A rule change proposed by FINRA to raise the maximum dollar amounts for customer disputes that can go through simplified arbitration can minimize litigation costs for plaintiffs and defendants. However, it could also mean individual registered reps and RIAs holding any FINRA licenses may see more arbitration awards against them, according to a securities attorney.
FINRA filed a proposal with the SEC to amend FINRA’s code of arbitration procedure to raise the limit for simplified arbitration to $50,000 from its current $25,000. The SEC published the proposed rule change in the Federal Register at the end of February, and the comment period ends March 20.
In a simplified, or paper-only, arbitration, one arbitrator oversees the case, discovery is limited and there is no hearing unless it’s requested by the customer, says Jennifer Woods Burke, a securities attorney and principal of compliance consulting firm CompliGuide.
On the plus side for FINRA-regulated firms, simplified arbitration where there are no hearings will depress litigation and forum costs, Woods Burke says. According to FINRA’s proposed rule change, claims between $25,000 and $50,000 are currently assessed a $450 fee for four hours or less of the arbitrators time. In cases with multiple conference calls and multiple hearings, the fees accumulate quickly, says Woods Burke.
FINRA estimates customers may save $1,900 with the increased arbitration limit.
However, the downside for individual advisors and registered representatives is that "with limited discovery and no ability for the financial representative and his attorney to face the complainer and test their credibility, there may be more to lose...an arbitration loss is permanent on the U4", Woods Burke says.
“Registered representatives should be mindful … that some customers may be emboldened by the fact that they do not have to face their registered representative and justify their personal actions or negligence to a panel of arbitrators. Yes, in theory the firm and rep could save some on lawyers fees but in the end they may end up paying out more on the claim than if it was pushed to a hearing and crumbled."
The $25,000 threshold has been in place since 1998. Back then, 21% of all arbitration cases went through the simplified procedure, but the $25,000 limit currently captures just 10% of FINRA’s caseload. Raising the maximum to $50,000 would likely increase the percentage of simplified cases to 17%, according to the text of the proposed rule change. It’s not clear when the rule change might go into effect.
Once the comment period is over, depending on the comments received, FINRA may propose amendments — if these are substantial, the FINRA Board must approve them, and substantial changes might even prompt the SEC to publish the revised rule in the Federal Register for another comment period, according to a FINRA spokeswoman.
Danielle Reed writes for Financial Planning.