Posted July 22nd, 2011 in Top Stories

Investors Now Can Choose An All-Public Arbitration Panel

The Securities and Exchange Commission (SEC) recently approved a proposed rule of the Financial Industry Regulatory Authority (FINRA) that provides investors the option of choosing all public arbitrators in cases with three arbitrators.  The new rule became effective February 1, 2011.

FINRA rules require a three-arbitrator panel in customer disputes with claims over $100,000.  In the past, these panels have been made up of two public arbitrators, and one non-public arbitrator who is from or works with the securities industry.  FINRA provides the parties with lists of three categories of potential arbitrators—public arbitrators qualified to act as chair; public arbitrators; and non-public arbitrators.  Each party has the right to strike up to four potential arbitrators in each category.

New Rule 12403, however, gives the customer the right to elect between two panel selection methods:  the traditional majority-public panel method described above or an optional all-public panel method.  If the customer chooses the all-public panel option, all parties then have an unlimited number of strikes with respect to the list of non-public arbitrators.  The new rule, therefore, gives customers the ability to control whether or not their arbitration panel will include a representative of the securities industry.  

FINRA believes that the new rule “will increase public confidence in the fairness of [the FINRA] dispute resolution process.”  But it also may introduce more unpredictability about the arbitration process for FINRA member firms.  Although many public arbitrators have some knowledge of the securities laws and industry, such knowledge is not required.  If customers are suspicious of arbitrators with ties to the securities industry, they may also exercise their strikes on the public lists to eliminate those arbitrators with the greatest industry knowledge.  Therefore, FINRA firms and their associated persons risk having their most complex cases decided by panel members unfamiliar with relevant securities laws and industry practices.   

Please contact Terri Kimker for more information on FINRA and other financial related laws and regulations.