Document ID: SEC-2023-0836-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2023-08-04T04:00Z

[Federal Register Volume 88, Number 149 (Friday, August 4, 2023)]
[Notices]
[Pages 51879-51882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16623]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98029; File No. SR-FINRA-2023-008]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA 
Rules 1015, 9261, 9341, 9524, 9830 and Funding Portal Rule 900 (Code of 
Procedure) To Permit Hearings Under Those Rules To Be Conducted by 
Video Conference

I. Introduction

    On April 26, 2023, 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 FINRA Rules 1015, 9261, 
9341, 9524 and 9830 and Funding Portal Rule 900 to allow for video 
conference hearings before the Office of Hearing Officers (``OHO'') and 
the National Adjudicatory Council (``NAC'') under specified conditions. 
The proposed rule change was published for comment in the Federal 
Register on May 4, 2023.\3\ On June 7, 2023, FINRA consented to extend 
until August 2, 2023, 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.\4\ This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 97403 (May 4, 2023), 88 FR 
28645 (May 4, 2023) (File No. SR-FINRA-2023-008) (``Notice''). The 
Commission did not receive any comments in connection with the 
Notice.
    \4\ See Letter from Ilana Reid, Associate General Counsel, FINRA 
(June 7, 2023) available at https://www.finra.org/sites/default/files/2023-06/sr-finra-2023-008-extension-no-1.pdf.
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II. Description of the Proposed Rule Change

A. Background

    FINRA Rules 1015, 9261, 9341, 9524 and 9830 and Funding Portal Rule 
900 pertain to the procedures for various types of proceedings 
conducted by OHO and the NAC.\5\ As summarized in the Notice, OHO 
conducts hearings in disciplinary proceedings \6\ and hearings for 
temporary and permanent cease and desist orders (``TCDOs'' and 
``PCDOs'').\7\ When orders in disciplinary proceedings are appealed, 
the NAC holds hearings on oral argument.\8\ The NAC also conducts 
hearings in membership proceedings,\9\ eligibility proceedings,\10\ and 
Funding Portal eligibility proceedings.\11\ Under these

[[Page 51880]]

rules (``original rules''), such hearings were generally conducted in 
person.\12\
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    \5\ See Notice at 28646.
    \6\ See Notice at 28646. FINRA stated that the FINRA Rule 9200 
Series sets forth the procedures for disciplinary proceedings 
initiated by the Department of Enforcement against any FINRA member 
or associated person for alleged violation of any rule, regulation, 
or statutory provision that FINRA has jurisdiction to enforce, 
including the federal securities laws and the regulations 
thereunder. See Notice at n.8. See also FINRA Rule 9261.
    \7\ See Notice at 28646. FINRA stated that the FINRA Rule 9800 
Series sets forth the procedures for TCDO and PCDO proceedings. 
These provide a mechanism for FINRA to take necessary remedial 
action against a member or associated person where there is a 
significant risk that the alleged misconduct could cause continuing 
harm to the investing public, if not addressed expeditiously. See 
Notice at n.9. See also FINRA Rule 9830.
    \8\ See Notice at 28646. FINRA stated that the FINRA Rule 9300 
Series sets forth the procedures for review of disciplinary 
proceedings by the NAC. See Notice at n.10. See also FINRA Rule 
9341.
    \9\ See Notice at 28646. FINRA stated that the FINRA Rule 1000 
Series governs, among other things, the process for: (i) applying 
for FINRA membership; (ii) FINRA members to seek approval of a 
change in ownership, control or business operations; and (iii) an 
applicant to request that the NAC review a FINRA decision rendered 
under the Rule 1000 Series. See Notice at n.11. See also FINRA Rule 
1015.
    \10\ See Notice at 28646. FINRA stated that the FINRA Rule 9520 
Series sets forth the procedures for eligibility proceedings and 
review of those proceedings by the NAC and FINRA Board. See Notice 
at n.12. See also FINRA Rule 9524. ``Eligibility proceedings,'' 
refer to the process where FINRA may allow a person subject to 
statutory disqualification to enter or remain in the securities 
industry. See e.g., https://www.finra.org/rules-guidance/guidance/eligibility-requirements (providing general information about these 
proceedings).
    \11\ See Notice at 28646. Paragraph (b) of Funding Portal Rule 
900 was established as a streamlined version of the FINRA Rule 9520 
Series, discussed supra note 10, and sets forth the procedures for 
funding portal eligibility proceedings. See Notice at n.13. See also 
FINRA Funding Portal Rule 900.
    \12\ See Notice at 28646. FINRA noted that telephonic testimony 
and hearings are already explicitly permitted in expedited 
proceedings. See FINRA Rule 9559(d)(5) (expedited proceedings 
``shall be held by telephone conference, unless the Hearing Officer 
orders otherwise for good cause shown''). See Notice at n.14.
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    Beginning in March of 2020, FINRA administratively postponed these 
in-person hearings because of the COVID-19 global health crisis.\13\ 
FINRA later adopted temporary amendments to the original rules 
(``temporary amendments'') \14\ that allowed OHO and the NAC to order, 
without a motion, hearings to proceed by video conference based on 
public health risks related to COVID-19.\15\
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    \13\ See Notice at 28645.
    \14\ The temporary amendments were intended to address the 
expanding backlog of cases from the over six-month long postponement 
of hearings. See id. FINRA did not temporarily amend Paragraph (b) 
of Funding Portal Rule 900. Instead, FINRA included Paragraph (b) of 
Funding Portal Rule 900 in the proposed rule change so that the 
procedures for funding portal eligibility proceedings are aligned 
with eligibility proceedings under the FINRA Rule 9520 Series. See 
Notice at 28646. See also supra note 11.
    \15\ See Securities Exchange Act Release No. 88917 (May 20, 
2020), 85 FR 31832 (May 27, 2020) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2020-015) and Securities Exchange 
Act Release No. 89737 (September 2, 2020), 85 FR 55712 (September 9, 
2020) (Notice of Filing and Immediate Effectiveness of File No. SR-
FINRA-2020-027).
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    These temporary amendments were extended multiple times due to the 
continuing public health risks and logistical challenges related to the 
ongoing COVID-19 pandemic.\16\ The temporary amendments expired on 
April 30, 2023.\17\
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    \16\ See Securities Exchange Act Release No. 90619 (December 9, 
2020), 85 FR 81250 (December 15, 2020) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2020-042); Securities 
Exchange Act Release No. 91495 (April 7, 2021), 86 FR 19306 (April 
13, 2021) (Notice of Filing and Immediate Effectiveness of File No. 
SR-FINRA-2021-006); Securities Exchange Act Release No. 92685 
(August 17, 2021), 86 FR 47169 (August 23, 2021) (Notice of Filing 
and Immediate Effectiveness of File No. SR-FINRA-2021-019); 
Securities Exchange Act Release No. 93758 (December 13, 2021), 86 FR 
71695 (December 17, 2021) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2021-031); Securities Exchange 
Act Release No. 94430 (March 16, 2022), 87 FR 16262 (March 22, 2022) 
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2022-004); Securities Exchange Act Release No. 95281 (July 14, 
2022), 87 FR 43335 (July 20, 2022) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2022-018); Securities Exchange 
Act Release No. 96107 (October 19, 2022), 87 FR 64526 (October 25, 
2022) (Notice of Filing and Immediate Effectiveness of File No. SR-
FINRA-2022-029); and Securities Exchange Act Release No. 96746 
(January 25, 2023), 88 FR 6346 (January 31, 2023) (Notice of Filing 
and Immediate Effectiveness of File No. SR-FINRA-2023-001).
    \17\ See Securities Exchange Act Release No. 96746 (January 25, 
2023), 88 FR 6346 (January 31, 2023) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2023-001).
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    According to FINRA, as a result of the temporary amendments, OHO 
and the NAC successfully held numerous hearings by video 
conference.\18\ FINRA conducted the video conference hearings using 
Zoom, a system which was vetted by FINRA's information technology 
staff.\19\ FINRA stated that this use of video conference technology 
has been an effective and efficient alternative to in-person 
hearings.\20\
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    \18\ According to FINRA, as of March 31, 2023, OHO has conducted 
18 disciplinary hearings by video conference (decisions have been 
issued in all but one of these cases). Also, as of March 31, 2023, 
the NAC has conducted 19 oral arguments by video conference in 
connection with appeals of FINRA disciplinary proceedings pursuant 
to FINRA Rule 9341(d), as temporarily amended. Furthermore, the NAC 
has conducted via video conference a one-day evidentiary hearing in 
a membership application proceeding pursuant to FINRA Rule 1015, as 
temporarily amended. The NAC also has conducted via video conference 
three evidentiary hearings in eligibility matters pursuant to FINRA 
Rule 9524, as temporarily amended. See Notice at n.6.
    \19\ See Notice at n.7.
    \20\ See Notice at 28646.
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B. Proposed Rule Change

    FINRA's proposed rule change would make the temporary amendments 
regarding video conference hearings permanent, with some modifications, 
to allow for the use of video conference for reasons beyond COVID-19. 
The proposed rule change would extend OHO and the NAC's authority to 
order hearings by video conference to other similar situations in which 
proceeding in person may endanger the health or safety of the 
participant or alternatively would be impracticable (i.e., an uncommon 
situation or extraordinary circumstance such as a natural disaster or 
terrorist attack that caused travel to be cancelled for an extended 
period of time).\21\ FINRA stated that this expanded authority is 
intended to empower OHO and the NAC to act quickly if a future 
unexpected event impaired their ability to conduct in-person hearings 
safely.\22\
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    \21\ See id.
    \22\ See Notice at 28647.
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    Additionally, FINRA explained that the proposed rule change would 
differ from the temporary amendments in several other ways.\23\ First, 
according to FINRA, under the proposed rule change, OHO and the NAC 
would also have authority to order hearings to occur by video 
conference based on a motion.\24\ Second, under the proposed rule 
change, FINRA chose to provide more flexibility for using video 
conference for oral arguments in appeals from disciplinary proceedings 
than for evidentiary hearings due to the differences between those 
types of hearings.\25\ Consequently, according to FINRA, the motion 
requirements and the standard that the adjudicator would follow when 
exercising authority under the proposed rule change would differ 
somewhat depending on the type of hearing involved.\26\ These 
differences are described further below.\27\
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    \23\ See Notice at 28646.
    \24\ See id.
    \25\ See id. For ease of reference, to be consistent with the 
language FINRA used in its filing, ``evidentiary hearings'' refers 
to hearings conducted before OHO under FINRA Rules 9261 and 9830, 
and the NAC under FINRA Rules 1015, 9524, and Funding Portal Rule 
900. ``Oral argument'' refers to hearings conducted before the NAC 
in appeals from disciplinary proceedings under Rule 9341. See Notice 
at n.17 and see supra notes 6-11 and accompanying text.
    \26\ See Notice at 28646.
    \27\ See infra notes 44-47 and accompanying text.
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    As set forth in the Notice, under the proposed rule change, OHO and 
the NAC would have discretion to determine whether the circumstances 
for a video hearing were met.\28\ However, FINRA noted that in-person 
hearings would remain the default method for conducting hearings.\29\ 
FINRA stated it will also use the same protocols for conducting video 
conference hearings as employed under the temporary amendments, 
including using a high quality, secure, user-friendly video 
conferencing service and providing thorough instructions, training, and 
technical support to all hearing participants.\30\
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    \28\ See Notice at 28646.
    \29\ See id.
    \30\ See id.
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Evidentiary Hearings Before OHO and the NAC
    As set forth in the Notice, for evidentiary hearings, the proposed 
rule change would give OHO and the NAC authority to order an 
evidentiary hearing to occur by video conference, in whole or in part, 
if OHO or the NAC determines that proceeding in person may endanger the 
health or safety of the participants or would be impracticable, as 
described above.\31\ OHO and the NAC would have such authority to order 
that the hearing occur by videoconference on their own (i.e., sua 
sponte).\32\
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    \31\ See id. See also, supra note 21 and accompanying text.
    \32\ See Notice at 28647. FINRA stated that OHO and the NAC 
would have such authority over the objection of a party, which was 
also the case under the temporary amendments. See also Notice at 
n.18. See also SR-FINRA-2020-027, supra note 15.
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    In addition, FINRA explained that under the proposed rule change, 
parties could file a joint motion requesting the hearing to occur, in 
whole or in part, by video conference based on a showing of good 
cause.\33\ FINRA stated that due to

[[Page 51881]]

the nature of evidentiary hearings, which often occur over multiple 
days and generally include numerous documents in evidence and witness 
testimony, the proposed rule change would require any motions for a 
hearing by video conference to be joined by all parties, and even joint 
motions may be denied if the adjudicator determines that good cause has 
not been shown.\34\
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    \33\ See Notice at 28647.
    \34\ See id. FINRA noted that its current practice is to allow 
witnesses in an otherwise in-person hearing to appear by video 
conference. According to FINRA, in evidentiary hearings, a party may 
file a motion to offer witness testimony by telephone or video 
conference. Further, even prior to the COVID-19 pandemic, 
adjudicators have allowed telephone participation by witnesses who 
are unable or unwilling to appear in person, such as customers over 
whom FINRA does not have jurisdiction and therefore cannot compel 
testimony under FINRA Rule 8210. See Notice at n.19.
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    According to FINRA, whether acting on their own or based on a joint 
motion of the parties, OHO and the NAC would have reasonable discretion 
to exercise their authority to determine whether a hearing should occur 
by video conference under the proposed rule change.\35\ FINRA further 
explained that in deciding whether to schedule a hearing by video 
conference, OHO and the NAC could consider and balance a variety of 
factors including, for example and without limitation, a hearing 
participant's individual health concerns and access to the connectivity 
and technology necessary to participate in a video conference 
hearing.\36\ Additionally, as noted above, OHO and the NAC may consider 
whether a situation is uncommon or there are extraordinary 
circumstances.\37\
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    \35\ See Notice at 28647.
    \36\ See id.
    \37\ See supra note 21 and accompanying text.
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Oral Argument Before the NAC
    The proposed rule change would give the NAC authority to order an 
oral argument hearing to occur by video conference, in whole or in 
part, if it determines that proceeding in person may endanger the 
health or safety of the participants or would be impracticable.\38\ 
According to FINRA, the NAC would have such authority on its own.\39\
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    \38\ See Notice at 28647.
    \39\ See id.
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    Further, under the proposed rule change, the NAC would have 
authority--on its own or on consideration of a motion by any party--to 
order oral argument to occur by video conference, in whole or in part, 
for other reasons (i.e. reasons not limited to public health, safety or 
impracticability).\40\ According to FINRA, under such circumstances, an 
opposing party would have the opportunity to demonstrate that the 
hearing should proceed in person because proceeding by video conference 
would materially disadvantage that party.\41\ FINRA explained that 
whether a party has shown material disadvantage would depend on the 
facts and circumstances.\42\ According to FINRA, considerations may 
include, for example and without limitation, case complexity, the 
issues on appeal, and whether the respondent is pro se and desires to 
appear in person.\43\
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    \40\ See id.
    \41\ See id.
    \42\ See id.
    \43\ See id.
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    According to FINRA, under the proposed rule change, the NAC would 
have greater flexibility to allow oral argument to occur by video 
conference than the NAC or OHO would have to permit an evidentiary 
hearing to occur via video conference.\44\ Specifically, FINRA stated 
that the proposed rule change as to NAC oral argument differs from the 
proposed rule change for evidentiary hearings in three respects: (1) it 
would give the NAC sua sponte authority to order oral argument hearings 
to occur by video conference for reasons other than public health, 
safety, or impracticability; (2) it would allow for motions by a single 
party rather than requiring joint motions; and (3) under either of 
those circumstances, it would permit a party to oppose on grounds that 
proceeding by video conference would materially disadvantage that 
party.\45\ As noted above, the third difference serves as an additional 
safeguard given that the NAC has greater flexibility, compared to 
evidentiary hearings held by the NAC or OHO, to allow oral argument to 
occur by video conference.\46\ These proposed differences are, 
according to FINRA, due to the nature of oral argument hearings, which 
are typically shorter than evidentiary hearings in duration (generally 
two hours or less), contain no presentation of new documentary evidence 
or witness testimony, and are often conducted by counsel.\47\
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    \44\ See id.
    \45\ See id.
    \46\ See id.
    \47\ See id.
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    According to FINRA, whether acting on its own or based on a motion 
of a party, the NAC would have reasonable discretion to exercise its 
authority to determine whether oral argument should occur by video 
conference under the proposed rule change.\48\ In deciding whether to 
order an oral argument hearing by video conference, the NAC could 
consider and balance a variety of factors including, for example and 
without limitation, a hearing participant's individual health concerns, 
access to video conference technology, whether a party has delayed or 
refused to appear in person, and whether proceeding by video conference 
would materially disadvantage any party.\49\
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    \48\ See id.
    \49\ See id.
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C. Effective Date

    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published by FINRA.

III. Discussion and Commission Findings

    After careful review of the proposed rule change, and considering 
that the Commission did not receive any comments that relate to the 
proposed rule change,\50\ 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.\51\ Specifically, the Commission finds that the 
proposed rule change is consistent with section 15A(b)(6) of the 
Exchange Act,\52\ 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.
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    \50\ The Commission received two comments related to the initial 
temporary amendments, as well as an additional comment related to 
one of the extensions. FINRA responded to these commenters. Comments 
are available at https://www.sec.gov/comments/sr-finra-2020-027/srfinra2020027.htm and https://www.sec.gov/comments/sr-finra-2021-019/srfinra2021019.htm. However, none of these comments were 
submitted in connection with the current proposed rule.
    \51\ 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).
    \52\ 15 U.S.C. 78o-3(b)(6).
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    As discussed in greater detail in the Notice and outlined in 
Section II above, FINRA Rules 1015, 9261, 9341, 9524 and 9830 and 
Funding Portal Rule 900 pertain to the procedures for various types of 
proceedings conducted by OHO and the NAC. The proposed rule change 
would make the temporary amendments regarding video conference hearings 
permanent, with some modifications that would allow for the use of 
video conference for reasons beyond COVID-19, as described above.\53\ 
The proposed

[[Page 51882]]

rule change would allow certain proceedings by video conference if the 
NAC or OHO determine that proceeding in person may endanger the health 
or safety of the participants or would be impracticable.\54\ 
Additionally, the proposed rule change would allow certain proceedings 
by video conference where both parties prefer doing so and show good 
cause, or where neither party would be materially disadvantaged.\55\ 
For approximately two and half years, while the temporary amendments 
were in effect, OHO and the NAC successfully conducted numerous 
disciplinary and evidentiary hearings by video conference.\56\
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    \53\ See supra notes 21-49 and accompanying text.
    \54\ See supra notes 21-22, 31, 38 and accompanying text.
    \55\ See supra notes 33-34, 40-43 and accompanying text.
    \56\ See supra note 18 and accompanying text.
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    The proposed rule change would provide greater flexibility and 
efficiency for FINRA's disciplinary and eligibility proceedings and 
other review processes which serve a critical role in providing 
investor protection and maintaining fair and orderly markets, while 
maintaining appropriate safeguards. The proposed rule change would 
enable OHO and the NAC to respond to unanticipated events such as 
health emergencies, natural disasters or terrorist attacks more quickly 
to avoid backlogs or unnecessary delays.\57\ Currently, as set forth in 
the Notice, FINRA does not have permanent rules that allow for video 
conference hearings before OHO and the NAC, even when both parties 
prefer proceeding by video conference, or doing so would not materially 
disadvantage any party, or when video conference is the only 
practicable method.\58\ However, the successful implementation of video 
conference hearings during the COVID-19 global health crisis 
demonstrated that technology can be an effective and efficient 
alternative to in-person hearings.\59\ The backlog of cases that arose 
as a result of the postponement of hearings during the COVID-19 
pandemic before the temporary amendments were enacted illustrate the 
need for greater flexibility to empower OHO and the NAC to react more 
expeditiously.\60\ The proposed rule change would modernize existing 
procedures and allow parties who jointly prefer video conference to 
potentially save travel costs and time.\61\
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    \57\ See Notice at 28647.
    \58\ See Notice at 28648.
    \59\ See Notice at n.6; see also supra note 18 and accompanying 
text.
    \60\ See Notice at 28647.
    \61\ See Notice at 28649.
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    Additionally, the use of video conferences would be limited and 
controlled. Notably, in-person hearings would still be the default 
method for conducting hearings.\62\ Furthermore, the proposed rule 
includes procedural safeguards to ensure fairness, such as the 
requirement for evidentiary hearings that any motions be joined by all 
parties and show good cause and, for oral argument, the ability of any 
party to oppose an order or motion to proceed by video conference on 
grounds that doing so would materially disadvantage that party.\63\
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    \62\ See supra note 29 and accompanying text.
    \63\ See Notice at 28647-28648.
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    For these reasons, the Commission finds the proposed rule change is 
consistent with the protection of investors and in the public interest.

IV. Conclusion

    It is therefore ordered pursuant to section 19(b)(2) of the 
Exchange Act \64\ that the proposed rule change (SR-FINRA-2023-008) be, 
and hereby is, approved.
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    \64\ 15 U.S.C. 78s(b)(2).

    Dated: July 31, 2023.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16623 Filed 8-3-23; 8:45 am]
BILLING CODE 8011-01-P