[Federal Register Volume 81, Number 99 (Monday, May 23, 2016)]
[Notices]
[Pages 32359-32360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12012]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77844; File No. SR-FINRA-2016-015]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Amending 
Rule 12904 (Awards) of the Code of Arbitration Procedure for Customer 
Disputes and Rule 13904 (Awards) of the Code of Arbitration Procedure 
for Industry Disputes To Permit Award Offsets in Arbitration

May 17, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on May 3, 2016, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by FINRA. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Rule 12904 (Awards) of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
Rule 13904 (Awards) of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code'') (together, ``Codes'') to provide that 
absent specification to the contrary in an award, when arbitrators 
order opposing parties to pay each other damages, the monetary awards 
shall offset, and the party that owes the larger amount shall pay the 
net difference.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    FINRA Rules 12904 and 13904 address awards issued by arbitrators at 
the FINRA Office of Dispute Resolution forum. They provide, among other 
matters, that awards must be in writing and signed by a majority of the 
arbitrators or as required by applicable law. The rules itemize 
required elements of awards, including a statement of the damages 
awarded, and provide that all monetary awards shall be paid within 30 
days of receipt unless a motion to vacate has been filed in a court of 
competent jurisdiction.
    Sometimes arbitrators order opposing parties in a case to pay each 
other monetary damages. When arbitrators make such awards, but do not 
specify whether the party that owes the higher amount must pay the net 
difference, the lack of clarity has resulted in parties asking 
arbitrators to revise an award after a case has closed or in post-award 
litigation. For example, arbitrators may award damages to a firm 
because an associated person failed to pay money owed on a promissory 
note and award a lesser amount to the associated person on a 
counterclaim. The firm is willing to accept the net payment due. 
However, if the arbitrators do not specify that awards should be 
offset, the firm may be required to pay the counterclaim even if the 
associated person refuses or is unable to pay the larger amount. The 
offset issue could also arise in customer cases, such as those 
involving margin account disputes. Currently, Rules 12904 and 13904 are 
silent on award offsets. Therefore, under the current Codes, FINRA does 
not require arbitrators to specify whether parties should offset 
amounts awarded.
    For example, in UBS Financial Services, Inc. (UBS) v. Thomas A. 
Mann (Mann), No. 2:2014cv10621, 2014 WL 1746249 (E.D. Mich. Apr. 30, 
2014), a federal district court heard a dispute relating to opposing 
awards made by a FINRA arbitration panel involving forgivable loans the 
firm made to Mann, an associated person. The arbitrators awarded UBS 
$217,000 and awarded Mann $150,000 for claims relating to his 
employment. Mann, 2014 WL 1746249 at *1. ``UBS expressed concern it 
would never receive payment from Mann, but still had to pay him.'' Id. 
Under the current Codes, the failure of a firm or person registered 
with FINRA, such as UBS, to pay an award within 30 days could subject 
that firm or person to FINRA disciplinary action, including 
cancellation of membership for the firm or suspension of the firm or 
person. UBS filed a motion to the arbitrators to correct the award 
because it was ambiguous in not providing for an offset. Id. In that 
motion, UBS argued that the award should be $67,000 in its favor, which 
is the difference in the amount of the two awards. Id. The arbitrators 
declined the request. Id. UBS asked the court to provide for an offset 
of the awards. Id. at *2. The court confirmed the award without 
ordering an offset because the arbitrators had an opportunity to review 
UBS' request for an offset and chose not to address it in the award. 
Id. at *3.
Proposed Amendments to Rules 12904(j) and 13904(j)
    FINRA is proposing to amend Rules 12904(j) and 13904(j) to provide 
that, absent specification to the contrary in an award, when 
arbitrators order opposing parties to pay each other damages, the 
monetary awards shall offset, and the party that owes the larger amount 
shall pay the net difference. FINRA is also proposing to replace the 
bullets in Rules 12904 and 13904 with numbers because forum users have 
indicated that for ease of citation, they would prefer that FINRA use 
numbers and letters instead of bullets.
    As noted in Item 2 of this filing, if the Commission approves the 
proposed rule change, FINRA will announce the effective date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 60 days following Commission approval. The effective date will be 
no later than 30 days following publication of the Regulatory Notice 
announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\3\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that providing a default in favor of 
offset when arbitrators fail to address the issue

[[Page 32360]]

in an award would benefit forum users by eliminating ambiguity and 
reducing the risk of post-award disputes.
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    \3\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA believes that the 
proposed rule change will mitigate the risk of failure to pay by an 
opposing party that may arise when multiple parties in a dispute are 
found to owe non-equivalent awards simultaneously. Creating a 
presumption that opposing award amounts will be offset will increase 
the likelihood that the arbitrators' purpose in issuing opposing awards 
would be carried out. In addition, the proposed rule would reduce 
instances where the party owed the greater net damages is required to 
make payment even if the opposing party fails to pay its damages. In 
addition, this proposed rule change would likely reduce legal expenses 
to the party owed greater damages by eliminating the need to apply for 
the reopening of the case or going to court to seek award offsets, or 
seek other redress.
    The scope of cases affected by offsets is small in comparison to 
the number of cases handled at the forum, but forum users have asked 
FINRA to address the issue. During 2013 and 2014, a total of 8,375 
cases were closed at the forum (predominantly by settlement or award). 
The majority of cases are settled before a hearing takes place. The 
offset issue had the potential to arise in 299 cases (just over 3.5% of 
cases) where there was a claim by both a claimant and a respondent, and 
the case was resolved by arbitrators at a hearing on the merits. In 17 
cases (0.2% of cases), the arbitrators awarded monetary damages to both 
a claimant and a respondent, offering the opportunity for an offset.
    Of these 17 cases, one involved a customer dispute in which a 
member initiated a claim for breach of contract. The arbitrators made a 
monetary award to both the customer and firm and provided for an 
offset. In the remaining 16 intra-industry cases, most of which 
involved promissory notes, the arbitrators made an award to both the 
firm and the associated person. In 8 of the 16 cases, the arbitrators 
ordered award offsets. In the remaining eight cases, the awards were 
silent as to offset.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2016-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2016-015. 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 Web site (http://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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549-1090, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2016-015 and should be 
submitted on or before June 13, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12012 Filed 5-20-16; 8:45 am]
 BILLING CODE 8011-01-P