FINRA Revises Definition of Public Arbitrator and Proposes New Rules on Arbitrator Selection And Amendments to Discovery Guide


In June 2013, FINRA announced the SEC approved amendments to the definition of “public arbitrator” to further address concerns of the claimants’ bar that former industry arbitrators turned public arbitrators skew panels in favor of the industry. FINRA also proposed new rules on arbitrator selection to make it easier to select all-public panels and amendments to the discovery guide to address electronic evidence, “product cases,” and affirmations regarding documents not produced.

Amendments to Definition of “Public Arbitrator”

FINRA released Regulatory Notice 13-21 describing new criteria for who can serve as a public arbitrator that became effective July 1, 2013.

Historically, FINRA required three-person arbitration panels to be comprised of two public arbitrators and one industry arbitrator. The presence of an industry arbitrator is to provide the panel with an understanding of the complex nature of securities and the securities industry. The claimants’ bar raised concerns that the presence of an industry arbitrator on the panel resulted in bias and awards in favor of the securities industry.

To address and analyze the validity of these concerns, in 2011 FINRA allowed customers to opt for an all-public arbitration panel and it is tracking the results. The results show that customers who opt for all-public panels are awarded damages more often than customers who opt for panels with one industry arbitrator, but the gap has been closing. In the first half of 2013, FINRA statistics show that customers opting for all-public panels were awarded damages in 46% of cases whereas customers opting for panels with one industry arbitrator were awarded damages in 40% of cases.

An “industry arbitrator” was defined as (1) anyone who had worked for a broker-dealer in the previous five years; (2) anyone who spent a substantial amount of time working for a broker-dealer and is retired; or (3) an attorney who derives a minimum of 20% of her revenue from representing broker-dealers.

FINRA’s new rule includes additional financial professionals, such as anyone who has worked for a mutual fund or hedge fund. It also requires anyone who formerly qualified as an industry arbitrator to wait two years before becoming a public arbitrator. A person therefore cannot cease working for a broker-dealer and then immediately seek to be qualified as a public arbitrator. 

Proposed Rule to Simplify Election of All-Public Panels

When FINRA allowed customers to select all-public panels in 2011 it implemented a two-step panel selection method for the selection of arbitrators. If the customer selected the all-public panel, the customer would not receive a list of nonpublic (industry) arbitrators. FINRA’s tracking results show that approximately three-quarters of customers have selected all-public panels by affirmative election or by default through the two selection methods. Due to the high number of customers selecting all-public panels, FINRA has proposed one selection method to select arbitrators to simplify the process for customers selecting all-public panels and to allow the customers to at least view the list of available nonpublic arbitrators. The SEC has until Sept. 18, 2013, to take action on this proposed rule.

Amendments to the Discovery Guide

FINRA also proposed amendments to the discovery guide, which requires automatic disclosures of certain documents in the arbitration process. The amendments are further indications that FINRA arbitration is becoming a less cost-effective means to resolve disputes and more like a typical court action. 

There are three key proposals. First, FINRA seeks to provide guidance on electronic discovery by adding language that encourages the parties to confer and agree on the format of electronic document production. The proposal also allows arbitrators resolving discovery disputes to consider whether the form of a produced document is different than the original form and whether conversion to a new format affects the “appearance, searchability, metadata, or maneuverability” of the document.

Second, FINRA notes that the discovery guide does not include a list of documents that must be automatically produced for “product cases.” FINRA indicates that these cases involve a greater number of documents, including due diligence analyses, product management and status reports, and other documents that are not at issue in a typical customer case. FINRA does not propose requiring a specific list of documents but indicates it may do so in the future and reiterates that parties may request documents that are not set forth in the discovery guide.

Third, FINRA proposes parties be required to provide more detailed affirmations if they are unable to produce certain documents. Currently, if a party is unable to produce a document, FINRA requires that party to provide an affirmation that he conducted a good-faith search and there are no requested documents. FINRA’s proposal would require a party to affirm he conducted a search, identify the sources he searched, and state he does not have the requested document. The SEC has until Sept. 18, 2013, to take action on this proposed rule.

Loading...