The Financial Industry Regulatory Authority, Inc. (FINRA) announced that it filed with the Securities and Exchange Commission (SEC or Commission) a proposed rule to amend the panel composition rule, and related rules, of the Code of Arbitration Procedure for Customer Disputes (Customer Code), to provide customers with the option to choose an all public arbitration panel in all cases.
Under FINRA Dispute Resolution rules, parties in arbitration participate in selecting the arbitrators who serve on their cases. For customer claims of more than $100,000, the Customer Code currently provides for a three arbitrator panel comprised of a chair-qualified public arbitrator, a public arbitrator, and a non-public arbitrator. FINRA uses the computerized Neutral List Selection System (NLSS) to generate random lists of 10 arbitrators from each of these categories. The parties select their panel through a process of striking and ranking the arbitrators on the lists generated by NLSS.
The Customer Code permits the parties to strike the names of up to four arbitrators from each list. The parties then rank the arbitrators remaining on the lists in order of preference. FINRA appoints the panel from among the names remaining on the lists that the parties return.
Amended Customer Code Proposal
FINRA is proposing to amend the Customer Code to provide customers with the option to choose between two panel selection methods — the current panel selection or the new Optional All Public Panel provision, which if chosen by the customer, would allow parties to select an all public arbitration panel.
Under this new provision, FINRA would send the parties the same three lists of randomly generated arbitrators that they would have received under the Majority Public Panel option, but FINRA would allow each party to strike any or all of the arbitrators on the non-public arbitrator list. If individually, or collectively, the parties struck all of the non-public arbitrators, FINRA would complete the panel by appointing a public arbitrator. Thus, by striking all the arbitrators on the non-public list, any party could ensure that the panel would have three public arbitrators.
Guiliano Law Group Filed Comment
On December 6, 2010, the Guiliano Law Group filed its comments to SR-FINRA-2010-053 with the Securities & Exchange Commissions stating that “While the presence of an industry or non-public arbitrator in some cases can assist the arbitration panel in understanding industry rules and practices, particularly in the most egregious cases, in many cases industry arbitrators, based upon their own experiences or experiences involving litigation against their masters, prejudge and are outright bias against the claims of public customers. We are pro-choice.”
FINRA All Public Arbitrator Pilot Program Results
Also on December 6, 2010, FINRA released the results of its all public arbitrator pilot program. As stated by the Guiliano Law Group, “it appears that arbitration claims before all public panels were almost 50% more likely to settle or not go to a final award (13% versus 19%), than cases where an industry arbitrator was assigned to the arbitration panel.”
Of the cases going to a final arbitration award in the public arbitrator pilot program customers prevailed 68% of the time, almost 40% more than customers that tried their cases at a final hearing before a panel of arbitrators consisting of at least one industry arbitrator.
The firm’s principal, Nicholas J. Guiliano, stated “Whether any bias is actual or merely a perceived bias that taints the legitimacy of the process, public customers ought to have the right to choose whether they want to have their claims tried before a Panel consisting of solely public arbitrators or with one person with an association with the securities industry. Accordingly, we strongly support SR-FINRA-2010-053 proposed changes to amend the panel composition rule, and related rules, of the Code of Arbitration Procedure for Customer Disputes (Customer Code), to provide customers with the option to choose an all public arbitration panel in all cases.”
Guiliano Law Group
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