By John Filar Atwood
The SEC has approved FINRA’s proposed amendment to its rules to provide a new option for simplified arbitration. Effective September 17, parties in arbitration with claims of $50,000 or less will be given an additional hearing option.
Current procedure. Prior to the amendment, FINRA’s codes of arbitration procedure for customer and industry disputes provided two options for administering cases with claims involving $50,000 or less. The default option is a decision by a single arbitrator based on the parties’ pleadings and other materials submitted by the parties, and the alternative option is a full hearing with a single arbitrator.
Under the customer code, a customer may request a hearing regardless of whether the customer is a claimant or respondent, and under the industry code, only the claimant may request a hearing. If a hearing is requested, it is generally held in person, and there are no limits on the number of hearing sessions that can take place.
New system. FINRA amended the codes to provide an additional hearing option for parties in arbitration with claims of $50,000 or less (a special proceeding). When filing a statement of claim through the dispute resolution portal, a claimant now will be prompted to choose one of the three options, including a special proceeding.
The special proceeding option is subject to the regular provisions of the codes relating to prehearings and hearings, including all fee provisions, with several limiting conditions. FINRA said that the conditions are intended to ensure that parties have an opportunity to present their case to an arbitrator in a convenient and cost-effective manner that is less demanding than a regular hearing.
Conditions. The conditions include that a special proceeding must be held by telephone unless the parties agree to another method of appearance. The claimants and respondents are limited to two hours to present their cases and one-half hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions.
Under the new procedure, the arbitrator will have the discretion to cede his or her allotted time to the parties. However, a special proceeding may not exceed two hearing sessions, exclusive of prehearing conferences, to be completed in one day.
In a special proceeding, the parties will not be permitted to question the opposing parties’ witnesses. Parties must still abide by the customer code provision that the customer could not call the opposing party, a current or former associated person of a member party, or a current or former employee of a member party as a witness, and members and associated persons could not call the customer of a member party as a witness. They also must adhere to the industry code stipulation that members and associated persons cannot call an opposing party as a witness.
FINRA indicated that it will create a dedicated hearing script for special proceedings that the arbitrator will read at the start of the proceeding. FINRA also intends to modify its initial pre-hearing conference script so that parties in special proceedings will have advance knowledge of the rule’s requirements, including the pre-hearing exchanges of documents and exhibits. Unlike regular hearings, parties will need to file their exhibits with FINRA before the special proceeding so that FINRA may send the exhibits to the arbitrators.
FINRA plans to create a video training module for arbitrators that covers proceedings. FINRA also will post training materials on its webpage. FINRA said that it will monitor the new process to determine whether it should modify the program in any way.