Securities Litigation

The Financial Industry Regulatory Authority ("FINRA") recently filed a proposed rule change with the Securities and Exchange Commission ("SEC") to amend Rules 12214 and 12601 of the Code of Arbitration for Customer Disputes ("Customer Code") and Rules 13214 and 13601 of the Code of Arbitration Procedure for Industry Disputes ("Industry Code") (collectively, "Codes") to require that parties to an arbitration to provide more advance notice before cancelling or postponing a hearing or pay a higher cancellation fee if advance notice is not provided. These changes are aimed at increasing the efficiency and effectiveness of the arbitrations by retaining qualified arbitrators and also encouraging parties to assess significant case issues sooner in the process. Specifically, the proposed change to Rules 12601 and 13601 would increase the advance notice period for cancelling or postponing a hearing from three (3) business days to ten (10) days. Furthermore, if a request is made less than ten (10) days prior to the hearing, the amendments propose to increase the late fee for cancelling or postponing a scheduled hearing from $100.00 per arbitrator to $600.00 per arbitrator. Accordingly, under the proposed rule changes, the late cancellation fee for a panel of three arbitrators would be $1,800.00 instead of $300.00 under the Rules as currently written. The proposed change was prompted by complaints received from arbitrators about the late cancellation rules which apply if the parties postpone, settle in advance of, or otherwise cancel a scheduled hearing session. Arbitrators objected to the Rules, claiming that the three (3) day cancellation window did not provide them enough time to secure other income-generating opportunities and that the $100.00 honorarium provided as consideration for late cancellations failed to adequately compensate them for the lost opportunities. The proposed changes are aimed at addressing these concerns in an effort to ensure that FINRA is able to attract, and maintain, the highest level of arbitrators possible. Additionally, raising the honorarium to $600.00 for late cancellations allows arbitrators to receive the same compensation as they would for one day of hearings and thereby provide them more adequate reparation in the event of late cancellations. In its proposal, FINRA notes some mitigation strategies for avoiding the increased cancellation fee. The first strategy is for the parties to begin addressing issues earlier in the arbitration process to allow for settlement or necessary postponements to occur sooner. Indeed, FINRA anticipates the proposed rule changes will affect potential settlements, especially if the settlement amount is small compared to the cancellation fee, and thus recommends addressing settlement earlier in the arbitration process. The second strategy is for the parties to negotiate sharing the late cancellation fee if they agree to cancel a hearing within the 10-day window. Finally, the Rules permit the panel to waive the fees if the circumstances warrant, such as in instances of illness or accident. Ultimately, FINRA believes that the proposed rule changes will result in fewer late cancellations by the parties, and, hopefully, allow for an increased number of amicable settlements and better retention of qualified arbitrators. For more information, contact: Mignon A. Lunsford at 251-345-8214 / mlunsford@burr.com, a member of Burr & Forman LLP's General Commercial Litigation Group, or the Burr & Forman attorney with whom you regularly work.