FINRA to launch new program for large arbitrations

A pilot program that will give parties more flexibility in securities arbitration cases involving $10 million or more in claims will launch on July 2, a Financial Industry Regulatory Authority executive said on Tuesday.

The FINRA program will, generally, allow parties in large disputes to "shape their own arbitration," said Linda Fienberg, president of FINRA's dispute resolution unit.

Parties that agree to use the pilot program can bypass certain FINRA arbitration rules and procedures by customizing the process to better suit their cases, Fienberg said in remarks on Tuesday during a New York City Bar Association seminar.

For example, parties will be able to hire arbitrators that may not be in FINRA's arbitrator pool and develop their own procedures for exchanging information prior to the hearing, among other things, Fienberg said.

FINRA, Wall Street's industry-funded watchdog, runs the arbitration forum in which most investors and securities industry members are required to resolve their legal disputes against brokerage firms.

Fienberg began publicly discussing initial plans for the tailored program last year. She expects the program will be used mostly in cases involving institutional investors.

The pilot program is FINRA's response to a surge in cases in which claimants are requesting significant awards, Feinberg said on Tuesday. There are more than 200 cases pending in FINRA's arbitration forum involving claims over $10 million, she said. Claimants, in a small number of those cases, are requesting as much as a $100 million, Feinberg said.

Some cases involve losses tied structured products, typically notes whose performance is tied to an underlying security, such as a stock or index. There were only four such cases filed in FINRA's arbitration unit in 2008, at the start of the financial crisis. There were 156 in 2011 and investors have filed 60 structured product cases with FINRA so far this year.

While large cases represent a small fraction of the roughly 6,500 pending at FINRA, they can be complex and extraordinarily time-consuming.

"The parties really do require special attention," said Michael Sullivan, a lawyer at Coughlin Duffy LLP in Morristown, New Jersey. Lawyers who file non-securities related arbitration cases outside of FINRA are often accustomed to customizing the process, Sullivan said. "I think FINRA is responding to that."

FINRA has already tried the customized approach in a small number of cases, Fienberg said. Parties with cases involving less than $10 million can also use the program, but it may not be worth the extra costs involved, according to Fienberg.

For example, parties may want to rent facilities outside of those that FINRA offers or agree to pay certain compensation to certain arbitrators, she said. Those costs could likely exceed FINRA's fees, which include $450 for each four-hour hearing session.

FINRA plans to ask the U.S. Securities and Exchange Commission to formalize the program through a new rule if the pilot is successful, Fienberg said. FINRA would have to offer the program for at least two years before it can consider a rule filing, according to Fienberg.

(Published by Reuters - June 12, 2012)