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: