On February 1, 2011, the Financial Industry Regulatory Authority (FINRA) amended its Code of Arbitration Procedure for cases brought against brokerage firms and their associated persons by their customers. In FINRA cases that proceed with three arbitrators, customers may now choose between two methods of selecting arbitrators - a new Optional All Public Panel Rule, or the current selection method, which results in a panel comprised of two public and one non-public arbitrators (the Majority Public Panel Rule). The selection option is available only to customers. Brokerage firms and their associated persons may not choose which method shall be used. Providing this customer option is intended to increase public confidence in the fairness of the FINRA dispute resolution process and rules. Selection of an all-public panel of arbitrators could significantly impact the dynamics of arbitration hearings and the decision-making process.
FINRA arbitration cases in which a customer seeks to recover more than $100,000 are automatically heard by three arbitrators. In smaller cases, parties may agree to a three person panel, but otherwise only a single, public arbitrator is appointed. In three arbitrator cases, the option to select an all-public panel is now available. Non-public arbitrators in FINRA cases (sometimes referred to as "industry" arbitrators) are, as with all arbitrators, qualified by FINRA to serve. However, they also have some current or past association with the securities industry, or devote a significant proportion of professional work to securities industry-related matters. Eliminating the non-public arbitrator on these panels means that whatever special expertise can brought to the panel will be lost. Public arbitrators are also qualified by FINRA to serve, but they have no connection to the securities industry. Public arbitrators have diverse backgrounds, and the elimination of a non-public arbitrator from panels may mean the loss of valuable insight and expertise on matters presented in cases.
Customers must weigh the all-public option against the loss of potentially important expertise. Brokerage firms and their associated persons likewise face the prospect of claims against them being heard and determined by arbitrators without the benefit of specialized knowledge and experience, leading to a heightened level of uncertainty. The absence of a non-public arbitrator may alter the manner in which both sides prepare and present their positions, and may increase costs. All of these factors may affect the parties' assessments of the settlement value of cases. The importance of having experienced defense counsel in these proceedings is now even more apparent, to bring expertise to the arbitrator selection process, and then to the presentation of the defense case in a manner tailored to the particular characteristics and understanding of public arbitrators who most often come from the same or nearby communities in which the case will be heard.