FINRA Dispute Resolution Services continues to update its rules and procedures to further its effort to operate the country’s largest securities dispute resolution forum in a fair, efficient, and effective manner. The five most significant developments in the past year are (1) updates to the arbitrator selection process, (2) significant changes to the expungement process, (3) continued efforts to respond to COVID-19 developments, (4) an amendment to the Code of Arbitration Procedure for Industry Disputes to align it with the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, and (5) a significant number of procedural amendments with which practitioners should be familiar.
Changes to the Arbitrator Selection Process
On December 23, 2022, FINRA filed proposed rule changes with the SEC that would make certain changes to its arbitrator selection process. These revisions were made largely in response to an independent review of the process. Most significantly, these amendments require the FINRA director to explain in writing her decision to grant or deny a party’s request to remove an arbitrator. The revisions also make clear that:
- A challenge for cause may be filed at any point after a party receives the arbitrator ranking lists generated by the list selection algorithm until the start of the first hearing session;
- if the director has sent the arbitrator ranking lists to the parties but the first hearing session has not begun, the director may remove an arbitrator for conflict of interest or bias, either at the request of a party or on the director’s own initiative;
- the director will exclude arbitrators from the lists based on a review of current conflicts of interest not identified within the list selection algorithm; and
- if an arbitrator is removed based on this conflicts review, the list selection algorithm will randomly select an arbitrator to complete the lists.
FINRA had previously effectuated a rule change that removed the term “Neutral List Selection System” from the codes of arbitration and replaced it with the “list selection algorithm.”
Significant Changes to the Expungement Process
On April 12, 2023, the SEC approved FINRA rule changes to the Customer and Industry Codes of Arbitration Procedure that significantly affect the process by which registered representatives can have customer complaints expunged from their Central Registration Depository records. The changes are being made in an effort to make it more difficult to secure such expungements. This adoption followed a lengthy process that involved a September 2020 package of proposed rule changes that FINRA sent to the SEC for approval, which was temporarily withdrawn in May 2021.
The details of the proposed rule changes are beyond the scope of this article as they are lengthy, detailed, and fairly complex in their interaction with existing rules and FINRA guidance. Practitioners are advised to closely consider the announced changes. They include—but are not limited to—the following:
- time limits on when expungement requests can be filed;
- the creation of a special roster of arbitrators who have been approved to hear expungement requests;
- significant changes to the manner in which those arbitrators are appointed to panels;
- customer and regulator notification and participation changes;
- a unanimity requirement;
- a prohibition of withdrawals of expungement requests;
- panel authorization to request any documentary, testimonial, or other evidence deemed relevant from the firm or associated person; and
- an instruction to arbitrators to give “absolutely no evidentiary value” to the fact that a customer did not attend or participate in an expungement hearing.
COVID-19 Developments
As of October 3, 2022, FINRA announced that it was no longer requiring in-person arbitration participants to wear masks except at FINRA offices where the COVID-19 community level is high. And effective January 30, 2023, FINRA stopped requiring vaccination, COVID testing, or health self-assessments for in-person participants at arbitration hearings or mediation sessions.
The rule change proposal relating to the arbitrator selection process discussed above also included two minor changes somewhat related to COVID-19 developments. Specifically, these changes provided (1) that the default venue for prehearing conferences will be via videoconference, unless the parties otherwise agree or the panel grants a motion for another type of hearing session, and (2) that the default venue for special proceedings will be via videoconference, unless the parties otherwise agree or a customer makes a request to the contrary at least 60 days before the first scheduled hearing.
Amendments to Comply with the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021
The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 prohibits mandatory arbitration of sexual assault and sexual harassment claims. To comply with the act, FINRA amended its Code of Arbitration Procedure for Industry Disputes to define “sexual assault claim” and “sexual harassment claim.” It also added subsection (c) to Rule 13201 to provide that a party alleging a sexual assault claim or sexual harassment claim “may elect post dispute not to arbitrate such a claim,” while also noting that such a dispute may be arbitrated “if the parties have agreed to arbitrate it after the dispute arose.”
Other Procedural Amendments
Finally, the rule change proposal discussed above and as amended also included a number of procedural amendments that addressed a variety of concerns. These include the following:
- requiring redaction of personal confidential information in simplified arbitrations;
- clarifying that a second hearing session begins after four hours of hearing time has elapsed;
- providing certain guidance regarding amending pleadings, filing third-party claims, and combining claims;
- codifying the process by which motions are sent to the panel;
- specifying that witness lists should not be combined with exhibit lists;
- providing that any transcripts ordered by the panel must be provided to each arbitrator, each party, and the director;
- amending the Customer and Industry Codes to provide that executive sessions held by the panel will not be recorded;
- providing for dismissal of proceedings for insufficient service; and
- effectively requiring a written award by the panel in connection with any dismissal of all of a claimant’s claims.
Conclusion
The changes discussed above reflect FINRA’s efforts at addressing several long-standing concerns.
©2023 by the American Bar Association. Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.