Client Alert: SEC Approves Amendments to Customer Arbitration

David N. Luder
October 10, 2013

By: David N. Luder

On September 23rd, the Financial Industry Regulatory Authority (“FINRA”) issued FINRA Regulatory Notice 13-30 announcing SEC approval of FINRA's proposed amendments to FINRA Rule 12403 of the Code of Arbitration Procedure for Customer Disputes. The amendments simplify the arbitration panel selection process in cases with three arbitrators. New Rule 12403 will apply to all arbitrations filed on or after September 30, 2013.

The History of FINRA Rule 12403

Since February 1, 2011, old-FINRA Rule 12403 provided customer-claimants in three-arbitrator cases the choice of two panel-composition methods:

  1. Majority-Public Panel Option provided for a mixed panel of one chair-qualified public arbitrator, one public arbitrator and one non-public arbitrator. This Panel option was FINRA’s (only) panel selection method for three-member panels prior to February 1, 2011.
  2. FINRA added the All-Public Panel Option on February 1, 2011. It permits any party to select a panel consisting of three public arbitrators. Customers were given the option of choosing such a panel-composition method in their statement of claim or within 35 days from service of the statement of claim. As the default method in the absence of a customer’s selection, old-FINRA Rule 12403 provided that the Majority-Public Panel Option (1) would apply.

Revised FINRA Rule 12403

New-FINRA Rule 12403 provides for only one panel selection method. Under the new rule, FINRA will provide the parties with lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The parties may strike four arbitrators on the chair-qualified public list and four arbitrators on the public list. Instead of opting-out from the Majority-Public Panel Option available under old-FINRA Rule 12403, under the revised rule, any party may select an all public arbitration panel by striking all 10 of the non-public arbitrators. If a party prefers a non-public arbitrator on the panel, the party can limit its strikes on the non-public list, but may nonetheless not get a non-public arbitrator if the other party strikes all non-public arbitrators.

FINRA's rule change comes after reviewing two years of arbitrator ranking data and awards history since the implementation of the arbitrator ranking system of (now) old-Rule 12403. FINRA found that customers in all-public panel arbitrations were awarded damages significantly more often than in mixed-panel arbitrations. FINRA’s review also led to its concern that pro-se litigants and attorneys unfamiliar with the selection process under old-FINRA Rule 12403 would mistakenly end up with a mixed-panel without understanding its potential significance. FINRA states that it sees two main benefits from the new rule:

  • Simplification of the arbitrator selection process while still providing the option of a mixed-panel arbitration; and
  • Preventing customer-claimants from inadvertently opting out of an all-public arbitration.

Outlook and Possible Implications 

We believe the rule change likely will lead to an even higher percentage of all-public panel arbitrations (which already stands at 77% over the last two years) and the potential risk for an even more increased claimants’ bent among the selected arbitrators.

If you would like additional information, please contact any member of the firm’s Securities Litigation and Regulation Group. (504) 589-9700, 

Barrasso Usdin client alerts are intended to provide general information about significant legal developments and should not be construed as legal advice on any specific facts and circumstances, nor should they be construed as advertisements for legal services. 

Barrasso Usdin Kupperman Freeman & Sarver, L.L.C. is located in New Orleans, Louisiana and has more than 30 attorneys. The Firm has experience litigating complex civil cases throughout the country, including all types of commercial disputes, class actions, environmental cases, intellectual property cases, insurance bad faith and coverage cases, and securities arbitrations, litigation, and regulatory matters.