Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Make Various Clarifying and Technical Changes to the Codes, Including in Response to Recommendations in the Report of Independent Counsel Lowenstein Sandler LLP, 2144-2151 [2023-00425]

Download as PDF 2144 Federal Register / Vol. 88, No. 8 / Thursday, January 12, 2023 / Notices information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted by March 13, 2023. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information under the PRA unless it displays a currently valid OMB control number. Please direct your written comments to: David Bottom, Director/Chief Information Officer, Securities and Exchange Commission, c/o John Pezzullo, 100 F Street NE, Washington, DC 20549 or send an email to: PRA_ Mailbox@sec.gov . Dated: January 6, 2023. Sherry R. Haywood, Assistant Secretary. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [FR Doc. 2023–00427 Filed 1–11–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–96607; File No. SR–FINRA– 2022–033] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Make Various Clarifying and Technical Changes to the Codes, Including in Response to Recommendations in the Report of Independent Counsel Lowenstein Sandler LLP khammond on DSKJM1Z7X2PROD with NOTICES for Industry Disputes (‘‘Industry Code’’) (together, ‘‘Codes’’) to make changes to provisions relating to the arbitrator list selection process in response to recommendations in the report of independent counsel Lowenstein Sandler LLP. The proposed rule change also makes clarifying and technical changes to requirements in the Codes for holding prehearing conferences and hearing sessions, initiating and responding to claims, motion practice, claim and case dismissals, and providing a hearing record. The text of the proposed rule change is available on FINRA’s website at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. 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 January 6, 2023. Background and Discussion Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 23, 2022, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. FINRA is proposing to amend the Codes to provide greater transparency and consistency regarding the arbitrator list selection process, and to clarify the application of certain procedures and include expressly these procedures in various rules in the Codes. The proposed rule change would enhance the transparency of the arbitration forum administered by FINRA Dispute Resolution Services (‘‘DRS’’).3 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and the Code of Arbitration Procedure 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Sep<11>2014 17:36 Jan 11, 2023 Jkt 259001 I. List Selection Process Amendments In June 2022, FINRA published the report from Lowenstein Sandler LLP relating to an independent review and analysis of the DRS arbitrator list selection process (‘‘Report’’).4 The 3 FINRA notes that the proposed rule change would impact all members, including members that are funding portals or have elected to be treated as capital acquisition brokers (‘‘CABs’’), given that the funding portal and CAB rule sets incorporate the impacted FINRA rules by reference. 4 See FINRA, The Report of the Independent Review of FINRA’s Dispute Resolution Services— PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 Report made several recommendations to provide greater transparency and consistency in the arbitrator list selection process, some of which require amendments to the Codes. In response to the recommendations in the Report, FINRA is proposing to amend the Codes to implement the Report’s recommendations, as described below.5 1. Conflicts of Interest The Codes provide that a list selection algorithm will randomly generate the ranking lists of arbitrators from the DRS roster of arbitrators,6 and exclude arbitrators from the lists based upon current conflicts of interest identified within the list selection algorithm.7 In addition, once the lists are generated, DRS conducts a manual review for other conflicts not identified within the list selection algorithm. This manual review is described on FINRA’s website and in rule filings with the SEC, but not in the Codes.8 The Report recommended that, ‘‘to improve transparency, FINRA should amend Rule 12400 to specifically state that prior to sending the arbitrator list to the parties, NM [DRS’s Neutral Management Arbitrator Selection Process, https://www.finra.org/ sites/default/files/2022-06/report-independentreview-drs-arbitrator-selection-process.pdf. In February 2022, the Audit Committee of FINRA’s Board of Governors engaged independent counsel Lowenstein Sandler LLP to provide a review and analysis in connection with a Fulton County (Georgia) Superior Court decision vacating an arbitration award in favor of Wells Fargo Clearing Services, LLC. See Order Granting Mot. to Vacate Arb. Award and Den. Cross Mot. to Confirm Arb. Award at 37, Leggett v. Wells Fargo Clearing Servs., LLC, No. 2019–CV–328949 (Ga. Super. Ct., January 25, 2022). Since publication of the Report, the Fulton County (Georgia) Superior Court’s decision was reversed by the Court of Appeals of Georgia. See Wells Fargo Clearing Servs. v. Leggett, No. A22A1149, 2022 Ga. App. (Ct. App. August 2, 2022). 5 Separately, FINRA addressed a recommendation from the Report by making technical, nonsubstantive changes to the Codes to remove references to the Neutral List Selection System from those rules describing arbitrator list selection and instead refer to a ‘‘list selection algorithm.’’ See Securities Exchange Act Release No. 95871 (September 22, 2022), 87 FR 58854 (September 28, 2022) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA–2022–026). 6 See FINRA Rules 12400, 12402, 12403, 13400 and 13406. 7 See FINRA Rules 12402(b), 12403(a)(3), 13403(a)(4) and 13403(b)(4). 8 See FINRA, How Parties Select Arbitrators, https://www.finra.org/arbitration-mediation/ arbitrator-selection. See also Securities Exchange Act Release No. 40261 (July 24, 1998), 63 FR 40761, 40769 (July 30, 1998) (Notice of Filing of SR– NASD–98–48) (stating that DRS will perform a manual review for conflicts of interests between parties and potential arbitrators); Securities Exchange Act Release No. 40555 (October 21, 1998), 63 FR 56670, 56675 (October 22, 1998) (Order Approving File No. SR–NASD–98–48) (describing the manual review for conflicts of interests between parties and potential arbitrators). E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 88, No. 8 / Thursday, January 12, 2023 / Notices Department] shall conduct a manual review for conflicts of interest.’’ 9 The proposed rule change would amend the Codes to clarify the current practice that the Director will exclude arbitrators from the lists based upon a review of current conflicts of interest not identified within the list selection algorithm.10 Under the proposed rule change, if an arbitrator is removed based on this conflicts review, consistent with current practice, the list selection algorithm would randomly select an arbitrator to complete the lists.11 Effective September 1, 2022, DRS updated its policy to provide a written explanation whenever a party-initiated challenge to remove an arbitrator is granted or denied, regardless of whether an explanation is requested by either party.13 To provide transparency and consistency, the proposed rule change would amend the Codes to codify this practice by requiring the Director to provide a written explanation to the parties of the Director’s decision to grant or deny a party’s request to remove an arbitrator.14 2. Written Explanation of Director’s Decision The Codes do not require the Director to provide a written explanation when deciding a party-initiated challenge to remove an arbitrator. The Report recommended that, to improve transparency, DRS should consider amending its policies to require a written explanation whenever a challenge to remove an arbitrator is granted or denied, if a written explanation is requested by either party.12 3. Challenge To Remove an Arbitrator Although not a specific recommendation in the Report, the proposed rule change would make an additional clarifying change to provisions in the Codes relating to party-initiated challenges for cause. Specifically, the Codes provide that before the first hearing session begins, the Director may remove an arbitrator for conflict of interest or bias, either upon request of a party or on the Director’s own initiative.15 To help ensure that parties are aware that they may challenge an arbitrator for cause at any point after receipt of the arbitrator ranking lists until the first hearing session begins, the proposed rule change would amend the Codes to clarify that after the Director sends the arbitrator ranking lists generated by the list selection algorithm to the parties, but before the first hearing session begins, the Director may remove an arbitrator for conflict of interest or bias, either upon request of a party or on the Director’s own initiative.16 khammond on DSKJM1Z7X2PROD with NOTICES 9 See Lowenstein Report at 36, supra note 4 (citing to a general rule on the list selection algorithm rather than specific FINRA rules relating to excluding arbitrators from the lists based upon current conflicts of interest identified within the list selection algorithm). See supra note 7. FINRA notes that an arbitration case may have three arbitrators. For a three-person panel under the Customer Code, the list selection algorithm generates three lists of arbitrators: one from the FINRA non-public arbitrator roster, another from the FINRA public arbitrator roster, and another from the FINRA chairperson roster. See FINRA Rule 12403(a)(1). Under the Industry Code, the number of lists generated for a three-person panel will depend on whether the dispute is between members or between associated persons or between or among members and associated persons. See FINRA Rule 13402. 10 See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5) and 13403(b)(5). The term ‘‘Director’’ means the Director of DRS. Unless the Codes provide that the Director may not delegate a specific function, the term includes FINRA staff to whom the Director has delegated authority. See FINRA Rules 12100(m) and 13100(m). 11 Potential conflicts include that: the arbitrator is employed by a party to the case; the arbitrator is an immediate family member or relative of a party to the case or a party’s counsel; the arbitrator is employed at the same firm as a party to the case; the arbitrator is employed at the same law firm as counsel to a party to the case; the arbitrator is representing a party to the case as counsel; the arbitrator is an account holder with a party to the case; the arbitrator is employed by a member firm that clears through a clearing agent that is a party to the case; or the arbitrator is in litigation with or against a party to the case. DRS may also remove an arbitrator for other reasons affecting the arbitrator’s ability to serve, such as if DRS learns the arbitrator has moved out of the hearing location. These potential conflicts, along with a description of the manual review process, are published on FINRA’s website. See FINRA, How Parties Select Arbitrators, https://www.finra.org/arbitrationmediation/arbitrator-selection. 12 See Lowenstein Report at 37, supra note 4. VerDate Sep<11>2014 17:36 Jan 11, 2023 Jkt 259001 II. Procedural Amendments The Codes include requirements for holding prehearing conferences and hearing sessions, initiating and responding to claims, motion practice, claim and case dismissals, and providing a hearing record. Over the years, DRS has developed practices to help implement these requirements so that arbitration cases are timely and efficiently administered in its forum. The proposed rule change would amend the Codes to incorporate these practices, as described below. 1. Virtual Prehearing Conferences Under the Codes, prehearing conferences are generally held by 13 See FINRA, Status Report on Lowenstein Sandler LLP Recommendations, https:// www.finra.org/rules-guidance/guidance/reports/ report-independent-review-finra-dispute-resolutionservices-arbitrator-selection-process. 14 See proposed Rules 12407(c) and 13410(c). 15 See FINRA Rules 12407(a) and 13410(a). 16 See proposed Rules 12407(a) and 13410(a). PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 2145 telephone.17 Based on forum users’ experiences during the COVID–19 pandemic, they have expressed a preference for holding prehearing conferences by video conference.18 As a result, effective July 1, 2022, DRS updated its policy so that all prehearing conferences are held by video conference. To provide greater transparency and consistency, the proposed rule change would codify this policy by amending the Codes to provide that prehearing conferences will generally be held by video conference unless the parties agree to, or the panel grants a motion for, another type of hearing session.19 In contrast to prehearing conferences, under the Codes, hearings are generally held in person.20 Forum users have not similarly expressed a preference for making video conference the default for hearings. Accordingly, the proposed rule change would amend the Codes to clarify that hearings will generally be held in person unless the parties agree to, or the panel grants a motion for, another type of hearing session.21 2. Virtual Option for Special Proceeding Arbitrations involving $50,000 or less, called simplified arbitrations, generally are decided by a single arbitrator based on the parties’ written submissions, unless the customer requests a hearing.22 In some cases, however, customers want an opportunity to present their case to the arbitrator without the travel and expenses associated with a full hearing. The 17 See, e.g., FINRA Rules 12500(b) and 13500(b). A ‘‘prehearing conference’’ means any hearing session, including an Initial Prehearing Conference, that takes place before the hearing on the merits begins. See FINRA Rules 12100(y) and 13100(w). 18 While FINRA postponed in-person arbitration hearings and mediation sessions in response to the pandemic, FINRA permitted arbitration hearings and mediation sessions to proceed virtually either by party agreement or arbitration panel order. See Regulatory Notice 21–44 (December 2021). On February 22, 2022, DRS began two pilot programs with some prehearing conferences held on the Zoom platform with video and some without video before updating its policy so that all prehearing conferences are held on the Zoom platform with video. See The Neutral Corner, ‘‘Pilot Programs: Prehearing Conferences by Zoom,’’ Volume 1— 2022. 19 See proposed Rules 12500(b), 12501(c) and 12504(a); see also proposed Rules 13500(b), 13501(c) and 13504(a). 20 The term ‘‘hearing’’ means the hearing on the merits of an arbitration under Rule 12600. See FINRA Rules 12100(o) and 13100(o). 21 See proposed Rules 12600(b) and 13600(b). In addition, the proposed rule change would require the renumbering of paragraphs in the rules impacted by the proposed rule change. 22 See FINRA Rules 12800(a) and 13800(a). Under the Industry Code, the individual filing the claim is referred to as the ‘‘claimant.’’ For simplicity in this section, ‘‘customer’’ will be used to refer to the individual filing the claim unless otherwise noted. E:\FR\FM\12JAN1.SGM 12JAN1 2146 Federal Register / Vol. 88, No. 8 / Thursday, January 12, 2023 / Notices Codes permit such customers to elect to have an abbreviated telephonic hearing (‘‘special proceeding’’).23 The special proceeding option is intended to ensure that customers have an opportunity to present their case to an arbitrator in a convenient and cost-effective manner without being subject to crossexamination by an opposing party.24 Following suggestions from customers that they would prefer also to have the option to have a special proceeding by video conference, FINRA is proposing to amend the Codes to provide customers with this option. Specifically, the proposed rule change would amend the Codes to provide that a special proceeding will be held by video conference, unless the customer requests at least 60 days before the first scheduled hearing that it be held by telephone, or the parties agree to another type of hearing session.25 Thus, the proposed rule change would make video conference the default for special proceedings; however, customers or claimants would have the option to select a telephonic hearing. The 60 days notification requirement would help ensure that the parties and arbitrator are aware of how the hearing session will be conducted well in advance of the hearing session and can prepare accordingly. khammond on DSKJM1Z7X2PROD with NOTICES 3. Redacting Confidential Information Under the Codes, when parties submit pleadings and supporting documents to DRS, the parties must redact personal confidential information (‘‘PCI’’) such as an individual’s Social Security number, taxpayer identification number or financial account number to include only the last four digits of such numbers.26 This requirement does not apply, however, to claims administered under FINRA’s simplified arbitration rules. As discussed above, generally a single arbitrator decides these claims based solely on the parties’ written submissions. Many claimants who initiate claims under the simplified arbitration rules are not represented by counsel, i.e., pro se customers. FINRA has not applied the redaction requirements to simplified arbitrations 23 See FINRA Rules 12800(c)(3)(B)(i) and 13800(c)(3)(B)(i). See also Securities Exchange Act Release No. 83276 (May 17, 2018), 83 FR 23959, 23960 (May 23, 2018) (Order Approving File No. SR–FINRA–2018–003). 24 See Securities Exchange Act Release No. 82693 (February 12, 2018), 83 FR 7086, 7087 (February 16, 2018) (Notice of Filing of File No. SR–FINRA– 2018–003); see also 83 FR 23959, 23960, supra note 23. 25 See proposed Rules 12800(c)(3)(B)(i) and 13800(c)(3)(B)(i). 26 See FINRA Rules 12300(d)(1)(A) and 13300(d)(1)(A). VerDate Sep<11>2014 17:36 Jan 11, 2023 Jkt 259001 due to concerns that the requirements may prove difficult for pro se customers.27 Due to increasing concerns with customers’ identities being used for fraudulent purposes in the securities industry,28 the proposed rule change would extend the requirement to redact PCI to parties in simplified arbitrations.29 In addition, if the proposal is approved by the SEC, FINRA will update guidance on its website regarding the steps parties can take to protect PCI, to include guidance to pro se parties on the importance of safeguarding PCI and on how to redact PCI from documents filed with DRS.30 4. Number of Hearing Sessions per Day Under the Codes, a ‘‘hearing session’’ is any meeting between the parties and arbitrators of four hours or less, including a hearing or a prehearing conference.31 Arbitrators are paid for each hearing session in which they participate.32 Currently, some arbitrators have the misunderstanding that they may be compensated for time spent outside of the hearing session, such as on lunch breaks, because the Codes do not specify when the next hearing session begins. DRS’s current practice is to calculate the number of hearing sessions per day by adding the number of hearing hours, subtracting time spent for lunch, and dividing that number by four hours.33 Consistent with this practice and to provide transparency and consistency, the proposal would amend the definition of ‘‘hearing session’’ to clarify that in one day, the next hearing session 27 See FINRA Rules 12300(d)(1)(C) and 13300(d)(1)(C). See also Securities Exchange Act Release No. 72269 (May 28, 2014), 79 FR 32003, 32004 (June 3, 2014) (Notice of Filing and Order Approving File No. SR–FINRA–2014–008). 28 See, e.g., Regulatory Notice 20–13 (May 2020) (reminding firms to be aware of fraud during the pandemic); Regulatory Notice 20–32 (September 2020) (reminding firms to be aware of fraudulent options trading in connection with potential account takeovers and new account fraud); Regulatory Notice 21–14 (March 2021) (alerting firms to recent increase in automated clearing house ‘‘Instant Funds’’ abuse); Regulatory Notice 21–18 (May 2021) (sharing practices firms use to protect customers from online account takeover attempts); and Regulatory Notice 22–21 (October 2022) (alerting firms to recent trend in fraudulent transfers of accounts through the Automated Customer Account Transfer Service). 29 FINRA Rules 12300(d)(1)(C) and 13300(d)(1)(C) would be deleted. See proposed Rules 12300(d)(1) and 13300(d)(1). 30 See FINRA, Protecting Personal Confidential Information, https://www.finra.org/arbitrationmediation/protecting-personal-confidentialinformation. 31 See FINRA Rules 12100(p) and 13100(p). 32 See generally FINRA Rules 12214 and 13214. 33 See FINRA, Honorarium, https:// www.finra.org/arbitration-mediation/honorarium. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 begins after four hours of hearing time has elapsed.34 5. Update Submission Agreement When Filing a Third Party Claim Under the Codes, respondents must serve a signed and dated Submission Agreement and an answer on each other party within 45 days of receipt of the statement of claim.35 The answer may include a third party claim.36 If the answer includes a third party claim, the respondent must also serve the third party with the answer containing the third party claim and all documents previously served by any party, or sent to the parties by the Director.37 The Codes also provide that the respondent must file the third party claim with the Director through the Party Portal, except as otherwise provided.38 Because the Codes do not have express procedures related to the filing of Submission Agreements if the answer includes a third party claim, often, when a respondent includes a third party claim in the answer, the respondent does not execute a Submission Agreement that lists the name of the third party. Under the Codes, the Director will not serve any claim that is deficient. A claim is deficient if the Submission Agreement does not name all parties named in the claim.39 In addition, the Codes do not provide that if the answer includes a third party claim, the respondent must file the Submission Agreement with the Director. Thus, if the answer includes a third party claim, DRS must contact the respondent to inform them of the deficiency and to file an updated Submission Agreement with the Director. These additional steps may result in delays and slower case processing times. To clarify to parties the requirements related to third party claims and Submission Agreements, the proposed rule change would amend the Codes to provide that if the answer contains a 34 See proposed Rules 12100(p) and 13100(p). FINRA Rules 12303(a) and 13303(a). The Submission Agreement is a document that parties must sign at the outset of an arbitration in which they agree to submit to arbitration under the Codes. See FINRA Rules 12100(dd) and 13100(ee). This document confirms FINRA’s jurisdiction over a case and binds parties to the outcome of the case. 36 A ‘‘third party claim’’ is a claim asserted against a party not already named in the statement of claim or any other previous pleading. See FINRA Rules 12100(ee) and 13100(gg). 37 See FINRA Rules 12303(b) and 13303(b). 38 See FINRA Rules 12303(b) and 13303(b). Parties must use the Party Portal to file initial statements of claim and to file and serve pleadings and any other documents on the Director or any other party, except as otherwise provided. See FINRA Rules 12300(a) and 13300(a). 39 See FINRA Rules 12307(a) and 13307(a). 35 See E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 88, No. 8 / Thursday, January 12, 2023 / Notices third party claim, the respondent must execute a Submission Agreement that lists the name of the third party.40 In addition, the proposed rule change would amend the Codes to clarify that the respondent must file the Submission Agreement with the Director.41 FINRA believes that the proposed rule change would help avoid potential delays and slower case processing times that may result from a lack of clarity in the Codes today regarding Submission Agreements when an answer contains a third party claim. 6. Amending Pleadings or Filing Third Party Claims As discussed above, currently, the Codes include provisions related to including a third party claim in an answer to a statement of claim.42 In addition, the Codes include provisions related to answering third party claims.43 The Codes do not, however, include express procedures related to the filing of third party claims other than in an answer to a statement of claim. Instead, procedures for the filing of third party claims are included broadly under the provisions related to amended pleadings. Accordingly, the proposed rule change would amend the Codes to expressly add the procedures for the filing of third party claims to the provisions in the Codes, such that the procedures that would apply to the filing and serving of third party claims would be the same procedures that would apply to amended pleadings.44 In addition, the proposed rule change would restructure the provisions related to amending pleadings and filing third party claims and add titles to clarify what processes are available based on various milestones in a case, including before and after panel appointment and before and after ranked arbitrator lists are due to the Director.45 khammond on DSKJM1Z7X2PROD with NOTICES a. Clarifying the Process The proposed rule change would also amend the Codes to clarify the processes related to amending pleadings and filing third party claims. Specifically, the proposed rule change would clarify that: (1) arbitrators are ‘‘appointed to’’ the panel, rather than placed ‘‘on’’ the panel; 46 (2) the form of an amended pleading or third party claim that should be included with a motion need 40 See proposed Rules 12303(b) and 13303(b). proposed Rules 12303(b) and 13303(b). 42 See FINRA Rules 12303(b) and 13303(b). 43 See FINRA Rules 12306 and 13306. 44 See proposed Rules 12309 and 13309. 45 See proposed Rules 12309 and 13309. 46 See proposed Rules 12309(a) and 13309(a). 41 See VerDate Sep<11>2014 17:36 Jan 11, 2023 Jkt 259001 not be a hard copy; 47 (3) once the ranked arbitrator lists are due, no party may amend a pleading to add a party or file a third party claim until a panel has been appointed and the panel grants a motion to amend a pleading or file the third party claim; 48 (4) service by firstclass mail or overnight mail service is accomplished on the date of mailing and that service by any other means is accomplished on the date of delivery; 49 (5) the provisions in the Codes relating to responding to amended pleadings are separate from the current provisions relating to answering amended claims; 50 and (6) before panel appointment, the Director has authority to determine whether any party may file a response to an amended pleading.51 b. Member or Associated Person Becomes Inactive The proposed rule change would also amend provisions of the Customer Code related to filing amended pleadings when a customer in an arbitration is notified by FINRA that a member or associated person in the arbitration has become inactive. Under the Customer Code, after panel appointment, a party may amend a pleading if FINRA notifies a customer that a member or an associated person has become inactive as set forth in FINRA Rule 12202.52 Once the ranked arbitrator lists are due to the Director, a party may only amend a pleading to add a new party to the arbitration if FINRA notifies a customer that a member or an associated person has become inactive as set forth in FINRA Rule 12202.53 The proposed rule change would amend these provisions of the Customer Code to also apply to the filing of third party claims.54 The same processes that would apply to the filing of third party claims are those that are applicable today to amending pleadings after panel appointment and amending pleadings to add a new party once the ranked arbitrator lists are due.55 In addition, FINRA is proposing to replace ‘‘party’’ with ‘‘customer’’ as it is the customer to the arbitration proceeding who may amend a pleading or file a third party claim if FINRA notifies the customer 47 The phrase ‘‘a copy of’’ would be deleted. See proposed Rules 12309(b)(1) and 13309(b)(1). 48 See proposed Rules 12309(c)(1) and 13309(c)(1). 49 See proposed Rules 12309(c)(3) and 13309(c)(3). 50 See proposed Rules 12309(d) and 13309(d). See also FINRA Rules 12310 and 13310. 51 See proposed Rules 12309(d) and 13309(d). See also FINRA Rules 12310 and 13310. 52 See FINRA Rule 12309(b)(2). 53 See FINRA Rule 12309(c). 54 See proposed Rule 12309(b)(2) and (c)(2). 55 See proposed Rules 12309 and 13309. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 2147 that a member or associated person has become inactive.56 7. Combining Claims Before ranked arbitrator lists are due to the Director, the Codes permit the Director to combine separate but related claims into one arbitration.57 The Codes also provide that once a panel has been appointed, the panel may reconsider the Director’s decision upon motion of a party.58 The Codes do not address, however, if a panel can combine separate but related claims into one arbitration, or which panel may reconsider the Director’s decision upon motion of party. Under current practice, if a panel has been appointed to the lowest numbered case (i.e., the case with the earliest filing date), the panel in that case may combine separate but related claims into one arbitration and reconsider the Director’s decision upon motion of a party.59 If a panel has been appointed to the highest numbered case (i.e., the case with the latest filing date), but not to the lowest numbered case, under current practice, the panel appointed to the highest numbered case may make these determinations. For transparency and consistency, FINRA is proposing to codify current practice by amending the Codes to provide that if a panel has been appointed to the lowest numbered case, the panel in that case may: (a) combine separate but related claims into one arbitration; and (b) reconsider the Director’s decision upon motion of a party.60 In addition, the proposed rule change would codify current practice that if a panel has been appointed to the highest numbered case (i.e., the case with the latest filing date), but not to the lowest numbered case, the panel appointed to the highest numbered case may: (a) combine separate but related claims into one arbitration; and (b) reconsider the Director’s decision upon motion of a party.61 The proposed rule change would clarify for parties and 56 See proposed Rule 12309(b)(2) and (c)(2). FINRA Rules 12314 and 13314. 58 See FINRA Rules 12314 and 13314. 59 The current practice of having the panel appointed to the lowest numbered case make such determinations is consistent with how motions related to separated claims are decided under the Codes today. For example, the Codes provide that in cases with multiple claimants or multiple respondents, a party whose claims were separated by the Director may make a motion to the panel in the lowest numbered case to reconsider the Director’s motion. See FINRA Rules 12312, 12313, 13312 and 13313. 60 See proposed Rules 12314(b)(1) and 13314(b)(1). 61 See proposed Rules 12314(b)(2) and 13314(b)(2). 57 See E:\FR\FM\12JAN1.SGM 12JAN1 2148 Federal Register / Vol. 88, No. 8 / Thursday, January 12, 2023 / Notices arbitrators procedures related to combining claims in the forum. combine claims upon motion of a party.67 8. Motion Practice Currently, some parties assume that the Party Portal automatically sends the parties’ responses and replies to the panel. In practice, DRS sends all motions and all responses to the panel after the last reply date has elapsed, unless otherwise directed by the panel. This practice helps ensure that the arbitrators have the complete set of motion papers before they begin considering the motion. Parties are often unaware of this practice because the Codes do not address how DRS processes motions including responses and replies. To provide transparency and consistency, the proposed rule change would amend the Codes to codify the current practice by providing that the Director will send all motions, responses, and replies to the panel after the last reply date has elapsed, unless otherwise directed by the panel.62 After the last reply date has elapsed, if the Director receives additional submissions on the motion,63 the Director will forward the submissions to the panel upon receipt and the panel will then determine whether to accept them.64 In addition, the proposed rule change would amend the Codes to clarify who has the authority to decide motions related to separating and combining claims or arbitrations. Specifically, the proposed rule change would amend the Codes to include cross-references to FINRA Rules 12312, 12313, 13312 and 13313, as applicable, which provide that motions relating to separating claims or arbitrations are decided by the Director before a panel is appointed, or by the panel after the panel is appointed.65 In addition, the proposed rule change would amend the Codes to include a cross-reference to proposed FINRA Rules 12314 and 13314,66 as applicable, which, as discussed above, would clarify which panel from multiple arbitrations may combine separate but related claims into one arbitration and reconsider the Director’s decision to 9. Witness Lists Shall Not Be Combined With Document Lists 62 See proposed Rules 12503(d) and 13503(d). respect to motions to amend a pleading, the proposed rule change would revise the Codes to state that such motions must ‘‘include’’ rather than ‘‘be accompanied by copies of’’ the proposed amended pleading to clarify that hard copies are not required. See proposed Rules 12504(a)(4) and 13504(a)(4). In addition, the proposed rule change would renumber paragraphs in the rules impacted by the proposed rule change. 64 See proposed Rules 12503(d) and 13503(d). 65 See proposed Rules 12503(e)(3) and 13503(e)(3). 66 See proposed Rules 12503(e)(4) and 13503(e)(4). khammond on DSKJM1Z7X2PROD with NOTICES 63 With VerDate Sep<11>2014 17:36 Jan 11, 2023 Jkt 259001 Under the Codes, 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 arbitrators before the hearing.68 The Codes also provide that at least 20 days before the first scheduled hearing date, all parties must provide each other 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.69 Often, parties file with the Director one document that contains both the list of documents and other materials, such as exhibits, they intend to use at the hearing that have not already been produced and the witness list. As the list of documents and other materials could contain prejudicial or inadmissible material, as a service to forum users, the Director will manually remove this information from the document containing the witness list before forwarding it to the panel. However, on occasion, the Director may inadvertently disseminate the list of documents and other materials to the arbitrators, which could reveal potentially prejudicial or inadmissible information to the arbitrators before the hearing. Because the Codes do not currently include language regarding the sharing of document lists before the hearing, the proposed rule change would specify that if the parties create lists of documents and other materials in their possession or control that they intend to use at the hearing and have not already been produced, the parties may serve the lists on all other parties, but shall not combine the lists with the witness lists filed with the Director.70 The proposed rule change would clarify to parties that they should not combine document lists with witness lists and, thereby, also help protect against the inadvertent sharing of such document lists with the arbitrators before the hearing. 67 See supra notes 60 and 61 and accompanying text. 68 See FINRA Rules 12514(a) and 13514(a). FINRA Rules 12514(b) and 13514(b). 70 See proposed Rules 12514(a) and 13514(a). 69 See PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 10. Hearing Records Under the Codes, the Director will make a tape, digital or other recording of every hearing with certain exceptions as specified in the Codes.71 The Codes permit the panel to order the parties to provide a transcription of the recording.72 The parties may also make a stenographic record of the hearing.73 a. Distributing Copies The Codes do not set forth which party must provide to each arbitrator, serve on each party and file with the Director a copy of a transcription of a recording or the stenographic record if it is the official record of the proceeding. Accordingly, the proposed rule change would amend the Codes to provide that if the panel orders a transcription, or the stenographic record is the official record of the proceeding, a copy of the transcription or stenographic record must be provided to each arbitrator, served on each party, and filed with the Director by the party or parties ordered to make the transcription or electing to make the stenographic record, as applicable.74 b. Executive Sessions Executive sessions are discussions among arbitrators outside the presence of the parties and their representatives, witnesses and stenographers and are not recorded as they are not part of the official record of the hearing. For transparency and consistency, the proposed rule change would amend the Codes to provide that executive sessions held by the panel will not be recorded.75 11. Dismissal of Proceedings for Insufficient Service Under the Codes, parties, except for pro se parties, must serve all pleadings and other documents through the Party Portal, and service is accomplished on the day of submission through the Party Portal.76 If a party who is served fails to submit an answer, DRS reviews the service history with the panel and asks the panel to decide whether service is complete and sufficient upon the unresponsive party before the case may proceed to hearing.77 The Codes do not address, however, what action a panel may take if the panel determines that 71 See FINRA Rules 12606(a) and 13606(a). FINRA Rules 12606(a)(2) and 13606(a)(2). 73 See FINRA Rules 12606(a) and 13606(b). 74 See proposed Rules 12606(a)(2), 13606(a)(2), 12606(b)(2) and 13606(b)(2). 75 See proposed Rules 12606(a)(1) and 13606(a)(1). 76 See FINRA Rules 12300(c) and 13300(c). 77 See FINRA, Initial Prehearing Conference Script for Panel Cases, https://www.finra.org/sites/ default/files/2022-08/iphc_script_panel_cases.pdf. 72 See E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 88, No. 8 / Thursday, January 12, 2023 / Notices service on the unresponsive party was insufficient. In practice, if the panel determines that service was insufficient, the panel may dismiss the claim or arbitration without prejudice. For transparency and consistency, the proposed rule change would codify current practice by amending the Codes to provide that the panel may dismiss without prejudice a claim or an arbitration for lack of sufficient service upon a respondent.78 khammond on DSKJM1Z7X2PROD with NOTICES 12. Dismissal of Claimant’s Claims Requires Issuance of an Award Under the Codes, an award is a document stating the disposition of a case,79 is final and is not subject to review or appeal,80 and shall be made publicly available.81 The Codes permit a panel to grant a motion to dismiss a party’s case at the conclusion of the case in chief.82 The Codes, however, do not address whether such a dismissal requires the issuance of an award. As the dismissal of all a claimant’s claims disposes of the case, it is current practice to require the issuance of an award for such dismissals.83 For transparency and consistency, the proposed rule change would codify current practice by amending the Codes to require that if a panel dismisses all of a claimant’s claims at the conclusion of the case in chief, the decision must contain the elements of a written award and must be made publicly available as an award.84 78 See proposed Rules 12700(c) and 13700(c). In addition, while FINRA Rules 12700(b) and 13700(b) currently include cross-references to other rules in which a panel may dismiss a claim or an arbitration, the rules do not include a crossreference to FINRA Rules 12504 or 13504, as applicable. Thus, the proposed rule change would amend FINRA Rules 12700(b) and 13700(b) to include a cross-reference to FINRA Rules 12504 or 13504, as applicable, which would clarify that a panel may dismiss a claim or an arbitration prior to the conclusion of a party’s case in chief under very limited circumstances (i.e., if it is time-barred upon motion of a party, as a sanction for material and intentional failure to comply with an order of the panel, or if there are multiple postponements). The proposed rule change would also remove the bullets and replace them with numbers for outline numbering consistency. See proposed Rules 12700(b)(1) and 13700(b)(1). 79 See FINRA Rules 12100(c) and 13100(c). 80 See FINRA Rules 12904(b) and 13904(b). 81 See FINRA Rules 12904(h) and 13904(h). See also FINRA, Arbitration Awards Online, https:// www.finra.org/arbitration-mediation/arbitrationawards. 82 See FINRA Rules 12504(b) and 13504(b). 83 See FINRA, FINRA Dispute Resolution Services Arbitrator’s Guide, https://www.finra.org/sites/ default/files/arbitrators-ref-guide.pdf. 84 See proposed Rules 12504(b) and 13504(b). See also FINRA Rules 12904(e) and 13904(e). If the panel grants a motion to dismiss some but not all of the claimant’s claims, the hearing would proceed as to the remaining claims and at the conclusion of the hearing, the panel would issue an award that VerDate Sep<11>2014 17:36 Jan 11, 2023 Jkt 259001 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,85 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. The proposed rule change will enhance the transparency of the arbitrator selection process by addressing recommendations in the Report by codifying DRS’s practice of conducting a manual review for conflicts of interest prior to sending an arbitrator list to the parties and requiring the Director to provide a written explanation to parties of the Director’s decision to grant or deny a party’s request to remove an arbitrator. In addition, the proposed rule change will clarify for forum users that parties may challenge an arbitrator for cause at any point after receipt of the arbitrator lists until the first hearing session begins. The proposed rule change will address the preferences of forum users to hold prehearing conferences by video conference and of customers in simplified arbitrations to have the option to hold simplified proceedings by video conference or by telephone, unless the parties agree to another type of hearing session. It may also help facilitate parties’ ability to participate or interact in such arbitration proceedings. The proposed rule change will also clarify for forum users that hearings will generally be held in person unless the parties agree to, or the panel grants a motion for, another type of hearing session. The proposed rule change will enhance the transparency and efficiency of the DRS arbitration forum for forum users, including investors, by codifying current practices relating to how parties must distribute transcriptions or stenographic records of hearings; clarifying that an answer with a third party claim must include an updated Submission Agreement that lists the name of the third party; clarifying the processes relating to amending pleadings and filing third party claims; codifying current practices relating to how DRS processes motions; codifying current practice that the panel appointed to the lowest numbered case disposes of each claim. See FINRA, FINRA Dispute Resolution Services Arbitrator’s Guide, https:// www.finra.org/sites/default/files/arbitrators-refguide.pdf. 85 15 U.S.C. 78o–3(b)(6). PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 2149 makes decisions regarding combining claims; codifying current practice to allow a panel to dismiss without prejudice a claim or an arbitration for lack of sufficient service upon a respondent; clarifying that executive sessions held by the panel will not be recorded; and codifying current practice requiring a panel to render a written award if the panel grants a motion to dismiss all of the claimant’s claims made after the conclusion of a party’s case. Finally, the proposed rule change will help protect forum users, including pro se parties, from the inadvertent disclosure of PCI or other information that is potentially prejudicial or inadmissible by requiring parties to redact PCI in simplified arbitrations and prohibiting parties from prematurely filing the list of documents and other materials they intend to use at a hearing with the Director. FINRA believes the proposed rule change reflects and aligns with DRS’s current practices and procedures, and enhances the transparency and efficiency of the DRS arbitration forum by codifying and clarifying these practices and procedures. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA has undertaken an economic impact assessment to analyze the regulatory need for the proposed rule change, its potential economic impacts, including anticipated costs, benefits, and distributional and competitive effects, relative to the current baseline, and the alternatives FINRA considered in assessing how best to meet FINRA’s regulatory objectives. As discussed below, FINRA does not believe that the proposed rule change would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. Economic Impact Assessment A. Regulatory Need Certain arbitration procedures are not formally described in the Codes, whereas certain other arbitration procedures are formally described in the Codes but questions arise regarding their application. This potential ambiguity may reduce the ability of parties to anticipate their future actions or obligations and thus may cause parties to incur additional costs to prepare and participate in the DRS arbitration forum. Parties and arbitrators may also incur the time to make inquiries to DRS to clarify these arbitration procedures. In addition, potential ambiguity regarding certain E:\FR\FM\12JAN1.SGM 12JAN1 2150 Federal Register / Vol. 88, No. 8 / Thursday, January 12, 2023 / Notices arbitration procedures may result in delays and slower case processing times. The proposed rule change would help address these costs by providing greater transparency and consistency regarding the arbitrator list selection process, and clarifying the application of certain procedures. khammond on DSKJM1Z7X2PROD with NOTICES B. Economic Baseline The economic baseline for the proposed rule change consists of the current provisions under the Codes that address the administration of arbitration proceedings. The economic baseline also includes current practices concerning the administration of arbitration proceedings. The proposed rule change is expected to affect parties to cases in the DRS arbitration forum, their legal representatives, and arbitrators. The proposed rule change may affect any of the cases parties file in the DRS arbitration forum. To describe the potential impact of the proposed rule change, however, FINRA uses the cases that closed from January 2017 to December 2021 (‘‘sample period’’). During the sample period, 19,141 cases closed in the DRS arbitration forum. The 19,141 cases include 12,205 cases involving one or more customers and 6,936 cases involving only industry parties. C. Economic Impacts Many of the proposed amendments would clarify in the Codes forum procedures and the obligations of parties and arbitrators and, in some instances, codify current practice. To the extent that these amendments would permit forum users to better understand their options or to anticipate their future actions or obligations, the proposed rule change may also increase their ability to prepare and participate in the forum. These amendments would also decrease the need for forum users to inquire with DRS when questions arise. Where the actions of parties or arbitrators vary from general current practice, clarification and codification should increase the consistency of the DRS arbitration forum. Relative to the baseline, such parties may incur costs to adhere to the proposed requirements, but there should be few such parties. Some of the proposed amendments may have other economic effects. The proposed amendments would clarify that parties may challenge an arbitrator for cause after receipt of the arbitrator lists. To the extent that parties currently believe that they may seek to remove an arbitrator through the challenge process only once the arbitrator is appointed, the proposed clarification may help VerDate Sep<11>2014 17:36 Jan 11, 2023 Jkt 259001 create efficiencies in the DRS arbitration forum by minimizing potential delays from challenges to arbitrators later in the arbitration proceedings. Among the 19,141 cases that were closed during the sample period, FINRA can identify 236 challenges to remove an arbitrator in 204 cases (one percent).86 The proposed amendments would provide that prehearing conferences would generally be held by video conference, unless the customer requests at least 60 days before the first scheduled hearing that it be held by telephone, or the parties agree to another type of hearing session, and may affect the options parties have in arbitration. Among the 19,141 cases that were closed during the sample period, a prehearing conference was held in 14,648 cases (77 percent, with an average of 1.7 prehearing conferences held per case) and a special proceeding was held in 290 cases (two percent). For these hearings, the use of video conference would generally be used in place of telephone. Some parties may perceive an increase in their ability to participate or interact in the hearings by video conference. As noted above, forum users have expressed a preference to hold prehearing conferences by video conference.87 Other parties, however, may perceive a decrease. The costs to these other parties may be mitigated by their ability to move for another method of appearance (e.g., telephone) or to seek assistance from DRS. Parties to special proceedings held by video conference may incur additional time to prepare to present their case. This preparation may include meeting with arbitrators to ensure that all hearing participants are able to use the video conference application.88 The proposed amendments related to combining claims may help parties decide whether to move to combine claims and how to respond to such motions in arbitration. Among the 19,141 cases that were closed during the sample period, 143 cases (one percent) were closed and consolidated with another case. The proposed rule change may improve the ability of parties to the higher numbered case to weigh the potential benefits of combining claims 86 See FINRA Rules 12407 and 13410. In general, the 236 challenges relate to challenges to remove an appointed arbitrator. Information describing party challenges to remove an arbitrator from a list was not collected during the sample period. 87 See supra note 18 and accompanying text. 88 The proposed amendments may ameliorate these additional costs by requiring that a customer request that a special proceeding be conducted by telephone at least 60 days before a scheduled hearing. Within the 60 days, similar to today, parties can agree to another type of hearing session PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 (e.g., lower legal and forum fees) against the potential costs associated with having the claim decided by the panel in the lowest numbered case. The parties to cases that combine as a result of the proposed amendments may benefit from lower legal and forum fees relative to the total fees parties would similarly incur in separate arbitrations. Parties that would choose to combine claims under the baseline due to a misunderstanding of the current practice, but not under the proposed rule change, would incur the legal and forum fees to separately arbitrate their dispute and have their claim decided by the panel to their case. The fees these parties incur may be greater than their share if they instead combined claims. The decision not to combine claims and incur the higher fees, however, results from improved information. The parties that do not want to combine claims, therefore, must anticipate that the higher fees are justified. Finally, the proposed amendments would better organize the handling of certain documents and records in the DRS arbitration forum by imposing new obligations and requirements on parties. These new obligations and requirements would reduce the level of involvement by DRS, allow for more efficient document management and help protect parties from the inadvertent sharing of potentially prejudicial or confidential information. For example, the proposed rule change would prohibit parties from combining lists of documents and other materials with the witness list to help protect against the inadvertent sharing of such document lists with the arbitrators before the hearing. In addition, the proposed requirement to redact PCI from filings with claims of $50,000 or less, exclusive of interest and expenses, would benefit parties by reducing the risk of identity theft. However, parties may incur additional costs to redact this information. Among the 19,141 cases that closed during the sample period, 4,431 cases (23 percent) relate to claims of $50,000 or less. At least one party appeared pro se in less than 30 percent of the 4,431 cases. These parties may benefit from updated guidance on how to redact PCI from documents filed with DRS.89 D. Alternatives Considered FINRA developed the proposed amendments over a multi-year process during which FINRA considered and modified proposals based on feedback from forum users, including investors, securities industry professionals and 89 See E:\FR\FM\12JAN1.SGM supra note 30 and accompanying text. 12JAN1 Federal Register / Vol. 88, No. 8 / Thursday, January 12, 2023 / Notices FINRA arbitrators. FINRA also considered the Report’s recommendations to provide greater transparency and consistency in the arbitrator list selection process, some of which require amendments to the Codes. In evaluating proposals, FINRA considered numerous factors including efficiency, cost, fairness and transparency, and certain tradeoffs among these factors. Codifying current practice may achieve greater efficiency and fairness by reducing uncertainty among forum users. It would also have the least impact on costs. Those amendments that do not codify current practice and are new requirements for forum users may result in the more efficient administration of cases in the DRS arbitration forum, and would not impose an undue burden. Thus, the proposed amendments strike an appropriate balance between further enhancing the DRS arbitration forum while limiting any additional costs of complying with the proposed amendments. 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. khammond on DSKJM1Z7X2PROD with NOTICES IV. Solicitation of Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or VerDate Sep<11>2014 17:36 Jan 11, 2023 Jkt 259001 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–2022–033. 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 (https://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 the 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–2022–033 and should be submitted on or before February 2, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.90 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–00425 Filed 1–11–23; 8:45 am] 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 • Send an email to rule-comments@ sec.gov. Please include File Number SR– FINRA–2022–033 on the subject line. BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION Interest Rates The Small Business Administration publishes an interest rate called the optional ‘‘peg’’ rate (13 CFR 120.214) on a quarterly basis. This rate is a weighted 90 17 PO 00000 CFR 200.30–3(a)(12). Frm 00090 Fmt 4703 Sfmt 4703 2151 average cost of money to the government for maturities similar to the average SBA direct loan. This rate may be used as a base rate for guaranteed fluctuating interest rate SBA loans. This rate will be 4.13 percent for the January–March quarter of FY 2023. Pursuant to 13 CFR 120.921(b), the maximum legal interest rate for any third-party lender’s commercial loan which funds any portion of the cost of a 504 project (see 13 CFR 120.801) shall be 6% over the New York Prime rate or, if that exceeds the maximum interest rate permitted by the constitution or laws of a given State, the maximum interest rate will be the rate permitted by the constitution or laws of the given State. David B. Parrish, Chief, Secondary Market Division. [FR Doc. 2023–00469 Filed 1–11–23; 8:45 am] BILLING CODE P SURFACE TRANSPORTATION BOARD 30-Day Notice of Intent To Seek Extension and Modification of an Existing Collection: Urgent Rail Service Issues Surface Transportation Board. Notice and request for comments. AGENCY: ACTION: As part of its continuing effort to reduce paperwork burdens, and as required by the Paperwork Reduction Act of 1995 (PRA), the Surface Transportation Board (Board) gives notice of its intent to seek approval from the Office of Management and Budget (OMB) for an extension and modification of an existing and approved information collection, as described below. An emergency approval was granted for this collection (OMB Control Number 2140–0041), expiring on January 31, 2023. The Board is now seeking to extend and modify that collection with a submission through OMB’s regular PRA clearance process. DATES: Comments on these information collections should be submitted by February 13, 2023. ADDRESSES: Written comments should be identified as ‘‘Paperwork Reduction Act Comments, Surface Transportation Board: Urgent Rail Service Issues.’’ Written comments for the proposed information collection should be submitted via www.reginfo.gov/public/ do/PRAMain. This information collection can be accessed by selecting ‘‘Currently under Review—Open for Public Comments’’ or by using the SUMMARY: E:\FR\FM\12JAN1.SGM 12JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 8 (Thursday, January 12, 2023)]
[Notices]
[Pages 2144-2151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00425]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96607; File No. SR-FINRA-2022-033]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
the Codes of Arbitration Procedure To Make Various Clarifying and 
Technical Changes to the Codes, Including in Response to 
Recommendations in the Report of Independent Counsel Lowenstein Sandler 
LLP

January 6, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on December 23, 2022, the Financial Industry 
Regulatory Authority, Inc. (``FINRA'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been 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 the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') (together, 
``Codes'') to make changes to provisions relating to the arbitrator 
list selection process in response to recommendations in the report of 
independent counsel Lowenstein Sandler LLP. The proposed rule change 
also makes clarifying and technical changes to requirements in the 
Codes for holding prehearing conferences and hearing sessions, 
initiating and responding to claims, motion practice, claim and case 
dismissals, and providing a hearing record.
    The text of the proposed rule change is available on FINRA's 
website at https://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 and Discussion
    FINRA is proposing to amend the Codes to provide greater 
transparency and consistency regarding the arbitrator list selection 
process, and to clarify the application of certain procedures and 
include expressly these procedures in various rules in the Codes. The 
proposed rule change would enhance the transparency of the arbitration 
forum administered by FINRA Dispute Resolution Services (``DRS'').\3\
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    \3\ FINRA notes that the proposed rule change would impact all 
members, including members that are funding portals or have elected 
to be treated as capital acquisition brokers (``CABs''), given that 
the funding portal and CAB rule sets incorporate the impacted FINRA 
rules by reference.
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I. List Selection Process Amendments
    In June 2022, FINRA published the report from Lowenstein Sandler 
LLP relating to an independent review and analysis of the DRS 
arbitrator list selection process (``Report'').\4\ The Report made 
several recommendations to provide greater transparency and consistency 
in the arbitrator list selection process, some of which require 
amendments to the Codes. In response to the recommendations in the 
Report, FINRA is proposing to amend the Codes to implement the Report's 
recommendations, as described below.\5\
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    \4\ See FINRA, The Report of the Independent Review of FINRA's 
Dispute Resolution Services--Arbitrator Selection Process, https://www.finra.org/sites/default/files/2022-06/report-independent-review-drs-arbitrator-selection-process.pdf. In February 2022, the Audit 
Committee of FINRA's Board of Governors engaged independent counsel 
Lowenstein Sandler LLP to provide a review and analysis in 
connection with a Fulton County (Georgia) Superior Court decision 
vacating an arbitration award in favor of Wells Fargo Clearing 
Services, LLC. See Order Granting Mot. to Vacate Arb. Award and Den. 
Cross Mot. to Confirm Arb. Award at 37, Leggett v. Wells Fargo 
Clearing Servs., LLC, No. 2019-CV-328949 (Ga. Super. Ct., January 
25, 2022). Since publication of the Report, the Fulton County 
(Georgia) Superior Court's decision was reversed by the Court of 
Appeals of Georgia. See Wells Fargo Clearing Servs. v. Leggett, No. 
A22A1149, 2022 Ga. App. (Ct. App. August 2, 2022).
    \5\ Separately, FINRA addressed a recommendation from the Report 
by making technical, non-substantive changes to the Codes to remove 
references to the Neutral List Selection System from those rules 
describing arbitrator list selection and instead refer to a ``list 
selection algorithm.'' See Securities Exchange Act Release No. 95871 
(September 22, 2022), 87 FR 58854 (September 28, 2022) (Notice of 
Filing and Immediate Effectiveness of File No. SR-FINRA-2022-026).
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1. Conflicts of Interest
    The Codes provide that a list selection algorithm will randomly 
generate the ranking lists of arbitrators from the DRS roster of 
arbitrators,\6\ and exclude arbitrators from the lists based upon 
current conflicts of interest identified within the list selection 
algorithm.\7\ In addition, once the lists are generated, DRS conducts a 
manual review for other conflicts not identified within the list 
selection algorithm. This manual review is described on FINRA's website 
and in rule filings with the SEC, but not in the Codes.\8\ The Report 
recommended that, ``to improve transparency, FINRA should amend Rule 
12400 to specifically state that prior to sending the arbitrator list 
to the parties, NM [DRS's Neutral Management

[[Page 2145]]

Department] shall conduct a manual review for conflicts of interest.'' 
\9\
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    \6\ See FINRA Rules 12400, 12402, 12403, 13400 and 13406.
    \7\ See FINRA Rules 12402(b), 12403(a)(3), 13403(a)(4) and 
13403(b)(4).
    \8\ See FINRA, How Parties Select Arbitrators, https://www.finra.org/arbitration-mediation/arbitrator-selection. See also 
Securities Exchange Act Release No. 40261 (July 24, 1998), 63 FR 
40761, 40769 (July 30, 1998) (Notice of Filing of SR-NASD-98-48) 
(stating that DRS will perform a manual review for conflicts of 
interests between parties and potential arbitrators); Securities 
Exchange Act Release No. 40555 (October 21, 1998), 63 FR 56670, 
56675 (October 22, 1998) (Order Approving File No. SR-NASD-98-48) 
(describing the manual review for conflicts of interests between 
parties and potential arbitrators).
    \9\ See Lowenstein Report at 36, supra note 4 (citing to a 
general rule on the list selection algorithm rather than specific 
FINRA rules relating to excluding arbitrators from the lists based 
upon current conflicts of interest identified within the list 
selection algorithm). See supra note 7. FINRA notes that an 
arbitration case may have three arbitrators. For a three-person 
panel under the Customer Code, the list selection algorithm 
generates three lists of arbitrators: one from the FINRA non-public 
arbitrator roster, another from the FINRA public arbitrator roster, 
and another from the FINRA chairperson roster. See FINRA Rule 
12403(a)(1). Under the Industry Code, the number of lists generated 
for a three-person panel will depend on whether the dispute is 
between members or between associated persons or between or among 
members and associated persons. See FINRA Rule 13402.
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    The proposed rule change would amend the Codes to clarify the 
current practice that the Director will exclude arbitrators from the 
lists based upon a review of current conflicts of interest not 
identified within the list selection algorithm.\10\ Under the proposed 
rule change, if an arbitrator is removed based on this conflicts 
review, consistent with current practice, the list selection algorithm 
would randomly select an arbitrator to complete the lists.\11\
---------------------------------------------------------------------------

    \10\ See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5) 
and 13403(b)(5). The term ``Director'' means the Director of DRS. 
Unless the Codes provide that the Director may not delegate a 
specific function, the term includes FINRA staff to whom the 
Director has delegated authority. See FINRA Rules 12100(m) and 
13100(m).
    \11\ Potential conflicts include that: the arbitrator is 
employed by a party to the case; the arbitrator is an immediate 
family member or relative of a party to the case or a party's 
counsel; the arbitrator is employed at the same firm as a party to 
the case; the arbitrator is employed at the same law firm as counsel 
to a party to the case; the arbitrator is representing a party to 
the case as counsel; the arbitrator is an account holder with a 
party to the case; the arbitrator is employed by a member firm that 
clears through a clearing agent that is a party to the case; or the 
arbitrator is in litigation with or against a party to the case. DRS 
may also remove an arbitrator for other reasons affecting the 
arbitrator's ability to serve, such as if DRS learns the arbitrator 
has moved out of the hearing location. These potential conflicts, 
along with a description of the manual review process, are published 
on FINRA's website. See FINRA, How Parties Select Arbitrators, 
https://www.finra.org/arbitration-mediation/arbitrator-selection.
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2. Written Explanation of Director's Decision
    The Codes do not require the Director to provide a written 
explanation when deciding a party-initiated challenge to remove an 
arbitrator. The Report recommended that, to improve transparency, DRS 
should consider amending its policies to require a written explanation 
whenever a challenge to remove an arbitrator is granted or denied, if a 
written explanation is requested by either party.\12\
---------------------------------------------------------------------------

    \12\ See Lowenstein Report at 37, supra note 4.
---------------------------------------------------------------------------

    Effective September 1, 2022, DRS updated its policy to provide a 
written explanation whenever a party-initiated challenge to remove an 
arbitrator is granted or denied, regardless of whether an explanation 
is requested by either party.\13\ To provide transparency and 
consistency, the proposed rule change would amend the Codes to codify 
this practice by requiring the Director to provide a written 
explanation to the parties of the Director's decision to grant or deny 
a party's request to remove an arbitrator.\14\
---------------------------------------------------------------------------

    \13\ See FINRA, Status Report on Lowenstein Sandler LLP 
Recommendations, https://www.finra.org/rules-guidance/guidance/reports/report-independent-review-finra-dispute-resolution-services-arbitrator-selection-process.
    \14\ See proposed Rules 12407(c) and 13410(c).
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3. Challenge To Remove an Arbitrator
    Although not a specific recommendation in the Report, the proposed 
rule change would make an additional clarifying change to provisions in 
the Codes relating to party-initiated challenges for cause. 
Specifically, the Codes provide that before the first hearing session 
begins, the Director may remove an arbitrator for conflict of interest 
or bias, either upon request of a party or on the Director's own 
initiative.\15\ To help ensure that parties are aware that they may 
challenge an arbitrator for cause at any point after receipt of the 
arbitrator ranking lists until the first hearing session begins, the 
proposed rule change would amend the Codes to clarify that after the 
Director sends the arbitrator ranking lists generated by the list 
selection algorithm to the parties, but before the first hearing 
session begins, the Director may remove an arbitrator for conflict of 
interest or bias, either upon request of a party or on the Director's 
own initiative.\16\
---------------------------------------------------------------------------

    \15\ See FINRA Rules 12407(a) and 13410(a).
    \16\ See proposed Rules 12407(a) and 13410(a).
---------------------------------------------------------------------------

II. Procedural Amendments
    The Codes include requirements for holding prehearing conferences 
and hearing sessions, initiating and responding to claims, motion 
practice, claim and case dismissals, and providing a hearing record. 
Over the years, DRS has developed practices to help implement these 
requirements so that arbitration cases are timely and efficiently 
administered in its forum. The proposed rule change would amend the 
Codes to incorporate these practices, as described below.
1. Virtual Prehearing Conferences
    Under the Codes, prehearing conferences are generally held by 
telephone.\17\ Based on forum users' experiences during the COVID-19 
pandemic, they have expressed a preference for holding prehearing 
conferences by video conference.\18\ As a result, effective July 1, 
2022, DRS updated its policy so that all prehearing conferences are 
held by video conference. To provide greater transparency and 
consistency, the proposed rule change would codify this policy by 
amending the Codes to provide that prehearing conferences will 
generally be held by video conference unless the parties agree to, or 
the panel grants a motion for, another type of hearing session.\19\
---------------------------------------------------------------------------

    \17\ See, e.g., FINRA Rules 12500(b) and 13500(b). A 
``prehearing conference'' means any hearing session, including an 
Initial Prehearing Conference, that takes place before the hearing 
on the merits begins. See FINRA Rules 12100(y) and 13100(w).
    \18\ While FINRA postponed in-person arbitration hearings and 
mediation sessions in response to the pandemic, FINRA permitted 
arbitration hearings and mediation sessions to proceed virtually 
either by party agreement or arbitration panel order. See Regulatory 
Notice 21-44 (December 2021). On February 22, 2022, DRS began two 
pilot programs with some prehearing conferences held on the Zoom 
platform with video and some without video before updating its 
policy so that all prehearing conferences are held on the Zoom 
platform with video. See The Neutral Corner, ``Pilot Programs: 
Prehearing Conferences by Zoom,'' Volume 1--2022.
    \19\ See proposed Rules 12500(b), 12501(c) and 12504(a); see 
also proposed Rules 13500(b), 13501(c) and 13504(a).
---------------------------------------------------------------------------

    In contrast to prehearing conferences, under the Codes, hearings 
are generally held in person.\20\ Forum users have not similarly 
expressed a preference for making video conference the default for 
hearings. Accordingly, the proposed rule change would amend the Codes 
to clarify that hearings will generally be held in person unless the 
parties agree to, or the panel grants a motion for, another type of 
hearing session.\21\
---------------------------------------------------------------------------

    \20\ The term ``hearing'' means the hearing on the merits of an 
arbitration under Rule 12600. See FINRA Rules 12100(o) and 13100(o).
    \21\ See proposed Rules 12600(b) and 13600(b). In addition, the 
proposed rule change would require the renumbering of paragraphs in 
the rules impacted by the proposed rule change.
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2. Virtual Option for Special Proceeding
    Arbitrations involving $50,000 or less, called simplified 
arbitrations, generally are decided by a single arbitrator based on the 
parties' written submissions, unless the customer requests a 
hearing.\22\ In some cases, however, customers want an opportunity to 
present their case to the arbitrator without the travel and expenses 
associated with a full hearing. The

[[Page 2146]]

Codes permit such customers to elect to have an abbreviated telephonic 
hearing (``special proceeding'').\23\ The special proceeding option is 
intended to ensure that customers 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.\24\
---------------------------------------------------------------------------

    \22\ See FINRA Rules 12800(a) and 13800(a). Under the Industry 
Code, the individual filing the claim is referred to as the 
``claimant.'' For simplicity in this section, ``customer'' will be 
used to refer to the individual filing the claim unless otherwise 
noted.
    \23\ See FINRA Rules 12800(c)(3)(B)(i) and 13800(c)(3)(B)(i). 
See also Securities Exchange Act Release No. 83276 (May 17, 2018), 
83 FR 23959, 23960 (May 23, 2018) (Order Approving File No. SR-
FINRA-2018-003).
    \24\ See Securities Exchange Act Release No. 82693 (February 12, 
2018), 83 FR 7086, 7087 (February 16, 2018) (Notice of Filing of 
File No. SR-FINRA-2018-003); see also 83 FR 23959, 23960, supra note 
23.
---------------------------------------------------------------------------

    Following suggestions from customers that they would prefer also to 
have the option to have a special proceeding by video conference, FINRA 
is proposing to amend the Codes to provide customers with this option. 
Specifically, the proposed rule change would amend the Codes to provide 
that a special proceeding will be held by video conference, unless the 
customer requests at least 60 days before the first scheduled hearing 
that it be held by telephone, or the parties agree to another type of 
hearing session.\25\ Thus, the proposed rule change would make video 
conference the default for special proceedings; however, customers or 
claimants would have the option to select a telephonic hearing. The 60 
days notification requirement would help ensure that the parties and 
arbitrator are aware of how the hearing session will be conducted well 
in advance of the hearing session and can prepare accordingly.
---------------------------------------------------------------------------

    \25\ See proposed Rules 12800(c)(3)(B)(i) and 13800(c)(3)(B)(i).
---------------------------------------------------------------------------

3. Redacting Confidential Information
    Under the Codes, when parties submit pleadings and supporting 
documents to DRS, the parties must redact personal confidential 
information (``PCI'') such as an individual's Social Security number, 
taxpayer identification number or financial account number to include 
only the last four digits of such numbers.\26\ This requirement does 
not apply, however, to claims administered under FINRA's simplified 
arbitration rules. As discussed above, generally a single arbitrator 
decides these claims based solely on the parties' written submissions. 
Many claimants who initiate claims under the simplified arbitration 
rules are not represented by counsel, i.e., pro se customers. FINRA has 
not applied the redaction requirements to simplified arbitrations due 
to concerns that the requirements may prove difficult for pro se 
customers.\27\
---------------------------------------------------------------------------

    \26\ See FINRA Rules 12300(d)(1)(A) and 13300(d)(1)(A).
    \27\ See FINRA Rules 12300(d)(1)(C) and 13300(d)(1)(C). See also 
Securities Exchange Act Release No. 72269 (May 28, 2014), 79 FR 
32003, 32004 (June 3, 2014) (Notice of Filing and Order Approving 
File No. SR-FINRA-2014-008).
---------------------------------------------------------------------------

    Due to increasing concerns with customers' identities being used 
for fraudulent purposes in the securities industry,\28\ the proposed 
rule change would extend the requirement to redact PCI to parties in 
simplified arbitrations.\29\ In addition, if the proposal is approved 
by the SEC, FINRA will update guidance on its website regarding the 
steps parties can take to protect PCI, to include guidance to pro se 
parties on the importance of safeguarding PCI and on how to redact PCI 
from documents filed with DRS.\30\
---------------------------------------------------------------------------

    \28\ See, e.g., Regulatory Notice 20-13 (May 2020) (reminding 
firms to be aware of fraud during the pandemic); Regulatory Notice 
20-32 (September 2020) (reminding firms to be aware of fraudulent 
options trading in connection with potential account takeovers and 
new account fraud); Regulatory Notice 21-14 (March 2021) (alerting 
firms to recent increase in automated clearing house ``Instant 
Funds'' abuse); Regulatory Notice 21-18 (May 2021) (sharing 
practices firms use to protect customers from online account 
takeover attempts); and Regulatory Notice 22-21 (October 2022) 
(alerting firms to recent trend in fraudulent transfers of accounts 
through the Automated Customer Account Transfer Service).
    \29\ FINRA Rules 12300(d)(1)(C) and 13300(d)(1)(C) would be 
deleted. See proposed Rules 12300(d)(1) and 13300(d)(1).
    \30\ See FINRA, Protecting Personal Confidential Information, 
https://www.finra.org/arbitration-mediation/protecting-personal-confidential-information.
---------------------------------------------------------------------------

4. Number of Hearing Sessions per Day
    Under the Codes, a ``hearing session'' is any meeting between the 
parties and arbitrators of four hours or less, including a hearing or a 
prehearing conference.\31\ Arbitrators are paid for each hearing 
session in which they participate.\32\ Currently, some arbitrators have 
the misunderstanding that they may be compensated for time spent 
outside of the hearing session, such as on lunch breaks, because the 
Codes do not specify when the next hearing session begins.
---------------------------------------------------------------------------

    \31\ See FINRA Rules 12100(p) and 13100(p).
    \32\ See generally FINRA Rules 12214 and 13214.
---------------------------------------------------------------------------

    DRS's current practice is to calculate the number of hearing 
sessions per day by adding the number of hearing hours, subtracting 
time spent for lunch, and dividing that number by four hours.\33\ 
Consistent with this practice and to provide transparency and 
consistency, the proposal would amend the definition of ``hearing 
session'' to clarify that in one day, the next hearing session begins 
after four hours of hearing time has elapsed.\34\
---------------------------------------------------------------------------

    \33\ See FINRA, Honorarium, https://www.finra.org/arbitration-mediation/honorarium.
    \34\ See proposed Rules 12100(p) and 13100(p).
---------------------------------------------------------------------------

5. Update Submission Agreement When Filing a Third Party Claim
    Under the Codes, respondents must serve a signed and dated 
Submission Agreement and an answer on each other party within 45 days 
of receipt of the statement of claim.\35\ The answer may include a 
third party claim.\36\ If the answer includes a third party claim, the 
respondent must also serve the third party with the answer containing 
the third party claim and all documents previously served by any party, 
or sent to the parties by the Director.\37\ The Codes also provide that 
the respondent must file the third party claim with the Director 
through the Party Portal, except as otherwise provided.\38\
---------------------------------------------------------------------------

    \35\ See FINRA Rules 12303(a) and 13303(a). The Submission 
Agreement is a document that parties must sign at the outset of an 
arbitration in which they agree to submit to arbitration under the 
Codes. See FINRA Rules 12100(dd) and 13100(ee). This document 
confirms FINRA's jurisdiction over a case and binds parties to the 
outcome of the case.
    \36\ A ``third party claim'' is a claim asserted against a party 
not already named in the statement of claim or any other previous 
pleading. See FINRA Rules 12100(ee) and 13100(gg).
    \37\ See FINRA Rules 12303(b) and 13303(b).
    \38\ See FINRA Rules 12303(b) and 13303(b). Parties must use the 
Party Portal to file initial statements of claim and to file and 
serve pleadings and any other documents on the Director or any other 
party, except as otherwise provided. See FINRA Rules 12300(a) and 
13300(a).
---------------------------------------------------------------------------

    Because the Codes do not have express procedures related to the 
filing of Submission Agreements if the answer includes a third party 
claim, often, when a respondent includes a third party claim in the 
answer, the respondent does not execute a Submission Agreement that 
lists the name of the third party. Under the Codes, the Director will 
not serve any claim that is deficient. A claim is deficient if the 
Submission Agreement does not name all parties named in the claim.\39\ 
In addition, the Codes do not provide that if the answer includes a 
third party claim, the respondent must file the Submission Agreement 
with the Director. Thus, if the answer includes a third party claim, 
DRS must contact the respondent to inform them of the deficiency and to 
file an updated Submission Agreement with the Director. These 
additional steps may result in delays and slower case processing times.
---------------------------------------------------------------------------

    \39\ See FINRA Rules 12307(a) and 13307(a).
---------------------------------------------------------------------------

    To clarify to parties the requirements related to third party 
claims and Submission Agreements, the proposed rule change would amend 
the Codes to provide that if the answer contains a

[[Page 2147]]

third party claim, the respondent must execute a Submission Agreement 
that lists the name of the third party.\40\ In addition, the proposed 
rule change would amend the Codes to clarify that the respondent must 
file the Submission Agreement with the Director.\41\ FINRA believes 
that the proposed rule change would help avoid potential delays and 
slower case processing times that may result from a lack of clarity in 
the Codes today regarding Submission Agreements when an answer contains 
a third party claim.
---------------------------------------------------------------------------

    \40\ See proposed Rules 12303(b) and 13303(b).
    \41\ See proposed Rules 12303(b) and 13303(b).
---------------------------------------------------------------------------

6. Amending Pleadings or Filing Third Party Claims
    As discussed above, currently, the Codes include provisions related 
to including a third party claim in an answer to a statement of 
claim.\42\ In addition, the Codes include provisions related to 
answering third party claims.\43\ The Codes do not, however, include 
express procedures related to the filing of third party claims other 
than in an answer to a statement of claim. Instead, procedures for the 
filing of third party claims are included broadly under the provisions 
related to amended pleadings. Accordingly, the proposed rule change 
would amend the Codes to expressly add the procedures for the filing of 
third party claims to the provisions in the Codes, such that the 
procedures that would apply to the filing and serving of third party 
claims would be the same procedures that would apply to amended 
pleadings.\44\ In addition, the proposed rule change would restructure 
the provisions related to amending pleadings and filing third party 
claims and add titles to clarify what processes are available based on 
various milestones in a case, including before and after panel 
appointment and before and after ranked arbitrator lists are due to the 
Director.\45\
---------------------------------------------------------------------------

    \42\ See FINRA Rules 12303(b) and 13303(b).
    \43\ See FINRA Rules 12306 and 13306.
    \44\ See proposed Rules 12309 and 13309.
    \45\ See proposed Rules 12309 and 13309.
---------------------------------------------------------------------------

a. Clarifying the Process
    The proposed rule change would also amend the Codes to clarify the 
processes related to amending pleadings and filing third party claims. 
Specifically, the proposed rule change would clarify that: (1) 
arbitrators are ``appointed to'' the panel, rather than placed ``on'' 
the panel; \46\ (2) the form of an amended pleading or third party 
claim that should be included with a motion need not be a hard copy; 
\47\ (3) once the ranked arbitrator lists are due, no party may amend a 
pleading to add a party or file a third party claim until a panel has 
been appointed and the panel grants a motion to amend a pleading or 
file the third party claim; \48\ (4) service by first-class mail or 
overnight mail service is accomplished on the date of mailing and that 
service by any other means is accomplished on the date of delivery; 
\49\ (5) the provisions in the Codes relating to responding to amended 
pleadings are separate from the current provisions relating to 
answering amended claims; \50\ and (6) before panel appointment, the 
Director has authority to determine whether any party may file a 
response to an amended pleading.\51\
---------------------------------------------------------------------------

    \46\ See proposed Rules 12309(a) and 13309(a).
    \47\ The phrase ``a copy of'' would be deleted. See proposed 
Rules 12309(b)(1) and 13309(b)(1).
    \48\ See proposed Rules 12309(c)(1) and 13309(c)(1).
    \49\ See proposed Rules 12309(c)(3) and 13309(c)(3).
    \50\ See proposed Rules 12309(d) and 13309(d). See also FINRA 
Rules 12310 and 13310.
    \51\ See proposed Rules 12309(d) and 13309(d). See also FINRA 
Rules 12310 and 13310.
---------------------------------------------------------------------------

b. Member or Associated Person Becomes Inactive
    The proposed rule change would also amend provisions of the 
Customer Code related to filing amended pleadings when a customer in an 
arbitration is notified by FINRA that a member or associated person in 
the arbitration has become inactive.
    Under the Customer Code, after panel appointment, a party may amend 
a pleading if FINRA notifies a customer that a member or an associated 
person has become inactive as set forth in FINRA Rule 12202.\52\ Once 
the ranked arbitrator lists are due to the Director, a party may only 
amend a pleading to add a new party to the arbitration if FINRA 
notifies a customer that a member or an associated person has become 
inactive as set forth in FINRA Rule 12202.\53\ The proposed rule change 
would amend these provisions of the Customer Code to also apply to the 
filing of third party claims.\54\ The same processes that would apply 
to the filing of third party claims are those that are applicable today 
to amending pleadings after panel appointment and amending pleadings to 
add a new party once the ranked arbitrator lists are due.\55\ In 
addition, FINRA is proposing to replace ``party'' with ``customer'' as 
it is the customer to the arbitration proceeding who may amend a 
pleading or file a third party claim if FINRA notifies the customer 
that a member or associated person has become inactive.\56\
---------------------------------------------------------------------------

    \52\ See FINRA Rule 12309(b)(2).
    \53\ See FINRA Rule 12309(c).
    \54\ See proposed Rule 12309(b)(2) and (c)(2).
    \55\ See proposed Rules 12309 and 13309.
    \56\ See proposed Rule 12309(b)(2) and (c)(2).
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7. Combining Claims
    Before ranked arbitrator lists are due to the Director, the Codes 
permit the Director to combine separate but related claims into one 
arbitration.\57\ The Codes also provide that once a panel has been 
appointed, the panel may reconsider the Director's decision upon motion 
of a party.\58\ The Codes do not address, however, if a panel can 
combine separate but related claims into one arbitration, or which 
panel may reconsider the Director's decision upon motion of party.
---------------------------------------------------------------------------

    \57\ See FINRA Rules 12314 and 13314.
    \58\ See FINRA Rules 12314 and 13314.
---------------------------------------------------------------------------

    Under current practice, if a panel has been appointed to the lowest 
numbered case (i.e., the case with the earliest filing date), the panel 
in that case may combine separate but related claims into one 
arbitration and reconsider the Director's decision upon motion of a 
party.\59\ If a panel has been appointed to the highest numbered case 
(i.e., the case with the latest filing date), but not to the lowest 
numbered case, under current practice, the panel appointed to the 
highest numbered case may make these determinations.
---------------------------------------------------------------------------

    \59\ The current practice of having the panel appointed to the 
lowest numbered case make such determinations is consistent with how 
motions related to separated claims are decided under the Codes 
today. For example, the Codes provide that in cases with multiple 
claimants or multiple respondents, a party whose claims were 
separated by the Director may make a motion to the panel in the 
lowest numbered case to reconsider the Director's motion. See FINRA 
Rules 12312, 12313, 13312 and 13313.
---------------------------------------------------------------------------

    For transparency and consistency, FINRA is proposing to codify 
current practice by amending the Codes to provide that if a panel has 
been appointed to the lowest numbered case, the panel in that case may: 
(a) combine separate but related claims into one arbitration; and (b) 
reconsider the Director's decision upon motion of a party.\60\ In 
addition, the proposed rule change would codify current practice that 
if a panel has been appointed to the highest numbered case (i.e., the 
case with the latest filing date), but not to the lowest numbered case, 
the panel appointed to the highest numbered case may: (a) combine 
separate but related claims into one arbitration; and (b) reconsider 
the Director's decision upon motion of a party.\61\ The proposed rule 
change would clarify for parties and

[[Page 2148]]

arbitrators procedures related to combining claims in the forum.
---------------------------------------------------------------------------

    \60\ See proposed Rules 12314(b)(1) and 13314(b)(1).
    \61\ See proposed Rules 12314(b)(2) and 13314(b)(2).
---------------------------------------------------------------------------

8. Motion Practice
    Currently, some parties assume that the Party Portal automatically 
sends the parties' responses and replies to the panel. In practice, DRS 
sends all motions and all responses to the panel after the last reply 
date has elapsed, unless otherwise directed by the panel. This practice 
helps ensure that the arbitrators have the complete set of motion 
papers before they begin considering the motion. Parties are often 
unaware of this practice because the Codes do not address how DRS 
processes motions including responses and replies.
    To provide transparency and consistency, the proposed rule change 
would amend the Codes to codify the current practice by providing that 
the Director will send all motions, responses, and replies to the panel 
after the last reply date has elapsed, unless otherwise directed by the 
panel.\62\ After the last reply date has elapsed, if the Director 
receives additional submissions on the motion,\63\ the Director will 
forward the submissions to the panel upon receipt and the panel will 
then determine whether to accept them.\64\
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    \62\ See proposed Rules 12503(d) and 13503(d).
    \63\ With respect to motions to amend a pleading, the proposed 
rule change would revise the Codes to state that such motions must 
``include'' rather than ``be accompanied by copies of'' the proposed 
amended pleading to clarify that hard copies are not required. See 
proposed Rules 12504(a)(4) and 13504(a)(4). In addition, the 
proposed rule change would renumber paragraphs in the rules impacted 
by the proposed rule change.
    \64\ See proposed Rules 12503(d) and 13503(d).
---------------------------------------------------------------------------

    In addition, the proposed rule change would amend the Codes to 
clarify who has the authority to decide motions related to separating 
and combining claims or arbitrations. Specifically, the proposed rule 
change would amend the Codes to include cross-references to FINRA Rules 
12312, 12313, 13312 and 13313, as applicable, which provide that 
motions relating to separating claims or arbitrations are decided by 
the Director before a panel is appointed, or by the panel after the 
panel is appointed.\65\ In addition, the proposed rule change would 
amend the Codes to include a cross-reference to proposed FINRA Rules 
12314 and 13314,\66\ as applicable, which, as discussed above, would 
clarify which panel from multiple arbitrations may combine separate but 
related claims into one arbitration and reconsider the Director's 
decision to combine claims upon motion of a party.\67\
---------------------------------------------------------------------------

    \65\ See proposed Rules 12503(e)(3) and 13503(e)(3).
    \66\ See proposed Rules 12503(e)(4) and 13503(e)(4).
    \67\ See supra notes 60 and 61 and accompanying text.
---------------------------------------------------------------------------

9. Witness Lists Shall Not Be Combined With Document Lists
    Under the Codes, 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 
arbitrators before the hearing.\68\ The Codes also provide that at 
least 20 days before the first scheduled hearing date, all parties must 
provide each other 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.\69\
---------------------------------------------------------------------------

    \68\ See FINRA Rules 12514(a) and 13514(a).
    \69\ See FINRA Rules 12514(b) and 13514(b).
---------------------------------------------------------------------------

    Often, parties file with the Director one document that contains 
both the list of documents and other materials, such as exhibits, they 
intend to use at the hearing that have not already been produced and 
the witness list. As the list of documents and other materials could 
contain prejudicial or inadmissible material, as a service to forum 
users, the Director will manually remove this information from the 
document containing the witness list before forwarding it to the panel. 
However, on occasion, the Director may inadvertently disseminate the 
list of documents and other materials to the arbitrators, which could 
reveal potentially prejudicial or inadmissible information to the 
arbitrators before the hearing.
    Because the Codes do not currently include language regarding the 
sharing of document lists before the hearing, the proposed rule change 
would specify that if the parties create lists of documents and other 
materials in their possession or control that they intend to use at the 
hearing and have not already been produced, the parties may serve the 
lists on all other parties, but shall not combine the lists with the 
witness lists filed with the Director.\70\ The proposed rule change 
would clarify to parties that they should not combine document lists 
with witness lists and, thereby, also help protect against the 
inadvertent sharing of such document lists with the arbitrators before 
the hearing.
---------------------------------------------------------------------------

    \70\ See proposed Rules 12514(a) and 13514(a).
---------------------------------------------------------------------------

10. Hearing Records
    Under the Codes, the Director will make a tape, digital or other 
recording of every hearing with certain exceptions as specified in the 
Codes.\71\ The Codes permit the panel to order the parties to provide a 
transcription of the recording.\72\ The parties may also make a 
stenographic record of the hearing.\73\
---------------------------------------------------------------------------

    \71\ See FINRA Rules 12606(a) and 13606(a).
    \72\ See FINRA Rules 12606(a)(2) and 13606(a)(2).
    \73\ See FINRA Rules 12606(a) and 13606(b).
---------------------------------------------------------------------------

a. Distributing Copies
    The Codes do not set forth which party must provide to each 
arbitrator, serve on each party and file with the Director a copy of a 
transcription of a recording or the stenographic record if it is the 
official record of the proceeding. Accordingly, the proposed rule 
change would amend the Codes to provide that if the panel orders a 
transcription, or the stenographic record is the official record of the 
proceeding, a copy of the transcription or stenographic record must be 
provided to each arbitrator, served on each party, and filed with the 
Director by the party or parties ordered to make the transcription or 
electing to make the stenographic record, as applicable.\74\
---------------------------------------------------------------------------

    \74\ See proposed Rules 12606(a)(2), 13606(a)(2), 12606(b)(2) 
and 13606(b)(2).
---------------------------------------------------------------------------

b. Executive Sessions
    Executive sessions are discussions among arbitrators outside the 
presence of the parties and their representatives, witnesses and 
stenographers and are not recorded as they are not part of the official 
record of the hearing. For transparency and consistency, the proposed 
rule change would amend the Codes to provide that executive sessions 
held by the panel will not be recorded.\75\
---------------------------------------------------------------------------

    \75\ See proposed Rules 12606(a)(1) and 13606(a)(1).
---------------------------------------------------------------------------

11. Dismissal of Proceedings for Insufficient Service
    Under the Codes, parties, except for pro se parties, must serve all 
pleadings and other documents through the Party Portal, and service is 
accomplished on the day of submission through the Party Portal.\76\ If 
a party who is served fails to submit an answer, DRS reviews the 
service history with the panel and asks the panel to decide whether 
service is complete and sufficient upon the unresponsive party before 
the case may proceed to hearing.\77\ The Codes do not address, however, 
what action a panel may take if the panel determines that

[[Page 2149]]

service on the unresponsive party was insufficient. In practice, if the 
panel determines that service was insufficient, the panel may dismiss 
the claim or arbitration without prejudice.
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    \76\ See FINRA Rules 12300(c) and 13300(c).
    \77\ See FINRA, Initial Prehearing Conference Script for Panel 
Cases, https://www.finra.org/sites/default/files/2022-08/iphc_script_panel_cases.pdf.
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    For transparency and consistency, the proposed rule change would 
codify current practice by amending the Codes to provide that the panel 
may dismiss without prejudice a claim or an arbitration for lack of 
sufficient service upon a respondent.\78\
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    \78\ See proposed Rules 12700(c) and 13700(c). In addition, 
while FINRA Rules 12700(b) and 13700(b) currently include cross-
references to other rules in which a panel may dismiss a claim or an 
arbitration, the rules do not include a cross-reference to FINRA 
Rules 12504 or 13504, as applicable. Thus, the proposed rule change 
would amend FINRA Rules 12700(b) and 13700(b) to include a cross-
reference to FINRA Rules 12504 or 13504, as applicable, which would 
clarify that a panel may dismiss a claim or an arbitration prior to 
the conclusion of a party's case in chief under very limited 
circumstances (i.e., if it is time-barred upon motion of a party, as 
a sanction for material and intentional failure to comply with an 
order of the panel, or if there are multiple postponements). The 
proposed rule change would also remove the bullets and replace them 
with numbers for outline numbering consistency. See proposed Rules 
12700(b)(1) and 13700(b)(1).
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12. Dismissal of Claimant's Claims Requires Issuance of an Award
    Under the Codes, an award is a document stating the disposition of 
a case,\79\ is final and is not subject to review or appeal,\80\ and 
shall be made publicly available.\81\ The Codes permit a panel to grant 
a motion to dismiss a party's case at the conclusion of the case in 
chief.\82\ The Codes, however, do not address whether such a dismissal 
requires the issuance of an award. As the dismissal of all a claimant's 
claims disposes of the case, it is current practice to require the 
issuance of an award for such dismissals.\83\ For transparency and 
consistency, the proposed rule change would codify current practice by 
amending the Codes to require that if a panel dismisses all of a 
claimant's claims at the conclusion of the case in chief, the decision 
must contain the elements of a written award and must be made publicly 
available as an award.\84\
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    \79\ See FINRA Rules 12100(c) and 13100(c).
    \80\ See FINRA Rules 12904(b) and 13904(b).
    \81\ See FINRA Rules 12904(h) and 13904(h). See also FINRA, 
Arbitration Awards Online, https://www.finra.org/arbitration-mediation/arbitration-awards.
    \82\ See FINRA Rules 12504(b) and 13504(b).
    \83\ See FINRA, FINRA Dispute Resolution Services Arbitrator's 
Guide, https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf.
    \84\ See proposed Rules 12504(b) and 13504(b). See also FINRA 
Rules 12904(e) and 13904(e). If the panel grants a motion to dismiss 
some but not all of the claimant's claims, the hearing would proceed 
as to the remaining claims and at the conclusion of the hearing, the 
panel would issue an award that disposes of each claim. See FINRA, 
FINRA Dispute Resolution Services Arbitrator's Guide, https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\85\ 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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    \85\ 15 U.S.C. 78o-3(b)(6).
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    The proposed rule change will enhance the transparency of the 
arbitrator selection process by addressing recommendations in the 
Report by codifying DRS's practice of conducting a manual review for 
conflicts of interest prior to sending an arbitrator list to the 
parties and requiring the Director to provide a written explanation to 
parties of the Director's decision to grant or deny a party's request 
to remove an arbitrator. In addition, the proposed rule change will 
clarify for forum users that parties may challenge an arbitrator for 
cause at any point after receipt of the arbitrator lists until the 
first hearing session begins.
    The proposed rule change will address the preferences of forum 
users to hold prehearing conferences by video conference and of 
customers in simplified arbitrations to have the option to hold 
simplified proceedings by video conference or by telephone, unless the 
parties agree to another type of hearing session. It may also help 
facilitate parties' ability to participate or interact in such 
arbitration proceedings. The proposed rule change will also clarify for 
forum users that hearings will generally be held in person unless the 
parties agree to, or the panel grants a motion for, another type of 
hearing session.
    The proposed rule change will enhance the transparency and 
efficiency of the DRS arbitration forum for forum users, including 
investors, by codifying current practices relating to how parties must 
distribute transcriptions or stenographic records of hearings; 
clarifying that an answer with a third party claim must include an 
updated Submission Agreement that lists the name of the third party; 
clarifying the processes relating to amending pleadings and filing 
third party claims; codifying current practices relating to how DRS 
processes motions; codifying current practice that the panel appointed 
to the lowest numbered case makes decisions regarding combining claims; 
codifying current practice to allow a panel to dismiss without 
prejudice a claim or an arbitration for lack of sufficient service upon 
a respondent; clarifying that executive sessions held by the panel will 
not be recorded; and codifying current practice requiring a panel to 
render a written award if the panel grants a motion to dismiss all of 
the claimant's claims made after the conclusion of a party's case.
    Finally, the proposed rule change will help protect forum users, 
including pro se parties, from the inadvertent disclosure of PCI or 
other information that is potentially prejudicial or inadmissible by 
requiring parties to redact PCI in simplified arbitrations and 
prohibiting parties from prematurely filing the list of documents and 
other materials they intend to use at a hearing with the Director.
    FINRA believes the proposed rule change reflects and aligns with 
DRS's current practices and procedures, and enhances the transparency 
and efficiency of the DRS arbitration forum by codifying and clarifying 
these practices and procedures.

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

    FINRA has undertaken an economic impact assessment to analyze the 
regulatory need for the proposed rule change, its potential economic 
impacts, including anticipated costs, benefits, and distributional and 
competitive effects, relative to the current baseline, and the 
alternatives FINRA considered in assessing how best to meet FINRA's 
regulatory objectives. As discussed below, FINRA does not believe that 
the proposed rule change would result in any burden on competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Exchange Act.
Economic Impact Assessment
A. Regulatory Need
    Certain arbitration procedures are not formally described in the 
Codes, whereas certain other arbitration procedures are formally 
described in the Codes but questions arise regarding their application. 
This potential ambiguity may reduce the ability of parties to 
anticipate their future actions or obligations and thus may cause 
parties to incur additional costs to prepare and participate in the DRS 
arbitration forum. Parties and arbitrators may also incur the time to 
make inquiries to DRS to clarify these arbitration procedures. In 
addition, potential ambiguity regarding certain

[[Page 2150]]

arbitration procedures may result in delays and slower case processing 
times. The proposed rule change would help address these costs by 
providing greater transparency and consistency regarding the arbitrator 
list selection process, and clarifying the application of certain 
procedures.
B. Economic Baseline
    The economic baseline for the proposed rule change consists of the 
current provisions under the Codes that address the administration of 
arbitration proceedings. The economic baseline also includes current 
practices concerning the administration of arbitration proceedings. The 
proposed rule change is expected to affect parties to cases in the DRS 
arbitration forum, their legal representatives, and arbitrators.
    The proposed rule change may affect any of the cases parties file 
in the DRS arbitration forum. To describe the potential impact of the 
proposed rule change, however, FINRA uses the cases that closed from 
January 2017 to December 2021 (``sample period''). During the sample 
period, 19,141 cases closed in the DRS arbitration forum. The 19,141 
cases include 12,205 cases involving one or more customers and 6,936 
cases involving only industry parties.
C. Economic Impacts
    Many of the proposed amendments would clarify in the Codes forum 
procedures and the obligations of parties and arbitrators and, in some 
instances, codify current practice. To the extent that these amendments 
would permit forum users to better understand their options or to 
anticipate their future actions or obligations, the proposed rule 
change may also increase their ability to prepare and participate in 
the forum. These amendments would also decrease the need for forum 
users to inquire with DRS when questions arise. Where the actions of 
parties or arbitrators vary from general current practice, 
clarification and codification should increase the consistency of the 
DRS arbitration forum. Relative to the baseline, such parties may incur 
costs to adhere to the proposed requirements, but there should be few 
such parties.
    Some of the proposed amendments may have other economic effects. 
The proposed amendments would clarify that parties may challenge an 
arbitrator for cause after receipt of the arbitrator lists. To the 
extent that parties currently believe that they may seek to remove an 
arbitrator through the challenge process only once the arbitrator is 
appointed, the proposed clarification may help create efficiencies in 
the DRS arbitration forum by minimizing potential delays from 
challenges to arbitrators later in the arbitration proceedings. Among 
the 19,141 cases that were closed during the sample period, FINRA can 
identify 236 challenges to remove an arbitrator in 204 cases (one 
percent).\86\
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    \86\ See FINRA Rules 12407 and 13410. In general, the 236 
challenges relate to challenges to remove an appointed arbitrator. 
Information describing party challenges to remove an arbitrator from 
a list was not collected during the sample period.
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    The proposed amendments would provide that prehearing conferences 
would generally be held by video conference, unless the customer 
requests at least 60 days before the first scheduled hearing that it be 
held by telephone, or the parties agree to another type of hearing 
session, and may affect the options parties have in arbitration. Among 
the 19,141 cases that were closed during the sample period, a 
prehearing conference was held in 14,648 cases (77 percent, with an 
average of 1.7 prehearing conferences held per case) and a special 
proceeding was held in 290 cases (two percent). For these hearings, the 
use of video conference would generally be used in place of telephone.
    Some parties may perceive an increase in their ability to 
participate or interact in the hearings by video conference. As noted 
above, forum users have expressed a preference to hold prehearing 
conferences by video conference.\87\ Other parties, however, may 
perceive a decrease. The costs to these other parties may be mitigated 
by their ability to move for another method of appearance (e.g., 
telephone) or to seek assistance from DRS. Parties to special 
proceedings held by video conference may incur additional time to 
prepare to present their case. This preparation may include meeting 
with arbitrators to ensure that all hearing participants are able to 
use the video conference application.\88\
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    \87\ See supra note 18 and accompanying text.
    \88\ The proposed amendments may ameliorate these additional 
costs by requiring that a customer request that a special proceeding 
be conducted by telephone at least 60 days before a scheduled 
hearing. Within the 60 days, similar to today, parties can agree to 
another type of hearing session
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    The proposed amendments related to combining claims may help 
parties decide whether to move to combine claims and how to respond to 
such motions in arbitration. Among the 19,141 cases that were closed 
during the sample period, 143 cases (one percent) were closed and 
consolidated with another case. The proposed rule change may improve 
the ability of parties to the higher numbered case to weigh the 
potential benefits of combining claims (e.g., lower legal and forum 
fees) against the potential costs associated with having the claim 
decided by the panel in the lowest numbered case.
    The parties to cases that combine as a result of the proposed 
amendments may benefit from lower legal and forum fees relative to the 
total fees parties would similarly incur in separate arbitrations. 
Parties that would choose to combine claims under the baseline due to a 
misunderstanding of the current practice, but not under the proposed 
rule change, would incur the legal and forum fees to separately 
arbitrate their dispute and have their claim decided by the panel to 
their case. The fees these parties incur may be greater than their 
share if they instead combined claims. The decision not to combine 
claims and incur the higher fees, however, results from improved 
information. The parties that do not want to combine claims, therefore, 
must anticipate that the higher fees are justified.
    Finally, the proposed amendments would better organize the handling 
of certain documents and records in the DRS arbitration forum by 
imposing new obligations and requirements on parties. These new 
obligations and requirements would reduce the level of involvement by 
DRS, allow for more efficient document management and help protect 
parties from the inadvertent sharing of potentially prejudicial or 
confidential information. For example, the proposed rule change would 
prohibit parties from combining lists of documents and other materials 
with the witness list to help protect against the inadvertent sharing 
of such document lists with the arbitrators before the hearing. In 
addition, the proposed requirement to redact PCI from filings with 
claims of $50,000 or less, exclusive of interest and expenses, would 
benefit parties by reducing the risk of identity theft. However, 
parties may incur additional costs to redact this information. Among 
the 19,141 cases that closed during the sample period, 4,431 cases (23 
percent) relate to claims of $50,000 or less. At least one party 
appeared pro se in less than 30 percent of the 4,431 cases. These 
parties may benefit from updated guidance on how to redact PCI from 
documents filed with DRS.\89\
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    \89\ See supra note 30 and accompanying text.
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D. Alternatives Considered
    FINRA developed the proposed amendments over a multi-year process 
during which FINRA considered and modified proposals based on feedback 
from forum users, including investors, securities industry 
professionals and

[[Page 2151]]

FINRA arbitrators. FINRA also considered the Report's recommendations 
to provide greater transparency and consistency in the arbitrator list 
selection process, some of which require amendments to the Codes. In 
evaluating proposals, FINRA considered numerous factors including 
efficiency, cost, fairness and transparency, and certain tradeoffs 
among these factors. Codifying current practice may achieve greater 
efficiency and fairness by reducing uncertainty among forum users. It 
would also have the least impact on costs. Those amendments that do not 
codify current practice and are new requirements for forum users may 
result in the more efficient administration of cases in the DRS 
arbitration forum, and would not impose an undue burden. Thus, the 
proposed amendments strike an appropriate balance between further 
enhancing the DRS arbitration forum while limiting any additional costs 
of complying with the proposed amendments.

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

    Written comments were neither solicited nor received.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2022-033 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-2022-033. 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 (https://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 the 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-2022-033 and 
should be submitted on or before February 2, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\90\
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    \90\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00425 Filed 1-11-23; 8:45 am]
BILLING CODE 8011-01-P

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