Introduction
On July 2, 2012, FINRA announced a voluntary pilot program that encourages participants in arbitrations of at least $10 million to vary FINRA's usual arbitration rules. The program does not necessarily break any new ground, but highlights FINRA's willingness to work with parties to craft arbitration procedures appropriate to particular cases.
Scope of Agreement
The pilot program calls for FINRA to appoint a senior case manager to each case in the program, even before the panel is appointed, to facilitate negotiation of modifications to FINRA's standard arbitration procedures. The program explicitly reminds the parties that they may agree to alter any of the procedures associated with the FINRA arbitration, including the arbitrator qualifications and selection, motion practice, discovery, official record of proceedings, hearing facilities, or explanation of decisions.
Even under current FINRA arbitration procedures, parties may agree to modify many aspects of the standard arbitration procedures (FINRA Codes of Arbitration Procedure 12105, 13105). In particular, they may agree to change location of hearings (FINRA Codes of Arbitration Procedure 12213, 13213), vary the number of arbitrators (FINRA Codes of Arbitration Procedure 12401, 13401), ask for an explained decision (FINRA Codes of Arbitration Procedure 12904(g), 13904(g)), or opt not to hold a hearing (FINRA Codes of Arbitration Procedure 12600, 13600). Thus, the pilot program is only a modest change. However, by rolling out the pilot and encouraging parties to think about ways to vary the procedures, FINRA is focusing attention on the parties' ability to craft procedures that meet the needs of particular cases, including in ways that were not explicit before. For example, rather than FINRA's usual procedure for arbitrator selection - in which FINRA provides a randomly-selected list of potential arbitrators from a pre-approved roster, and the parties strike or rank the arbitrators on the list - the parties could designate a particular arbitrator (including one not on FINRA's usual roster of arbitrators), require that the arbitrators have certain qualifications or experience, or have each party select an arbitrator with the two then picking a third arbitrator. The pilot also makes explicit that the parties can agree to depositions or interrogatories, or vary the location of an arbitration. Some of the usual FINRA arbitration venues are small, and do not have facilities such as video conferencing, wi-fi, breakout rooms, and other amenities useful in the presentation of a complex case.
How the Program Will Work
FINRA will contact the parties that are candidates for the pilot when eligible matters are filed. Additionally, parties to ongoing matters can ask that they be permitted to participate in the pilot. According to FINRA, there are over 200 cases that they are administrating that fit the qualification of at least $10 million in damages claimed. All parties will need to consent, both to participate in the program and to any specific changes.
The pilot envisions that parties will enter into a written stipulation that details the plan for administration of the case. Parties can mutually agree to terminate the agreement, but cannot do so unilaterally.
FINRA anticipates that arbitrators under the pilot will be paid at a higher (but unspecified) rate than regular arbitrators, and may be compensated for deliberation time, travel time, and other expenses. In addition, FINRA will charge an additional administrative fee of $1,000 per separately represented party.
Who Might Be Interested in the Program
The changes to the arbitrator selection system and arbitrator compensation may be attractive to parties to large cases, particularly in complex cases that would benefit from certain panel expertise.
Some parties may find the use of additional discovery, such as depositions, attractive, but other parties may decide that the added cost and time, and breadth of this discovery, take away one of the advantages of arbitration as compared to litigation, and will find no reason to agree to modify the rules. And because the pilot requires mutual consent to each modification to the standard rules, a party cannot be forced to accept any particular changes under the present program. Nevertheless, it appears that most parties will find some aspect of this pilot program useful, as it allows them greater flexibility and control in the FINRA arbitration forum.
More specific details on the pilot program are available here.
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