
[Federal Register Volume 79, Number 127 (Wednesday, July 2, 2014)]
[Notices]
[Pages 37786-37796]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15474]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72479; File No. SR-FINRA-2014-026]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a 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

June 26, 2014.
    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 June 13, 2014, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been substantially prepared by 
FINRA. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') (together, 
``Codes'') to increase arbitration filing fees, member surcharges and 
process fees, and hearing session fees for the primary purpose of 
increasing arbitrator honoraria.
    Specifically, the proposed rule change 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.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal

[[Page 37787]]

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
    FINRA is proposing to increase arbitrator honoraria for the first 
time since 1999.\3\ FINRA believes that these increases are needed to 
recruit and retain a roster of high-quality arbitrators. FINRA is 
proposing to increase certain fees assessed in the arbitration forum to 
fund these increases. For example, the proposed rule change would 
increase the member surcharges and process fees for claims larger than 
$250,000 \4\ 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.\5\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Rel. No. 41056 (Feb. 16, 1999), 
64 FR 10041 (Mar. 1, 1999) (File No. SR-NASD-97-79).
    \4\ The proposed rule change would also increase the member 
surcharge for the $10,000.01 to $25,000 tier. See infra note 49.
    \5\ As discussed below, the proposed rule change would also 
increase member surcharges as well as certain member and investor 
fees as to non-monetary or unspecified claims.
---------------------------------------------------------------------------

    Section I below provides background for the proposed rule change, 
which includes an assessment of the economic impact of the honoraria 
and fee increases, a general description of the honoraria being 
increased, as well as the filing fees, member surcharges, member 
process fees, and hearing session fees that would be increased by the 
proposed rule change. Section II discusses the development of the 
proposed rule change. Section III describes the proposed rule change, 
and uses an example to show the effects of the increases on a typical 
arbitration.
Section I--Background
A. Economic Impact Assessment
    FINRA's dispute resolution forum has received numerous complaints 
in recent years from its arbitrators regarding the honoraria paid to 
them for their service. FINRA is aware that arbitrators in private 
arbitration forums set their own rates \6\ and charge significantly 
more than FINRA pays. Surveys of organizations and individuals 
recruited to be FINRA arbitrators, reports from arbitrators at focus 
groups, and other arbitrator comments indicate a heightened sensitivity 
to the comparatively low honoraria paid by FINRA. There are non-
monetary benefits to serving as a FINRA arbitrator, such as 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.\7\ However, the current honoraria 
level is a barrier to recruiting.
---------------------------------------------------------------------------

    \6\ See, e.g., American Arbitration Association, Commercial 
Arbitration Rules and Mediation Procedures (Including Procedures for 
Large, Complex Commercial Disputes), R-55 (Neutral Arbitrator's 
Compensation), available at https://www.adr.org/aaa/faces/aoe/commercial/c_search/c_rule/c_rule_detail?doc=ADRSTG_004130 
(last visited June 10, 2014).
    \7\ See FINRA, Arbitration and Mediation, ``Benefits of Becoming 
a FINRA Arbitrator,'' available at http://www.finra.org/ArbitrationAndMediation/Arbitrators/BecomeanArbitrator/Benefits/index.htm (last visited June 10, 2014).
---------------------------------------------------------------------------

    In addition, 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. These 
extra requests are viewed as the ``last straw'' that prevents good 
arbitrators from remaining on the roster at the current honoraria rate. 
The increased honoraria would help the forum recruit qualified 
arbitrators because there is a continuing need for new arbitrators. 
Moreover, FINRA staff has learned that its arbitrators may occasionally 
postpone FINRA commitments when they conflict with higher paying 
assignments.
    FINRA believes that these honoraria increases are needed to help 
the forum 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.
    FINRA acknowledges that the proposed honoraria increases (discussed 
in Section III(F) below) would not rise to market rates. To increase 
the honoraria to market rates would impose a significant financial 
burden on firms by increasing the fees they pay if they file or are 
named as a party to an arbitration, and could increase consequently the 
cost of securities transactions for customers, if firms seek to pass 
their increased expenses to customers. In addition, increasing 
honoraria to market rates could require a greater increase in 
arbitration filing fees,\8\ which would increase the costs of 
customers, associated persons, and firms. Thus, FINRA believes the 
proposed rule change is the best option to narrow the gap without 
unduly increasing costs to forum users.
---------------------------------------------------------------------------

    \8\ See infra Section I(C), ``General Description of Fees.''
---------------------------------------------------------------------------

    Currently, the arbitration fee structure assigns much of the cost 
of the forum to those members that are parties to arbitration 
proceedings. The proposed rule change would retain this approach. 
FINRA's current and proposed fee structures are designed to keep its 
arbitration program accessible and affordable to the parties, 
especially investors.
B. General Description of Honoraria
    Arbitrator honoraria are the payments that FINRA makes to its 
arbitrators for the services they provide to FINRA's dispute resolution 
forum. Rules 12214 and 12800 of the Customer Code \9\ address the 
honoraria arbitrators receive for the services provided. Currently, 
under Rule 12214(a), arbitrators receive $200 for each hearing session 
\10\ in which the arbitrator participates. A typical day has two 
hearing sessions.
---------------------------------------------------------------------------

    \9\ For purposes of this discussion, FINRA refers to rules in 
the Customer Code. However, the changes and discussion would also 
apply to the same rules of the Industry Code.
    \10\ The term ``hearing session'' means any meeting between the 
parties and arbitrator(s) of four hours or less, including a hearing 
or a prehearing conference.
---------------------------------------------------------------------------

    Chairpersons are often the arbitrators on FINRA's rosters with the 
most experience who have completed chairperson training. In addition, 
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.\11\ In recognition of their increased experience 
and extra responsibilities during a hearing,\12\ FINRA currently pays 
chairpersons an additional $75 per

[[Page 37788]]

hearing day.\13\ The chairperson receives the additional honoraria for 
each day the person serves as chair at a hearing, regardless of the 
number of hearing sessions held per day.
---------------------------------------------------------------------------

    \11\ Rules 12400(c) and 13400(c).
    \12\ For example, during a typical arbitration, the chairperson 
decides discovery motions and conducts the initial prehearing 
conference(s). Rules 12503(d)(3) and 13503(d)(3) (Discovery Motions) 
and Rules 12500(c) and 13500(c) (Initial Prehearing Conference).
    \13\ A ``hearing'' means the hearing on the merits of an 
arbitration. Rules 12100(m) and 13100(m).
---------------------------------------------------------------------------

    Arbitrators receive honoraria when they decide contested motions 
requesting the issuance of a subpoena without a hearing (``contested 
subpoena requests'').\14\ A contested subpoena request includes a 
motion requesting the issuance of a subpoena, the draft subpoena, a 
written objection from the party opposing the issuance of the subpoena, 
and any other documents supporting a party's position.\15\ 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. Under most circumstances, the chairperson will be the only 
arbitrator to decide the contested subpoena request based on the 
documents supplied by the parties. However, a party may request that 
the entire panel decide the contested subpoena request. The honoraria 
will be paid on a per case basis, regardless of the number of contested 
subpoena requests decided by an arbitrator or panel during the case. 
Thus, the maximum amount that the parties could pay for any one case 
will be $600. If 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.\16\
---------------------------------------------------------------------------

    \14\ Rules 12214(d) and 13214(d).
    \15\ Rules 12214(d)(2) and 13214(d)(2).
    \16\ Rules 12214(d)(3) and 13214(d)(3).
---------------------------------------------------------------------------

    Finally, when a claimant \17\ files an arbitration 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--no hearings are 
held.\18\ In the forum, these cases are referred to as simplified 
arbitration cases because they are decided ``on the papers.'' The 
arbitrator who decides this type of case currently receives $125 per 
case.
---------------------------------------------------------------------------

    \17\ A ``claimant'' is a party that files the statement of claim 
that initiates an arbitration. Rules 12100(e) and 13100(e).
    \18\ Rules 12800 and 13800.
---------------------------------------------------------------------------

C. General Description of Fees
    FINRA is proposing to amend some of the fees for arbitration 
proceedings in the following categories: (1) The filing fee; (2) the 
member surcharge; (3) the member process fee; and (4) the hearing 
session fee. A general description of each fee follows.
(i) Filing Fee
    Under the Codes, a customer, associated person, other non-member, 
or member who files a claim, counterclaim, cross claim or third party 
claim must pay a filing fee to initiate an arbitration.\19\ The filing 
fee consists of two parts--a non-refundable fee, which FINRA keeps when 
a claim is filed, and a deposit, which FINRA may return in whole or in 
part to the party that filed the claim in certain circumstances. For 
example, 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.\20\ Additionally, if a claim is settled or withdrawn in excess of 
10 days before the merits hearing is scheduled to begin, a party paying 
a filing fee will receive a refund in the amount of the refundable 
portion of the filing fee less any other fees or costs assessed against 
the party under the Code.\21\ A claimant may also request, as part of 
the award, that the panel order reimbursement of any non-refundable 
filing fee paid.\22\ For customers and associated persons, the 
refundable portion of the filing fee is larger than the non-refundable 
fee to minimize these parties' committed costs. The filing fees for 
claims filed by members are higher than those for customers, associated 
persons or other non-members.\23\ The non-refundable portion of the 
member filing fee is larger than the refundable portion in most cases 
to provide the forum with a stream of revenue at the outset of a case 
to offset the forum's expenses.
---------------------------------------------------------------------------

    \19\ Rules 12900(a) and 13900(a).
    \20\ Rules 12902(b) and 13902(b).
    \21\ Rules 12900(c) and 13900(c).
    \22\ Rules 12900(d) and 13900(d).
    \23\ Rules 12900(b) and 13900(b).
---------------------------------------------------------------------------

(ii) Member Surcharge
    Currently, the Codes provide that a surcharge will be assessed 
against each member that: (1) Files a claim, counterclaim, cross claim, 
or third party claim under the Code; (2) is named as a respondent in a 
claim, counterclaim, cross claim, or third party claim filed and served 
under the Code; 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 Code.\24\ 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. The member surcharge is the responsibility of the member 
party and cannot be allocated to any other party (``non-
allocable'').\25\
---------------------------------------------------------------------------

    \24\ Rules 12901 and 13901.
    \25\ Rules 12901(a)(4) and 13901(d). See also Rules 12701(b) and 
13701(b).
---------------------------------------------------------------------------

(iii) Process Fee
    Currently, each member that is a party to an arbitration in which 
the claim amount is more than $25,000 must pay process fees, which are 
assessed at specific milestones in each case.\26\ Specifically, FINRA 
assesses 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.\27\ Therefore, 
when the parties receive the arbitrator lists or notification of the 
hearing, FINRA assesses each member party the applicable process fee, 
whether the member is a claimant or respondent in the case. Further, 
like the member surcharges, the process fee is also non-allocable to 
other parties to the arbitration.\28\
---------------------------------------------------------------------------

    \26\ If a claim amount is less than $25,000, the member would 
not be assessed any process fees. If a claim amount is between 
$25,000 and $50,000, FINRA would assess a non-refundable prehearing 
process fee, but not the non-refundable hearing process fee.
    \27\ Rule 12903(a) and 13903(a).
    \28\ Rules 12903(c) and 13903(c). See also Rules 12701(b) and 
13701(b).
---------------------------------------------------------------------------

(iv) Hearing Session Fee
    FINRA assesses a hearing session fee for each hearing session held. 
Hearing session fees are fees assessed for each hearing, pre-hearing, 
and injunctive hearing conducted.\29\ A hearing session is a meeting of 
the parties and arbitrators.\30\ The hearing session fee is allocable 
to the parties and based on the highest claim amount within the 
case.\31\ In FINRA arbitrations, hearing sessions are classified as 
either a prehearing session or hearing session. One type of prehearing 
session is called an initial prehearing conference (``IPHC''), which 
FINRA schedules after the panel is appointed.\32\ The panel and the 
parties use the IPHC, among other things, to set discovery, briefing, 
and motions

[[Page 37789]]

deadlines, and to schedule subsequent hearing sessions.\33\
---------------------------------------------------------------------------

    \29\ Rules 12902(a) and 13902(a).
    \30\ See supra note 10.
    \31\ Id.
    \32\ Rules 12500(a) and 13500(a).
    \33\ Rules 12500(c) and 13500(c). The parties may agree to 
forego an IPHC under certain circumstances.
---------------------------------------------------------------------------

    The hearing session fee is intended to offset FINRA's cost to 
conduct hearing sessions. The cost of conducting a hearing session 
includes arbitrator compensation and travel expenses, hearing 
conference rooms, and staff work and expenses. Arbitrators may assess 
the hearing session fees in the award, or by arbitrator order if the 
parties held hearing sessions before agreeing to settle.\34\ The 
arbitrators may apportion the fees in any manner, including assessing 
the entire amount against one party.\35\ FINRA applies the refundable 
portion of the filing fee against any hearing session fees assessed 
against the party that paid the filing fee.
---------------------------------------------------------------------------

    \34\ The parties may agree to a different allocation in the 
settlement agreement.
    \35\ Rules 12902(a)(1) and 13902(a)(1).
---------------------------------------------------------------------------

(v) Unspecified Claim Fee
    If a party files a claim that does not request or specify money 
damages, that claim is considered an unspecified claim. When a party 
files an unspecified claim, the party must pay the filing fee for 
unspecified claims.\36\ Further, a member would be assessed a surcharge 
and process fee, and the parties could be assessed hearing session 
fees, as discussed above. Each of these fee schedules contains a fee 
amount for non-monetary or unspecified claims.\37\ Moreover, the Code 
provides that if a claim is unspecified or does not request monetary 
damages, the panel would consist of three arbitrators, unless the 
parties agree in writing to one arbitrator.\38\
---------------------------------------------------------------------------

    \36\ Rule 12900(a)(2). See also Rule 13900(a)(2).
    \37\ Rules 12900(b)(2), 12901(a)(2), 12902(a)(2), and 12903(a). 
See also Rules 13900(b)(2), 13901(a), 13902(a)(2) and 13903(a).
    \38\ Rule 12401(c). See also Rule 13401(c).
---------------------------------------------------------------------------

Section II--Development of the Proposed Rule Change
    In developing the proposed rule change, FINRA's primary goal was to 
ensure that the proposed fee increases would match as closely as 
possible the proposed honoraria (or expense) increases. FINRA staff 
(``staff'') ran statistical models of the forum's fees and expenses 
over a four year period, from 2009 to 2012. For the years studied, 
FINRA notes that its arbitration case volume was the highest in 2009 
and decreased progressively in subsequent years. To analyze the model 
years, staff began by using the actual honoraria payments made to the 
arbitrators for each year. Then, for each payment made, staff 
calculated the proposed honoraria amount and totaled the difference. 
Once staff determined how much the honoraria payments would have 
increased in the aggregate for the model years, staff adjusted the 
following fees until the revenue matched the expense increases in the 
corresponding years.
    Under the proposed rule change, FINRA would increase the member 
surcharge and process fees. These fees provide FINRA with revenue to 
cover some of the costs of administering its arbitration forum; these 
costs include arbitrator honoraria. Staff determined to increase the 
member surcharge and process fees for claim amounts of more than 
$250,000 because, in FINRA's experience, larger claims are more labor-
intensive for arbitrators and, thus, require more resources. FINRA 
notes that under the proposed rule change, the member surcharge and 
process fees would remain non-allocable to other parties.
    FINRA would also increase some of the filing fees that parties must 
pay to initiate an arbitration.\39\ Specifically, filing fees would 
increase for claim amounts of more than $500,000 for all parties. Staff 
determined to increase the filing fee amounts for larger claims, 
because, as noted, they are more labor-intensive, and to minimize the 
impact on customers with smaller claims. To further mitigate the impact 
of the filing fee increases on all parties, staff added most of the 
increases to the refundable portion of the filing fee.
---------------------------------------------------------------------------

    \39\ See supra Section I(C)(i), ``Filing Fee.''
---------------------------------------------------------------------------

    As for the hearing session fees, staff determined that the proposed 
fee increases should begin only at the $500,000.01 to $1,000,000 tier 
for hearing sessions with three arbitrators. This proposed increase 
would also allow staff to retain the current fee structure for hearing 
sessions with one arbitrator.\40\ FINRA recognizes that the proposed 
increases to hearing session fees could result in additional costs for 
customers with larger claims. However, the increases would provide the 
forum with enough revenue to cover the honoraria payments for these 
cases, and allow the forum to offset the deficits created at the lower 
tier amounts.
---------------------------------------------------------------------------

    \40\ See infra Section III(D), ``Hearing Session Fee 
Increases.''
---------------------------------------------------------------------------

    FINRA notes that the effects of the hearing session fee increases 
can be minimized under the Codes. For example, the parties may settle 
\41\ the arbitration before any hearings are conducted to avoid being 
assessed fees for a hearing.\42\ Further, during settlement 
negotiations, if hearings were held, parties have the opportunity to 
determine how the hearing session fees could be shared.\43\ Moreover, 
arbitrators have discretion to allocate hearing session fees as part of 
their award,\44\ which allows them to consider numerous factors to 
determine each party's appropriate share and assign the costs 
accordingly. The proposed rule change would not change the parties' 
ability to settle or the arbitrators' discretion to allocate these 
fees.
---------------------------------------------------------------------------

    \41\ Rules 12701(a) and 13701(a).
    \42\ See supra note 10. FINRA would assess a hearing session fee 
against the parties for an IPHC, if one was held. Rules 12500(c) and 
13500(c).
    \43\ Rules 12701(b) and 13701(b).
    \44\ Rules 12902(a)(1) and 13902(a)(1).
---------------------------------------------------------------------------

    Under the proposal, FINRA would also increase the unspecified claim 
fees provided in each of the fee types described above (i.e., filing 
fee, member surcharge, process fee and hearing session fee). Staff's 
analysis of actual case experience during the model years found that a 
large percentage of arbitration cases requested a claim amount of more 
than $100,000. Currently, the unspecified claim fee amount for each fee 
type is lower than the fee amounts for the $100,000.01 to $500,000 
tier. For example, the current unspecified filing fee is $1,250; 
however, the filing fee for the $100,000.01 to $500,000 tier is $1,425. 
Staff believes that a practical starting point for the unspecified 
claim fees should fall in the middle of the claim amount tiers, where a 
majority of the specified claims are clustered. To accomplish this, the 
proposed rule change would increase the unspecified claim fees in each 
category.\45\ FINRA believes that increasing the unspecified claim fees 
in each fee type will more accurately reflect the appropriate fee for 
the damages sought and the potential range of recovery.
---------------------------------------------------------------------------

    \45\ See infra Section III, ``Proposed Rule Change'' (providing 
a description of unspecified claim fee increases in each fee 
category).
---------------------------------------------------------------------------

    FINRA reiterates that staff designed the proposed rule change to 
generate enough revenue to pay for the increases in arbitrator 
honoraria. FINRA cannot guarantee, however, that the proposed fee 
increases would cover the expense increases exactly. For example, while 
the years staff modeled resulted in a positive net result, fluctuations 
in case filings could result in a negative result. By linking the fee 
increases to larger claim amounts, FINRA believes the proposed rule 
change is an appropriate and fair way to distribute the arbitrator 
honoraria increases among users of the forum. Moreover, the proposed 
rule change should provide FINRA with a

[[Page 37790]]

progressive fee structure that should generate enough revenue to cover 
the proposed increases in the honoraria. Thus, based on staff's 
analysis of the actual case data in the modeled years, the proposed 
honoraria increases would add between $3.5 and $4.2 million to the 
forum's expenses. The revenue generated by the proposed fee increases 
to users of the forum would be $4.0 to $5.6 million, which would cover 
the proposed increases in honoraria.
    Finally, FINRA notes that in developing the proposed rule change, 
staff considered smaller honoraria increases, to avoid increasing fees 
on customers. However, FINRA opted for a larger honoraria increase and 
related fee increases on all parties to help the forum retain a roster 
of high-quality arbitrators and attract qualified individuals who 
possess the skills necessary to manage arbitration cases and who would 
consider thoroughly all arbitration issues presented. In support of 
this approach, FINRA notes that it has not sought an increase to 
customer fees since February 1999 \46\ or to member fees since October 
2001.\47\ Then, as now, staff adhered to the philosophy that the cost 
of arbitration should be borne by the users of the forum, without 
imposing a significant barrier to public customers who bring 
arbitration claims to the forum. Thus, under the proposed rule change, 
a large portion of the fee increases are covered by member surcharges 
and process fees imposed only on members. Conversely, a smaller portion 
of the fee increases are covered by filing fees and hearing session 
fees, which are shared by members, associated persons, and public 
customers. FINRA believes that claimants and respondents would benefit 
from the forum attracting and retaining qualified, dedicated 
arbitrators to decide their cases, and that they should share in the 
effort to sustain and improve the forum.
---------------------------------------------------------------------------

    \46\ See supra note 3.
    \47\ See Securities Exchange Act Rel. No. 44897 (Oct. 2, 2001), 
66 FR 51711 (Oct. 10, 2001) (File No. SR-NASD-2001-62).
---------------------------------------------------------------------------

Section III--Proposed Rule Change
    To fund increases in the arbitrator honoraria, FINRA is proposing 
to increase the member surcharges and process fees, filing fees, and 
the hearing session fees assessed under the Codes.\48\ FINRA believes 
the proposed fee increases would generate sufficient revenue to offset 
the proposed increases in the arbitrator honoraria as described in 
Section III(F) below without placing an undue burden on the public 
customer.
---------------------------------------------------------------------------

    \48\ For purposes of Section III, ``Proposed Rule Change,'' 
FINRA refers to rules in the Customer Code. However, the changes and 
discussion would also apply to the same rules of the Industry Code.
---------------------------------------------------------------------------

A. Member Surcharge Increases
    FINRA is proposing to amend Rule 12901 to increase the member 
surcharges primarily for claim amounts larger than $250,000. Table 1 
illustrates the dollar and percentage changes for each tier.

                                       Member Surcharge Schedule--Table 1
----------------------------------------------------------------------------------------------------------------
    Amount [in dispute] of claimL
(exclusive of interest and expenses)  Current surcharge    Proposed fees          Change       Percentage 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
----------------------------------------------------------------------------------------------------------------

    Under the proposed rule change, the member surcharge would be 
amended in a manner that would reduce the surcharge for some smaller 
claims. For example, the proposed rule change would combine the first 
two tiers of claim amounts, so that a claim amount up to $5,000 would 
be assessed a $150 surcharge. By combining the first two tiers, the 
proposed rule change would reduce the member surcharge for claims 
between $2,500.01 and $5,000.00 by $50 or 25 percent. Similarly, the 
proposed rule change would combine the current $25,000.01 to $30,000 
and $30,000.01 to $50,000 tiers. This change makes the proposed tiers 
in the surcharge schedule more consistent with other fee schedules in 
the Codes. For the proposed $25,000.01 to $50,000 tier, the surcharge 
would be $750, or a reduction of 14 percent, when compared to the 
current surcharge of $875. FINRA believes this change is a more 
practical approach for case administration purposes, and would make the 
surcharge schedule easier to understand for parties.
    The proposed rule change would, however, increase the surcharge for 
larger claims.\49\ FINRA is proposing to divide the current $100,000.01 
to $500,000 tier with its surcharge of $1,700 into two new tiers, 
because a large percentage of claims fall within the current tier and 
staff decided that there should be a greater distinction between the 
claims. For claim amounts between $100,000.01 and $250,000, the 
surcharge for the first new tier would remain unchanged. For claim 
amounts between $250,000.01 and $500,000, the surcharge for the second 
new tier would increase by $200 or about 12 percent. The surcharges for 
the higher tiers would also increase. For example, the surcharge for a 
claim amount between $1,000,000.01 and $5,000,000 would increase by 
$225 (an 8 percent increase).
---------------------------------------------------------------------------

    \49\ FINRA notes that the surcharge for the $10,000.01 to 
$25,000 tier would increase by $25 or 6 percent.
---------------------------------------------------------------------------

    The member surcharges assessed for unspecified claims would 
increase by $400 or 27 percent, the largest increase under the proposed 
rule change. This change is consistent with comparable increases in the 
unspecified filing fees for customer and industry claimants, as

[[Page 37791]]

discussed in the ``Filing Fees'' section below.
    FINRA notes that member surcharges would remain non-allocable under 
the proposal, and, thus, would not result in any additional costs to 
customers.
B. Member Process Fee Increases
    The proposed rule change would amend Rule 12903 to increase the 
member process fees for claim amounts larger than $250,000. Table 2 
shows the current process fees, proposed combined fees and the changes 
between the two.

                                                          Member Process Fee Schedule--Table 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              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 proposed rule change would combine the two process fees, 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. 
FINRA recognizes that this change would result in an increase to the 
member process fee in many cases. 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. 
Further, this change would 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.
    Like the member surcharge increase, 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. For 
example, for a claim amount between $25,000.01 and $50,000, the process 
fee would remain unchanged at $1,750.\50\ Further, for claim amounts 
between $50,000.01 and $100,000, the process fee would decrease by $200 
or 8 percent.
---------------------------------------------------------------------------

    \50\ If the claim amount of a case is less than $25,000, FINRA 
does not assess the process fee. This feature of the rule would 
remain unchanged.
---------------------------------------------------------------------------

    The proposed rule change would increase the fees for claim amounts, 
beginning with the new $250,000.01 to $500,000 tier. Thus, for claims 
that fall in this range, the proposed process fee would increase by 
$250 or by 7 percent. For claim amounts that fall in the over 
$10,000,000 tier, the fee would increase by 12 percent or $750.
    Under the proposed rule change, the process fees assessed for 
unspecified claims would increase by $800 or 27 percent, the largest 
increase in the proposed process fee schedule. This change is 
consistent with comparable increases in the unspecified filing fees for 
customer and industry claimants, as discussed in the ``Filing Fees'' 
section below.
    FINRA notes that the member process fee would remain non-allocable 
under the proposal, and, thus, would not result in any additional costs 
to customers.
C. Filing Fee Increases
    FINRA is proposing to amend Rule 12900 to increase the filing fees 
for investors, associated persons, other non-members, or members 
bringing claims of more than $500,000. Tables 3 and 4 show the current 
filing fee, proposed filing fee, dollar and percentage changes, and the 
non-refundable and partial refund breakdown of each fee.
(i) Filing Fees Paid by Customers, Associated Persons or Other Non-
Members
    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.

                                  Filing Fees for Customers, Associated Persons or Other Non-Member Claimants--Table 3
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Non-refundable
                                                          Current claim  Proposed claim     Change in                    filing fee with  Partial refund
 Amount of claim  (exclusive of interest and expenses)     filing fee      filing fee      filing fee    Percent change      proposed      with proposed
                                                                                                                             changes          changes
--------------------------------------------------------------------------------------------------------------------------------------------------------
$.01-$1000.............................................             $50             $50              $0               0              $25             $25
$1,000.01-$2,500.......................................              75              75               0               0               25              50
$2,500.01-$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

[[Page 37792]]

 
$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
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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.
    To further mitigate the impact of the filing fee increases, FINRA 
is proposing to add most of the increases to the refundable portion of 
the filing fee.\51\ For example, for a claim amount that falls within 
the $500,000.01 to $1,000,000 tier, the filing fee would increase by 
$150 or 10 percent. The non-refundable portion of the filing fee, 
however, would increase by only $50. The refundable portion would 
increase by $100. Moreover, in the award, arbitrators have the 
authority to order a respondent to reimburse all or part of any filing 
fee paid,\52\ which should also help minimize the impact of these 
increases on claimants.
---------------------------------------------------------------------------

    \51\ A claimant may be entitled to a partial refund of a filing 
fee under the circumstances described in Rules 12900(c) and 
13900(c). Exhibit 5 to the proposed filing shows the proposed 
amended refund amounts in these rules that correspond to the 
proposed filing fee increases.
    \52\ Rules 12900(d) and 13900(d).
---------------------------------------------------------------------------

    The proposed rule change also would increase the unspecified filing 
fee by $325 or 26 percent. The non-refundable portion would increase by 
$125 and the refundable portion by $200. 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. These 
increases would help fund the increases in arbitrator honoraria.
(ii) Filing Fees Paid by Members
    The proposed rule change would also increase the filing fee for 
members at the higher claim amount tiers.

                                                        Filing Fees for Member Claimant--Table 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          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
--------------------------------------------------------------------------------------------------------------------------------------------------------
$.01-$1000.............................................            $225            $225              $0               0             $200             $25
$1,000.01-$2,500.......................................             350             350               0               0              300              50
$2,500.01-$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
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Specifically, for the $500,000.01 to $1,000,000 tier, the filing 
fee would increase by $100 or 4 percent. For the $1,000,000.01 to 
$5,000,000 tier, the filing fee would increase by $200 or 6 percent. 
For the over $5,000,000 tier, the filing fee would increase by $300 or 
8 percent. For each of these increases, FINRA is proposing to add the 
increased amount to the refundable portion of the filing fee,\53\ as 
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.\54\
---------------------------------------------------------------------------

    \53\ See supra note 51.
    \54\ Rules 12701(a) and 13701(a).
---------------------------------------------------------------------------

    The unspecified filing fee for members would also increase under 
the proposed rule change. Specifically, the filing fee would increase 
by $200 or 13 percent, and the increase would be added to the 
refundable portion of the fee.
D. Hearing Session Fee Increases
    FINRA is proposing to amend Rule 12902 to increase the hearing 
session fees for claims of more than $500,000. Tables 5 and 6 
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.
(i) Hearings With One Arbitrator
    Under the proposed rule change, the fees for a hearing session with 
one arbitrator would not change.

[[Page 37793]]



                          Hearing Session Fees for Session With One Arbitrator--Table 5
----------------------------------------------------------------------------------------------------------------
                                       Current fee for    Proposed fee for
    Amount of claim (exclusive of      session/decision   session/decision        Change         Percent change
       interest and expenses)          w/one arbitrator   w/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/                 450                450                  0                  0
 Not Specified
----------------------------------------------------------------------------------------------------------------

    The proposed rule change would, however, make a technical change to 
the claim amount tiers. Specifically, FINRA is proposing to 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.\55\ FINRA would retain the $450 hearing session fee for 
each new tier.
---------------------------------------------------------------------------

    \55\ See supra Section III(C), ``Filing Fee Increases.''
---------------------------------------------------------------------------

    In assessing the hearing session fees for cases heard by one 
arbitrator, FINRA determined to retain the current fee structure for a 
hearing session with one arbitrator, even though the current fees would 
not cover the proposed increased honoraria payments for claims in the 
$.01--$10,000 tiers. Nevertheless, FINRA would retain the current fees 
for these lower claim amounts, so that the forum remains accessible and 
affordable to claimants with smaller claims.
    Further, under the current fee structure, as the claim amount 
increases for claims heard by one arbitrator, the hearing session fee 
increases to $450 and is capped at this figure. The proposed rule 
change will not change this fee structure.
(ii) Hearings With Three Arbitrators
    FINRA is proposing to increase the fees only for hearing sessions 
with three arbitrators, and only for claim amounts starting at 
$500,000.01.

                        Hearing Session Fees for Session With Three Arbitrators--Table 6
----------------------------------------------------------------------------------------------------------------
                                       Current fee for    Proposed fee for
    Amount of claim (exclusive of      session w/three    session w/three         Change         Percent change
       interest and expenses)            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/               1,000              1,125                125                 13
 Not Specified......................
----------------------------------------------------------------------------------------------------------------

    The proposed rule change would create new tier amounts starting at 
$500,000.01 and would increase the fees over the current top rate of 
$1,200. For example, for claim amounts between the new $500,000.01 to 
$1,000,000 tier heard by three arbitrators, the hearing session fee 
would increase by $100 or 8 percent. For a claim amount between the new 
$1,000,000.01 to $5,000,000 tier heard by three arbitrators, the 
hearing session fee would increase by $200 or 17 percent. For a claim 
amount over $5,000,000 heard by three arbitrators, the hearing session 
fee would increase by $300 or 25 percent. The proposed rule change 
would also increase the hearing session fee for unspecified claims by 
$125 or 13 percent.
    For claims heard by three arbitrators, the hearing session fees do 
not cover the forum's actual costs for smaller claims. Nevertheless, 
FINRA is proposing to retain the current fees for lower claim amounts, 
so that the forum remains accessible and affordable for claimants with 
smaller claims. The proposed rule change would instead distribute the 
increases to hearing session fees among the higher claim amounts. The 
increases 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.
    Finally, FINRA is proposing three technical changes to the Hearing 
Session Fee chart in the Codes. The first would change 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 would be consistent. The second technical change 
would add ``exclusive of interest and expenses'' to the title of the 
claim amount tiers in the Hearing Session fee charts for consistency 
and to clarify that hearing session fees are based on the claim amount 
and do not include interest or expenses. FINRA notes that the 
modifications would codify current practice. Finally, FINRA

[[Page 37794]]

would change the title of ``Unspecified'' to ``Non-Monetary/Not 
Specified'' so that the title is the same as those in the other fee 
schedules in the Codes.
E. Example
    FINRA believes the following example should help illustrate how the 
proposed increases would effect a typical arbitration. FINRA notes that 
the fees associated with an arbitration claim depend on multiple 
factors including, but not limited to: the claim amount, the number of 
arbitrators, the number of hearing sessions conducted, how the 
arbitrators decide to assess the fees between the parties, and whether 
the case is settled or withdrawn. In the following example, a customer 
files a claim for $600,000. The parties select three arbitrators who 
conduct an IPHC and four hearing sessions, after which the arbitrators 
issue an award.
    For a claim between $500,000.01 and $1 million, the customer would 
pay $1,725, an increase of $150 or 10 percent. The $1,725 fee consists 
of a $425 non-refundable filing fee and a $1,300 potential refund 
amount. The member surcharge to the firm, assessed when FINRA serves 
the claim, would be $2,475, an increase of $225 or 10 percent. The 
combined process fees, assessed when FINRA sends the arbitrator lists 
to the parties, would be $5,075, for an increase of $325 or 7 percent. 
The $5,075 process fee would consist of a $750 prehearing process fee 
and a $4,325 hearing process fee. Member fees on these cases currently 
total $7,000 (member surcharge of $2,250 and a combined process fee of 
$4,750), so the increase to $7,550 (member surcharge of $2,475 and 
combined process fee of $5,075) would be an increase of approximately 8 
percent.
    For a claim between $500,000.01 and $1 million and heard by three 
arbitrators, the hearing session fee would increase from $1,200 to 
$1,300 or 8 percent. Thus, under the example, FINRA would assess 
hearing session fees of $6,500--the cost of five hearing sessions (one 
IPHC and four hearing sessions) at $1,300 each. The arbitrators have 
the discretion to allocate these fees evenly between the parties, or 
apportion them in any other manner, including assessing the entire 
amount against one party.
F. Proposed Arbitrator Honoraria Increases
    Under the proposed rule change, FINRA would amend Rules 12214 and 
12800 of the Customer Code to increase the arbitrator honoraria. Table 
7 illustrates the proposed increases and the percentage changes from 
the current rates.

                                Proposed Arbitrator Honoraria Increases--Table 7
----------------------------------------------------------------------------------------------------------------
                                                                                                    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
----------------------------------------------------------------------------------------------------------------

    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. 
Currently, for each arbitrator who decides a contested subpoena 
request, FINRA assesses a $200 fee to the parties to cover the cost of 
the honoraria. The proposed rule change would increase the honoraria 
from $200 to $250. In most cases, the chairperson would decide the 
contested subpoena request; however, a party may request that the 
entire panel decide such motion. These honoraria are paid on a per case 
basis, regardless of the number of contested subpoena requests decided 
by an arbitrator or panel. Thus, under the proposed rule change, if a 
three-person panel decided a contested subpoena request, the maximum 
fee that the parties could be assessed, collectively, would increase 
from $600 to $750. If an arbitrator or the panel decides such a motion, 
the panel would allocate the cost of the honoraria to the parties in 
the award.\56\
---------------------------------------------------------------------------

    \56\ Rules 12214(d)(3) and 13214(d)(3).
---------------------------------------------------------------------------

    Finally, the proposed rule change would increase the honoraria for 
simplified cases. FINRA recently raised the claim amount limit for 
simplified arbitration from $25,000 to $50,000.\57\ Typically, as the 
claim amount increases, arbitrators encounter issues that are more 
complicated to resolve, and, thus, require more of their time. Although 
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. Thus, Rule 12800(f) would be amended to increase the 
simplified arbitration honoraria, which is a flat per case payment, 
from $125 to $350. FINRA notes that the proposed simplified honoraria 
increase would be the first since 1999,\58\ when FINRA (then NASD) 
increased the amount from $75 to $125, the current honoraria level for 
this service.
---------------------------------------------------------------------------

    \57\ See Securities Exchange Act Rel. No. 66913 (May 3, 2012), 
77 FR 27262 (May 9, 2012) (File No. SR-FINRA-2012-012) (Approval 
Order). FINRA last raised the claim amount for simplified 
arbitration from $10,000 to $25,000 in 1998. See Securities Exchange 
Act Rel. No. 38635 (May 14, 1997), 62 FR 27819 (May 21, 1997) (File 
No. SR-NASD-97-22) (Approval Order).
    \58\ See supra note 3.
---------------------------------------------------------------------------

G. Conclusion
    The proposed rule change would permit FINRA to cover the proposed 
increases to arbitrator honoraria by increasing selected arbitration 
fees. FINRA believes the proposed rule change would help the forum 
retain a roster of high-quality arbitrators and attract qualified 
individuals who possess the skills necessary to manage arbitration 
cases and would consider thoroughly all arbitration issues presented, 
which are essential elements for FINRA to meet its regulatory objective 
of protecting the investing public. To achieve this goal, FINRA 
believes it is incumbent on all users of the forum to contribute to the 
goal of enhancing the effectiveness of the arbitration forum.
    As noted in Item 2 of this filing, 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

[[Page 37795]]

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,\59\ 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 also believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(5) of the Act,\60\ 
which requires, among other things, that FINRA rules provide for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system that 
FINRA operates or controls.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78o-3 (b)(6).
    \60\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

    FINRA believes that the proposed rule change appropriately 
allocates the proposed fee increases among users of the forum by 
spreading them through the higher claim amounts. In particular, the 
filing fee and hearing session fee increases for customers begin at the 
$500,000 claim amount, which would minimize the impact of the increases 
on smaller claims and keep the arbitration forum accessible for the 
small investor. In general, FINRA believes that proposed rule change 
would protect investors and the public interest by improving FINRA's 
ability to retain and attract qualified arbitrators willing to devote 
the time and effort necessary to consider thoroughly all arbitration 
issues presented, which, FINRA believes, is an essential element for 
FINRA to achieve its mission of investor protection and market 
integrity.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change would result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change would 
permit FINRA to cover the proposed increases to arbitrator honoraria by 
increasing selected arbitration fees. Under the proposed rule change, 
all members would be subject to the same fee increases. In developing 
the proposed rule change, FINRA considered that fee increases could 
have a greater impact on smaller firms than on larger firms. To 
mitigate this impact, FINRA linked the fee increases to larger claim 
amounts, so that the largest increases would be linked to the larger 
claim amounts. As proposed, the member fee increases would primarily 
apply to claim amounts of $250,000 and above.
    FINRA also focused on minimizing the exposure of public customers 
to the fee increases. As a result, the proposed fee increases would 
become effective at the top tiers of the claim amounts in the fee 
schedules. Thus, on the fees that customers pay, for example filing 
fees and hearing session fees, the proposed increases would apply only 
to claim amounts of more than $500,000. To further mitigate the impact 
of the filing fee increases, the proposed rule change would add most of 
the increases to the refundable portion of the filing fee. Moreover, in 
the award, arbitrators have the authority to order a respondent to 
reimburse all or part of any filing fee paid.
    For the hearing session fees, FINRA acknowledges that the proposed 
increases could result in additional costs for customers. However, the 
effects of the hearing session fee increases could be minimized under 
the Codes. For example, the parties may settle \61\ the arbitration 
before any hearings are conducted to avoid being assessed fees for a 
hearing.\62\ Further, during settlement negotiations, if hearings were 
held, parties have the opportunity to determine how to share any 
hearing session fees.\63\ Moreover, arbitrators have discretion to 
allocate hearing session fees as part of their award,\64\ which allows 
them to consider numerous factors to determine each party's appropriate 
share and assign the costs accordingly. The proposed rule change would 
not change parties' ability to settle or arbitrators' discretion to 
allocate these fees.
---------------------------------------------------------------------------

    \61\ Rules 12701(a) and 13701(a).
    \62\ See supra note 10. FINRA would assess a hearing session fee 
against the parties for an IPHC, if one was held. Rules 12500(c) and 
13500(c).
    \63\ Rules 12701(b) and 13701(b).
    \64\ Rules 12902(a)(1) and 13902(a)(1).
---------------------------------------------------------------------------

    Further, FINRA believes that modifying the unspecified claim fees 
in each fee type would more accurately reflect the appropriate fee for 
the damages sought and the potential range of recovery.
    Finally, FINRA believes that the proposed rule change adheres to 
the philosophy that the cost of arbitration should be borne by the 
users of the forum, without imposing significant burdens on public 
customers who bring the arbitration claims to the forum. Thus, a large 
portion of the fee increases would be covered by member surcharges and 
process fees imposed only on members. Conversely, a smaller portion of 
the fee increases would be covered by filing fees and hearing session 
fees, which are shared by members, associated persons, and public 
customers.

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);
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2014-026 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-2014-026. 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

[[Page 37796]]

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, on official 
business days between the hours of 10:00 a.m. and 3:00 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-2014-026 and should be submitted on or before July 23, 2014.


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\65\
---------------------------------------------------------------------------

    \65\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15474 Filed 7-1-14; 8:45 am]
BILLING CODE 8011-01-P


