This PDF is the current document as it appeared on Public Inspection on 08/16/2016 at 08:45 am.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4 thereunder, notice is hereby given that on August 3, 2016, Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission Start Printed Page 54889(“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.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 12504 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and FINRA Rule 13504 of the Code of Arbitration Procedure for Industry Disputes (“Industry Code,” and together with the Customer Code, the “Codes”), to provide that arbitrators may act upon a motion to dismiss a party or claim prior to the conclusion of a party's case in chief if the arbitrators determine that the non-moving party previously brought a claim regarding the same dispute against the same party, and the dispute was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision.
The text of the proposed rule change is available on FINRA's Web site at http://www.finra.org, at the principal office of FINRA and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In 2009, FINRA amended the Codes to adopt new FINRA Rules 12504 and 13504 (Motions to Dismiss), and to amend FINRA Rules 12206 and 13206 (Time Limits), to establish procedures limiting motions to dismiss in arbitration. A motion to dismiss is a request made to the arbitrators to remove a party or some or all claims raised by a party filing a claim. If the arbitrators grant a motion to dismiss before a hearing is held (a prehearing motion), the party bringing the claim loses the opportunity to have his or her arbitration case heard in whole or in part by the arbitrators. FINRA limited motions to dismiss because FINRA believed that respondents were filing prehearing motions routinely and repetitively in an effort to delay scheduled hearing sessions on the merits, increase investors' costs, and intimidate less sophisticated investors.
The procedures set forth in the Codes significantly limit the use of motions to dismiss. Among other requirements, FINRA requires parties to file prehearing motions to dismiss in writing, separately from the answer, and only after they file the answer. The full panel of arbitrators must decide a motion to dismiss, and the panel must hold a hearing on the motion unless the parties waive the hearing. If a panel grants a motion to dismiss, the decision must be unanimous, and must be accompanied by a written explanation.
Under the Codes, arbitrators cannot act upon a motion prior to the conclusion of the non-moving party's case in chief unless the arbitrators determine that: (1) The non-moving party previously released the claim in dispute by a signed settlement or written release, (2) the moving party was not associated with the account, security, or conduct at issue, or (3) a claim is not eligible for arbitration because it does not meet the six-year time limit for submitting a claim.
Furthermore, the procedures set forth in the Codes impose stringent sanctions against parties for engaging in abusive practices. For instance, under the motions to dismiss rules, if the arbitrators deny a motion to dismiss prior to the conclusion of the non-moving party's case in chief, the arbitrators must assess forum fees associated with hearing the motion against the moving party, and if they find the motion to be frivolous, they must award reasonable costs and attorneys' fees to a party that opposed the motion. Moreover, the arbitrators may issue other sanctions under the Codes if they determine that a party filed a motion under the rule in bad faith.
FINRA Dispute Resolution Task Force
In 2014, FINRA formed the FINRA Dispute Resolution Task Force (“Task Force”) to suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA's securities dispute resolution forum for all participants. The Task Force reviewed the topic of motions to dismiss and determined that the rule appears to be working as intended to prevent frivolous motions to dismiss. However, the Task Force reached a consensus that in instances where arbitrations involve claims previously adjudicated by a court or arbitrated by an arbitration panel, respondents should be able to seek early dismissal. The Task Force recommended that FINRA amend the motions to dismiss rule in customer cases to include one additional category for which motions to dismiss may be made before the conclusion of the case in chief: situations where the dispute was previously concluded through adjudication or arbitration and memorialized in an order, judgment, award, or decision.
Proposed Rule Change
FINRA agrees with the Task Force recommendation, and believes that it would be appropriate to add the additional ground for arbitrators to act on motions to dismiss prior to the conclusion of the claimant's case in chief in both customer and industry cases. Currently under the Codes, the Director of Arbitration can deny use of the forum for customer and industry claims if it is clear that a party is bringing exactly the same claims against the same parties that were already heard at the forum. However, if there are questions about whether the matter concerns a different claim, the Director is likely to deny the motion and allow the arbitration to proceed so that the arbitrators can decide the merits of the parties' assertions. FINRA believes that adding the additional ground for arbitrators to act on motions to dismiss is appropriate because parties should not be subject to the legal fees associated with arbitrating claims that have been fully adjudicated in a prior proceeding. The proposed rule change Start Printed Page 54890would also act as a deterrent to using repeated filings as a means of leverage during settlement negotiations.
FINRA is proposing to amend FINRA Rules 12504(a)(6) and 13504(a)(6) to add new paragraph (c) which would specify that arbitrators can also act upon a motion to dismiss a party or claim if they determine that 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. The proposed rule change would allow the arbitrators to grant a motion to dismiss relating to a particular controversy if they believe the matter was adjudicated fully even in instances where a claimant adds a new cause of action, or adds additional facts. For example, consider a case where a claimant initiated a claim against a firm for $150,000 for suitability based on a broker's investment in XYZ stock. The arbitrators dismiss the claim after a full hearing. The proposed rule change would allow the arbitrators to hear a motion to dismiss if the claimant subsequently files an arbitration against the same firm relating to the investment in XYZ but in the new case the claimant alleges fraud in inducing the claimant to make the purchase.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Act, which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that the proposed rule change would enhance efficiency for forum participants because arbitrators would be permitted to dismiss previously adjudicated cases at an earlier point in an arbitration proceeding.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Currently, the Codes impose significant restrictions on motions to dismiss an arbitration. With limited exceptions, in cases where the dispute has been permitted to go forward by the Director of Arbitration and a party puts forward a motion to dismiss, arbitrators cannot act upon the motion prior to the conclusion of the non-moving party's case in chief. Both sides incur additional costs related to making and defending the motion. However, a successful motion to dismiss could end part or all of the case resulting in reduced costs for parties.
The Task Force reviewed arbitration case data from 2013 and 2014. During that time period, the Office of Dispute Resolution (ODR) had an average pending caseload of approximately 5,000 cases. ODR recorded 725 cases (both customer and industry disputes) in which a prehearing motion to dismiss was filed by respondents. Of the 725 cases, 249 were still pending at the time of the Task Force review, 310 settled or closed for other reasons prior to any decision on the motion (i.e., bankruptcy, etc.), and 166 closed by award. FINRA reviewed the 166 cases closed by award to determine the arbitrators' decisions regarding a motion to dismiss. The arbitrators granted a prehearing motion to dismiss (in whole or part) in 64 of the 166 cases closed by award. In addition, arbitrators granted a respondent's motion to dismiss after the conclusion of claimant's case in chief in 12 of the 166 cases closed by award. These figures suggest that motions to dismiss occur in a small but significant number of cases.
Where arbitrators have sufficient information to determine the finding with respect to the motion to dismiss prior to hearing the non-moving party's case, the proposed rule change will reduce both parties' costs where the motion is granted. Where the motion is denied, the proposed rule change may impose some costs on the non-moving party due to the potential delay and the need to argue the dispute associated with the motion prehearing. FINRA expects the costs to be limited because hearings on narrow issues such as a single motion are generally completed quickly. The rule would continue to permit the non-moving party to present evidence and testimony to the arbitrators concerning the merits of the motion prior to the decision on the motion, and thus would limit the risk that the arbitrators might act on incomplete or insufficient information.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
- Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
- Send an email to firstname.lastname@example.org. Please include File Number SR-FINRA-2016-030 on the subject line.
- Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2016-030. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549-1090, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing Start Printed Page 54891also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FINRA-2016-030 and should be submitted on or before September 7, 2016.Start Signature
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10
Robert W. Errett,
3. See Regulatory Notice 09-07 announcing Commission approval of new FINRA Rules 12504 and 13504 (Motions to Dismiss) and amendments to FINRA Rules 12206 and 13206 (Time Limits).Back to Citation
4. See FINRA Rules 12504 and 13504 (Motions to Dismiss).Back to Citation
5. See FINRA Rules 12206 and 13206 (Time Limits), which provide that no claim shall be eligible for submission to arbitration where six years have elapsed from the occurrence or event giving rise to the claim.Back to Citation
6. See FINRA Rules 12212 and 13212 (Sanctions) relating to available sanctions.Back to Citation
7. See FINRA Rules 12203 and 13303 (Denial of the Forum), which provide that the Director may decline to permit the use of the FINRA arbitration forum if the Director determines that, given the purposes of FINRA and the intent of the Code, the subject matter of the dispute is inappropriate. The Director rarely invokes this authority.Back to Citation
8. FINRA Rules 12100 and 13100 provide that “dispute” means a dispute, claim or controversy, and that it may consist of one or more claims.Back to Citation
[FR Doc. 2016-19583 Filed 8-16-16; 8:45 am]
BILLING CODE 8011-01-P