Changing the Rules: FINRA Eases Arbitration Withdrawal Requirements, While NY Courts Want Mediation Certification

By Angela Cipolla

There have been significant recent updates on rules regarding alternative dispute resolution mechanisms in the regulatory world and in courts. Below is a summary of a recently proposed amendment for FINRA arbitration rules, which is now open for comment, and the recently finalized ADR certification for courts in the New York Commercial Division.

FINRA Regulatory Notice 17-33

FINRA’s Oct. 18 Regulatory Notice 17-33 addresses the issue of unpaid customer arbitration awards. The goal of the proposed amendment to FINRA’s Code of Arbitration Procedure for Customer Disputes is to expand a customer’s options to withdraw an arbitration claim in two situations: (1) when a firm becomes inactive during a pending arbitration, or (2) where an “associated person” becomes inactive either before a claim is filed or during a pending arbitration. Both situations have not yet been addressed in existing FINRA rules.

The proposed amendment seeks to fill the gap of FINRA’s current rule, Rule 12202, “Claims Against Inactive Members.” Rule 12202 protects customers by allowing them an opportunity to “evaluate the likelihood of collecting on an award and make an informed decision whether to proceed in arbitration” against members that have been declared inactive prior to the commencement of the arbitration.

The proposed amendment addresses the issue of when a member firm becomes inactive during the course of an arbitration.  It seeks to give customers an opportunity to evaluate the decision to arbitrate, regardless of whether an existing pre-dispute arbitration agreement was signed.

Under the proposed change, FINRA would notify customers “if a member or an associated person becomes inactive during a pending arbitration,” giving the customer “60 days to withdraw the claim(s) with or without prejudice.”

The proposed amendment also seeks to add definitions of “inactive member” and “inactive associated person” under FINRA Rule 12100, “Definitions.” The proposal states that “inactive member” would be defined as “a member whose membership is terminated, suspended, cancelled or revoked; that has been expelled from FINRA; or that is otherwise defunct.”

“Inactive associated person” would be defined as a person “associated with a member whose registration is revoked or suspended, or whose registration has been terminated for a minimum of 365 days.”

FINRA also seeks to amend Rule 12309 on “Amending Pleadings,” which limits a party’s ability to amend its pleadings once a panel is appointed to the case. The proposed amendment would allow customers to amend a pleading, and add a new party within sixty (60) days of receiving notice from FINRA that a firm or associated person has become inactive.

This proposal is motivated by FINRA’s belief that a customer should have the right to change a litigation strategy after learning that a firm or associated person has become inactive and may pose a collection problem in the event of an award.

Regarding issues of postponement, FINRA proposes to amend Rule 12601 to allow a customer, upon notice from FINRA of a firm or associated person’s status change, to postpone the hearing date if such notice was within sixty (60) days of the scheduled hearing.

In this situation, FINRA also proposes to waive the usual postponement fee and/or additional fees per arbitrator if a customer chooses to exercise the right to postpone. To honor the arbitrators’ time, FINRA would amend Rule 12214 and would take it upon itself to pay the arbitrators’ fee if a customer postpones within ten (10) days before a scheduled hearing due to the inactive status of the firm or associated person against whom the customer has filed for relief.

FINRA has proposed to amend FINRA Rule 12801(a) to allow claimants to “request a default proceeding against a terminated associated person who fails to file an answer within the time provided in the Code regardless of the number of days since termination.”  The change would allow, for example, a customer to start a default proceeding against an associated person who left a firm, but remains active at another firm and failed to answer a claim.

Finally, FINRA’s proposed rules amendment includes a revision to Rule 12900, “Fees Due When a Claim is Filed,” which would allow for a customer to receive a full refund of the filing fee if FINRA provided notice of a status change of a firm or associated member to inactive, and the case is withdrawn within 60 days of the notification.

FINRA is receiving comments on the proposed amendments until Dec. 18; submissions can be emailed to or mailed to FINRA’s Office of the Corporate Secretary.

The full copy of the regulatory notice can be found at

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New York Commercial Division Rule: Amendment to Rules 10 and 11 of Section 202.70(g)

On Oct. 11, New York Courts Chief Administrative Judge Lawrence K. Marks signed an order that amended Rules 10 and 11 of Section 202.60(g) of the “Rules of Practice for the Commercial Division.” (22 NYCRR 202.70).

The rule changes represent an effort on behalf of the New York state courts’ Commercial Division to emphasize the use of alternative dispute resolution procedures among litigating parties.

Rule 10, “Submission of Information,” will now include an amendment, “Certification Relating to Alternative Dispute Resolution.”  The certification, a form for which was annexed to Marks’ order, will require each party to submit to the court a certifying statement which states that counsel and the party discussed the availability of alternative dispute resolution mechanisms—including those “provided by the Commercial Division and/or private ADR providers.”

The statement also must specify whether the party is “presently willing to pursue mediation at some point during the litigation.”

Additionally, the change for Rule 11 on discovery will now require that preliminary conference orders include, where appropriate, “a specific date by which a mediator shall be identified by the parties for assistance with resolution of the action.” This requirement will take effect in cases that the parties certify their willingness to pursue mediation, pursuant to the amended Rule 10.

These amendments have been adopted by the Unified Court System’s Administrative Board and will take effect on Jan. 1, 2018.

The original proposal was explained in this April 10 memorandum: Judge Marks’ order, with the certification form, is available at

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The author is a Fall 2017 CPR Institute Intern.

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