June 25, 2013
I am the immediate past FINRA Director of Arbitration, having retired last January. I submit this comment with respect to SR-FINRA-2013-023 (Proposed Rule Change to Amend FINRA Rule 12403 of the Code of Arbitration Procedure for Customer Disputes to Simplify Arbitrator Selection in Cases with Three Arbitrators). For the reasons articulated below I believe the proposed rule, while well-intended, may have potentially adverse consequences for some customers. Specifically, whereas the current rule ensures that a customer desiring to have a non-public arbitrator on their case may do so, the proposed rule would eliminate that right.
The statistics in the rule filing show that under the current rule, which since early 2011 gives the customer the option of an all public or majority public arbitrator selection method, a significant percentage of customers apparently are willing to have a non-public arbitrator on their case. Customers express this by either: 1) not opting in to the All Public Panel Option (about 25% of the time according to the rule filing) or 2) opting in and ranking (not striking) at least some of the proposed non-public arbitrators (34% of the time).
Why a customer does not elect the All Public Panel Option (either expressly or by default), or ranks names of non-public arbitrators, is a matter of some conjecture. The rule proposal states a concern that some customers or attorneys might fail to opt in due to inexperience, and the proposed cure is to use in all cases the all public panel composition method. But it is not clear that these customers or attorneys (i.e., those who don't opt in within the 35 days after service of the Statement of Claim provided in the current rule) are all doing so through neglect or inexperience. In other words, at least some of these folks are doing it on purpose because they are willing – or even want – to have a non-public arbitrator on their case.
The FINRA data in the rule filing tell us that sometimes the customer evidently wants a non-public arbitrator. This is certainly so in the nearly 6% of the cases where the customer expressly declines the All Public Panel Option. How do we know? The rule filing states that about 25% of the time, customers use the Majority Public Panel Option, but that 77% of these customers use it by default. This means at least 23% use it on purpose. So, in 6% of the eligible cases – 23% of the 25% -- the customers must be using the Majority Public Panel Option intentionally.
Also, customers must at least be willing to have non-public arbitrators on their case when they leave names on the list of proposed non-public arbitrators when given the chance to strike all of them. We know through informal feedback from customers attorneys that this is true in some "bad broker" arbitrations, which involve allegations of poor broker conduct. Stated differently, sometimes there are customers or attorneys who want a non-public arbitrator on their bad broker case because such arbitrators know poor broker conduct when they see it. This is a right they will lose under the proposed rule.
How does the proposed rule eliminate this possibility? The rule in all three-arbitrator cases would default to the all public panel composition method. Any party – including the industry party – could strike up to all names of proposed non-public arbitrators. Where no names remain on the list of proposed non-public arbitrators, FINRA will appoint a public arbitrator to fill this seat, thus resulting in an all public panel. A customer wishing to ensure that they get a non-public arbitrator on their case – a right they can exercise under the current rule by not opting in – will lose that ability under the proposed rule, since in every case the all public panel composition method will be used. Worse, a proverbial bad broker who wants to avoid being judged by a non-public arbitrator would be able to ensure that outcome by striking all the non-public names. As the rule filing says, By striking all the arbitrators on the non-public list, any party can ensure that the panel will have three public arbitrators emphasis added.
A better approach would be to change the default: the customer should be given 35 days (the current time frame) to opt out of the all public panel composition method. If the customer does not affirmatively opt out, then the all public panel composition method would be followed. This proposal would preserve the customers right to ensure a non-public arbitrator on their case if they want one. It would also address the concern about inexperienced customers or attorneys expressed in the rule filing. And it would not slow down the process under Rule 12403(c)(2) lists of arbitrators are not generated until approximately 30 days after the last Answer is due, which under Rule 12303 is at a minimum 45 days after receipt of the Statement of Claim.
With some slight adjustments to the proposed rule, the stated objectives can be attained without the risks identified in this comment letter.