SEC Approves Amendments to the Customer Code of Arbitration Procedure Regarding Panel Selection in Cases with Three Arbitrators
| Regulatory Notice | |
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Notice Type Rule Amendment |
Referenced Rules & Notices FINRA Rule 12403 |
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Suggested Routing Compliance Legal Registered Representatives Senior Management |
Key Topics Arbitration Customer Code of Arbitration Procedure Panel Selection |
Executive Summary
The Securities and Exchange Commission (SEC) approved1 amendments to FINRA Rule 12403 (Cases with Three Arbitrators) of the Code of Arbitration Procedure for Customer Disputes (Customer Code) to increase the number of arbitrators on the public arbitrator list that FINRA sends to parties during the arbitration panel selection process from 10 to 15. The amendments also increase the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule.
The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017, for panel selection in customer cases with three arbitrators.
The text of the amendments is set forth in Attachment A.
Questions concerning this Notice should be directed to:
Background & Discussion
FINRA allows parties to participate in selecting the arbitrators who serve on their cases. Parties select their arbitration panel from computer-generated lists of arbitrators that FINRA sends them. Under FINRA Rule 12403(a), in customer cases with three arbitrators, FINRA sends the parties three lists: a list of 10 chair-qualified public arbitrators, a list of 10 public arbitrators and a list of 10 non-public arbitrators. The parties select their panel through a process of striking and ranking the arbitrators on the lists. Under Rule 12403(c)(2), each party is allowed to strike up to four arbitrators on the chair-qualified public list and four arbitrators on the public list. At least six names must remain on each list. However, Rule 12403(c)(1) provides for unlimited strikes on the non-public list so that any party may select a panel of all public arbitrators in a customer case.
When parties collectively strike all of the non-public arbitrators from the list, FINRA fills all three panel seats from the two 10-person lists of public arbitrators. Specifically, the Customer Code provides that when parties collectively strike all of the arbitrators appearing on the non-public list, FINRA returns to the public list to select the next highest ranked available arbitrator to fill the seat. If no public arbitrators remain available to fill the vacancy, FINRA returns to the chair-qualified public list to select the next highest ranked public chair. In doing so, there is a likelihood that FINRA will appoint an arbitrator who the parties accepted, but who is ranked lower on the public or chair-qualified public lists.
FINRA believes that parties should have a greater choice of public arbitrators during the panel selection process. Therefore, FINRA amended Rule 12403(a)(1) to increase the number of arbitrators on the public arbitrator list FINRA sends to parties during the arbitration panel selection process from 10 to 15. FINRA also amended Rule 12403(c)(2) to increase the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule.
Effective Date
The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017 for panel selection in customer cases with three arbitrators.
1See Securities Exchange Act Release No. 78836 (September 14, 2016), 81 FR 64564 (September 20, 2016) (Order Approving File No. SRFINRA- 2016-022).
Attachment A
New language is underlined; deletions are in brackets.
12403. Cases with Three Arbitrators