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The Sec Approves Amendments To Finra’s Customer Code Of Arbitration Procedure Regarding The Selection Of Arbitrators In Cases Involving Three Panel Members

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  • Posted on: Dec 16 2016

In a December 2016 regulatory notice to member firms, the Financial Industry Regulatory Authority (“FINRA”) announced that the Securities and Exchange Commission (“SEC”) approved amendments to Rule 12403 of the Code of Arbitration Procedure for Customer Disputes. The amended rule will increase (1) the number of arbitrators on the public arbitrator list that FINRA sends to parties during the panel selection process from 10 to 15, and (2) the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule.

Prior to the rule change, FINRA provided customers with a choice between two methods for the selection of a three-person panel. The first method, the Majority-Public Panel Option, provided for a panel of one chair-qualified public arbitrator, one public arbitrator and one non-public arbitrator. Prior to February 1, 2011, this option was FINRA’s only method for the selection of three-member panels. The second method, the All-Public Panel Option, which was added on February 1, 2011, permits any party to select a panel consisting of three public arbitrators. Customers were given the option of choosing this method of selection in their statement of claim or within 35 days from service of the statement of claim. In the absence of a customer’s selection, by default, the Majority-Public Panel Option would apply.

Following implementation of the All-Public Panel Option, FINRA reviewed arbitrator ranking data and awards to determine whether the All-Public Panel Option was having the intended result – to eradicate the perceived bias in favor of the securities industry in cases involving three arbitrators and enhance confidence in and increase the perception of fairness in the arbitration process.  FINRA found that in approximately 75% of the eligible cases, customers chose the All-Public Panel Option. Customers using the Majority-Public Panel Option did so by default 77% of the time, rather than making an affirmative choice. FINRA also found that the choice of selection method had an impact on the awards issued by its panels: namely, customers were awarded damages significantly more often when an all-public panel presided over their case. Moreover, FINRA’s review led to its concern that pro-se litigants and attorneys unfamiliar with the selection process would inadvertently end up with a mixed-panel without understanding the significance of that panel composition. Based on, among others, these findings and concerns, FINRA proposed the amendments to Rule 12403.

The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017, for panel selection in customer cases with three arbitrators. The text of the amendments is set forth in the attachment to the notice.

Takeaway:

The amended rule provides the parties with greater choice in the selection of public arbitrators during the panel selection process. By increasing the number of qualified public arbitrators to be ranked, the amended rule should minimize the selection of arbitrators by FINRA without the parties’ input (also known as cramdown arbitrators). At bottom, the amended rule should improve the parties’ ability to select a panel that they feel is most appropriate to resolve their dispute (i.e., a panel of all public arbitrators), while increasing the perception that the arbitration process is fair and equitable.

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