FINRA’s Board of Governors to Consider Several DR Proposals

Tomorrow, FINRA’s Board of Governors is holding its December 2011 meeting, and on its agenda are several rule proposals in the Dispute Resolution area.  FINRA has been very active in continuously reforming and updating its Codes of Procedure for arbitration and mediation, to address concerns and critique from its various constituents. 

 The proposals related to FINRA arbitration are as follows:

Expungement for Persons Not Named as Parties in Arbitration Claims
The Board will consider a proposal to amend the Codes of Arbitration Procedure for Customer and Industry Disputes to adopt new rules that would permit persons who are the “subject of” allegations of sales practice violations made in arbitration claims, but who are not named as parties to the arbitration, to seek expungement relief by initiating In re expungement proceedings.

Subpoenas and Orders of Production in Arbitrations
The Board will consider proposed amendments to the Customer and Industry Codes of Arbitration Procedure (Rules 12512, 12513, 13512 and 13513) to standardize FINRA practices relating to arbitrator orders or subpoenas to non-party brokerage firms. The proposed amendments provide that a brokerage firm party requesting the appearance of a witness or production of documents, either by subpoena or arbitrator order, would pay the reasonable costs of the appearance and/or production. In addition, the amendments would codify FINRA’s current practice of allowing the non-party to raise objections to subpoenas or orders issued by arbitrators.

Threshold for Simplified Arbitration
The Board will consider proposed amendments to Rules 12800 and 13800 of the Customer and Industry Codes of Arbitration Procedure, respectively, to raise the threshold for simplified arbitration from $25,000 to $50,000. Under simplified arbitration procedures, claims are generally decided on the written submissions of the parties and no hearing takes place.

Also, for the first time in recent memory, FINRA is proposing an amendment to its Code of Mediation Procedure:

Mediator Selection
The Board will consider a proposed amendment to Rule 14107 of the Code of Mediation Procedure to provide the Director of Mediation with discretion to determine whether parties to a FINRA mediation may select a mediator who is not on FINRA’s mediator roster. Currently, the Mediation Code permits parties to select a mediator either from a list supplied by FINRA or from a list or other source of the parties’ choosing.

The proposal to raise the threshold for simplified arbitrations (paper cases) causes me the most concern.  Eliminating a live arbitration hearing (at least as the default procedure) in cases in which a claimant alleges damages between $25,001 and $50,000  introduces another category of claims in which a brokerage firm customer effectively will not have the opportunity to be heard.  While the rule permits a customer to request a live hearing and thus opt out of the Simplified Arbitration procedure, in reality, my understanding is that very few customers have exercised that opt-0ut right for claims under $25,000.  FINRA’s proposal to raise the monetary threshold for paper cases also implicitly recognizes that it may not be economically feasible for a customer claimant to go to a live hearing in cases in which the alleged damages are up to $50,000.

JG

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