[Federal Register Volume 84, Number 226 (Friday, November 22, 2019)]
[Notices]
[Pages 64581-64589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25324]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87557; File No. SR-FINRA-2019-027]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 12000 Series To Expand Options Available to Customers if a 
Firm or Associated Person Is or Becomes Inactive

November 18, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 5, 2019, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rules 12100, 12202, 12214, 12309, 
12400, 12601, 12702, 12801, and 12900 of the Code of Arbitration 
Procedure for Customer Disputes (``Customer Code'' or ``Code'') to 
expand a customer's options to withdraw an arbitration claim if a 
member or an associated person becomes inactive before a claim is filed 
or during a pending arbitration. In addition, the proposed amendments 
would allow customers to amend pleadings, postpone hearings, request 
default proceedings and receive a refund of filing fees in these 
situations.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

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

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

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

1. Purpose
Background
    Most unpaid customer arbitration awards are rendered against firms 
or individuals whose FINRA registration has been terminated, suspended, 
cancelled, or revoked, or who have been expelled from FINRA. These 
firms and individuals are generally referred to as ``inactive,'' and 
are no longer FINRA members or associated with a FINRA member, although 
they may continue to operate in another area of the financial services 
industry where FINRA registration is not required. Firms and 
individuals can become inactive prior to an arbitration claim being 
filed, during an arbitration proceeding, or subsequent to an 
arbitration award, and this status can be caused by FINRA's action, 
such as when a firm or individual is suspended for failing to pay an 
award, or by the firm's or individual's own voluntary action.
    FINRA has implemented a number of changes to its arbitration 
program that expand the options available to a customer when dealing 
with those members or associated persons that are inactive either at 
the time the claim is filed or at the time of the award. For example, 
when a customer claimant first files an arbitration claim, FINRA 
alerts, by letter, the customer claimant if the respondent, whether a 
member or an associated person, is inactive. FINRA also informs the 
claimant that awards against such members or associated persons have a 
much higher incidence of non-payment and that FINRA has limited 
disciplinary leverage over inactive members or associated persons that 
fail to pay arbitration awards. Thus, the customer knows before 
pursuing the claim in arbitration that collection of an award may be 
more difficult. In addition, upon learning that the member or 
associated person is inactive, a customer may determine to amend his or 
her claim to add other respondents from whom the customer may be able 
to collect should the claim go to award.
Proposed Rule Change
    FINRA is proposing to amend the Customer Code \3\ to expand further 
the options available to customers in situations where a firm becomes 
inactive during a pending arbitration, or where an associated person 
becomes inactive either before a claim is filed or during a pending 
arbitration. FINRA is also proposing to amend the Code to allow 
customers to amend pleadings, postpone hearings, request default 
proceedings and receive a refund of filing fees if the customer 
withdraws the claim under these situations.\4\
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    \3\ While unpaid awards occur in intra-industry cases (i.e., 
disputes between or among members and associated persons), the 
proposed amendments would apply to customer cases only.
    \4\ FINRA is also proposing to amend the Code to update cross-
references and make other non-substantive, technical changes to 
rules impacted by the proposed rule change.
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A. Arbitrating Claims Against Inactive Members and Associated Persons
    Currently, under FINRA Rule 12202 (Claims Against Inactive 
Members), a customer's claim against a firm whose membership is 
terminated, suspended, cancelled or revoked, or that has been expelled 
from FINRA, or that is

[[Page 64582]]

otherwise defunct, is ineligible for arbitration unless the customer 
agrees in writing to arbitrate after the claim arises. In these 
situations, the customer is able to evaluate the likelihood of 
collecting on an award and make an informed decision whether to proceed 
in arbitration, to file the claim in court or to take no action, 
regardless of whether the customer signed a predispute arbitration 
agreement.\5\ Accordingly, claims against inactive firms proceed in 
arbitration only at the customer's option.
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    \5\ If the customer notifies FINRA in writing that he or she 
does not want to proceed against the inactive member in FINRA's 
forum, FINRA deems the customer's agreement to submit to arbitration 
rescinded and sends the customer a full refund of any filing fee 
remitted.
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    The Code does not address situations, however, where a member firm 
becomes inactive during a pending arbitration. In addition, the Code 
does not provide specific procedures for a customer to withdraw, and 
file in court, a claim against an associated person who becomes 
inactive before the customer files a claim or during a pending 
arbitration.
    Accordingly, FINRA is proposing to amend FINRA Rule 12202 to expand 
a customer's option to withdraw a claim to situations where a member 
becomes inactive during a pending arbitration, or where an associated 
person becomes inactive either before a claim is filed or during a 
pending arbitration. Under the proposal, FINRA Rule 12202 would specify 
that a customer's claim against an associated person who is inactive at 
the time the claim is filed is ineligible for arbitration unless the 
customer agrees in writing to arbitrate after the claim arises. In 
addition, FINRA Rule 12202 would specify that if a member or an 
associated person becomes inactive during a pending arbitration, FINRA 
would notify the customer of the status change, and provide the 
customer with 60 days to withdraw the claim(s) with or without 
prejudice.\6\
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    \6\ FINRA Rule 12702 (Withdrawal of Claims) provides that before 
a party answers a statement of claim, the claimant can withdraw the 
claim with or without prejudice. However, after a party submits an 
answer, the claimant can only withdraw the claim with prejudice 
unless the panel or the parties agree otherwise. FINRA is proposing 
to make a conforming change to FINRA Rule 12702 to provide that a 
customer can withdraw a claim without prejudice if the party that 
submitted an answer is an inactive member or inactive associated 
person. Withdrawal without prejudice would allow the customer to re-
file the arbitration at a later date.
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    Similar to the current rules and procedures relating to claims 
filed against inactive members, the proposed amendments would allow the 
customer to evaluate the likelihood of collecting on an award and make 
an informed decision whether to proceed in arbitration, to file the 
claim in court or to take no action, regardless of whether the customer 
signed a predispute arbitration agreement.
    In addition, FINRA is proposing to amend FINRA Rule 12100 
(Definitions) to add definitions of ``inactive member'' and ``inactive 
associated person.'' Consistent with current Rule 12202, FINRA is 
proposing to define an ``inactive member'' as a member whose membership 
is terminated, suspended, cancelled or revoked; that has been expelled 
or barred \7\ from FINRA, or that is otherwise defunct.\8\
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    \7\ FINRA is adding ``or barred'' to the definition of an 
``inactive member'' to capture that a member may be inactive due to 
a bar.
    \8\ The proposed rule change would amend the definition of 
``member'' under the Customer Code, the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code''), and in Article 
I of the By-Laws of FINRA Regulation, Inc. to conform the definition 
to the proposed definition of an ``inactive member'' as discussed 
below. The proposed changes would make the definition of ``member'' 
consistent in the FINRA rules that apply to FINRA's arbitration 
forum.
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    An ``inactive associated person'' would be defined as a person 
associated with a member whose registration is revoked, cancelled, or 
suspended, who has been expelled or barred from FINRA,\9\ or whose 
registration has been terminated for a minimum of 365 days. Thus, if an 
associated person's registration is not revoked, cancelled, or 
suspended, the person has not been expelled or barred from FINRA, and 
the individual's registration has been terminated for less than one 
year, the individual would not be classified as terminated and, 
therefore, would not be deemed inactive.
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    \9\ In Regulatory Notice 17-33 (October 2017), discussed infra, 
FINRA proposed to define an ``inactive associated person'' as a 
person associated with a member whose registration is revoked or 
suspended, or whose registration has been terminated for a minimum 
of 365 days. FINRA is proposing to add ``expelled or barred from 
FINRA'' and ``whose registration is cancelled'' to this definition 
to capture other ways in which an individual could be categorized as 
inactive.
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    FINRA believes the 365-day minimum termination \10\ requirement for 
associated persons would help ensure that enough time has elapsed to 
assume reasonably that the associated person has permanently left the 
securities industry. The requirement would allow enough time for those 
associated persons who may have temporarily left the industry to return 
before the arbitration closes.\11\
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    \10\ Termination, in some cases, may be a voluntary action that 
can be of short duration.
    \11\ In its analysis of 2,054 customer cases closed by hearing, 
on the papers, or by stipulated award from 2014 to 2018, FINRA 
identified 78 cases where an associated person was not in the 
industry while the arbitration was pending but returned to the 
industry in fewer than 365 days.
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B. Amending Pleadings
    FINRA Rule 12309 (Amending Pleadings) limits a party's ability to 
amend a statement of claim, among other pleadings, after FINRA has 
appointed a panel to the case. Specifically, once FINRA appoints a 
panel to a case, a party can amend a pleading only if the arbitrators 
grant a party's motion to do so. FINRA Rule 12309 also provides that a 
party cannot add a new party to the case after arbitrator ranking lists 
are due to the Director of Arbitration until FINRA appoints the panel 
and the arbitrators grant a party's motion to add the new party.
    FINRA believes that a customer should be able to change his or her 
litigation strategy during a pending case once the customer learns that 
a firm or an associated person has become inactive. Accordingly, FINRA 
is proposing to amend FINRA Rule 12309 to provide that if FINRA 
notifies a customer that a firm or an associated person has become 
inactive during a pending arbitration, the customer may amend a 
pleading, including adding a new party, within 60 days of receiving 
such notice.\12\
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    \12\ FINRA Rule 12309(d) would permit any party to file a 
response to an amended pleading, provided the response is filed and 
served within 20 days of receipt of the amended pleading, unless the 
panel determines otherwise. Thus, the newly-added party could file a 
response to the amended pleading for the panel or arbitrator to 
consider.
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C. Postponing Hearings
    FINRA Rule 12601 (Postponement of Hearings) addresses when a 
scheduled hearing date can be postponed. The parties can agree to 
postpone a hearing. Absent an agreed upon postponement, a hearing can 
be postponed by FINRA in extraordinary circumstances, by the 
arbitrators at their discretion, or by the arbitrators upon a party's 
motion. FINRA is proposing to amend FINRA Rule 12601 to provide that if 
FINRA notifies a customer that a firm or an associated person has 
become inactive and the scheduled hearing date is within 60 days of the 
date the customer receives the notice from FINRA, the customer may 
postpone the hearing date. Since the proposed amendment would provide a 
customer with 60 days to determine how to proceed after FINRA notifies 
the customer of the status change to inactive, it would be appropriate 
to allow the customer to postpone a scheduled hearing that falls within 
that time period.
    In addition, FINRA assesses postponement fees against the parties 
for each postponement agreed to by the parties, or granted upon the 
request of

[[Page 64583]]

one or more parties. FINRA also charges an additional fee of $600 per 
arbitrator if a postponement takes place within 10 days of a scheduled 
hearing date. The additional $600 per arbitrator fee is paid to the 
arbitrators to compensate them for the late adjournment.\13\ FINRA is 
proposing to amend FINRA Rule 12601 to provide that if FINRA notifies a 
customer that a firm or an associated person has become inactive and 
the scheduled hearing date is within 60 days of the date the customer 
receives the notice from FINRA, FINRA would not charge the customer a 
postponement fee or an additional fee of $600 per arbitrator if a 
customer chooses to postpone a scheduled hearing.
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    \13\ See FINRA Rule 12214 (Payment of Arbitrators).
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    FINRA is also proposing to amend FINRA Rule 12214 to make it clear 
that it would continue to pay the $600 honoraria to the arbitrators to 
compensate them for their time if a customer chooses to postpone a 
scheduled hearing within 10 days before it is scheduled because the 
customer learns that the firm or associated person has become inactive.
D. Default Proceedings
    FINRA Rule 12801 (Default Proceedings) permits a claimant to 
request default proceedings against any respondent whose registration 
is terminated, revoked or suspended, and who failed to file an answer 
\14\ to a claim within the time provided in the Code. A single 
arbitrator will decide the case based on the claimant's pleadings and 
other documentation.\15\ The claimants must present a sufficient basis 
to support the making of an award.\16\ The arbitrator may not issue an 
award based solely on the nonappearance of a party.\17\
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    \14\ A respondent must serve each party with a signed and dated 
Submission Agreement and answer specifying the relevant facts and 
available defenses to the statement of claim within 45 days of 
receipt of the statement of claim. See FINRA Rule 12303(a).
    \15\ See FINRA Rule 12801(b)(2)(B). No hearings are held in 
default proceedings unless the customer requests one. See FINRA Rule 
12801(c).
    \16\ See FINRA Rule 12801(e)(1).
    \17\ Id. If the defaulting respondent files an answer before an 
award has been issued, the proceedings against this respondent will 
be terminated and the claim will proceed under the regular 
provisions of the Code. See FINRA Rule 12801(f).
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    As noted, the proposed amendments would define an inactive 
associated person as a person associated with a member whose 
registration is revoked, cancelled, or suspended, who has been expelled 
or barred from FINRA, or whose registration has been terminated for a 
minimum of 365 days. In the context of a default proceeding, FINRA 
believes that it would be appropriate to continue to allow a customer 
to request default proceedings against any terminated associated person 
who fails to answer a claim, regardless of how long the associated 
person has been terminated, consistent with the existing rule. 
Accordingly, FINRA is proposing to amend FINRA Rule 12801(a) to specify 
that a claimant may request a default proceeding against a terminated 
associated person who fails to file an answer within the time provided 
in the Code regardless of the number of days since termination.\18\
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    \18\ See supra note 10.
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E. Refunding Filing Fees
    FINRA Rule 12900 (Fees Due When a Claim is Filed) specifies that if 
a claim is settled or withdrawn more than 10 days before the date that 
the hearing is scheduled to begin, a party paying a filing fee will 
receive a partial refund of the filing fee. The rule also provides that 
FINRA will not refund any portion of the filing fee if a claim is 
settled or withdrawn within 10 days of the date that the hearing is 
scheduled to begin.
    FINRA is proposing to amend FINRA Rule 12900 to provide that FINRA 
would refund a customer's full filing fee if FINRA notifies a customer 
that a firm or an associated person has become inactive during a 
pending arbitration, and the customer withdraws the case against all 
parties within 60 days of the notification. FINRA would refund the 
filing fee even if the customer withdraws the case within 10 days of 
the date that the hearing is scheduled to begin.
F. Non-Substantive Changes
    In addition to amending FINRA Rules 12100, 12202, 12214, 12309, 
12400, 12601, 12702, 12801, and 12900 to expand a customer's options to 
withdraw an arbitration claim if a member or an associated person 
becomes inactive before a claim is filed or during a pending 
arbitration, FINRA is also proposing to amend the Code to update cross-
references and make other non-substantive, technical changes to the 
rules impacted by the proposal.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 90 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\19\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
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    \19\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed rule change would protect 
investors and the public interest by expanding the options available to 
customers with claims against respondents who are unlikely to be able 
to pay. The proposed rule change would extend the concept of what it 
means to be inactive to expressly include associated persons, so that 
customers would have the same options during a case against inactive 
associated persons as they would against inactive members. The proposed 
change, therefore, would add consistency to FINRA rules.
    Further, FINRA believes that the proposed amendments would provide 
customers with expanded options and flexibility to change case strategy 
if FINRA notifies them that a member or associated person has become 
inactive during a pending arbitration. In particular, the proposed rule 
change would permit a customer to amend his or her pleading or to add 
parties without arbitrator intervention. FINRA rules, however, permit 
the newly-added party to respond to the amended pleading and to have 
the panel or arbitrator consider any objections.
    The proposed rule change would also clarify the default rule to 
include an inactive associated person who does not answer a claim, 
regardless of the number of days since termination. FINRA believes that 
the proposed rule change would add consistency to FINRA's default rule 
so that the procedures would apply to inactive members and inactive 
associated persons equally. As a result, investors would know that they 
have the same options and rights in default proceedings against any 
inactive respondent under the Customer Code. FINRA believes this could 
help expedite these arbitration cases, as any ambiguity about how the 
rule should be applied would be removed. Moreover, FINRA believes that 
exempting the minimum-day termination requirement would prevent an 
associated person from using the 365-day requirement as a shield to 
delay the arbitration case.

[[Page 64584]]

    FINRA believes that the proposed amendments provide customers with 
more options and flexibility in how they choose to resolve claims 
against respondents who are unlikely to pay, and, thus, give them more 
control over the arbitration case when they are notified that a member 
or associated person has become inactive. Moreover, by eliminating the 
postponement fees and refunding filing fees in certain circumstances, 
the proposed amendments eliminate these costs as a potential barrier 
for customers who may opt to pursue their claims in other forums. For 
these reasons, FINRA believes that the proposed rule change protects 
investors and the public interest.

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

    FINRA does not believe that the proposed amendments will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. A discussion of the economic 
impacts of the proposed amendments follows.
Economic Impact Assessment
(a) Regulatory Need
    The Code addresses situations where customers bring claims against 
inactive members. The Code does not address situations, however, where 
a member firm becomes inactive during a pending arbitration or where an 
associated person becomes inactive before a claim is filed or during a 
pending arbitration. This may limit the options available to customers 
to seek redress, as well as their ability to collect an award.
(b) Economic Baseline
    The economic baseline for the proposed amendments is the current 
rules under the Code that address customer disputes in arbitration. The 
proposed amendments are expected to affect the parties to an 
arbitration, including customers, member firms, associated persons, and 
arbitrators.
    FINRA is able to identify 2,054 customer cases closed by hearing, 
on the papers, or by stipulated award from 2014 to 2018. Among these 
cases, FINRA is able to identify 128 cases (six percent) where a member 
firm would have been defined as inactive (under the proposed 
amendments) before an arbitration. In these instances, the current 
rules under the Code provide customers the option to proceed in 
arbitration, to file the claim in court, or to take no action 
regardless of whether the customer signed a pre-dispute arbitration 
agreement. Customers are therefore able to evaluate the likelihood of 
collecting on an award and to choose the forum in which to proceed.
    FINRA is also able to identify 427 cases (21 percent of 2,054) 
where a firm became inactive during a pending arbitration, or where an 
associated person would have been identified as inactive (under the 
proposed amendments) either before or during a pending arbitration. The 
current rules do not provide similar options to customers in these 
instances, and customers may be less able to choose the forum in which 
to proceed or to change their litigation strategy during a pending 
case.\20\
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    \20\ In the 427 cases, the total amount of compensatory damages 
sought by customers was $580.3 million, and customers were awarded 
compensatory damages of $96.0 million. For the 347 cases that closed 
from 2014 through 2017, 126 relate to an award that went unpaid, and 
the member firms or associated persons responsible for the unpaid 
awards would have been identified as inactive under the proposed 
amendments. The total amount of awards relating to these cases that 
went unpaid was $55.9 million. The respondents that would have been 
identified as inactive were responsible for nearly all of the awards 
that went unpaid.
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(c) Economic Impact
    The proposed amendments would expand customers' options under the 
Code where a member becomes inactive during a pending arbitration or 
where an associated person becomes inactive before a claim is filed or 
during a pending arbitration. The benefits and costs of the proposed 
amendments are discussed below.
    In general, the benefits of the proposed amendments arise from the 
expansion of customer options under the Code when a member becomes 
inactive during a pending arbitration, or when an associated person 
becomes inactive before a claim is filed or during a pending 
arbitration. In these instances, the proposed amendments would increase 
the flexibility of customers to determine whether and how to proceed in 
arbitration. Customers would exercise the options under the proposed 
amendments if they believe it would increase their ability to seek 
redress, and may increase the amount of monetary compensation they 
expect to receive.
    The expansion of customer options under the Code would arise from 
the reduction of the restrictions and penalties to alter their 
litigation strategy in arbitration or to withdraw their claims from 
arbitration. For example, customers who proceed in arbitration may 
amend a pleading without arbitrators granting the motion. This includes 
the addition of a new respondent from whom the customer may be able to 
collect should the claim go to award. Customers who proceed in 
arbitration may also postpone a scheduled hearing without penalty to 
assess the options and gain additional time to prepare.\21\ Customers 
may also withdraw their claim without prejudice if the party that 
submitted an answer is an inactive member or inactive associated 
person. Customers who withdraw their claims against all parties within 
the allotted time would also receive a full refund of the filing fee.
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    \21\ Among the 2,054 customer cases in the baseline sample, 
FINRA is able to identify 240 (12 percent) cases where a member or 
an associated person would have been identified as inactive after 
arbitrator ranking lists were due or FINRA appointed a panel. FINRA 
is also able to identify 119 (six percent) cases where a member or 
an associated person would have been identified as inactive within 
60 days of a scheduled hearing.
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    Customers who exercise the options under the proposed amendments, 
and the member firms and associated persons who are also parties to the 
arbitration, may incur additional costs. For example, if customers 
withdraw their claims from arbitration and restart the case in another 
venue, then the parties may incur additional legal expense and time to 
resolve the dispute. If instead customers amend their pleadings but 
remain in arbitration, the parties (including member firms and 
associated persons who are newly-named in the amended pleadings) may 
also incur additional legal expense to alter their litigation strategy, 
time to resolve the dispute, and forum fees (e.g., hearing session 
fees).\22\ Parties may also incur additional time to resolve the 
dispute if customers postpone scheduled hearings. Customers have the 
option to incur these additional expenses, and would likely incur them 
only if they believe the costs would increase the amount of monetary 
compensation they may expect to receive.
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    \22\ FINRA does not believe, however, that the proposed 
amendments would cause member firms and associated persons to be 
named without having a connection to the case. See discussion in 
Section II.C.
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    The proposed amendments would provide no significant benefits and 
impose no material costs on customers who would not change their 
behavior when notified of an associated person's or firm's change of 
status during arbitration in the presence of the amendments, nor on the 
members and associated persons who are party to their claims. In 
FINRA's experience, customers typically proceed in arbitration when 
notified that a member is inactive at the time of filing, and typically 
remain in arbitration when a member or an associated person leaves

[[Page 64585]]

the industry while the arbitration is pending.\23\ One reason customers 
remain in arbitration when a member or an associated person leaves the 
industry may be the additional costs of restarting a case in another 
venue. Another reason may be the expectation that another forum would 
not result in a higher likelihood of redress.
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    \23\ Among the 2,054 customer cases in the baseline sample, 
FINRA is able to identify 297 (14 percent) cases where a member firm 
or an associated person would have been identified as inactive 
during a pending arbitration.
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    Based on this experience, FINRA believes that few customers would 
withdraw claims from the forum in the presence of the proposed rules, 
but would instead remain in arbitration. Customers are, therefore, more 
likely to exercise their new options under the proposed amendments to 
amend pleadings or to postpone hearings. The benefits and costs of the 
proposed amendments, therefore, may result more from the amendment of 
pleadings or the rescheduling of hearings than the withdrawal of 
claims.
(d) Alternatives Considered
    FINRA exercised discretion in setting the minimum number of days 
for a terminated associated person to be considered inactive (365). 
FINRA also exercised discretion when setting the maximum number of days 
for customers to exercise the options under the proposed amendments 
after they receive notification of the inactive status of a member or 
an associated person (60).
    The minimum-day requirement for a terminated associated person to 
be considered inactive affects the length of time that customers must 
wait before being able to exercise the options under the proposed 
amendments. A longer minimum-day requirement decreases the number of 
customers who may have access to the options under the proposed 
amendments, and therefore decreases their ability to seek redress.\24\ 
A longer minimum-day requirement, however, also decreases the 
likelihood that an associated person returns to the industry after 
being identified as inactive.\25\ Customers may therefore be less 
likely to exercise the options under the proposed amendments only for 
the inactive associated person to return to the industry, and parties 
may be less likely to incur the associated costs unnecessarily. A 
shorter minimum-day requirement, on the other hand, may increase the 
ability of customers to seek redress, but also may increase the costs 
parties may incur unnecessarily. FINRA believes that the 365-day 
minimum requirement would provide customers access to the options under 
the proposed amendments and help ensure that the associated person had 
permanently left the securities industry.
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    \24\ For example, a longer minimum-day requirement would 
increase the number of associated persons who left the industry as 
of the close of the arbitration but not considered inactive. In 
these instances, customers would not have access to the options 
because the associated persons would not have been considered 
inactive while the arbitration is pending. Among the 2,054 customer 
cases in the baseline sample, FINRA is able to identify 23 cases 
where an associated person had left the industry as of the close of 
the arbitration but for 60 days or fewer. The number of cases 
increases to 36 for 120 days, 58 for 180 days, and 129 for 365 days.
    \25\ With a longer minimum-day requirement, fewer associated 
persons would be deemed inactive as defined under the proposed 
amendments and then return to the industry. Fewer customers would 
therefore exercise the options under the proposed amendments only 
for the associated person to return to the industry. For example, 
among the 2,054 customer cases in the baseline sample, FINRA is able 
to identify 59 cases where an associated person was not in the 
industry while the arbitration was pending but returned to the 
industry in 60 days or fewer. The number of cases increases to 66 
cases for 120 days, 69 cases for 180 days, and 78 cases for 365 
days.
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    The 60-day maximum requirement for customers after receiving notice 
that a firm or an associated person has become inactive to withdraw 
their claims without prejudice or to amend a pleading would also limit 
their ability to exercise the options and decrease its associated 
benefits. The requirement, however, would also limit the effect of an 
inactive member or associated person on a pending arbitration, and 
provide certainty that the arbitration would continue after the time 
period had elapsed. FINRA believes that the 60-day maximum requirement 
would reduce the potential number of disruptions to the arbitration 
process, while still providing customers access to the proposed 
options.

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

    On October 18, 2017, FINRA published Regulatory Notice 17-33 
(``Notice'') to solicit comment on the proposed amendments to the Code 
that would expand a customer's options to withdraw an arbitration claim 
if a member or an associated person becomes inactive before a claim is 
filed or during a pending arbitration as well as allow customers to 
amend pleadings, postpone hearings and receive a refund of filing fees 
in these situations.\26\ FINRA received eight comments on the 
Notice.\27\ While all of the commenters supported the proposed rule 
change discussed in the Notice, some stated that the proposed 
amendments did not go far enough,\28\ and six commenters suggested 
modifications.\29\ Commenters who supported the proposed rule change, 
in general, described it as ``a good faith effort to partially address 
some of the predicates that cause unpaid awards'' \30\ as well as a 
proposal that would provide customers with additional options and 
flexibility to alter their litigation strategy.\31\ Several commenters 
specifically noted their support for the proposed amendments to FINRA 
Rule 12100 (Definitions of Inactive Member and Inactive Associated 
Person),\32\ FINRA Rule 12202 (Claims Against Inactive Members and 
Inactive Associated Persons),\33\ FINRA Rule 12309 (Amending 
Pleadings),\34\ FINRA Rule

[[Page 64586]]

12601 (Postponement of Hearings),\35\ FINRA Rule 12801 (Default 
Proceedings) \36\ and FINRA Rule 12900 (Fees Due When a Claim Is 
Filed).\37\
---------------------------------------------------------------------------

    \26\ Available at http://www.finra.org/industry/notices/17-33.
    \27\ See letters to Marcia E. Asquith including: Steven B. 
Caruso, Attorney, Maddox Hargett & Caruso, P.C., dated November 20, 
2017 (``Caruso''); Gregory M. Curley, Senior Litigation Counsel, 
Advisor Group, dated December 1, 2017 (``Advisor Group''); William 
A. Jacobson, Clinical Professor of Law and Tina Davis, Law School 
Student, Cornell University School of Law, dated December 7, 2017 
(``Cornell''); Kevin M. Carroll, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association, dated December 15, 2017 (``SIFMA''); Andrew Stoltmann, 
President, Public Investors Arbitration Bar Association, dated 
December 18, 2017 (``PIABA''); Justin M. Daley, Legal Intern, St. 
John's University School of Law, dated December 18, 2017 (``SJU''); 
Robin M. Traxler, Vice President, Regulatory Affairs & Associate 
General Counsel, Financial Services Institute, dated December 18, 
2017 (``FSI''); and Joseph Borg, President, North American 
Securities Administrators Association, Inc., dated December 20, 2017 
(``NASAA'').
    \28\ See Caruso, FSI, NASAA, and PIABA.
    \29\ See Advisor Group, Cornell, FSI, PIABA, SIFMA, and SJU.
    \30\ See Caruso.
    \31\ See Cornell and NASAA.
    \32\ See FSI and SJU. FSI noted that ``the proposed amendments 
address a scenario that is not currently addressed in FINRA rules 
and, as such, brings important clarity to the arbitration process.'' 
SJU suggested that the proposed changes ``offer an important 
protection to customers . . . by providing them with ``the same 
options available with respect to individuals who are unregistered 
associated persons which they now have with respect to firms that 
are unregistered members.''
    \33\ See Cornell, FSI, PIABA, and SJU. FSI suggested that 
requiring FINRA to notify customers when a member or an associated 
person becomes inactive during a pending arbitration would ensure 
that customers are promptly informed of the change in the firm's or 
the associated person's status. PIABA supported this change as it 
``would allow a customer to withdraw filed claims without prejudice 
(or in the case of inactive associated persons, never submit the 
claim to FINRA Arbitration in the first place), and file a claim in 
court, regardless of whether the customer signed a predispute 
arbitration agreement.'' SJU supported ``requiring the written 
consent of a customer in proceeding with an arbitration claim with a 
member or an associated person who is no longer registered . . . 
because it is essential that customers be given a fair opportunity 
to reconsider their arbitration strategies.''
    \34\ See Caruso, Cornell and PIABA.
    \35\ See Caruso, Cornell, and SJU. SJU stated that ``any 
additional costs involving arbitration could persuade customers to 
drop otherwise justifiable claims,'' thus, ``the rules should not 
put undue financial burdens on customers.''
    \36\ See Cornell, PIABA, and SJU.
    \37\ See Caruso and Cornell.
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Effectiveness of the Proposed Amendments
    Four commenters stated that the proposed rule change is not as 
effective as it could be.\38\ FSI suggested that instead of directly 
addressing the issue of unpaid awards, the proposed rule change amends 
the arbitration process in ways that would bias the process in favor of 
one party's subsequent recovery efforts. FINRA's primary role in the 
arbitration process is to administer cases brought to the forum in a 
neutral, efficient and fair manner. In its capacity as a neutral 
administrator of the forum, FINRA must also ensure that its rules are 
not used to hinder a party's recovery efforts. Moreover, once customers 
are notified of a member's or associated person's status change during 
the arbitration case, they should be permitted to assess the 
collectability of their claims and change strategy during the case 
without penalty. FINRA believes that, rather than creating bias in the 
process against a particular group, the proposed rule change instead 
would provide customers with options under the rules to pursue claims 
against inactive respondents.
---------------------------------------------------------------------------

    \38\ See supra note 30.
---------------------------------------------------------------------------

    NASAA stated that when awards go unpaid, members and associated 
persons are not held responsible for their misconduct and investors are 
left without recourse. Under the Code, a respondent must pay a monetary 
award within 30 days of receipt.\39\ In order to incentivize member 
firms or associated persons to pay customer awards, and restrict those 
who do not, FINRA expels or suspends from the brokerage industry any 
member firm or associated person who fails to pay an arbitration award. 
If a member firm or associated person fails to comply with an 
arbitration award or a settlement agreement related to an arbitration, 
FINRA notifies such firm or associated person in writing that the 
failure to comply within 21 days of service of the notice will result 
in a suspension or cancellation of membership or a suspension from 
associating with any member.\40\ If the threat of suspension is not 
effective in compelling payment of an award or settlement, FINRA notes 
that an investor-claimant may take an award to court and have it 
converted to a judgment. The claimant may then attempt to collect on 
the judgment using the court's collection procedures.\41\
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    \39\ See FINRA Rule 12904(j). An associated person or firm has 
four available defenses to FINRA disciplinary measures for non-
payment in customer cases: (1) The firm or associated person paid 
the award in full; (2) the parties have agreed to installment 
payments or have otherwise settled the matter; (3) the firm or 
associated person has filed a timely motion to vacate or modify the 
award and such motion has not been denied; and (4) the firm or 
associated person has filed a petition in bankruptcy and the 
bankruptcy proceeding is pending or the award has been discharged by 
the bankruptcy court. See Notice to Members 00-55 (August 2000). In 
July 2010, FINRA eliminated the ``bona fide inability to pay'' 
defense in the expedited suspension proceedings it initiates when a 
firm or associated person fails to pay an arbitration award to a 
customer. See Regulatory Notice 10-31 (June 2010).
    \40\ See FINRA Rule 9554(a).
    \41\ An investor-claimant in the FINRA arbitration forum would 
be in a similar position as a claimant who had brought an action in 
court and had been awarded the same amount of damages.
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    The remaining two commenters in this group advocated for FINRA to 
create a monetary solution to address unpaid awards. PIABA stated that 
FINRA should establish a national investor recovery pool. Caruso 
suggested a ``viable economic solution,'' stating ``very few investors 
would be able to actually recover their losses'' under the proposed 
amendments.\42\ Although these comments are outside the scope of the 
proposed rule change, FINRA notes that in its Discussion Paper on 
Customer Recovery,\43\ FINRA has identified a number of alternative 
approaches that could be taken to further address the issue of unpaid 
customer arbitration awards, and FINRA continues to focus on this 
important issue.\44\
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    \42\ Caruso also suggested that FINRA convene a group to 
consider the extent of the unpaid awards problem and develop 
solutions to address it.
    \43\ See Discussion Paper, FINRA Perspectives on Customer 
Recovery (February 8, 2018), http://www.finra.org/sites/default/files/finra_perspectives_on_customer_recovery.pdf.
    \44\ See Discussion Paper at 16-18.
---------------------------------------------------------------------------

    As noted above, six commenters suggested modifications to the 
proposed amendments.\45\ FINRA addresses these suggestions in the 
following discussion.
---------------------------------------------------------------------------

    \45\ See supra note 26.
---------------------------------------------------------------------------

Amendment To Add a Party
    Three commenters stated that FINRA should revise the proposed 
amendment to FINRA Rule 12309(c) to require that a customer's right to 
add parties to an arbitration case should be subject to the arbitration 
panel's approval.\46\ Advisor Group suggested that the proposed 
amendment would prejudice the rights of member firms to participate in 
the arbitrator selection process \47\ by requiring them to enter the 
arbitration case after the parties had selected an arbitrator or a 
panel. FSI suggested that allowing a claimant to add a new party 
without prior arbitrator or panel approval could cause a party to incur 
costs in defending against potentially meritless claims. SIFMA stated 
that allowing a customer claimant to amend his or her pleading after 
learning that a respondent firm or associated person has become 
inactive could prejudice the other active respondents remaining in the 
case by eliminating their right to review the proposed amended 
pleading, respond in writing, and if there is a claim of prejudice, 
obtain a ruling on the amended pleading from the panel.
---------------------------------------------------------------------------

    \46\ See Advisor Group, FSI, and SIFMA.
    \47\ Arbitrator selection is the process in which the parties 
receive lists of potential arbitrators and select the panel to hear 
their case. The number of arbitrators who hear a case is determined 
by the amount of the claim. See generally Part IV (Appointment, 
Disqualification, and Authority of Arbitrators) of the Code. See 
also Arbitrator Selection, http://www.finra.org/arbitration-and-mediation/arbitrator-selection.
---------------------------------------------------------------------------

    Currently, FINRA Rule 12309 permits a party to amend a pleading any 
time before the panel is appointed.\48\ Once a panel is appointed, 
however, the party must receive the panel's approval prior to amending 
a pleading.\49\ The rule also requires that, if a panel has been 
selected, a party must request approval from the panel prior to adding 
a new party.\50\ Under the proposed amendments, if FINRA notifies a 
customer that a member or associated person has become inactive, 
proposed FINRA Rules 12309(b) and (c) would make it easier to amend 
pleadings to add a claim or party by eliminating the need for pre-
approval by an arbitrator or panel. If the amended pleading to add a 
party occurs after panel appointment, the newly-added party would not 
be able to participate in the arbitration selection process.
---------------------------------------------------------------------------

    \48\ See FINRA Rule 12309(a).
    \49\ See FINRA Rule 12309(b).
    \50\ See FINRA Rule 12309(c).
---------------------------------------------------------------------------

    In this scenario, FINRA would provide the arbitrator disclosure 
reports \51\ of the sitting panelists to the parties and permit the 
parties to raise any conflicts they find with the panel.\52\

[[Page 64587]]

If a party discovers a conflict, the party may file a motion to recuse 
the arbitrator.\53\ The arbitrator who is the subject of the motion to 
recuse would consider whether to withdraw \54\ from the case and rule 
on the motion.\55\ The party may also request removal of the arbitrator 
by the Director, under certain circumstances.\56\
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    \51\ An arbitrator disclosure report is a summary of the 
arbitrator's background and is provided to the parties to help them 
make informed decisions during the arbitrator selection process.
    \52\ Arbitrators must make a reasonable effort to learn of, and 
must disclose to the Director, any circumstances which might 
preclude the arbitrator from rendering an objective and impartial 
determination in the proceeding, including, for example, any 
existing or past financial, business, professional, family, social, 
or other relationships or circumstances with any party, any party's 
representative, or anyone who the arbitrator is told may be a 
witness in the proceeding, that are likely to affect impartiality or 
might reasonably create an appearance of partiality or bias. See 
FINRA Rule 12405(a). The duty to disclose any relationship, 
experience and background information that may affect, or even 
appear to affect, the arbitrator's ability to be impartial and the 
parties' belief that the arbitrator will be able to render a fair 
decision, is an ongoing duty. See FINRA Rule 12405(b). Thus, if a 
party is added under proposed FINRA Rule 12309(c)(2), the panelists 
must update their disclosures or review them to ensure that further 
updates are not warranted.
    \53\ See FINRA Rule 12406.
    \54\ The Code of Ethics for Arbitrators in Commercial Disputes 
(``Canon of Ethics'') applies to arbitrators on FINRA's arbitrator 
rosters. See Canon of Ethics, http://www.finra.org/arbitration-and-mediation/code-ethics-arbitrators-commercial-disputes. Canon II 
provides that if an arbitrator is requested to withdraw by less than 
all of the parties because of alleged partiality, the arbitrator 
should withdraw except in two circumstances. In one such 
circumstance, the arbitrator could consider the matter, determine 
that the reason for the challenge is not substantial, and that he or 
she can nevertheless act and decide the case impartially and fairly. 
See Canon II (An Arbitrator Should Disclose Any Interest Or 
Relationship Likely To Affect Impartiality Or Which Might Create An 
Appearance Of Partiality), Section G.
    \55\ See FINRA Rule 12406.
    \56\ The rule states, in relevant part, that before the first 
hearing session begins, the Director will grant a party's request to 
remove an arbitrator if it is reasonable to infer, based on 
information known at the time of the request, that the arbitrator is 
biased, lacks impartiality, or has a direct or indirect interest in 
the outcome of the arbitration. The interest or bias must be 
definite and capable of reasonable demonstration, rather than remote 
or speculative. See FINRA Rule 12407(a)(1). After the first hearing 
session begins, the Director may remove an arbitrator based only on 
information required to be disclosed under Rule 12405 that was not 
previously known by the parties. See FINRA Rule 12407(b).
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    FINRA does not believe that the proposed amendments would encourage 
claimants to add members or associated persons who have no nexus to the 
arbitration case as some commenters fear. While the proposed amendments 
to FINRA Rule 12309 would remove the requirement for arbitrator or 
panel approval prior to adding a claim or party, FINRA Rule 12309(d) 
permits any party, whether existing or newly-added, to respond to an 
amended pleading after it is filed by filing an answer and raising any 
available defenses.\57\ Thus, if the claim or party to be added has no 
connection to the arbitration case, the respondents would have an 
opportunity to make that argument to the arbitrator or panel.\58\ It 
would not be in the claimant's interest, therefore, to add frivolous 
claims or unnecessary parties, as doing so would likely increase a 
claimant's costs in supporting the amended pleading and would delay the 
outcome of the case.
---------------------------------------------------------------------------

    \57\ See FINRA Rule 12303(a).
    \58\ After the newly-added party files an answer, the party 
could seek to have the claim dismissed prior to the conclusion of 
the case in chief, on the basis that the moving party was not 
associated with the account(s), security(ies), or conduct at issue. 
See FINRA Rules 12504(a)(2) and (a)(6).
---------------------------------------------------------------------------

    FSI suggested that if the arbitrator or panel no longer has the 
right to approve adding a new claim or new parties, the proposed 
amendments could result in orphaned accounts. FSI commented that FSI's 
members may no longer accept customer accounts from inactive firms to 
minimize service interruptions because the proposed amendments would 
``make it easier for, and likely encourage, customers to pursue claims 
against the firm that accepts the customer accounts.''
    FINRA believes it is unlikely that a customer would add the firm 
that accepted his or her accounts from an inactive firm as a party to 
an arbitration case against the inactive firm because the rules permit 
the customer to add new parties without pre-approval of the arbitrator 
or panel. If the customer's new firm has no connection to the dispute 
involving the inactive firm, yet the customer adds the new firm to the 
case, the customer risks jeopardizing the business relationship with 
the new firm, increasing his or her costs to support a frivolous claim, 
and alienating the panel by adding a member that was not associated 
with the account or conduct at issue \59\ until after the named 
respondent had gone out of business. FINRA believes, therefore, that 
these risks outweigh any benefit to the customer who might consider 
adding a party that has no connection to the arbitration case.
---------------------------------------------------------------------------

    \59\ After the member responds to the amended claim, the member 
could then file a motion to dismiss prior to the conclusion of the 
customer's case on the ground that the member was not associated 
with the account(s), security(ies), or conduct at issue. See FINRA 
Rule 12504(a)(6)(B).
---------------------------------------------------------------------------

Length of Termination Period for Associated Persons
    In the Notice, FINRA proposed to define an ``inactive associated 
person'' as a person associated with a member whose registration is 
revoked or suspended, or whose registration has been terminated for a 
minimum of 365 days. Three commenters stated that the timeframe should 
be shortened to 6 months,\60\ 120 days,\61\ or 60 days.\62\
---------------------------------------------------------------------------

    \60\ See SJU.
    \61\ See Cornell, stating that ``FINRA should consider the 
average time it takes to find new employment, and the economic costs 
to parties having to pursue a claim when the associated person has 
left the industry permanently but has not yet hit the 365-day 
minimum requirement.''
    \62\ See PIABA, stating that ``a shorter window simply provides 
the customer with more options regarding amendment and/or withdrawal 
of the claims without prejudice.''
---------------------------------------------------------------------------

    FINRA recognizes the commenters' concerns, but believes that the 
365-day minimum termination requirement for associated persons would 
help ensure that enough time has elapsed to assume reasonably that the 
associated person has permanently left the securities industry. FINRA 
believes the requirement would benefit those customers who would 
exercise the option to withdraw the case from the arbitration forum and 
move it to an alternate venue, because they would have more certainty 
that the associated person would not return to the securities industry 
to exercise his or her rights under the predispute arbitration 
agreement. Further, the 365-day requirement could reduce potential 
costs to these customers, as they would save money on filing fees and 
avoid procedural delays, such as staying the case in an alternate venue 
and re-starting it in FINRA's arbitration forum, which could result if 
the associated person is only temporarily out of the industry.
Length of Time To Decide Whether To Withdraw Claim
    Under the proposed amendments to FINRA Rule 12202(b), if a member 
or an associated person becomes inactive during a pending arbitration, 
FINRA would notify the customer about the status change. The customer 
would be permitted to withdraw the claim against the inactive member or 
inactive associated person with or without prejudice within 60 days of 
receiving notice of a status change.\63\ SJU suggested that the 60-day 
period should be increased to 90 days to provide the customer with 
additional time to decide whether to pursue the claim in court (and 
consult with and secure appropriate counsel), to continue with the 
arbitration, and to amend pleadings. FINRA believes that once a 
customer is notified of a member's or associated person's inactive 
status, the proposed 60-day timeframe is a reasonable amount of time 
for the customer to

[[Page 64588]]

decide whether to withdraw the claim, amend the claim or add a party. 
FINRA believes the 60-day timeframe provides customers with enough time 
to make informed decisions on how to proceed in the case, while still 
keeping the case on track for timely resolution, which could improve 
the customer's chances at recovery, if an arbitrator or panel issued an 
award.
---------------------------------------------------------------------------

    \63\ Within the same 60-day period, the customer would also be 
permitted to amend a pleading or add a party without pre-approval 
from the arbitrator or panel, under the proposed amendments to FINRA 
Rules 12309(b)(2) and (c)(2).
---------------------------------------------------------------------------

Extend the Proposed Amendments to Intra-Industry Cases
    The proposed amendments would apply to customer cases only. SIFMA 
contended that the proposed amendments should apply also to intra-
industry cases (i.e., disputes between or among members and associated 
persons).\64\ SIFMA stated that ``all of the arguments and 
justifications that FINRA makes in favor of expanding the options 
available to a customer claimant when dealing with those member firms 
or associated persons who are responsible for most unpaid awards apply 
equally to industry claimants when dealing with those same member firms 
and associated persons.''
---------------------------------------------------------------------------

    \64\ See FINRA Rule 13000 Series.
---------------------------------------------------------------------------

    FINRA acknowledges SIFMA's concerns. At this time, however, FINRA 
has decided to apply the proposed amendments to customer cases only 
because providing customers with more control over the arbitration 
process when faced with a respondent that likely will not be able to 
pay an award furthers FINRA's goal of investor protection.
Related Claims Should Be Litigated in Same Forum
    Under the proposed amendments to FINRA Rule 12202, claims against 
inactive firms or inactive associated persons would not be eligible for 
arbitration, unless the customer agrees in writing to arbitrate after 
the claim arises. FSI expressed concern that, under the proposed rule 
change, customers could proceed against a member in arbitration and an 
associated person in court. In this scenario, FSI stated that the 
discovery in the customer's case against the associated person in court 
could reveal additional facts that the customer could use against the 
firm in its arbitration case. FSI suggested that the member would not 
have the opportunity to seek comparable information from the customer 
during the arbitration case. FSI requested, therefore, that FINRA 
clarify in the proposed amendments that customers be required to pursue 
related claims (i.e., a claim against the firm and a claim against the 
associated person that arise from the same facts and alleged 
misconduct) in the same forum.
    FINRA notes that the goal of the proposed amendments is to provide 
customers with the same options against an associated person who is 
inactive at the time of filing as those that currently exist against an 
inactive member. By providing a customer with the option to pursue his 
or her claim in court against an inactive associated person, the 
proposed amendments could result in customers filing claims based on 
the same facts and circumstances in FINRA arbitration and in court at 
the same time. FINRA notes that this approach would increase the 
parties' costs, but would have little effect on a member's access to 
information during its case with the customer.
    FINRA provides the Discovery Guide for customer cases only, which 
outlines documents that the parties should exchange without arbitrator 
intervention. The Discovery Guide contains two document production 
lists of presumptively discoverable documents: one for the firm/
associated persons to produce and one for the customer to produce.\65\ 
Thus, at the outset of the arbitration, the member would be permitted 
to seek information from the customer that is in the customer's 
possession or control and is relevant to the member's case. In 
addition, under the Customer Code, the member would be permitted to 
request additional documents or information from any party in 
arbitration,\66\ and arbitrators have the authority to issue subpoenas 
\67\ or orders \68\ compelling discovery if the subject of the request 
fails to comply with a request. If the customer learns of information 
during the court proceeding that he or she intends to use during the 
arbitration proceeding, the customer must provide copies of all 
documents and materials in customer's possession or control that have 
not already been produced at the 20-day exchange deadline.\69\ For 
these reasons, FINRA declines to amend the proposed rule change as 
suggested.
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    \65\ See Discovery Guide, http://www.finra.org/arbitration-and-mediation/discovery-guide.
    \66\ See FINRA Rule 12507.
    \67\ See FINRA Rule 12512.
    \68\ See FINRA Rule 12513.
    \69\ See FINRA Rule 12514.
---------------------------------------------------------------------------

Request for Additional FINRA Data
    PIABA requested that FINRA release the data and other statistical 
information FINRA used to support the proposed amendments. FINRA has 
made available data on which it relied in its discussion of the 
economic impacts of the proposed amendments.
Minimize Delays and Postponements From Newly-Added Party
    PIABA expressed concern that newly[hyphen]named respondents may 
demand extended delays and postponements of scheduled hearing dates. 
PIABA urged FINRA to consider adopting arbitrator training and 
guidelines to instruct arbitrators to balance carefully the interests 
of all the parties to the arbitration when considering 
newly[hyphen]added respondent requests to extend deadlines or hearings.
    When FINRA receives approval of proposed rule changes that involve 
arbitration practices and procedures, FINRA's Office of Dispute 
Resolution (``ODR'') will include articles on the new rules in The 
Neutral Corner, an ODR newsletter for arbitrators and other neutrals 
that includes updates on rules affecting dispute resolution and tips on 
how to be a better arbitrator or mediator.\70\ In addition, ODR will 
develop arbitrator training to explain how the new rules would work and 
provide guidance to arbitrators on their roles and responsibilities 
under the new rules. These informational and training materials will 
provide examples of best practices that arbitrators could use as guides 
to assist them when they are deciding a newly-added respondent's 
request for an extension or postponement. As is current practice under 
the Code, arbitrators would have the authority under the proposed 
amendments to exercise their judgment when addressing these matters, 
based on the facts and circumstances of the case.
---------------------------------------------------------------------------

    \70\ The Neutral Corner, Volume 1--2019, http://www.finra.org/arbitration-and-mediation/neutral-corner-volume-1-2019-0319. See 
also the previous editions at http://www.finra.org/arbitration-and-mediation/previous-editions-neutral-corner.
---------------------------------------------------------------------------

Reporting Mechanisms Should Be Accurate and Made Available to the 
Public
    Under the proposed amendments, an ``inactive member'' would be 
defined as a member whose membership has been terminated, suspended, 
cancelled, revoked, the member has been expelled from FINRA, or the 
member is otherwise defunct. An ``inactive associated person'' would be 
defined as a person whose registration is revoked or suspended, who has 
been expelled or barred from FINRA, or has been terminated for a 
minimum of 365 days. NASAA suggested that the withdrawal statistic that 
ODR publishes \71\ should be broken down to reflect the appropriate 
subcategory (e.g., terminated,

[[Page 64589]]

suspended, canceled, etc.) that customers use to withdraw their claims. 
FINRA cannot commit to publishing subcategories of withdrawals as 
requested, because the programming costs required to capture that level 
of detail would likely be significant. FINRA agrees, however, that its 
withdrawal statistics should distinguish between a claim (or case) 
withdrawn because a claimant exercised rights under the rules after a 
respondent became inactive and claims withdrawn for other reasons. If 
the SEC approves the proposed rule change, FINRA would assess its 
technology platforms to determine what programming changes would be 
needed to capture the data relating to claims or cases withdrawn due to 
an inactive respondent.
---------------------------------------------------------------------------

    \71\ Dispute Resolution Statistics, https://www.finra.org/arbitration-and-mediation/dispute-resolution-statistics.
---------------------------------------------------------------------------

    NASAA also suggested that FINRA create and make public a separate 
report to capture the members and associated persons who become 
inactive due to unpaid arbitration awards or judgments in favor of 
customers. NASAA stated that such a report would provide transparency 
on industry participants that leave the industry due to customer 
complaints and would provide customers with additional information when 
making a decision about whether to work with a specific FINRA member or 
associated person.
    FINRA is committed to providing customers with information on the 
state of unpaid customer arbitration awards in the forum, so that they 
may make informed decisions about whom to entrust with their money and, 
therefore, has made data on unpaid customer arbitration awards 
available on its website.\72\ Moreover, FINRA has published a list of 
member firms and associated persons with unpaid customer arbitration 
awards.\73\ This information will continue to appear on the firm's or 
individual's BrokerCheck[supreg] \74\ report.
---------------------------------------------------------------------------

    \72\ See Statistics on Unpaid Customer Awards in FINRA 
Arbitration, http://www.finra.org/arbitration-and-mediation/statistics-unpaid-customer-awards-finra-arbitration. FINRA updates 
these data periodically.
    \73\ See Member Firms and Associated Persons with Unpaid 
Customer Arbitration Awards, http://www.finra.org/arbitration-and-mediation/members-firms-and-associated-persons-unpaid-customer-arbitration-awards. FINRA updates these data periodically.
    \74\ FINRA developed and operates this free tool under the 
oversight of the SEC to provide investors with information regarding 
a broker's employment history, regulatory actions, investment-
related licensing information, arbitrations and complaints. See 
BrokerCheck[supreg], https://brokercheck.finra.org.
---------------------------------------------------------------------------

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2019-027 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2019-027. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2019-027 and should be submitted on or before December 13, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\75\
---------------------------------------------------------------------------

    \75\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25324 Filed 11-21-19; 8:45 am]
 BILLING CODE 8011-01-P


