Alert February 22, 2011

FINRA Amends Rules Governing Panel Composition in Customer Arbitrations

On February 1, 2011, FINRA issued Regulatory Notice 11-05 announcing the effectiveness of amendments to the Code of Arbitration Procedure for Customer Disputes that make changes to the methodology for selecting the panel for customer arbitrations.  The amendments, which replace Rules 12402 through 12406 with new Rules 12402 and 12403 and renumber Rules 12407-12414, became effective as of February 1, and apply to all customer cases in which FINRA had not sent lists of arbitrators to the parties by that date.

Rule 12401, which is unchanged, provides that in cases involving claims of $25,000 or less, the panel consists of one arbitrator.  In cases involving claims of $25,000 up to $100,000, the panel consists of one arbitrator unless the parties agree in writing to three arbitrators.  In cases involving claims of more than $100,000, the panel consists of three arbitrators unless the parties agree in writing to one arbitrator.  New Rule 12403, which applies to cases having three arbitrators, provides customers with two options for panel composition in arbitration.  The first option, which was available under the prior rule, is the majority-public panel; it calls for a panel composed of a chair-qualified public arbitrator, a public arbitrator and a non-public arbitrator.  The new second option is the all-public panel, which calls for a panel composed of a chair-qualified public arbitrator and two public arbitrators.  Under the new procedure for selecting arbitrators pursuant to the all-public panel option in Rule 12403(d), FINRA will generate lists of public and non-public arbitrators, but non‑industry parties may ensure an all-public panel by striking all non-public arbitrators on the list.

Non-public arbitrators are arbitrators with connections to the securities or commodities industries, as a result of having worked in those industries or having represented the industries, for example, as an attorney or accountant, for a substantial part of the person’s time.  Public arbitrators are persons who would not be considered non-public arbitrators and are not associated with or related to such a person (as more fully described in Rule 12100(u)).  Chair-qualified arbitrators, as defined in Rule 12400(c), are public arbitrators who have completed chairperson training provided by FINRA and are either bar-qualified attorneys or have served as an arbitrator through award on at least three arbitrations administered by an SRO.

The new amendments do not apply to disputes that involve only industry parties.