Notice2025-16185
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Make Clarifying, Technical, and Procedural Changes to the Arbitrator List Selection Process
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 25, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 162 (Monday, August 25, 2025)</title>
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[Federal Register Volume 90, Number 162 (Monday, August 25, 2025)]
[Notices]
[Pages 41449-41459]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-16185]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103753; File No. SR-FINRA-2024-022]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Amend the
Codes of Arbitration Procedure To Make Clarifying, Technical, and
Procedural Changes to the Arbitrator List Selection Process
August 20, 2025.
I. Introduction
On December 18, 2024, 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 (``Customer Code'') and the Code of
Arbitration Procedure for Industry Disputes (``Industry Code'')
(together, ``Codes'') to make changes to certain provisions relating to
the arbitrator selection process. Specifically, the proposed rule
change would amend the Codes to increase the odds that public
arbitrators who are not eligible to serve as chairpersons would appear
on the list of public arbitrator candidates in certain disputes that
have a three-arbitrator panel. In addition, the proposed rule changes
would, among other things: codify certain current practices to increase
transparency; establish new timeframes for objecting to requests for
additional information from arbitrators, withdrawing such requests for
additional information, and filing motions to remove arbitrators after
disclosures of causal challenges; and align provisions of the Codes
related to the expungement of customer dispute information.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 101993 (Dec. 19, 2024), 89 FR
106635, 106637 (Dec. 30, 2024) (File No. SR-FINRA-2024-022)
(``Notice'').
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The proposed rule change was published for comment in the Federal
Register on December 30, 2024.\4\ The public comment period closed on
January 21, 2025. The Commission received comment letters related to
this filing.\5\ On January 27, 2025, FINRA consented to extend until
March 28, 2025, 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.\6\ On March 10, 2025, the Commission published an
order instituting proceedings (``OIP'') to determine whether to approve
or disapprove the proposed rule change.\7\ On March 11, 2025, FINRA
responded to the comment letters received in response to the Notice.\8\
The OIP public comment period closed on April 4, 2025, and the
Commission received an additional comment letter. On June 11, 2025,
FINRA consented to extend until August 27, 2025, the time period in
which the Commission must approve or disapprove the proposed rule
change.\9\ This order approves the proposed rule change.
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\4\ See Notice.
\5\ The comment letters are available at <a href="https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022.htm">https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022.htm</a>.
\6\ See letter from Bria Adams, Assistant General Counsel, FINRA
(dated Jan. 27, 2025), <a href="https://www.finra.org/sites/default/files/2025-01/FINRA-2024-022-Extension-3-28-25.pdf">https://www.finra.org/sites/default/files/2025-01/FINRA-2024-022-Extension-3-28-25.pdf</a>.
\7\ Exchange Act Release No. 102559 (Mar. 10, 2025), 90 FR 12196
(Mar. 14, 2025) (File No. SR-FINRA-2024-022).
\8\ See letter from Bria Adams, Assistant General Counsel, FINRA
(dated Mar. 11, 2025), <a href="https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-582475-1676182.pdf">https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-582475-1676182.pdf</a> (``FINRA Response'').
\9\ See letter from Bria Adams, Assistant General Counsel, FINRA
(dated Jun. 11, 2025), <a href="https://www.finra.org/sites/default/files/2025-06/2024-022x2.pdf">https://www.finra.org/sites/default/files/2025-06/2024-022x2.pdf</a>.
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II. Description of the Proposed Rule Change
A. Background
1. FINRA's Arbitration Forum
FINRA's Dispute Resolution Services (``DRS'') provides an
arbitration forum to resolve disputes between customers, member firms,
and associated persons of member firms arising in connection with the
business activities of a member firm or its associated persons, except
disputes involving the insurance business activities of a member firm
that is also an insurance company.\10\ FINRA maintains a roster for
each of the three types of arbitrators that may be appointed to an
arbitration panel to hear a claim: public, non-public, and chairperson
arbitrators.\11\ 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.\12\ 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 past ties to the financial industry.\13\ A public arbitrator is
eligible to serve as a ``chairperson'' if he or 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.\14\ For
purposes of this Order, a ``chair-qualified public arbitrator'' is a
public arbitrator who is eligible to serve as a chairperson, and a
``non-chair-qualified public arbitrator'' is a public arbitrator who is
not eligible to serve as a chairperson.
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\10\ See FINRA Rules 12101, 12200, 12201, 13101, 13200, 13201,
13202.
\11\ See FINRA Rules 12400(b), 13400(b).
\12\ See FINRA Rules 12100(aa), 13100(x).
\13\ See FINRA Rules 12100(t), 13100(r).
\14\ 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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2. The Arbitrator-Selection Process
The proposed rule change addresses rules in the Codes that govern
the arbitrator-selection process in certain cases with three
arbitrators. As relevant here, a three-arbitrator panel decides claims
that are greater than $100,000 (exclusive of interest and expenses),
are unspecified, or do not request money
[[Page 41450]]
damages (unless the parties agree in writing to one arbitrator).\15\
For claims 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 three.\16\
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\15\ See FINRA Rules 12401(c), 13401(c).
\16\ See FINRA Rules 12401(b), 13401(b).
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In these cases, the arbitrator-selection process begins with a
computerized list-selection algorithm (the ``list-selection
algorithm''), which generates three pools of available arbitrators from
DRS's rosters for the selected hearing location: one for chair-
qualified public arbitrators, one for public arbitrators (both chair-
qualified and non-chair-qualified), and one for non-public
arbitrators.\17\ From these pools, the list-selection algorithm
randomly generates three lists of arbitrators for the parties.\18\ For
a customer claim, the list-selection algorithm generates one list with
chair-qualified public arbitrators, one list with public arbitrators,
and one list with non-public arbitrators.\19\ For an industry claim
between associated persons or between or among member firms and
associated persons,\20\ the list-selection algorithm generates one list
with chair-qualified public arbitrators, one list with public
arbitrators, and one list with non-public arbitrators.\21\ In each
case, the list-selection algorithm generates the chair-qualified public
list before it generates the public list.\22\ When the algorithm
generates the list of public arbitrators, any available chair-qualified
public arbitrator is eligible for selection as a public arbitrator so
long as he or she was not already selected for the chair-qualified
public list.\23\ In this way, the list-generation algorithm effectively
gives chair-qualified public arbitrators two chances to appear on a
list: once as a chairperson; and, if not selected for the chair-
qualified public list, a second as a public arbitrator.\24\
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\17\ See FINRA, How Parties Select Arbitrators, <a href="https://www.finra.org/arbitration-mediation/about/arbitration-process/arbitrator-selection">https://www.finra.org/arbitration-mediation/about/arbitration-process/arbitrator-selection</a>. When generating these ``pools,'' the list-
selection algorithm screens for both geography and conflicts of
interest, excluding those who are not available to serve at the
selected hearing location and those with certain known conflicts of
interest with a party. Id.
\18\ See FINRA Rules 12403(a) (Generating Lists in Customer
Cases with Three Arbitrators), 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).
\19\ See FINRA Rule 12403(a)(1). Here, the list-selection
algorithm generates one list with 10 chair-qualified public
arbitrators, one list with 15 public arbitrators, and one list with
10 non-public arbitrators. Id.
\20\ Three-arbitrator panels also decide industry disputes
between member firms, but those panels do not include public
arbitrators and are therefore not relevant to this proposed rule
change. See FINRA Rule 13403(a).
\21\ See FINRA Rule 13403(b)(2). Here, the list-selection
algorithm generates one list with 10 chair-qualified public
arbitrators, one list with 10 public arbitrators, and one list with
10 non-public arbitrators. Id.
\22\ FINRA Rules 12403(a)(2), 13403(b)(3).
\23\ See id.
\24\ Notice at 106636.
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Once the parties receive the three lists, they may exercise a
specified number of strikes against each list and rank the remaining
arbitrators on each list in order of preference.\25\ The DRS Director
then consolidates the strike and ranking lists and appoints the
highest-ranking arbitrators who survived the parties' strikes.\26\
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\25\ See FINRA Rules 12403(c)(1), 12403(c)(2), 13404(a),
13404(c).
\26\ See FINRA Rules 12402(e), 12402(f), 12403(d), 12403(e)(1),
13405, 13406. FINRA publishes more detailed information on the
arbitrator-selection process online. See supra note 17.
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B. The Proposed Rule Change
1. Generating Public Lists in Cases With Three Arbitrators
The proposed rule change would amend the list-selection algorithm
in certain cases in which the three-arbitrator panel includes at least
two public arbitrators, increasing the chances that non-chair-qualified
public arbitrators would appear on the public list.\27\ Specifically,
the proposed rule change would provide that, ``[i]n preparing the
public list, the list selection algorithm will provide two chances for
selection to public arbitrators that are not chair-qualified, and will
[continue to] provide one chance for selection to chair-qualified
public arbitrators.'' \28\ Although non-chair-qualified public
arbitrators would have two chances for selection to the public list,
the proposed rule change would provide that ``[a]n individual
arbitrator cannot appear more than once on the public list selected for
the same case.'' \29\ The proposed rule change would not otherwise
amend the process by which the list-selection algorithm generates the
public list.\30\
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\27\ Notice at 106636.
\28\ Proposed Rules 12403(a)(3), 13403(b)(4).
\29\ Proposed Rules 12403(a)(3), 13403(b)(4). FINRA stated that
the list-selection algorithm would implement this proposed rule
change by ``including the names of public arbitrators who are not
chair qualified twice on the roster of available public arbitrators
used to randomly generate a Public List.'' Notice at 106636 n.21.
\30\ Notice at 106636.
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FINRA stated that the proposed rule change could help FINRA retain
non-chair-qualified public arbitrators on its arbitrator roster because
it ``may increase the likelihood for public arbitrators who are not
chair-qualified to be selected by parties to serve as panelists.'' \31\
As noted above, parties have an opportunity to express preferences in
the arbitrator-selection process by striking and ranking the candidates
on the arbitrator lists.\32\ FINRA explained that parties ``appear to
prefer chair-qualified public arbitrators who have experience in the
DRS arbitration forum and a record of previous arbitration award
outcomes.'' \33\ FINRA explained that if new or less experienced
arbitrators are never selected to serve on a panel, they ``may lose
interest in serving as arbitrators.'' \34\ The proposed rule change,
FINRA stated, may incentivize new or less experienced arbitrators to
remain on the roster by increasing their opportunities for selection as
a panelist.\35\
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\31\ Id. at 106637.
\32\ See FINRA Rules 12402(d)(2), 12403(c)(1)(B) and (2)(B),
13404(c).
\33\ Notice at 106637.
\34\ Id.
\35\ Id.
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FINRA also stated that the proposed rule change may help FINRA
expand its roster of chair-qualified public arbitrators.\36\ As noted
above, a public arbitrator is eligible to serve as a ``chairperson'' if
he or 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 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.\37\ FINRA stated that the
proposed rule change may help non-chair-qualified public arbitrators
``to gain the experience they need to become chair-qualified'' by
increasing their opportunity to be selected for a panel.\38\
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\36\ Id.
\37\ See FINRA Rules 12400(c), 13400(c).
\38\ Notice at 106637.
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In addition, FINRA stated that the potential increase of chair-
qualified public arbitrators might ``increase the number of local
chairpersons across hearing locations.'' \39\ FINRA stated that parties
prefer chair-qualified public arbitrators who live near the hearing
location.\40\ FINRA stated, however, that ``78 percent of hearing
locations lack a sufficient number of local chairpersons'' to complete
a chair-qualified public list, so it must fill such lists with chair-
qualified public arbitrators from other hearing locations.\41\ FINRA
stated that
[[Page 41451]]
the proposed rule change could help generate chair-qualified public
lists with more local chairpersons in these areas by increasing the
number of opportunities for non-chair-qualified public arbitrators to
serve on panels.\42\
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\39\ Id.
\40\ Id.
\41\ See id.
\42\ Id.
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2. Other Proposed Rule Changes
FINRA stated that the proposed rule changes would also, among other
things: codify certain current practices to increase transparency;
establish new timeframes for objecting to requests for additional
information from arbitrators, withdrawing such requests for additional
information, and filing motions to remove arbitrators after disclosures
of causal challenges; and align provisions of the Codes related to the
expungement of customer dispute information.\43\ The Commission
describes each additional proposed rule change in turn.
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\43\ Id.
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a. Sending Arbitrator Lists to the Parties
The Codes currently provide that the DRS Director will send the
list(s) generated by the list-selection algorithm ``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.'' \44\ FINRA stated, however, that in practice the DRS sends the
arbitrator lists to the parties ``well within the 30-day timeframe
provided by the rules.'' \45\ FINRA stated that the proposed rule
change would codify current practice by amending FINRA Rules
12402(c)(1), 12403(b)(1), and 13403(c)(1) to replace the 30-day
timeline with a 20-day timeline.\46\ FINRA stated that the proposed
rule change would increase transparency and efficiency in arbitrator
list selection.\47\
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\44\ FINRA Rules 12402(c)(1), 12403(b)(1), 13403(c)(1).
\45\ Notice at 106637.
\46\ See proposed Rules 12402(c)(1), 12403(b)(1), 13403(c)(1).
\47\ Notice at 106637.
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b. Arbitrator-Disclosure Reports
Current FINRA rules provide that the parties will receive
``employment history for the past 10 years'' and other background
information for each arbitrator on an arbitrator list.\48\ FINRA stated
that its practice, however, is to request each arbitrator's full post-
education employment history and send ``this employment history and
other background information to the parties'' in a ``disclosure
report.'' \49\ FINRA stated that the proposed rule change would codify
this practice by removing ``for the past 10 years'' from the relevant
rules and clarifying that employment history and background information
will be provided in a ``disclosure report.'' \50\ FINRA stated that the
proposed rule change would increase transparency.\51\
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\48\ FINRA Rules 12402(c)(1), 12403(b)(1), 12404(a),
13403(c)(1), 13407(a), 13804(b)(3)(A)(i), 13804(b)(3)(B)(i).
\49\ Notice at 106637.
\50\ See Notice at 106637; proposed Rules 12402(c)(1),
12403(b)(1), 12404(a), 13403(c)(1), 13407(a), 13804(b)(3)(A)(i),
13804(b)(3)(B)(i).
\51\ See Notice at 106637.
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c. Requests for Additional Information About Arbitrators
The Codes provide that ``[i]f a party requests additional
information about an arbitrator, the [DRS] Director will request the
additional information from the arbitrator[] and will send any response
to all the parties at the same time.'' \52\ FINRA stated that, in
practice, it permits parties to request additional information about
arbitrators at any point during an arbitration proceeding.\53\ If such
a request is unopposed, FINRA stated that it submits the request to the
arbitrator anonymously.\54\ If, on the other hand, there is an
objection to such a request, FINRA stated that it will disclose the
identity of the requesting party and forward both the request and any
objections to the relevant arbitrator.\55\
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\52\ FINRA Rules 12402(c)(2), 12403(b)(2), 13403(c)(2).
\53\ Notice at 106637.
\54\ See id. at 106638.
\55\ Id.
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The proposed rule change would make three changes related to this
process.\56\ First, FINRA stated that the proposed rule change would
codify current practice by expressly providing that a party may request
additional information about an arbitrator ``at any stage of the
proceeding'' by filing such request with the Director and serving it
upon all other parties.\57\ FINRA stated that ``it is appropriate to
permit parties to request additional information about arbitrators at
any stage of the proceeding because such requests could uncover
circumstances that might preclude an arbitrator from rendering an
objective and impartial decision.'' \58\ FINRA further stated that this
proposed rule change ``complements arbitrators' continuing duty to
disclose [potential conflicts], further ensures the integrity of final
awards, and helps to minimize the number of requests for vacatur based
on an arbitrator's failure to disclose.'' \59\
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\56\ FINRA stated that the proposed rule change would also make
``technical changes'' that would result from these proposed rule
changes. Id. at 106637 n.26. Specifically, FINRA stated that the
proposed rule change would relocate--without substantive changes--
text from FINRA Rules 12402(c)(2), 12403(b)(2), and 13403(c)(2) to
new proposed sub-sections within the same FINRA rules. Id.
Specifically, proposed Rules 12402(c)(2)(D), 12403(b)(2)(D), and
13403(c)(2)(D) would provide that ``[t]he Director will send any
response from the arbitrator to all of the parties at the same
time.'' In addition, proposed Rules 12402(c)(2)(E), 12403(b)(2)(E),
and 13403(c)(2)(E) would provide that ``[w]hen a party requests
additional information, the Director may, but is not required to,
toll the time for parties to return the ranked lists . . . .''
\57\ Proposed Rules 12402(c)(2)(A), 12403(b)(2)(A),
13403(c)(2)(A); Notice at 106638.
\58\ Notice at 106638.
\59\ Id.
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Second, FINRA stated that the proposed rule change would codify
current practice by amending FINRA Rules 12402, 12403, and 13403 to
provide that a request for additional information about an arbitrator
``may omit any information that would reveal the identity of the party
making the request.'' \60\ The proposed rule change also would provide
that ``[i]f no opposing party objects to the request for additional
information, the [DRS] Director and the parties shall not disclose the
identity of the requesting party'' to the arbitrator or the panel.\61\
In cases of unopposed requests for information, FINRA stated that it is
appropriate to preserve confidentiality ``to minimize any potential
bias.'' \62\ If, however, an opposing party objects to such a request,
FINRA stated that it is appropriate to disclose the identity of the
requesting party to ``minimize the risk of any potential bias shifting
to the opposing parties.'' \63\ FINRA stated that arbitration
participants have expressed concern that other parties' requests could
be erroneously attributed to them and result in negative inferences
against them.\64\ In addition, FINRA stated that in cases involving
only two parties, a requesting party likely could not--as a practical
matter--remain anonymous, as the opposing party may identify itself in
its objection, thereby indirectly identifying the other party as the
requestor.\65\
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\60\ Proposed Rules 12402(c)(2)(A), 12403(b)(2)(A),
13403(c)(2)(A); Notice at 106638.
\61\ Proposed Rules 12402(c)(2)(C), 12403(b)(2)(C),
13403(c)(2)(C).
\62\ Notice at 106638.
\63\ Id.
\64\ Id.
\65\ See id.
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Third, the proposed rule change would amend FINRA Rules 12402,
12403, and 13403 to provide that an opposing party may object to a
request for additional information by filing its objection with the
Director and serving it upon all other parties ``[w]ithin ten days of
receipt of the request'' for additional information.\66\ The proposed
[[Page 41452]]
rule change also would provide that the Director will forward the
request for additional information along with any objections to the
arbitrator who is the subject of the request ``[a]fter five days have
elapsed from the service of any objections and provided that the
request for additional information has not been withdrawn.'' \67\ FINRA
stated that this proposed rule change would increase efficiency in
arbitrator-list selection by helping to ensure that ``parties are aware
of their ability to object to or withdraw a request and the timeframes
for doing so.'' \68\
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\66\ Proposed Rules 12402(c)(2)(B), 12403(b)(2)(B),
13403(c)(2)(B).
\67\ Id.
\68\ Notice at 106638.
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d. Striking Arbitrators for Any Reason
FINRA Rules 12402(d)(1), 12403(c)(1)(A), 12403(c)(2)(A), and
13404(a) and (b) provide that each separately represented party may
strike a certain number of arbitrators from the lists of arbitrators
that the list-selection algorithm generates.\69\ All but one of these
provisions--FINRA Rule 12403(c)(1)(A) (governing striking arbitrators
from the non-public arbitrator list)--expressly provides that a party
may strike arbitrators from a list ``for any reason.'' \70\ FINRA
stated that even though FINRA Rule 12403(c)(1)(A) lacks this language,
``there are no limitations on the reasons a party may strike an
arbitrator.\71\ The proposed rule change would amend FINRA Rule
12403(c)(1)(A) ``to expressly provide that each separately represented
party may strike any or all of the arbitrators from the Non-Public List
for any reason.'' \72\ FINRA stated that the proposed rule change would
promote consistency among the provisions describing the striking
process.\73\
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\69\ FINRA Rules 12402(d)(1), 12403(c)(1)(A), 12403(c)(2)(A),
13404(a), 13404(b).
\70\ Id.
\71\ Notice at 106638.
\72\ Id. (emphasis in original); proposed Rule 12403(c)(1)(A).
\73\ Notice at 106638.
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e. Electronic List Selection
FINRA Rules 12402(d)(1), 12403(c)(1)(A), 12403(c)(2)(A), and
13404(a) and (b) currently provide that each separately represented
party may strike arbitrators from the list(s) of arbitrators ``by
crossing through the names of the arbitrators.'' \74\ FINRA stated
that, in practice, parties generally use a web-based system, the Party
Portal, to complete arbitrator list selection electronically.\75\ FINRA
stated that the proposed rule change would align the Codes with this
practice by amending FINRA Rules 12402(d)(1), 12403(c)(1)(A),
12403(c)(2)(A), and 13404(a) and (b) to delete the phrase ``by crossing
through the names of the arbitrators.'' \76\
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\74\ FINRA Rules 12402(d)(1), 12403(c)(1)(A), 12403(c)(2)(A),
13404(a), 13404(b).
\75\ Notice at 106639. The term ``Party Portal'' means ``the
web-based system that is accessible by arbitration and mediation
parties and their representatives. The Party Portal allows invited
participants to access a secure section of FINRA's website to submit
documents and view their arbitration and mediation case information
and documents.'' See FINRA Rules 12100(v), 13100(t).
\76\ Notice at 106639. FINRA stated that some pro se claimants
choose not to use the Party Portal, but it stated that the rules, as
amended, would still be ``broad enough to appropriately instruct pro
se customers on how to strike arbitrators manually from hard copy
lists.'' Id.
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f. Extensions of Time To Complete Ranked Lists
FINRA rules currently provide that after striking and ranking the
arbitrators on the arbitrator lists, each separately represented party
must return their ranked lists to the DRS Director ``either within 20
days or no more than 20 days after the date upon which the Director
sent the lists to the parties.'' \77\ FINRA stated that ``parties
frequently file requests with the Director to extend the 20-day
deadline only after it has elapsed.'' \78\ FINRA rules permit the
Director to extend or modify the deadline for good cause; \79\ FINRA
stated that, in practice, the Director typically denies requests made
after the deadline has expired absent a showing of extraordinary
circumstances.\80\ The proposed rule change would codify current
practice by expressly providing that, ``[a]bsent extraordinary
circumstances, the Director will not grant a party's request for an
extension to complete the ranked list[s] that is filed after the
deadline has elapsed.\81\ FINRA stated that a showing of extraordinary
circumstances is appropriate, as the lesser standard of good cause
``could lead to unnecessary delays in the appointment of arbitration
panels and arbitration proceedings.'' \82\ FINRA also stated that the
proposed rule change would codify current practice, help ensure that
parties are aware of the deadline, and encourage parties to complete
their ranked lists or request an extension prior to that deadline.\83\
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\77\ Id.; see FINRA Rules 12402(d)(3), 12403(c)(3), 12404(a),
13404(d), 13407(a).
\78\ Notice at 106639.
\79\ FINRA Rules 12207(c), 13207(c).
\80\ Notice at 106639.
\81\ Id.; see Proposed Rules 12402(d)(3), 12403(c)(3), 12404(a),
13404(d), 13407(a).
\82\ Notice at 106639.
\83\ Id.
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g. Agreements To Remove Arbitrators
Current FINRA guidance states that parties may agree to remove an
arbitrator.\84\ The proposed rule change would codify this guidance by
amending FINRA Rules 12407 and 13410 to expressly provide that, ``at
any stage of the arbitration proceeding, the Director may remove an
arbitrator if all of the named parties agree in writing to the
arbitrator's removal.'' \85\ FINRA stated that the proposed rule change
would ``help ensure that parties are aware of the ability to remove an
arbitrator upon party agreement.'' \86\
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\84\ Id. FINRA stated that it ``makes clear in its training
materials for arbitrators that, pursuant to the requirements of the
ABA's Code of Ethics for Arbitrators in Commercial Disputes, an
arbitrator must withdraw from a panel if all of the parties request
that the arbitrator do so.'' Id. FINRA also stated that Notice to
Members 01-13 describes how arbitrators may be removed when ``all
the parties agree that the arbitrator should be removed.'' Id.
(quoting NASD Notice to Members 01-13 at 2 (March 2001), <a href="https://www.finra.org/sites/default/files/NoticeDocument/p003916.pdf">https://www.finra.org/sites/default/files/NoticeDocument/p003916.pdf</a>).
\85\ Id.; proposed Rules 12407(d)(1), 13410(d)(1). FINRA stated
that ``[r]equests to remove an arbitrator may not be granted when
there are extraordinary circumstances which make removal
inappropriate (e.g., requests based on discriminatory grounds).''
Notice at 106639 n.35.
\86\ Id. at 106639.
---------------------------------------------------------------------------
However, the proposed rule change also would provide that ``parties
may not agree to remove an arbitrator who is considering a request to
expunge customer dispute information, except that a party shall be
permitted to challenge'' for cause any arbitrator selected pursuant to
FINRA Rule 12407(a)(1) or (b) or FINRA Rule 13410(a)(1) or (b).\87\
FINRA stated that this proposed rule change is consistent with recent
changes it made to the expungement process.\88\ Specifically, FINRA
stated that this proposed rule change would align with FINRA Rule
12800(d) by ``prohibiting the parties from agreeing to remove an
arbitrator if there is a request to expunge customer dispute
information during a simplified investment-related, customer-initiated
arbitration (``simplified arbitration'') under FINRA Rule 12800.'' \89\
FINRA stated that the proposed rule change would also align with FINRA
Rule 13806, which prohibits striking, or stipulating to the removal of,
any arbitrators selected by the list selection algorithm in a straight-
in request absent a challenge for cause.\90\ FINRA stated
[[Page 41453]]
that the proposed rule change would align FINRA rules to ``help ensure
that the expungement process operates efficiently and as intended.''
\91\
---------------------------------------------------------------------------
\87\ Id.; see Proposed Rules 12407(d)(2), 13410(d)(2).
\88\ Notice at 106639-40.
\89\ Id. at 106640 (stating that, as required by FINRA Rule
12800(d), the arbitrator who has considered the merits of the
customer dispute in the simplified arbitration would also decide the
expungement request).
\90\ Id. FINRA stated that a ``straight-in request'' refers to
an arbitration proceeding in which ``an associated person requests
expungement of customer dispute information separate from a customer
arbitration.'' Id. at 106640 n.39.
\91\ Id.
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h. Prohibition on the Disclosure of Party-Initiated Challenges To
Remove Arbitrators
FINRA Rules 12407 and 13410 permit parties to challenge arbitrators
for cause.\92\ Current DRS guidance advises the parties that ``they may
not inform the panel of an opposing party's causal challenge.'' \93\
The proposed rule change would codify this guidance by expressly
providing that ``a party may not inform the panel or arbitrator of
another party's request to remove an arbitrator for cause.'' \94\ FINRA
stated that the disclosure of a party's challenge to remove an
arbitrator ``could prejudice the arbitrator or create the appearance of
bias against the requesting party.'' \95\ FINRA also stated that
codifying existing guidance ``would more effectively curb the
disclosure of a party's request to remove an arbitrator because parties
will be incented to comply with the Codes.'' \96\
---------------------------------------------------------------------------
\92\ FINRA Rules 12407, 13410.
\93\ Notice at 106640. FINRA stated that this guidance is
conveyed in two letters it sends to the parties: one is sent with
the list of arbitrators; the second advises the parties of the panel
composition. Id.
\94\ Id.; Proposed Rules 12407(e)(1); 13410(e)(1).
\95\ Notice at 106640.
\96\ Id.
---------------------------------------------------------------------------
The proposed rule change would also create a remedy if a party
discloses to the arbitrator or panel an opposing party's request to
remove an arbitrator for cause.\97\ Specifically, the proposed rule
change would provide that the party that requested removal of the
arbitrator ``may file with the Director within five days of being made
aware of the disclosure a written motion for removal of the
arbitrator.'' \98\ The proposed rule change also would provide that
``[i]f the requesting party does not file a motion for removal of the
arbitrator within five days of being made aware of the disclosure, then
the requesting party shall forfeit the opportunity to request removal
of the arbitrator because of the disclosure.'' \99\ In addition, the
proposed rule change would provide that, absent extraordinary
circumstances, the DRS Director shall grant such a motion if the party
that made the request to remove the arbitrator timely files the
motion.\100\ FINRA stated that this proposed rule change ``would strike
the right balance between providing an opportunity for any aggrieved
party to seek a remedy while, at the same time, allowing for the
efficient processing of the proceeding.'' \101\
---------------------------------------------------------------------------
\97\ Id.
\98\ Proposed Rule 12407(e)(2), 13410(e)(2).
\99\ Id.
\100\ Id.
\101\ Notice at 106640.
---------------------------------------------------------------------------
i. Updating Cross-References
FINRA Rules 13406(c) and 13411(d) cross-reference FINRA Rule
13100(r)(2) and (r)(3) to incorporate the definition of ``non-public
arbitrator.'' \102\ FINRA stated that prior to 2017, FINRA Rule
13100(r)(1), (r)(2), (r)(3), and (r)(4) ``listed the specific criteria
for inclusion on FINRA's non-public arbitrator roster.'' \103\ FINRA
stated that due to a rule change in 2017 that eliminated those four
sub-sections, the aforementioned cross-references to FINRA Rule
13100(r) are outdated.\104\ The proposed rule change would update FINRA
Rules 13406(c) and 13411(d) with correct cross-references to FINRA Rule
13100(x)(2) through (11).\105\
---------------------------------------------------------------------------
\102\ FINRA Rules 13406(c), 13411(d).
\103\ Notice at 106641.
\104\ See id.
\105\ Notice at 106641; proposed FINRA Rules 13406(c), 13411(d).
---------------------------------------------------------------------------
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.\106\ 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, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.\107\
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\106\ 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).
\107\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
A. Generating Public Lists in Cases With Three Arbitrators
As stated above, the proposed rule change would amend the list-
selection algorithm in certain cases in which the three-arbitrator
panel includes two public arbitrators to increase the chance that non-
chair-qualified public arbitrators appear on the public arbitrator
list.\108\ Specifically, the proposed rule change would provide that,
``[i]n preparing the public list, the list selection algorithm will
provide two chances for selection to public arbitrators that are not
chair-qualified, and will [continue to] provide one chance for
selection to chair-qualified public arbitrators.'' \109\ Although non-
chair-qualified public arbitrators would have two chances for selection
to the public list, such an arbitrator could only be selected once for
the public list in the same case.\110\
---------------------------------------------------------------------------
\108\ See Notice at 106636.
\109\ Proposed Rules 12403(a)(3), 13403(b)(4).
\110\ Id.
---------------------------------------------------------------------------
Several commenters generally supported the proposed rule
change.\111\ One of these commenters identified himself as a non-chair-
qualified public arbitrator who has considered withdrawing as an
arbitrator due to a lack of case assignments, and he expressed hope
that this proposed rule change would result in broader participation by
all public arbitrators.\112\ Another commenter stated that the proposed
rule change may increase opportunities for non-chair-qualified public
arbitrators to serve on panels, which could help to attract arbitrator
applicants, retain existing arbitrators, and provide opportunities for
arbitrators to secure the experience necessary to become
chairpersons.\113\ Two commenters emphasized that the proposed rule
change should increase the number of local chairpersons across hearing
locations by providing greater opportunities for otherwise qualified
public arbitrators to secure the requisite experience to become
chairpersons.\114\
[[Page 41454]]
As a result, one commenter stated that the proposed rule change would
``enhance investor confidence in the FINRA arbitration process,
increase the efficiency of the arbitration process, and result in fewer
delays or postponements.'' \115\
---------------------------------------------------------------------------
\111\ Letters from Leslie Van Buskirk, President, North American
Securities Administrators Association, Inc., at 1 (dated Jan. 21,
2025), <a href="https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-558715-1603262.pdf">https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-558715-1603262.pdf</a> (``NASAA Letter''); Matthew
Kearney at 1 (dated Jan. 13, 2025), <a href="https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-1595482.htm">https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-1595482.htm</a> (``Kearney Letter'');
Michael Bixby, Executive Vice President, Public Investor Advocate
Bar Association, at 1 (dated Jan. 21, 2025), <a href="https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-558935-1603442.pdf">https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-558935-1603442.pdf</a>
(``PIABA Letter''); Elissa Germaine et al., Securities Arbitration
Clinic, St. John's University School of Law, at 1 (dated Jan. 21,
2025), <a href="https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-558995-1603582.pdf">https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-558995-1603582.pdf</a> (``St. John's Letter I''); Elissa
Germaine et al., Securities Arbitration Clinic, St. John's
University School of Law, at 1 (dated Apr. 4, 2025), <a href="https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-587677-1698422.pdf">https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-587677-1698422.pdf</a> (``St. John's Letter II'').
\112\ Kearney Letter at 1.
\113\ St. John's Letter I at 2.
\114\ See St. John's Letter I at 3 (stating that non-local
chairpersons may be unfamiliar with local customs, are more likely
to cause delays because of travel difficulties, and are financially
inefficient, as FINRA must bear the cost of their travel, meals, and
lodging); PIABA Letter at 2.
\115\ PIABA Letter at 2.
---------------------------------------------------------------------------
One commenter opposed this proposed rule change, stating that their
clients generally prefer chair-qualified public arbitrators over non-
chair qualified arbitrators for two reasons.\116\ First, the commenter
stated that panels with two non-chair qualified arbitrators are more
likely to commit errors that would form the basis for a motion to
vacate in court because non-chair qualified arbitrators are often not
as experienced as chair-qualified arbitrators.\117\ This is especially
problematic for the commenter's clients because they generally do not
have the means to pursue vacatur in court.\118\ Second, the commenter's
clients prefer chair-qualified public arbitrators because they are more
likely to have a record of prior decisions or legal practice that would
inform their ranking and striking decisions.\119\
---------------------------------------------------------------------------
\116\ Letter from Alice Stewart et al., Securities Arbitration
Clinic, University of Pittsburgh School of Law, at 2 (dated Jan. 21,
2025), <a href="https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-558795-1603302.pdf">https://www.sec.gov/comments/sr-finra-2024-022/srfinra2024022-558795-1603302.pdf</a> (``Pittsburgh Letter'').
\117\ See id. at 2.
\118\ Id. This commenter stated that ``the negative consequences
of these amendments would fall the hardest on [its] economically
disadvantaged and elderly clients.'' Id. at 4.
\119\ Id. at 2-3.
---------------------------------------------------------------------------
The opposing commenter acknowledged, however, the need for more
chair-qualified public arbitrators and offered three alternatives.\120\
First, the commenter suggested allowing arbitrators with a law degree
to immediately serve as chairpersons.\121\ The commenter stated that
arbitrators with a law degree are generally more knowledgeable about
securities law, arbitration procedure, and rules of evidence than those
without such a degree, and they typically have a record of legal
practice that may offer insights to the parties during the arbitrator-
selection process.\122\ Second, the commenter recommended that FINRA
increase the honorarium for serving on a panel.\123\ The commenter
stated that larger honoraria would likely increase the roster of
arbitrators and decrease the number of arbitrators who leave the
roster.\124\ Third, the commenter recommended that the proposed rule
change, if adopted, should expire once the ``percentage of public
arbitrators who are chair-qualified increases to a proportion with
relative parity to their appearances on the public lists.'' \125\ The
commenter stated that at that point, FINRA should revert to the current
rule text in recognition of parties' preference for ``experienced
public arbitrators with a record of award outcomes.'' \126\
---------------------------------------------------------------------------
\120\ Id. at 3-4.
\121\ Id. at 3.
\122\ Id.
\123\ Id.
\124\ Id.
\125\ Id. at 4. This commenter contemplated that FINRA could
either engineer the proposed rule change to expire upon achievement
of a specified benchmark, or, in the alternative, conduct annual
reviews to determine when to sunset the proposed rule change. Id.
\126\ Id.
---------------------------------------------------------------------------
In response, FINRA recognized that certain parties may prefer
chair-qualified public arbitrators, and the proposed rule change
would--for this reason--still permit chair-qualified public arbitrators
to appear on the list of public arbitrators.\127\ FINRA also stated
that the proposed rule change would not limit a party's ability to
strike and rank the chair- and non-chair-qualified public arbitrators
that appear on a public list.\128\ In addition, FINRA stated that the
proposed rule change may help to address party preferences by
increasing the number of chair-qualified public arbitrators on FINRA's
rosters.\129\
---------------------------------------------------------------------------
\127\ See FINRA Response Letter at 2-3.
\128\ Id. at 3.
\129\ Id.
---------------------------------------------------------------------------
FINRA also responded to the commenter's proposed alternatives.
First, FINRA stated that a law degree (but no experience serving as an
arbitrator through award in at least one arbitration in which hearings
were held) may not equip an arbitrator with the experience necessary to
serve as a chairperson.\130\ FINRA stated that the hearing requirement
helps to ensure that chairpersons have the experience necessary to
effectively fulfill their responsibilities, which may include
facilitating prehearing conferences, deciding discovery-related
motions, and writing explained decisions.\131\ Second, FINRA stated
than an increased honorarium could help retain arbitrators, but it
would not address FINRA's primary concern--``the current imbalance in
arbitrator list selection.'' \132\ FINRA stated that an increased
honorarium would not improve the opportunity for non-chair-qualified
public arbitrators to be selected for a public list.\133\ Third, in
response to the commenter's request that the proposed rule change
expire once its goals are met, FINRA stated that it would monitor the
impact of the proposed rule change and ``continue to consider if
additional changes are warranted.'' \134\ For these reasons, FINRA
declined to adopt the commenter's suggested alternatives.\135\
---------------------------------------------------------------------------
\130\ Id. at 3-4.
\131\ Id.
\132\ Id. at 4. FINRA stated that public arbitrators must first
appear on a public list to have a chance to be selected by the
parties. Id. Only after selection, appointment to a panel of
arbitrators, and presiding over the arbitration case would an
arbitrator receive an honorarium. Id. For this reason, an increased
honorarium would not impact the chances that a non-chair-qualified
public arbitrator would appear on a public list. Id.
\133\ Id.
\134\ Id. at 5.
\135\ Id. at 3-5.
---------------------------------------------------------------------------
The proposed rule change is reasonably designed to improve non-
chair-qualified public arbitrator retention, increase the size of
FINRA's public chairperson roster, and improve the availability of
public chairpersons at local hearing locations across the country.
Currently, the list-selection algorithm gives chair-qualified public
arbitrators twice as many chances as non-chair-qualified public
arbitrators to appear on an arbitrator list, and parties' apparent
preference for chair-qualified public arbitrators makes it less likely
that non-chair qualified arbitrators make it past the striking and
ranking process. Thus, the arbitrator list-selection process is not
optimized to provide opportunities for non-chair-qualified public
arbitrators to serve on panels and secure the experience they need to
qualify as chairpersons. This has, in part, led to a shortage of chair-
qualified public arbitrators serving in certain hearing locations,
limiting the choices of arbitrators for parties bringing claims in
those hearing locations.
In recognition of parties' preferences for chair-qualified public
arbitrators, the proposed rule change would not prohibit chair-
qualified public arbitrators from filling the public arbitrator spot on
a panel. Nor would the proposed rule change limit a party's ability to
strike and rank arbitrators on the public list. The proposed rule
change instead takes a more tailored approach--the list-selection
algorithm would provide two chances for each non-chair-qualified public
arbitrator to be selected for the public list. FINRA reasonably
concluded that a greater opportunity for selection to a public list may
result in increased participation among, and retention of, non-chair-
qualified public arbitrators, and a corresponding increase in public
arbitrators who are eligible to serve as chairpersons, including in
locations with a present shortage of chair-
[[Page 41455]]
qualified public arbitrators. As such, the proposed rule change should
facilitate opportunities for non-chair-qualified public arbitrators to
gain experience, result in greater fairness to investors in areas with
a current shortage of chair-qualified public arbitrators, and provide a
more fair and balanced arbitration selection process and pool.
FINRA reasonably declined to amend the proposed rule change in
response to the commenter's recommendations. First, extending
chairperson eligibility to any arbitrators with a law degree,
regardless of experience serving on an arbitration panel, may result in
chairpersons who lack practical experience in efficient case management
and deciding disputed issues of law and fact. Second, while increasing
the honorarium for serving on a panel might improve arbitrator
recruitment and retention, it would not address the circumstances that
make it more difficult for non-chair-qualified public arbitrators to be
selected to serve on a panel. Third, setting an expiration date may be
impractical, as it is unclear how long it would take for the proposed
rule change to mitigate the issues FINRA identified. FINRA stated,
however, that it would monitor the impact of the proposed rule change
and consider whether additional changes are required.\136\
---------------------------------------------------------------------------
\136\ Id.
---------------------------------------------------------------------------
For these reasons, the proposed rule change is reasonably designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, and, in general, to protect
investors and the public interest.
B. Other Proposed Rule Changes
As stated above, the proposed rule changes would also, among other
things: codify certain current practices to increase transparency;
establish new timeframes for objecting to requests for additional
information from arbitrators, withdrawing such requests for additional
information, and filing motions to remove arbitrators after disclosures
of causal challenges; and align provisions of the Codes related to the
expungement of customer dispute information.\137\ The Commission
describes each proposed rule change, and any corresponding comments, in
turn.
---------------------------------------------------------------------------
\137\ Notice at 106637.
---------------------------------------------------------------------------
1. Sending Arbitrator Lists to the Parties
The Codes currently provide that the DRS Director will send the
list(s) generated by the list-selection algorithm ``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.'' \138\ In practice, however, FINRA stated that DRS sends the
arbitrator lists to the parties ``well within the 30-day timeframe
provided by the rules.'' \139\ FINRA stated that the proposed rule
change would codify current practice by amending FINRA Rules
12402(c)(1), 12403(b)(1), and 13403(c)(1) to replace the 30-day
timeline with a 20-day timeline.\140\ One commenter supported this
proposed rule change, characterizing it as a measure that would
increase efficiency.\141\
---------------------------------------------------------------------------
\138\ FINRA Rules 12402(c)(1), 12403(b)(1), 13403(c)(1).
\139\ Notice at 106637.
\140\ See proposed Rules 12402(c)(1), 12403(b)(1), 13403(c)(1).
\141\ PIABA Letter at 2.
---------------------------------------------------------------------------
The proposed rule change is reasonably designed to improve
transparency of the list selection process. The Codes presently provide
that DRS will send the arbitrator lists to the parties within
approximately 30 days after the last answer is due.\142\ However, this
deadline overestimates the time it actually takes for DRS to deliver
the lists to the parties. The proposed rule change would enhance
transparency by codifying a DRS practice that may have been unknown to
some parties, especially those without significant experience in the
forum. For these reasons, the proposed rule change is reasonably
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\142\ FINRA Rules 12402(c)(1), 12403(b)(1), 13403(c)(1).
---------------------------------------------------------------------------
2. Arbitrator-Disclosure Reports
The Codes currently provide that the parties will receive
``employment history for the past 10 years'' and other background
information for each arbitrator on an arbitrator list.\143\ In
practice, however, FINRA stated that it requests each arbitrator's full
post-education employment history and sends it, along with other
background information, to the parties in a disclosure report.\144\ The
proposed rule change would codify existing practice by amending rules
governing arbitrator-disclosure reports to remove ``for the past 10
years'' from the relevant rules and clarify that employment history and
background information will be provided in a disclosure report.\145\
The Commission received no comment on this proposed rule change.
---------------------------------------------------------------------------
\143\ FINRA Rules 12402(c)(1), 12403(b)(1), 12404(a),
13403(c)(1), 13407(a), 13804(b)(3)(A)(i), 13804(b)(3)(B)(i).
\144\ Notice at 106637.
\145\ See id.; proposed Rules 12402(c)(1), 12403(b)(1),
12404(a), 13403(c)(1), 13407(a), 13804(b)(3)(A)(i),
13804(b)(3)(B)(i).
---------------------------------------------------------------------------
The proposed rule change is reasonably designed to improve the
transparency of the arbitrator selection process. Although the Codes
provide that parties will receive ``employment history for the past 10
years,'' \146\ in practice FINRA requests each arbitrator's full post-
education employment history and provides each party a disclosure
report with that employment history and other background information.
Therefore, absent this proposed rule change, parties and arbitrators--
especially those without significant experience in the forum--may be
unaware of what information appears in an arbitrator-disclosure report.
For these reasons, the proposed rule change is reasonably designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\146\ FINRA Rules 12402(c)(1), 12403(b)(1), 12404(a),
13403(c)(1), 13407(a), 13804(b)(3)(A)(i), 13804(b)(3)(B)(i).
---------------------------------------------------------------------------
3. Requests for Additional Information About Arbitrators
As stated above, the proposed rule change would make three changes
related to the process by which parties may request additional
information about arbitrators. First, the proposed rule change would
codify current practice by expressly providing that a party may request
additional information about an arbitrator ``at any stage of the
proceeding'' by filing such request with the Director and serving it
upon all other parties.\147\ Second, the proposed rule change would
codify current practice by amending FINRA Rules 12402, 12403, and 13403
to provide that a request for additional information about an
arbitrator ``may omit any information that would reveal the identity of
the party making the request.'' \148\ The proposed rule change also
would provide that ``[i]f no opposing party objects to the request for
additional information, the [DRS] Director and the parties shall not
disclose the identity of the requesting party'' to the arbitrator or
the panel.\149\ Third, the proposed rule change would amend FINRA Rules
12402, 12403, and
[[Page 41456]]
13403 to provide that an opposing party may object to a request for
additional information by filing its objection with the Director and
serving it upon all other parties ``[w]ithin ten days of receipt of the
request'' for additional information.\150\ The proposed rule change
also would provide that the Director will forward the request for
additional information along with any objections to the relevant
arbitrator ``[a]fter five days have elapsed from the service of any
objections and provided that the request for additional information has
not been withdrawn.'' \151\
---------------------------------------------------------------------------
\147\ Proposed Rules 12402(c)(2)(A), 12403(b)(2)(A),
13403(c)(2)(A); Notice at 106638.
\148\ Id.
\149\ Proposed Rules 12402(c)(2)(C), 12403(b)(2)(C),
13403(c)(2)(C).
\150\ Proposed Rules 12402(c)(2)(B), 12403(b)(2)(B),
13403(c)(2)(B).
\151\ Id.
---------------------------------------------------------------------------
One commenter supported these proposed rule changes, characterizing
the codification of FINRA's current practice as a measure that
increases transparency.\152\ A second commenter supported these
proposed rule changes, stating that they would permit parties in an
arbitration proceeding to conduct greater due diligence on prospective
arbitrators without prejudicing their case (provided no other party
objects to the request).\153\ This second commenter, however, also
recommended modifications to the proposed rule change to establish
stronger sanctions for the disclosure of the identity of a party
requesting additional information.\154\ Specifically, this commenter
requested that proposed Rules 12402(c)(2)(C), 12403(b)(2)(C), and
13403(c)(2)(C) also provide that ``[a]ny violation . . . by a party or
party's representative at any point in an arbitration proceeding shall
constitute a failure to comply with discovery provisions of the Code
within the meaning of'' FINRA Rules 12511(a) or 13511(a) (Discovery
Sanctions), as applicable.\155\ This commenter stated that the
invocation of FINRA's Discovery Sanctions Rules would help to
discourage parties from violating this prohibition and provide
``appropriate context for crafting equitable remedies.'' \156\
---------------------------------------------------------------------------
\152\ PIABA Letter at 2.
\153\ See NASAA Letter at 3.
\154\ Id. at 3-4.
\155\ Id.
\156\ Id. 3 n.11, 3-4. If FINRA declines to accept this proposed
modification, this commenter suggested that FINRA consider
referencing the General Sanctions Rules and providing guidance on
how seriously arbitrators must treat violations of these
prohibitions. Id. at 3 n.11. In its response letter, FINRA declined
the commenter's suggested alternative but stated that it would
monitor the impact of the proposed rule change and consider whether
additional changes are warranted. FINRA Response Letter at 5.
---------------------------------------------------------------------------
In response, FINRA stated that it would be inappropriate to apply
the Discovery Sanctions Rules to such a violation when it does not
involve a failure to comply with discovery rules or a frivolous
objection to the production of documents or information.\157\ In
addition, FINRA stated that the General Sanctions Rules already provide
``a panel with broad discretion in addressing a party's failure to
comply with any provision of the Codes'' or any order of the
panel.\158\ Therefore, a panel would not need any additional authority
to sanction a party for disclosing a party's request for additional
information about an arbitrator in violation of this proposed
rule.\159\ For these reasons, FINRA declined to modify this proposed
rule change to reference either the General or Discovery Sanctions
Rules.\160\
---------------------------------------------------------------------------
\157\ FINRA Response Letter at 7.
\158\ Id. at 6-7 (citing FINRA Rules 12212, 13212) (stating that
sanctions could include, but are not limited to: monetary penalties;
evidentiary exclusions; adverse inferences; fee, costs, or expense
assessments; disciplinary referrals; and dismissals).
\159\ Id. at 7.
\160\ See id. at 6-7.
---------------------------------------------------------------------------
The proposed rule change is reasonably designed to improve
efficiency in the arbitration forum and the transparency of the process
for requesting additional information about an arbitrator. By codifying
current practice, the proposed rule change helps to ensure that
parties--especially those without significant experience in the forum--
understand that they may, subject to certain conditions, anonymously
\161\ request additional information about arbitrators at any stage of
the arbitration proceeding. This helps to ensure the integrity of
arbitration awards, as the requests for additional information may
uncover information suggesting an arbitrator's partiality or conflict
of interest, which could prompt a party to request that arbitrator's
removal. In addition, the proposed rule change's timelines for requests
and corresponding objections would improve efficiency by helping to
ensure that such requests do not cause unreasonable delays in
arbitration cases.
---------------------------------------------------------------------------
\161\ Where the request for additional information is unopposed,
the proposed rule change would preserve the anonymity of the
requester. Proposed Rules 12402(c)(2), 12403(b)(2), 13403(c)(2).
Where the request is opposed, however, the proposed rule change
reasonably would permit the identification of the requesting party
to address concerns that, absent such an identification, the
arbitrator(s) may reach erroneous and prejudicial conclusions about
the requester's identity. Notice at 106638.
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FINRA reasonably declined to amend the proposed rule change in
response to the commenter's recommendations. First, given that the
Discovery Sanctions Rules typically apply only in connection with a
party's violation of FINRA's discovery rules or frivolous objections to
requests for the production of documents or other information, a
reference to them in the proposed rule change would be
inappropriate.\162\ Second, given that the General Sanctions Rules
already empower a panel to sanction any violation of the Codes,\163\
and the proposed rule change would become part of the Codes, expressly
referencing the General Sanctions Rules would be unnecessary. Third,
although FINRA does not currently provide guidance on how seriously
arbitrators should treat violations of this proposed rule change,\164\
FINRA stated that it would monitor the impact of the proposed rule
change and whether additional changes are necessary.\165\
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\162\ FINRA Rules 12511(a), 13511(a).
\163\ FINRA Rules 12212, 13212.
\164\ NASAA Letter at 3 n.11.
\165\ FINRA Response Letter at 5.
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For these reasons, the proposed rule change is reasonably designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, and, in general, to protect
investors and the public interest.
4. Striking Arbitrators for Any Reason
As stated above, the proposed rule change would amend FINRA Rule
12403(c)(1)(A) ``to expressly provide that each separately represented
party may strike any or all of the arbitrators from the Non-Public List
for any reason.'' \166\ The Commission received no comment on this
proposed rule change.
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\166\ Notice at 106638 (emphasis in original); proposed Rule
12403(c)(1)(A).
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The proposed rule change is reasonably designed to improve the
transparency of the arbitrator list striking process and consistency in
the arbitration forum. Because similarly situated rules expressly
provide that a party may strike arbitrators from the list ``for any
reason,'' \167\ parties could erroneously conclude that FINRA Rule
12403(c)(1)(A) does not authorize strikes in the same manner. The
proposed rule change enhances consistency by expressly aligning FINRA
Rule 12403(c)(1)(A) with other, similar FINRA rules, and it increases
transparency by clarifying that parties may strike an arbitrator for
any reason. For these reasons, the proposed rule change is reasonably
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in
[[Page 41457]]
general, to protect investors and the public interest.
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\167\ FINRA Rules 12402(d)(1), 12403(c)(2)(A), 13404(a),
13404(b).
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5. Electronic List Selection
As stated above, FINRA Rules 12402(d)(1), 12403(c)(1)(A),
12403(c)(2)(A), and 13404(a) and (b) currently provide that each
separately represented party may strike arbitrators from the list(s) of
arbitrators ``by crossing through the names of the arbitrators.'' \168\
The proposed rule change would amend these rules to align with parties'
use of the web-based Party Portal to strike arbitrators. Specifically,
the proposed rule change would amend FINRA Rules 12402(d)(1),
12403(c)(1)(A), 12403(c)(2)(A), and 13404(a) and (b) to delete the
phrase ``by crossing through the names of the arbitrators.'' \169\ The
Commission received no comment on this proposed rule change.
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\168\ FINRA Rules 12402(d)(1), 12403(c)(1)(A), 12403(c)(2)(A),
13404(a), 13404(b).
\169\ Proposed Rules 12402(d)(1), 12403(c)(1)(A),
12403(c)(2)(A), 13404(a), 13404(b).
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The proposed rule change is reasonably designed to improve the
transparency of the arbitrator list striking process. Because parties
do not cross through names of arbitrators on the web-based Party
Portal, the Codes' present reference to that action could cause
confusion. The proposed rule change would help to reduce such confusion
by deleting this reference. For pro se parties who decline to use the
Party Portal, the relevant rules, as amended, would still indicate that
parties may ``strike'' arbitrators from the list. This language is
sufficiently clear to equip a pro se party to understand how to
communicate their strikes on paper. For these reasons, the proposed
rule change is reasonably designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
6. Extensions of Time To Complete Ranked Lists
FINRA rules currently provide that after striking and ranking the
arbitrators on the arbitrator lists, each separately represented party
must return their ranked lists to the DRS Director ``either within 20
days or no more than 20 days after the date upon which the Director
sent the lists to the parties.'' \170\ Currently, FINRA rules permit
the Director to extend or modify the deadline for good cause; \171\ in
practice, the Director typically denies extension requests made after
the deadline absent a showing of extraordinary circumstances.\172\ The
proposed rule change would codify current practice by expressly
providing that, absent extraordinary circumstances, the DRS Director
will not grant a party's request for an extension to complete the
ranked list(s) that is filed after the deadline has elapsed.\173\ The
Commission received no comment on this proposed rule change.
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\170\ FINRA Rules 12402(d)(3), 12403(c)(3), 12404(a), 13404(d),
13407(a).
\171\ FINRA Rules 12207(c), 13207(c).
\172\ Notice at 106639.
\173\ See proposed Rules 12402(d)(3), 12403(c)(3), 12404(a),
13404(d), 13407(a).
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The proposed rule change is reasonably designed to improve
efficiency in the arbitration forum and the transparency of the ranking
and striking process. Because provisions in the Codes permit the DRS
Director to extend or modify a deadline for good cause,\174\ parties--
especially those without significant experience in the forum--may
conclude that they can file untimely requests for extensions and secure
that relief upon a showing of good cause. The proposed rule change
would help to avoid such confusion by expressly codifying that the
Director will not grant an untimely request to extend the deadline for
a party to return their ranked lists absent extraordinary
circumstances. In addition, the proposed rule change should help to
improve efficiency in the forum by encouraging parties to file their
ranked lists or seek an extension prior to the deadline. For these
reasons, the proposed rule change is reasonably designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest.
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\174\ FINRA Rules 12207(c), 13207(c).
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7. Agreements To Remove Arbitrators
As stated above, current FINRA guidance states that parties may
agree to remove an arbitrator.\175\ The proposed rule change would
codify this guidance by amending FINRA Rules 12407 and 13410 to
expressly provide that, ``at any stage of the arbitration proceeding,
the Director may remove an arbitrator if all of the named parties agree
in writing to the arbitrator's removal.'' \176\ The proposed rule
change also would provide, however, that ``parties may not agree to
remove an arbitrator who is considering a request to expunge customer
dispute information . . . except that a party shall be permitted to
challenge any arbitrator selected for cause . . . .'' \177\ The
Commission received no comment on this proposed rule change.
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\175\ See supra note 84.
\176\ Proposed Rules 12407(d)(1), 13410(d)(1).
\177\ Proposed Rules 12407(d)(2), 13410(d)(2); Notice at 106639.
The proposed rule change would not restrict a party's ability to
challenge any arbitrator for cause pursuant to FINRA Rule
12407(a)(1) or (b) or FINRA Rule 13410(a)(1) or (b). See Notice at
106639.
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The proposed rule change is reasonably designed to improve the
transparency of the arbitrator removal process and help ensure that the
expungement process operates as intended. Although FINRA's arbitrator
training and public guidance have made clear that parties may agree to
remove arbitrators,\178\ the Codes do not presently reflect that
guidance. The proposed rule change would increase the transparency of
the arbitrator removal process by codifying that pre-existing guidance.
In addition, the proposed rule change would promote consistency with
expungement-related rules \179\ by making clear that--absent a
challenge for cause--parties may not agree to remove an arbitrator who
is considering a request to expunge customer dispute information. For
these reasons, the proposed rule change is reasonably designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest.
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\178\ See supra note 84.
\179\ See FINRA Rules 12800(d) (stating that the arbitrator who
has considered the merits of the customer dispute in the simplified
arbitration would also decide the expungement request), 13806
(prohibiting striking, or stipulating to the removal of, any
arbitrators selected by the list selection algorithm in a straight-
in request absent a challenge for cause).
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8. Prohibition on the Disclosure of Party-Initiated Challenges To
Remove Arbitrators
As stated above, current DRS guidance advises the parties that
``they may not inform the panel of an opposing party's causal
challenge.'' \180\ The proposed rule change would codify this existing
guidance by expressly providing that ``[a] party may not inform the
arbitrator or panel of another party's request to remove an
arbitrator'' for cause.\181\ The proposed rule change would also create
a remedy for the disclosure of a party's challenge to remove an
arbitrator.\182\ Specifically, the proposed rule change would provide
that the requesting party ``may file with the Director within five days
of being made aware of the disclosure a written
[[Page 41458]]
motion for removal of the arbitrator.'' \183\ The proposed rule change
also would provide that the requesting party would forfeit the ability
to request removal of the arbitrator because of the disclosure if such
motion is not filed within five days.\184\ In addition, the proposed
rule change would provide that, absent extraordinary circumstances, the
DRS Director shall grant such a motion if it is timely filed.\185\
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\180\ Notice at 106640; see supra note 93.
\181\ Notice at 106640; proposed Rules 12407(e)(1); 13410(e)(1).
\182\ Notice at 106640.
\183\ Proposed Rule 12407(e)(2), 13410(e)(2).
\184\ Id.
\185\ Id.
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One supportive commenter asked FINRA to consider further
modifications to the proposed rule text. Specifically, this commenter
requested that the proposed rule change also provide that ``[a]ny
violation . . . by a party or party's representative at any point in an
arbitration proceeding shall constitute a failure to comply with
discovery provisions of the Code[s] within the meaning of'' FINRA Rules
12511(a) or 13511(a), as applicable.\186\ This commenter stated that
such a modification would provide greater flexibility to aggrieved
parties, some of whom may prefer a sanction or remedy less severe than
removal of the subject arbitrator.\187\ This commenter also stated that
a reference to the Discovery Sanctions Rules is more appropriate than
the General Sanctions Rules, as the Discovery Sanctions Rules would
provide a better framework for arbitrators to evaluate and redress a
violation.\188\
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\186\ NASAA Letter at 5-6.
\187\ Id. (stating that ``if an improper disclosure were made
near the end of a panel proceeding, an aggrieved party reasonably
may not want to seek removal of the affected arbitrator (thereby
either concluding the arbitration with just two panelists or
delaying a conclusion until a replacement panelist can be appointed
and prepped).'').
\188\ Id. at 2-3, 3 n.11, 5.
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In response, FINRA stated that it would be inappropriate to apply
the Discovery Sanctions Rules to such a violation when it does not
involve a failure to comply with discovery rules or a frivolous
objection to the production of documents or information.\189\ In
addition, FINRA stated that the General Sanctions Rules already provide
``a panel with broad discretion \190\ in addressing a party's failure
to comply with any provision of the Codes'' or any order of the
panel.\191\ For this reason, the proposed rule change need not cross-
reference the General Sanctions Rules.\192\ Separately, FINRA stated
that allowing an aggrieved party to file a motion to remove the subject
arbitrator ``would be the most appropriate remedy,'' but the proposed
rule change would not require an aggrieved party to seek that
remedy.\193\ FINRA stated that, under the proposed rule change, an
aggrieved party may proceed with the subject arbitrator, seek the
arbitrator's removal under the proposed rule change's remedy provision,
or seek other sanctions under the General Sanctions Rules.\194\ For
these reasons, FINRA declined to adopt the commenter's suggested
alternative.\195\
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\189\ FINRA Response Letter at 7.
\190\ FINRA stated that sanctions could include but are not
limited to: monetary penalties; evidentiary exclusions; adverse
inferences; fee, cost, or expense assessments; disciplinary
referrals; and dismissals. Id. at 6-7.
\191\ Id. (citing FINRA Rules 12212, 13212).
\192\ Id.
\193\ Id. at 7.
\194\ Id.
\195\ See id. at 6-7.
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The proposed rule change is reasonably designed to improve
efficiency in the arbitration forum and the transparency of the process
for requesting the removal of an arbitrator. By codifying current
practice, the proposed rule change helps to ensure that parties--
especially those without significant experience in the forum--
understand their recourse where a party improperly discloses their
request to remove an arbitrator for cause. This helps to ensure the
integrity of arbitration awards by addressing any prejudice resulting
from an unauthorized disclosure, as the aggrieved party may--at its
discretion--file a motion to remove the subject arbitrator because of
the unauthorized disclosure. In addition, the proposed rule change's
timeline for making a request to remove an arbitrator improves
efficiency in the arbitration forum by helping to ensure such requests
do not cause unreasonable delays in arbitration cases.
In addition, FINRA reasonably declined to amend the proposed rule
change in response to the commenter's recommendations. First, as FINRA
explained, the Discovery Sanctions Rules typically apply only in
connection with a party's violation of FINRA's discovery rules or
frivolous objections to requests for the production of documents or
other information; thus a reference to them in the proposed rule change
would be inappropriate.\196\ Second, in addition to an aggrieved
party's ability to request the removal of the subject arbitrator, the
General Sanctions Rules already empower a panel to sanction any
violation of the Codes.\197\ Because the proposed rule change would
become part of the Codes, expressly referencing the General Sanctions
Rules would be unnecessary. Third, although FINRA does not currently
provide guidance on how seriously arbitrators should treat violations
of this proposed rule change,\198\ FINRA stated that it would monitor
the impact of the proposed rule change and whether additional changes
are necessary.\199\
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\196\ FINRA Rules 12511(a), 13511(a).
\197\ FINRA Rules 12212, 13212.
\198\ NASAA Letter at 3 n.11.
\199\ FINRA Response Letter at 5.
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For these reasons, the proposed rule change is reasonably designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, and, in general, to protect
investors and the public interest.
9. Updating Cross-References
As stated above, the proposed rule change would provide necessary
clarification by updating FINRA Rules 13406(c) and 13411(d) with
correct cross-references to FINRA Rule 13100(x)(2) through (11). The
Commission received no comment on this proposed rule change.
The proposed rule change is reasonably designed to improve the
transparency of the Codes by updating outdated cross-references. Absent
this proposed rule change, parties--especially those without
significant experience in the forum--could get confused by outdated
cross-references in FINRA Rules 13406(c) and 13411(d). The proposed
rule change would help eliminate any such confusion. For these reasons,
the proposed rule change is reasonably designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
IV. Conclusion
For the reasons set forth above, 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.\200\
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\200\ 15 U.S.C. 78o-3(b)(6).
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It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \201\ that the proposed rule change (SR-FINRA-2024-022),
be, and hereby is, approved.
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\201\ 15 U.S.C. 78s(b)(2).
[[Page 41459]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\202\
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\202\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-16185 Filed 8-22-25; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 25, 2025.
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