Simplified Arbitration

Publicly available records provided by the Financial Industry Regulatory Authority (FINRA) and accessed on July 31, 2018, as well as a news article on The National Law Review report that FINRA has amended its rules to offer investors a new option for simplified arbitration proceedings.

According to Regulatory Notice 18-21, which FINRA published on July 23, 2018, FINRA’s current rules provide two options for arbitration proceedings where the parties of claims of $50,000 or less, not including interest and expenses. One is a decision by a lone arbitrator, which the arbitrator makes after reading the parties’ pleadings and any other materials they submit. The other is a full hearing with a single arbitrator. These procedures are provided by two separate codes: the Code of Arbitration Procedure (“Customer Code”) and the Code of Arbitration Procedure for Industry Disputes (“Industry Code”). The former allows a customer to request a hearing whether they are a claimant or a respondent, and the latter only allows claimants to request hearings. Hearings are generally held in person, the notice notes, and “there are no limits on the number of hearing sessions that can take place.” According to the Notice, FINRA amended these codes to offer a new hearing option for arbitration proceedings in circumstances where the parties have claims of $50,000 or less. The new option is “subject to regular provisions of the Codes relating to prehearings and proceedings, including all fee provisions,” though it has a number of “limiting conditions.” These conditions are designed to provide the parties “an opportunity to present their case… in a convenient and cost-effective manner” without all the demands of a traditional hearing. Per FINRA, these conditions are:

-Unless the parties agree to an alternative method, the hearing is held over the phone
-The claimants have a collective two hours to make their cases, and a half hour for rebuttals and closing statements, not including any questions asked by the arbitrator and the parties’ responses to those questions
-The above condition also applies to respondents;
-At their own discretion, the arbitrator is permitted to “cede his or her allotted time to the parties”
-The proceeding cannot exceed two hearing sessions, “exclusive of prehearing conferences,” in a single day
-The parties are not allowed to ask questions of the other parties’ witnesses
-The customer cannot “call the opposing party, a current or former associated person of a member party, or a current or former employee of a member party” to serve as a witness; similarly, members and associated persons are not permitted to call the customer of a member party to serve as a witness
-Members and associated persons cannot call an opposing party to serve as a witness

The new amendments will take effect on, and apply to claims filed after September 17th, 2018, according to FINRA. The Notice also says that FINRA will “create a dedicated hearing script” for these proceedings, and train arbitrators on the new model “by producing a unique video training module” and other training materials.