[Federal Register Volume 88, Number 176 (Wednesday, September 13, 2023)]
[Notices]
[Pages 62835-62850]
[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

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

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

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

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

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

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

e. Number of Hearing Sessions per Day
    Arbitrators are paid for each hearing session in which they
participate.\87\ The Codes define a ``hearing session'' as ``any
meeting between the parties and arbitrator(s) of four hours or less,
including a hearing or a prehearing conference.'' \88\ FINRA stated
that ``some arbitrators have the misunderstanding that they may be
compensated for time spent outside of the hearing session, such as on
lunch breaks, because the Codes do not specify when the next hearing
session begins.'' \89\
---------------------------------------------------------------------------

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

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

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

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

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

g. Amending Pleadings or Filing Third-Party Claims
    FINRA stated that the Codes do not include express procedures
related to the filing of third-party claims other than those filed in
an answer to a statement of claim.\98\ Rather, FINRA indicated that
FINRA rules relating to amended pleadings currently govern the filing
of third-party claims.\99\ FINRA stated that the proposed rule change
would amend the Codes to expressly extend the procedures that apply to
amended pleadings to the filing and serving of third-party claims.\100\
The proposed rule change also would ``restructure the provisions
related to amending pleadings and filing third-party claims and add
titles to clarify what processes are available based on various
milestones in a case, including before and after panel appointment and
before and after ranked arbitrator lists are due to the Director.''
\101\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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,

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

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

    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\
---------------------------------------------------------------------------

    \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\
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    \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

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-

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