
[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.
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    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\
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    \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).
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    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\
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    \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).
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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\
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    \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).
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    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\
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    \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).
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    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\
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    \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.
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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\
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    \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).
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    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\
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    \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.
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    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\
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    \57\ See Notice at 2144.
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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\
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    \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).
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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\
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    \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).
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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\
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    \67\ Notice at 2145.
    \68\ Lowenstein Report at 37.
    \69\ Notice at 2145.
    \70\ See proposed Rules 12407(c), 13410(c).
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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\
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    \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).
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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\
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    \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).
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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\
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    \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).
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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\
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    \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.
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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\
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    \87\ See Notice at 2146 (citing FINRA Rules 12214, 13214).
    \88\ FINRA Rules 12100(p), 13100(p).
    \89\ Notice at 2146.
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    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).
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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\
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    \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\
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    \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.
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    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\
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    \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.
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    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.
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    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\
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    \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).

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[[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\
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    \267\ See proposed Rules 12314(b), 13314(b); see also Amendment 
No. 1 at 4.
    \268\ See Notice at 2147.
    \269\ See id.
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    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\
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    \270\ Pickard Letter at 5.
    \271\ Cornell Letter at 4.
    \272\ Id.
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    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\
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    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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


