June 25, 2013

SEC Seeks Public Comment on Arbitrator Selection Rule Proposal

By Jill Gross

The SEC has published for public comment a rule change proposal filed by FINRA to alter the arbitrator selection method in three-arbitrator customer cases.   Comments are due by July 11, 2013.

Currently, customers must elect a panel composition method at the beginning of a case, with the default method being the Majority Public Panel option that results in one non-public (i.e. securities industry-affiliated) arbitrator sitting on a three-arbitrator panel.  Currently , customers can opt out of that default by choosing the All Public Panel option, giving them the ability to strike all arbitrators on the non-public list if they choose.

Recent statistics have shown that, since the advent of the All Public Panel option in 2011, customers prevailed 49% of the time in cases decided by all public panels but only 34% of the time in cases decided by majority public panels.  Additionally, customers were not electing the All Public Panel method 25% of the time (by default 77% of that 25%), perhaps out of lack of clarity or understanding of the panel composition options.

In light of these statistics, FINRA wisely moved quickly to simplify the panel selection methods and remove the step of requiring customers to elect the All Public Panel option and instead just implementing it as the only method.  Customers who want a non-public arbitrator can have one; customers who do not are not forced to.  Seems like a no-brainer to me.

What is more concerning to me is the large differential between customer success with an all public panel versus a majority public panel (49% vs. 34%).  I used to believe that industry arbitrators added value to some panels and were not inherently biased against customers merely by virtue of their classification.  I now need to revisit that belief in the face of this damning evidence.

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