The Financial Industry Regulatory Authority (FINRA) filed a proposed rule change with the Securities and Exchange Commission (SEC) on December 23, 2022, that, among other things includes amendments to FINRA’s Code of Arbitration Procedure aimed at improving the experience of parties using FINRA’s arbitration forum.

The proposed procedural changes include:

  1. Virtual Prehearing Conferences

First, under proposed Rules 12500(b), 12501(c) and 12504(a), Rules 13500(b), 13501(c) and 13504(a), prehearing conferences will be held by video conference unless the parties agree to, or the panel grants a motion for, another type of hearing session. Previously, prehearing conference were generally held by telephone.

  1. Virtual Option for Special Proceeding

 Second, under proposed Rules 12800(c)(3)(B)(i) and 13800(c)(3)(B)(i), customer dispute special proceedings will be held by video conference unless the customer requests at least 60 days before the first scheduled hearing that it be held by telephone, or the parties agree to another type of hearing session. The proposed change would make video conference the default for special proceedings.

  1. Redacting Confidential Information

 Third, proposed Rules 12300(d)(1) and 13300(d)(1) extend the requirement to redact personal confidential information (“PCI”) to simplified arbitrations. Previously, FINRA did not apply the redaction requirements to simplified arbitrations due to its concern that the requirement to redact PCI would prove too difficult for pro se customers, who most often elect for a simplified proceeding. If the proposal is approved by the SEC, FINRA will issue guidance on its website regarding the steps parties can take to protect PCI, which is to include guidance to pro se parties on the importance of safeguarding PCI and on how to redact PCI from documents filed with FINRA.

  1. Number of Hearing Sessions Per Day

Fourth, FINRA proposes to amend the definition of “hearing session” to clarify that in one day, the next hearing session begins after four hours of hearing time has elapsed. See proposed Rules 12100(p) and 13100(p).

  1. Update Submission Agreements When Filing a Third-Party Claim

Fifth, the proposed rules provide that if an answer contains a third-party claim (i.e., a claim asserted against a party not already named in the Statement of Claim or any other previous pleading), the Respondent must execute a Submission Agreement that lists the name of the third party, and additionally, that the Respondent must file the Submission Agreement with the FINRA Director of Dispute Resolution Services. See proposed Rules 12303(b) and 13303(b).

  1. Amending Pleadings or Filing Third Party Claims

Sixth, proposed Rules 12309 and 13309 provide for a new procedure for filing third party claims. Under the new procedure, third party claims will be subject to the same filing and serving requirements as amended pleadings. Proposed Rules 12309 and 13309 also aim to clarify the processes related to amended pleadings and filing of third party claims.

  1. Combining Claims

Seventh, under current practice, before ranked arbitrator lists are due to the Director, the Director can combine separate but related claims into a single arbitration. Proposed Rules 12314 and 13314 aim to codify this current practice by providing that, where there are separate but related claims pending, if a panel is appointed to the lowest numbered case (i.e., the case with the earliest filing date), the panel in that case may: (a) combine separate but related claims into one arbitration; and (b) reconsider the Director’s decision upon motion of a party. Additionally, if a panel has been appointed to the highest numbered case (i.e., the case with the latest filing date), but not to the lowest numbered case, the panel appointed to the highest numbered case may: (a) combine separate but related claims into one arbitration; and (b) reconsider the Director’s decision upon motion of a party.

  1. Motion Practice

Eighth, proposed Rules 12503(d) and 13503(d) amend the Rules to provide that the Director of FINRA Dispute Resolution Services will send all motions, responses, and replies to the panel after the last reply date has elapsed, unless otherwise directed by the panel. If the Director receives additional submission after the last reply date has lapsed, the Director is to forward submissions to the panel upon receipt and the panel will only then determine whether to accept the reply. Proposed Rules 12503(e)(3) and 13503(e)(3) provide that motions relating to separating claims or arbitrations are decided by the Director before a panel is appointed, or by the panel after the panel is appointed.

  1. Witness Lists Shall Not be Combined with Document Lists

Ninth, the Rules do not currently include language regarding the sharing of document lists before the hearing.  Proposed Rules 12514(a) and 13514(a) would specify that if the parties create lists of documents and other materials in their possession or control that they intend to use at the hearing and have not already been produced, the parties may serve the lists on all other parties but must not combine the lists with the witness lists filed with the Director. Proposed. Rules 12514(a) and 13514(a) would clarify to parties that they should not combine document lists with witness lists, which, in theory, would help protect against the inadvertent sharing of such document lists with the arbitrators before the hearing.

  1. Hearing Records

Tenth, proposed Rules 12606(a)(2), 13606(a)(2), 12606(b)(2), and 13606(b)(2) would amend the rules to provide that if the panel orders a transcript, or the stenographic record is the official record of the proceeding, a copy of the transcription or stenographic record must be provided to each arbitrator, served on each party, and filed with the Director by the party (or parties) ordered to make the transcription or electing to make the stenographic record. Proposed Rules 12606(a)(1) and 13606(a)(1) provide those executive sessions held by the arbitration panel (i.e., discussions among arbitrators outside the presence of the parties and their representatives, witnesses, and stenographers) will not be recorded.

  1. Dismissal of Proceedings for Insufficient Service

Eleventh, proposed Rules 12700(c) and 13700(c) would codify current practice by amending the Rules to provide that the panel may dismiss without prejudice a claim or an arbitration for lack of sufficient service upon a respondent.

  1. Dismissal of Claimant’s Claims Requires Issuance of an Award

Twelfth, proposed Rules 12504(b) and 13504(b) would amend current Rules to require that if a panel dismisses all of a claimant’s claims at the conclusion of the case in chief, the decision must contain the elements of a written award and must be made publicly available as an award.

To read the full rule change proposed by FINRA, please click here.  (LINK BELOW)

Winget, Spadafora & Schwartzberg, LLP is closely monitoring these developments.  Any questions can be directed to our Securities Litigation Practice Group.