Does FINRA’s Large Arbitration Pilot Program Make Sense?

July 9, 2012Articles Westlaw News & Insight Securities Blog

Over the years, broker-dealers have relied upon the certainty of having customer disputes resolved through industry arbitration. Arbitration was favored because of a perceived cost savings through a streamlined arbitration process. This streamlined process afforded the parties limited discovery in the form of document and information requests (or also known as interrogatories-light).

Each party had defined obligations to produce certain categories of documents without any request. Moreover, depositions were only permitted in extremely rare circumstances. Arbitrators were selected from a list provided by FINRA. As such, arbitration was generally seen as a cost effective method to resolve customer disputes. At least as to large arbitration cases -- claims involving $10 million or more -- the certainty of streamlined arbitration may be no more.

On July 2 FINRA announced a pilot program for large arbitration cases that modifies this streamlined process. Although the pilot program is voluntary, there are a number of components to the program that may be troubling to broker-dealers who have become accustomed to the existing process and procedure.

The fundamental change envisioned by the pilot program is a more formal approach to arbitration that allows the parties to customize the arbitral process. The parties will have greater control over arbitrator selection, including the ability to select non-FINRA arbitrators for their cases. The parties can customize the method of exchanging information in advance of the arbitration, as opposed to the standard twenty-day disclosures. The one option that may be particularly troubling to broker-dealers is that the pilot program permits depositions and full-blown interrogatories.

With the exception of the arbitrator-selection process under the pilot program, the program sounds more and more like the manner in which a case is handled in a court, but without the procedural safeguards that you have in a court. For example, the defending party still will not have any real ability to file a motion to dismiss. Similarly, the parties still do not have the right to file for summary judgment or a real ability to appeal an award. So the question becomes, why bother with the pilot program if, instead, you could be in court with the same discovery rights but with greater safeguards.

Based upon my experience, I see that the industry will not fully embrace the pilot program. Instead, you may see a whipsaw effect and more and more broker-dealers having forum selection clauses for certain courts rather than arbitration at all. I suspect that the pilot program is going to make many in the industry revisit the arbitral process when they could have more control and better procedural protection in a court. Time will tell.

Josh is also an editor of the firm's Securities Compliance Sentinel Blog.
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