[Federal Register Volume 83, Number 100 (Wednesday, May 23, 2018)]
[Notices]
[Pages 23959-23963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10977]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83276; File No. SR-FINRA-2018-003]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of a Proposed Rule Change 
Relating to Simplified Arbitration

May 17, 2018.

I. Introduction

    On January 29, 2018, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') and Rule 19b-4 thereunder, 
proposed amendments to FINRA Rules 12600 and 12800 of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
13600 and 13800 of the Code of Arbitration Procedure for Industry 
Disputes (``Industry Code,'' and together with the Customer Code, the 
``Codes''), to amend the hearing provisions to provide an additional 
hearing option for parties in arbitration with claims of $50,000 or 
less, excluding interest and expenses.
    The proposed rule change was published for comment in the Federal 
Register on February 16, 2018.\1\ The public comment period closed on 
March 9, 2018. On March 28, 2018, FINRA extended the time period in 
which the Commission must approve the proposed rule change, disapprove 
the proposed rule change, or institute proceedings to determine whether 
to approve or disapprove the proposed rule change to May 17, 2018. The 
Commission received 12 comment letters in response to the Notice.\2\ On 
May 7, 2018, FINRA responded to the comment letters received in 
response to the Notice.\3\
---------------------------------------------------------------------------

    \1\ See Exchange Act Release No. 34-82693 (February 12, 2018), 
83 FR 7086 (February 16, 2018) (``Notice'').
    \2\ See Letters from Steven B. Caruso, Maddox Hargett & Caruso, 
P.C., dated February 13, 2018 (``Caruso Letter''); Andrew Stoltmann, 
President, Public Investors Arbitration Bar Association, dated March 
6, 2018 (``PIABA Letter''); Eric Duhon and Paige Foley, Student 
Attorneys, Investor Protection Clinic, William S. Boyd School of 
Law, University of Nevada, Las Vegas, dated March 6, 2018 (``UNLV 
Letter''); Katherine Kokotos, Amrita Maitlall, and Sumaya Restagno, 
Legal Interns, and Christine Lazaro, Director of the Securities 
Arbitration Clinic and Professor of Clinical Legal Education, St. 
John's University School of Law, dated March 6, 2018 (``SJU 
Letter''); Daniel P. Guernsey, Student Intern and Teresa J. Verges, 
Director, University of Miami School of Law Investor Rights Clinic, 
dated March 6, 2018 (``MIRC Letter''); Jill I. Gross, Professor of 
Law, Elisabeth Haub School of Law, Pace University, dated march 8, 
2018 (``Gross Letter''); William A. Jacobson, Clinical Professor of 
Law and Director, Cornell Securities Law Clinic, and Sam Wildman, 
Cornell University Law School, dated March 8, 2018 (``Cornell 
Letter''); Kevin M. Carroll, Managing Director and Associate General 
Counsel, Securities Industry and Financial Markets Association, 
dated March 8, 2018 (``SIFMA Letter''); Barbara Black, Professor of 
Law, University of Cincinnati College of Law (Retired), dated March 
8, 2018 (``Black Letter''); John Ripoli, Simon Halper, and Mark 
Sarno, Student Interns, and Elissa Germaine, Director, Investor 
Rights Clinic at the Elisabeth Haub School of Law, Pace University, 
dated March 8, 2018 (``PIRC Letter''); Abigail Howd, Eric Peters, 
and Dowdy White, Student Interns, and Nicole G. Iannarone, Assistant 
Clinical Professor, Investor Advocacy Clinic, Georgia State 
University College of Law, dated March 9, 2018 (``GSU Letter''); and 
Mark D. Norych, President and General Counsel, Arbitration 
Resolution Services, Inc., dated March 9, 2018 (``ARS Letter'').
    \3\ See Letter from Margo A. Hassan, Associate Chief Counsel, 
FINRA Office of Dispute Resolution, to the Commission, dated May 7, 
2018 (``FINRA Letter''). The FINRA Letter is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA, 
at the Commission's website at https://www.sec.gov/comments/sr-finra-2018-003/finra2018003-3590730-162342.pdf, and at the 
Commission's Public Reference Room.
---------------------------------------------------------------------------

    This order approves the proposal.

II. Description of the Proposed Rule Change

    The Codes provide two methods for administering arbitration cases 
with claims involving $50,000 or less, excluding interest and expenses. 
The default method is a decision by a single arbitrator based on the 
parties' pleadings and other materials submitted by the parties. The 
alternative method involves a full hearing with a single arbitrator. 
Under the Customer Code, a customer may request a hearing (regardless 
of whether the customer is a claimant or respondent),\4\ and under the 
Industry Code, the claimant may request a hearing.\5\ If a hearing is 
requested, it is generally held in-person, and there are no limits on 
the number of hearing sessions that can take place.
---------------------------------------------------------------------------

    \4\ See FINRA Rule 12800(c).
    \5\ See FINRA Rule 13800(c).
---------------------------------------------------------------------------

    FINRA believes that forum users with claims involving $50,000 or 
less would benefit by having an additional, intermediate form of 
adjudication that would provide them with an opportunity to argue their 
cases before an arbitrator in a shorter, limited telephonic hearing 
format. Therefore, FINRA is proposing to amend the Codes to include a 
Special Proceeding for Simplified Arbitration (``Special Proceeding''). 
The Special Proceeding would be limited to two hearing sessions, 
exclusive of prehearing conferences,\6\ with parties being given time 
limits for their presentations. As discussed above, parties with claims 
involving $50,000 or less are currently limited to a decision based on 
the pleadings and other materials submitted by the parties, or a full 
hearing that typically takes place in-person and is not limited in 
duration. While a party might wish for an opportunity to present his or 
her case to an arbitrator, the travel and expenses associated with a 
full hearing might prevent that party from requesting one. In addition, 
the prospect of cross-examination by an opposing party might act as a 
deterrent for parties seeking to avoid a direct confrontation with 
their opponents. FINRA noted that these concerns particularly impact 
pro se, senior, and seriously ill parties.
---------------------------------------------------------------------------

    \6\ See FINRA Rules 12100 and 13100 (Definitions). Under these 
rules, ``hearing'' means the hearing on the merits of an arbitration 
and a ``hearing session'' is defined as any meeting between the 
parties and arbitrator(s) of four hours or less, including a hearing 
or a prehearing conference.
---------------------------------------------------------------------------

    The suggestion to propose an intermediate form of adjudication 
originated from the FINRA Dispute Resolution Task Force (``Task 
Force'').\7\ The Task Force observed that customers whose cases were 
decided on the papers were the least satisfied of any group of forum 
users. They also noted that, from the arbitrator's perspective, it is 
more

[[Page 23960]]

difficult to assess crucial issues of credibility when deciding cases 
on the papers. The Task Force recommended that the goal of the 
intermediate process should be to give the claimant personal contact 
with the arbitrator deciding the case and to give each party the 
opportunity to argue its case, to ask questions, and to respond to 
contentions from the other side. The Task Force also recommended that 
the intermediate process should allow the arbitrator to probe 
contentions in the papers in an interactive format.\8\
---------------------------------------------------------------------------

    \7\ The Task Force was formed in 2014 to suggest strategies to 
enhance the transparency, impartiality, and efficiency of FINRA's 
securities dispute resolution forum. On December 16, 2015, the Task 
Force issued its Final Report and Recommendations, available at 
http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.
    \8\ Id. at 29.
---------------------------------------------------------------------------

    FINRA considered the Task Force's recommendations and questions in 
developing the format for an intermediate form of adjudication.\9\ 
Accordingly, FINRA is proposing to amend Rules 12800(c) and 13800(c) to 
provide that parties that opt for a hearing must select between two 
hearing options. Option One would be the current hearing option that 
provides for the regular provisions of the Codes relating to 
prehearings and hearings, including all fee provisions. If the parties 
choose Option One, they would continue to have in-person hearings 
without time limits, and they would continue to be permitted to 
question opposing parties' witnesses.
---------------------------------------------------------------------------

    \9\ The Task Force provided the following questions for FINRA to 
consider in developing an intermediate form of adjudication: (1) 
Whether parties appearing should be able to amplify positions taken 
in their papers and to answer questions posed by the arbitrator; (2) 
whether fact witnesses should be permitted to tell their stories to 
the arbitrator; (3) whether there should be a clear boundary between 
the informal, expedited adjudication and a full-blown hearing; (4) 
whether witnesses should be subject to cross-examination by adverse 
counsel; (5) whether parties should be able to compel the attendance 
of particular witnesses, and if so, should there be a limit; (6) 
what arrangements should be made for parties who are not appearing 
in person; and (7) whether arbitrators should use the session as an 
opportunity to press the parties to settle.
---------------------------------------------------------------------------

    Option Two would be the new Special Proceeding subject to the 
regular provisions of the Code relating to prehearings and hearings, 
including all fee provisions, with several limiting conditions. The 
conditions are intended to ensure that the parties have an opportunity 
to present their case to an arbitrator in a convenient and cost 
effective manner without being subject to cross-examination by an 
opposing party.
    Specifically:
     A Special Proceeding would be held by telephone unless the 
parties agree to another method of appearance; \10\
---------------------------------------------------------------------------

    \10\ The Task Force recommended allowing parties with claims 
involving $50,000 or less to be able to appear in whatever manner 
they prefer: In person, by phone or by videoconference. FINRA 
determined that it is in the best interest of the parties to hold 
hearings by telephone because this method is the most expeditious 
and inexpensive format for hearings. As stated above, FINRA is 
proposing that parties can agree to other methods of appearance, 
including appearing in person or by videoconference.
---------------------------------------------------------------------------

     the claimants, collectively, would be limited to two hours 
to present their case and \1/2\ hour for any rebuttal and closing 
statement, exclusive of questions from the arbitrator and responses to 
such questions;
     the respondents, collectively, would be limited to two 
hours to present their case and \1/2\ hour for any rebuttal and closing 
statement, exclusive of questions from the arbitrator and responses to 
such questions;
     notwithstanding the abovementioned conditions, the 
arbitrator would have the discretion to cede his or her allotted time 
to the parties;
     in no event could a Special Proceeding exceed two hearing 
sessions, exclusive of prehearing conferences, to be completed in one 
day;
     the parties would not be permitted to question the 
opposing parties' witnesses;
     the Customer Code would provide that a customer could not 
call an opposing party, a current or former associated person of a 
member party, or a current or former employee of a member party as a 
witness, and members and associated persons could not call a customer 
of a member party as a witness; and
     the Industry Code would provide that members and 
associated persons could not call an opposing party as a witness.
    Except for the two hearing session time limit for a Special 
Proceeding, FINRA would not impose any restrictions on the arbitrator's 
ability to ask the parties questions and has incorporated a substantial 
amount of time for arbitrator questions. Specifically, since FINRA 
would limit the parties' combined presentations to five hours, the 
arbitrator would have up to three hours to ask questions. In addition, 
under the proposed rule change FINRA would not prohibit the arbitrator 
from allowing parties additional time for their presentations or 
witness testimonies, so long as the hearing on the merits is completed 
within the two hearing session limit.\11\
---------------------------------------------------------------------------

    \11\ The Task Force recommended a shorter time limit on each 
case to enable an arbitrator to hear several cases in a hearing day 
and to limit the time commitment of the parties. FINRA was concerned 
that a period shorter than the proposed two hearing session time 
limit would restrict the parties' presentations and their ability to 
answer questions posed by the arbitrator.
---------------------------------------------------------------------------

    FINRA is further proposing to amend Rule 12800(a) to add clarity to 
the rule by explaining the customer's options earlier in the rule text. 
FINRA is proposing to amend the sentence in Rule 12800(c) that states 
that ``[I]f no hearing is held, no initial prehearing conference or 
other prehearing conference will be held, and the arbitrator will 
render an award based on the pleadings and other materials submitted by 
the parties.'' FINRA would replace the first ``held'' in the sentence 
with the term ``requested'' to better reflect that a hearing would only 
occur if the customer requested it. FINRA believes the amendment would 
add clarity to the rule text. FINRA is further proposing to amend Rule 
12600(a) that discusses exceptions to when required hearings will be 
held to specify Rule 12800(c) as one of the exceptions.
    To add clarity on how arbitrators are paid in cases where the 
customer requests a hearing, FINRA is proposing to amend Rule 12800(f) 
to clarify that the regular provisions of the Code relating to 
arbitrator honoraria would apply in such cases. Since the Special 
Proceeding would be a new form of adjudication at the forum, FINRA 
intends to provide substantial training to arbitrators including, but 
not limited to, updating FINRA's written training materials for 
arbitrators, posting a Neutral Workshop video on the FINRA website for 
arbitrators to view on-demand, and including discussions about the 
Special Proceeding in FINRA's publication for arbitrators and 
mediators, The Neutral Corner. FINRA would instruct arbitrators that 
the arbitrator's role in a Special Proceeding might be different than 
it is in a full hearing because parties would not be permitted to 
question opposing parties' witnesses. FINRA would emphasize that in a 
Special Proceeding the arbitrator might need to ask more questions than 
he or she would ask in a regular hearing to gain clarity on issues and 
to assess witness credibility.

III. Comment Summary and FINRA's Response

    As noted above, the Commission received 12 comment letters on the 
proposed rule change and a response letter from FINRA. As discussed in 
more detail below, 11 commenters supported the proposed rule change, 
although seven commenters supported it with suggested 
modifications.\12\ Commenters

[[Page 23961]]

who supported the proposed rule change stated, among other things, that 
it would: (1) Facilitate fairness and efficiency in the arbitration 
forum; \13\ (2) provide access to justice for pro se claimants; \14\ 
(3) provide an additional option for investors; \15\ (4) result in 
lower costs, increased representation rates of claimants, and greater 
participant satisfaction with the arbitration process; \16\ (5) lead to 
more investor trust in the process; \17\ and (6) improve both 
procedural and substantive justice.\18\ One commenter did not expressly 
support or oppose the proposed rule change.\19\ However, one commenter 
asserted objections to specific aspects of the proposed rule change and 
made recommendations for modifications.\20\ As referenced above, 
several commenters suggested modifications to the proposed rule change.
---------------------------------------------------------------------------

    \12\ See ARS Letter, PIABA Letter, SJU Letter, MIRC Letter, 
Black Letter, PIRC Letter, and GSU Letter. ARS proposed the creation 
of a pilot whereby parties could opt in to voluntary expedited 
online arbitration at its forum. This comment is outside the scope 
of the proposed rule change.
    \13\ See, e.g. Caruso Letter, stating that ``the proposed 
amendments . . . would be a fair, equitable and reasonable approach 
that would facilitate the fairness and efficiency of the investor 
participants experience in the FINRA arbitration forum.''
    \14\ See, e.g. Gross Letter, stating that ``This simpler, lower 
cost and faster process provides access to justice especially for 
pro se claimants, as well as the elderly and disabled.''
    \15\ See, e.g. PIABA Letter, stating that ``it is important to 
have additional options related to simplified arbitration.''
    \16\ See, e.g. UNLV Letter, stating that ``Special Proceedings 
will result in lower costs, increased representation rates of 
claimants, and greater participant satisfaction with the arbitration 
process.'' The UNLV Letter also states that ``[a]t present, the 
private bar may provide less representation in [cases with less than 
$50,000 in dispute] because of the time required to prepare adequate 
pleadings or conduct an in-person hearing. An attorney may incur 
significant costs preparing for and traveling to an in-person 
arbitration, including the opportunity costs associated with 
foregoing work on other matters. The proposed Special Proceedings 
would substantially reduce or even eliminate many of these costs.''
    \17\ See MIRC Letter, stating that ``simplifying the hearing 
process and allowing investors to tell their story gives investors a 
sense of participation that they do not get when their case is 
decided on the papers . . . and therefore can lead to more investor 
trust in the process.''
    \18\ See Gross Letter, stating that ``[N]ot only does the 
proposal offer more choices to small claim claimants, but it also 
designs a small claims arbitration process that improves both 
procedural and substantive justice by providing a viable option for 
disputants to voice their grievances out loud to a third-party 
neutral.''
    \19\ See SIFMA Letter.
    \20\ Id.
---------------------------------------------------------------------------

Cross-Examination

    One commenter stated that FINRA should permit cross-examination on 
fairness and due process grounds asserting, among other matters, that 
``members and associated persons should have the right to explore, 
identify, examine, and highlight errors, omissions, and misstatements 
that bear upon the credibility, accuracy and completeness of a 
claimant's or witness's testimony.'' \21\ Another commenter urged FINRA 
to allow limited cross-examination of one or two key witnesses stating 
that ``cross examination is often one of the most effective means of 
eliciting evidence during a hearing.'' \22\ Several commenters 
supported FINRA's prohibition on cross-examination in a Special 
Proceeding.\23\ Two commenters asserted that trained and experienced 
FINRA arbitrators have the knowledge and judgment to ask questions and 
obtain much of the same information that would have been revealed 
through cross-examination.\24\ Moreover, one of those two commenters 
stated that ``because formal rules of evidence do not apply in 
arbitration, cross-examination rarely yields the `gotcha' moment we 
might see dramatized on television.'' \25\
---------------------------------------------------------------------------

    \21\ See SIFMA Letter at 2.
    \22\ See PIABA Letter at 2.
    \23\ See Gross Letter, UNLV Letter, SJU Letter, MIRC Letter, 
Black Letter, and PIRC Letter.
    \24\ See UNLV Letter at 2 and Gross Letter at 5.
    \25\ See Gross Letter at 5.
---------------------------------------------------------------------------

    FINRA noted in the FINRA Letter that the absence of cross-
examination is one of the main features that distinguishes a Special 
Proceeding from the full hearing option.\26\ FINRA believes that the 
ability to present a case without cross-examination would benefit 
parties whose testimony could be intimidated by a direct 
confrontation.\27\ FINRA also believes that the broader role of 
arbitrators in a Special Proceeding in asking questions of the parties 
would serve a similar function to cross-examination, such as gaining 
clarity on issues and assessing witness credibility, but within a 
potentially less intimidating environment.\28\ Moreover, FINRA is not 
eliminating the cross-examination feature in the full hearing option. A 
customer (under the Customer Code), or a claimant (under the Industry 
Code), would continue to have the option of electing a full hearing if 
the party believes that cross-examination would be beneficial in a 
particular case.
---------------------------------------------------------------------------

    \26\ See FINRA Letter at 3.
    \27\ Id.
    \28\ See Id.
---------------------------------------------------------------------------

The Right To Request a Special Proceeding Under the Codes

    One commenter asserted that FINRA should allow firms and their 
associated persons to request a Special Proceeding.\29\ The FINRA 
Letter notes that, currently, no hearing will be held in simplified 
cases unless the customer (under the Customer Code), or a claimant 
(under the Industry Code), requests a hearing.\30\ FINRA stated that, 
in developing the proposal, it considered whether to expand the right 
of firms and associated persons under the Customer Code, and 
respondents under the Industry Code, to request a Special 
Proceeding.\31\ FINRA decided not to change the rights of the parties 
under the Codes relating to the ability to elect a hearing option.\32\ 
FINRA believes it is in the best interest of investors to continue to 
allow them to determine how they want to proceed in arbitration. FINRA 
further believes that giving the firm, generally the party with the 
most resources, the ability to determine the arbitration method, could 
create an inappropriate barrier for some investors, particularly if the 
firm chooses the most expensive arbitration method.\33\
---------------------------------------------------------------------------

    \29\ See SIFMA Letter at 2.
    \30\ See FINRA Letter at 3.
    \31\ See Id.
    \32\ See Id.
    \33\ See Id.
---------------------------------------------------------------------------

Additional Mechanisms for Firms and Associated Persons

    One commenter asserted that in a Special Proceeding, FINRA should 
allow firms and their associated persons to file a motion to dismiss 
for failure to state a claim, and if granted, the case should be 
decided on the papers.\34\ That same commenter stated that because 
FINRA does not allow motions to dismiss for failure to state a claim in 
instances where a statement of claim lacks specificity or is drafted 
poorly, respondents cannot adequately prepare to defend themselves at a 
hearing.\35\ That commenter also stated that in a Special Proceeding, 
the claimant should be precluded from raising new issues, claims or 
evidence not previously raised or referenced in the statement of 
claim.\36\ FINRA believes that motions to dismiss should be narrowly 
confined to the grounds outlined in Rules 12504 and 13504,\37\ and 
notes that parties can

[[Page 23962]]

use the discovery process to explore the substance of their opponent's 
case.\38\ Moreover, under the Codes, FINRA requires parties to provide 
all other parties with copies of all documents and other materials that 
they intend to use at the hearing that were not already produced as 
well as a copy of the parties' witness lists.\39\ FINRA stated that it 
will monitor how the process is working to determine whether it should 
modify the program in any way.\40\
---------------------------------------------------------------------------

    \34\ See SIFMA Letter at 3.
    \35\ See Id.
    \36\ See Id.
    \37\ See FINRA Letter at 3. FINRA Rules 12504(a) and 13504(a) 
(Motions to Dismiss Prior to Conclusion of Case in Chief) provide 
that: ``The panel cannot act upon a motion to dismiss a party or 
claim under paragraph (a) of this rule, unless the panel determines 
that:
    (A) The non-moving party previously released the claim(s) in 
dispute by a signed settlement agreement and/or written release;
    (B) the moving party was not associated with the account(s), 
security(ies), or conduct at issue; or
    (C) the non-moving party previously brought a claim regarding 
the same dispute against the same party that was fully and finally 
adjudicated on the merits and memorialized in an order, judgment, 
award, or decision.''
    Under FINRA Rules 12504(c) and 13504(c) (Motions to Dismiss 
Based on Eligibility), the panel cannot act upon a motion to dismiss 
a claim under Rule 12206 (Time Limits), unless the panel determines 
that the claim is not eligible for arbitration where six years have 
elapsed from the occurrence or event giving rise to the claim.
    \38\ FINRA Rules 12800(d) and 13800(d) (Discovery and Additional 
Evidence) provide that: ``The parties may request documents and 
other information from each other. All requests for the production 
of documents and other information must be servced on all other 
parties, and filed with the Director, within 30 days from the date 
that the last answer is due. Any response or objection to a 
discovery request must be served on all other parties and filed with 
the Director within 10 days of the receipt of the requests. The 
parties receiving the request must produce the requested documents 
or information to all other parties by serving the requested 
documents or information by first-class mail, overnight delivery 
service, hand delivery, email or facsimile. Parties must not file 
the documents with the Director. The arbitrator will resolve any 
discovery disputes.
    \39\ FINRA Rules 12514(a) and 13514(a) (Documents and Other 
Materials) provide that: ``At least 20 days before the first 
scheduled hearing date, all parties must provide all other parties 
with copies of all documents and other materials in their possession 
or control that they intend to use at the hearing that have not 
already been produced. The parties should not file the documents 
with the Director or the arbitrators before the hearing.''
    FINRA Rules 12514(b) and 13514(b) (Witness Lists) provide that: 
``At least 20 days before the first scheduled hearing date, all 
parties must provide each other party with the names and business 
affiliations of all witnesses they intend to present at the hearing. 
All parties must file their witness lists with the Director.''
    \40\ See FINRA Letter at 4.
---------------------------------------------------------------------------

Clarify the Structure of the Special Proceedings

    One commenter stated that FINRA should allow parties to give their 
closing statements after each party presents its case and the 
arbitrator concludes his or her questioning.\41\ FINRA responded by 
noting that it provides arbitrators with hearing scripts to ensure that 
parties understand how the hearing will progress.\42\ FINRA stated that 
it will provide a new hearing script specific to Special Proceedings 
which will state that absent circumstances indicating the need to hold 
the hearing in a different order, parties will be allowed to give their 
closing statements after each party presents its case and the 
arbitrator concludes his or her questioning.\43\ In addition, FINRA 
will explain in the Regulatory Notice announcing approval of the 
proposed rule change, and in its arbitrator training materials, how the 
hearing will be conducted, including when parties are allowed to make 
closing statements.\44\
---------------------------------------------------------------------------

    \41\ See GSU Letter at 2.
    \42\ See FINRA Letter at 4.
    \43\ See FINRA Letter at 4.
    \44\ See Id.
---------------------------------------------------------------------------

    Another commenter objected to the time allotments in the rule 
proposal and recommended allotments made on a percentage or other 
basis.\45\ According to FINRA, the conditions outlined in the proposed 
rule change are intended to ensure that the parties have an opportunity 
to present their case to an arbitrator in a convenient and cost-
effective manner.\46\ The time frames are specific and straightforward. 
FINRA believes that the time frames will help arbitrators and parties 
stay within the two session maximum for a Special Proceeding.\47\ FINRA 
stated that it will clearly articulate the time frames in its hearing 
script.\48\ Moreover, through correspondence and written materials, 
FINRA currently reminds arbitrators to stay on schedule during the 
arbitration hearing and avoid reducing the allotted time by starting 
late or ending early. In addition, FINRA stated that it would emphasize 
during the arbitrator training on Special Proceedings the importance of 
ensuring that arbitrators are mindful of the time frames outlined in 
the rule text.\49\
---------------------------------------------------------------------------

    \45\ See SIFMA Letter at 3.
    \46\ See FINRA Letter at 5.
    \47\ See Id.
    \48\ See Id.
    \49\ See FINRA Letter at 5.
---------------------------------------------------------------------------

Other Methods of Appearance

    One commenter stated that FINRA should encourage the use of 
videoconferencing because this technology affords the arbitrator a 
chance to better assess the credibility of witnesses.\50\ Another 
commenter stated that FINRA should allow customers to choose a hearing 
by videoconference or in person.\51\ FINRA responded by noting that the 
proposed rule change allows the parties to agree to other methods of 
appearance, including appearing in person or by videoconference. FINRA 
determined that it is in the best interest of the parties to make 
telephonic hearings the default hearing type because this method is the 
most widely available, expeditious and inexpensive format for 
hearings.\52\
---------------------------------------------------------------------------

    \50\ See MIRC Letter at 2.
    \51\ See PIRC Letter at 2.
    \52\ See FINRA Letter at 5.
---------------------------------------------------------------------------

Raise the Dollar Limits on Simplified Arbitration

    One commenter stated that FINRA should raise the current dollar 
limit on simplified arbitration from $50,000 to $75,000 and increase 
the dollar limit of the rule proposal to $100,000.\53\ FINRA stated 
that it will consider the feasibility of increasing the dollar limits 
on simplified arbitration after it has gained experience with Special 
Proceedings.\54\
---------------------------------------------------------------------------

    \53\ See SJU Letter at 2.
    \54\ See FINRA Letter at 5.
---------------------------------------------------------------------------

Abridged Discovery Guide

    Currently, the Customer Code provides that Document Production 
Lists do not apply to simplified cases. Two commenters recommended that 
FINRA provide a Discovery Guide (``Guide'') containing a shorter 
Document Production List for the exchange of documents in all 
simplified cases.\55\ One of those two commenters further stated that 
FINRA should provide parties with some additional time for discovery 
exchange.\56\ FINRA responded by noting that staff is currently 
studying potential enhancements to the discovery process in simplified 
arbitration generally that would not impede the expedited nature of 
simplified cases,\57\ and that FINRA would consider whether any such 
enhancements would also apply to the Special Proceedings.\58\
---------------------------------------------------------------------------

    \55\ See MIRC Letter at 3, GSU Letter at 3. The Guide 
supplements the discovery rules contained in the Customer Code. It 
includes an introduction which describes the discovery process 
generally, and explains how arbitrators should apply the Guide in 
arbitration proceedings. The introduction is followed by two 
Document Production Lists, one for firms and associated persons, and 
one for customers, which enumerate the documents that are 
presumptively discoverable in customer cases. As presumptively 
discoverable, parties do not have to expressly request the 
documents. FINRA expects the parties to exchange the documents 
without arbitrator or staff intervention. The Guide only applies to 
customer arbitration proceedings, not to intra-industry cases.
    \56\ See MIRC Letter at 3.
    \57\ See FINRA Letter at 5.
    \58\ See FINRA Letter at 6.
---------------------------------------------------------------------------

Specially-Qualified Arbitrator Roster and Mandatory Training

    Two commenters supported FINRA's intent to provide additional 
arbitrator training on Special Proceedings.\59\ Two other commenters 
stated that FINRA should make arbitrator training on Special 
Proceedings a requirement.\60\ One of those commenters recommended in-
person training and also stated that FINRA should require specialized 
expertise for arbitrators presiding over Special Proceedings.\61\ Two 
commenters

[[Page 23963]]

recommended that FINRA establish a special roster of arbitrators to 
handle Special Proceedings.\62\ One of those two commenters stated that 
the arbitrators should be chair-qualified and trained to work with pro 
se claimants.\63\
---------------------------------------------------------------------------

    \59\ See SJU Letter at 2, Cornell Letter at 2.
    \60\ See Black Letter at 1, GSU Letter at 1.
    \61\ See GSU Letter at 1.
    \62\ See MIRC Letter at 3, Black Letter at 1.
    \63\ See MIRC Letter at 3.
---------------------------------------------------------------------------

    The FINRA Letter noted that all simplified cases are decided by a 
single chair-qualified public arbitrator who has fulfilled special 
eligibility requirements and completed chairperson training.\64\ FINRA 
will provide arbitrator training in Special Proceedings through a 
Neutral Workshop video on the FINRA website for arbitrators to view on 
demand, and written training materials for arbitrators including, but 
not limited to, discussions about the Special Proceeding in FINRA's 
publication for arbitrators and mediators, The Neutral Corner.\65\ In 
its training, FINRA would instruct arbitrators that the arbitrator's 
role in a Special Proceeding might be different than it is in a full 
hearing because parties would not be permitted to question opposing 
parties' witnesses.\66\ FINRA would emphasize that in a Special 
Proceeding the arbitrator might need to ask more questions than he or 
she would ask in a regular hearing to gain clarity on issues and to 
assess witness credibility.\67\ FINRA believes it needs time and 
experience with the new hearing option before it can consider 
additional qualifications and requirements for arbitrators.\68\ While 
FINRA will strongly encourage arbitrators to avail themselves of 
training resources on Special Proceedings, FINRA is concerned about the 
potential negative impact that additional required training could have 
on the availability of arbitrators to serve on Special Proceedings.\69\
---------------------------------------------------------------------------

    \64\ See FINRA Letter at 6.
    \65\ See Id.
    \66\ See Id.
    \67\ See Id.
    \68\ See Id.
    \69\ See FINRA Letter at 6.
---------------------------------------------------------------------------

Change the Name of the Simplified Arbitration Process

    One commenter recommended that FINRA change the name of the 
simplified arbitration process to ``small claims'' arbitration because 
their clients believe that their claims are not taken seriously due to 
the term ``simplified.'' \70\ The FINRA Letter noted the comment, but 
asserted that using the term ``simplified'' appropriately captures the 
process and helps distinguish it from the full hearing process.\71\
---------------------------------------------------------------------------

    \70\ See GSU Letter at 1.
    \71\ See FINRA Letter at 6.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters, and FINRA's response to the comments, the Commission finds 
that the proposal is consistent with the requirements of the Exchange 
Act and the rules and regulations thereunder that are applicable to a 
national securities association.\72\ Specifically, the Commission finds 
that the rule change is consistent with Section 15A(b)(6) of the 
Exchange Act,\73\ which requires, among other things, that FINRA rules 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \72\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \73\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    As stated in the Notice, FINRA believes that forum users with 
claims involving $50,000 or less would benefit by having an additional, 
intermediate form of adjudication that would provide them with an 
opportunity to argue their cases before an arbitrator in a shorter, 
limited telephonic hearing format.\74\ The Commission notes that 
FINRA's proposal originated from a recommendation of the Task Force, 
which was charged with suggesting strategies to enhance the 
transparency, impartiality, and efficiency of FINRA's securities 
dispute resolution forum for all participants.\75\ The Task Force 
recommendations were informed by input from individuals representing a 
broad range of interests in FINRA's dispute resolution forum along with 
public comments.\76\ The Commission further notes that eleven of the 
twelve public comments received for this proposal were supportive, in 
part, because the proposed rule would provide an additional and helpful 
option for investors seeking arbitration.\77\
---------------------------------------------------------------------------

    \74\ Notice at 7087.
    \75\ See Id.
    \76\ See Final Report and Recommendations at 4, available at 
http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.
    \77\ See ARS Letter, Black Letter, Cornell Letter, Caruso 
Letter, PIABA Letter, UNLV Letter, SJU Letter, MIRC Letter, Gross 
Letter, PIRC Letter, and GSU Letter.
---------------------------------------------------------------------------

    Taking into consideration the comment letters and the FINRA Letter, 
the Commission believes that the proposal is consistent with the 
Exchange Act. The Commission believes that the proposal will help 
protect investors and the public interest by providing an additional, 
intermediate form of adjudication that would provide arbitration users 
with an opportunity to argue their cases before an arbitrator in a 
convenient, time-efficient, and cost-effective manner without being 
subject to cross-examination by an opposing party. The Commission 
further believes that FINRA's response, as discussed in more detail 
above, appropriately addressed commenters' concerns about arbitrator 
training and adequately explained its reasons for how this additional, 
intermediate form of adjudication would better serve some arbitration 
forum users by leading to more investor trust in the arbitration 
process, providing greater access to justice for pro se claimants, and 
facilitating fairness and efficiency. Further, the Commission notes 
FINRA's intent to monitor how the process is working to determine 
whether it should consider modifying the program in any way, including 
by considering the feasibility of increasing the dollar limits on 
simplified arbitration, and by studying potential enhancements to the 
discovery process in simplified arbitration generally.
    The Commission believes that the approach proposed by FINRA is 
appropriate and designed to protect investors and the public interest, 
consistent with Section 15A(b)(6) of the Exchange Act. For these 
reasons, the Commission finds that the proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
thereunder.

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) \78\ of the 
Exchange Act that the proposal (SR-FINRA-2018-003) be and hereby is 
approved.
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 78s(b)(2).
    \79\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\79\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10977 Filed 5-22-18; 8:45 am]
 BILLING CODE 8011-01-P


