Arbitration Tweaks

Nearly everybody seems to complain about arbitration (well, accept for the firms). In late January, the SEC tried to help improve the system by offering a new code of procedures for picking arbitrators. But as arbitration lawyers began examining the 137-page document from the SEC's Web site, they found there was not much to get excited about. The new code, when it takes effect in April, will bring

Nearly everybody seems to complain about arbitration (well, accept for the firms). In late January, the SEC tried to help improve the system by offering a new code of procedures for picking arbitrators. But as arbitration lawyers began examining the 137-page document from the SEC's Web site, they found there was not much to get excited about.

The new code, when it takes effect in April, will bring one big change: It alters the crazy-quilt method by which the opposing sides select the three arbitrators who will serve on the panel that hears a customer's dispute against a broker or firm. These rules require that two members, including the chair, qualify as members of the “public,” and that the remaining panelist come from the brokerage industry.

Under current practice, the parties are given a list of 10 public arbitrators and five industry arbitrators to rank according to preference. But they can strike as many names as they want from the lists for no reason at all — known as making a “peremptory” challenge in legal jargon. Problem is, this process often left fewer than three arbitrators, so the parties were stuck with an arbitrator randomly selected from the NASD's computer.

Under the new rules, parties will get three lists, each containing eight names: one for a public arbitrator, another for a public arbitrator who has qualified to be a panel chair and another from the brokerage industry. But now, parties are limited to four strikes on each list, thus upping the mathematical chances that they will land with a panel of arbitrators chosen by them rather than the NASD computer.

“This will supposedly reduce the number of cram-downs,” says Seth Lipner of Deutsch & Lipner in Garden City, N.Y., a lawyer who specializes in representing customers. “I personally don't believe it's going to work.” Defense lawyer Matthew Farley of New York's Drinker Biddle & Reath has more faith: “It increases the odds that the three on the panel were all on the lists and that there's some input from the parties,” he says, adding, “It may be each side's worst nightmare!”

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