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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, according to a Financial Industry Regulatory Authority executive.
The FINRA program generally allows 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 case needs.
For example, parties can hire arbitrators that may not be in FINRA’s arbitrator pool and develop their own procedures for exchanging information prior to the hearing.
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.
The pilot program is FINRA’s response to a surge in cases in which claimants are requesting significant awards, Feinberg said. There are more than 200 cases pending in FINRA’s arbitration forum involving claims more than $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 to 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.
FINRA plans to ask the SEC 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.
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