In a remarkably short time period, the Securities and Exchange Commission approved a proposed rule change filed by FINRA to provide investors with the option of selecting an all public arbitrator panel in arbitrations filed against their brokers or brokerage firms in FINRA’s Dispute Resolution forum. Thus, customer claimants have the option of eliminating an industry-affiliated arbitrator on all three-arbitrator panels hearing claims of $100,000 or more in damages. All of the regulatory filings, including today’s SEC approval order and the details of the all public panel option, can be accessed on the FINRA web site, here.

Today’s approval order comes just a little more than three months after FINRA filed its proposal with the SEC on October 25, 2010. The SEC published the proposal for public comment on November 12, 2010 with comments due by December 3, 2010, and FINRA responded to the comments on December 16, 2010 by filing Amendment No. 1 to the proposal. This fast-tracked approval process reflects an urgency by both the SEC and FINRA to respond to pressures from investor advocacy groups. These pressures arose, in part, from the SICA Fairness Study, in which I, along with Professor Barbara Black, found that a majority of investors perceived that FINRA arbitrators were biased. Because the Dodd-Frank Act mandated the SEC to conduct a review of securities arbitration, which is considered mandatory because virtually all broker-dealers include a pre-dispute arbitration clause in their customer agreements, FINRA could no longer justify its insistence on a non-public (industry-affiliated) arbitrator on all three-arbitrator panel customer cases.

I predict that the SEC’s Dodd-Frank study of FINRA arbitration will now conclude that this latest reform enhances the fairness of the forum. As a result, the SEC will refrain from prohibiting mandatory securities arbitration.