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New FINRA Arbitration Program Strives For Flexibility
By Ian Thoms
Law360, New York (July 03, 2012, 7:47 PM ET) -- In launching a pilot program Tuesday for claims of $10
million or more, the Financial Industry Regulatory Authority injected some much needed flexibility into
its popular arbitration service and gave parties the long-desired ability to tweak the proceedings to
better suit their needs, attorneys say.
Under the new program, FINRA will allow parties to hire their own arbitrators and set custom
qualifications for those arbitrators. The self-regulatory body will also permit expanded discovery with
depositions and interrogatories, and give parties the option to develop their own procedures for
exchanging information prior to hearings.
Participation in the program is voluntary and open to all cases involving claims of $10 million or more,
FINRA said. But both parties have to agree to pick up any additional costs, and they must be represented
by counsel, according to FINRA.
"In response to the increasing number of very large cases, we wanted to introduce a more formal
approach to give parties greater flexibility and more control over the administration of their case," said
Linda Fienberg, president of FINRA's arbitration program.
FINRA, which is bankrolled by the Wall Street firms it regulates, handles most arbitration claims filed
against brokerage firms by investors and other securities industry participants. As of May, the selfregulatory body had received just under 2,000 new cases filed. It will send letters to parties in existing
cases involving claims of $10 million or more to solicit participation in the pilot.
Arbitration has grown in popularity in recent years as the U.S. Supreme Court has repeatedly endorsed
its validity and both district and state courts have become overburdened by traditional legal claims.
Given its increased use, attorneys welcomed FINRA's efforts to improve its dispute-resolution process.
"This move by FINRA represents a growing recognition of arbitration as an alternative dispute resolution
with sufficient safeguards to protect all the parties involved," said Bradley J. Bondi, a partner at
Cadwalader Wickersham & Taft LLP. "The arbitration system that we have today is more developed and
has far more safeguards than the system 20 years ago."
But Bondi and others cautioned that FINRA's pilot program might not prove as attractive as it appears at
first glance, depending on how the details shake out. FINRA acknowledged that the increased flexibility
it's offering could come with increased costs.
The selection of a non-FINRA arbitrator or outside venue could drive up costs, attorneys said.
Depositions and interrogatories would also boost the price tag, they said.
"Of course, the devil is in the details," Bondi said. "The choice of arbitrators is critical, and arbitration
can be as costly, if not more costly, than actual litigation if sufficient rules aren't in place."
While appreciative of the increased flexibility, some attorneys said they weren't sure they would avail
themselves of all of the options in the pilot program. They said FINRA's streamlined process is
sometimes the best option.
"I do like the idea of expanded discovery and maybe some deposition. The flexibility is nice to have,"
said Christopher B. Wells, head of Lane Powell PC's broker-dealer group. "But after trying a lot of cases
in court and a lot of cases in arbitration, I think I can get by without depositions. Sometimes depositions
help prepare the other side, and FINRA arbitration [cases] are really more dependent on document
discovery."
Wells noted that the pilot program, while welcome, does little to address the larger issues surrounding
arbitration. For one, appealing an arbitration decision will remain the sticky proposition it currently is.
Few arbitration awards are overturned, and Wells expects that will continue to be the case under
FINRA's program.
But Wells and other attorneys said they were glad to see FINRA was tinkering with its dispute-resolution
process in hopes of improving it. They said arbitration is a critical alternative to the clogged judicial
system.
"Any move to alleviate the burden on the overworked judicial system is positive, provided that the
parties have adequate safeguards," Bondi said.
--Editing by John Quinn and Lindsay Naylor.
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