Each of the regulatory settlements to date with auction rate securities (“ARS”) issuers and brokers has included a provision requiring that the firm consent to a "special arbitration procedure” to deal with investors' consequential damages relating to the sudden illiquidity of ARS. On December 16, 2008, the Financial Industry Regulatory Authority (“FINRA”) announced the details of this “special arbitration procedure.”
The procedure is designed to offer investors a faster and less costly alternative to the standard FINRA arbitration procedure, though investors retain the right to use the standard procedure if they so choose. According to FINRA, under this special arbitration procedure, firms will pay all fees related to the arbitration and will not be permitted to contest liability or raise the investor’s failure to cash out its ARS holdings as a defense to liability. While claims for under $1 million will be heard by a single public arbitrator, parties with claims exceeding $1 million may mutually agree to have a panel of three arbitrators.
Approximately 275 ARS claims were filed with FINRA under its standard procedure as of the end of November. These these investors will be given the option to switch to the special arbitration procedure. For more details on this issue, please see FINRA’s recent press release here.