In arbitration, however, instead of presenting their case to a judge and a jury, investors present their case to a Panel of arbitrators. Approximately 30 days after Respondent files its Answer, the parties receive a “randomly” selected list of arbitrators. The parties select their arbitrator choices these lists based on Arbitrator disclosure information provided by FINRA. According to the Code of Arbitration Procedure, each separately represented party may strike up to four of the arbitrators from each list for any reason.
These arbitrators, in FINRA securities arbitrations, have undergone certain training to be eligible arbitrators. Arbitrators are typically lawyers, business persons, accountants, former judges, and others. In connection with the arbitration process, the parties are provided a list of typically thirty (30) arbitrators, together with a summary of their educational and occupational background and prior awards that they have rendered.
On July 24, 2008, FINRA announced a voluntary two-year Public Arbitrator Pilot Program (Pilot Program), which allows investors in three-arbitrator cases naming only a participating firm to have a panel consisting of three public arbitrators, instead of two public arbitrators and one non-public arbitrator.
On February 1, 2011, customers in FINRA securities arbitrations were given the option to choose an all public arbitration panel in all cases with three arbitrators. As of December 2014, FINRA’s national roster of qualified arbitrations includes 3,527 public arbitrators and 2,834 non-public or securities industry related arbitrators.
Code of Arbitration Procedure
Under the FINRA Code of Arbitration Procedure, before appointing arbitrators to a panel, the Director of FINRA Securities Arbitration will notify the arbitrators of the nature of the dispute and the identity of the parties. Each potential arbitrator must make a reasonable effort to learn of, and must disclose to the Director, any circumstances which might preclude the arbitrator from rendering an objective and impartial determination in the proceeding, including: (1) Any direct or indirect financial or personal interest in the outcome of the arbitration; (2) Any existing or past financial, business, professional, family, social, or other relationships or circumstances with any party, any party’s representative, or anyone who the arbitrator is told may be a witness in the proceeding, that are likely to affect impartiality or might reasonably create an appearance of partiality or bias; (3) Any such relationship or circumstances involving members of the arbitrator’s family or the arbitrator’s current employers, partners, or business associates; and (4) Any existing or past service as a mediator for any of the parties in the case for which the arbitrator has been selected.
The Arbitrator’s Manual, specifically provides that: “[t]he arbitrators should avoid even the appearance of impropriety.”
But when FINRA makes a mistake, and frequently mis-classifies an arbitrator with industry ties as a public arbitrator, or FINRA chooses not to disclose information that the arbitrator does disclose to FINRA, at least according to the United States Court of Appeals for the Third Circuit, in its affirmation of the District Court’s decision in Lawrence Stone v. Bear Stearns & Co., Inc., Case 2:11-cv-05118-LDD, it is the investor’s fault.
Initial Pre-Hearing Conference
After the arbitrators are appointed by FINRA, based upon the respective selections or rankings of the arbitrators by the parties, an Initial Pre-Hearing Conference is conducted by the Panel, by telephone with counsel for the respective parties, where final hearing dates and other important dates, including the dates to file motions, or other matters, are scheduled.
Once the arbitrators are appointed to a Panel, the arbitrators can only be removed for cause of the failure to disclose any conflicts as set forth above.
Within approximately 30 days from the last final hearing session, the Arbitration Panel renders an Award.
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 Group
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