Back in October 2008, the Financial Industry Regulatory Authority (FINRA) launched a pilot program to gauge the interest investors might have in arbitrating their claims before a panel composed solely of public arbitrators, instead of two public arbitrators and one arbitrator from within the financial industry, as was normally the case.

Data from the pilot program show that all-public panels awarded investors damages in 65 percent of the cases that resulted in awards, as opposed to 49 percent of the non-pilot program cases in 2009 and 48 percent of the non-pilot program cases in 2010.

To be eligible, an investor’s case had to involve one of 14 brokerage firms that had volunteered to enter to a set number of investor cases in the program. The cases did not involve individual brokers. Among investors who had eligible cases, 54 percent opted in.

FINRA All-Public Arbitrator Option Approved By SEC

In October 2010, FINRA proposed a rule to make the all-public arbitrator option permanent, and it was approved by the Securities and Exchange Commission (SEC) in February 2011. The rule applies to all investor disputes against any firm and any individual broker, but does not apply to arbitration disputes involving only industry parties. The pilot program ended when SEC approved the rule.

Richard Ketchum, FINRA chairman and CEO said at the time that giving investors the option to have an all-public panel would increase public confidence in the fairness of FINRA’s dispute resolution process.

Pilot Program Results Summary

FINRA has now released a summary of the results of the pilot program that led to the new rule, one year after the program closed to new cases. FINRA cautioned, however, that 12 percent of the cases that entered the program are still pending, so that some of the results are incomplete.

To return to data on damages, the summary shows that in the pilot program cases — whether the panels comprised all-public arbitrators or just a majority of public arbitrators — investors were given damages more often than they were in awards issued by majority public panels in non-pilot program cases. FINRA stated in its summary that the data is not sufficient to draw meaningful conclusions about these awards

Of the 49 awards issued by all-public panels in the pilot program, investors were awarded damages in 26 of 40 cases, or 65 percent.

In the remaining nine cases, the parties settled and the all-public panels awarded expungement or other relief.

Among the pilot program awards, 23 were issued by panels comprising two public arbitrators and one non-public arbitrator. These panels awarded damages to investors in eight of the 13 cases, or 62 percent. The remaining 10 cases settled.

To compare, panels of three arbitrators awarded damages to investors in 49 percent of non-pilot program cases. In 2010, arbitrators awarded damages in 48 percent of these cases.

The numbers show that 51 percent of the investors who chose to participate in the program opted for a panel composed solely of public arbitrators.

Not every investor eligible for the pilot program participated, however. FINRA noted that if eligible investors who declined to participate were included in the numbers, then actually only 27 percent of eligible investors chose an all-public panel. Eligible investors who declined would be certain to have at least one arbitrator from within the financial industry seated on their panels.

The numbers are not all cut and dry when it comes to public versus industry arbitrators, however. Although panels generally have three arbitrators, the parties are given a list of 10 arbitrators to rank in order of preference, resulting in the followings statistics:

  • In 289 cases investors named all public arbitrators as their possible choices for the panel.
  • In 50 cases investors named a single non-public arbitrator as a possible choice for the panel.
  • In 44 cases investors named two non-public arbitrators.

  • In 19 cases named three non-public arbitrators.

  • In 106 cases investors named four non-public arbitrators.
  • In 33 cases investors named five non-public arbitrators.
  • In 19 cases investors named six non-public arbitrators.
  • In 7 cases investors named seven non-public arbitrators.
  • In 3 cases investors named eight or more non-public arbitrators as possible choices for the panel.

To put it another way, investors in 29 percent of the pilot cases chose four or more non-public arbitrators as possible panelists.

Not surprisingly, broker-dealer firms made much different choices. In 96 percent of the cases, firms chose four or more non-public arbitrators to possible sit on the panel.

Pilot Program Cases Compared to Non-Pilot Cases
FINRA also examined differences in the disposition of pilot program cases as compared to non-pilot program cases.

Cases in the pilot program that had all public arbitrators settled 84 percent of the time. The result was an award in 13 percent of the cases, and the case was withdrawn 3 percent of the time.

Cases in the pilot program with panels made up of a majority of public arbitrators settled 86 percent of the time. The result was an award in eight percent of the cases, and the case was withdrawn 6 percent of the time.

Perhaps the most surprising result was the number of awards bestowed by arbitration panels that were not a part of the pilot program. Among all investors’ cases that were decided by a three-member arbitration panel, 71 percent of them settled, but 19 percent resulted in an award, which is 6 percent higher than the figure for all-public panels in the pilot program. Of course as shown by the statistics above, awards do not necessarily include damages.

Eight percent of the non-pilot program cases were withdrawn, and 2 percent had some other outcome, labeled by FINRA as miscellaneous.

As far as turnaround time is concerned, there wasn’t much of a difference. The non-pilot program cases closed in 14.6 months. Cases in the pilot program with an all-public panel closed in 15.8 months, and cases in the pilot program with a majority public panel closed in 13.5 months.

Finally, there was no appreciable difference among cases in the use of expert witnesses.

Guiliano Law Firm

The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.

Comments are closed.