Latest FINRA Updates: Revised Codes of Arbitration Procedure

The Financial Industry Regulatory Authority (FINRA) recently implemented significant updates to its Codes of Arbitration Procedure, effective March 4, 2024. The new amendments aim to enhance the efficiency of the arbitration process. These revisions reflect FINRA’s commitment to adapting to the evolving financial landscape and improving the overall experience for all parties involved in arbitration.

In a rapidly evolving landscape, these updates are essential to ensuring that arbitration remains a viable and effective method of dispute resolution. The revised codes not only clarify existing rules but also introduce new guidelines addressing emerging technologies and the increasing importance of cybersecurity.

Discover some of the changes FINRA has made to its Codes of Arbitration Procedure in this article.

Adjustments to the Process for Selecting Arbitrators

• Conflict of Interests
  In the arbitrator selection process, the Codes require a list selection algorithm to randomly generate a roster of arbitrators based on the hearing location, excluding those with conflicts identified by the algorithm. Recent amendments codify that, once the list is generated, Dispute Resolution Services (DRS) will conduct a manual review to identify any additional conflicts not detected by the algorithm. If a conflict is found during this review, the algorithm will randomly select a replacement arbitrator to complete the list.

• Written Explanation of Director’s Decision
  In September 2022, to enhance transparency, DRS updated its policy to require a written explanation whenever a request to remove an arbitrator is granted or denied, regardless of whether a party requests it. Previously, a written explanation was only provided if specifically requested by one of the parties. The recent amendments formalize this policy, mandating that the Director must issue a written explanation when deciding on a party’s request to remove an arbitrator. Additionally, DRS has updated its guidance to arbitrators, requiring them to include the most common reasons for granting or denying such requests.

• Challenge to Remove an Arbitrator
  The recent amendments to the Codes clarify the timing for challenges to remove an arbitrator for reasons such as conflict of interest or bias, either upon a party’s request or at the Director’s initiative. Previously, the timing for making such challenges was unclear. The amendments now specify that challenges can be initiated after the arbitrator ranking list is generated and sent to the parties, but before the first hearing session begins, offering clearer guidance on when these challenges can be made.

Updates to Arbitration Procedures

• Number of Hearing Sessions Per Day
  The recent amendments clarify how arbitrators are compensated for hearing sessions. A “hearing session” is defined as any meeting between the parties and arbitrators lasting four hours or less. To address confusion among some arbitrators who believed they could be compensated for time spent outside the hearing, such as during lunch breaks, the amendments specify that a new hearing session begins only after four hours of actual hearing time. This change ensures that compensation is based solely on time spent at hearings, promoting more efficient time management during sessions.

• Redacting Confidential Information
  Parties have always been required to redact personal confidential information (PCI), such as Social Security numbers, ID numbers, and financial account details, when submitting documents to DRS. However, this requirement did not previously apply to claims under FINRA’s simplified arbitration rules. In response to increasing concerns about identity theft and fraud in the securities industry, recent amendments now extend the PCI redaction requirement to simplified arbitrators as well. FINRA has also updated its website with clear instructions on how to protect and properly redact PCI.

• Revise Submission Agreement for Third Party Claims
  The Submission Agreement, signed by parties at the start of arbitration, commits them to arbitration under the Codes. A claim is deemed deficient if the Submission Agreement does not list all the parties involved. Prior to the recent amendments, the Codes did not explicitly require respondents to update the agreement when filing a third-party claim, leading to incomplete submissions when the third party was not included. The amendments now require that if the answer includes a third-party claim, the respondent must provide a Submission Agreement that names the third party, serve both the answer and the Submission Agreement to the third party, and file the agreement with the Director.

• Amending Pleadings or Filing Third Party Claims
  Before the recent amendments, the Codes did not provide clear procedures for filing third-party claims, except when included in an answer to a statement of claim. The amendments now clarify that the procedures for amending pleadings also apply to the filing and serving of third-party claims. Furthermore, the updates to the Customer Code permit a customer in arbitration to file a third-party claim if FINRA notifies them that a member or associated person has become inactive, even after arbitrator panels are appointed and ranked lists have been submitted.

• Combining Claims
  Before the ranked arbitrator lists are submitted to the Director, the Codes permit combining separate but related claims into a single arbitration. Previously, there was no specific guidance on whether a panel could combine such claims, or which panel would have the authority to reconsider the Director’s decision if multiple panels were involved. The recent amendments now formalize this practice, specifying that if a panel has been appointed to multiple cases, the panel assigned to the lowest numbered case may combine the related claims into one arbitration and reconsider the Director’s decision upon a party’s motion.

The recent updates to FINRA’s Codes of Arbitration Procedure bring improved clarity and structure to the arbitration process. By enhancing efficiency and transparency, these changes ensure a more streamlined experience for all parties involved. Staying informed about these revisions is crucial for navigating FINRA’s evolving landscape with confidence.

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