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Mini-Survey – Customer-Member Awards: Three-Member Panel Composition and Case Duration
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The SEC’s recent approval of FINRA’s new Arbitrator Classification Rule Proposal (see SAA 2015-08), which we expect will substantially deplete the ranks of public arbitrators and, we fear, may substantially delay cases, made us wonder how another measure that increased the demand for public arbitrators affects FINRA Arbitration’s ability to process its caseload.

Prior to Feb. 1, 2011, the norm for three-member panels in customer cases was two public and one industry panelist, the Majority Public Panel (MPP). Since that date, customers entitled to three-member panels may officially elect to choose three public arbitrators, the All-Public Panel (APP). Because the ranks of public and industry panelists are evenly matched (see our discussion of FINRA stats in SAA 2015-11), but the former are already used far more often than the latter (filling 82% of the arbitrator slots on Awards issued by FINRA in 2014), we wondered whether the dynamics related to having three, rather than only two, public arbitrators would, in any way, affect the time it takes to resolve the case. One factor we identified as a realistic possibility, and tried to test, was whether the absence of arbitrators with experience in the securities industry would cause the parties to take more time to “educate” them about the case, through the use of expert witnesses and otherwise.

Methodology. We limited our sample to Awards issued in FINRA Customer-Member cases filed since Feb. 1, 2011 and decided by three-member panels after at least two hearings (ed: a single hearing might address only expungement); we excluded stipulated Awards, as arbitrators don’t control the timing of those outcomes. To test our “education” hypothesis, which we believe would be more likely to be a factor when the stakes are high, we also looked at a subset of those Awards in cases where the customer requested at least $500,000 in damages. We then separately calculated for APPs and MPPs, within the foregoing set and subset, the average number of hearing sessions, average turnaround time (ATT, i.e., the length of time from filing of the case to issuance of the Award) and the length of time from the first hearing to the Award. Knowing that parties may take time to become accustomed to the new option, we also calculated the median filing date and discovered that, indeed, MPP cases had a head start that might account for the difference in ATTs that we observed. We therefore also conducted the same survey on another subset – cases filed on or after Jan. 1, 2012, by which time, our results showed, the advantage in filing times had reversed – as well as the subset of those cases with compensatory claims of $500,000 or greater. We present our results in the chart below.

Screen Shot 2015-03-26 at 5.16.34 PMFindings. We found that APP cases consistently had a higher average number of hearings, a result consistent with our “education” hypothesis, and the difference was greater in cases filed since 1/1/12. However, the comparative ATTs in APP cases was only slightly less than in MPP cases overall, they were less than in MPP cases when the claims were at least $500,000, and this pattern held even when one controlled for median filing dates. Even more significantly and paradoxically, the days between the first hearing and Award were less for APP cases than for MPP cases in the full set and every subset, even though one would expect that the length of that phase of the arbitration would be impacted by the number of hearings and not by the filing date. It seems that, even though APPs require more hearings than MPPs, they still get the job done as efficiently, or more efficiently, than the latter.

(ed: *Most discussions about the advantage of APPs to customers focus on the supposition that they will be less biased toward the industry and, therefore, more likely to favor the customer. Our survey suggests a hidden advantage – a prompter outcome. **Please note this one caveat: the longer it takes a case to resolve, the less likely it is to show up in our survey. It is possible that currently pending cases might change the results of this survey in the future. ***These results help us to understand FINRA’s optimism that public arbitrators will be able to handle their individual caseloads even when there are fewer of them as a result of the new Arbitrator Classification Rule (although we remain skeptical). ****We have urged the Dispute Resolution Task Force to recommend that FINRA add more required information to its Awards – in particular, the names of testifying experts. With this information, one could actually see if APPs elicited the greater use of experts and which side uses experts more commonly, and judge better the impact of such use on the time and costs involved in trying a case at FINRA.)

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