New Optional All Public Panel Rules
On January 31, 2011, the United States Securities and Exchange Commission (SEC) approved a rule change to provide customers in cases that proceed with three arbitrators the option to choose between two panel selection methods – a new panel selection method which is known as the Optional All Public Panel rule, or the current panel selection method which is the Majority Public Panel rule. Customers choose the panel selection method; neither the firms nor associated persons can choose the selection method. The rule change expands to all customer cases (whether the customer is a claimant or a respondent) the FINRA Public Arbitrator Pilot Program (Pilot Program) that gave investors filing an arbitration claim against certain firms the option of choosing an all-public panel.
Optional All Public Panel Rule 12403(d)
The new Optional All Public Panel rule provides for an all-public arbitration panel or a majority public panel depending on how the parties exercise their strikes. Under this option, FINRA will send the parties three lists – i.e., one with 10 chair-qualified public arbitrators, one with 10 public arbitrators, and one with 10 non-public arbitrators. Each separately represented party may strike up to four arbitrators on each of the chair-qualified public and public lists, leaving at least six arbitrator names remaining on each party’s lists. The rule, however, allows each separately represented party to strike up to all 10 arbitrators on the non-public arbitrator list. By striking all of the arbitrators on the non-public list, any party can ensure that the panel will have three public arbitrators.
If individually, or collectively, the parties strike all of the non-public arbitrators, FINRA will not appoint a non-public arbitrator to the case. Rather, FINRA will appoint the next highest ranked available public arbitrator to complete the panel. If none of the remaining arbitrators on the public list is available to serve, FINRA will appoint the next highest-ranked arbitrator appearing on the chair-qualified public list to complete the panel. If none of the remaining arbitrators on the chair-qualified public list is available to serve, FINRA will randomly appoint a public arbitrator using the Neutral List Selection System (NLSS).
Majority Public Panel Rule 12403(c)
The Majority Public Panel rule, which is the same as the current rule for selecting three arbitrators, provides for a panel of one chair-qualified public arbitrator, one public arbitrator, and one non-public arbitrator in every case. Under this option, FINRA will send the parties the same three lists that parties receive under the Optional All Public Panel rule – i.e., one with 10 chair-qualified public arbitrators, one with 10 public arbitrators, and one with 10 non-public arbitrators. Each separately represented party may strike up to four arbitrators on each list, leaving at least six arbitrator names remaining on each party’s lists. In the event no ranked arbitrators remain on the list of the required classification, or if all remaining arbitrators of the required classification are not available to serve, FINRA will randomly appoint an arbitrator of the required classification by using NLSS. This option ensures that FINRA appoints one non-public arbitrator on a three arbitrator panel.
New Rule Effectiveness
The new rule will apply to all customer cases requiring a three arbitrator panel in which arbitrator lists have not been sent as of January 31, 2011. Customers in these cases will receive a letter advising them of the new arbitrator list selection options and alerting them to the 35-day deadline to select the Optional All Public Panel rule.
FINRA will impose a very short moratorium on sending arbitrator lists in customer cases with three arbitrators, starting with the issuance of the SEC approval order and ending with publication of FINRA’s Regulatory Notice.
Closing the Public Arbitrator Pilot Program to New Cases
FINRA will not accept any new cases in the Pilot Program as of February 1, 2011, when the new rule becomes effective. Pilot Program cases in which parties have been sent arbitrator lists as of January 31, 2011 will remain in the Pilot Program. Pilot Program cases in which parties have not been sent arbitrator lists as of January 31, 2011 will be removed from the Pilot Program and will proceed under the Optional All Public Panel Rule.
FINRA will continue to evaluate the cases that remain in the Pilot Program according to a number of criteria.