The Financial Industry Regulatory Authority (“FINRA”) recently proposed a change to Rule 12403 of the Code of Arbitration Procedure for Customer Disputes to the Securities and Exchange Commission. FINRA’s proposal is that Rule 12403 be amended to (i) increase the number of public arbitrators on the list that FINRA sends parties to arbitrations with three arbitrators during arbitrator selection from 10 to 15 arbitrators and (ii) increase the number of strikes that a party may make to the public list in that situation from four to six strikes.

FINRA’s rationale for the proposed amendment is that when parties strike all of the non-public arbitrators (arbitrators with an industry affiliation) from the list of 10 possible arbitrators in three-arbitrator cases, FINRA fills the panel with selections from the two 10 person lists of public arbitrators and “[i]n doing so, there is a likelihood that FINRA will appoint an arbitrator who the parties accepted, but ranked lower on the public or chair-qualified public lists.” According to FINRA, claimants strike all non-public arbitrators in nearly seven out of 10 cases. As a result, the parties are functionally choosing three arbitrators from 20 candidates (instead of thirty candidates) a large amount of the time. To remedy this solution, FINRA’s proposal would increase the number of potential public arbitrators from which the parties may choose, while proportionally increasing the number of strikes available to the parties.

If the SEC approves the proposed amendment, FINRA will announce the effective date of the rule change in a regulatory notice within 90 days of approval and the effective date will be no more than 60 days after the publication of the regulatory notice.

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