Simplified Arbitration Approved by SEC

The Code of Arbitration Procedure for Customer Disputes (Customer Code) and the Code of Arbitration Procedure for Industry Disputes (Industry Code, and together with the Customer Code, the Codes) have provided two options for administering cases with claims involving $50,000 or less, excluding interest and expenses. The default option for arbitration was a decision by a single arbitrator based on the parties’ pleadings and other materials submitted by the parties.

The alternative option for arbitration was 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.

The SEC has approved to FINRA amendments to the Codes to provide an additional hearing option for parties in arbitration with claims of $50,000 or less, excluding interest and expenses (Special Proceeding).   When filing a statement of claim through the Dispute Resolution Portal (DR Portal), a claimant will be prompted to choose one of the three options, including a Special Proceeding.   When FINRA transmits the statement of claim to the respondent, FINRA will advise the respondent if the claimant has elected a Special Proceeding for arbitration.  The Special Proceeding option is subject to regular provisions of the Codes relating to pre-hearings and hearings, including all fee provisions, with several limiting conditions. 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.

The Special Proceeding option is subject to regular provisions of the Codes relating to pre-hearings and hearings, including all fee provisions, with several limiting conditions. 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 arbitration hearing. Specifically:

  • A Special Proceeding is held by telephone unless the parties agree to another method of appearance;
  • The claimants, collectively, are limited to two hours to present their case(s) and half hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions;
  • The respondents, collectively, are limited to two hours to present their case and half hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions; 0 notwithstanding the above conditions, the arbitrator would have the discretion to cede his or her allotted time to the parties;
  • In no event could a Special Proceeding exceed two hearing sessions, exclusive of prehearing conferences, to be completed in one day; The parties will not be permitted to question the opposing parties’ witnesses;
  • The Customer Code provides 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; and
  • The Industry Code provides that members and associated persons could not call an opposing party as a witness.

FINRA anticipates that arbitrators will follow the usual order of proceedings. The claimant(s) will present an opening statement, followed by the respondent(s)’ opening statement.  The claimants will then present their case-in-chief, followed by the respondent(s)’ case-in-chief.  Any rebuttal would occur afterwards. The arbitrator will proceed with his or her questioning.  The claimant(s) will present a closing statement, followed by the respondent(s)’ closing statement. With the exception of the requirements for Special Proceedings, an arbitrator may vary the hearing procedure in his or her discretion, provided all parties are allowed a full and fair opportunity to present their respective cases.

FINRA will create a dedicated hearing script for Special Proceedings that the arbitrator will read at the start of the Special Proceeding. FINRA will also modify its Initial Pre-Hearing Conference Script (IPHC 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. The IPHC Script will also address the need for parties to have all exhibits available while they testify telephonically.

The amendments discussed are effective September 17, 2018 and apply to cases filed on or after that date.

Additional details of the Additional Hearing Option can be found in Regulatory Notice 18-21.