Justia Agencies And Commissions Securities And Exchange Commission Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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, 62835-62850 [2023-19729]

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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, 62835-62850 [2023-19729]

Download as PDF Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices [SEC File No. 270–156, OMB Control No. 3235–0288] request for extension of the previously approved collection of information discussed below. Form 20–F (17 CFR 249.220f) is used to register securities of foreign private issuers pursuant to Section 12 of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) (15 U.S.C. 78l) or as annual and transitional reports pursuant to Sections 13 and 15(d) of the Exchange Act (15 U.S.C. 78m(a) and 78o(d)). The information required in the Form 20–F is used by investors in making investment decisions with respect to the securities of such foreign private issuers. We estimate that Form 20–F takes approximately 2,629.92 hours per response and is filed by approximately 729 respondents. We estimate that 25% of the 2,629.92 hours per response (657.48 hours) is prepared by the issuer for a total reporting burden of 479,303 (657.48 hours per response × 729 responses). An agency may conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The public may view background documentation for this information collection at the following website: www.reginfo.gov. Find this particular information collection by selecting ‘‘Currently under 30-day Review—Open for Public Comments’’ or by using the search function. Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice by October 13, 2023 to (i) www.reginfo.gov/public/do/PRAMain and (ii) David Bottom, Director/Chief Information Officer, Securities and Exchange Commission, c/o John Pezzullo, 100 F Street, NE, Washington, DC 20549, or by sending an email to: PRA_Mailbox@sec.gov. Submission for OMB Review; Comment Request; Extension: Form 20–F Dated: September 8, 2023. Sherry R. Haywood, Assistant Secretary. 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 the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–BX–2023–021 and should be submitted on or before October 4, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.8 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–19730 Filed 9–12–23; 8:45 am] BILLING CODE 8011–01–P ddrumheller on DSK120RN23PROD with NOTICES1 SECURITIES AND EXCHANGE COMMISSION Upon Written Request Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549–2736 Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (‘‘Commission’’) has submitted to the Office of Management and Budget this 8 17 [FR Doc. 2023–19792 Filed 9–12–23; 8:45 am] BILLING CODE 8011–01–P 17:37 Sep 12, 2023 Jkt 259001 PO 00000 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–98317; File No. SR–FINRA– 2022–033] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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 September 7, 2023. I. Introduction On December 23, 2022, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend the Code of Arbitration Procedure for Customer Disputes 3 (‘‘Customer Code’’) and the Code of Arbitration Procedure for Industry Disputes 4 (‘‘Industry Code’’) (together, ‘‘Codes’’). The proposed rule change, as modified by Amendment No. 1 (defined below), would amend provisions of the Codes governing the arbitrator listselection process to: (1) exclude arbitrators from the arbitrator ranking lists based on certain conflicts of interest; 5 (2) permit the removal of an arbitrator for cause at any point after receipt of the arbitrator ranking lists until the first hearing session begins; 6 and (3) provide parties with a written explanation of the decision by the Director of FINRA Dispute Resolution Services (‘‘DRS Director’’) 7 to grant or deny a request to remove an arbitrator.8 In addition, the proposed rule change, as modified by Amendment No. 1, would amend procedural rules in the Codes, such as those pertaining to holding prehearing conferences and 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See FINRA Rule 12000 Series (Code of Arbitration Procedure for Customer Disputes). 4 See FINRA Rule 13000 Series (Code of Arbitration Procedure for Industry Disputes). 5 See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5), 13403(b)(5). 6 See proposed Rules 12407(a), 13410(a). 7 Unless the Codes provide otherwise, the DRS Director may delegate their duties when it is appropriate. FINRA Rule 12103 (Director of FINRA Dispute Resolution Services). 8 See proposed Rules 12407(c), 13410(c). 2 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 Frm 00066 Fmt 4703 62835 Sfmt 4703 E:\FR\FM\13SEN1.SGM 13SEN1 62836 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 hearing sessions,9 initiating and responding to claims,10 motion practice,11 claim and case dismissals,12 and providing a hearing record.13 The proposed rule change was published for comment in the Federal Register on January 12, 2023.14 On February 14, 2023, FINRA consented to extend until April 12, 2023, the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change.15 The Commission received five comment letters in response to the Notice.16 On April 11, 2023, FINRA responded to the comment letters received in response to the Notice and filed an amendment to the proposed rule change (‘‘Amendment No. 1’’).17 On April 12, 2023, the Commission published a notice of filing of Amendment No. 1 and an order instituting proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1 (hereinafter referred to as the ‘‘proposed rule change’’ unless otherwise specified).18 The Commission received two comment letters in response to that notice and order.19 On July 3, 2023, FINRA consented to an extension of the time period in which the Commission must approve or disapprove the proposed rule change to September 8, 2023.20 On August 10, 9 See proposed Rules 12500(b), 12501(c), 12504(a)(5), 12600(b), 12800(c)(3)(B)(i), 13500(b), 13501(c), 13504(a), 13600(b), 13800(c)(3)(B)(i). 10 See proposed Rules 12303(b), 12309, 13303(b), 13309. 11 See proposed Rules 12503, 13503. 12 See proposed Rules 12700(b), 13700(b). 13 See proposed Rules 12606(a)(2), 12606(b)(2), 13606(a)(2), 13606(b)(2). 14 See Exchange Act Release No. 96607 (Jan. 6, 2023), 88 FR 2144 (Jan. 12, 2023) (File No. SR– FINRA–2022–033) (hereinafter, the ‘‘Notice’’). 15 See letter from Kristine Vo, Assistant General Counsel, Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant Chief Counsel, Division of Trading and Markets, U.S. Securities and Exchange Commission (Feb. 14, 2023), https:// www.finra.org/sites/default/files/2023-02/sr-finra2022-033-extension-no-1.pdf. 16 The comment letters are available at https:// www.sec.gov/comments/sr-finra-2022-033/ srfinra2022033.htm. 17 See letter from Kristine Vo, Assistant General Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission (Apr. 11, 2023) (‘‘FINRA April Letter’’), https://www.sec.gov/comments/srfinra-2022-033/srfinra2022033-20164047333995.pdf. 18 Exchange Act Release No. 97291 (Apr. 12, 2023), 88 FR 23720 (Apr. 18, 2023) (File No. SR– FINRA–2022–033) (‘‘Order Instituting Proceedings’’). 19 See supra note 16. 20 See letter from Kristine Vo, Assistant General Counsel, Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant Chief Counsel, VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 2023, the Commission received a letter from FINRA responding to comments received in response to the Order Instituting Proceedings prior to that date.21 This order approves the proposed rule change. II. Description of the Proposed Rule Change A. Background FINRA’s Dispute Resolution Services (‘‘DRS’’) provides a forum for disputes between customers, member firms, and associated persons of member firms through two non-judicial proceedings: arbitration 22 and mediation.23 FINRA’s arbitration forum accommodates two broad categories of proceedings, and each has its own rules of procedure. The Customer Code governs any dispute between a customer and a member or associated person.24 The Industry Code governs any dispute exclusively among associated persons and/or member firms.25 The Codes govern all aspects of an arbitration claim, including: initiating and responding to claims; appointment, disqualification, and authority of arbitrators; prehearing procedures and discovery; and hearings, evidence, and closing the record.26 In particular, the Codes govern the number of arbitrators on a panel for a Division of Trading and Markets, U.S. Securities and Exchange Commission (July 3, 2023), https:// www.finra.org/sites/default/files/2023-07/sr-finra2022-033-extension-no2.pdf. 21 See letter from Kristine Vo, Assistant General Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission (Aug. 10, 2023) (‘‘FINRA August Letter’’), https://www.sec.gov/comments/srfinra-2022-033/srfinra2022033-242999-511962.pdf. 22 See FINRA Rules 12101(a) (Applicability of [Customer] Code), 13101(a) (Applicability of [Industry] Code). 23 See FINRA Rule 14000 Series (Code of Mediation Procedure) (‘‘Mediation Code’’). Because the proposed rule change would amend the Customer Code and Industry Code, and not the Mediation Code, this order does not provide background on the mediation process. 24 See FINRA Rules 12200, 12201. Under FINRA Rule 12200, parties must arbitrate disputes about the non-insurance business activity of a member or associated person if the customer requests arbitration or arbitration is required by written agreement; under FINRA Rule 12201, parties may agree in writing to arbitrate their disputes about the non-insurance business activity of a member or associated person. 25 See FINRA Rules 13101 (Industry Code applies to any dispute filed under Rules 13200, 13201, or 13202), 13200 (requiring arbitration ‘‘if the dispute arises out of the [non-insurance] business activities of a member or an associated person and is between or among’’ members and/or associated persons), 13201 (permitting arbitration of employment discrimination, whistleblower, and sexual misconduct cases), 13202 (requiring arbitration if the dispute involves the business activity of a registered clearing agency that has entered into an agreement to use FINRA’s arbitration forum). 26 See FINRA Customer Code (FINRA Rule 12000 Series), Parts III–VI; FINRA Industry Code (FINRA Rule 13000 Series), Parts III–VI. PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 proceeding based, in part, on the value of the underlying claim.27 If the amount of a claim is $50,000 or less, exclusive of interest and expenses, the panel will consist of one arbitrator 28 who will decide the claim based solely on the written pleadings and other materials submitted by the parties (‘‘Simplified Arbitration’’).29 If the amount of a claim is greater than $50,000 but not more than $100,000, exclusive of interest and expenses, the panel will consist of one arbitrator (unless the parties agree in writing to a three-arbitrator panel) who will decide the claim after a hearing.30 If the amount of a claim is more than $100,000 (exclusive of interest and expenses), is unspecified, or does not request money damages, the panel will consist of three arbitrators (unless the parties agree in writing to one arbitrator) who will decide the claim after a hearing.31 FINRA maintains a roster for each of the three types of arbitrators that may be appointed to a panel: public, nonpublic, and chairperson arbitrators.32 In general, a ‘‘public’’ arbitrator is a person who is otherwise qualified to serve as an arbitrator and is not disqualified from service as a public arbitrator due to their current or past ties to the financial industry.33 A ‘‘non-public’’ arbitrator is a person who is otherwise qualified to serve as an arbitrator and is disqualified from service as a public arbitrator due to their current or previous association with the financial industry.34 An arbitrator is eligible to serve as a ‘‘chairperson’’ if she has completed FINRA’s chairperson training and (1) has a law degree, is a member of a bar of at least one jurisdiction, and has served as an arbitrator through award on at least one arbitration administered by a self-regulatory organization (‘‘SRO’’) in which hearings were held or (2) has served as an arbitrator through award on 27 See FINRA Rules 12401, 13401. FINRA Rules 12401(a), 13401(a). Alternatively, parties may agree in writing to have a three-person panel decide their simplified case. See FINRA Rules 12800(b), 13800(b). 29 See FINRA Rules 12401(a), 13401(a). Simplified Arbitration is governed by FINRA Rule 12800 (Simplified Arbitration) or FINRA Rule 13800 (Simplified Arbitration), respectively. In general, no hearing will be held in Simplified Arbitration unless the customer or claimant requests a hearing. FINRA Rules 12800(c)(1), 13800(c)(1). 30 See FINRA Rules 12401(b), 13401(b); see also FINRA Rules 12600(a), 13600(a) (hearing is required unless it is a Simplified Arbitration or default proceeding). 31 See FINRA Rules 12401(c), 13401(c); see also FINRA Rules 12600(a), 13600(a) (hearing is required unless it is a Simplified Arbitration or default proceeding). 32 See FINRA Rules 12400(b), 13400(b). 33 See FINRA Rules 12100(aa), 13100(x). 34 See FINRA Rules 12100(t), 13100(r). 28 See E:\FR\FM\13SEN1.SGM 13SEN1 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices at least three arbitrations administered by a SRO in which hearings were held.35 B. The Arbitrator-Selection Process Whatever the size of the claim or nature of the dispute, the arbitratorselection process typically follows the same steps for each proceeding: (1) the Neutral List Selection System (‘‘NLSS’’), a computerized list-selection algorithm, randomly generates a list (or lists) of arbitrators from DRS’s rosters of eligible arbitrators for the selected hearing location for each proceeding; 36 (2) the DRS Director sends the list(s) to the parties; 37 (3) the parties exercise limited strikes to eliminate candidates from the list(s); 38 (4) the parties express preferences by ranking the remaining candidates on the list(s); 39 and (5) the DRS Director combines the strike and ranking lists to identify and appoint the arbitrator(s) to the panel.40 For example, for a customer claim of $100,000 or less, the NLSS would generate one list of 10 public arbitrators from the chairperson roster.41 For a customer claim of more than $100,000, the NLSS would generate three lists: one with 10 chair-qualified public arbitrators; one with 15 public arbitrators; and one with 10 non-public arbitrators.42 After each party exercises limited strikes against each list and ranks the remaining arbitrators on each list in order of preference,43 the DRS Director consolidates the strike and ranking lists and appoints the highestranking arbitrator(s) who survived the parties’ strikes.44 The arbitrator-selection process differs in industry disputes. For an industry claim of $100,000 or less, the NLSS would generate one list of 10 arbitrators from the chairperson roster.45 For an industry claim of more than $100,000 between members, the NLSS would generate two lists: one with 10 chair-qualified non-public arbitrators; and one with 20 non-public arbitrators.46 For an industry claim of more than $100,000 between associated persons or between or among members and associated persons, the NLSS would generate three lists: one with 10 chairqualified public arbitrators; one with 10 public arbitrators; and one with 10 nonpublic arbitrators.47 Once the DRS Director sends the NLSS-generated list(s) to the parties, each party exercises limited strikes against the list(s) and ranks the remaining arbitrators in order of preference.48 The DRS Director then consolidates the strike and ranking 42 See ddrumheller on DSK120RN23PROD with NOTICES1 35 See FINRA Rules 12400(c), 13400(c). In customer disputes, the chairperson must be a public arbitrator. See FINRA Rule 12400(c). 36 See FINRA Rules 12402(b) (Generating Lists in Customer Cases with One Arbitrator), 12403(a) (Generating Lists in Customer Cases with Three Arbitrators), 13403(a) (Lists Generated in Disputes Between Members), 13403(b) (Lists Generated in Disputes Between Associated Persons or Between or Among Members and Associated Persons); see also FINRA Rules 12400(a), 13400(a). 37 See FINRA Rules 12402(c), 12403(b), 13403(c). 38 See FINRA Rules 12402(d)(1) (Striking and Ranking Arbitrators in Customer Cases with One Arbitrator), 12403(c)(1)(A) and (2)(A) (Striking and Ranking Arbitrators in Customer Cases with Three Arbitrators), 13404(a) and (b) (Striking and Ranking Arbitrators in Industry Disputes). 39 See FINRA Rules 12402(d)(2), 12403(c)(1)(B) and (2)(B), 13404(c). Parties must deliver their ranked lists to the DRS Director no more than 20 days after the date upon which the DRS Director sent the lists to the parties. Except for certain pro se parties, parties must complete and deliver their ranked lists via the DR Party Portal (‘‘Portal’’). See FINRA Rules 12402(d)(3), 12403(c)(3), 13404(d). The Portal permits arbitration case participants to, among other things, file an arbitration claim, view case documents, submit documents to FINRA and send documents to other Portal case participants, and schedule hearing dates. See FINRA, Dispute Resolution Services: DR Portal, https:// www.finra.org/arbitration-mediation/dr-portal. 40 See FINRA Rules 12402(e) (Combining Lists in Customer Cases with One Arbitrators), 12402(f) (Appointment of Arbitrators in Customer Cases with One Arbitrator), 12403(d) (Combining Lists in Customer Cases with Three Arbitrators), 12403(e) (Appointment of Arbitrators in Customer Cases with Three Arbitrators), 13405 (Combining Lists in Industry Disputes), 13406 (Appointment of Arbitrators in Industry Disputes). 41 See FINRA Rule 12402(b)(1). VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 FINRA Rule 12403(a)(1). FINRA Rules 12402(d), 12403(c)(1), 12403(c)(2). The number of strikes available varies for each type of case. For a customer claim of $100,000 or less, each party may exercise up to four strikes against the list. See FINRA Rule 12402(d)(1). For a customer claim of more than $100,000, each party may exercise up to four strikes of chairqualified arbitrators, up to six strikes of public arbitrators, and up to 10 strikes of non-public arbitrators. See FINRA Rule 12403(c). 44 See FINRA Rules 12402(e), 12402(f), 12403(d), 12403(e)(1). 45 See FINRA Rules 13403(a)(1), 13403(b)(1). For disputes between members, the arbitrator would generally be non-public unless the parties agree in writing otherwise. See FINRA Rule 13402(a)(1). For disputes between associated persons or between or among members and associated persons, the arbitrator would generally be public unless the parties agree in writing otherwise. See FINRA Rule 13402(b). 46 See FINRA Rule 13403(a)(2). The panel would consist of three non-public arbitrators, one of which must be chair-qualified, unless the parties agree in writing otherwise. See FINRA Rule 13402(a)(1). 47 See FINRA Rule 13403(b)(2). The panel would consist of two public arbitrators and one non-public arbitrator. One of the public arbitrators would serve as the chairperson unless the parties agree in writing otherwise. See FINRA Rule 13402(b). 48 See FINRA Rule 13404. The number of strikes available varies for each type of case. For industry disputes with a single arbitrator, each party may exercise up to four strikes against the list. See FINRA Rule 13404(a). For industry disputes of more than $100,000 between members, each party may exercise up to four strikes from the chair-qualified non-public arbitrator list and up to eight strikes from the non-public arbitrator list. See FINRA Rule 13404(b). For industry disputes of more than $100,000 between members and/or associated persons, each party exercises as many as four strikes against each list. See FINRA Rule 13404(a). 43 See PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 62837 list(s) and appoints the highest-ranking arbitrator(s) who survived the parties’ strikes.49 C. The Lowenstein Report In a January 2022 order, a Georgia trial court vacated a FINRA arbitration award, finding (among other things) that FINRA had a ‘‘secret agreement’’ with an attorney to remove certain arbitrators from any lists generated in that attorney’s cases.50 The trial court concluded that such an agreement ‘‘calls into question the entire fairness’’ of FINRA’s arbitration forum.51 The Court of Appeals of Georgia subsequently reversed the trial court’s order, holding (among other things) that ‘‘there is no evidence that [a secret] agreement was at play here’’ given that the arbitrator in question appeared on the ranking list notwithstanding the alleged existence of a ‘‘secret agreement’’ to exclude him.52 Prior to the order’s reversal on appeal, the Audit Committee of FINRA’s Board of Governors engaged a law firm, Lowenstein Sandler LLP (‘‘Lowenstein’’), to: (1) independently review the trial court’s finding about the arbitrator-selection process in that case; and (2) ‘‘determine generally whether any improvements to the arbitrator selection process [are] necessary to ensure neutrality and improve DRS’s transparency.’’ 53 Lowenstein began its review in February 2022, and in June 2022, it delivered a 37-page report.54 The Lowenstein Report concluded that there was not any agreement between the attorney and FINRA regarding the panels for that attorney’s cases.55 ‘‘Nonetheless, . . . Lowenstein identified a series of potential improvements to the FINRA arbitrator selection process intended to increase transparency and ensure neutrality in the work undertaken by DRS.’’ 56 In response to the recommendations made in the Lowenstein Report, FINRA proposed amendments to its arbitrator list-selection process, as well as additional changes to its procedural 49 See FINRA Rules 13405, 13406. Leggett v. Wells Fargo Clearing Servs., LLC, No. 2019–CV–328949, 2022 WL 1522096, at *10 (Ga. Super. Ct. Jan. 25, 2022). 51 Id. at *10. 52 Wells Fargo Clearing Servs., LLC v. Leggett, 876 SE2d 888, 895 (Ga. Ct. App. 2022). 53 Christopher W. Gerold, Lowenstein Sandler LLP, The Report of the Independent Review of FINRA’s Dispute Resolution Services—Arbitrator Selection Process at 2, https://www.finra.org/rulesguidance/guidance/reports/report-independentreview-finra-dispute-resolution-services-arbitratorselection-process (June 28, 2022) (hereinafter, the ‘‘Lowenstein Report’’). 54 Id. 55 Id. at 35. 56 Id. 50 See E:\FR\FM\13SEN1.SGM 13SEN1 62838 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices rules governing arbitration cases, as described below.57 b. Removal of Arbitrators for Conflicts of Interest or Bias After Lists are Sent to the Parties but Before the First Hearing Session D. Proposed Rule Change 1. Arbitrator List-Selection Amendments The proposed changes to the arbitrator list-selection process would address: (1) manual reviews for conflicts of interest prior to sending the ranking lists to parties; (2) the timing of conflictof-interest and bias challenges to remove arbitrators; and (3) written explanations of the DRS Director’s decision on a party-initiated challenge to an arbitrator. a. Removal of Arbitrators for Conflicts of Interest Before Ranking Lists are Sent to the Parties As stated above, the NLSS randomly generates a list or lists of arbitrators from which parties in each arbitration case select a panel to hear and decide the case. As part of the list-generation process, the NLSS ‘‘exclude[s] arbitrators from the lists based upon current conflicts of interest.’’ 58 FINRA stated that DRS then ‘‘conducts a manual review [of the list(s)] for other conflicts not identified within the list selection algorithm.’’ 59 The Codes do not, however, describe this manual review process.60 The Lowenstein Report recommended that FINRA amend the Codes to require that, prior to sending the arbitrator list(s) to the parties, DRS’s Neutral Management Department must conduct a manual review for conflicts of interest.61 This proposed rule change would codify existing practice by expressly requiring the DRS Director to manually review arbitrators on each list for current conflicts of interest not identified within the NLSS and authorizing the DRS Director to remove arbitrators based on the existence of such conflicts.62 Under this proposed rule change, ‘‘[i]f an arbitrator is removed due to such conflicts, the list selection algorithm will randomly select an arbitrator to complete the list.’’ 63 57 See Notice at 2144. Rules 12402(b)(2), 12403(a)(3), 13403(a)(4), 13403(b)(4). 59 Notice at 2144. 60 Id. 61 See Lowenstein Report at 36. The Lowenstein Report recommended that FINRA amend Rule 12400. Although FINRA has elected to follow this recommendation, it did so by amending rules elsewhere in the Codes. See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5), 13403(b)(5). 62 See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5), 13403(b)(5); Notice at 2145. 63 Proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5), 13403(b)(5). ddrumheller on DSK120RN23PROD with NOTICES1 58 FINRA VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 Currently, the Codes permit the DRS Director to remove an arbitrator for a conflict of interest or bias, either upon request of a party or on the DRS Director’s own initiative, before the first hearing session begins.64 The Codes do not expressly specify, however, when the DRS Director may first initiate, or a party may first bring, such a challenge. FINRA stated that in practice parties may ‘‘challenge an arbitrator for cause at any point after receipt of the arbitrator ranking lists until the first hearing session begins[.]’’ 65 The proposed rule change would expressly codify this timing by authorizing the DRS Director to remove an arbitrator for a conflict of interest or bias, either upon request of a party or on the DRS Director’s own initiative, ‘‘[a]fter the Director sends the list(s) generated by the list-selection algorithm to the parties,’’ but before the first hearing session begins.66 c. Written Explanation of the DRS Director’s Decision Currently, the Codes do not require the DRS Director to issue a written explanation of their decision on a partyinitiated challenge to remove an arbitrator.67 The Lowenstein Report recommended that FINRA consider amending the Codes to require the issuance of a written explanation of such a decision upon the request of either party.68 FINRA stated that its current practice is ‘‘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.’’ 69 The proposed rule change would codify this practice by expressly requiring the DRS Director to provide the parties with a written explanation of their decision to grant or deny a party’s request to remove an arbitrator.70 2. Procedural Rules Governing Arbitration Cases The proposed rule change would also amend certain procedural rules governing FINRA arbitration cases. The proposed rule change would address thirteen such procedural issues, and this Order discusses each in turn. a. Virtual Prehearing Conferences A ‘‘prehearing conference’’ is any hearing session ‘‘that takes place before the hearing on the merits begins.’’ 71 Currently, the Codes indicate that prehearing conferences may generally be held by telephone.72 However, FINRA stated that based on forum users’ experiences during the COVID–19 pandemic, DRS updated its practice to provide that all prehearing conferences would be held by video.73 The proposed rule change would codify this practice by expressly requiring 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.’’ 74 b. In-Person Hearings A ‘‘hearing’’ is ‘‘the hearing on the merits of an arbitration.’’ 75 Currently, the Codes do not establish a default format for hearings but FINRA stated that ‘‘hearings are generally held in person,’’ and forum users ‘‘have not similarly expressed a preference for making video conference the default for hearings.’’ 76 Accordingly, other than for special proceedings (defined below),77 the proposed rule change would provide that all hearings ‘‘will generally be held in person unless the parties agree to, or the panel grants a motion for, another type of hearing session.’’ 78 c. Virtual Option for Special Proceedings As stated above, a Simplified Arbitration generally is decided by a single arbitrator based on the parties’ written submissions, unless the 71 FINRA Rules 12100(y), 13100(w). FINRA Rules 12500(b), 12501(c), 13500(b), 13501(c). 73 Notice at 2145. See FINRA, Dispute Resolution Services: Pre-Hearing Conferences, https:// www.finra.org/arbitration-mediation/prehearingconferences. 74 Proposed Rules 12500(b), 12501(c), 12504(a)(5), 13500(b), 13501(c), 13504(a). 75 FINRA Rules 12100(o), 13100(o). 76 Notice at 2145. 77 Under the proposed rule change, a special proceeding (defined below) would 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. See proposed Rules 12800(c) and 13800(c); see also infra notes 79–82 and accompanying text. 78 Proposed Rules 12600(b), 13600(b). 72 See 64 FINRA Rules 12407(a), 13410(a). The DRS Director must first notify the parties before removing an arbitrator on the DRS Director’s own initiative. The DRS Director may not remove the arbitrator if the parties agree in writing to retain the arbitrator within five days of receiving notice of the DRS Director’s intent to remove the arbitrator. FINRA Rules 12407(a)(2), 13410(a)(2). 65 See Notice at 2145 (indicating that FINRA wants to ‘‘ensure that the 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’’). 66 See proposed Rules 12407(a), 13410(a). 67 Notice at 2145. 68 Lowenstein Report at 37. 69 Notice at 2145. 70 See proposed Rules 12407(c), 13410(c). PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 E:\FR\FM\13SEN1.SGM 13SEN1 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices customer or claimant requests a hearing.79 If the customer or claimant requests a hearing, the Codes permit the customer or claimant to request an abbreviated telephonic hearing (i.e., a ‘‘special proceeding’’) on the merits.80 FINRA stated that it received indications that customers ‘‘would prefer also to have the option to have a special proceeding by video conference.’’ 81 The proposed rule change would require any special proceeding to be held by video conference, unless: (1) the customer requests at least 60 days before the first scheduled hearing that it be held by telephone; or (2) the parties agree to another type of hearing session.82 d. Redacting Confidential Information The Codes require a party to redact any personal confidential information (‘‘PCI’’) from documents they file with the DRS Director.83 Currently, this requirement does not apply to parties in a Simplified Arbitration.84 FINRA stated that ‘‘[d]ue to increasing concerns with customers’ identities being used for fraudulent purposes in the securities industry,’’ the proposed rule change would expand this redaction requirement to require a party in a Simplified Arbitration to redact any PCI from documents filed with the DRS Director.85 In addition, FINRA stated that it would ‘‘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.’’ 86 e. Number of Hearing Sessions per Day Arbitrators are paid for each hearing session in which they participate.87 The Codes define a ‘‘hearing session’’ as ‘‘any meeting between the parties and arbitrator(s) of four hours or less, including a hearing or a prehearing 79 FINRA Rules 12800, 13800. Rules 12800(c)(3)(B), 13800(c)(3)(B). 81 Notice at 2146. 82 Proposed Rules 12800(c)(3)(B)(i), 13800(c)(3)(B)(i). 83 FINRA Rules 12300(d)(1)(A), 13300(d)(1)(A). According to FINRA, PCI includes social security numbers; brokerage, bank or other financial account numbers; taxpayer identification numbers; and medical records. See FINRA, Dispute Resolution Services: Protecting Personal Confidential Information, https://www.finra.org/arbitrationmediation/protecting-personal-confidentialinformation (last visited May 11, 2023) (‘‘PCI Guidance’’). 84 FINRA Rules 12300(d)(1)(C), 13300(d)(1)(C). 85 Notice at 2146 and n.29 (explaining that FINRA Rules 12300(d)(1)(C) and 13300(d)(1)(C) would be deleted); proposed Rules 12300(d)(1), 13300(d)(1). 86 See Notice at 2146; see also PCI Guidance, supra note 83. 87 See Notice at 2146 (citing FINRA Rules 12214, 13214). ddrumheller on DSK120RN23PROD with NOTICES1 80 FINRA VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 conference.’’ 88 FINRA stated that ‘‘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.’’ 89 FINRA explained that DRS’s current practice is to calculate the total number of hearing hours, subtract any time spent for lunch, and divide the remainder by four (as in four hours) to identify the number of hearing sessions.90 FINRA stated that consistent with that practice, the proposed rule change would amend the definition of ‘‘hearing session’’ to indicate that, during a single day, ‘‘the next hearing session begins after four hours of hearing time has elapsed.’’ 91 f. Update Submission Agreement When Filing a Third-Party Claim The Codes define the term ‘‘Submission Agreement’’ to mean the agreement ‘‘that parties must sign at the outset of an arbitration in which they agree to submit to arbitration under the Code.’’ 92 In general, if a claim does not include a complete and properly executed Submission Agreement, the claim would be considered deficient and would not be served by the DRS Director on the other parties (e.g., if a Submission Agreement fails to name all of the parties named in a claim, the claim would be considered deficient).93 Thus, in practice, when a respondent includes a third-party claim 94 in their answer to a statement of claim, the respondent must serve a fully executed Submission Agreement and an answer on each other party, including the third party.95 However, FINRA stated that because the Codes do not expressly require the respondent to file an updated Submission Agreement with any third-party claim, respondents often file deficient claims because they neglect to add the third party to the Submission Agreement.96 The proposed rule change would address this confusion. Specifically, the proposed rule change would require a respondent filing an answer containing a third-party 88 FINRA 89 Notice 90 Id. 91 Id.; see proposed Rules 12100(p), 13100(p). Rules 12100(dd), 13100(ee); see Notice at 2146 n.35. 93 FINRA Rules 12307(a)(1)–(3), 13307(a)(1)–(3). 94 A ‘‘third-party claim’’ is a ‘‘claim asserted against a party not already named in the statement of claim or any other previous pleading.’’ FINRA Rules 12100(ee), 13100(gg). 95 See Notice at 2146; FINRA Rules 12307(a)(1)– (3), 13307(a)(1)–(3). 96 FINRA Rules 12303(b), 13303(b); see Notice at 2146. 92 FINRA PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 claim to: (1) execute a Submission Agreement that lists the name of the third-party; and (2) file the updated Submission Agreement with the DRS Director.97 g. Amending Pleadings or Filing ThirdParty Claims FINRA stated that the Codes do not include express procedures related to the filing of third-party claims other than those filed in an answer to a statement of claim.98 Rather, FINRA indicated that FINRA rules relating to amended pleadings currently govern the filing of third-party claims.99 FINRA stated that the proposed rule change would amend the Codes to expressly extend the procedures that apply to amended pleadings to the filing and serving of third-party claims.100 The proposed rule change also would ‘‘restructure the provisions related to amending pleadings and filing thirdparty 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.’’ 101 The proposed rule change would make other changes to the Codes relating to amended pleadings, including specifying that: (1) arbitrators would be ‘‘appointed to’’ the panel, not placed ‘‘on’’ the panel; 102 (2) the version of an amended pleading or third-party claim that should be included with a motion need not be a hard copy; 103 (3) once the ranked arbitrator lists are due, no party would be permitted to 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; 104 (4) service by first-class mail or overnight mail service would be accomplished on the date of mailing and service by any other means would be accomplished on the date of 97 Proposed 98 Notice Rules 12100(p), 13100(p). at 2146. 62839 Rules 12303(b), 13303(b). at 2147; see FINRA Rules 12303(b), 13303(b). 99 Notice at 2147; see FINRA Rules 12309, 13309. FINRA Rules 12309(a)(2) and 13309(a)(2) address the amendment of a pleading to add a party, but they do not address the filing of a third-party claim other than in an amended pleading. 100 See Notice at 2147; proposed Rules 12309, 13309. 101 Id. 102 Notice at 2147; see proposed Rules 12309(a), 13309(a). 103 Notice at 2147; see proposed Rules 12309(b)(1), 13309(b) (deleting ‘‘a copy of’’). 104 Notice at 2147; see proposed Rules 12309(c)(1), 13309(c)(1). E:\FR\FM\13SEN1.SGM 13SEN1 62840 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices delivery; 105 (5) the provisions in the Codes relating to responding to amended pleadings would be separate from the current provisions relating to answering amended claims; 106 and (6) before panel appointment, the DRS Director would be authorized to determine whether any party may file a response to an amended pleading.107 In addition, the proposed rule change would update the Customer Code’s provisions governing ‘‘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.’’ 108 Currently, under the Customer Code, if a respondent member or associated person becomes inactive during a pending arbitration, FINRA will notify the customer of the respondent’s inactive status.109 Within 60 days of receiving that notice, the customer may: (1) withdraw the claim(s) against the inactive member or associated person; 110 (2) amend a pleading (if a panel has been appointed); 111 or (3) amend a pleading to add a new party (if the notification is after the ranked arbitrator lists are due to the DRS Director).112 However, the Customer Code does not expressly authorize the customer in an arbitration to file a thirdparty claim when they are notified by FINRA that a member or associated person in the arbitration has become inactive.113 FINRA stated that the proposed rule change would modify the Codes relating to amended pleadings to expressly authorize a customer in an arbitration to file a third-party claim when they are notified by FINRA that a member or associated person in the arbitration has become inactive after a panel is appointed, as well as after the ranked arbitrator lists are due.114 ddrumheller on DSK120RN23PROD with NOTICES1 h. Combining Claims Under the Codes, a party may move to join multiple claims together in the same arbitration if: (1) the claims contain common questions of law or fact; and (2)(a) the claims assert any right to relief jointly and severally, or (b) the claims arise out of the same transaction or occurrence, or series of 105 Notice at 2147; see proposed Rules 12309(a)(3), 13309(a)(3). 106 Notice at 2147; see proposed Rules 12309(d), 13309(d); FINRA Rules 12310, 13310. 107 Id. 108 Notice at 2147. 109 FINRA Rule 12202(b). 110 Id. 111 FINRA Rule 12309(b)(2). 112 FINRA Rule 12309(c)(2); see supra note 39. 113 See supra notes 109–112 and accompanying text. 114 See Notice at 2147; proposed Rules 12309(b)(2), 12309(c)(2). VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 transactions or occurrences (i.e., separate but related claims).115 The Codes are unclear, however, with respect to who has authority (e.g., the DRS Director or a panel) to combine separate but related claims in response to such motions after a panel has been appointed to one or more cases.116 Before a panel has been appointed in any of the arbitration cases hearing the separate but related claims, only the DRS Director is authorized to combine such claims into one arbitration.117 Once a panel has been appointed in at least one of the related cases, the Codes authorize the panel to ‘‘reconsider the Director’s decision upon motion of a party.’’ 118 The Codes do not address whether the panel has independent authority to combine such claims.119 Nor do the Codes specify which panel— if more than one has been appointed to hear the separate but related claims— may reconsider the DRS Director’s decision to combine the claims.120 FINRA explained the current practice typically is for the panel appointed to the ‘‘lowest-numbered case with a panel’’ (i.e., the case with the earliest filing date) to have this authority. Where a panel has been appointed to the highest-numbered case (but not any other case) subject to the motion to combine, the panel in the highestnumbered case has the authority.121 Where a panel has been appointed to a middle-numbered case (but not any other case filed earlier) subject to a motion to combine, the panel in that middle-numbered case has the authority.122 The proposed rule change, as modified by Amendment No. 1, would codify this existing practice.123 i. Motions in Arbitration The Codes do not address the timing of DRS’s delivery of motions, responses, and replies to the arbitrator(s) on a panel.124 In practice, however, DRS distributes a motion, along with all the 115 See FINRA Rules 12312, 13312. Notice at 2147. 117 More specifically, ‘‘the [DRS] Director may combine separate but related claims into one arbitration’’ before the ranked arbitrator lists are due to the DRS Director. FINRA Rules 12314, 13314; see Notice at 2147; supra note 39. 118 FINRA Rules 12314, 13314. 119 Notice at 2147. 120 Id. 121 See Notice at 2147; Amendment No. 1 at 4. 122 Amendment No. 1 at 4 (expressing that this proposed rule change would ‘‘provide transparency and consistency regarding the current practice’’). ‘‘Although this scenario would be rare, FINRA notes that under the proposed amendment, the default would be for the panel appointed to the lowest numbered case with a panel to preside over the combined case.’’ Id. 123 Id.; proposed Rules 12314(b), 13314(b). 124 Notice at 2148. 116 See PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 related responses and replies to that motion, to the panel after the last reply date has elapsed, unless the panel directs otherwise.125 The proposed rule change would codify that practice, expressly providing that the DRS Director will send all motions, responses, and replies to the panel after the last reply date expires, unless the panel directs otherwise.126 If the DRS Director receives any submissions on the motion after the last reply date has elapsed, this proposed rule change would require the DRS Director to forward them to the panel upon receipt, and the panel would determine whether to accept them.127 In addition, this proposed rule change would amend the Codes to add crossreferences to: (1) FINRA Rules 12312 (Multiple Claimants), 12313 (Multiple Respondents), 13312 (Multiple Claimants), or 13313 (Multiple Respondents), as applicable, to indicate that motions related to separating claims or arbitrations would be decided by the DRS Director before a panel is appointed and by the panel after the panel is appointed; 128 and (2) proposed FINRA Rules 12314 (Combining Claims) and 13314 (Combining Claims), as applicable, to indicate which panel among multiple cases may combine separate but related claims into one arbitration or reconsider the DRS Director’s decision to combine claims upon motion of a party.129 Finally, the Codes require a motion to amend a pleading after panel appointment to ‘‘be accompanied by copies of the proposed amended pleading when the motion is served on the other parties and filed with the Director.’’ 130 In practice, ‘‘accompanied by copies’’ has been interpreted to mean ‘‘accompanied by hard copies.’’ 131 To clarify that parties may serve on other parties and file with the DRS Director electronic copies (as well as hard copies) of a proposed amendment pleading (i.e., to ‘‘clarify that hard copies are not required’’), this proposed rule change would provide that a motion to amend a pleading need only ‘‘include,’’ rather than ‘‘be accompanied 125 Id. 126 Proposed Rules 12503(d), 13503(d). 127 Id. 128 Proposed Rules 12503(e)(3), 13503(e)(3); see Notice at 2148. 129 Proposed Rules 12503(e)(4), 13503(e)(4). The addition of the proposed text to Rules 12503(e) and 13503(e) requires the renumbering of some paragraphs in that subsection. See Notice at 2148 n.63. 130 FINRA Rules 12503(a)(4), 13503(a)(4). 131 See Notice at 2148 n.63. E:\FR\FM\13SEN1.SGM 13SEN1 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices by copies of,’’ the proposed amended pleading.132 k. Hearing Records j. Witness Lists Shall Not Be Combined With Document Lists ddrumheller on DSK120RN23PROD with NOTICES1 Under the Codes, at least 20 days before the first scheduled hearing, all parties must: (1) provide all other parties—but not the DRS Director or arbitrators—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; 133 and (2) provide each other party—as well as the DRS Director—with the names and business affiliations of all witnesses they intend to present at the hearing.134 Separately, FINRA stated that parties often file a single document with the DRS Director that includes a list of documents and other materials, such as exhibits, they intend to use at the hearing that have not already been produced and their witness list.135 Because the list of documents and other materials ‘‘could contain prejudicial or inadmissible material, as a service to forum users, the DRS Director will manually remove this information from the document containing the witness list before forwarding [the witness list] to the panel.’’ 136 But, at times, the DRS 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.’’ 137 The proposed rule change protects against this risk of inadvertent disclosure by expressly providing that if parties create lists of 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 may serve the lists on all other parties, but shall not combine the lists with the witness lists filed with the DRS Director pursuant to Rule 12514(b) or 13514(b), as applicable.138 132 Proposed Rules 12503(a)(4), 13503(a)(4); see Notice at 2148 n.63 (erroneously citing proposed Rules 12504(a)(4) and 13504(a)(4) when describing this proposed rule change); FINRA April Letter at 1 n.1 (correcting the error). 133 See FINRA Rules 12514(a), 13514(a) (‘‘The parties should not file the documents with the [DRS] Director or the arbitrators before the hearing.’’). 134 FINRA Rules 12514(b), 13514(b). 135 Notice at 2148. 136 Id. 137 Id. 138 Proposed Rule 12514(a), 13514(a); see Notice at 2148. VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 The official record of an arbitration hearing is the DRS Director’s tape, digital, or other recording of every arbitration hearing; however, if a party chooses to make a stenographic record of a hearing, a panel may decide in advance of a hearing that a party’s stenographic record will be the official record of the hearing.139 If the DRS Director’s recording is the official record, the panel ‘‘may order the parties to provide a transcription of the recording’’ and ‘‘copies of the transcription must be provided to each arbitrator, served on each party, and filed with the Director.’’ 140 If a party’s stenographic record is the official record, ‘‘a copy must be provided to each arbitrator, served on each other party, and filed with the Director.’’ 141 Further, ‘‘[t]he cost of making and copying the stenographic record will be borne by the party electing to make the stenographic record, unless the panel decides that one or more other parties should bear all or part of the costs.’’ 142 But the Codes do not specify which party must provide to each arbitrator, serve on each other party, and file with the DRS Director a copy of a transcription of the official record.143 The proposed rule change would assign that responsibility to the party or parties: (1) ordered to provide a transcription; or (2) electing to make a stenographic record.144 In addition, FINRA indicated that ‘‘executive sessions’’ are not recorded because they are not part of the official record of the hearing.145 Rather, they are ‘‘discussions among arbitrators’’ outside the presence of the parties, the parties’ representatives, witnesses, and stenographers.146 FINRA stated that to promote ‘‘transparency and consistency,’’ this proposed rule change would expressly provide that executive sessions would not be recorded.147 l. Dismissal of Proceedings for Insufficient Service The Codes require parties, other than those proceeding pro se, to serve all pleadings and other documents through the Portal.148 Service is accomplished on the date of submission in the 139 FINRA 140 FINRA Rules 12606, 13606. Rules 12606(a)(2), 13606(a)(2). 141 Id. 142 Id. 143 Notice at 2148. Rules 12606(a)(2), 13606(a)(2), 12606(b)(2), 13606(b)(2). 145 Notice at 2148. 146 Id. 147 Proposed Rules 12606(a)(1), 13606(a)(1). 148 FINRA Rules 12300, 13300; see supra note 39. 144 Proposed PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 62841 Portal.149 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 was complete and sufficient before the case may proceed to hearing.150 Although the Codes do not address what action the panel should take if it determines that service was insufficient,151 current practice permits a panel to dismiss a claim or arbitration without prejudice if it finds insufficient service.152 The proposed rule change would codify this practice, expressly permitting a panel to dismiss a claim or arbitration without prejudice if it finds insufficient service upon a respondent.153 The proposed rule change would also make non-substantive changes to the Codes. FINRA Rules 12700 (Dismissal of Proceedings Prior to Award) and 13700 (Dismissal of Proceedings Prior to Award) currently include crossreferences to specific rules in which a panel may dismiss a claim or an arbitration, including dismissals of time-barred claims,154 dismissals as a ‘‘sanction for material and intentional failure to comply with an order of the panel,’’ 155 and dismissals due to multiple postponements.156 The rules do not, however, include crossreferences to FINRA rules generally governing motions to dismiss (i.e., FINRA Rules 12504 and 13504). The proposed rule change would amend Rules 12700(b) and 13700(b) to add a cross-reference to Rule 12504 or 13504, as applicable.157 m. Dismissal of Claims Requires Issuance of an Award An ‘‘award’’ is a document stating the final disposition of an arbitration at its conclusion.158 It may include, among other things, a ‘‘summary of the issues . . . in controversy,’’ the damages or relief requested, the damages or relief the panel has awarded, and the panel’s reasoning.159 The Codes require FINRA to publish awards, which it does on its 149 Id. 150 Notice at 2148. at 2148–49. 152 Id. at 2149. 153 Proposed Rules 12700(c), 13700(c). 154 FINRA Rule 12700(b) (citing Rule 12206); FINRA Rule 13700(b) (citing Rule 13306). 155 FINRA Rule 12700(b) (citing Rule 12212(c)); FINRA Rule 13700(b) (citing Rule 13212(c)). 156 FINRA Rule 12700(b) (citing Rule 12601(c)); FINRA Rule 13700(b) (citing Rule 13601(c)). 157 Proposed Rules 12700(b)(1), 13700(b)(1). The proposed rule change also would replace the bulleted list with a numbered list. Proposed Rules 12700(b), 13700(b). 158 FINRA Rules 12100(c), 13100(c), 12904(b), 13904(b). 159 See FINRA Rules 12904, 13904. 151 Id. E:\FR\FM\13SEN1.SGM 13SEN1 62842 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices website.160 Although the Codes permit a panel to grant a motion to dismiss a party’s entire case after the conclusion of that party’s case-in-chief,161 the Codes do not address whether such a dismissal requires the issuance of an award.162 FINRA stated that current practice is ‘‘to require the issuance of an award’’ in this situation because ‘‘the dismissal of all a claimant’s claims disposes of the case.’’ 163 The proposed rule change would codify this practice by requiring any panel that grants a motion to dismiss all claims to issue a ‘‘decision’’ containing the elements of a written award and make the decision ‘‘publicly available as an award.’’ 164 III. Discussion and Commission Findings ddrumheller on DSK120RN23PROD with NOTICES1 After careful review of the proposed rule change, the comment letters, and FINRA’s response to the comments, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder that are applicable to a national securities association.165 Specifically, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act, which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and, in general, protect investors and the public interest.166 In particular, as set forth below, the Commission finds that the proposed rule change is reasonably designed to protect investors and the public interest. It promotes transparency about FINRA’s arbitration process and helps ensure consistent requirements across arbitration cases. The Commission addresses each aspect of the proposed rule change, and any related comments, in turn. 160 See FINRA Rules 12904(h) and 13904(h); see also FINRA, Arbitration Awards Online, https:// www.finra.org/arbitration-mediation/arbitrationawards. 161 See FINRA Rules 12504(b), 13504(b). 162 Notice at 2149. 163 Id. 164 Id.; see proposed Rule 12504(b), 13504(b); FINRA Rules 12904(e), 13904(e) (describing elements of an award). 165 In approving this rule change, the Commission has considered the rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 166 15 U.S.C. 78o–3(b)(6). VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 A. Arbitrator List-Selection Amendments 1. Removal of Arbitrators for Conflicts of Interest Before Ranking Lists Are Sent to the Parties As stated above, the proposed rule change would codify existing practice by expressly requiring the DRS Director to manually review arbitrators on each arbitrator ranking list for current conflicts of interest not identified within the NLSS selection process and authorizing the DRS Director to remove arbitrators based on the existence of such conflicts before sending the arbitrator ranking lists to the parties.167 Under this proposed rule change, ‘‘[i]f an arbitrator is removed due to such conflicts, the list selection algorithm will randomly select an arbitrator to complete the list.’’ 168 FINRA stated that this proposed rule change responds to the Lowenstein Report’s recommendation that the Codes require DRS’s Neutral Management Department to conduct a manual review for conflicts of interest prior to sending the arbitrator list to the parties.169 FINRA believes that this proposed rule change would enhance the transparency of the arbitrator-selection process by codifying DRS’s practice of conducting a manual review for conflicts of interest that the NLSS may have missed prior to sending an arbitrator ranking list to the parties.170 Four commenters supported this proposed rule change.171 One commenter emphasized that this 167 See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5), 13403(b)(5); Notice at 2145. 168 Proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5), 13403(b)(5). The DRS Director will send the lists generated by the NLSS to all parties at the same time, within approximately 30 days after the last answer is due, regardless of the parties’ agreement to extend any answer due date. See FINRA Rules 12402(c), 12403(b), 13403(c). 169 See Notice at 2144; Lowenstein Report at 36. 170 See Notice at 2144–45, 2149. 171 Letter from Hugh Berkson, President, Public Investors Advocate Bar Association (‘‘PIABA’’), to Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission (Feb. 1, 2023) (‘‘PIABA Letter’’) at 2; letter from Elissa Germaine, Supervising Attorney, Fairbridge Investor Rights Clinic, Pace University School of Law, to Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission (Feb. 2, 2023) (‘‘Pace Letter’’) at 1; letter from Christine Lazaro, Professor of Clinical Legal Education & Director of the Securities Arbitration Clinic, St. John’s University School of Law, to Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission (Feb. 2, 2023) (‘‘St. John’s Letter’’) at 1; and letter from William Jacobson, Clinical Professor & Director, Cornell Law School’s Securities Law Clinic, to Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission (Feb. 2, 2023) (‘‘Cornell Letter’’) at 1–2 (Cornell’s pagination is mistaken; throughout this Order, the Commission refers to the actual page number as it appears in the sequence of the PDF document). PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 proposed rule change would provide ‘‘much greater transparency to internal FINRA processes.’’ 172 A second commenter indicated that it would boost confidence in the arbitrator listselection process.173 A third commenter stated that it would promote efficiency and fairness in the arbitration process by ‘‘prevent[ing] scenarios where the parties would have to initiate a challenge to remove arbitrators due to blatant conflicts of interest once a panel has been appointed.’’ 174 A fifth commenter offered no objection to this proposed rule change provided that the DRS Director’s authority would be limited to ‘‘conflicts of interest of the type screened out by the [NLSS],’’ and the DRS Director would not have ‘‘unlimited discretion to strike arbitrators for potential or suspected conflicts of interest or bias.’’ 175 The commenter acknowledged that FINRA publishes some general guidance on conflicts of interest 176 but suggested that ‘‘the Codes define ‘conflicts of interest’ to clarify to the parties what relationships will cause an arbitrator to be struck by NLSS or manually by the Director.’’ 177 In response, FINRA stated that the ‘‘non-exhaustive list of potential conflicts . . . published on [its] website 172 PIABA Letter at 2. John’s Letter at 1 (‘‘Codifying this process will help parties feel confident in the selection process.’’). St. John’s couples its support with a recommendation that FINRA ‘‘upgrad[e] the archaic algorithm by which the conflicts are screened,’’ thus ‘‘limit[ing] the necessity for manual review.’’ St. John’s Letter at 1. This comment is outside the scope of this proposed rule change, as FINRA has not proposed any changes to the NLSS itself. FINRA indicated, however, that it is in the process of assessing whether the NLSS remains ‘‘the most effective means in creating random, computergenerated arbitrator lists for the arbitrator participants.’’ FINRA April Letter at 4. 174 Cornell Letter at 2. 175 Letter from Aleah Jones, Pickard Djinis and Pisarri LLP, to Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission (May 9, 2023) (‘‘Pickard Letter’’) at 3. 176 Id. at 3 n.8 (citing FINRA, How Parties Select Arbitrators, https://www.finra.org/arbitration mediation/arbitrator-selection). In the Notice, FINRA cited the same web page and identified the following potential conflicts of interest: ‘‘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.’’ Notice at 2145 n.11. 177 Pickard Letter at 3. 173 St. E:\FR\FM\13SEN1.SGM 13SEN1 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 sufficiently explains to forum users what types of relationships or connections FINRA looks for to determine whether a conflict of interest exists.’’ 178 The Commission believes that expressly requiring the DRS Director to manually review arbitrators on each arbitrator ranking list for current conflicts of interest not identified within the NLSS and authorizing the DRS Director to remove arbitrators based on the existence of such conflicts should improve fairness in the arbitration process. Specifically, the proposed rule change should help ensure that each arbitrator ranking list is composed of arbitrators that are free of conflicts of interest with the parties to the arbitration. The Commission further notes that the proposed rule change does not expand the DRS Director’s discretion to remove arbitrators from the ranking lists due to a conflict of interest. Instead, the DRS Director’s review of ranking lists will continue to be limited to current conflicts of interest not identified within the NLSS selection process and consistent with those described by FINRA on its website. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 2. Removal of Arbitrators for Conflicts of Interest or Bias After Lists Are Sent to the Parties but Before the First Hearing Session In addition to authorizing the DRS Director to remove an arbitrator for a conflict of interest before the NLSSgenerated ranking lists are sent to the parties,179 the proposed rule change would expressly authorize the DRS Director to remove an arbitrator for a conflict of interest or bias on the DRS Director’s own initiative or upon a party’s request ‘‘[a]fter the Director sends the lists generated by the list selection algorithm to the parties, but before the first hearing session begins.’’ 180 FINRA explained that this change would ‘‘ensure that the 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.’’ 181 Four commenters supported this proposed rule change.182 One of these 178 See FINRA August Letter at 4. proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5), 13403(b)(5). 180 See proposed Rules 12407(a), 13410(a). 181 See Notice at 2145. 182 See PIABA Letter at 2; Pace Letter at 1 (noting its ‘‘support [for] FINRA’s proposed list selection process amendments,’’ though it only emphasizes 179 See VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 four commenters reasoned that it ‘‘would assist parties unfamiliar with the arbitration process by helping them understand their rights and abilities as it relates to challenges to remove arbitrators.’’ 183 A fifth commenter objected to the proposed rule change, expressing concern that parties could ‘‘exert greater control over the arbitral selection process than they had under the previous rule set’’ and assert a ‘‘conflict of interest or bias’’ as a form of gamesmanship.184 This commenter urged FINRA to ‘‘restore the arbitration ranking system previously in place.’’ 185 In response, FINRA stated that the proposed rule change would not amend the process related to the removal of arbitrators on the DRS Director’s own initiative or upon a party’s request.186 Rather, the proposed rule changes would clarify the timing for the process (i.e., after the DRS Director sends the lists generated by the NLSS to the parties, but before the first hearing session begins).187 Accordingly, to challenge an arbitrator, the Codes would continue to require a party to file a written motion with DRS and serve the motion on each party so that the motions are available to all parties.188 Thus, if a party challenges an arbitrator, all other parties are provided an opportunity to make their arguments prior to any decision by the DRS Director.189 The Commission believes the fifth commenter’s objection reflects a mistaken reading of this proposed rule change. The Codes currently permit the DRS Director to remove an arbitrator for a conflict of interest or bias, either upon request of a party or on the DRS Director’s own initiative at any point after parties’ receipt of the arbitrator ranking lists until the first hearing session begins.190 The proposed rule change does not alter the DRS Director’s or parties’ ability to challenge an arbitrator for cause but rather would make the process more transparent by making explicit in the rule text that such challenge may take place at any point after receipt of the arbitrator ranking lists until the first hearing session begins. The Commission believes that the proposed rule change is reasonably designed to help ensure its support for the written-decision proposed rule change); Cornell Letter at 2; St. John’s Letter at 2. 183 See St. John’s Letter at 2. 184 See Pickard Letter at 3–4. 185 Id. at 4. 186 See FINRA August Letter at 3–4. 187 See proposed Rules 12407(a), 13410(a). 188 See id. at 4; see also FINRA Rules 12503 (Motions) and 13503 (Motions). 189 See FINRA August Letter at 4. 190 See FINRA Rules 12407(a) and 13410(a). PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 62843 that all parties are equally informed of their ability to challenge arbitrators for cause. For these reasons, the Commission finds that it is reasonably designed to protect investors and in the public interest. 3. Written Explanation of DRS Director’s Decision As stated above, the proposed rule change would codify existing practice by expressly requiring the DRS Director to provide the parties to an arbitration with a written explanation of their decision ‘‘to grant or deny a party’s request to remove an arbitrator . . . .’’ 191 FINRA stated that it codified this current practice in response to a recommendation in the Lowenstein Report.192 Four commenters supported this proposed rule change, explaining that written explanations would improve transparency, consistency, and fairness in the arbitrator-removal process.193 One commenter also emphasized that written explanations would promote ‘‘confidence in the integrity of the arbitration selection process.’’ 194 Two commenters indicated that written explanations would help parties to understand the DRS Director’s decisions.195 But another commenter coupled its support for this proposed change with a recommendation for improvement: the written explanations should be published in a ‘‘publicly available database, such as the one currently maintained for FINRA awards.’’ 196 According to this commenter, publishing such information—even in redacted form— would illuminate the nature and scope of the factors that FINRA considers to be ‘‘legitimate ground[s] for a challenge to a potential arbitrator.’’ 197 A fifth commenter offered no objection to this proposed rule change provided, as stated above, that the DRS Director would not have unlimited authority to strike potential arbitrators.198 In response, FINRA acknowledged the commenter’s recommendation to publish the DRS Director’s written explanation in a publicly available database in order to enhance ‘‘transparency regarding the arbitrator 191 See proposed Rules 12407(c), 13410(c); Notice at 2145. 192 See Notice at 2145; Lowenstein Report at 37. 193 See PIABA Letter at 2; Cornell Letter at 2; Pace Letter at 2; St. John’s Letter at 2. 194 See Pace Letter at 2 (supporting the proposed rule change and noting the importance of ‘‘confidence in the integrity’’ of the system). 195 Id. at 2; Cornell Letter at 2. 196 See PIABA Letter at 2. 197 Id. at 2. 198 See Pickard Letter at 3. E:\FR\FM\13SEN1.SGM 13SEN1 62844 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices list selection process.’’ 199 However, FINRA declined to make public the DRS Director’s written explanations to grant or deny a party’s request to remove an arbitrator.200 FINRA explained that these decisions have ‘‘little precedential value’’—and their publication therefore offers limited public value—because each decision is based on the facts and circumstances of a single case.201 But to address the commenter’s recommendation to enhance transparency, FINRA stated that it would publish ‘‘the most common reasons for granting or denying partyinitiated challenges’’ on its website.202 FINRA believes that the publication of this information on its website would make the arbitrator-challenge process more transparent by providing parties with ‘‘useful information when considering potential challenges to remove an arbitrator.’’ 203 The Commission believes that expressly requiring the DRS Director to provide the parties to an arbitration with a written explanation of the DRS Director’s decision to grant or deny a party’s request to remove an arbitrator improves the perception of fairness in the arbitration forum by enhancing transparency into the removal process. Because the proposed rule change would not expand the DRS Director’s discretion to remove a conflicted or biased arbitrator, the DRS Director’s authority to remove such arbitrator would remain limited. In addition, with respect to public access to decisions on motions to remove arbitrators, the Commission believes that FINRA’s approach of publishing the most common reasons for granting or denying such requests on its website would provide participants considering whether to file a motion to remove an arbitrator for conflicts or bias with a valuable source of information regarding such challenges. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. ddrumheller on DSK120RN23PROD with NOTICES1 B. Procedural Amendments 1. Virtual Prehearing Conferences As stated above, the Codes currently indicate that prehearing conferences will generally be held by telephone.204 The proposed rule change would provide that prehearing conferences ‘‘will generally be held by video conference unless the parties agree to, or 199 See FINRA April Letter at 4. id. at 4–5. 201 Id. at 4. 202 See id. at 4–5. 203 Id. at 5. 204 See supra note 77. 200 See VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 the panel grants a motion for, another type of hearing session.’’ 205 FINRA stated that parties ‘‘have expressed a preference for holding prehearing conferences by video conference[,]’’ 206 explaining that some parties ‘‘may perceive an increase in their ability to participate or interact in the hearings by video.’’ 207 Three commenters supported this proposed rule change, and a fourth did not address this specific issue.208 One commenter emphasized that video conferences would ‘‘enhance[ ] communication between the parties, counsel, and arbitrators [by providing] the ability to read body language and facial expressions.’’ 209 Motivated by a concern that video conferencing could impose an ‘‘undue burden on claimants,’’ one commenter recommended that this proposed rule change require a panel to consider the parties’ access to and comfort with technology when evaluating motions for hearings in formats other than video.210 A fifth commenter offered general support for this proposed rule change but recommended that this proposed rule change permit ‘‘another type of hearing session . . . if agreed to by a majority of the parties.’’ 211 This commenter explained that ‘‘the majority should prevail without the matter needing to be put to a motion and considered at a prehearing session’’ where there are more than two parties to an arbitration.212 In response, FINRA stated that the COVID–19 pandemic required the development of ‘‘policies and procedures around conducting arbitration cases using virtual hearings and [therefore FINRA] created resource guides for parties and arbitrators for such hearings.’’ 213 Approximately three years later, ‘‘parties have become proficient with using this technology and have embraced it as an alternative to other hearing methods.’’ 214 The proposed rule change would reflect this preference. FINRA also stated that it would update, as appropriate, the guidance it makes available to participants to help ensure that all 205 See proposed Rules 12500(b), 12501(c), 12504(a)(5), 13500(b), 13501(c), 13504(a). 206 See Notice at 2145. 207 See Notice at 2150. 208 See Cornell Letter at 2; Pace Letter at 2; St. John’s Letter at 2; see PIABA Letter at 2–3 (noting general support for all procedural amendments, but not addressing this one specifically). 209 See Pace Letter at 2. 210 See Cornell Letter at 2. 211 See Pickard Letter at 4 (emphasis removed). 212 Id. at 4. 213 See FINRA April Letter at 11. 214 Id. PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 participants have the information they need to ‘‘participate fully in virtual prehearing conferences.’’ 215 If a party nonetheless prefers to have an in-person prehearing conference, FINRA stated that it could file a motion seeking that relief, and the panel can consider, among other things, ‘‘a party’s access to and comfort level with technology.’’ 216 In addition, FINRA stated that it believes a panel, once fully briefed, is in the best position to determine whether an alternative prehearing format is more suitable to the parties than the proposed default format of video conference. Therefore, FINRA declined to amend the proposed rule change to allow a majority of the parties to agree to another type of hearing.217 The Commission believes that requiring prehearing conferences to be held by video conference provides parties the opportunity to see and interact with the other participants in the case, enhancing their participation. But because this proposed rule change also permits a motion by a party for another hearing format, every party has a fair opportunity to request an alternative format based upon, among other things, access to or comfort with technology. Furthermore, the Commission believes FINRA reasonably determined that the arbitrator panel is in the best positioned to evaluate and determine whether another prehearing format is appropriate in situations where there is not agreement among the parties to another type of hearing. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 2. In-Person Hearings The proposed rule change would also amend the provision governing the format for hearings on the merits of a case. Currently, the Codes do not articulate a definitive format for hearings.218 FINRA stated, however, that ‘‘hearings are generally held in person,’’ and forum users ‘‘have not similarly expressed a preference for making video conference the default for hearings.’’ 219 The proposed rule change would codify existing practice, 215 Id. 216 See id. (stating that ‘‘[i]n addition, FINRA notes that once fully briefed, a panel will decide a motion regarding the hearing format based on all the information provided, which could include a party’s access to and comfort level with technology.’’). 217 See FINRA August Letter at 5. 218 See FINRA Rules 12600(b) and 13600(b) (stating that the panel will decide the time and date of the hearing at the initial prehearing conference or otherwise in another manner). 219 See Notice at 2145. E:\FR\FM\13SEN1.SGM 13SEN1 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices providing that all hearings ‘‘will generally be held in person unless the parties agree to, or the panel grants a motion for, another type of hearing session.’’ 220 No commenter offered specific support or opposition to this proposed change. In light of FINRA’s experience with forum users, the Commission believes FINRA’s determination to require that hearings on the merits generally be held in person is reasonable. It will clarify the default format of the hearing, which should enhance transparency and efficiency, and eliminate potential misunderstandings among parties. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. ddrumheller on DSK120RN23PROD with NOTICES1 3. Virtual Option for Special Proceedings As stated above, the proposed rule change would require parties to hold special proceedings in Simplified Arbitrations by video conference, unless: (1) the claimant requests at least 60 days before the first scheduled hearing that it be held by telephone; or (2) the parties agree to another type of hearing session.221 This proposed rule change follows FINRA’s receipt of ‘‘suggestions from customers that they would prefer . . . to have the option to have a special proceeding by video conference.’’ 222 Four commenters supported this proposed rule change, and a fifth offered no objection.223 One commenter emphasized that it would ‘‘facilitate more accurate communication compared to telephone conferences’’ by permitting participants to view facial expressions and reactions.224 Another commenter indicated that video conferences would permit ‘‘investors with small claims to present their case to the arbitrator without added expenses or travel.’’ 225 The Commission believes that requiring parties to hold special proceedings in Simplified Arbitrations by video conference (with limited exceptions) should improve the format and delivery of claimants’ cases to arbitrators in Simplified Arbitration. In addition, given the proliferation of video-conferencing technology to the 220 See proposed Rules 12600(b), 13600(b); but see supra note 77. 221 See proposed Rules 12800(c)(3)(B)(i), 13800(c)(3)(B)(i). 222 See Notice at 2146. 223 PIABA Letter at 3; Cornell Letter at 2–3; Pace Letter at 2; St. John’s Letter at 2; Pickard Letter at 4. 224 Cornell Letter at 3; see Pace Letter at 2. 225 St. John’s Letter at 2. VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 public, this proposed rule change should not impose logistical or financial burdens on parties. At the same time, however, the proposed rule change makes clear the flexibility to alter the format of these hearings as necessary where a claimant requests or the parties agree. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 4. Redacting Confidential Information As stated above, the proposed rule change would require any party in a Simplified Arbitration to redact any PCI from documents filed with the DRS Director.226 FINRA stated that this change would address ‘‘increasing concerns with customers’ identities being used for fraudulent purposes in the securities industry.’’ 227 It would also align the redaction requirements for Simplified Arbitrations with those of other arbitration cases.228 FINRA acknowledged that it previously declined to extend this requirement to Simplified Arbitrations due to a concern that pro se litigants would have difficulty complying.229 To address this concern, FINRA stated that it would update guidance on its website regarding how to redact PCI from documents filed with DRS.230 Four commenters broadly supported FINRA’s effort to protect investors’ PCI in Simplified Arbitrations, and a fifth offered no objection.231 But the four supportive commenters each expressed concern that this proposed rule change would disproportionately impact pro se claimants who may lack the technological experience to effectively and efficiently redact PCI.232 Notwithstanding that concern, one commenter concluded that ‘‘the benefits to privacy outweigh the increased complexity, assuming that the guidance provided by FINRA adequately assists pro se parties in making redactions.’’ 233 The other three supportive commenters recommended changes to the rule or its implementation to help mitigate their concern over pro se 226 See Notice at 2146 and n.29 (explaining that FINRA Rules 12300(d)(1)(C) and 13300(d)(1)(C) would be deleted); proposed Rules 12300(d)(1), 13300(d)(1). 227 See Notice at 2146. 228 See FINRA Rules 12300(d)(1)(A), 13300(d)(1)(A). 229 See Notice at 2146. 230 Id.; see PCI Guidance, supra note 83. 231 See PIABA Letter at 3; Cornell Letter at 3; Pace Letter at 2; St. John’s Letter at 2; Pickard Letter at 5. 232 See PIABA Letter at 3; Cornell Letter at 3; Pace Letter at 2–3; St. John’s Letter at 2. 233 See Cornell Letter at 3. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 62845 parties.234 Two of these commenters suggested that FINRA post redaction guidance both on its website and the Portal.235 One commenter emphasized the importance of FINRA providing clear, comprehensive, and plain-English guidance for the benefit of pro se claimants, as well as ‘‘examples of what a properly redacted document looks like, and basic suggestions about how to make the redactions.’’ 236 For cases in which claimants are unable to redact PCI notwithstanding the guidance, another commenter recommended that FINRA either apply the required redactions itself or permit investors to waive the redaction of their own PCI.237 The commenter explained that this alternative approach would prevent ‘‘dismissals either due to pro se filers’ inability to comply with the rule, or their abandoning their case because they don’t fully understand how to accomplish the redaction.’’ 238 In response, FINRA stated that it would provide clear, plain English guidance on the steps pro se parties can take to protect PCI and on how to redact PCI from documents filed with DRS on both its website and the Portal.239 But FINRA declined to permit pro se investors to waive the redaction of their own PCI because it would undermine this proposed rule change’s effort to ‘‘safeguard investors’ information and their financial resources.’’ 240 FINRA also declined to make the redactions itself, explaining that FINRA rules require the application of redactions before a document is ever filed with FINRA.241 In sum, ‘‘FINRA believes the benefits of safeguarding customers’ identities and sensitive information balance the concerns relating to pro se 234 See PIABA Letter at 3; Pace Letter at 2–3; St. John’s Letter at 2. 235 See PIABA Letter at 3 (stating that FINRA should post the guidance on the ‘‘case’s docket/ portal’’); Pace Letter at 3 (stating that FINRA should post the guidance on the Portal in a ‘‘visible and accessible manner, at the point in time when customers are likely to be uploading documents that may contain PCI’’ to help ‘‘ensure that guidance on PCI redaction is sufficiently beginnerand user-friendly and is not overlooked by pro se parties’’). 236 See Pace Letter at 3. 237 See St. John’s Letter at 2. 238 Id. 239 See FINRA April Letter at 5–6. 240 Id. at 6 (noting that waiver ‘‘would defeat the purpose of the Proposal’’). 241 Id.; see also FINRA Rules 12300(d)(1)(A) and 13300(d)(1)(A) (stating that ‘‘if the Director receives a claim . . . with the full Social Security number, taxpayer identification number or financial account number, the Director will deem the filing deficient under Rule 12307 and will request that the party refile the document in compliance with this paragraph.’’); see also FINRA April Letter at 6 n.20 (emphasizing that FINRA would treat any filed claim or document as deficient or improper if it contained certain PCI). E:\FR\FM\13SEN1.SGM 13SEN1 62846 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices parties’ lack of experience with filing claims in the forum.’’ 242 The Commission believes that requiring customers to redact PCI from any document they submit to DRS should help prevent substantial harm to investors. Absent this proposed rule change, unredacted PCI filed in Simplified Arbitrations could be misused by third parties. The Commission acknowledges commenters’ concern that pro se investors might struggle to comply with the new redaction requirements and believes FINRA’s plan to publish plain-English guidance should aid pro se investors in complying with these obligations without diminishing FINRA’s efforts to protect PCI. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. ddrumheller on DSK120RN23PROD with NOTICES1 5. Number of Hearing Sessions per Day As stated above, arbitrators receive compensation for each hearing session in which they participate.243 To calculate the number of hearing sessions per day, FINRA explained that DRS’s current practice is to calculate the total number of hearing hours, subtract any time spent for lunch, and divide the remainder by four (as in four hours).244 Consistent with this methodology, this proposed rule change would amend the definition of ‘‘hearing session’’ to indicate that, during a single day, ‘‘the next hearing session begins after four hours of hearing time has elapsed.’’ 245 One commenter supported this proposed rule change.246 Another commenter offered no objection to this proposed rule change so long as it ‘‘would not cause the party to whom fees are assessed . . . to pay for ‘session time’ not actually spent in session.’’ 247 More broadly, this commenter requested ‘‘greater clarity . . . as it is unclear . . . whether fees for two full sessions will be assessed after four hours and one minute of hearing time have elapsed.’’ 248 In response, FINRA stated that after four hours and one minute of hearing time have elapsed, it would pay arbitrators for two hearing sessions to ensure that they are compensated for their time and service to the DRS forum.249 FINRA further stated that it would update its arbitrator guidance to 242 See 243 See FINRA April Letter at 7. Notice at 2146 (citing FINRA Rules 12214, 13214). 244 Id. 245 Id.; see proposed Rules 12100(p), 13100(p). 246 See Cornell Letter at 3. 247 See Pickard Letter at 5. 248 Id. at 5. 249 See FINRA August Letter at 5. VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 encourage arbitrators to be efficient in managing the time during hearings to minimize, whenever possible, the number of hearing sessions held.250 The Commission believes that aligning the Codes’ definition of ‘‘hearing session’’ with FINRA’s current practice for calculating the number of hearing sessions in a single day promotes transparency and clarity in the way DRS calculates the number of hearing sessions. As such, the proposed rule change should help parties to an arbitration better understand the fees charged in a proceeding and better plan the presentation of their claim. For these reasons the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 6. Update Submission Agreement When Filing a Third-Party Claim As stated above, the proposed rule change would expressly require a respondent filing an answer with a third-party claim to (1) execute a Submission Agreement that lists the name of the third-party and (2) file the updated Submission Agreement with the DRS Director.251 FINRA stated that failing to file an updated Submission Agreement makes a third-party claim deficient under existing rules, and that the prevalence of this mistake currently causes time-consuming delays in arbitration.252 The proposed rule change would help ‘‘avoid potential delay and slower case processing times’’ by emphasizing the parties’ obligations under the rules.253 One commenter offered no objection to this proposed rule change.254 Another commenter supported this proposed rule change, explaining that it has ‘‘no drawbacks’’ because it would ‘‘add clarification and prevent delays.’’ 255 The Commission believes that by addressing the apparent confusion that results in filing of deficient claims, this proposed rule change helps ensure more consistent compliance with forum rules and prevent unnecessary delays in case processing. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 250 Id. 251 See proposed Rules 12303(b), 13303(b). Notice at 2146. 253 Id. at 2146–47 (explaining that the proposed rule change aims ‘‘[t]o clarify to parties the requirements related to third party claims and Submission Agreements’’). 254 See Pickard Letter at 5. 255 See Cornell Letter at 3. 252 See PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 7. Amending Pleadings or Filing ThirdParty Claims As stated above, the proposed rule change would modify several procedures related to the filing of amended pleadings and third-party claims. First, the proposed rule change would expand the application of FINRA Rules 12309 and 13309 (Amending Pleadings) from just amended pleadings to both amended pleadings and thirdparty claims.256 FINRA stated that these proposed rule changes would help address the current absence of express provisions governing the filing of thirdparty claims other than in a respondent’s answer to a claim.257 Second, the proposed rule change would make other changes to the Codes relating to amended pleadings, including specifying that: arbitrators are ‘‘appointed to’’ the panel, not placed ‘‘on’’ the panel; 258 an amended pleading or third-party claim that is included with a motion need not be a hard copy; 259 once the ranked arbitrator lists are due, no party may amend a pleading to add a party or file a thirdparty claim until a panel has been appointed and the panel grants a motion to amend a pleading or file the thirdparty claim; 260 service by first-class mail or overnight mail service is accomplished on the date of mailing; service by any other means is accomplished on the date of delivery; 261 the provisions in the Codes relating to responding to amended pleadings are separate from the current provisions relating to answering amended claims; 262 and before panel appointment, the DRS Director would be authorized to determine whether any party may file a response to an amended pleading.263 Third, the proposed rule change would expressly permit a customer to file a third-party claim if a respondent becomes an inactive FINRA member or associated person.264 256 See Notice at 2147; see generally proposed Rules 12309, 13309. 257 Notice at 2147; see FINRA Rules 12303(b), 13303(b). 258 Notice at 2147; see proposed Rules 12309(a), 13309(a). 259 Notice at 2147; see proposed Rules 12309(b)(1), 13309(b) (deleting ‘‘a copy of’’). 260 Notice at 2147; see proposed Rules 12309(c)(1), 13309(c)(1). 261 Notice at 2147; see proposed Rules 12309(a)(3), 13309(a)(3). 262 Notice at 2147; see proposed Rules 12309(d), 13309(d); FINRA Rules 12310, 13310. 263 Notice at 2147; see proposed Rules 12309(d), 13309(d); FINRA Rules 12310, 13310. 264 Proposed Rules 12309(b)(2), 12309(c)(2). E:\FR\FM\13SEN1.SGM 13SEN1 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices Two commenters supported these proposed rule changes,265 and a third offered no objection.266 The Commission believes that by addressing procedural and other ambiguities in the relevant rules, these proposed rule changes should enhance the transparency of the forum’s procedures and promote their consistent and efficient application. For this these reasons, the Commission finds that the proposed rule changes are reasonably designed to protect investors and the public interest. ddrumheller on DSK120RN23PROD with NOTICES1 8. Combining Claims As stated above, the proposed rule change would address which panel among those in multiple cases involving separate but related claims would decide a motion to combine such claims into a single arbitration or reconsider the DRS Director’s previous decision on a motion to combine such claims.267 Specifically, the original proposed rule change would have set forth rules governing two scenarios: (1) if a panel has been appointed to the lowest numbered case, the panel in that case would have the above-referenced authority; and (2) 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 would have the abovereferenced authority.268 FINRA stated that this original proposed rule change would have codified current practice.269 One commenter offered no objection to this proposed rule change.270 A second commenter stated that as originally proposed, the proposed rule change would promote clarity and efficiency by codifying current practice.271 However, this commenter noted that this original proposed rule change had an apparent gap—it did not address ‘‘what happens if a panel has only been appointed to cases numbered in the middle (i.e.[,] neither the lowest nor the highest) if more than two combinable claims are involved.’’ 272 In its response, FINRA amended the proposed rule change to address this commenter’s concerns. FINRA 265 PIABA Letter at 3; Cornell Letter at 3–4 (stating that this proposed rule change would codify respondents’ current ability to file third-party claims, create the same procedures for filing thirdparty claims as those for amending a complaint, and promote simplicity and fairness in the process). 266 Pickard Letter at 5. 267 See proposed Rules 12314(b), 13314(b); see also Amendment No. 1 at 4. 268 See Notice at 2147. 269 See id. 270 Pickard Letter at 5. 271 Cornell Letter at 4. 272 Id. VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 explained that the original proposed rule change addressed the two most common situations in which a motion to combine claims is filed.273 But to provide greater clarity, FINRA amended this proposed rule change to provide that ‘‘[i]f a panel has been appointed to one or more cases [involving separate but related claims], the panel appointed to the lowest-numbered case with a panel’’ has the authority to: (1) combine separate but related claims into one arbitration; and (2) reconsider the DRS Director’s decision on such a motion to combine claims.274 The Commission believes that by addressing ambiguities in the Codes and codifying existing practice, the proposed rule change enhances the transparency of the forum’s procedures and promotes their consistent application in all arbitration cases. In addition, this proposed rule change should enhance the efficiency of the arbitration process by reducing the number of arbitrations hearing separate but related claims. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 9. Motions in Arbitration As stated above, the proposed rule change would amend FINRA’s rules governing parties’ motions in arbitration. First, the proposed rule change would require the DRS Director to send all motions, responses, and replies to the panel after the last reply date expires, unless the arbitrator panel directs otherwise.275 If the DRS Director receives any submissions on the motion after the last reply date has elapsed, this proposed rule change would require the DRS Director to forward the submissions to the panel upon receipt, and the panel would determine whether to accept them.276 FINRA stated that this proposed rule change would codify an existing practice, bringing transparency and consistency to arbitration.277 Second, the proposed rule change would add cross-references to rules governing motions to separate or combine claims or arbitrations. In particular, the proposed rule change would clarify: (1) that the DRS Director may decide a motion to separate claims 273 FINRA April Letter at 7–8. Rules 12314(b)(1), 13314(b)(1); FINRA April Letter at 7–8; see also Amendment No. 1 at 4. 275 Proposed Rules 12503(d), 13503(d). 276 Id. 277 See Notice at 2148 (stating that ‘‘[i]n practice, DRS sends all motions and all responses to the panel after the last reply date has elapsed, unless otherwise directed by the panel.’’). 274 Proposed PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 62847 or arbitrations prior to panel appointment, but the panel assumes that authority upon its appointment; 278 and (2) which panel among multiple cases may combine separate but related claims into one arbitration or reconsider the DRS Director’s decision to combine claims upon motion of a party (as discussed above).279 Third, the proposed rule change would clarify if a motion to amend a pleading is made after panel appointment, the amended pleading that should be included with the motion does not need to be a hard copy.280 One commenter supported these proposed rule changes, characterizing them as ‘‘clear benefit[s] for both claimants and respondents’’ that do not alter current procedures.281 The Commission believes that by identifying and reducing ambiguity, the proposed rule change makes the arbitration process more transparent and promotes uniformity across arbitration cases. For these reasons, the Commission finds that the proposed clarifications are reasonably designed to protect investors and the public interest. 10. Witness Lists Shall Not Be Combined With Document Lists As stated above, the Codes require that at least 20 days before the first scheduled hearing, all parties must: (1) provide all other parties—but not the DRS Director or arbitrators—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; 282 and (2) provide each other party—as well as the DRS Director—with the names and business affiliations of all witnesses they intend to present at the hearing.283 Separately, FINRA stated that in addition to producing copies of documents and other materials they intend to use at the hearing, parties often produce and file with the DRS 278 Proposed Rules 12503(e)(3), 13503(e)(3) (adding cross-references to Rules 12312, 12313, 13312, and 13313, as applicable, which identify the circumstances in which the DRS Director or a panel may separate claims or arbitrations). 279 Proposed Rules 12503(e)(4), 13503(e)(4) (adding cross-reference to proposed Rules 12314 or 13314, as applicable, which articulates who has authority to decide motions to combine claims). The addition of the proposed text to Rules 12503(e) and 13503(e) requires the renumbering of certain paragraphs in that subsection. See Notice at 2148 n.63. 280 See proposed Rules 12503(a)(4), 13503(a)(4). 281 See Cornell Letter at 4. Another commenter offered no objection. See Pickard Letter at 5. 282 See FINRA Rules 12514(a), 13514(a) (stating that ‘‘[t]he parties should not file the documents with the [DRS] Director or the arbitrators before the hearing.’’). 283 FINRA Rules 12514(b), 13514(b). E:\FR\FM\13SEN1.SGM 13SEN1 62848 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices Director a single document listing such documents and other materials.284 FINRA explained that even though FINRA Rules 12514(a) and 13514(a) indicate that ‘‘parties should not file the documents with the [DRS] Director or arbitrators before the hearing,’’ the Codes do not currently include language regarding the sharing of document lists that parties may choose to create before the hearing.285 As such, parties who choose to create document lists, often file such lists with the DRS Director, along with the witness list.286 When parties file combined lists, FINRA stated that it endeavors to remove any potentially prejudicial or inadmissible materials (typically found in a party’s list of documents) from the combined lists before forwarding the witness lists to the arbitrators.287 To better protect against the risk of inadvertent disclosure of prejudicial or inadmissible materials, the proposed rule change would expressly provide that if a party creates a list of documents and other materials in their possession or control that they intend to use at the hearing that have not already been produced, it may serve the list on all other parties, but shall not combine the list with the witness list filed with the DRS Director pursuant to Rule 12514(b) or 13514(b), as applicable.288 One commenter offered ‘‘no strong objection,’’ but observed that FINRA arbitrators prefer identifying admissible documents and materials prior to the hearing to avoid mid-hearing delays.289 A second commenter supported this proposed rule change, emphasizing that it would reduce work for the DRS Director and minimize unintentional disclosures of confidential information to arbitrators without imposing a significant burden on the parties.290 The Commission believes the proposed rule change would reduce the risk of unintentional disclosure of prejudicial information to arbitrators without imposing a new obligation upon the parties. By more clearly setting forth the requirements of parties in arbitration, the proposed rule change would enhance the fairness of the arbitration process by helping to limit the exposure of prejudicial or 284 Notice at 2148. see FINRA Rules 12514(a), 13514(a). 286 See Notice at 2148; see also FINRA Rules 12514(a), 13514(a). 287 See Notice at 2148. 288 Proposed Rule 12514(a), 13514(a); see Notice at 2148. 289 Pickard Letter at 6 (indicating that arbitrators ‘‘prefer identifying admissible documents and materials prior to the hearing to avoid mid-hearing delays, and may use exhibit lists before and during the hearing for ease of reference.’’). 290 Cornell Letter at 4. ddrumheller on DSK120RN23PROD with NOTICES1 285 Id.; VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 inadmissible materials to the panel. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 11. Hearing Records a. Allocation to Parties of Responsibilities for Hearing Records The Codes require the DRS Director to ‘‘make a tape, digital, or other recording of every hearing.’’ 291 The official record of an arbitration hearing is the DRS Director’s tape, digital, or other recording of every arbitration hearing; 292 however, if a party chooses to make a stenographic record of a hearing, a panel may decide in advance of the hearing that the stenographic record will be the official record of the hearing.293 If the DRS Director’s recording is the official record, the panel ‘‘may order the parties to provide a transcription of the recording’’ and ‘‘copies of the transcription must be provided to each arbitrator, served on each party, and filed with the Director.’’ 294 If a party’s stenographic record is the official record, ‘‘a copy must be provided to each arbitrator, served on each other party, and filed with the Director.’’ 295 Further, ‘‘[t]he cost of making and copying the stenographic record will be borne by the party electing to make the stenographic record, unless the panel decides that one or more other parties should bear all or part of the costs.’’ 296 But the Codes do not specify which party must provide to each arbitrator, serve on each other party, and file with the DRS Director a copy of the official record.297 The proposed rule change would assign that responsibility to the party or parties: (1) ordered to provide a transcription of the DRS Director’s recording; or (2) electing to make a stenographic record.298 One commenter offered no objection.299 A second commenter opposed this proposed rule change as drafted.300 Specifically, the commenter opposed the appropriateness of requiring a claimant with limited financial means to produce a transcription of a hearing record.301 Noting the ‘‘high costs’’ associated with 291 Current FINRA Rules 12606(a)(1), 13606(a)(1). Rules 12606(a)(3), 13606(a)(3). 293 FINRA Rules 12606(b)(1), 13606(b)(1). 294 FINRA Rules 12606(a)(2), 13606(a)(2). 295 FINRA Rules 12606(b)(2), 13606(b)(2). 296 Id. 297 Notice at 2148. 298 Proposed Rules 12606(a)(2), 13606(a)(2), 12606(b)(2), 13606(b)(2). 299 Pickard Letter at 6. 300 Cornell Letter at 5. 301 See id. 292 FINRA PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 the provision of a transcription of a hearing record, the commenter recommended that FINRA: ‘‘(1) provide guidelines on the circumstances under which the panel might order hearing records from a party; (2) consider only allowing the panel to order hearing records from member firms; and (3) provide waivers or other forms of financial and legal assistance to indigent parties who cannot afford to provide the hearing records and whose case might be jeopardized as a result.’’ 302 In response, FINRA declined to amend this proposed rule change.303 FINRA explained that in cases where the DRS Director’s recording is the official record, a panel usually orders a transcript of the recording only upon a motion of a party, and that because the digital recording made by the DRS Director continues to be the official record of a hearing, these motions are rare.304 When such a motion is made, the parties may litigate the motion by addressing, among other things, whether a transcript should be ordered at all or which party should bear the burden of generating the transcript.305 In that process, a party could raise—and an arbitration panel would be wellpositioned to consider—objections based on financial grounds.306 For that reason, FINRA also declined ‘‘to provide for waivers or other forms of financial and legal assistance to parties who may not have the financial resources to pay for hearing records.’’ 307 FINRA indicated, however, ‘‘that guidance on the process for ordering a transcript from a party may be helpful to the parties in preparing their case,’’ so it stated that it would provide such guidance on its website if the Commission approves this proposed rule change.308 The Commission believes it is reasonable that FINRA has determined to rest the obligation of providing, serving, and filing a transcription or stenographic record on the party responsible for creating that record (in the case of a transcription) or on the party that elected to make the record (in the case of a stenographic record). Clearly identifying the party responsible for providing, serving, and filing a transcription or stenographic record should help clarify the obligations of the parties. Additionally, the panel should be well positioned to consider any cost302 Id. 303 FINRA April Letter at 9 n.28 and accompanying text. 304 Id. 305 See id. 306 Id. 307 Id. 308 Id. E:\FR\FM\13SEN1.SGM 13SEN1 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices related issues raised by the parties. For these reasons, this proposed rule change is reasonably designed to protect investors and the public interest. ddrumheller on DSK120RN23PROD with NOTICES1 b. Record of Executive Sessions As noted above, the Codes require the DRS Director to ‘‘make a tape, digital, or other recording of every hearing.’’ 309 Although the Codes do not specifically state that executive sessions will not be recorded, as a matter of practice, executive sessions are not recorded because they are not part of the official record of the hearing.310 Rather, executive sessions are ‘‘discussions among arbitrators’’ outside the presence of the parties, the parties’ representatives, witnesses, and stenographers.311 The proposed rule change would codify this practice by providing that the DRS Director will not make an official recording of any executive sessions, i.e., discussions among arbitrators outside the presence of the parties, witnesses, and stenographers.312 FINRA stated that this proposed rule change would promote ‘‘transparency and consistency’’ by codifying an existing practice.313 One commenter addressed this proposed rule change, offering no objection.314 The Commission believes that maintaining the confidentiality of executive session deliberations encourages candid discourse about a case among arbitrators. Specifically, the expectation of a private deliberation that is not recorded, in which each arbitrator can speak candidly, provides an opportunity to sharpen their assessments of a case and helps promote sound decision-making. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 12. Dismissal of Proceedings for Insufficient Service As stated above, the Codes require parties, other than those proceeding pro se, to serve all pleadings and other documents through the Portal.315 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 was complete and sufficient before the case may proceed to hearing.316 Although the 309 Current 310 Notice 311 See FINRA Rules 12606(a)(1), 13606(a)(1). at 2148. id. 312 Proposed Rules 12606(a)(1), 13606(a)(1). 313 Id. 314 See Pickard Letter at 6. Rules 12300, 13300; see supra note 39. 316 Notice at 2148. 315 FINRA VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 Codes do not address what action the panel should take if it determines that service was insufficient, current practice permits a panel to dismiss a claim or arbitration without prejudice (i.e., a party can refile their claim in the future) if it finds insufficient service.317 To promote ‘‘transparency and consistency,’’ the proposed rule change would expressly permit a panel to dismiss a claim or arbitration without prejudice if it finds insufficient service upon a respondent.318 One commenter supported this proposed rule change, agreeing that it codifies current practice and ‘‘ensures that errors and misunderstandings are minimized.’’ 319 A second commenter offered no objection.320 The Commission believes that permitting a panel to dismiss a claim or arbitration without prejudice if it finds insufficient service of a pleading or other document reasonably balances a respondent’s need for appropriate notice with a party’s ability to refile a claim without prejudice so the case can move forward. The Commission also believes that the proposed rule change would promote transparency about FINRA’s arbitration process and help ensure consistent procedures across arbitration cases. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. 13. Dismissal of Claims Requires Issuance of an Award As stated above, an award is a document stating the final disposition of a case.321 The Codes require FINRA to publish awards, which it does on its website.322 Currently, although the Codes permit a panel to grant a motion to dismiss a party’s entire case after the conclusion of that party’s case-inchief,323 the Codes do not specifically address whether such a dismissal requires the issuance, and publication, of an award.324 FINRA stated that as the dismissal of all a claimant’s claims disposes of a case, it is current practice to require the issuance, and publication, of an award for such dismissals.325 The proposed rule change would codify this practice by requiring a panel granting a motion to dismiss all claims to issue a 317 Id. at 2148–49. Rules 12700(c), 13700(c); see Notice at 2148–49. 319 Cornell Letter at 5. 320 Pickard Letter at 6. 321 See supra notes 158–159 and accompanying text. 322 See supra note 160. 323 See FINRA Rules 12504(b), 13504(b). 324 Notice at 2149. 325 Id. 318 Proposed PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 62849 ‘‘decision’’ containing the elements of a written award and make the decision ‘‘publicly available as an award.’’ 326 One commenter supported this proposed rule change.327 A second commenter objected to the proposed rule change, stating that the publication of an award dismissing all of a claimant’s claims would negatively impact the respondent’s reputation.328 Specifically, because all arbitration awards are published in a ‘‘permanent, unredacted database,’’ they ‘‘reiterate the details of the customer complaint information about each broker, regardless of the complaint’s merit.’’ 329 Similarly, because a motion to dismiss will be granted after claimant’s case-inchief and before respondents present their own case, the award ‘‘will not reflect any defense by [r]espondent[.]’’ 330 The commenter concluded that ‘‘[i]f a customer complaint has so little merit that it is disposed of through a Motion to Dismiss . . . , there is no regulatory purpose in ensuring that the member firm and/or registered representatives implicated by the complaint continue to have their reputations tainted by the allegations.’’ 331 In response, FINRA acknowledged that the award may not reflect any defense raised by respondents.332 However, FINRA stated that the Codes permit arbitrators to include a rationale underlying the award to provide 326 Id.; see proposed Rule 12504(b), 13504(b); FINRA Rules 12904(e), 13904(e) (describing elements of an award). 327 Cornell Letter at 5. 328 Pickard at 6–7. Another commenter asserted that the proposed rule change would improperly amend the meaning of ‘‘final award’’ to include a panel’s dismissal of some, but not all, of a claimants’ claims. See letter from Anonymous to Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission (Sep. 5, 2023). The Commission believes that this comment misinterprets the proposed rule change. In the Notice, FINRA stated that currently a panel renders a written award if it grants a motion to dismiss all of a claimant’s claims at the conclusion of the case in chief. See Notice at 2149. The proposed rule change would codify this practice. See proposed Rules 12504(b); 13504(b). FINRA further stated that if a 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 Notice at 2149 n.84 (citing FINRA Dispute Resolution Services Arbitrator’s Guide, https://www.finra.org/ sites/default/files/arbitrators-ref-guide.pdf). The proposed rule change is not modifying this practice. 329 Id. at 6. 330 Id. 331 Id. This commenter also asked FINRA to develop a mechanism to remove information from or redact records in its public arbitration award database. Id. at 7–8. As FINRA has not proposed rules related to the redaction or removal of information from that database, this comment is outside the scope of this proposed rule change. 332 See FINRA August Letter at 7. E:\FR\FM\13SEN1.SGM 13SEN1 62850 Federal Register / Vol. 88, No. 176 / Wednesday, September 13, 2023 / Notices relevant context.333 In addition, FINRA stated that after a panel dismisses a case at the conclusion of the case-in-chief, the firm must file an amended Uniform Application for Securities Industry Registration or Transfer (‘‘Form U4’’) for the associated person to report the final disposition of the case as dismissed.334 FINRA stated that along with the final disposition, an associated person can provide a brief summary or add context on Form U4 regarding the circumstances leading to the customer arbitration, as well as the current status or final disposition.335 This updated information is subsequently disclosed on the associated person’s BrokerCheck report, which is publicly available to investors.336 The Commission believes that this proposed rule change should promote transparency about FINRA’s arbitration process and help ensure consistent treatment of awards. Specifically, the proposed rule change equally requires all arbitration awards, including awards granting a motion to dismiss all claims, to be published. These published awards should provide current and future parties to an arbitration with data that could help inform the administration of their cases. The Commission acknowledges the commenter’s concern that a published award granting a motion to dismiss all claims may not reflect any defense raised by respondents. However, these concerns should be ameliorated by the fact that the Codes permit arbitrators to include a rationale underlying the award, providing relevant context to the dismissal of the claim such as the circumstances under which the claim was dismissed. In addition, an associated person may provide context on Form U4 regarding the circumstances leading to the customer arbitration, as ddrumheller on DSK120RN23PROD with NOTICES1 333 See id.; see also FINRA Rules 12904(f) and 13904(f). 334 See FINRA August Letter at 7 (citing FINRA By-Laws, Article V, Sections 2(c), 3(a) and 3(b)). 335 See id. at 7 n.30. 336 FINRA Rule 8312 (FINRA BrokerCheck Disclosure) governs the information FINRA releases to the public through its BrokerCheck system. Information available to investors through BrokerCheck includes, among other things, information reported on the most recently filed ‘‘Registration Forms’’ (with limited exceptions) for both member firms and registered individuals, and summary information about certain arbitration awards against the firm involving a securities or commodities dispute with a public customer; see also FINRA Rule 8312(b)(2)(A) (using the term ‘‘Registration Forms’’ to refer collectively to Form U4, the Uniform Termination Notice for Securities Industry Registration (Form U5), the Uniform Disciplinary Action Reporting Form (Form U6), the Uniform Application for Broker-Dealer Registration (Form BD), and the Uniform Request for BrokerDealer Withdrawal (Form BDW)). The BrokerCheck website is available at brokercheck.finra.org. VerDate Sep<11>2014 17:37 Sep 12, 2023 Jkt 259001 well as the claim’s current status or final disposition. For these reasons, the Commission finds that this proposed rule change is reasonably designed to protect investors and the public interest. IV. Conclusion For the reasons set forth above, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with Section 15A(b)(6) of the Exchange Act, which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and, in general, protect investors and the public interest.337 It is therefore ordered pursuant to Section 19(b)(2) of the Exchange Act 338 that the proposed rule change (SR– FINRA–2022–033), as amended by Amendment No. 1, be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.339 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–19729 Filed 9–12–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–98321; File No. SR– NASDAQ–2022–079] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, To Amend Rules 4702(b)(14) and (b)(15) Concerning Dynamic M–ELO Holding Period September 7, 2023. I. Introduction On December 21, 2022, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to replace the static holding period requirements for Midpoint Extended Life Orders and Midpoint Extended Life Orders Plus Continuous Book with 337 15 U.S.C. 78o–3(b)(6). U.S.C. 78s(b)(2). 339 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 338 15 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 dynamic holding periods. The proposed rule change was published for comment in the Federal Register on January 10, 2023.3 On February 22, 2023, pursuant to Section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 On March 9, 2023, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and superseded the proposed rule change as originally filed. On April 7, 2023, the Commission provided notice of filing of Amendment No. 1 and instituted proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.6 On July 6, 2023, pursuant to Section 19(b)(2) of the Act,7 the Commission designated a longer period on proceedings to determine whether to approve or disapprove the proposed rule change.8 On July 18, 2023, the Exchange filed Amendment No. 2 to the proposed rule change, which amended and superseded the proposed rule change as amended by Amendment No. 1. The Commission received comments on the proposed rule change.9 The Commission is publishing this Notice and Order to solicit comment on Amendment No. 2 in Sections II and III below, which sections are being published verbatim as filed by the Exchange, and to approve the proposed rule change, as modified by Amendment No. 2, on an accelerated basis. II. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rules 4702(b)(14) and (b)(15) of the Exchange’s Rulebook to replace the static holding period requirements for Midpoint Extended Life Orders and Midpoint Extended Life Orders Plus Continuous Book with dynamic holding periods. This Amendment No. 2 3 See Securities Exchange Act Release No. 92844 (January 4, 2023), 88 FR 1438. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 96963, 88 FR 12710 (February 28, 2023). 6 See Securities Exchange Act Release No. 97263, 88 FR 22498 (April 13, 2023). 7 15 U.S.C. 78s(b)(2). 8 See Securities Exchange Act Release No. 97844, 88 FR 44423 (July 12, 2023). 9 All comments received by the Commission on the proposed rule change are available on the Commission’s website at: https://www.sec.gov/ comments/sr-nasdaq-2022-079/srnasdaq2022079. htm. E:\FR\FM\13SEN1.SGM 13SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 176 (Wednesday, September 13, 2023)]
[Notices]
[Pages 62835-62850]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19729]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98317; File No. SR-FINRA-2022-033]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Approval of a Proposed Rule Change, as
Modified by Amendment No. 1, 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

September 7, 2023.

I. Introduction

On December 23, 2022, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the Code of Arbitration
Procedure for Customer Disputes \3\ (``Customer Code'') and the Code of
Arbitration Procedure for Industry Disputes \4\ (``Industry Code'')
(together, ``Codes''). The proposed rule change, as modified by
Amendment No. 1 (defined below), would amend provisions of the Codes
governing the arbitrator list-selection process to: (1) exclude
arbitrators from the arbitrator ranking lists based on certain
conflicts of interest; \5\ (2) permit the removal of an arbitrator for
cause at any point after receipt of the arbitrator ranking lists until
the first hearing session begins; \6\ and (3) provide parties with a
written explanation of the decision by the Director of FINRA Dispute
Resolution Services (``DRS Director'') \7\ to grant or deny a request
to remove an arbitrator.\8\ In addition, the proposed rule change, as
modified by Amendment No. 1, would amend procedural rules in the Codes,
such as those pertaining to holding prehearing conferences and

[[Page 62836]]

hearing sessions,\9\ initiating and responding to claims,\10\ motion
practice,\11\ claim and case dismissals,\12\ and providing a hearing
record.\13\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See FINRA Rule 12000 Series (Code of Arbitration Procedure
for Customer Disputes).
\4\ See FINRA Rule 13000 Series (Code of Arbitration Procedure
for Industry Disputes).
\5\ See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5),
13403(b)(5).
\6\ See proposed Rules 12407(a), 13410(a).
\7\ Unless the Codes provide otherwise, the DRS Director may
delegate their duties when it is appropriate. FINRA Rule 12103
(Director of FINRA Dispute Resolution Services).
\8\ See proposed Rules 12407(c), 13410(c).
\9\ See proposed Rules 12500(b), 12501(c), 12504(a)(5),
12600(b), 12800(c)(3)(B)(i), 13500(b), 13501(c), 13504(a), 13600(b),
13800(c)(3)(B)(i).
\10\ See proposed Rules 12303(b), 12309, 13303(b), 13309.
\11\ See proposed Rules 12503, 13503.
\12\ See proposed Rules 12700(b), 13700(b).
\13\ See proposed Rules 12606(a)(2), 12606(b)(2), 13606(a)(2),
13606(b)(2).
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The proposed rule change was published for comment in the Federal
Register on January 12, 2023.\14\ On February 14, 2023, FINRA consented
to extend until April 12, 2023, the time period in which the Commission
must approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to approve or
disapprove the proposed rule change.\15\ The Commission received five
comment letters in response to the Notice.\16\ On April 11, 2023, FINRA
responded to the comment letters received in response to the Notice and
filed an amendment to the proposed rule change (``Amendment No.
1'').\17\ On April 12, 2023, the Commission published a notice of
filing of Amendment No. 1 and an order instituting proceedings to
determine whether to approve or disapprove the proposed rule change, as
modified by Amendment No. 1 (hereinafter referred to as the ``proposed
rule change'' unless otherwise specified).\18\ The Commission received
two comment letters in response to that notice and order.\19\ On July
3, 2023, FINRA consented to an extension of the time period in which
the Commission must approve or disapprove the proposed rule change to
September 8, 2023.\20\ On August 10, 2023, the Commission received a
letter from FINRA responding to comments received in response to the
Order Instituting Proceedings prior to that date.\21\ This order
approves the proposed rule change.
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\14\ See Exchange Act Release No. 96607 (Jan. 6, 2023), 88 FR
2144 (Jan. 12, 2023) (File No. SR-FINRA-2022-033) (hereinafter, the
``Notice'').
\15\ See letter from Kristine Vo, Assistant General Counsel,
Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant
Chief Counsel, Division of Trading and Markets, U.S. Securities and
Exchange Commission (Feb. 14, 2023), https://www.finra.org/sites/default/files/2023-02/sr-finra-2022-033-extension-no-1.pdf.
\16\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2022-033/srfinra2022033.htm.
\17\ See letter from Kristine Vo, Assistant General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
U.S. Securities and Exchange Commission (Apr. 11, 2023) (``FINRA
April Letter''), https://www.sec.gov/comments/sr-finra-2022-033/srfinra2022033-20164047-333995.pdf.
\18\ Exchange Act Release No. 97291 (Apr. 12, 2023), 88 FR 23720
(Apr. 18, 2023) (File No. SR-FINRA-2022-033) (``Order Instituting
Proceedings'').
\19\ See supra note 16.
\20\ See letter from Kristine Vo, Assistant General Counsel,
Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant
Chief Counsel, Division of Trading and Markets, U.S. Securities and
Exchange Commission (July 3, 2023), https://www.finra.org/sites/default/files/2023-07/sr-finra-2022-033-extension-no2.pdf.
\21\ See letter from Kristine Vo, Assistant General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
U.S. Securities and Exchange Commission (Aug. 10, 2023) (``FINRA
August Letter''), https://www.sec.gov/comments/sr-finra-2022-033/srfinra2022033-242999-511962.pdf.
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II. Description of the Proposed Rule Change

A. Background

FINRA's Dispute Resolution Services (``DRS'') provides a forum for
disputes between customers, member firms, and associated persons of
member firms through two non-judicial proceedings: arbitration \22\ and
mediation.\23\ FINRA's arbitration forum accommodates two broad
categories of proceedings, and each has its own rules of procedure. The
Customer Code governs any dispute between a customer and a member or
associated person.\24\ The Industry Code governs any dispute
exclusively among associated persons and/or member firms.\25\ The Codes
govern all aspects of an arbitration claim, including: initiating and
responding to claims; appointment, disqualification, and authority of
arbitrators; prehearing procedures and discovery; and hearings,
evidence, and closing the record.\26\
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\22\ See FINRA Rules 12101(a) (Applicability of [Customer]
Code), 13101(a) (Applicability of [Industry] Code).
\23\ See FINRA Rule 14000 Series (Code of Mediation Procedure)
(``Mediation Code''). Because the proposed rule change would amend
the Customer Code and Industry Code, and not the Mediation Code,
this order does not provide background on the mediation process.
\24\ See FINRA Rules 12200, 12201. Under FINRA Rule 12200,
parties must arbitrate disputes about the non-insurance business
activity of a member or associated person if the customer requests
arbitration or arbitration is required by written agreement; under
FINRA Rule 12201, parties may agree in writing to arbitrate their
disputes about the non-insurance business activity of a member or
associated person.
\25\ See FINRA Rules 13101 (Industry Code applies to any dispute
filed under Rules 13200, 13201, or 13202), 13200 (requiring
arbitration ``if the dispute arises out of the [non-insurance]
business activities of a member or an associated person and is
between or among'' members and/or associated persons), 13201
(permitting arbitration of employment discrimination, whistleblower,
and sexual misconduct cases), 13202 (requiring arbitration if the
dispute involves the business activity of a registered clearing
agency that has entered into an agreement to use FINRA's arbitration
forum).
\26\ See FINRA Customer Code (FINRA Rule 12000 Series), Parts
III-VI; FINRA Industry Code (FINRA Rule 13000 Series), Parts III-VI.
---------------------------------------------------------------------------

In particular, the Codes govern the number of arbitrators on a
panel for a proceeding based, in part, on the value of the underlying
claim.\27\ If the amount of a claim is $50,000 or less, exclusive of
interest and expenses, the panel will consist of one arbitrator \28\
who will decide the claim based solely on the written pleadings and
other materials submitted by the parties (``Simplified
Arbitration'').\29\ If the amount of a claim is greater than $50,000
but not more than $100,000, exclusive of interest and expenses, the
panel will consist of one arbitrator (unless the parties agree in
writing to a three-arbitrator panel) who will decide the claim after a
hearing.\30\ If the amount of a claim is more than $100,000 (exclusive
of interest and expenses), is unspecified, or does not request money
damages, the panel will consist of three arbitrators (unless the
parties agree in writing to one arbitrator) who will decide the claim
after a hearing.\31\
---------------------------------------------------------------------------

\27\ See FINRA Rules 12401, 13401.
\28\ See FINRA Rules 12401(a), 13401(a). Alternatively, parties
may agree in writing to have a three-person panel decide their
simplified case. See FINRA Rules 12800(b), 13800(b).
\29\ See FINRA Rules 12401(a), 13401(a). Simplified Arbitration
is governed by FINRA Rule 12800 (Simplified Arbitration) or FINRA
Rule 13800 (Simplified Arbitration), respectively. In general, no
hearing will be held in Simplified Arbitration unless the customer
or claimant requests a hearing. FINRA Rules 12800(c)(1),
13800(c)(1).
\30\ See FINRA Rules 12401(b), 13401(b); see also FINRA Rules
12600(a), 13600(a) (hearing is required unless it is a Simplified
Arbitration or default proceeding).
\31\ See FINRA Rules 12401(c), 13401(c); see also FINRA Rules
12600(a), 13600(a) (hearing is required unless it is a Simplified
Arbitration or default proceeding).
---------------------------------------------------------------------------

FINRA maintains a roster for each of the three types of arbitrators
that may be appointed to a panel: public, non-public, and chairperson
arbitrators.\32\ In general, a ``public'' arbitrator is a person who is
otherwise qualified to serve as an arbitrator and is not disqualified
from service as a public arbitrator due to their current or past ties
to the financial industry.\33\ A ``non-public'' arbitrator is a person
who is otherwise qualified to serve as an arbitrator and is
disqualified from service as a public arbitrator due to their current
or previous association with the financial industry.\34\ An arbitrator
is eligible to serve as a ``chairperson'' if she has completed FINRA's
chairperson training and (1) has a law degree, is a member of a bar of
at least one jurisdiction, and has served as an arbitrator through
award on at least one arbitration administered by a self-regulatory
organization (``SRO'') in which hearings were held or (2) has served as
an arbitrator through award on

[[Page 62837]]

at least three arbitrations administered by a SRO in which hearings
were held.\35\
---------------------------------------------------------------------------

\32\ See FINRA Rules 12400(b), 13400(b).
\33\ See FINRA Rules 12100(aa), 13100(x).
\34\ See FINRA Rules 12100(t), 13100(r).
\35\ See FINRA Rules 12400(c), 13400(c). In customer disputes,
the chairperson must be a public arbitrator. See FINRA Rule
12400(c).
---------------------------------------------------------------------------

B. The Arbitrator-Selection Process

Whatever the size of the claim or nature of the dispute, the
arbitrator-selection process typically follows the same steps for each
proceeding: (1) the Neutral List Selection System (``NLSS''), a
computerized list-selection algorithm, randomly generates a list (or
lists) of arbitrators from DRS's rosters of eligible arbitrators for
the selected hearing location for each proceeding; \36\ (2) the DRS
Director sends the list(s) to the parties; \37\ (3) the parties
exercise limited strikes to eliminate candidates from the list(s); \38\
(4) the parties express preferences by ranking the remaining candidates
on the list(s); \39\ and (5) the DRS Director combines the strike and
ranking lists to identify and appoint the arbitrator(s) to the
panel.\40\
---------------------------------------------------------------------------

\36\ See FINRA Rules 12402(b) (Generating Lists in Customer
Cases with One Arbitrator), 12403(a) (Generating Lists in Customer
Cases with Three Arbitrators), 13403(a) (Lists Generated in Disputes
Between Members), 13403(b) (Lists Generated in Disputes Between
Associated Persons or Between or Among Members and Associated
Persons); see also FINRA Rules 12400(a), 13400(a).
\37\ See FINRA Rules 12402(c), 12403(b), 13403(c).
\38\ See FINRA Rules 12402(d)(1) (Striking and Ranking
Arbitrators in Customer Cases with One Arbitrator), 12403(c)(1)(A)
and (2)(A) (Striking and Ranking Arbitrators in Customer Cases with
Three Arbitrators), 13404(a) and (b) (Striking and Ranking
Arbitrators in Industry Disputes).
\39\ See FINRA Rules 12402(d)(2), 12403(c)(1)(B) and (2)(B),
13404(c). Parties must deliver their ranked lists to the DRS
Director no more than 20 days after the date upon which the DRS
Director sent the lists to the parties. Except for certain pro se
parties, parties must complete and deliver their ranked lists via
the DR Party Portal (``Portal''). See FINRA Rules 12402(d)(3),
12403(c)(3), 13404(d). The Portal permits arbitration case
participants to, among other things, file an arbitration claim, view
case documents, submit documents to FINRA and send documents to
other Portal case participants, and schedule hearing dates. See
FINRA, Dispute Resolution Services: DR Portal, https://www.finra.org/arbitration-mediation/dr-portal.
\40\ See FINRA Rules 12402(e) (Combining Lists in Customer Cases
with One Arbitrators), 12402(f) (Appointment of Arbitrators in
Customer Cases with One Arbitrator), 12403(d) (Combining Lists in
Customer Cases with Three Arbitrators), 12403(e) (Appointment of
Arbitrators in Customer Cases with Three Arbitrators), 13405
(Combining Lists in Industry Disputes), 13406 (Appointment of
Arbitrators in Industry Disputes).
---------------------------------------------------------------------------

For example, for a customer claim of $100,000 or less, the NLSS
would generate one list of 10 public arbitrators from the chairperson
roster.\41\ For a customer claim of more than $100,000, the NLSS would
generate three lists: one with 10 chair-qualified public arbitrators;
one with 15 public arbitrators; and one with 10 non-public
arbitrators.\42\ After each party exercises limited strikes against
each list and ranks the remaining arbitrators on each list in order of
preference,\43\ the DRS Director consolidates the strike and ranking
lists and appoints the highest-ranking arbitrator(s) who survived the
parties' strikes.\44\
---------------------------------------------------------------------------

\41\ See FINRA Rule 12402(b)(1).
\42\ See FINRA Rule 12403(a)(1).
\43\ See FINRA Rules 12402(d), 12403(c)(1), 12403(c)(2). The
number of strikes available varies for each type of case. For a
customer claim of $100,000 or less, each party may exercise up to
four strikes against the list. See FINRA Rule 12402(d)(1). For a
customer claim of more than $100,000, each party may exercise up to
four strikes of chair-qualified arbitrators, up to six strikes of
public arbitrators, and up to 10 strikes of non-public arbitrators.
See FINRA Rule 12403(c).
\44\ See FINRA Rules 12402(e), 12402(f), 12403(d), 12403(e)(1).
---------------------------------------------------------------------------

The arbitrator-selection process differs in industry disputes. For
an industry claim of $100,000 or less, the NLSS would generate one list
of 10 arbitrators from the chairperson roster.\45\ For an industry
claim of more than $100,000 between members, the NLSS would generate
two lists: one with 10 chair-qualified non-public arbitrators; and one
with 20 non-public arbitrators.\46\ For an industry claim of more than
$100,000 between associated persons or between or among members and
associated persons, the NLSS would generate three lists: one with 10
chair-qualified public arbitrators; one with 10 public arbitrators; and
one with 10 non-public arbitrators.\47\ Once the DRS Director sends the
NLSS-generated list(s) to the parties, each party exercises limited
strikes against the list(s) and ranks the remaining arbitrators in
order of preference.\48\ The DRS Director then consolidates the strike
and ranking list(s) and appoints the highest-ranking arbitrator(s) who
survived the parties' strikes.\49\
---------------------------------------------------------------------------

\45\ See FINRA Rules 13403(a)(1), 13403(b)(1). For disputes
between members, the arbitrator would generally be non-public unless
the parties agree in writing otherwise. See FINRA Rule 13402(a)(1).
For disputes between associated persons or between or among members
and associated persons, the arbitrator would generally be public
unless the parties agree in writing otherwise. See FINRA Rule
13402(b).
\46\ See FINRA Rule 13403(a)(2). The panel would consist of
three non-public arbitrators, one of which must be chair-qualified,
unless the parties agree in writing otherwise. See FINRA Rule
13402(a)(1).
\47\ See FINRA Rule 13403(b)(2). The panel would consist of two
public arbitrators and one non-public arbitrator. One of the public
arbitrators would serve as the chairperson unless the parties agree
in writing otherwise. See FINRA Rule 13402(b).
\48\ See FINRA Rule 13404. The number of strikes available
varies for each type of case. For industry disputes with a single
arbitrator, each party may exercise up to four strikes against the
list. See FINRA Rule 13404(a). For industry disputes of more than
$100,000 between members, each party may exercise up to four strikes
from the chair-qualified non-public arbitrator list and up to eight
strikes from the non-public arbitrator list. See FINRA Rule
13404(b). For industry disputes of more than $100,000 between
members and/or associated persons, each party exercises as many as
four strikes against each list. See FINRA Rule 13404(a).
\49\ See FINRA Rules 13405, 13406.
---------------------------------------------------------------------------

C. The Lowenstein Report

In a January 2022 order, a Georgia trial court vacated a FINRA
arbitration award, finding (among other things) that FINRA had a
``secret agreement'' with an attorney to remove certain arbitrators
from any lists generated in that attorney's cases.\50\ The trial court
concluded that such an agreement ``calls into question the entire
fairness'' of FINRA's arbitration forum.\51\ The Court of Appeals of
Georgia subsequently reversed the trial court's order, holding (among
other things) that ``there is no evidence that [a secret] agreement was
at play here'' given that the arbitrator in question appeared on the
ranking list notwithstanding the alleged existence of a ``secret
agreement'' to exclude him.\52\
---------------------------------------------------------------------------

\50\ See Leggett v. Wells Fargo Clearing Servs., LLC, No. 2019-
CV-328949, 2022 WL 1522096, at *10 (Ga. Super. Ct. Jan. 25, 2022).
\51\ Id. at *10.
\52\ Wells Fargo Clearing Servs., LLC v. Leggett, 876 SE2d 888,
895 (Ga. Ct. App. 2022).
---------------------------------------------------------------------------

Prior to the order's reversal on appeal, the Audit Committee of
FINRA's Board of Governors engaged a law firm, Lowenstein Sandler LLP
(``Lowenstein''), to: (1) independently review the trial court's
finding about the arbitrator-selection process in that case; and (2)
``determine generally whether any improvements to the arbitrator
selection process [are] necessary to ensure neutrality and improve
DRS's transparency.'' \53\ Lowenstein began its review in February
2022, and in June 2022, it delivered a 37-page report.\54\ The
Lowenstein Report concluded that there was not any agreement between
the attorney and FINRA regarding the panels for that attorney's
cases.\55\ ``Nonetheless, . . . Lowenstein identified a series of
potential improvements to the FINRA arbitrator selection process
intended to increase transparency and ensure neutrality in the work
undertaken by DRS.'' \56\
---------------------------------------------------------------------------

\53\ Christopher W. Gerold, Lowenstein Sandler LLP, The Report
of the Independent Review of FINRA's Dispute Resolution Services--
Arbitrator Selection Process at 2, https://www.finra.org/rules-guidance/guidance/reports/report-independent-review-finra-dispute-resolution-services-arbitrator-selection-process (June 28, 2022)
(hereinafter, the ``Lowenstein Report'').
\54\ Id.
\55\ Id. at 35.
\56\ Id.
---------------------------------------------------------------------------

In response to the recommendations made in the Lowenstein Report,
FINRA proposed amendments to its arbitrator list-selection process, as
well as additional changes to its procedural

[[Page 62838]]

rules governing arbitration cases, as described below.\57\
---------------------------------------------------------------------------

\57\ See Notice at 2144.
---------------------------------------------------------------------------

D. Proposed Rule Change

1. Arbitrator List-Selection Amendments
The proposed changes to the arbitrator list-selection process would
address: (1) manual reviews for conflicts of interest prior to sending
the ranking lists to parties; (2) the timing of conflict-of-interest
and bias challenges to remove arbitrators; and (3) written explanations
of the DRS Director's decision on a party-initiated challenge to an
arbitrator.
a. Removal of Arbitrators for Conflicts of Interest Before Ranking
Lists are Sent to the Parties
As stated above, the NLSS randomly generates a list or lists of
arbitrators from which parties in each arbitration case select a panel
to hear and decide the case. As part of the list-generation process,
the NLSS ``exclude[s] arbitrators from the lists based upon current
conflicts of interest.'' \58\ FINRA stated that DRS then ``conducts a
manual review [of the list(s)] for other conflicts not identified
within the list selection algorithm.'' \59\ The Codes do not, however,
describe this manual review process.\60\ The Lowenstein Report
recommended that FINRA amend the Codes to require that, prior to
sending the arbitrator list(s) to the parties, DRS's Neutral Management
Department must conduct a manual review for conflicts of interest.\61\
This proposed rule change would codify existing practice by expressly
requiring the DRS Director to manually review arbitrators on each list
for current conflicts of interest not identified within the NLSS and
authorizing the DRS Director to remove arbitrators based on the
existence of such conflicts.\62\ Under this proposed rule change,
``[i]f an arbitrator is removed due to such conflicts, the list
selection algorithm will randomly select an arbitrator to complete the
list.'' \63\
---------------------------------------------------------------------------

\58\ FINRA Rules 12402(b)(2), 12403(a)(3), 13403(a)(4),
13403(b)(4).
\59\ Notice at 2144.
\60\ Id.
\61\ See Lowenstein Report at 36. The Lowenstein Report
recommended that FINRA amend Rule 12400. Although FINRA has elected
to follow this recommendation, it did so by amending rules elsewhere
in the Codes. See proposed Rules 12402(b)(3), 12403(a)(4),
13403(a)(5), 13403(b)(5).
\62\ See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5),
13403(b)(5); Notice at 2145.
\63\ Proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5),
13403(b)(5).
---------------------------------------------------------------------------

b. Removal of Arbitrators for Conflicts of Interest or Bias After Lists
are Sent to the Parties but Before the First Hearing Session
Currently, the Codes permit the DRS Director to remove an
arbitrator for a conflict of interest or bias, either upon request of a
party or on the DRS Director's own initiative, before the first hearing
session begins.\64\ The Codes do not expressly specify, however, when
the DRS Director may first initiate, or a party may first bring, such a
challenge. FINRA stated that in practice parties may ``challenge an
arbitrator for cause at any point after receipt of the arbitrator
ranking lists until the first hearing session begins[.]'' \65\ The
proposed rule change would expressly codify this timing by authorizing
the DRS Director to remove an arbitrator for a conflict of interest or
bias, either upon request of a party or on the DRS Director's own
initiative, ``[a]fter the Director sends the list(s) generated by the
list-selection algorithm to the parties,'' but before the first hearing
session begins.\66\
---------------------------------------------------------------------------

\64\ FINRA Rules 12407(a), 13410(a). The DRS Director must first
notify the parties before removing an arbitrator on the DRS
Director's own initiative. The DRS Director may not remove the
arbitrator if the parties agree in writing to retain the arbitrator
within five days of receiving notice of the DRS Director's intent to
remove the arbitrator. FINRA Rules 12407(a)(2), 13410(a)(2).
\65\ See Notice at 2145 (indicating that FINRA wants to ``ensure
that the 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'').
\66\ See proposed Rules 12407(a), 13410(a).
---------------------------------------------------------------------------

c. Written Explanation of the DRS Director's Decision
Currently, the Codes do not require the DRS Director to issue a
written explanation of their decision on a party-initiated challenge to
remove an arbitrator.\67\ The Lowenstein Report recommended that FINRA
consider amending the Codes to require the issuance of a written
explanation of such a decision upon the request of either party.\68\
FINRA stated that its current practice is ``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.'' \69\ The proposed rule change would
codify this practice by expressly requiring the DRS Director to provide
the parties with a written explanation of their decision to grant or
deny a party's request to remove an arbitrator.\70\
---------------------------------------------------------------------------

\67\ Notice at 2145.
\68\ Lowenstein Report at 37.
\69\ Notice at 2145.
\70\ See proposed Rules 12407(c), 13410(c).
---------------------------------------------------------------------------

2. Procedural Rules Governing Arbitration Cases
The proposed rule change would also amend certain procedural rules
governing FINRA arbitration cases. The proposed rule change would
address thirteen such procedural issues, and this Order discusses each
in turn.
a. Virtual Prehearing Conferences
A ``prehearing conference'' is any hearing session ``that takes
place before the hearing on the merits begins.'' \71\ Currently, the
Codes indicate that prehearing conferences may generally be held by
telephone.\72\ However, FINRA stated that based on forum users'
experiences during the COVID-19 pandemic, DRS updated its practice to
provide that all prehearing conferences would be held by video.\73\ The
proposed rule change would codify this practice by expressly requiring
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.'' \74\
---------------------------------------------------------------------------

\71\ FINRA Rules 12100(y), 13100(w).
\72\ See FINRA Rules 12500(b), 12501(c), 13500(b), 13501(c).
\73\ Notice at 2145. See FINRA, Dispute Resolution Services:
Pre-Hearing Conferences, https://www.finra.org/arbitration-mediation/prehearing-conferences.
\74\ Proposed Rules 12500(b), 12501(c), 12504(a)(5), 13500(b),
13501(c), 13504(a).
---------------------------------------------------------------------------

b. In-Person Hearings
A ``hearing'' is ``the hearing on the merits of an arbitration.''
\75\ Currently, the Codes do not establish a default format for
hearings but FINRA stated that ``hearings are generally held in
person,'' and forum users ``have not similarly expressed a preference
for making video conference the default for hearings.'' \76\
Accordingly, other than for special proceedings (defined below),\77\
the proposed rule change would provide that all hearings ``will
generally be held in person unless the parties agree to, or the panel
grants a motion for, another type of hearing session.'' \78\
---------------------------------------------------------------------------

\75\ FINRA Rules 12100(o), 13100(o).
\76\ Notice at 2145.
\77\ Under the proposed rule change, a special proceeding
(defined below) would 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. See proposed Rules 12800(c) and
13800(c); see also infra notes 79-82 and accompanying text.
\78\ Proposed Rules 12600(b), 13600(b).
---------------------------------------------------------------------------

c. Virtual Option for Special Proceedings
As stated above, a Simplified Arbitration generally is decided by a
single arbitrator based on the parties' written submissions, unless the

[[Page 62839]]

customer or claimant requests a hearing.\79\ If the customer or
claimant requests a hearing, the Codes permit the customer or claimant
to request an abbreviated telephonic hearing (i.e., a ``special
proceeding'') on the merits.\80\ FINRA stated that it received
indications that customers ``would prefer also to have the option to
have a special proceeding by video conference.'' \81\ The proposed rule
change would require any special proceeding to be held by video
conference, unless: (1) the customer requests at least 60 days before
the first scheduled hearing that it be held by telephone; or (2) the
parties agree to another type of hearing session.\82\
---------------------------------------------------------------------------

\79\ FINRA Rules 12800, 13800.
\80\ FINRA Rules 12800(c)(3)(B), 13800(c)(3)(B).
\81\ Notice at 2146.
\82\ Proposed Rules 12800(c)(3)(B)(i), 13800(c)(3)(B)(i).
---------------------------------------------------------------------------

d. Redacting Confidential Information
The Codes require a party to redact any personal confidential
information (``PCI'') from documents they file with the DRS
Director.\83\ Currently, this requirement does not apply to parties in
a Simplified Arbitration.\84\ FINRA stated that ``[d]ue to increasing
concerns with customers' identities being used for fraudulent purposes
in the securities industry,'' the proposed rule change would expand
this redaction requirement to require a party in a Simplified
Arbitration to redact any PCI from documents filed with the DRS
Director.\85\ In addition, FINRA stated that it would ``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.'' \86\
---------------------------------------------------------------------------

\83\ FINRA Rules 12300(d)(1)(A), 13300(d)(1)(A). According to
FINRA, PCI includes social security numbers; brokerage, bank or
other financial account numbers; taxpayer identification numbers;
and medical records. See FINRA, Dispute Resolution Services:
Protecting Personal Confidential Information, https://www.finra.org/arbitration-mediation/protecting-personal-confidential-information
(last visited May 11, 2023) (``PCI Guidance'').
\84\ FINRA Rules 12300(d)(1)(C), 13300(d)(1)(C).
\85\ Notice at 2146 and n.29 (explaining that FINRA Rules
12300(d)(1)(C) and 13300(d)(1)(C) would be deleted); proposed Rules
12300(d)(1), 13300(d)(1).
\86\ See Notice at 2146; see also PCI Guidance, supra note 83.
---------------------------------------------------------------------------

e. Number of Hearing Sessions per Day
Arbitrators are paid for each hearing session in which they
participate.\87\ The Codes define a ``hearing session'' as ``any
meeting between the parties and arbitrator(s) of four hours or less,
including a hearing or a prehearing conference.'' \88\ FINRA stated
that ``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.'' \89\
---------------------------------------------------------------------------

\87\ See Notice at 2146 (citing FINRA Rules 12214, 13214).
\88\ FINRA Rules 12100(p), 13100(p).
\89\ Notice at 2146.
---------------------------------------------------------------------------

FINRA explained that DRS's current practice is to calculate the
total number of hearing hours, subtract any time spent for lunch, and
divide the remainder by four (as in four hours) to identify the number
of hearing sessions.\90\ FINRA stated that consistent with that
practice, the proposed rule change would amend the definition of
``hearing session'' to indicate that, during a single day, ``the next
hearing session begins after four hours of hearing time has elapsed.''
\91\
---------------------------------------------------------------------------

\90\ Id.
\91\ Id.; see proposed Rules 12100(p), 13100(p).
---------------------------------------------------------------------------

f. Update Submission Agreement When Filing a Third-Party Claim
The Codes define the term ``Submission Agreement'' to mean the
agreement ``that parties must sign at the outset of an arbitration in
which they agree to submit to arbitration under the Code.'' \92\ In
general, if a claim does not include a complete and properly executed
Submission Agreement, the claim would be considered deficient and would
not be served by the DRS Director on the other parties (e.g., if a
Submission Agreement fails to name all of the parties named in a claim,
the claim would be considered deficient).\93\ Thus, in practice, when a
respondent includes a third-party claim \94\ in their answer to a
statement of claim, the respondent must serve a fully executed
Submission Agreement and an answer on each other party, including the
third party.\95\ However, FINRA stated that because the Codes do not
expressly require the respondent to file an updated Submission
Agreement with any third-party claim, respondents often file deficient
claims because they neglect to add the third party to the Submission
Agreement.\96\ The proposed rule change would address this confusion.
Specifically, the proposed rule change would require a respondent
filing an answer containing a third-party claim to: (1) execute a
Submission Agreement that lists the name of the third-party; and (2)
file the updated Submission Agreement with the DRS Director.\97\
---------------------------------------------------------------------------

\92\ FINRA Rules 12100(dd), 13100(ee); see Notice at 2146 n.35.
\93\ FINRA Rules 12307(a)(1)-(3), 13307(a)(1)-(3).
\94\ A ``third-party claim'' is a ``claim asserted against a
party not already named in the statement of claim or any other
previous pleading.'' FINRA Rules 12100(ee), 13100(gg).
\95\ See Notice at 2146; FINRA Rules 12307(a)(1)-(3),
13307(a)(1)-(3).
\96\ FINRA Rules 12303(b), 13303(b); see Notice at 2146.
\97\ Proposed Rules 12303(b), 13303(b).
---------------------------------------------------------------------------

g. Amending Pleadings or Filing Third-Party Claims
FINRA stated that the Codes do not include express procedures
related to the filing of third-party claims other than those filed in
an answer to a statement of claim.\98\ Rather, FINRA indicated that
FINRA rules relating to amended pleadings currently govern the filing
of third-party claims.\99\ FINRA stated that the proposed rule change
would amend the Codes to expressly extend the procedures that apply to
amended pleadings to the filing and serving of third-party claims.\100\
The proposed rule change also 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.''
\101\
---------------------------------------------------------------------------

\98\ Notice at 2147; see FINRA Rules 12303(b), 13303(b).
\99\ Notice at 2147; see FINRA Rules 12309, 13309. FINRA Rules
12309(a)(2) and 13309(a)(2) address the amendment of a pleading to
add a party, but they do not address the filing of a third-party
claim other than in an amended pleading.
\100\ See Notice at 2147; proposed Rules 12309, 13309.
\101\ Id.
---------------------------------------------------------------------------

The proposed rule change would make other changes to the Codes
relating to amended pleadings, including specifying that: (1)
arbitrators would be ``appointed to'' the panel, not placed ``on'' the
panel; \102\ (2) the version of an amended pleading or third-party
claim that should be included with a motion need not be a hard copy;
\103\ (3) once the ranked arbitrator lists are due, no party would be
permitted to 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; \104\ (4) service by
first-class mail or overnight mail service would be accomplished on the
date of mailing and service by any other means would be accomplished on
the date of

[[Page 62840]]

delivery; \105\ (5) the provisions in the Codes relating to responding
to amended pleadings would be separate from the current provisions
relating to answering amended claims; \106\ and (6) before panel
appointment, the DRS Director would be authorized to determine whether
any party may file a response to an amended pleading.\107\
---------------------------------------------------------------------------

\102\ Notice at 2147; see proposed Rules 12309(a), 13309(a).
\103\ Notice at 2147; see proposed Rules 12309(b)(1), 13309(b)
(deleting ``a copy of'').
\104\ Notice at 2147; see proposed Rules 12309(c)(1),
13309(c)(1).
\105\ Notice at 2147; see proposed Rules 12309(a)(3),
13309(a)(3).
\106\ Notice at 2147; see proposed Rules 12309(d), 13309(d);
FINRA Rules 12310, 13310.
\107\ Id.
---------------------------------------------------------------------------

In addition, the proposed rule change would update the Customer
Code's provisions governing ``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.'' \108\ Currently, under
the Customer Code, if a respondent member or associated person becomes
inactive during a pending arbitration, FINRA will notify the customer
of the respondent's inactive status.\109\ Within 60 days of receiving
that notice, the customer may: (1) withdraw the claim(s) against the
inactive member or associated person; \110\ (2) amend a pleading (if a
panel has been appointed); \111\ or (3) amend a pleading to add a new
party (if the notification is after the ranked arbitrator lists are due
to the DRS Director).\112\ However, the Customer Code does not
expressly authorize the customer in an arbitration to file a third-
party claim when they are notified by FINRA that a member or associated
person in the arbitration has become inactive.\113\ FINRA stated that
the proposed rule change would modify the Codes relating to amended
pleadings to expressly authorize a customer in an arbitration to file a
third-party claim when they are notified by FINRA that a member or
associated person in the arbitration has become inactive after a panel
is appointed, as well as after the ranked arbitrator lists are
due.\114\
---------------------------------------------------------------------------

\108\ Notice at 2147.
\109\ FINRA Rule 12202(b).
\110\ Id.
\111\ FINRA Rule 12309(b)(2).
\112\ FINRA Rule 12309(c)(2); see supra note 39.
\113\ See supra notes 109-112 and accompanying text.
\114\ See Notice at 2147; proposed Rules 12309(b)(2),
12309(c)(2).
---------------------------------------------------------------------------

h. Combining Claims
Under the Codes, a party may move to join multiple claims together
in the same arbitration if: (1) the claims contain common questions of
law or fact; and (2)(a) the claims assert any right to relief jointly
and severally, or (b) the claims arise out of the same transaction or
occurrence, or series of transactions or occurrences (i.e., separate
but related claims).\115\ The Codes are unclear, however, with respect
to who has authority (e.g., the DRS Director or a panel) to combine
separate but related claims in response to such motions after a panel
has been appointed to one or more cases.\116\
---------------------------------------------------------------------------

\115\ See FINRA Rules 12312, 13312.
\116\ See Notice at 2147.
---------------------------------------------------------------------------

Before a panel has been appointed in any of the arbitration cases
hearing the separate but related claims, only the DRS Director is
authorized to combine such claims into one arbitration.\117\ Once a
panel has been appointed in at least one of the related cases, the
Codes authorize the panel to ``reconsider the Director's decision upon
motion of a party.'' \118\ The Codes do not address whether the panel
has independent authority to combine such claims.\119\ Nor do the Codes
specify which panel--if more than one has been appointed to hear the
separate but related claims--may reconsider the DRS Director's decision
to combine the claims.\120\
---------------------------------------------------------------------------

\117\ More specifically, ``the [DRS] Director may combine
separate but related claims into one arbitration'' before the ranked
arbitrator lists are due to the DRS Director. FINRA Rules 12314,
13314; see Notice at 2147; supra note 39.
\118\ FINRA Rules 12314, 13314.
\119\ Notice at 2147.
\120\ Id.
---------------------------------------------------------------------------

FINRA explained the current practice typically is for the panel
appointed to the ``lowest-numbered case with a panel'' (i.e., the case
with the earliest filing date) to have this authority. Where a panel
has been appointed to the highest-numbered case (but not any other
case) subject to the motion to combine, the panel in the highest-
numbered case has the authority.\121\ Where a panel has been appointed
to a middle-numbered case (but not any other case filed earlier)
subject to a motion to combine, the panel in that middle-numbered case
has the authority.\122\ The proposed rule change, as modified by
Amendment No. 1, would codify this existing practice.\123\
---------------------------------------------------------------------------

\121\ See Notice at 2147; Amendment No. 1 at 4.
\122\ Amendment No. 1 at 4 (expressing that this proposed rule
change would ``provide transparency and consistency regarding the
current practice''). ``Although this scenario would be rare, FINRA
notes that under the proposed amendment, the default would be for
the panel appointed to the lowest numbered case with a panel to
preside over the combined case.'' Id.
\123\ Id.; proposed Rules 12314(b), 13314(b).
---------------------------------------------------------------------------

i. Motions in Arbitration
The Codes do not address the timing of DRS's delivery of motions,
responses, and replies to the arbitrator(s) on a panel.\124\ In
practice, however, DRS distributes a motion, along with all the related
responses and replies to that motion, to the panel after the last reply
date has elapsed, unless the panel directs otherwise.\125\ The proposed
rule change would codify that practice, expressly providing that the
DRS Director will send all motions, responses, and replies to the panel
after the last reply date expires, unless the panel directs
otherwise.\126\ If the DRS Director receives any submissions on the
motion after the last reply date has elapsed, this proposed rule change
would require the DRS Director to forward them to the panel upon
receipt, and the panel would determine whether to accept them.\127\
---------------------------------------------------------------------------

\124\ Notice at 2148.
\125\ Id.
\126\ Proposed Rules 12503(d), 13503(d).
\127\ Id.
---------------------------------------------------------------------------

In addition, this proposed rule change would amend the Codes to add
cross-references to: (1) FINRA Rules 12312 (Multiple Claimants), 12313
(Multiple Respondents), 13312 (Multiple Claimants), or 13313 (Multiple
Respondents), as applicable, to indicate that motions related to
separating claims or arbitrations would be decided by the DRS Director
before a panel is appointed and by the panel after the panel is
appointed; \128\ and (2) proposed FINRA Rules 12314 (Combining Claims)
and 13314 (Combining Claims), as applicable, to indicate which panel
among multiple cases may combine separate but related claims into one
arbitration or reconsider the DRS Director's decision to combine claims
upon motion of a party.\129\
---------------------------------------------------------------------------

\128\ Proposed Rules 12503(e)(3), 13503(e)(3); see Notice at
2148.
\129\ Proposed Rules 12503(e)(4), 13503(e)(4). The addition of
the proposed text to Rules 12503(e) and 13503(e) requires the
renumbering of some paragraphs in that subsection. See Notice at
2148 n.63.
---------------------------------------------------------------------------

Finally, the Codes require a motion to amend a pleading after panel
appointment to ``be accompanied by copies of the proposed amended
pleading when the motion is served on the other parties and filed with
the Director.'' \130\ In practice, ``accompanied by copies'' has been
interpreted to mean ``accompanied by hard copies.'' \131\ To clarify
that parties may serve on other parties and file with the DRS Director
electronic copies (as well as hard copies) of a proposed amendment
pleading (i.e., to ``clarify that hard copies are not required''), this
proposed rule change would provide that a motion to amend a pleading
need only ``include,'' rather than ``be accompanied

[[Page 62841]]

by copies of,'' the proposed amended pleading.\132\
---------------------------------------------------------------------------

\130\ FINRA Rules 12503(a)(4), 13503(a)(4).
\131\ See Notice at 2148 n.63.
\132\ Proposed Rules 12503(a)(4), 13503(a)(4); see Notice at
2148 n.63 (erroneously citing proposed Rules 12504(a)(4) and
13504(a)(4) when describing this proposed rule change); FINRA April
Letter at 1 n.1 (correcting the error).
---------------------------------------------------------------------------

j. Witness Lists Shall Not Be Combined With Document Lists
Under the Codes, at least 20 days before the first scheduled
hearing, all parties must: (1) provide all other parties--but not the
DRS Director or arbitrators--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; \133\ and (2) provide each
other party--as well as the DRS Director--with the names and business
affiliations of all witnesses they intend to present at the
hearing.\134\
---------------------------------------------------------------------------

\133\ See FINRA Rules 12514(a), 13514(a) (``The parties should
not file the documents with the [DRS] Director or the arbitrators
before the hearing.'').
\134\ FINRA Rules 12514(b), 13514(b).
---------------------------------------------------------------------------

Separately, FINRA stated that parties often file a single document
with the DRS Director that includes a list of documents and other
materials, such as exhibits, they intend to use at the hearing that
have not already been produced and their witness list.\135\ Because the
list of documents and other materials ``could contain prejudicial or
inadmissible material, as a service to forum users, the DRS Director
will manually remove this information from the document containing the
witness list before forwarding [the witness list] to the panel.'' \136\
But, at times, the DRS 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.'' \137\
---------------------------------------------------------------------------

\135\ Notice at 2148.
\136\ Id.
\137\ Id.
---------------------------------------------------------------------------

The proposed rule change protects against this risk of inadvertent
disclosure by expressly providing that if parties create lists of
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 may serve the lists on all other parties, but shall not combine
the lists with the witness lists filed with the DRS Director pursuant
to Rule 12514(b) or 13514(b), as applicable.\138\
---------------------------------------------------------------------------

\138\ Proposed Rule 12514(a), 13514(a); see Notice at 2148.
---------------------------------------------------------------------------

k. Hearing Records
The official record of an arbitration hearing is the DRS Director's
tape, digital, or other recording of every arbitration hearing;
however, if a party chooses to make a stenographic record of a hearing,
a panel may decide in advance of a hearing that a party's stenographic
record will be the official record of the hearing.\139\ If the DRS
Director's recording is the official record, the panel ``may order the
parties to provide a transcription of the recording'' and ``copies of
the transcription must be provided to each arbitrator, served on each
party, and filed with the Director.'' \140\ If a party's stenographic
record is the official record, ``a copy must be provided to each
arbitrator, served on each other party, and filed with the Director.''
\141\ Further, ``[t]he cost of making and copying the stenographic
record will be borne by the party electing to make the stenographic
record, unless the panel decides that one or more other parties should
bear all or part of the costs.'' \142\ But the Codes do not specify
which party must provide to each arbitrator, serve on each other party,
and file with the DRS Director a copy of a transcription of the
official record.\143\ The proposed rule change would assign that
responsibility to the party or parties: (1) ordered to provide a
transcription; or (2) electing to make a stenographic record.\144\
---------------------------------------------------------------------------

\139\ FINRA Rules 12606, 13606.
\140\ FINRA Rules 12606(a)(2), 13606(a)(2).
\141\ Id.
\142\ Id.
\143\ Notice at 2148.
\144\ Proposed Rules 12606(a)(2), 13606(a)(2), 12606(b)(2),
13606(b)(2).
---------------------------------------------------------------------------

In addition, FINRA indicated that ``executive sessions'' are not
recorded because they are not part of the official record of the
hearing.\145\ Rather, they are ``discussions among arbitrators''
outside the presence of the parties, the parties' representatives,
witnesses, and stenographers.\146\ FINRA stated that to promote
``transparency and consistency,'' this proposed rule change would
expressly provide that executive sessions would not be recorded.\147\
---------------------------------------------------------------------------

\145\ Notice at 2148.
\146\ Id.
\147\ Proposed Rules 12606(a)(1), 13606(a)(1).
---------------------------------------------------------------------------

l. Dismissal of Proceedings for Insufficient Service
The Codes require parties, other than those proceeding pro se, to
serve all pleadings and other documents through the Portal.\148\
Service is accomplished on the date of submission in the Portal.\149\
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 was complete and sufficient before the case may proceed to
hearing.\150\ Although the Codes do not address what action the panel
should take if it determines that service was insufficient,\151\
current practice permits a panel to dismiss a claim or arbitration
without prejudice if it finds insufficient service.\152\ The proposed
rule change would codify this practice, expressly permitting a panel to
dismiss a claim or arbitration without prejudice if it finds
insufficient service upon a respondent.\153\
---------------------------------------------------------------------------

\148\ FINRA Rules 12300, 13300; see supra note 39.
\149\ Id.
\150\ Notice at 2148.
\151\ Id. at 2148-49.
\152\ Id. at 2149.
\153\ Proposed Rules 12700(c), 13700(c).
---------------------------------------------------------------------------

The proposed rule change would also make non-substantive changes to
the Codes. FINRA Rules 12700 (Dismissal of Proceedings Prior to Award)
and 13700 (Dismissal of Proceedings Prior to Award) currently include
cross-references to specific rules in which a panel may dismiss a claim
or an arbitration, including dismissals of time-barred claims,\154\
dismissals as a ``sanction for material and intentional failure to
comply with an order of the panel,'' \155\ and dismissals due to
multiple postponements.\156\ The rules do not, however, include cross-
references to FINRA rules generally governing motions to dismiss (i.e.,
FINRA Rules 12504 and 13504). The proposed rule change would amend
Rules 12700(b) and 13700(b) to add a cross-reference to Rule 12504 or
13504, as applicable.\157\
---------------------------------------------------------------------------

\154\ FINRA Rule 12700(b) (citing Rule 12206); FINRA Rule
13700(b) (citing Rule 13306).
\155\ FINRA Rule 12700(b) (citing Rule 12212(c)); FINRA Rule
13700(b) (citing Rule 13212(c)).
\156\ FINRA Rule 12700(b) (citing Rule 12601(c)); FINRA Rule
13700(b) (citing Rule 13601(c)).
\157\ Proposed Rules 12700(b)(1), 13700(b)(1). The proposed rule
change also would replace the bulleted list with a numbered list.
Proposed Rules 12700(b), 13700(b).
---------------------------------------------------------------------------

m. Dismissal of Claims Requires Issuance of an Award
An ``award'' is a document stating the final disposition of an
arbitration at its conclusion.\158\ It may include, among other things,
a ``summary of the issues . . . in controversy,'' the damages or relief
requested, the damages or relief the panel has awarded, and the panel's
reasoning.\159\ The Codes require FINRA to publish awards, which it
does on its

[[Page 62842]]

website.\160\ Although the Codes permit a panel to grant a motion to
dismiss a party's entire case after the conclusion of that party's
case-in-chief,\161\ the Codes do not address whether such a dismissal
requires the issuance of an award.\162\ FINRA stated that current
practice is ``to require the issuance of an award'' in this situation
because ``the dismissal of all a claimant's claims disposes of the
case.'' \163\ The proposed rule change would codify this practice by
requiring any panel that grants a motion to dismiss all claims to issue
a ``decision'' containing the elements of a written award and make the
decision ``publicly available as an award.'' \164\
---------------------------------------------------------------------------

\158\ FINRA Rules 12100(c), 13100(c), 12904(b), 13904(b).
\159\ See FINRA Rules 12904, 13904.
\160\ See FINRA Rules 12904(h) and 13904(h); see also FINRA,
Arbitration Awards Online, https://www.finra.org/arbitration-mediation/arbitration-awards.
\161\ See FINRA Rules 12504(b), 13504(b).
\162\ Notice at 2149.
\163\ Id.
\164\ Id.; see proposed Rule 12504(b), 13504(b); FINRA Rules
12904(e), 13904(e) (describing elements of an award).
---------------------------------------------------------------------------

III. Discussion and Commission Findings

After careful review of the proposed rule change, the comment
letters, and FINRA's response to the comments, the Commission finds
that the proposed rule change is consistent with the requirements of
the Exchange Act and the rules and regulations thereunder that are
applicable to a national securities association.\165\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Exchange Act, which requires, among other
things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and, in general, protect investors and the public
interest.\166\ In particular, as set forth below, the Commission finds
that the proposed rule change is reasonably designed to protect
investors and the public interest. It promotes transparency about
FINRA's arbitration process and helps ensure consistent requirements
across arbitration cases. The Commission addresses each aspect of the
proposed rule change, and any related comments, in turn.
---------------------------------------------------------------------------

\165\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\166\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

A. Arbitrator List-Selection Amendments

1. Removal of Arbitrators for Conflicts of Interest Before Ranking
Lists Are Sent to the Parties
As stated above, the proposed rule change would codify existing
practice by expressly requiring the DRS Director to manually review
arbitrators on each arbitrator ranking list for current conflicts of
interest not identified within the NLSS selection process and
authorizing the DRS Director to remove arbitrators based on the
existence of such conflicts before sending the arbitrator ranking lists
to the parties.\167\ Under this proposed rule change, ``[i]f an
arbitrator is removed due to such conflicts, the list selection
algorithm will randomly select an arbitrator to complete the list.''
\168\ FINRA stated that this proposed rule change responds to the
Lowenstein Report's recommendation that the Codes require DRS's Neutral
Management Department to conduct a manual review for conflicts of
interest prior to sending the arbitrator list to the parties.\169\
FINRA believes that this proposed rule change would enhance the
transparency of the arbitrator-selection process by codifying DRS's
practice of conducting a manual review for conflicts of interest that
the NLSS may have missed prior to sending an arbitrator ranking list to
the parties.\170\
---------------------------------------------------------------------------

\167\ See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5),
13403(b)(5); Notice at 2145.
\168\ Proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5),
13403(b)(5). The DRS Director will send the lists generated by the
NLSS to all parties at the same time, within approximately 30 days
after the last answer is due, regardless of the parties' agreement
to extend any answer due date. See FINRA Rules 12402(c), 12403(b),
13403(c).
\169\ See Notice at 2144; Lowenstein Report at 36.
\170\ See Notice at 2144-45, 2149.
---------------------------------------------------------------------------

Four commenters supported this proposed rule change.\171\ One
commenter emphasized that this proposed rule change would provide
``much greater transparency to internal FINRA processes.'' \172\ A
second commenter indicated that it would boost confidence in the
arbitrator list-selection process.\173\ A third commenter stated that
it would promote efficiency and fairness in the arbitration process by
``prevent[ing] scenarios where the parties would have to initiate a
challenge to remove arbitrators due to blatant conflicts of interest
once a panel has been appointed.'' \174\
---------------------------------------------------------------------------

\171\ Letter from Hugh Berkson, President, Public Investors
Advocate Bar Association (``PIABA''), to Vanessa Countryman,
Secretary, U.S. Securities and Exchange Commission (Feb. 1, 2023)
(``PIABA Letter'') at 2; letter from Elissa Germaine, Supervising
Attorney, Fairbridge Investor Rights Clinic, Pace University School
of Law, to Vanessa Countryman, Secretary, U.S. Securities and
Exchange Commission (Feb. 2, 2023) (``Pace Letter'') at 1; letter
from Christine Lazaro, Professor of Clinical Legal Education &
Director of the Securities Arbitration Clinic, St. John's University
School of Law, to Vanessa Countryman, Secretary, U.S. Securities and
Exchange Commission (Feb. 2, 2023) (``St. John's Letter'') at 1; and
letter from William Jacobson, Clinical Professor & Director, Cornell
Law School's Securities Law Clinic, to Vanessa Countryman,
Secretary, U.S. Securities and Exchange Commission (Feb. 2, 2023)
(``Cornell Letter'') at 1-2 (Cornell's pagination is mistaken;
throughout this Order, the Commission refers to the actual page
number as it appears in the sequence of the PDF document).
\172\ PIABA Letter at 2.
\173\ St. John's Letter at 1 (``Codifying this process will help
parties feel confident in the selection process.''). St. John's
couples its support with a recommendation that FINRA ``upgrad[e] the
archaic algorithm by which the conflicts are screened,'' thus
``limit[ing] the necessity for manual review.'' St. John's Letter at
1. This comment is outside the scope of this proposed rule change,
as FINRA has not proposed any changes to the NLSS itself. FINRA
indicated, however, that it is in the process of assessing whether
the NLSS remains ``the most effective means in creating random,
computer-generated arbitrator lists for the arbitrator
participants.'' FINRA April Letter at 4.
\174\ Cornell Letter at 2.
---------------------------------------------------------------------------

A fifth commenter offered no objection to this proposed rule change
provided that the DRS Director's authority would be limited to
``conflicts of interest of the type screened out by the [NLSS],'' and
the DRS Director would not have ``unlimited discretion to strike
arbitrators for potential or suspected conflicts of interest or bias.''
\175\ The commenter acknowledged that FINRA publishes some general
guidance on conflicts of interest \176\ but suggested that ``the Codes
define `conflicts of interest' to clarify to the parties what
relationships will cause an arbitrator to be struck by NLSS or manually
by the Director.'' \177\
---------------------------------------------------------------------------

\175\ Letter from Aleah Jones, Pickard Djinis and Pisarri LLP,
to Vanessa Countryman, Secretary, U.S. Securities and Exchange
Commission (May 9, 2023) (``Pickard Letter'') at 3.
\176\ Id. at 3 n.8 (citing FINRA, How Parties Select
Arbitrators, https://www.finra.org/arbitrationmediation/arbitrator-selection). In the Notice, FINRA cited the same web page and
identified the following potential conflicts of interest: ``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.'' Notice at
2145 n.11.
\177\ Pickard Letter at 3.
---------------------------------------------------------------------------

In response, FINRA stated that the ``non-exhaustive list of
potential conflicts . . . published on [its] website

[[Page 62843]]

sufficiently explains to forum users what types of relationships or
connections FINRA looks for to determine whether a conflict of interest
exists.'' \178\
---------------------------------------------------------------------------

\178\ See FINRA August Letter at 4.
---------------------------------------------------------------------------

The Commission believes that expressly requiring the DRS Director
to manually review arbitrators on each arbitrator ranking list for
current conflicts of interest not identified within the NLSS and
authorizing the DRS Director to remove arbitrators based on the
existence of such conflicts should improve fairness in the arbitration
process. Specifically, the proposed rule change should help ensure that
each arbitrator ranking list is composed of arbitrators that are free
of conflicts of interest with the parties to the arbitration. The
Commission further notes that the proposed rule change does not expand
the DRS Director's discretion to remove arbitrators from the ranking
lists due to a conflict of interest. Instead, the DRS Director's review
of ranking lists will continue to be limited to current conflicts of
interest not identified within the NLSS selection process and
consistent with those described by FINRA on its website. For these
reasons, the Commission finds that this proposed rule change is
reasonably designed to protect investors and the public interest.
2. Removal of Arbitrators for Conflicts of Interest or Bias After Lists
Are Sent to the Parties but Before the First Hearing Session
In addition to authorizing the DRS Director to remove an arbitrator
for a conflict of interest before the NLSS-generated ranking lists are
sent to the parties,\179\ the proposed rule change would expressly
authorize the DRS Director to remove an arbitrator for a conflict of
interest or bias on the DRS Director's own initiative or upon a party's
request ``[a]fter the Director sends the lists generated by the list
selection algorithm to the parties, but before the first hearing
session begins.'' \180\ FINRA explained that this change would ``ensure
that the 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.'' \181\
---------------------------------------------------------------------------

\179\ See proposed Rules 12402(b)(3), 12403(a)(4), 13403(a)(5),
13403(b)(5).
\180\ See proposed Rules 12407(a), 13410(a).
\181\ See Notice at 2145.
---------------------------------------------------------------------------

Four commenters supported this proposed rule change.\182\ One of
these four commenters reasoned that it ``would assist parties
unfamiliar with the arbitration process by helping them understand
their rights and abilities as it relates to challenges to remove
arbitrators.'' \183\ A fifth commenter objected to the proposed rule
change, expressing concern that parties could ``exert greater control
over the arbitral selection process than they had under the previous
rule set'' and assert a ``conflict of interest or bias'' as a form of
gamesmanship.\184\ This commenter urged FINRA to ``restore the
arbitration ranking system previously in place.'' \185\
---------------------------------------------------------------------------

\182\ See PIABA Letter at 2; Pace Letter at 1 (noting its
``support [for] FINRA's proposed list selection process
amendments,'' though it only emphasizes its support for the written-
decision proposed rule change); Cornell Letter at 2; St. John's
Letter at 2.
\183\ See St. John's Letter at 2.
\184\ See Pickard Letter at 3-4.
\185\ Id. at 4.
---------------------------------------------------------------------------

In response, FINRA stated that the proposed rule change would not
amend the process related to the removal of arbitrators on the DRS
Director's own initiative or upon a party's request.\186\ Rather, the
proposed rule changes would clarify the timing for the process (i.e.,
after the DRS Director sends the lists generated by the NLSS to the
parties, but before the first hearing session begins).\187\
Accordingly, to challenge an arbitrator, the Codes would continue to
require a party to file a written motion with DRS and serve the motion
on each party so that the motions are available to all parties.\188\
Thus, if a party challenges an arbitrator, all other parties are
provided an opportunity to make their arguments prior to any decision
by the DRS Director.\189\
---------------------------------------------------------------------------

\186\ See FINRA August Letter at 3-4.
\187\ See proposed Rules 12407(a), 13410(a).
\188\ See id. at 4; see also FINRA Rules 12503 (Motions) and
13503 (Motions).
\189\ See FINRA August Letter at 4.
---------------------------------------------------------------------------

The Commission believes the fifth commenter's objection reflects a
mistaken reading of this proposed rule change. The Codes currently
permit the DRS Director to remove an arbitrator for a conflict of
interest or bias, either upon request of a party or on the DRS
Director's own initiative at any point after parties' receipt of the
arbitrator ranking lists until the first hearing session begins.\190\
The proposed rule change does not alter the DRS Director's or parties'
ability to challenge an arbitrator for cause but rather would make the
process more transparent by making explicit in the rule text that such
challenge may take place at any point after receipt of the arbitrator
ranking lists until the first hearing session begins. The Commission
believes that the proposed rule change is reasonably designed to help
ensure that all parties are equally informed of their ability to
challenge arbitrators for cause. For these reasons, the Commission
finds that it is reasonably designed to protect investors and in the
public interest.
---------------------------------------------------------------------------

\190\ See FINRA Rules 12407(a) and 13410(a).
---------------------------------------------------------------------------

3. Written Explanation of DRS Director's Decision
As stated above, the proposed rule change would codify existing
practice by expressly requiring the DRS Director to provide the parties
to an arbitration with a written explanation of their decision ``to
grant or deny a party's request to remove an arbitrator . . . .'' \191\
FINRA stated that it codified this current practice in response to a
recommendation in the Lowenstein Report.\192\
---------------------------------------------------------------------------

\191\ See proposed Rules 12407(c), 13410(c); Notice at 2145.
\192\ See Notice at 2145; Lowenstein Report at 37.
---------------------------------------------------------------------------

Four commenters supported this proposed rule change, explaining
that written explanations would improve transparency, consistency, and
fairness in the arbitrator-removal process.\193\ One commenter also
emphasized that written explanations would promote ``confidence in the
integrity of the arbitration selection process.'' \194\ Two commenters
indicated that written explanations would help parties to understand
the DRS Director's decisions.\195\ But another commenter coupled its
support for this proposed change with a recommendation for improvement:
the written explanations should be published in a ``publicly available
database, such as the one currently maintained for FINRA awards.''
\196\ According to this commenter, publishing such information--even in
redacted form--would illuminate the nature and scope of the factors
that FINRA considers to be ``legitimate ground[s] for a challenge to a
potential arbitrator.'' \197\ A fifth commenter offered no objection to
this proposed rule change provided, as stated above, that the DRS
Director would not have unlimited authority to strike potential
arbitrators.\198\
---------------------------------------------------------------------------

\193\ See PIABA Letter at 2; Cornell Letter at 2; Pace Letter at
2; St. John's Letter at 2.
\194\ See Pace Letter at 2 (supporting the proposed rule change
and noting the importance of ``confidence in the integrity'' of the
system).
\195\ Id. at 2; Cornell Letter at 2.
\196\ See PIABA Letter at 2.
\197\ Id. at 2.
\198\ See Pickard Letter at 3.
---------------------------------------------------------------------------

In response, FINRA acknowledged the commenter's recommendation to
publish the DRS Director's written explanation in a publicly available
database in order to enhance ``transparency regarding the arbitrator

[[Page 62844]]

list selection process.'' \199\ However, FINRA declined to make public
the DRS Director's written explanations to grant or deny a party's
request to remove an arbitrator.\200\ FINRA explained that these
decisions have ``little precedential value''--and their publication
therefore offers limited public value--because each decision is based
on the facts and circumstances of a single case.\201\ But to address
the commenter's recommendation to enhance transparency, FINRA stated
that it would publish ``the most common reasons for granting or denying
party-initiated challenges'' on its website.\202\ FINRA believes that
the publication of this information on its website would make the
arbitrator-challenge process more transparent by providing parties with
``useful information when considering potential challenges to remove an
arbitrator.'' \203\
---------------------------------------------------------------------------

\199\ See FINRA April Letter at 4.
\200\ See id. at 4-5.
\201\ Id. at 4.
\202\ See id. at 4-5.
\203\ Id. at 5.
---------------------------------------------------------------------------

The Commission believes that expressly requiring the DRS Director
to provide the parties to an arbitration with a written explanation of
the DRS Director's decision to grant or deny a party's request to
remove an arbitrator improves the perception of fairness in the
arbitration forum by enhancing transparency into the removal process.
Because the proposed rule change would not expand the DRS Director's
discretion to remove a conflicted or biased arbitrator, the DRS
Director's authority to remove such arbitrator would remain limited. In
addition, with respect to public access to decisions on motions to
remove arbitrators, the Commission believes that FINRA's approach of
publishing the most common reasons for granting or denying such
requests on its website would provide participants considering whether
to file a motion to remove an arbitrator for conflicts or bias with a
valuable source of information regarding such challenges. For these
reasons, the Commission finds that this proposed rule change is
reasonably designed to protect investors and the public interest.

B. Procedural Amendments

1. Virtual Prehearing Conferences
As stated above, the Codes currently indicate that prehearing
conferences will generally be held by telephone.\204\ The proposed rule
change would 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.'' \205\ FINRA
stated that parties ``have expressed a preference for holding
prehearing conferences by video conference[,]'' \206\ explaining that
some parties ``may perceive an increase in their ability to participate
or interact in the hearings by video.'' \207\
---------------------------------------------------------------------------

\204\ See supra note 77.
\205\ See proposed Rules 12500(b), 12501(c), 12504(a)(5),
13500(b), 13501(c), 13504(a).
\206\ See Notice at 2145.
\207\ See Notice at 2150.
---------------------------------------------------------------------------

Three commenters supported this proposed rule change, and a fourth
did not address this specific issue.\208\ One commenter emphasized that
video conferences would ``enhance[ ] communication between the parties,
counsel, and arbitrators [by providing] the ability to read body
language and facial expressions.'' \209\ Motivated by a concern that
video conferencing could impose an ``undue burden on claimants,'' one
commenter recommended that this proposed rule change require a panel to
consider the parties' access to and comfort with technology when
evaluating motions for hearings in formats other than video.\210\ A
fifth commenter offered general support for this proposed rule change
but recommended that this proposed rule change permit ``another type of
hearing session . . . if agreed to by a majority of the parties.''
\211\ This commenter explained that ``the majority should prevail
without the matter needing to be put to a motion and considered at a
prehearing session'' where there are more than two parties to an
arbitration.\212\
---------------------------------------------------------------------------

\208\ See Cornell Letter at 2; Pace Letter at 2; St. John's
Letter at 2; see PIABA Letter at 2-3 (noting general support for all
procedural amendments, but not addressing this one specifically).
\209\ See Pace Letter at 2.
\210\ See Cornell Letter at 2.
\211\ See Pickard Letter at 4 (emphasis removed).
\212\ Id. at 4.
---------------------------------------------------------------------------

In response, FINRA stated that the COVID-19 pandemic required the
development of ``policies and procedures around conducting arbitration
cases using virtual hearings and [therefore FINRA] created resource
guides for parties and arbitrators for such hearings.'' \213\
Approximately three years later, ``parties have become proficient with
using this technology and have embraced it as an alternative to other
hearing methods.'' \214\ The proposed rule change would reflect this
preference. FINRA also stated that it would update, as appropriate, the
guidance it makes available to participants to help ensure that all
participants have the information they need to ``participate fully in
virtual prehearing conferences.'' \215\ If a party nonetheless prefers
to have an in-person prehearing conference, FINRA stated that it could
file a motion seeking that relief, and the panel can consider, among
other things, ``a party's access to and comfort level with
technology.'' \216\
---------------------------------------------------------------------------

\213\ See FINRA April Letter at 11.
\214\ Id.
\215\ Id.
\216\ See id. (stating that ``[i]n addition, FINRA notes that
once fully briefed, a panel will decide a motion regarding the
hearing format based on all the information provided, which could
include a party's access to and comfort level with technology.'').
---------------------------------------------------------------------------

In addition, FINRA stated that it believes a panel, once fully
briefed, is in the best position to determine whether an alternative
prehearing format is more suitable to the parties than the proposed
default format of video conference. Therefore, FINRA declined to amend
the proposed rule change to allow a majority of the parties to agree to
another type of hearing.\217\
---------------------------------------------------------------------------

\217\ See FINRA August Letter at 5.
---------------------------------------------------------------------------

The Commission believes that requiring prehearing conferences to be
held by video conference provides parties the opportunity to see and
interact with the other participants in the case, enhancing their
participation. But because this proposed rule change also permits a
motion by a party for another hearing format, every party has a fair
opportunity to request an alternative format based upon, among other
things, access to or comfort with technology. Furthermore, the
Commission believes FINRA reasonably determined that the arbitrator
panel is in the best positioned to evaluate and determine whether
another prehearing format is appropriate in situations where there is
not agreement among the parties to another type of hearing. For these
reasons, the Commission finds that this proposed rule change is
reasonably designed to protect investors and the public interest.
2. In-Person Hearings
The proposed rule change would also amend the provision governing
the format for hearings on the merits of a case. Currently, the Codes
do not articulate a definitive format for hearings.\218\ FINRA stated,
however, that ``hearings are generally held in person,'' and forum
users ``have not similarly expressed a preference for making video
conference the default for hearings.'' \219\ The proposed rule change
would codify existing practice,

[[Page 62845]]

providing that all hearings ``will generally be held in person unless
the parties agree to, or the panel grants a motion for, another type of
hearing session.'' \220\ No commenter offered specific support or
opposition to this proposed change.
---------------------------------------------------------------------------

\218\ See FINRA Rules 12600(b) and 13600(b) (stating that the
panel will decide the time and date of the hearing at the initial
prehearing conference or otherwise in another manner).
\219\ See Notice at 2145.
\220\ See proposed Rules 12600(b), 13600(b); but see supra note
77.
---------------------------------------------------------------------------

In light of FINRA's experience with forum users, the Commission
believes FINRA's determination to require that hearings on the merits
generally be held in person is reasonable. It will clarify the default
format of the hearing, which should enhance transparency and
efficiency, and eliminate potential misunderstandings among parties.
For these reasons, the Commission finds that this proposed rule change
is reasonably designed to protect investors and the public interest.
3. Virtual Option for Special Proceedings
As stated above, the proposed rule change would require parties to
hold special proceedings in Simplified Arbitrations by video
conference, unless: (1) the claimant requests at least 60 days before
the first scheduled hearing that it be held by telephone; or (2) the
parties agree to another type of hearing session.\221\ This proposed
rule change follows FINRA's receipt of ``suggestions from customers
that they would prefer . . . to have the option to have a special
proceeding by video conference.'' \222\
---------------------------------------------------------------------------

\221\ See proposed Rules 12800(c)(3)(B)(i), 13800(c)(3)(B)(i).
\222\ See Notice at 2146.
---------------------------------------------------------------------------

Four commenters supported this proposed rule change, and a fifth
offered no objection.\223\ One commenter emphasized that it would
``facilitate more accurate communication compared to telephone
conferences'' by permitting participants to view facial expressions and
reactions.\224\ Another commenter indicated that video conferences
would permit ``investors with small claims to present their case to the
arbitrator without added expenses or travel.'' \225\
---------------------------------------------------------------------------

\223\ PIABA Letter at 3; Cornell Letter at 2-3; Pace Letter at
2; St. John's Letter at 2; Pickard Letter at 4.
\224\ Cornell Letter at 3; see Pace Letter at 2.
\225\ St. John's Letter at 2.
---------------------------------------------------------------------------

The Commission believes that requiring parties to hold special
proceedings in Simplified Arbitrations by video conference (with
limited exceptions) should improve the format and delivery of
claimants' cases to arbitrators in Simplified Arbitration. In addition,
given the proliferation of video-conferencing technology to the public,
this proposed rule change should not impose logistical or financial
burdens on parties. At the same time, however, the proposed rule change
makes clear the flexibility to alter the format of these hearings as
necessary where a claimant requests or the parties agree. For these
reasons, the Commission finds that this proposed rule change is
reasonably designed to protect investors and the public interest.
4. Redacting Confidential Information
As stated above, the proposed rule change would require any party
in a Simplified Arbitration to redact any PCI from documents filed with
the DRS Director.\226\ FINRA stated that this change would address
``increasing concerns with customers' identities being used for
fraudulent purposes in the securities industry.'' \227\ It would also
align the redaction requirements for Simplified Arbitrations with those
of other arbitration cases.\228\ FINRA acknowledged that it previously
declined to extend this requirement to Simplified Arbitrations due to a
concern that pro se litigants would have difficulty complying.\229\ To
address this concern, FINRA stated that it would update guidance on its
website regarding how to redact PCI from documents filed with DRS.\230\
---------------------------------------------------------------------------

\226\ See Notice at 2146 and n.29 (explaining that FINRA Rules
12300(d)(1)(C) and 13300(d)(1)(C) would be deleted); proposed Rules
12300(d)(1), 13300(d)(1).
\227\ See Notice at 2146.
\228\ See FINRA Rules 12300(d)(1)(A), 13300(d)(1)(A).
\229\ See Notice at 2146.
\230\ Id.; see PCI Guidance, supra note 83.
---------------------------------------------------------------------------

Four commenters broadly supported FINRA's effort to protect
investors' PCI in Simplified Arbitrations, and a fifth offered no
objection.\231\ But the four supportive commenters each expressed
concern that this proposed rule change would disproportionately impact
pro se claimants who may lack the technological experience to
effectively and efficiently redact PCI.\232\ Notwithstanding that
concern, one commenter concluded that ``the benefits to privacy
outweigh the increased complexity, assuming that the guidance provided
by FINRA adequately assists pro se parties in making redactions.''
\233\
---------------------------------------------------------------------------

\231\ See PIABA Letter at 3; Cornell Letter at 3; Pace Letter at
2; St. John's Letter at 2; Pickard Letter at 5.
\232\ See PIABA Letter at 3; Cornell Letter at 3; Pace Letter at
2-3; St. John's Letter at 2.
\233\ See Cornell Letter at 3.
---------------------------------------------------------------------------

The other three supportive commenters recommended changes to the
rule or its implementation to help mitigate their concern over pro se
parties.\234\ Two of these commenters suggested that FINRA post
redaction guidance both on its website and the Portal.\235\ One
commenter emphasized the importance of FINRA providing clear,
comprehensive, and plain-English guidance for the benefit of pro se
claimants, as well as ``examples of what a properly redacted document
looks like, and basic suggestions about how to make the redactions.''
\236\ For cases in which claimants are unable to redact PCI
notwithstanding the guidance, another commenter recommended that FINRA
either apply the required redactions itself or permit investors to
waive the redaction of their own PCI.\237\ The commenter explained that
this alternative approach would prevent ``dismissals either due to pro
se filers' inability to comply with the rule, or their abandoning their
case because they don't fully understand how to accomplish the
redaction.'' \238\
---------------------------------------------------------------------------

\234\ See PIABA Letter at 3; Pace Letter at 2-3; St. John's
Letter at 2.
\235\ See PIABA Letter at 3 (stating that FINRA should post the
guidance on the ``case's docket/portal''); Pace Letter at 3 (stating
that FINRA should post the guidance on the Portal in a ``visible and
accessible manner, at the point in time when customers are likely to
be uploading documents that may contain PCI'' to help ``ensure that
guidance on PCI redaction is sufficiently beginner- and user-
friendly and is not overlooked by pro se parties'').
\236\ See Pace Letter at 3.
\237\ See St. John's Letter at 2.
\238\ Id.
---------------------------------------------------------------------------

In response, FINRA stated that it would provide clear, plain
English guidance on the steps pro se parties can take to protect PCI
and on how to redact PCI from documents filed with DRS on both its
website and the Portal.\239\ But FINRA declined to permit pro se
investors to waive the redaction of their own PCI because it would
undermine this proposed rule change's effort to ``safeguard investors'
information and their financial resources.'' \240\ FINRA also declined
to make the redactions itself, explaining that FINRA rules require the
application of redactions before a document is ever filed with
FINRA.\241\ In sum, ``FINRA believes the benefits of safeguarding
customers' identities and sensitive information balance the concerns
relating to pro se

[[Page 62846]]

parties' lack of experience with filing claims in the forum.'' \242\
---------------------------------------------------------------------------

\239\ See FINRA April Letter at 5-6.
\240\ Id. at 6 (noting that waiver ``would defeat the purpose of
the Proposal'').
\241\ Id.; see also FINRA Rules 12300(d)(1)(A) and
13300(d)(1)(A) (stating that ``if the Director receives a claim . .
. with the full Social Security number, taxpayer identification
number or financial account number, the Director will deem the
filing deficient under Rule 12307 and will request that the party
refile the document in compliance with this paragraph.''); see also
FINRA April Letter at 6 n.20 (emphasizing that FINRA would treat any
filed claim or document as deficient or improper if it contained
certain PCI).
\242\ See FINRA April Letter at 7.
---------------------------------------------------------------------------

The Commission believes that requiring customers to redact PCI from
any document they submit to DRS should help prevent substantial harm to
investors. Absent this proposed rule change, unredacted PCI filed in
Simplified Arbitrations could be misused by third parties. The
Commission acknowledges commenters' concern that pro se investors might
struggle to comply with the new redaction requirements and believes
FINRA's plan to publish plain-English guidance should aid pro se
investors in complying with these obligations without diminishing
FINRA's efforts to protect PCI. For these reasons, the Commission finds
that this proposed rule change is reasonably designed to protect
investors and the public interest.
5. Number of Hearing Sessions per Day
As stated above, arbitrators receive compensation for each hearing
session in which they participate.\243\ To calculate the number of
hearing sessions per day, FINRA explained that DRS's current practice
is to calculate the total number of hearing hours, subtract any time
spent for lunch, and divide the remainder by four (as in four
hours).\244\ Consistent with this methodology, this proposed rule
change would amend the definition of ``hearing session'' to indicate
that, during a single day, ``the next hearing session begins after four
hours of hearing time has elapsed.'' \245\
---------------------------------------------------------------------------

\243\ See Notice at 2146 (citing FINRA Rules 12214, 13214).
\244\ Id.
\245\ Id.; see proposed Rules 12100(p), 13100(p).
---------------------------------------------------------------------------

One commenter supported this proposed rule change.\246\ Another
commenter offered no objection to this proposed rule change so long as
it ``would not cause the party to whom fees are assessed . . . to pay
for `session time' not actually spent in session.'' \247\ More broadly,
this commenter requested ``greater clarity . . . as it is unclear . . .
whether fees for two full sessions will be assessed after four hours
and one minute of hearing time have elapsed.'' \248\
---------------------------------------------------------------------------

\246\ See Cornell Letter at 3.
\247\ See Pickard Letter at 5.
\248\ Id. at 5.
---------------------------------------------------------------------------

In response, FINRA stated that after four hours and one minute of
hearing time have elapsed, it would pay arbitrators for two hearing
sessions to ensure that they are compensated for their time and service
to the DRS forum.\249\ FINRA further stated that it would update its
arbitrator guidance to encourage arbitrators to be efficient in
managing the time during hearings to minimize, whenever possible, the
number of hearing sessions held.\250\
---------------------------------------------------------------------------

\249\ See FINRA August Letter at 5.
\250\ Id.
---------------------------------------------------------------------------

The Commission believes that aligning the Codes' definition of
``hearing session'' with FINRA's current practice for calculating the
number of hearing sessions in a single day promotes transparency and
clarity in the way DRS calculates the number of hearing sessions. As
such, the proposed rule change should help parties to an arbitration
better understand the fees charged in a proceeding and better plan the
presentation of their claim. For these reasons the Commission finds
that this proposed rule change is reasonably designed to protect
investors and the public interest.
6. Update Submission Agreement When Filing a Third-Party Claim
As stated above, the proposed rule change would expressly require a
respondent filing an answer with a third-party claim to (1) execute a
Submission Agreement that lists the name of the third-party and (2)
file the updated Submission Agreement with the DRS Director.\251\ FINRA
stated that failing to file an updated Submission Agreement makes a
third-party claim deficient under existing rules, and that the
prevalence of this mistake currently causes time-consuming delays in
arbitration.\252\ The proposed rule change would help ``avoid potential
delay and slower case processing times'' by emphasizing the parties'
obligations under the rules.\253\
---------------------------------------------------------------------------

\251\ See proposed Rules 12303(b), 13303(b).
\252\ See Notice at 2146.
\253\ Id. at 2146-47 (explaining that the proposed rule change
aims ``[t]o clarify to parties the requirements related to third
party claims and Submission Agreements'').
---------------------------------------------------------------------------

One commenter offered no objection to this proposed rule
change.\254\ Another commenter supported this proposed rule change,
explaining that it has ``no drawbacks'' because it would ``add
clarification and prevent delays.'' \255\
---------------------------------------------------------------------------

\254\ See Pickard Letter at 5.
\255\ See Cornell Letter at 3.
---------------------------------------------------------------------------

The Commission believes that by addressing the apparent confusion
that results in filing of deficient claims, this proposed rule change
helps ensure more consistent compliance with forum rules and prevent
unnecessary delays in case processing. For these reasons, the
Commission finds that this proposed rule change is reasonably designed
to protect investors and the public interest.
7. Amending Pleadings or Filing Third-Party Claims
As stated above, the proposed rule change would modify several
procedures related to the filing of amended pleadings and third-party
claims. First, the proposed rule change would expand the application of
FINRA Rules 12309 and 13309 (Amending Pleadings) from just amended
pleadings to both amended pleadings and third-party claims.\256\ FINRA
stated that these proposed rule changes would help address the current
absence of express provisions governing the filing of third-party
claims other than in a respondent's answer to a claim.\257\ Second, the
proposed rule change would make other changes to the Codes relating to
amended pleadings, including specifying that: arbitrators are
``appointed to'' the panel, not placed ``on'' the panel; \258\ an
amended pleading or third-party claim that is included with a motion
need not be a hard copy; \259\ 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; \260\ service by first-
class mail or overnight mail service is accomplished on the date of
mailing; service by any other means is accomplished on the date of
delivery; \261\ the provisions in the Codes relating to responding to
amended pleadings are separate from the current provisions relating to
answering amended claims; \262\ and before panel appointment, the DRS
Director would be authorized to determine whether any party may file a
response to an amended pleading.\263\ Third, the proposed rule change
would expressly permit a customer to file a third-party claim if a
respondent becomes an inactive FINRA member or associated person.\264\
---------------------------------------------------------------------------

\256\ See Notice at 2147; see generally proposed Rules 12309,
13309.
\257\ Notice at 2147; see FINRA Rules 12303(b), 13303(b).
\258\ Notice at 2147; see proposed Rules 12309(a), 13309(a).
\259\ Notice at 2147; see proposed Rules 12309(b)(1), 13309(b)
(deleting ``a copy of'').
\260\ Notice at 2147; see proposed Rules 12309(c)(1),
13309(c)(1).
\261\ Notice at 2147; see proposed Rules 12309(a)(3),
13309(a)(3).
\262\ Notice at 2147; see proposed Rules 12309(d), 13309(d);
FINRA Rules 12310, 13310.
\263\ Notice at 2147; see proposed Rules 12309(d), 13309(d);
FINRA Rules 12310, 13310.
\264\ Proposed Rules 12309(b)(2), 12309(c)(2).

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

[[Page 62847]]

Two commenters supported these proposed rule changes,\265\ and a
third offered no objection.\266\
---------------------------------------------------------------------------

\265\ PIABA Letter at 3; Cornell Letter at 3-4 (stating that
this proposed rule change would codify respondents' current ability
to file third-party claims, create the same procedures for filing
third-party claims as those for amending a complaint, and promote
simplicity and fairness in the process).
\266\ Pickard Letter at 5.
---------------------------------------------------------------------------

The Commission believes that by addressing procedural and other
ambiguities in the relevant rules, these proposed rule changes should
enhance the transparency of the forum's procedures and promote their
consistent and efficient application. For this these reasons, the
Commission finds that the proposed rule changes are reasonably designed
to protect investors and the public interest.
8. Combining Claims
As stated above, the proposed rule change would address which panel
among those in multiple cases involving separate but related claims
would decide a motion to combine such claims into a single arbitration
or reconsider the DRS Director's previous decision on a motion to
combine such claims.\267\ Specifically, the original proposed rule
change would have set forth rules governing two scenarios: (1) if a
panel has been appointed to the lowest numbered case, the panel in that
case would have the above-referenced authority; and (2) 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 would have the above-referenced
authority.\268\ FINRA stated that this original proposed rule change
would have codified current practice.\269\
---------------------------------------------------------------------------

\267\ See proposed Rules 12314(b), 13314(b); see also Amendment
No. 1 at 4.
\268\ See Notice at 2147.
\269\ See id.
---------------------------------------------------------------------------

One commenter offered no objection to this proposed rule
change.\270\ A second commenter stated that as originally proposed, the
proposed rule change would promote clarity and efficiency by codifying
current practice.\271\ However, this commenter noted that this original
proposed rule change had an apparent gap--it did not address ``what
happens if a panel has only been appointed to cases numbered in the
middle (i.e.[,] neither the lowest nor the highest) if more than two
combinable claims are involved.'' \272\
---------------------------------------------------------------------------

\270\ Pickard Letter at 5.
\271\ Cornell Letter at 4.
\272\ Id.
---------------------------------------------------------------------------

In its response, FINRA amended the proposed rule change to address
this commenter's concerns. FINRA explained that the original proposed
rule change addressed the two most common situations in which a motion
to combine claims is filed.\273\ But to provide greater clarity, FINRA
amended this proposed rule change to provide that ``[i]f a panel has
been appointed to one or more cases [involving separate but related
claims], the panel appointed to the lowest-numbered case with a panel''
has the authority to: (1) combine separate but related claims into one
arbitration; and (2) reconsider the DRS Director's decision on such a
motion to combine claims.\274\
---------------------------------------------------------------------------

\273\ FINRA April Letter at 7-8.
\274\ Proposed Rules 12314(b)(1), 13314(b)(1); FINRA April
Letter at 7-8; see also Amendment No. 1 at 4.
---------------------------------------------------------------------------

The Commission believes that by addressing ambiguities in the Codes
and codifying existing practice, the proposed rule change enhances the
transparency of the forum's procedures and promotes their consistent
application in all arbitration cases. In addition, this proposed rule
change should enhance the efficiency of the arbitration process by
reducing the number of arbitrations hearing separate but related
claims. For these reasons, the Commission finds that this proposed rule
change is reasonably designed to protect investors and the public
interest.
9. Motions in Arbitration
As stated above, the proposed rule change would amend FINRA's rules
governing parties' motions in arbitration. First, the proposed rule
change would require the DRS Director to send all motions, responses,
and replies to the panel after the last reply date expires, unless the
arbitrator panel directs otherwise.\275\ If the DRS Director receives
any submissions on the motion after the last reply date has elapsed,
this proposed rule change would require the DRS Director to forward the
submissions to the panel upon receipt, and the panel would determine
whether to accept them.\276\ FINRA stated that this proposed rule
change would codify an existing practice, bringing transparency and
consistency to arbitration.\277\
---------------------------------------------------------------------------

\275\ Proposed Rules 12503(d), 13503(d).
\276\ Id.
\277\ See Notice at 2148 (stating that ``[i]n practice, DRS
sends all motions and all responses to the panel after the last
reply date has elapsed, unless otherwise directed by the panel.'').
---------------------------------------------------------------------------

Second, the proposed rule change would add cross-references to
rules governing motions to separate or combine claims or arbitrations.
In particular, the proposed rule change would clarify: (1) that the DRS
Director may decide a motion to separate claims or arbitrations prior
to panel appointment, but the panel assumes that authority upon its
appointment; \278\ and (2) which panel among multiple cases may combine
separate but related claims into one arbitration or reconsider the DRS
Director's decision to combine claims upon motion of a party (as
discussed above).\279\
---------------------------------------------------------------------------

\278\ Proposed Rules 12503(e)(3), 13503(e)(3) (adding cross-
references to Rules 12312, 12313, 13312, and 13313, as applicable,
which identify the circumstances in which the DRS Director or a
panel may separate claims or arbitrations).
\279\ Proposed Rules 12503(e)(4), 13503(e)(4) (adding cross-
reference to proposed Rules 12314 or 13314, as applicable, which
articulates who has authority to decide motions to combine claims).
The addition of the proposed text to Rules 12503(e) and 13503(e)
requires the renumbering of certain paragraphs in that subsection.
See Notice at 2148 n.63.
---------------------------------------------------------------------------

Third, the proposed rule change would clarify if a motion to amend
a pleading is made after panel appointment, the amended pleading that
should be included with the motion does not need to be a hard
copy.\280\
---------------------------------------------------------------------------

\280\ See proposed Rules 12503(a)(4), 13503(a)(4).
---------------------------------------------------------------------------

One commenter supported these proposed rule changes, characterizing
them as ``clear benefit[s] for both claimants and respondents'' that do
not alter current procedures.\281\
---------------------------------------------------------------------------

\281\ See Cornell Letter at 4. Another commenter offered no
objection. See Pickard Letter at 5.
---------------------------------------------------------------------------

The Commission believes that by identifying and reducing ambiguity,
the proposed rule change makes the arbitration process more transparent
and promotes uniformity across arbitration cases. For these reasons,
the Commission finds that the proposed clarifications are reasonably
designed to protect investors and the public interest.
10. Witness Lists Shall Not Be Combined With Document Lists
As stated above, the Codes require that at least 20 days before the
first scheduled hearing, all parties must: (1) provide all other
parties--but not the DRS Director or arbitrators--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; \282\
and (2) provide each other party--as well as the DRS Director--with the
names and business affiliations of all witnesses they intend to present
at the hearing.\283\ Separately, FINRA stated that in addition to
producing copies of documents and other materials they intend to use at
the hearing, parties often produce and file with the DRS

[[Page 62848]]

Director a single document listing such documents and other
materials.\284\ FINRA explained that even though FINRA Rules 12514(a)
and 13514(a) indicate that ``parties should not file the documents with
the [DRS] Director or arbitrators before the hearing,'' the Codes do
not currently include language regarding the sharing of document lists
that parties may choose to create before the hearing.\285\ As such,
parties who choose to create document lists, often file such lists with
the DRS Director, along with the witness list.\286\ When parties file
combined lists, FINRA stated that it endeavors to remove any
potentially prejudicial or inadmissible materials (typically found in a
party's list of documents) from the combined lists before forwarding
the witness lists to the arbitrators.\287\ To better protect against
the risk of inadvertent disclosure of prejudicial or inadmissible
materials, the proposed rule change would expressly provide that if a
party creates a list of documents and other materials in their
possession or control that they intend to use at the hearing that have
not already been produced, it may serve the list on all other parties,
but shall not combine the list with the witness list filed with the DRS
Director pursuant to Rule 12514(b) or 13514(b), as applicable.\288\
---------------------------------------------------------------------------

\282\ See FINRA Rules 12514(a), 13514(a) (stating that ``[t]he
parties should not file the documents with the [DRS] Director or the
arbitrators before the hearing.'').
\283\ FINRA Rules 12514(b), 13514(b).
\284\ Notice at 2148.
\285\ Id.; see FINRA Rules 12514(a), 13514(a).
\286\ See Notice at 2148; see also FINRA Rules 12514(a),
13514(a).
\287\ See Notice at 2148.
\288\ Proposed Rule 12514(a), 13514(a); see Notice at 2148.
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One commenter offered ``no strong objection,'' but observed that
FINRA arbitrators prefer identifying admissible documents and materials
prior to the hearing to avoid mid-hearing delays.\289\ A second
commenter supported this proposed rule change, emphasizing that it
would reduce work for the DRS Director and minimize unintentional
disclosures of confidential information to arbitrators without imposing
a significant burden on the parties.\290\
---------------------------------------------------------------------------

\289\ Pickard Letter at 6 (indicating that arbitrators ``prefer
identifying admissible documents and materials prior to the hearing
to avoid mid-hearing delays, and may use exhibit lists before and
during the hearing for ease of reference.'').
\290\ Cornell Letter at 4.
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The Commission believes the proposed rule change would reduce the
risk of unintentional disclosure of prejudicial information to
arbitrators without imposing a new obligation upon the parties. By more
clearly setting forth the requirements of parties in arbitration, the
proposed rule change would enhance the fairness of the arbitration
process by helping to limit the exposure of prejudicial or inadmissible
materials to the panel. For these reasons, the Commission finds that
this proposed rule change is reasonably designed to protect investors
and the public interest.
11. Hearing Records
a. Allocation to Parties of Responsibilities for Hearing Records
The Codes require the DRS Director to ``make a tape, digital, or
other recording of every hearing.'' \291\ The official record of an
arbitration hearing is the DRS Director's tape, digital, or other
recording of every arbitration hearing; \292\ however, if a party
chooses to make a stenographic record of a hearing, a panel may decide
in advance of the hearing that the stenographic record will be the
official record of the hearing.\293\ If the DRS Director's recording is
the official record, the panel ``may order the parties to provide a
transcription of the recording'' and ``copies of the transcription must
be provided to each arbitrator, served on each party, and filed with
the Director.'' \294\ If a party's stenographic record is the official
record, ``a copy must be provided to each arbitrator, served on each
other party, and filed with the Director.'' \295\ Further, ``[t]he cost
of making and copying the stenographic record will be borne by the
party electing to make the stenographic record, unless the panel
decides that one or more other parties should bear all or part of the
costs.'' \296\ But the Codes do not specify which party must provide to
each arbitrator, serve on each other party, and file with the DRS
Director a copy of the official record.\297\ The proposed rule change
would assign that responsibility to the party or parties: (1) ordered
to provide a transcription of the DRS Director's recording; or (2)
electing to make a stenographic record.\298\
---------------------------------------------------------------------------

\291\ Current FINRA Rules 12606(a)(1), 13606(a)(1).
\292\ FINRA Rules 12606(a)(3), 13606(a)(3).
\293\ FINRA Rules 12606(b)(1), 13606(b)(1).
\294\ FINRA Rules 12606(a)(2), 13606(a)(2).
\295\ FINRA Rules 12606(b)(2), 13606(b)(2).
\296\ Id.
\297\ Notice at 2148.
\298\ Proposed Rules 12606(a)(2), 13606(a)(2), 12606(b)(2),
13606(b)(2).
---------------------------------------------------------------------------

One commenter offered no objection.\299\ A second commenter opposed
this proposed rule change as drafted.\300\ Specifically, the commenter
opposed the appropriateness of requiring a claimant with limited
financial means to produce a transcription of a hearing record.\301\
Noting the ``high costs'' associated with the provision of a
transcription of a hearing record, the commenter recommended that
FINRA: ``(1) provide guidelines on the circumstances under which the
panel might order hearing records from a party; (2) consider only
allowing the panel to order hearing records from member firms; and (3)
provide waivers or other forms of financial and legal assistance to
indigent parties who cannot afford to provide the hearing records and
whose case might be jeopardized as a result.'' \302\
---------------------------------------------------------------------------

\299\ Pickard Letter at 6.
\300\ Cornell Letter at 5.
\301\ See id.
\302\ Id.
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In response, FINRA declined to amend this proposed rule
change.\303\ FINRA explained that in cases where the DRS Director's
recording is the official record, a panel usually orders a transcript
of the recording only upon a motion of a party, and that because the
digital recording made by the DRS Director continues to be the official
record of a hearing, these motions are rare.\304\ When such a motion is
made, the parties may litigate the motion by addressing, among other
things, whether a transcript should be ordered at all or which party
should bear the burden of generating the transcript.\305\ In that
process, a party could raise--and an arbitration panel would be well-
positioned to consider--objections based on financial grounds.\306\ For
that reason, FINRA also declined ``to provide for waivers or other
forms of financial and legal assistance to parties who may not have the
financial resources to pay for hearing records.'' \307\ FINRA
indicated, however, ``that guidance on the process for ordering a
transcript from a party may be helpful to the parties in preparing
their case,'' so it stated that it would provide such guidance on its
website if the Commission approves this proposed rule change.\308\
---------------------------------------------------------------------------

\303\ FINRA April Letter at 9 n.28 and accompanying text.
\304\ Id.
\305\ See id.
\306\ Id.
\307\ Id.
\308\ Id.
---------------------------------------------------------------------------

The Commission believes it is reasonable that FINRA has determined
to rest the obligation of providing, serving, and filing a
transcription or stenographic record on the party responsible for
creating that record (in the case of a transcription) or on the party
that elected to make the record (in the case of a stenographic record).
Clearly identifying the party responsible for providing, serving, and
filing a transcription or stenographic record should help clarify the
obligations of the parties. Additionally, the panel should be well
positioned to consider any cost-

[[Page 62849]]

related issues raised by the parties. For these reasons, this proposed
rule change is reasonably designed to protect investors and the public
interest.
b. Record of Executive Sessions
As noted above, the Codes require the DRS Director to ``make a
tape, digital, or other recording of every hearing.'' \309\ Although
the Codes do not specifically state that executive sessions will not be
recorded, as a matter of practice, executive sessions are not recorded
because they are not part of the official record of the hearing.\310\
Rather, executive sessions are ``discussions among arbitrators''
outside the presence of the parties, the parties' representatives,
witnesses, and stenographers.\311\ The proposed rule change would
codify this practice by providing that the DRS Director will not make
an official recording of any executive sessions, i.e., discussions
among arbitrators outside the presence of the parties, witnesses, and
stenographers.\312\ FINRA stated that this proposed rule change would
promote ``transparency and consistency'' by codifying an existing
practice.\313\
---------------------------------------------------------------------------

\309\ Current FINRA Rules 12606(a)(1), 13606(a)(1).
\310\ Notice at 2148.
\311\ See id.
\312\ Proposed Rules 12606(a)(1), 13606(a)(1).
\313\ Id.
---------------------------------------------------------------------------

One commenter addressed this proposed rule change, offering no
objection.\314\
---------------------------------------------------------------------------

\314\ See Pickard Letter at 6.
---------------------------------------------------------------------------

The Commission believes that maintaining the confidentiality of
executive session deliberations encourages candid discourse about a
case among arbitrators. Specifically, the expectation of a private
deliberation that is not recorded, in which each arbitrator can speak
candidly, provides an opportunity to sharpen their assessments of a
case and helps promote sound decision-making. For these reasons, the
Commission finds that this proposed rule change is reasonably designed
to protect investors and the public interest.
12. Dismissal of Proceedings for Insufficient Service
As stated above, the Codes require parties, other than those
proceeding pro se, to serve all pleadings and other documents through
the Portal.\315\ 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 was complete and sufficient before the case may
proceed to hearing.\316\ Although the Codes do not address what action
the panel should take if it determines that service was insufficient,
current practice permits a panel to dismiss a claim or arbitration
without prejudice (i.e., a party can refile their claim in the future)
if it finds insufficient service.\317\ To promote ``transparency and
consistency,'' the proposed rule change would expressly permit a panel
to dismiss a claim or arbitration without prejudice if it finds
insufficient service upon a respondent.\318\
---------------------------------------------------------------------------

\315\ FINRA Rules 12300, 13300; see supra note 39.
\316\ Notice at 2148.
\317\ Id. at 2148-49.
\318\ Proposed Rules 12700(c), 13700(c); see Notice at 2148-49.
---------------------------------------------------------------------------

One commenter supported this proposed rule change, agreeing that it
codifies current practice and ``ensures that errors and
misunderstandings are minimized.'' \319\ A second commenter offered no
objection.\320\
---------------------------------------------------------------------------

\319\ Cornell Letter at 5.
\320\ Pickard Letter at 6.
---------------------------------------------------------------------------

The Commission believes that permitting a panel to dismiss a claim
or arbitration without prejudice if it finds insufficient service of a
pleading or other document reasonably balances a respondent's need for
appropriate notice with a party's ability to refile a claim without
prejudice so the case can move forward. The Commission also believes
that the proposed rule change would promote transparency about FINRA's
arbitration process and help ensure consistent procedures across
arbitration cases. For these reasons, the Commission finds that this
proposed rule change is reasonably designed to protect investors and
the public interest.
13. Dismissal of Claims Requires Issuance of an Award
As stated above, an award is a document stating the final
disposition of a case.\321\ The Codes require FINRA to publish awards,
which it does on its website.\322\ Currently, although the Codes permit
a panel to grant a motion to dismiss a party's entire case after the
conclusion of that party's case-in-chief,\323\ the Codes do not
specifically address whether such a dismissal requires the issuance,
and publication, of an award.\324\ FINRA stated that as the dismissal
of all a claimant's claims disposes of a case, it is current practice
to require the issuance, and publication, of an award for such
dismissals.\325\ The proposed rule change would codify this practice by
requiring a panel granting a motion to dismiss all claims to issue a
``decision'' containing the elements of a written award and make the
decision ``publicly available as an award.'' \326\
---------------------------------------------------------------------------

\321\ See supra notes 158-159 and accompanying text.
\322\ See supra note 160.
\323\ See FINRA Rules 12504(b), 13504(b).
\324\ Notice at 2149.
\325\ Id.
\326\ Id.; see proposed Rule 12504(b), 13504(b); FINRA Rules
12904(e), 13904(e) (describing elements of an award).
---------------------------------------------------------------------------

One commenter supported this proposed rule change.\327\ A second
commenter objected to the proposed rule change, stating that the
publication of an award dismissing all of a claimant's claims would
negatively impact the respondent's reputation.\328\ Specifically,
because all arbitration awards are published in a ``permanent,
unredacted database,'' they ``reiterate the details of the customer
complaint information about each broker, regardless of the complaint's
merit.'' \329\ Similarly, because a motion to dismiss will be granted
after claimant's case-in-chief and before respondents present their own
case, the award ``will not reflect any defense by [r]espondent[.]''
\330\ The commenter concluded that ``[i]f a customer complaint has so
little merit that it is disposed of through a Motion to Dismiss . . . ,
there is no regulatory purpose in ensuring that the member firm and/or
registered representatives implicated by the complaint continue to have
their reputations tainted by the allegations.'' \331\
---------------------------------------------------------------------------

\327\ Cornell Letter at 5.
\328\ Pickard at 6-7. Another commenter asserted that the
proposed rule change would improperly amend the meaning of ``final
award'' to include a panel's dismissal of some, but not all, of a
claimants' claims. See letter from Anonymous to Vanessa Countryman,
Secretary, U.S. Securities and Exchange Commission (Sep. 5, 2023).
The Commission believes that this comment misinterprets the proposed
rule change. In the Notice, FINRA stated that currently a panel
renders a written award if it grants a motion to dismiss all of a
claimant's claims at the conclusion of the case in chief. See Notice
at 2149. The proposed rule change would codify this practice. See
proposed Rules 12504(b); 13504(b). FINRA further stated that if a
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 Notice at 2149 n.84 (citing FINRA
Dispute Resolution Services Arbitrator's Guide, https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf). The
proposed rule change is not modifying this practice.
\329\ Id. at 6.
\330\ Id.
\331\ Id. This commenter also asked FINRA to develop a mechanism
to remove information from or redact records in its public
arbitration award database. Id. at 7-8. As FINRA has not proposed
rules related to the redaction or removal of information from that
database, this comment is outside the scope of this proposed rule
change.
---------------------------------------------------------------------------

In response, FINRA acknowledged that the award may not reflect any
defense raised by respondents.\332\ However, FINRA stated that the
Codes permit arbitrators to include a rationale underlying the award to
provide

[[Page 62850]]

relevant context.\333\ In addition, FINRA stated that after a panel
dismisses a case at the conclusion of the case-in-chief, the firm must
file an amended Uniform Application for Securities Industry
Registration or Transfer (``Form U4'') for the associated person to
report the final disposition of the case as dismissed.\334\ FINRA
stated that along with the final disposition, an associated person can
provide a brief summary or add context on Form U4 regarding the
circumstances leading to the customer arbitration, as well as the
current status or final disposition.\335\ This updated information is
subsequently disclosed on the associated person's BrokerCheck report,
which is publicly available to investors.\336\
---------------------------------------------------------------------------

\332\ See FINRA August Letter at 7.
\333\ See id.; see also FINRA Rules 12904(f) and 13904(f).
\334\ See FINRA August Letter at 7 (citing FINRA By-Laws,
Article V, Sections 2(c), 3(a) and 3(b)).
\335\ See id. at 7 n.30.
\336\ FINRA Rule 8312 (FINRA BrokerCheck Disclosure) governs the
information FINRA releases to the public through its BrokerCheck
system. Information available to investors through BrokerCheck
includes, among other things, information reported on the most
recently filed ``Registration Forms'' (with limited exceptions) for
both member firms and registered individuals, and summary
information about certain arbitration awards against the firm
involving a securities or commodities dispute with a public
customer; see also FINRA Rule 8312(b)(2)(A) (using the term
``Registration Forms'' to refer collectively to Form U4, the Uniform
Termination Notice for Securities Industry Registration (Form U5),
the Uniform Disciplinary Action Reporting Form (Form U6), the
Uniform Application for Broker-Dealer Registration (Form BD), and
the Uniform Request for Broker-Dealer Withdrawal (Form BDW)). The
BrokerCheck website is available at brokercheck.finra.org.
---------------------------------------------------------------------------

The Commission believes that this proposed rule change should
promote transparency about FINRA's arbitration process and help ensure
consistent treatment of awards. Specifically, the proposed rule change
equally requires all arbitration awards, including awards granting a
motion to dismiss all claims, to be published. These published awards
should provide current and future parties to an arbitration with data
that could help inform the administration of their cases. The
Commission acknowledges the commenter's concern that a published award
granting a motion to dismiss all claims may not reflect any defense
raised by respondents. However, these concerns should be ameliorated by
the fact that the Codes permit arbitrators to include a rationale
underlying the award, providing relevant context to the dismissal of
the claim such as the circumstances under which the claim was
dismissed. In addition, an associated person may provide context on
Form U4 regarding the circumstances leading to the customer
arbitration, as well as the claim's current status or final
disposition. For these reasons, the Commission finds that this proposed
rule change is reasonably designed to protect investors and the public
interest.

IV. Conclusion

For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 15A(b)(6) of the Exchange Act, which requires, among other
things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and, in general, protect investors and the public
interest.\337\
---------------------------------------------------------------------------

\337\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \338\ that the proposed rule change (SR-FINRA-2022-033),
as amended by Amendment No. 1, be, and hereby is, approved.
---------------------------------------------------------------------------

\338\ 15 U.S.C. 78s(b)(2).
\339\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\339\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-19729 Filed 9-12-23; 8:45 am]
BILLING CODE 8011-01-P

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