FINRA Incorporates New Special Proceeding Option for Small Claims Parties into its Operations
Posted on Categories Arbitration, FINRA Code of Arbitration, Securities ArbitrationTags , , ,

With the new Rule now in effect, we wanted to see how FINRA Dispute Resolution has gone about introducing Claimants to this new innovation and to view, from the investors' perspective, the information and guidance available from FINRA that introduces the new option.

The new Special Proceeding option, added to the FINRA Simplified Arbitration procedures (Rules 12800 and 13800), effective September 17, 2018, provides an intermediate route that customers and intra-industry claimants with disputes not exceeding $50,000, can utilize, instead of the widely different "on the papers" default procedure and the full-blown, in-person hearing option.

For an easier discussion, we'll address only the customer provision, Rule 12800(c), although readers should keep in mind that the new Special Proceeding option is available in industry, small claims matters as well (see Rule 13800(c)). To review, new subparagraph 12800(c) was approved by the SEC on May 17, 2018, pursuant to a proposal submitted by FINRA (SR-FINRA-2018-003).

Small Claims SP: How It Works

The new "Special Proceeding" will be conducted by telephone conference call generally, and will last no longer than a day. During that time, the customer will present her case within a two-hour allotted time limit. She may call no witnesses who are or were associated with a member party and there is no time allotted to cross-examine the opposition's witnesses.

The member party is similarly restricted. It has two hours as well and may not call the customer of a member party as a witness. In this way, both sides are prevented from end-running the "cross-examination" ban by calling a contra-party as a witness. Each party is allotted one half hour to offer rebuttal and make closing statements. Three hours remain in the 8-hour day for the Arbitrator, which s/he may use, not use, or cede to the parties.

FINRA Guidance & Information

FINRA-DR has posted descriptive language on the online claim filing system that guides customers through the three options available to them. The description of the Special Proceeding lies between the default choice of a "paper" proceeding and the full-blown hearing. We presume, without knowing, that similar descriptive language appears in the FINRA correspondence that goes out to claimants (ed: recall that pro se Claimants -- which many small claims investors are -- are not obliged to use the online claim filing system. For that matter, investors who are occasional respondents in a simplified claim filed by a broker-dealer will not see the online language either; query whether similar guidance exists in the online answer filing section). FINRA will necessarily cover all of these bases, to ensure that use of the Special Proceeding by small claims investors will be maximized.

Clinics are Psyched

We hear from some of the Securities Arbitration Clinics, which use Rule 12800 regularly for their cases that they favor the Special Proceeding and one at least says they expect to use it as a default choice. FINRA guides the investor to Rule 12800(c) for "detailed information" in the online explanation. In fact, FINRA has a Simplified Arbitration Page under the "Learn About Arbitration" section of its Website that is more plain-English (and probably has a Spanish translation, too). A reference to Regulatory Notice 18-21 appears on that Page; it provides far more guidance than a simple reference to the Rule's language does. Investors are being asked to make a material choice upfront and many will not have the guidance of counsel, so more information at the online gate seems prudent.

Arbitrators Well-Prepared

That the Clinics incline toward using this new procedure means to us that all of the FINRA guidance available should be placed before the incipient claimant. FINRA has done a thorough job, in our view, advising its arbitrators about the Special Proceeding. An article in the arbitrator newsletter, TNC (The Neutral Corner), tells arbitrators about the new procedure and points to the Regulatory Notice. FINRA has developed and posted a Special Proceedings hearing script for arbitrators and, for the IPHC -- which does apply in Simplified Arbitration -- FINRA has also modified portions of the ever-growing IPHC script.

Thank the Stars - a Video!

The best information guide in our judgment -- and, again, it's located in the "Information for Arbitrators" section of the Website, where only the sophisticated party is likely to forage for insights -- features a video presentation by FINRA-DR staff members that deals with the nitty-gritty aspects of the procedure. The staff has thought this new procedure through and is ready with detailed guidance for arbitrators about how to proceed.

In viewing this video for arbitrators, we finally understood what the Rule means about arbitrators ceding control of their allotted time. The discovery procedures are covered in greater detail with reference to deadlines and arbitrator interplay. It becomes clear that one's initial choice about using the Special Proceeding is not irrevocable and, even, that the parties upon mutual agreement can morph the Special Proceeding into an in-person or telephonic hearing, should the one-day's time prove too short to finish. While this video is just ten minutes, it's packed with content.

(ed: *Many thanks to the FINRA staff who assisted us in learning about the new procedures surrounding the Special Proceeding and in navigating to the relevant FINRA-DR Website Pages. **Perhaps, the Small Claims investors' first notice of the Special Proceeding occurs when s/he enters the online claim filing system and the system invites a choice to proceed. We'd suggest a pop-up screen or the like that, right there, lists all of the resource material, especially the video, that we've mentioned above. That would be an invitation to know more before accepting the default choice. Similarly, the Simplified Arbitration page for parties now lists just three resources. That list would do well, we think, to include links to all of the materials we've mentioned.) (SAC Ref. No. 2018-43-01)

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