,
Elissa Germaine, Supervising Attorney, and Jill Gross, Director,
Pace Investor Rights Clinic (``PIRC''), Pace University School of
Law, dated July 23, 2014 (``PIRC Letter''); David T. Bellaire, Esq.,
Executive Vice President and General Counsel, Financial Services
Institute (``FSI''), dated July 23, 2014 (``FSI Letter''); Andrea
Seidt, Ohio Securities Commissioner and President, North American
Securities Administrators Association (``NASAA''), dated July 23,
2014 (``NASAA Letter''); and Michael J. Quarequio, Esq., Law Office
of Michael J. Quarequio, P.A., dated July 23, 2014 (``Quarequio
Letter'').
\5\ See Letter from Mignon McLemore, Assistant Chief Counsel,
FINRA Dispute Resolution, Inc., to Lourdes Gonzalez, Assistant Chief
Counsel, Sales Practices, Division of Trading and Markets,
Securities and Exchange Commission, dated August 5, 2014.
\6\ See Letter from Mignon McLemore, Assistant Chief Counsel,
FINRA Dispute Resolution, Inc., to Brent J. Fields, Secretary,
Securities and Exchange Commission, dated September 18, 2014
(``FINRA Response Letter'').
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II. Description of the Proposed Rule Change

A. Background

As stated in the Notice, FINRA is proposing to amend the Codes to
increase certain arbitration filing fees, member surcharges and process
fees, and hearing session fees for the primary purpose of increasing
arbitrator honoraria.\7\ In support of the proposal, FINRA stated that
it has ``received numerous complaints in recent years from its
arbitrators regarding the honoraria paid to them for their service.''
\8\ FINRA further noted that surveys of organizations and individuals
recruited to be FINRA arbitrators, as well as reports from arbitrators
at focus groups, and other arbitrator comments indicate a ``heightened
sensitivity to the comparatively low honoraria paid by FINRA.'' \9\
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\7\ See Notice, 79 FR at 37786. See also id. at 37787 n. 3
(noting FINRA's last increase to arbitrator honoraria and citing
Securities Exchange Act Rel. No. 41056 (Feb. 16, 1999), 64 FR 10041
(Mar. 1, 1999) (File No. SR-NASD-97-79)).
\8\ Notice, 79 FR at 377887 (stating that FINRA is also aware
that arbitrators in private arbitration forums set their own rates
and charge significantly more than FINRA pays).
\9\ Id.
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Although FINRA acknowledged that there are non-monetary benefits to
serving as an arbitrator, FINRA still believes that ``the current
honoraria level is a barrier to recruiting.'' \10\ FINRA also reported
that ``arbitrators have regularly cited the honoraria level when
leaving the roster, particularly when they are asked to take a new
training course or complete a survey or disclosure statement.'' \11\
Accordingly, FINRA believes that increasing honoraria is needed to
``retain a roster of high-quality arbitrators and attract qualified
individuals who possess the skills necessary to manage arbitration
cases and consider thoroughly all arbitration issues presented, which
are essential elements for FINRA to meet its regulatory objective of
protecting the investing public.'' \12\
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\10\ Id. (noting the non-monetary benefits to serving as a FINRA
arbitrator include ``learning the skills necessary to be an
effective commercial arbitrator, serving the public, or giving back
to one's community by applying professional knowledge gained as an
arbitrator'').
\11\ Id. (stating that ``[t]hese extra requests are viewed as
the `last straw' that prevents good arbitrators from remaining on
the roster at the current honoraria rate'').
\12\ Id.
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To fund these honoraria increases, FINRA is proposing to increase
certain fees and surcharges assessed in the arbitration forum.
Specifically, FINRA's proposal would amend Rules 12214 (Payment of
Arbitrators), 12800 (Simplified Arbitration), 12900 (Fees Due When a
Claim is Filed), 12901 (Member Surcharge), 12902 (Hearing Session Fees,
and Other Costs and Expenses), and 12903 (Process Fees Paid by Members)
of the Customer Code. The proposed rule change would also amend Rules
13214 (Payment of Arbitrators), 13800 (Simplified Arbitration), 13900
(Fees Due When a Claim is Filed), 13901 (Member Surcharge), 13902
(Hearing Session Fees, and Other Costs and Expenses), and 13903
(Process Fees Paid by Members) of the Industry Code.\13\
In general, the proposal would increase the member surcharges and

[[Page 59877]]

process fees for claims larger than $250,000 \14\ as well as filing
fees for investors, associated persons, or firms bringing claims of
more than $500,000 and hearing session fees for claims of more than
$500,000.\15\ FINRA recognizes that increasing honoraria to market
rates would impose a significant burden on forum users and, therefore,
believes that ``the proposed rule change is the best option to narrow
the gap without unduly increasing costs to forum users.'' \16\
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\13\ See id. at 37786-87. The text of the proposed rule change
is available at the principal office of FINRA, on FINRA's Web site
at http://www.finra.org, and at the Commission's Public Reference
Room. For ease of reference, this Order generally refers only to
rules in the Customer Code. However, the changes and discussion
would also apply to the same rules of the Industry Code.
\14\ See id. at 37787 n. 4 (noting, however, that the proposed
rule change would also increase the member surcharge for the
$10,000.01 to $25,000 tier).
\15\ See id.
\16\ Id. (explaining that, for example, ``increasing honoraria
to market rates could require a greater increase in arbitration
filing fees, which would increase the costs of customers, associated
persons, and firms'').
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The following sections outline each of FINRA's proposed rule change
amendments.

B. Proposed Arbitrator Honoraria Increases

Proposed Amendments to FINRA Rules 12214 and 13214 (Payment to
Arbitrators) and FINRA Rules 12800 and 13800 (Simplified Arbitration)
Arbitrator honoraria are the payments that FINRA makes to its
arbitrators for the services they provide to FINRA's dispute resolution
forum.\17\ Currently, under Rule 12214(a), an arbitrator receives $200
for each hearing session in which the arbitrator participates.\18\
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\17\ See id.
\18\ See id. n. 10 (noting that the term ``hearing session''
typically means ``any meeting between the parties and arbitrator(s)
of four hours or less, including a hearing or a prehearing
conference''). See also id. at 37787 (noting that a typical day has
two hearing sessions).
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FINRA noted that ``[c]hairpersons are often the arbitrators on
FINRA's rosters with the most experience who have completed chairperson
training.'' \19\ In recognition of a chairperson's increased experience
and extra responsibilities during a hearing,\20\ FINRA currently pays
chairpersons an additional $75 per hearing day.\21\
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\19\ Notice, 79 FR at 37787 (noting that ``to qualify as a
chairperson, an arbitrator must have served on at least three
arbitrations through award in which hearings were held, or be a
lawyer who served on at least two arbitrations through award in
which hearings were held'').
\20\ See id. n. 12 (FINRA notes that, for example, during a
typical arbitration, the chairperson decides discovery motions and
conducts the initial prehearing conference(s)) (citing Rules
12500(c), 12503(d)(3), 13500(c), and 13503(d)(3)).
\21\ See id. at 37787-88. See also id. at 37788 (explaining that
a ``hearing'' means the hearing on the merits and that the
chairperson receives the additional honoraria for each day he or she
serves as chair at a hearing, regardless of the number of hearing
sessions per day).
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Arbitrators also receive honoraria when they decide contested
motions requesting the issuance of a subpoena without a hearing
(``contested subpoena requests'').\22\ FINRA assesses a $200 fee to the
parties for each arbitrator who participates in deciding the contested
subpoena request to cover the cost of the honoraria.\23\ As FINRA
explained, this amount of honoraria is paid on a per case basis,
regardless of the number of contested subpoena requests decided by an
arbitrator or panel during the case.\24\
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\22\ See Notice, 79 FR at 37788 (citing Rules 12214(d) and
13214(d)).
\23\ See id.
\24\ See id. (explaining that ``[i]f an arbitrator or the panel
decides a contested subpoena request, the arbitrator or panel
allocates the cost of the honoraria to the parties in the award'')
(citing Rules 12214(d)(3) and 13214(d)(3)).
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Finally, under Rule 12800, when a claimant \25\ files a claim in
which the amount in dispute, excluding interest and expenses (``claim
amount'') is $50,000 or less, one arbitrator decides the case based
solely on the documents provided by the parties (i.e., no hearings are
held).\26\ FINRA refers to these types of cases as ``simplified
arbitration.'' The arbitrator who decides a simplified arbitration case
currently receives $125 per case.\27\
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\25\ See id. (explaining that FINRA Rules 12100(e) and 13100(e)
define the term ``claimant'' as a party that files the statement of
claim that initiates an arbitration).
\26\ FINRA noted that it recently raised the claim amount limit
for simplified arbitration from $25,000 to $50,000. See id. at 37794
n. 57 (citing Securities Exchange Act Rel. No. 66913 (May 3, 2012),
77 FR 27262 (May 9, 2012) (File No. SR-FINRA-2012-012)). FINRA also
stated that ``[t]ypically, as the claim amount increases,
arbitrators encounter issues that are more complicated to resolve,
and, thus, require more of their time.'' Id. at 37794.
\27\ See Notice, 79 FR at 37788.
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Under the proposed rule change, FINRA would amend Rules 12214 and
12800 of the Customer Code to increase the arbitrator honoraria.\28\
Table 1 (below) illustrates the proposed increases and the percentage
changes from the current rates.
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\28\ See id. at 37794.

Proposed Arbitrator Honoraria Increases--Table 1
----------------------------------------------------------------------------------------------------------------
Percentage
Arbitrator honoraria Current Proposed change
----------------------------------------------------------------------------------------------------------------
Per arbitrator, per hearing session............................. $200 $300 50
Chairpersons (per day of hearing)............................... 75 125 67
Contested Subpoena Requests..................................... 200 250 25
Simplified Arbitration Cases (flat rate)........................ 125 350 180
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Specifically, FINRA is proposing to amend Rule 12214(a) to increase
the payment to each arbitrator for each hearing session in which the
arbitrator participates from $200 to $300 per hearing session. The rule
would also be amended to increase the additional amount that
chairpersons receive from $75 to $125 per day of hearings. Rule
12214(d) would be amended to increase the honoraria that arbitrators
receive when they decide contested subpoena requests from $200 to $250.
Finally, Rule 12800(f) would be amended to increase the honoraria for
simplified arbitration cases, which is a flat per case payment, from
$125 to $350. FINRA stated that ``[a]lthough no hearings are conducted
in simplified arbitrations, these cases can be time-consuming, and, in
FINRA's view, the current honoraria level does not reflect fairly the
arbitrator's time and effort to render a decision.'' \29\
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\29\ Id.
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To fund these increases in arbitrator honoraria, FINRA is proposing
to increase certain filing fees, member surcharges and process fees,
and the hearing session fees assessed under the Codes as illustrated in
the tables below.\30\ FINRA stated that it ``believes the proposed fee
increases would generate sufficient revenue to offset the proposed
increases in the arbitrator honoraria as described [above] without
placing an undue burden on the public customer.'' \31\
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\30\ See, e.g., id. at 37790 (noting that although FINRA refers
to rules in the Customer Code, the changes and discussion below also
apply to the same rules of the Industry Code).
\31\ Id.

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[[Page 59878]]

C. Proposed Increases to Certain Fees and Surcharges

1. Proposed Amendments to FINRA Rules 12900 and 13900 (Fees Due When A
Claim is Filed)
Currently, Rules 12900(a) and 13900(a) require a customer,
associated person, other non-member, or member who files a claim,
counterclaim, cross claim, or third party claim to pay a filing fee to
initiate an arbitration. The filing fee consists of two parts: (1) A
non-refundable fee, which FINRA keeps when a claim is filed, and (2) a
deposit, which FINRA may return in whole or in part to the party that
filed the claim in certain circumstances.\32\
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\32\ See id. at 37788 (providing examples of when fees can be
refunded and citing the FINRA rules governing the return of those,
including Rules 12902(b)-(d) and 13902(b)-(d)).
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Under the proposed rule change, FINRA would amend Rules 12900 and
13900 to increase the filing fees for investors, associated persons,
other non-members, or members bringing claims of more than
$500,000.\33\ Tables 2 and 3 (below) show the current filing fee,
proposed filing fee, dollar and percentage changes, and the non-
refundable and partial refund breakdown of each fee.\34\
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\33\ See id. at 37791.
\34\ See id. at 37791-92 (discussing ``Filing Fee Increases'').
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(a) Filing Fees Paid by Customers, Associated Persons, or Other Non-
Members

Proposed Filing Fees for Customers, Associated Persons or Other Non-Member Claimants--Table 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-Refundable
Current claim Proposed claim Change in filing fee Partial refund
Amount of claim (exclusive of interest and expenses) filing fee filing fee filing fee Percent change with proposed with proposed
changes changes
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$.01-$1000.............................................. $50 $50 $0 0 $25 $25
1,000.01-2,500.......................................... 75 75 0 0 25 50
2500.01-5,000........................................... 175 175 0 0 50 125
5,000.01-10,000......................................... 325 325 0 0 75 250
10,000.01-25,000........................................ 425 425 0 0 125 300
25,000.01-50,000........................................ 600 600 0 0 150 450
50,000.01-100,000....................................... 975 975 0 0 225 750
100,000.01-500,000...................................... 1,425 1,425 0 0 300 1,125
500,000.01-1,000,000.................................... 1,575 1,725 150 10 [375] 425 [1,200] 1,300
1,000,000.01-5,000,000.................................. 1,800 2,000 200 11 600 [1,200] 1,400
Over $5,000,000......................................... 1,800 2,250 450 25 [600] 750 [1,200] 1,500
Non-Monetary/Not Specified.............................. 1,250 1,575 325 26 [250] 375 [1,000] 1,200
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As reflected in Table 2, under the proposed rule change, FINRA
would increase the filing fees for claim amounts beginning at the
$500,000.01 to $1,000,000 tier, so that the fee increases impact only
those claimants with larger claims.\35\
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\35\ See id.
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The proposed rule change would also create two new tiers, at the
upper level, to spread the cost increases among larger claims. The
first new tier of $1,000,000.01 to $5,000,000 would have a filing fee
of $2,000. The second new tier would begin at over $5,000,000, with a
filing fee of $2,250.\36\
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\36\ See id. at 37792.
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In addition, the proposed rule change would increase the
unspecified filing fee by $325. FINRA believes the unspecified claim
fees should fall in the middle of the claim amount tiers for each fee
type, where a majority of the specified claims are clustered.\37\
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\37\ See id.
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As stated above, FINRA believes that these increases would help
fund the increases in arbitrator honoraria. Furthermore, FINRA believes
potential impact of the proposed increased filing fee would be
mitigated by, among other things, (1) FINRA allocating most of the
increases to the refundable portion of the filing fee; \38\ and (2) the
ability of arbitrators to order a respondent to reimburse all or part
of any filing fee paid in the award.\39\
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\38\ See id. See also id. n. 51.
\39\ See Notice, 79 FR at 37792 (citing Rules 12900(d) and
13900(d)).
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(b) Filing Fees Paid by Members

Filing Fees for Member Claimant--Table 3
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Partial refund
Amount of claim (exclusive of interest and expenses) Current claim Proposed claim Change in Percent change Non-refundable with proposed
filing fee filing fee filing fee filing fee changes
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$.01-$1000.............................................. $225 $225 $0 0 $200 $25
1,000.01-2,500.......................................... 350 350 0 0 300 50
2500.01-5,000........................................... 525 525 0 0 400 125
5,000.01-10,000......................................... 750 750 0 0 500 250
10,000.01-25,000........................................ 1,050 1,050 0 0 750 300
25,000.01-50,000........................................ 1,450 1,450 0 0 1,000 450
50,000.01-100,000....................................... 1,750 1,750 0 0 1,000 750
100,000.01-500,000...................................... 2,125 2,125 0 0 1,000 1,125
500,000.01-1,000,000.................................... 2,450 2,550 100 4 1,250 [1,200] 1,300
1,000,000.01-5,000,000.................................. 3,200 3,400 200 6 2,000 [1,200] 1,400
Over $5,000,000......................................... 3,700 4,000 300 8 2,500 [1,200] 1,500
Non-Monetary/Not Specified.............................. 1,500 1,700 200 13 500 [1,000] 1,200
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[[Page 59879]]

As reflected in Table 3, the proposed rule change would also
increase the filing fee for members at the highest claim amount tiers,
as well as at the unspecified claim tier. For each of the above
increases, FINRA stated that it is proposing to add the increased
amount to the refundable portion of the filing fee, explaining that
``this part of the filing fee, which is linked closely to FINRA's costs
to administer arbitration cases, particularly hearing sessions, could
be avoided if the parties agree to settle.'' \40\
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\40\ Id. (citing Rules 12701(a) and 13701(a)).
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2. Proposed Amendments to FINRA Rules 12901 and 13901 (Member
Surcharge)
Currently, FINRA Rules 12901(a) and 13901(a) provide that a
surcharge will be assessed against each member that: (1) Files a claim,
counterclaim, cross claim, or third party claim under the Codes; (2) is
named as a respondent in a claim, counterclaim, cross claim, or third
party claim filed and served under the Codes; or (3) employed, at the
time the dispute arose, an associated person who is named as a
respondent in a claim, counterclaim, cross claim, or third party claim
filed and served under the Codes. FINRA explained that member
surcharges are intended to allocate the costs of administering the
arbitration case to the brokerage firms that are involved in those
cases. Thus, each member is assessed a member surcharge, based on the
aggregate claim amount, when it is brought into the case, whether
through a claim, counterclaim, cross claim or third party claim. FINRA
noted that the member surcharge is the responsibility of the member
party and cannot be allocated to any other party (``non-
allocable'').\41\
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\41\ See id. at 37788 (citing Rules 12901(a)(4) and 13901(d)).
See also Rules 12701(b) and 13701(b).
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The proposal would amend Rules 12901 and 13901 to increase the
member surcharges primarily for claim amounts larger than $250,000. The
proposal would also make a technical change to the title of the tiers
in the ``Member Surcharge'' charts from ``Amount in Dispute'' to
``Amount of Claim,'' so that the title describing the claim amounts in
all of the fee charts in the Codes would be consistent.\42\
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\42\ See Notice, 79 FR at 37788.
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Table 4 (below) illustrates the current member surcharges, the
proposed surcharge, and percentage increases.

Member Surcharge Schedule--Table 4
----------------------------------------------------------------------------------------------------------------
Amount [in dispute] of claim (exclusive of Current Proposed Percentage
interest and expenses) surcharge surcharge Change change
----------------------------------------------------------------------------------------------------------------
$.01-$2,500................................... $150 $150 $0 0
2,500.01-5,000................................ 200 150 (50) (25)
5,000.01-10,000............................... 325 325 0 0
10,000.01-25,000.............................. 425 450 25 6
25,000.01-30,000.............................. 600 750 150 25
30,000.01-50,000.............................. 875 750 (125) (14)
50,000.01-100,000............................. 1,100 1,100 0 0
100,000.01-250,000............................ 1,700 1,700 0 0
250,000.01-500,000............................ 1,700 1,900 200 12
500,000.01-1,000,000.......................... 2,250 2,475 225 10
1,000,000.01-5,000,000........................ 2,800 3,025 225 8
5,000,000.01-10,000,000....................... 3,350 3,600 250 8
Over $10,000,000.............................. 3,750 4,025 275 7
Non-Monetary/Not Specified.................... 1,500 1,900 400 27
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As reflected in Table 4, the proposal would reduce the member
surcharge for some smaller claims \43\ and increase the member
surcharge for larger claims.\44\ The proposal would also increase the
member surcharge assessed for unspecified claims by $400.\45\ FINRA
believes that this change is consistent with comparable increases in
the unspecified filing fees for customer and industry claimants. FINRA
also noted that member surcharges would remain non-allocable under the
proposal, and, thus, would not result in any additional costs to
customers.\46\
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\43\ See id. at 37790.
\44\ See id. n. 49 (noting that the surcharge for the
$10,000.01-to-$25,000 tier would also increase by $25 or 6 percent).
\45\ See id. at 37790-91.
\46\ See id.at 37791.
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The proposal would also combine the current $25,000.01-to-$30,000
and $30,000.01-to-$50,000 tiers. FINRA stated that this change ``was
intended to make the proposed tiers in the surcharge schedule more
consistent with other fee schedules in the Codes.'' \47\ FINRA also
believes that this merger ``is a more practical approach for case
administration purposes, and would make the surcharge schedule easier
to understand for parties.'' \48\ In addition, the proposal would
divide the current $100,000.01-to-$500,000 tier with its surcharge of
$1,700 into two new tiers. The surcharge for the new $100,000.01-to-
$250,000 tier would remain $1,700 while the surcharge for the new
$250,000.01-to-$500,000 tier would increase by $200 or about 12
percent. FINRA proposed this change because it believes ``a large
percentage of claims fall within the current tier and FINRA decided
that there should be a greater distinction between the claims.'' \49\
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\47\ Id.
\48\ Id.
\49\ Id.
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3. Proposed Amendments to FINRA Rules 12902 and 13902 (Hearing Session
Fees, and Other Costs and Expenses)
Currently, FINRA Rules 12902(a) and 13902(a) assess a hearing
session fee for each hearing session held. A hearing session is a
meeting of the parties and arbitrators, including any hearing, pre-
hearing, and injunctive hearing.\50\ According to FINRA, the hearing
session fee is ``intended to offset FINRA's cost to conduct hearing
sessions.'' \51\
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\50\ See id. at 37788.
\51\ Id. at 37789 (noting that ``[t]he cost of conducting a
hearing session includes arbitrator compensation and travel
expenses, hearing conference rooms, and staff work and expenses'').
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As FINRA explained, the hearing session fee is allocable to the
parties and based on the highest claim amount within the case. In
addition, Rules 12902(a)(1) and 13902(a)(1) provide arbitrators the
authority to apportion the fees in any manner, including assessing

[[Page 59880]]

the entire amount against one party.\52\ FINRA also stated that it
applies the refundable portion of the filing fee against any hearing
session fees assessed against the party that paid the filing fee.\53\
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\52\ See id. (noting that ``[a]rbitrators may assess the hearing
session fees in the award, or by arbitrator order if the parties
held hearing sessions before agreeing to settle''). See also id. n.
34 (explaining that ``[t]he parties may agree to a different
allocation in the settlement agreement'').
\53\ See Notice, 79 FR at 37789. See also id. at 37788
(explaining, for example, that ``if a case goes to hearing, and the
panel orders a respondent to pay all hearing session fees, the
refundable portion of the filing fee will be refunded to the
claimants, less any fees, costs, and expenses that may have been
assessed against this party under the Code'').
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FINRA is proposing to amend Rule 12902 to increase the hearing
session fees for claims of more than $500,000.\54\ The proposal would
also make two technical changes to the ``Hearing Session Fees'' charts:
(1) Add ``(exclusive of interest and expenses)'' to the ``Amount of
Claim'' title to make it consistent with those in the Codes' other fee
schedules and to clarify that hearing session fees are based on the
claim amount and do not include interest or expenses; \55\ and (2)
change the title of the tier currently identified as ``Unspecified'' to
``Non-Monetary/Not Specified'' so that the title is consistent with
those in the other fee schedules in the Codes.\56\
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\54\ See Notice, 79 FR at 37792.
\55\ See id. at 37793 (noting that the exclusion of interest or
other expenses ``would codify current practice'').
\56\ See id. at 37793-94.
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Tables 5 and 6 (below) illustrate the current fee for hearing
sessions with either one or three arbitrators, the proposed fee, dollar
and percentage changes, and the arbitrator payment at each tier.
(a) Hearings With One Arbitrator
As reflected in Table 5 (below), under the proposed rule change,
the fees for a hearing session with one arbitrator would not
change.\57\ FINRA noted, however, that the proposal would create two
new tiers, beginning at $500,000.01, so that the tiers for the fees for
a hearing session with one arbitrator match the claim amount tiers for
filing fees. FINRA would retain the $450 hearing session fee for each
new tier.\58\
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\57\ See id. at 37792.
\58\ See id. at 37793.

Table 5--Hearing Session Fees for Session With One Arbitrator
----------------------------------------------------------------------------------------------------------------
Current fee Proposed fee
Amount of claim (exclusive of interest and for session/ for session/
expenses) decision w/ decision w/ Change Percent change
one arbitrator one arbitrator
----------------------------------------------------------------------------------------------------------------
$.01-$2,500..................................... $50 $50 $0 0
2,500.01-5,000.................................. 125 125 0 0
5,000.01-10,000................................. 250 250 0 0
10,000.01-25,000................................ 450 450 0 0
25,000.01-50,000................................ 450 450 0 0
50,000.01-100,000............................... 450 450 0 0
100,000.01-500,000.............................. 450 450 0 0
500,000.01-1,000,000............................ 450 450 0 0
1,000,000.01-5,000,000.......................... 450 450 0 0
Over $5,000,000................................. 450 450 0 0
[Unspecified Damages] Non-Monetary/Not Specified 450 450 0 0
----------------------------------------------------------------------------------------------------------------

FINRA stated that ``[i]n assessing the hearing session fees for
cases heard by one arbitrator, FINRA determined to retain the current
fee structure . . . even though the current fees would not cover the
proposed increased honoraria payments for claims in the $.01-$10,000
tiers.'' \59\ FINRA explained that it ``would retain the current fees
for these lower claim amounts, so that the forum remains accessible and
affordable to claimants with smaller claims.'' \60\
---------------------------------------------------------------------------

\59\ Id.
\60\ See id.
---------------------------------------------------------------------------

(b) Hearings With Three Arbitrators
As reflected in Table 6 (below), the proposal would create new
tiers for claims amounts starting at $500,000.01 for hearing sessions
with three arbitrators and would increase the fees only for those
tiers.\61\
---------------------------------------------------------------------------

\61\ See id.

Table 6--Hearing Session Fees for Session With Three Arbitrators
----------------------------------------------------------------------------------------------------------------
Current fee Proposed fee
Amount of claim (exclusive of interest and for session w/ for session w/
expenses) three three Change Percent change
arbitrators arbitrators
----------------------------------------------------------------------------------------------------------------
Up-$2,500....................................... N/A N/A N/A N/A
2,500.01-5,000.................................. N/A N/A N/A N/A
5,000.01-10,000................................. N/A N/A N/A N/A
10,000.01-25,000................................ N/A N/A N/A N/A
25,000.01-50,000................................ 600 600 0 0
50,000.01-100,000............................... 750 750 0 0
100,000.01-500,000.............................. 1,125 1,125 0 0
500,000.01-1,000,000............................ 1,200 1,300 100 8
1,000,000.01-5,000,000.......................... 1,200 1,400 200 17
Over $5,000,000................................. 1,200 1,500 300 25
[Unspecified Damages] Non-Monetary/Not Specified 1,000 1,125 125 13
----------------------------------------------------------------------------------------------------------------

[[Page 59881]]

FINRA stated that it would retain the current fees for lower claim
amounts despite the fact that ``the hearing session fees do not cover
the forum's actual costs for smaller claims.'' \62\ FINRA stated that
it intends this proposed amendment to keep the forum accessible and
affordable for claimants with smaller claims.\63\ FINRA further noted
that the proposed increases on larger claim amounts ``would provide the
forum with enough revenue to cover its honoraria payments for these
cases as well as offset the deficits created at the lower tier
amounts.'' \64\
---------------------------------------------------------------------------

\62\ Id.
\63\ Id.
\64\ Id.
---------------------------------------------------------------------------

4. Proposed Amendments to FINRA Rules 12903 and 13903 (Process Fees
Paid by Members)
Currently, FINRA Rules 12903(a) and 13903(a) require each member
that is a party to an arbitration in which the claim amount is more
than $25,000 to pay process fees, which are assessed at specific
milestones in each case.\65\ In particular, FINRA assesses each member
a non-refundable prehearing process fee of $750 at the time the parties
are sent arbitrator lists and a non-refundable hearing process fee,
based on the claim amount, when the parties are notified of the date
and location of the hearing on the merits. Like the member surcharges,
the process fee is non-allocable to other parties to the
arbitration.\66\
---------------------------------------------------------------------------

\65\ See id. at 37788.
\66\ See id. (citing Rules 12903(c) and 13903(c)). See also
Rules 12701(b) and 13701(b).
---------------------------------------------------------------------------

As reflected in Table 7 (below), the proposal would combine the
prehearing process fee and hearing process fee, into one fee, which
would be due at the time the parties are sent the arbitrator lists.\67\
FINRA recognizes that this change would result in an increase to the
member process fee in many cases.\68\ However, FINRA believes this
change is ``necessary to ensure that the forum has the resources
available at the initial stages of a case to cover the proposed
honoraria increases.'' \69\ Further, FINRA states that this change
would also ``make the collection process more efficient for FINRA and
the members, as it would reduce the number of invoices sent and
collection activities performed by FINRA's Finance Department.'' \70\
The proposed rule change would also amend Rule 12903 to increase the
member process fees for claim amounts larger than $250,000.\71\
---------------------------------------------------------------------------

\67\ See Notice, 79 FR at 37791.
\68\ See id.
\69\ Id.
\70\ Id.
\71\ See id. at 37791.
---------------------------------------------------------------------------

Table 7 (below) shows the current process fees, the proposed
combined fees, and the changes between the two.

Member Process Fee Schedule--Table 7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current
Amount of claim (exclusive of interest and expenses) Pre-hearing Hearing combined Proposed fees Change Percentage
process fee process fee process fees change
--------------------------------------------------------------------------------------------------------------------------------------------------------
$.01-$5,000............................................. N/A N/A N/A N/A N/A N/A
2,500.01-5,000.......................................... N/A N/A N/A N/A N/A N/A
5,000.01-10,000......................................... N/A N/A N/A N/A N/A N/A
10,000.01-25,000........................................ N/A N/A N/A N/A N/A N/A
25,000.01-30,000........................................ 750 1,000 1,750 N/A N/A N/A
30,000.01-50,000........................................ 750 1,000 1,750 N/A N/A N/A
50,000.01-100,000....................................... 750 1,700 2,450 2,250 (200) (8)
100,000.01-250,000...................................... 750 2,750 3,500 3,250 (250) (7)
250,000.01-500,000...................................... 750 2,750 3,500 3,750 250 7
500,000.01-1,000,000.................................... 750 4,000 4,750 5,075 325 7
1,000,000.01-5,000,000.................................. 750 5,000 5,750 6,175 425 7
5,000,000.01-10,000,000................................. 750 5,500 6,250 6,800 550 9
Over 10,000,000......................................... 750 5,500 6,250 7,000 750 12
Non-Monetary/Not Specified.............................. 750 2,200 2,950 3,750 800 27
--------------------------------------------------------------------------------------------------------------------------------------------------------

The proposal would increase the fees for claim amounts beginning
with the new $250,000.01-to-$500,000 tier. Similar to the member
surcharge increase discussed above, FINRA is proposing to spread the
process fee increases among larger claim amounts, while retaining or
decreasing the fees associated with the lower claim amounts.\72\ The
proposal would also increase the process fees assessed for unspecified
claims by $800. FINRA believes that this change is consistent with
comparable increases in the unspecified filing fees for customer and
industry claimants.\73\ FINRA also explained that the member process
fee--like the member surcharge increase discussed above--would remain
non-allocable under the proposal, and, thus, would not result in any
additional costs to customers.\74\
---------------------------------------------------------------------------

\72\ See id.
\73\ See id.
\74\ See id.
---------------------------------------------------------------------------

III. Summary of Comments and FINRA's Response

As noted above, the Commission received eight comment letters on
the proposed rule change \75\ and a response letter from FINRA.\76\ As
discussed in more detail below, all of the eight commenters expressed
support, in whole or in part, for FINRA's proposal.\77\ Three of the
eight commenters, however, also suggested further modifications.\78\ In
addition, two of the eight commenters also expressed partial opposition
to the proposal.\79\ The sections below outline the suggestions or
specific concerns raised by those five commenters as well as FINRA's
response.
---------------------------------------------------------------------------

\75\ See supra note 4.
\76\ See supra note 6.
\77\ See Caruso Letter; Bakhtiari Letter; Aidikoff Letter; PIABA
Letter; PIRC Letter; FSI Letter; NASAA Letter; and Quarequio Letter.
\78\ See PIRC Letter; FSI Letter; and Quarequio Letter.
\79\ See PIABA Letter and NASAA Letter.
---------------------------------------------------------------------------

A. FINRA Members Should Pay All Proposed Fee Increases

While a majority of the commenters supported the proposed increase
in arbitrator honoraria, two commenters opposed the proposed increase
in filing fees that customers would pay to help fund the honoraria
increases.\80\
---------------------------------------------------------------------------

\80\ See PIABA Letter at 1-2; NASAA Letter at 2.
---------------------------------------------------------------------------

One of these commenters expressed concern ``that requiring
investors to pay the increased honorarium by raising the filing fees
may deny them access to the

[[Page 59882]]

forum.'' \81\ Rather, this commenter stated that ``FINRA members should
be responsible for paying 100% of the proposed increased filing fees
claims'' given that ``investors are forced into the FINRA arbitration
forum as a result of mandatory arbitration.'' \82\
---------------------------------------------------------------------------

\81\ PIABA Letter at 1-2.
\82\ Id. at 2.
---------------------------------------------------------------------------

Similarly, a second commenter opposed ``FINRA's effort to pass
along increased honoraria costs to investors that are forced into
FINRA's dispute resolution forum as the result of industry mandatory
pre-dispute arbitration agreements.'' \83\ This commenter contended
that investors with ``'more complicated to resolve' and `time-
consuming' claims might prefer pursuing their claims in court rather
than paying more for FINRA arbitrators to handle the disputes.'' \84\
---------------------------------------------------------------------------

\83\ NASAA Letter at 2 (NASAA generally supports and ``does not
question FINRA's need to update arbitrator honoraria'' and
``appreciates FINRA's efforts to mitigate the impact to smaller
public users,'' however, ``NASAA respectfully disagrees with FINRA
that it is incumbent upon [investors] to pay or contribute more to
enhance FINRA's dispute resolution program.'').
\84\ Id. (claiming that state court filing fees in most
jurisdictions are generally less than the filing fees contemplated
in the proposal). See also id. (stating that ``investors with
catastrophic losses as might be found in half- to multi-million
dollar claims are often the least able to afford large fees'').
---------------------------------------------------------------------------

In addition, both of these commenters argued that because FINRA
member firms use pre-dispute arbitration agreements (``PDAAs'') to
require their customers to arbitrate claims, investors do not have a
choice of forum. Consequently, these commenters asserted that such
investors should not be required to pay the proposed increase in filing
fees.\85\
---------------------------------------------------------------------------

\85\ See PIABA Letter at 2; NASAA Letter at 2.
---------------------------------------------------------------------------

In response, FINRA noted that ``as claimants and respondents
utilize the arbitration facilities to resolve disputes, it would be
inequitable for industry members to pay 100 percent of the filing fee
increase.'' \86\ Furthermore, FINRA disagreed with the one commenter's
assertion that an increase in filing fees for investors may serve to
deny access to the forum for investors.\87\ Rather, FINRA stated that
the proposal would help minimize the impact on claimants of the
increased fees because ``the filing fee increases begin for claims over
$500,000 and a majority of the increases are added to the refundable
portion of the fee.'' \88\
---------------------------------------------------------------------------

\86\ Response Letter at 3.
\87\ See id. (citing PIABA Letter at 1-2).
\88\ Id. (citing Notice, 79 FR at 37791-92).
---------------------------------------------------------------------------

In response to the comment that investors may not be able to afford
the proposed filing fees after having suffered ``catastrophic losses,''
\89\ FINRA noted that ``an inability to pay the filing fees would not
foreclose an investor's ability to seek redress in the forum'' as FINRA
may waive the filing fees ``[i]f an investor demonstrates financial
hardship.'' \90\
---------------------------------------------------------------------------

\89\ See supra note 84.
\90\ Response Letter at 3.
---------------------------------------------------------------------------

In its response, FINRA also noted that neither the use of PDAAs by
FINRA members nor whether certain claims should be litigated in court
or arbitrated is the subject of the proposal. Consequently, FINRA
stated that both issues are ``outside the scope of the filing.'' \91\
Nevertheless, FINRA noted that, while the proposed filing fees may not
be comparable to those in state courts, ``investors experience
substantial savings in arbitration compared to litigation.'' \92\
Accordingly, FINRA stated that ``the benefits and cost savings of
arbitration make filing an arbitration claim a less costly option for
investors.'' \93\
---------------------------------------------------------------------------

\91\ Id.
\92\ Id. (explaining that, for example, ``claims in arbitration
are typically resolved more quickly than claims in litigation'' and
``investors in arbitration avoid the expense of depositions and
similar costs associated with discovery in litigation'').
\93\ Id. at 4.
---------------------------------------------------------------------------

Therefore, for these reasons, FINRA declined to modify the proposed
rule change to assign all filing fee increases to FINRA members.\94\
---------------------------------------------------------------------------

\94\ See id.
---------------------------------------------------------------------------

B. Assessment of Forum Fees Against Respondents

One commenter that opposed the proposal, stating that FINRA members
should be responsible for paying all of the proposed increased filing
fees, also contended that ``[t]his point is emphasized even more when
you consider that arbitration panels rarely assess forum fees against
respondents even when they find the respondents liable for the
claimants' losses.'' \95\
---------------------------------------------------------------------------

\95\ PIABA Letter at 2.
---------------------------------------------------------------------------

FINRA refuted this commenter's assertion, calling it ``inaccurate
and misleading.'' \96\ FINRA noted that ``arbitrators make allocation
decisions on a case-by-case basis depending on what happened during the
hearings.'' \97\ FINRA also stated that it reviewed customer claimant
cases closed by award from 2011 through 2013 and, ``[i]n only four of
these cases (less than one percent), the respondent was found liable
for claimants' losses, but was not assessed any fees.'' \98\ FINRA
further stated that three of those four cases were pursued by claimants
in default proceedings,\99\ and in the fourth case, only the claimant
appeared at the hearing.\100\ Furthermore, with respect to the fourth
case, FINRA also stated that it ``waived the claimant's filing fees in
that matter and the arbitrators awarded the claimant more than 160
percent of the compensatory damages claimed plus $15,000 in sanctions
from the respondent firm.'' \101\
---------------------------------------------------------------------------

\96\ Response Letter at 5.
\97\ Id. (explaining that arbitrator training materials and the
Award Information Sheet guide arbitrators on making allocation
decisions and noting that some of the factors arbitrators might
consider when making allocation decisions include ``a party's
perceived ability to pay forum fees'').
\98\ Id.
\99\ See id. (noting that in these three cases, the arbitrators
assessed forum fees of $300, $300, and $1,425 respectively against
the claimants).
\100\ See id. (noting that in the fourth case, the arbitrators
assessed the claimant a total of $4,500 for two hearing sessions and
four prehearing conference sessions).
\101\ Id.
---------------------------------------------------------------------------

For these reasons, FINRA declined to modify its proposal in
response to comments.

C. Request Additional Data

One commenter claimed that FINRA's proposal does not provide
sufficient information ``to assess the reasonableness or anticipated
effectiveness of the increases that FINRA proposes'' because the
statistical models and underlying data were not provided to the
public.\102\ This commenter requested that FINRA produce, as part of
the public comment file, the statistical models FINRA used to ``match
anticipated revenue with expenses for purposes of setting increased
rates.'' \103\
---------------------------------------------------------------------------

\102\ Id.
\103\ NASAA Letter at 2.
---------------------------------------------------------------------------

In response to this comment, FINRA stated that the information
provided in the proposal is ``sufficient to elicit meaningful
comment.'' \104\ Moreover, FINRA noted that its financial systems and
the data generated by those systems ``are used by only FINRA staff when
conducting FINRA business and operations.'' \105\ Accordingly, FINRA
claimed that ``[b]ecause of the proprietary nature of these systems and
their data, FINRA believes this information should remain non-public.''
\106\
---------------------------------------------------------------------------

\104\ Response Letter at 5.
\105\ Id.
\106\ Id.
---------------------------------------------------------------------------

D. Enhance Recruitment To Expand the Arbitrator Roster

One commenter claimed that it cannot assess whether there is a need
for increased arbitrator honoraria because FINRA's proposal does not
provide ``basic information regarding the existing size or quality of
FINRA's

[[Page 59883]]

existing arbitrator pool, including relevant recruiting and retention
rates.'' \107\ This commenter also suggested that the Commission
``consider expanding FINRA's roster by revising arbitrator
qualifications and by utilizing different recruiting methods of
outreach.'' \108\ Finally, this commenter claimed that ``FINRA may have
greater flexibility in setting honoraria amounts by expanding its
geographical presence.'' \109\
---------------------------------------------------------------------------

\107\ NASAA Letter at 2.
\108\ Id. at 3.
\109\ Id. (explaining that ``[e]xtending its reach in this
manner would reduce FINRA travel expense reimbursements for many
participants'').
---------------------------------------------------------------------------

In response, FINRA stated that it ``relies on a diverse roster of
over 6,300 arbitrators to maintain its fair, impartial and efficient
system of dispute resolution'' and that ``[t]he exact number of
arbitrators, broken down by public and non-public classifications, is
updated monthly and published on [FINRA's] Web site.'' \110\ FINRA also
responded to the commenter's concerns about the quality of FINRA's
arbitrators by describing its: (i) Minimum requirements for
arbitrators; (ii) application and screening processes; (iii) background
verification and re-verification processes; (iv) arbitrator training
programs; (v) mandatory surveys to ensure classification as either a
public or a non-public arbitrator; and (vi) evaluation processes by
FINRA staff, the parties, and fellow arbitrators at the conclusion of
each case.\111\
---------------------------------------------------------------------------

\110\ Response Letter at 6 (citing FINRA, Arbitration &
Mediation, Dispute Resolution Statistics, available at http://www.finra.org/ArbitrationAndMediation/Arbitrators/Responsibilites/OathofArbitrator/index.htm). See also id. (noting that FINRA's
roster ``consists of arbitrators from various backgrounds, including
educators, accountants, medical professionals and others, as well as
lawyers and securities professionals'').
\111\ See Response Letter at 6-7.
---------------------------------------------------------------------------

With respect to the commenter's concerns about expanding FINRA's
geographical presence, FINRA explained that it ``already focuses on
areas of the country where there is a lower number of available
arbitrators'' and that ``[i]n its effort to recruit arbitrators from a
diverse group of professionals, FINRA continues to conduct outreach
activities in underserved locations.'' \112\ FINRA further noted that
it ``tracks the success of its recruitment initiatives by asking in its
application how applicants learned of the arbitrator opportunity'' and
that ``[i]t also asks [applicants] to provide names of individuals whom
they recommend for the roster.'' \113\
---------------------------------------------------------------------------

\112\ Id. at 7 (citing, for example, ``attending business and
recruitment conferences, initiating direct marketing and ad
campaigns, publishing articles in The Neutral Corner, and soliciting
applicant referrals in a monthly email that is distributed to FINRA
neutrals'').
\113\ Id.
---------------------------------------------------------------------------

FINRA stated that ``the increased honoraria would be helpful in its
recruiting efforts, as staff has received feedback from prospective
applicants who have declined to apply when they learn of the current
pay structure.'' \114\ FINRA further explained that increased honoraria
would also support its ``retention objective, as current arbitrators
express their concerns to FINRA staff regularly about the honoraria
levels.'' \115\
---------------------------------------------------------------------------

\114\ Id.
\115\ Id.
---------------------------------------------------------------------------

For these reasons, FINRA declined to modify its proposal.

E. Apply Increased Honoraria Retroactively

One commenter expressed concern that applying the proposed
increased honoraria prospectively would create a two-tier pay
structure: One for arbitrators assigned before the proposal's effective
date and another for those assigned after the effective date.\116\ This
commenter suggested making the honoraria increase partially retroactive
to pending cases.
---------------------------------------------------------------------------

\116\ See Quarequio Letter at 1 (stating that ``[a]lthough this
imbalance would be temporary until existing cases work their way
through the system, it does not appear fair to have, at least for
some time, a `two-tier' pay structure which penalizes those who have
been arbitrators longer'').
---------------------------------------------------------------------------

In response, FINRA explained that, although it understands the
concern, it believes that if the suggestion was implemented it ``would
have a negative impact on the forum's resources.'' \117\ FINRA noted
that if it were to extend the honoraria increases to pending cases, the
honoraria payments would not be properly funded, as the fees in those
cases would be based on the current, lower fee structure.\118\ FINRA
stated that in order ``[t]o simplify the technology programming and to
ensure consistent application of the honoraria and fee changes, FINRA
believes the increased honoraria should apply to cases filed on or
after the effective date.'' \119\
---------------------------------------------------------------------------

\117\ Response Letter at 8.
\118\ See id.
\119\ Id.
---------------------------------------------------------------------------

For these reasons, FINRA declined to modify the proposal to make
the honoraria increase partially retroactive to pending cases.

F. The Proposal Could Create Conflicts of Interest

One commenter suggested that ``FINRA should also consider the
impact increased arbitrator compensation could have on certain
conflicts of interest.'' \120\ For example, ``an arbitrator may be
reluctant to grant a Motion to Dismiss because it would eliminate the
potential compensation they would receive from serving on the panel.''
\121\ Therefore, this commenter suggested that FINRA consider paying a
``set honorarium'' which, the commenter believes, ``would reduce or
eliminate any reluctance on the part of the arbitrator to grant the
motion that is motivated by a desire to be adequately compensated for
their time.'' \122\
---------------------------------------------------------------------------

\120\ FSI Letter at 2.
\121\ Id.
\122\ Id.
---------------------------------------------------------------------------

In response, FINRA stated that it ``does not believe that
increasing the honoraria would prevent arbitrators from performing
their duties and deciding disputes in a fair manner, as they must agree
to do by executing the arbitrator oath.'' \123\ Furthermore, FINRA
noted that, ``if arbitrators deny a motion to dismiss, it would be
because they believe that the grounds for dismissing a claim prior to
the conclusion of a claimant's case in chief have not been met.'' \124\
---------------------------------------------------------------------------

\123\ Response Letter at 8 (citing Canon 1 of the Code of Ethics
for Arbitrators in Commercial Disputes which states that ``an
arbitrator should uphold the integrity and fairness of the
arbitration process'' and requires that ``arbitrators conduct
themselves in a way that is fair to all parties and should not be
swayed by outside pressure, public clamor, and fear of criticism or
self-interest'').
\124\ Id. at 8-9.
---------------------------------------------------------------------------

FINRA also clarified that, although the commenter does not define
``set honorarium,'' FINRA interpreted it to mean ``a fixed amount,
regardless of the number of motions decided or hearings held during a
case.'' \125\ FINRA believes that such a payment structure would
present the following challenges to the forum: (1) It would negate the
benefit of providing the parties with some control over the tasks and
activities that arbitrators need to perform in a case; \126\ (2) it
``would be unfair to parties whose arbitration case requires a minimal
number of hearing sessions as well as to those arbitrators who sit on
cases with a large number of hearing sessions;'' \127\ and (3) ``more
cases would go to hearing, as there would be no incentive to settle,
which would result in an increase in forum expenses.'' \128\
---------------------------------------------------------------------------

\125\ Id. at 9.
\126\ See id.
\127\ Id.
\128\ Id.
---------------------------------------------------------------------------

For these reasons, FINRA declined to amend the proposal to pay a
``set honorarium.''

[[Page 59884]]

G. Calculate Hearing Session Fees at an Hourly Rate

One commenter suggested changing FINRA's current payment structure
for arbitrators ``from sessions of `four hours or less' to an hourly
rate.'' \129\ Specifically, this commenter claimed that, in its
experience, ``most hearing sessions last significantly less than four
hours and the length of each session can vary considerably,'' \130\ and
that arbitrators are compensated the same amount regardless of whether
a hearing session lasts two hours or four hours.\131\
---------------------------------------------------------------------------

\129\ PIRC Letter at 2 (suggesting that ``[t]his more equitable
compensation structure should help eliminate unnecessary expenses to
FINRA--which are passed along to claimants and members'').
\130\ Id.
\131\ See id.
---------------------------------------------------------------------------

In response, FINRA explained that the structure of hearing session
payments is not the subject of this rule filing and therefore outside
the scope of the proposal.\132\ Therefore, FINRA declined to respond to
that comment at this time.\133\
---------------------------------------------------------------------------

\132\ See Response Letter at 9.
\133\ See id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

The Commission has carefully considered the proposal, the comments
received, and FINRA's responses to the comments. Based on its review of
the record, the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\134\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(5) of the Act,\135\ which
requires that FINRA's rules provide for the equitable allocation of
reasonable dues, fees, and other charges among its members and other
persons using any facility or system which FINRA operates or controls.
The Commission also finds that the proposed rule change is consistent
with Section 15A(b)(6) of the Act,\136\ which requires, among other
things, that FINRA's 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.
---------------------------------------------------------------------------

\134\ In approving the proposed rule change, the Commission has
also considered the rule change's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\135\ 15 U.S.C. 78o-3(b)(5).
\136\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

As outlined above, the Commission received eight comment letters on
the proposed rule change \137\ and FINRA's response to the
comments.\138\ While the Commission appreciates the suggestions raised
by some commenters, the Commission believes that FINRA responded
appropriately to their concerns. Most notably, the Commission agrees
with FINRA's observation that ``[a] majority of the commenters
acknowledge that, as it has been 15 years since the last increase, the
proposed increase is long overdue and critical to the forum in
recruiting and retaining a roster of high quality arbitrators.'' \139\
---------------------------------------------------------------------------

\137\ See supra note 4.
\138\ See supra note 6.
\139\ Response Letter at 2. See also Aidikoff Letter at 1
(stating that ``there has been no increase in the arbitrator
honoraria for fifteen years and in my view increasing these payments
will help retain qualified individuals in the pool as well as
helping to recruit new arbitrators'').
---------------------------------------------------------------------------

Specifically, the Commission believes that the proposed rule change
would further the purposes of the Act as it provides for the equitable
allocation of reasonable fees, surcharges and other charges among FINRA
members, customers, associated persons, or other non-members using
FINRA's arbitration forum.\140\ The Commission agrees with the views of
certain commenters that FINRA: (1) ``investigated several alternative
approaches for increasing honoraria and has struck an effective
balance'' and (2) took ``a measured and balanced approach to the
economic considerations that are associated with the arbitrator
honoraria increases.'' \141\ The Commission also notes, as certain
commenters did, ``FINRA's effort to minimize the exposure of the fee
increases to the investing public.'' \142\ The Commission also agrees
that FINRA's proposal to allocate the majority of the proposed fee
increases among higher claim amounts will help ``[minimize] the impact
of the increases on smaller claims and keeps the arbitration forum
accessible for the small investor.'' \143\
---------------------------------------------------------------------------

\140\ See 15 U.S.C. 78o-3(b)(5).
\141\ Caruso Letter at 1. See also Aidikoff Letter at 1 (stating
that ``increasing these payments will help retain qualified
individuals in the pool as well as helping to recruit new
arbitrators.''); Bakhtiari Letter at 1 (stating that ``[t]he
honoraria raise is fair and will not materially affect aggrieved
public investors that file claims in the Finra forum'').
\142\ PIRC Letter at 1-2 (noting that the fee allocation ``is
consistent with FINRA's goal of maintaining a just and equitable
forum for parties to settle their disputes''). See also NASAA Letter
at 1-2 (stating that it ``appreciates FINRA's efforts to mitigate
the impact to smaller public users'').
\143\ Response Letter at 4. See also id. (explaining that ``to
further mitigate the impact of the filing fee increases, most of the
increases would be added to the refundable portion of the filing
fee'' and noting that ``the filing fee and hearing session fee
increases for customers begin for claim amounts of more than
$500,000'').
---------------------------------------------------------------------------

Moreover, the Commission also believes that the proposed rule
change would further the purposes of the Act as it is reasonably
designed to protect investors and the public interest.\144\ In addition
to the observations above regarding FINRA's efforts to minimize the
exposure of its fee increases to investors in order to keep the forum
accessible to small investors,\145\ the Commission also agrees with
FINRA's assessment that the proposal is designed to ``retain a roster
of high-quality arbitrators and attract qualified individuals who
possess the skills necessary to manage arbitration cases and consider
thoroughly all arbitration issues presented, which are essential
elements for FINRA to meet its regulatory objective of protecting the
investing public.'' \146\
---------------------------------------------------------------------------

\144\ See 15 U.S.C. 78o-3(b)(6).
\145\ See supra notes 142 and 143 and accompanying text.
\146\ See Notice, 79 FR at 377887. See also Response Letter at
2.
---------------------------------------------------------------------------

For the reasons stated above, the Commission finds that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder.

V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\147\ that the proposed rule change (SR-FINRA-2014-026), be, and
hereby is, approved.
---------------------------------------------------------------------------

\147\ 15 U.S.C. 78s(b)(2).
\148\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\148\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23568 Filed 10-2-14; 8:45 am]
BILLING CODE 8011-01-P