
[Federal Register Volume 79, Number 192 (Friday, October 3, 2014)]
[Notices]
[Pages 59876-59884]
From the Federal Register Online via the Government Printing 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
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                                                                                                    Percentage
                      Arbitrator honoraria                            Current        Proposed         change
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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
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                                                                                                                          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
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  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\
---------------------------------------------------------------------------

    \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\
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    \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'').
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    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\
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    \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.
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    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.
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    \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


