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The Heritage Foundation’s “Project  2025” report recommends that FINRA be abolished and merged into the SEC. Failing that, the conservative thinktank urges major changes to the Authority’s arbitration program.

The 900+ page Mandate for Leadership: The Conservative Promise:

“is a collective effort of hundreds of volunteers who have banded together in the spirit of advancing positive change for America. Our work is by no means the comprehensive compendium of conservative policies, nor is our group the exclusive cadre of conservative thinkers. The ideas expressed in this volume are not necessarily shared by all…. This volume—The Conservative Promise—is the opening salvo of the 2025 Presidential Transition Project, launched by The Heritage Foundation and our many partners in April 2022. Its 30 chapters lay out hundreds of clear and concrete policy recommendations for White House offices, Cabinet departments, Congress, and agencies, commissions, and boards.”

Although the massive document touches on several agencies and concepts, two got our immediate attention.

Abolish FINRA

The first show-stopper for us is:

“With regulatory authority delegated by the government, both the Public Company Accounting Oversight Board (PCAOB) and FINRA have proved to be ineffective, costly, opaque, and largely impervious to reform. To reduce costs and improve transparency, due process, congressional oversight, and responsiveness, PCAOB and FINRA should be abolished, and their regulatory functions should be merged into the SEC.”

If FINRA is not abolished outright: “[i]n the absence of merging FINRA into the SEC as recommended, require that:

1. FINRA’s Board of Governors meetings be open to the public unless the board votes to meet in executive session.
2. FINRA’s Board of Governors’ agenda be made available to the public in advance.
3. Board minutes describing actions taken be published without delay.
4. FINRA make available to the public in advance rulemakings that the FINRA board is expected to consider.”

(ed: We point out that items 2-4 are already the case.)

Change Arbitration Program

The report also addresses arbitration program changes the Foundation wants to see, absent FINRA’s abolition (listed verbatim):

• FINRA arbitration and disciplinary hearings should be open to the public and reported.
• Require FINRA arbitrators to make findings of fact based on the evidentiary record and demonstrate how those facts led to the award given (except with respect to very small claims). These written FINRA arbitration decisions should be subject to SEC review and limited judicial review.
• Require each SRO to submit an annual report to Congress with detailed, specified information about its budget and fees; its enforcement activities (including sanctions and fines imposed by type of violation and type of firm or individual); its dispute resolution activities; and its rulemaking activities (emphasis added).

(ed: *Interesting to see the Foundation’s views on some arbitration issues align with those of PIABA and NASAA. **Of course, implementation would require that the GOP win the presidency and control of Congress.)

The California Supreme Court has agreed to review a case on FAA preemption of California Code of Civil Procedure sections 1281.97 and 1281.98.

We covered in SAA 2024-11 (Mar. 14) Hohenshelt v. Superior Court, No. B327524 (Calif. Ct. App. 2 Feb. 27, 2024), not for the holding, but for the scathing dissent. Justice John Shepard Wiley Jr.’s dissent in Hohenshelt offered an excellent primer on SCOTUS decisions on Federal Arbitration Act preemption of California law disadvantaging arbitration. We borrow heavily from our past coverage. We repeat below essentially verbatim its core (brackets and ellipses in original).

Statute in Question

Enacted in 2019, California Code of Civil Procedure sections 1281.97 and 1281.98:

“provide that if a company or business that drafts an arbitration agreement does not pay its share of required arbitration fees or costs within 30 days after they are due, the company or business is in ‘material breach’ of the arbitration agreement. (Code Civ. Proc., §§ 1281.97, subd. (a)(1); 1281.98, subd. (a)(1). In the case of such a material breach, an employee or consumer can, among other things, withdraw his or her claim from arbitration and proceed in court. (§§ 1281.97, subd. (b)(1); 1281.98, subd. (b)(1).)”

Justice Wiley’s Dissent

“By again putting arbitration on the chopping block, this statute invites a seventh reprimand from the Supreme Court of the United States. Recall the past six.

“Over and over again, with determined but unavailing persistence, the Supreme Court of the United States has rebuked California state law that continues to find new ways to disfavor arbitration.

“First, the high court held the Federal Arbitration Act set forth a federal policy favoring arbitration that was clear and in unmistakable conflict with California’s ‘requirement that litigants be provided a judicial forum for resolving wage disputes. Therefore, under the Supremacy Clause, the [California] statute must give way.’ (Perry v. Thomas (1987) 482 U.S. 483, 491 [preempting California law].)

“Second, the high court held the Federal Arbitration Act preempted California state law referring certain disputes initially to an administrative agency. ‘When parties agree to arbitrate all questions arising under a contract, the [Federal Arbitration Act] supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.’ (Preston v. Ferrer (2008) 552 U.S. 346, 359; see also id. at pp. 349–350, 355–356.)

“Third, the high court’s decision in AT&T Mobility v. Concepcion (2011) 563 U.S. 333, 337–338, 352 preempted California’s rule that class-action waivers in arbitration agreements were unconscionable.

“Fourth, in DIRECTV, Inc. v. Imburgia (2015) 577 U.S. 47, the high court pointedly addressed California’s continuing defiance of federal law. The ‘Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source. . . . The Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.’ (Id. at p. 53 [preempting California law].)

“Fifth, the decision in Lamps Plus, Inc. v. Varela (2019) 587 U.S. __ [139 S.Ct. 1407, 1414–1415] reversed the Ninth Circuit for applying a California state law requiring courts to construe ambiguities against the drafter, a rule that applied with peculiar force, said California law, in the case of a contract of adhesion, like the arbitration contract there at issue. The proper approach required the federal Act’s default rule, which is that ‘ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration.’ (Id. at p. 1418.) The Lamps Plus decision thus preempted a California law disfavoring arbitration.

“Sixth, Viking River Cruises, Inc. v. Moriana (2022) 596 U.S. 639, 662 preempted a California arbitration law that invalidated contractual waivers of the right to assert representative claims under California’s Private Attorneys General Act. Federal law established an equal treatment principle: state courts may invalidate an arbitration agreement based on generally applicable contract defenses like fraud or unconscionability, but not on legal rules that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. (Id. at p. 649.)

“So, the federal arbitration preemption rule is simple. The Federal Arbitration Act preempts a state rule that ‘singles out arbitration agreements for disfavored treatment.’ (Kindred Nursing Centers L.P. v. Clark (2017) 581 U.S. 246, 248.)

“This California statute ‘singles out arbitration agreements for disfavored treatment.’ No other contracts are voided on a hair-trigger basis due to tardy performance. Only arbitration contracts face this firing squad. This statute thus is preempted.

“California cannot create a rule specific to the arbitration context that contravenes the arbitration on which the parties agreed. After six epistles, we should get the message.”

Review Request Granted

The California Supreme Court on June 12 agreed to review the case, No. S284498.

(ed: *We’ll be sure to track this one. **An Alert h/t to Editorial Board member Peter R. Boutin, Esq., of Keesal, Young & Logan, for alerting us to this decision.)

An All-Public Panel dismisses with prejudice a group of customers’ claims against Respondent broker-dealer and imposes monetary sanctions in the form of attorney fees pursuant to FINRA Rules 12212(c) and 12511 for their intentional disregard and failure to comply with the Panel’s Orders regarding the production of discovery in this matter.

Claims

In the Statement of Claim in Hayes v. Aegis Capital Corp., FINRA ID No. 22-02854 (Cleveland, OH, May 24, 2024), Claimants asserted the following causes of action:

“suitability, churning, failure to supervise, breach of fiduciary duty, breach of contract, unauthorized trading, negligence, misrepresentation, and omission of facts. The causes of action related to Original Claimants’ allegations that they are the victims of various FINRA violations and suffered loss of their savings. Unless specifically admitted in the Statement of Answer, Respondent denied the allegations made in the Statement of Claim and asserted various affirmative defenses.”

Discovery Orders Not Followed

After several arguments were exchanged over discovery, the Panel holds:

“No factual explanations have been provided by Claimants’ counsel either to Respondent throughout discovery or to the Panel since November 2023 regarding the remaining gaps in discoverable items sought, with no indication of intent for further submissions. No discussions have been held or are planned between the parties for resolving the open issues.

“The complete discovery record shows extended non-compliance regarding essential items, with repeated efforts by the Panel to guide the process to a satisfactory resolution proving unsuccessful. There is no evidence of prospects for a favorable change by Brandon Dei, who on his clients’ behalf ultimately bears the burden of proof for their alleged claims. The Panel thus grants the Motion to Dismiss with prejudice. Also ruling on the Respondent’s Motion to Enforce and for Sanctions prepared on September 27, 2023, a decision which had been deferred across multiple hearings to allow further opportunity for production that went unrealized, the documented expense of $4,132.00 covering attorneys’ fees to prepare the motion for sanctions is granted to Respondent against Claimants. No further damages or sanctions or any other form of relief are awarded, with each party responsible for all its own costs to this conclusion.”

Claims Dismissed

On the substantive claims:

“After considering the pleadings, the Motion to Dismiss and all responses thereto, and the arguments presented at the prehearing conference on April 9, 2024, the Panel has decided in full and final resolution of the issues submitted for determination as follows: 1. Claimants’ claims are dismissed in their entirety; 2. Claimants are jointly and severally liable for and shall pay to Respondent the sum of $4,132.00 in attorneys’ fees in connection with the Motion for Sanctions; and 3. Any and all claims for relief not specifically addressed herein, including any requests for punitive damages and treble damages, are denied.”

All but $562.50 of the $5,625 in hearing session fees were assessed jointly and severally against Claimants.

(ed: Lead summary provided courtesy of SAC’s ARBchek facility (www.arbchek.com).)

The Consumer Financial Protection Bureau (“CFPB”) on June 4 issued a circular warning on the use of deceptive terms in contracts for consumer financial products or services, with arbitration featured as a prime example.

Says the notice:

“Many federal laws—including statutes enforced by the CFPB—render unlawful or unenforceable various contract terms in certain contexts. For example … Regulation Z, which implements the Truth-in-Lending Act (TILA), prohibits the inclusion in a residential mortgage loan or open-ended consumer credit plan secured by the principal dwelling of terms requiring arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling claims arising out of the transaction. … And the Military Lending Act and its implementing regulations generally prohibit terms in certain consumer credit contracts that require servicemembers and their dependents to ‘waive the covered borrower’s right to legal recourse under any otherwise applicable provision of State or Federal law. . . .[] In addition to express prohibitions like these, a recent federal district court decision [Espin v. Citibank, N.A., No. 5:22-CV-383-BO-RN, 2023 WL 6449909, at *3 (E.D.N.C. Sept. 29, 2023)] held that the Servicemembers Civil Relief Act (SCRA) renders unenforceable provisions in contracts with servicemembers that purport to waive their right to participate in class actions to enforce the SCRA. The Federal Trade Commission also administers laws that forbid certain contractual waivers. And certain state laws similarly prohibit or restrict the use of waivers in consumer contracts.” (footnotes omitted).

Drivers

The question presented was: “Can persons that include unlawful or unenforceable terms and conditions in contracts for consumer financial products and services violate the prohibition on deceptive acts or practices in the Consumer Financial Protection Act (CFPA)?” The summary response was:

“Yes. ‘Covered persons’ and ‘service providers’ must comply with the prohibition on deceptive acts or practices in the CFPA. The inclusion of certain terms in contracts for consumer financial products or services may violate the prohibition when applicable federal or state law renders such contractual terms, including those that purport to waive consumer rights, unlawful or unenforceable…. The CFPB is issuing this Circular to emphasize that covered persons who include unlawful or unenforceable terms in their consumer contracts may violate the CFPA’s prohibition on deceptive acts or practices” (footnote omitted).

Explanation

The circular explains:

“As these examples demonstrate, the inclusion of unlawful or unenforceable terms and conditions in consumer contracts is likely to mislead a reasonable consumer into believing that the terms are lawful and/or enforceable, when in fact they are not. Further, the representations made by the presence of such terms are often material, presumptively so when they are made expressly. In particular, consumers are unlikely to be aware of the existence of laws that render the terms or conditions at issue unlawful or unenforceable, so in the event of a dispute, they are likely to conclude they lawfully agreed to waive their legal rights or protections after reviewing the contract on their own or when covered persons point out the existence of these contractual terms and conditions. Deceptive acts and practices such as these pose risk to consumers, whose rights are undermined as a result, and distort markets to the disadvantage of covered persons who abide by the law by including only lawful terms and conditions in their consumer contracts.”

(ed: Of course, this stops short of an express arbitration clause ban.)

The Supreme Court holds 7-2 that the CPPB’s funding mechanism does not violate the Constitution’s Appropriations Clause.

We reported in SAA 2023-10 (Mar. 9) that the Supreme Court had granted Certiorari in Community Financial Services Ass’n of America v. CFPB, No. 21-50826 (5th Cir. Oct. 19, 2022), where a unanimous Fifth Circuit held that, although the Consumer Financial Protection Bureau (“CFPB”) did not exceed its authority in promulgating the Payday Lending Rule, its funding method is unconstitutional. As reported in SAA 2022-40 (Oct. 27), the Fifth Circuit’s Opinion stated:

“Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers. We thus reverse the judgment of the district court, render judgment in favor of the Plaintiffs, and vacate the Bureau’s 2017 Payday Lending Rule.”

Certiorari Granted

Our editorial comment in # 2022-40 said: “We suspect a Petition for en banc review is next.” As reported in SAA 2022-45 (Dec. 1), eschewing that route, the CFPB instead went right to the Supreme Court. Specifically, the Bureau on November 14, 2022 filed a Certiorari Petition identifying this question:

“Whether the court of appeals erred in holding that the statute providing funding to the Consumer Financial Protection Bureau (CFPB), 12 U.S.C. 5497, violates the Appropriations Clause, U.S. Const. Art. I, § 9, Cl. 7, and in vacating a regulation promulgated at a time when the CFPB was receiving such funding.”

The SCOTUS case is Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited, No. 22-448, and appears on page one of the February 27 Order List. It will be heard next Term.

SCOTUS: Funding Mechanism is Constitutional

The Court’s 7-2 opinion released on May 16 was authored by Justice Thomas. He was joined by Chief Justice Roberts and Justices Sotomayor, Kagan, Kavenaugh, Barrett, and Jackson. Justice Kagan filed a concurring opinion, in which Justices Sotomayor, Kavenaugh, and Barrett joined. Justice Jackson filed a concurring opinion. Justices Alito and Gorsuch dissented. The core majority holding:

“Our Constitution gives Congress control over the public fisc, but it specifies that its control must be exercised in a specific manner. The Appropriations Clause commands that ‘[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.’ Art. I, §9, cl. 7. For most federal agencies, Congress provides funding on an annual basis. This annual process forces them to regularly implore Congress to fund their operations for the next year. The Consumer Financial Protection Bureau is different. The Bureau does not have to petition for funds each year. Instead, Congress authorized the Bureau to draw from the Federal Reserve System the amount its Director deems ‘reasonably necessary to carry out’ the Bureau’s duties, subject only to an inflation-adjusted cap. 124 Stat. 1975, 12 U. S. C. §§5497(a)(1), (2). In this case, we must decide the narrow question whether this funding mechanism complies with the Appropriations Clause. We hold that it does.”

The Other Shoe Drops

We reported in SAA 2023-14 (Apr. 13) that, in a split with its sister Circuit, the Second Circuit held unanimously in CFPB v. Law Offices of Crystal Moroney, No. 20-3471 (2d Cir. Mar. 23, 2023), that the Bureau’s funding mechanism does not violate the Constitution’s Appropriations Clause. We later reported as follows:

“On June 21 [2023], Moroney filed a Certiorari Petition in Law Offices of Crystal Moroney v. CFPB, No. 22-1233, identifying this issue for review: “Whether the Consumer Financial Protection Agency’s funding structure—which imposes no meaningful constraints on the authority of the President or CFPB to choose the Bureau’s amount of annual public funding—violates the Appropriations Clause, U.S. Const. Art. I, Sec. 9, Cl. 7, and renders unenforceable the CID [Civil Investigative Demand] issued in this case.”

For nearly a year, the case’s status has been unchanged. That’s no longer the case; the Court’s May 28 Order List on page 1 announces that Certiorari has been denied.

(ed: We’re not surprised by either the decision or the Cert. denial.)

A unanimous Court holds in Smith v. Spizzirri, No. 22-1218, that under Federal Arbitration Act (“FAA”) section three, courts compelling arbitration must stay but cannot dismiss the underlying litigation.

As reported in SAA 2024-18 (May 9), the Court heard oral argument April 22. The audio is here and the transcript can be found here.

Certiorari Petition

As reported in SAA 2023-36 (Sep. 21), the June 2023 Petition for Certiorari states:

“This case presents a clear and intractable conflict regarding an important statutory question under the Federal Arbitration Act (FAA), 9 U.S.C. 1-16.[] The FAA establishes procedures for enforcing arbitration agreements in federal court. Under Section 3 of the Act, when a court finds a dispute subject to arbitration, the court ‘shall on application of one of the parties stay the trial of the action until [the] arbitration’ has concluded. 9 U.S.C. 3 (emphasis added)…. The question presented is: Whether Section 3 of the FAA requires district courts to stay a lawsuit pending arbitration, or whether district courts have discretion to dismiss when all claims are subject to arbitration.”

The Oral Argument

With a full complement of Justices, the oral argument in this case was audio livestreamed via the SCOTUS Website. The discussion focused squarely on the text of FAA section 3. Petitioner’s Counsel Daniel Geyser framed the issue this way:

“Section 3 unambiguously mandates a stay pending arbitration, and the FAA’s plain text, structure, and purpose confirm that conclusion. Congress directed that a court shall stay the trial of the action until the arbitration is complete. There is no mention of dismissal, and there are no exceptions for cases where all claims are subject to arbitration.”

Respondent’s attorney E. Joshua Rosenkranz, said:

“When Congress directed courts to stay the trial of a case in deference to arbitration, it meant stop the litigation in court. It did not mean you must retain jurisdiction. It did not mean never dismiss, no matter how clear it is that the case will never come back to court. I get that modern lawyers often think of stays and dismissals as two completely distinct animals, but when Congress passed Section 3 a hundred years ago, Congress would not have drawn that stark a distinction. The drafters would have understood that a dismissal was one way to stay a litigation. When Congress intended that a court retain jurisdiction, it used those words in Section 8.”

Unanimous Court Opts for Strict Statutory Construction

We commented presciently in no. 18 that: “Based on the questions and comments from the Justices from both wings, we think there will be a strong ‘literal reading’ majority. Justice Sotomayor’s unanimous opinion rejects the argument that Courts have discretion under FAA section 3 to dismiss the underlying litigation:

“The Federal Arbitration Act (FAA) sets forth procedures for enforcing arbitration agreements in federal court. Section 3 of the FAA specifies that, when a dispute is subject to arbitration, the court ‘shall on application of one of the parties stay the trial of the action until [the] arbitration’ has concluded. 9 U. S. C. §3. The question here is whether §3 permits a court to dismiss the case instead of issuing a stay when the dispute is subject to arbitration and a party requests a stay pending arbitration. It does not.”

Courts’ Supervisory Role

The opinion notes that the FAA envisions that courts retain a supervisory role:

“Finally, staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts. The FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator, see 9 U. S. C. §5; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see §7; and facilitating recovery on an arbitral award, see §9. Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections.”

In a footnote, Justice Sotomayor notes that: “That is not to say that the court is barred from dismissing the suit if there is a separate reason to dismiss, unrelated to the fact that an issue in the case is subject to arbitration. If, for example, the court lacks jurisdiction, §3 is no bar to dismissing on that basis.”

(ed: *The Supreme Court heard oral argument February 28 in Coinbase v. Suski, No. 23-3, the remaining case involving arbitration to be decided. The June 2023 Certiorari Petition raised this issue: “Whether, where parties enter into an arbitration agreement with a delegation clause, an arbitrator or a court should decide whether that arbitration agreement is narrowed by a later contract that is silent as to arbitration and delegation.” **For an excellent analysis, see this May 16 CPR blog post, More Plain Text: Scotus Says FAA Sec. 3 Requires Litigation Stays.)

The Department of Labor’s (“DOL”) final fiduciary rule has been published; it goes into effect September 23. We borrow heavily from our previous reporting.

As reported in SAA 2023-42 (Nov. 8), the DOL’s Employee Benefits Security Administration proposed last fall: “a new rule that would protect workers’ retirement savings by updating the regulation defining a fiduciary under the Employee Retirement Income Security Act (ERISA).” As described on the DOL’s dedicated Webpage:

“The ‘Retirement Security Rule: Definition of an Investment Advice Fiduciary’ would affect how investors get advice on their job-based retirement accounts and other retirement savings plans and how investment advice providers must act if they have a conflict of interest…. The proposed rule and related proposed amendments to prohibited transaction exemptions (PTEs) detail when advice providers are acting in a fiduciary role under federal pension laws and explain the conditions they must follow to protect retirement investors.”

The proposal was announced in an October 2023 Press Release.

Details

The DOL observed that: “Many people who give investment advice and get paid for it are currently not considered investment advice fiduciaries under ERISA. Investment advice fiduciaries legally must follow strict rules of conduct.[] Under these proposals, investment advice fiduciaries would:

• give advice that is prudent and loyal.
• avoid misleading statements about conflicts of interest, fees, and investments.
• follow policies and procedures designed to ensure the advice given is in an investor’s best interest.
• charge no more than is reasonable for their services.
• give investors basic information about any conflicts of interest.”

The Department provided substantial support materials, including: a Fact Sheet; a blog; and a video. There are also links to key documents.

Basis for the Proposed Rule

Said the DOL:

“EBSA’s mission is to protect the job-based retirement, health and other welfare plan benefits of America’s workers and their families. Requiring investment advice providers to comply with fiduciary standards protects retirement investors from harmful conflicts of interest. Conflicts of interest can put an investment advice provider in the position of choosing between what’s good for them and what’s best for you. That could result in excess fees and/or lost investment returns that reduce a person’s retirement savings.[] The existing definition is from 1975 and doesn’t work in today’s marketplace. Investors who are making decisions for their retirement accounts expect advice to be in their best interest — so, it should be.”

Publication and Comments

All rules were published in the Federal Register November 3, 2023 (Vol. 88, No. 212, P. 75890), with comments due January 24. The Department held public hearings on December 12-13, 2023, as described in a press release. Here is the agenda. Over 19,000 comments were received. In a 21-page January 2 letter, Charles Schwab asserted that the rule is not necessary, costly, counterproductive, not authorized, and should be withdrawn.

Final Rule

As reported in SAA 2024-11 (Mar. 14), the final rule was sent to OMB on March 8 (RIN: 1210-AC02). We reported then that OMB review typically takes 90 days, which turns out was accurate. The Final Rule — 89 FR 32122 – was published April 24; it is effective September 23, 2024. Says the summary:

“The Department of Labor (Department) is adopting a final rule defining when a person renders ‘investment advice for a fee or other compensation, direct or indirect’ with respect to any moneys or other property of an employee benefit plan, for purposes of the definition of a ‘fiduciary’ in the Employee Retirement Income Security Act of 1974 (Title I of ERISA or the Act). The final rule also applies for purposes of Title II of ERISA to the definition of a fiduciary of a plan defined in Internal Revenue Code (Code), including an individual retirement account or other plan identified in the Code. The Department also is publishing elsewhere in this issue of the Federal Register amendments to Prohibited Transaction Exemption 2020-02 (Improving Investment Advice for Workers & Retirees) and to several other existing administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA.”

First Suit Filed

According to a May 3 Law360 story: “The U.S. Department of Labor was hit with a lawsuit … in Texas federal court seeking to invalidate recently finalized regulations that broaden who qualifies as a fiduciary under the Employee Retirement Income Security Act, marking the first-filed legal challenge since the agency’s late-April final release.” The case is Federation of Americans for Consumer Choice, Inc. v. Department of Labor, No. 6:24-cv-00163 (E.D. Tex. May 2, 2024). The plaintiffs seek a judgment:

1. Declaring that the 2024 Fiduciary Rule and amended PTE 84-24 were promulgated by the DOL in excess of its statutory jurisdiction, authority, or limitations within the meaning of 5 U.S.C. § 706(2)(C) and is arbitrary, capricious, or otherwise contrary to law within the meaning of 5 U.S.C. § 706(2)(A);
2. Vacating and setting aside the 2024 Fiduciary Rule and the amendments to PTE 84-24 in their entirety;
3. Preliminarily and permanently enjoining the DOL and all of its officers, employees and agents from implementing, applying, or taking any action of any type under the 2024 Fiduciary Rule or amended PTE 84-24 anywhere within the DOL’s jurisdiction;
4. Awarding Plaintiffs their costs incurred in bringing this action; and
5. Granting such other and further relief as the Court determines is appropriate.

(ed: We will certainly track this one!)

As reported in SAA 2023-36 (Sep. 21), the June 2023 Petition for Certiorari states:

“This case presents a clear and intractable conflict regarding an important statutory question under the Federal Arbitration Act (FAA), 9 U.S.C. 1-16.[] The FAA establishes procedures for enforcing arbitration agreements in federal court. Under Section 3 of the Act, when a court finds a dispute subject to arbitration, the court ‘shall on application of one of the parties stay the trial of the action until [the] arbitration’ has concluded. 9 U.S.C. 3 (emphasis added)…. The question presented is: Whether Section 3 of the FAA requires district courts to stay a lawsuit pending arbitration, or whether district courts have discretion to dismiss when all claims are subject to arbitration.”

The Oral Argument

With a full complement of Justices, the oral argument in this case was audio livestreamed via the SCOTUS Website. The discussion focused squarely on the text of FAA section 3. Petitioner’s Counsel Daniel Geyser framed the issue this way:

“Section 3 unambiguously mandates a stay pending arbitration, and the FAA’s plain text, structure, and purpose confirm that conclusion. Congress directed that a court shall stay the trial of the action until the arbitration is complete. There is no mention of dismissal, and there are no exceptions for cases where all claims are subject to arbitration.”

Respondent’s attorney E. Joshua Rosenkranz, said:

“When Congress directed courts to stay the trial of a case in deference to arbitration, it meant stop the litigation in court. It did not mean you must retain jurisdiction. It did not mean never dismiss, no matter how clear it is that the case will never come back to court. I get that modern lawyers often think of stays and dismissals as two completely distinct animals, but when Congress passed Section 3 a hundred years ago, Congress would not have drawn that stark a distinction. The drafters would have understood that a dismissal was one way to stay a litigation. When Congress intended that a court retain jurisdiction, it used those words in Section 8.”

Questions were posed by all of the Justices, several of whom seemed to be leaning toward a literal reading of section 3. For a comprehensive “chapter-and-verse” analysis, we recommend that readers peruse this April 22 CPR Blog post, Today’s SCOTUS: Does Federal Arbitration Act Sec. 3 on Litigation Stays Allow Dismissal?

(ed: *Based on the questions and comments from the Justices from both wings, we think there will be a strong “literal reading” majority. **We expect a decision in June.)

FINRA has begun to post expungement-related stats on its Website.

For as long as we can remember, arbitrator-recommended expungement has been a topic of interest in the financial services field, and for nearly as long the Alert has been advocating that FINRA post expungement stats on its Website. The latter came to pass earlier this month: FINRA has added expungement statistics to the finra.org website, at https://www.finra.org/rules-guidance/key-topics/expungement-of-dispute-information#statistics (click on the “statistics” tab). We repeat below verbatim the intro to Statistics on Expungement of Customer Dispute Information in the FINRA Arbitration Forum (footnotes omitted):

Effective October 16, 2023, FINRA amended its rules to modify the process relating to requests to expunge customer dispute information from the Central Registration Depository (CRD^®) in the FINRA Dispute Resolution Services (DRS) arbitration forum. The statistics below cover the three types of arbitration proceedings in which requests to expunge customer dispute information may be filed in the DRS arbitration forum on or after October 16, 2023:

1. Straight-In Requests:expungement requests filed by an associated person (AP) separate from a customer arbitration (see FINRA Rule 13805 of the Industry Code).
2. Non-Simplified Customer Arbitrations:expungement requests filed by an AP in an investment-related, customer-initiated arbitration that is not administered as a simplified proceeding (see FINRA Rule 12805 of the Customer Code).
3. Simplified Customer Arbitrations:expungement requests filed by an AP in an investment-related, customer-initiated arbitration administered as a simplified proceeding, e., arbitrations involving $50,000 or less (see FINRA Rule 12800 of the Customer Code).

The statistics … below provide the total number of cases filed in the DRS arbitration forum that include an expungement request and, for cases decided by a panel, the total number of occurrences and the number and percentage of occurrences for which the arbitration panel awarded or denied expungement relief.

We reached out for a comment to Richard Berry, Executive Vice President of FINRA Dispute Resolution, who said:

“FINRA is committed to continuing to enhance its dispute resolution forum, and providing more transparency of expungement data is part of that commitment.”

(ed: *The numbers so far is not yet meaningful, but over time they will be. **There is also a link to the expungement statistics on the Dispute Resolution Services statistics page. ***Hats off to FINRA!)

A unanimous Court holds in Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51, that the Federal Arbitration Act (“FAA”) section one exemption does not require that the worker be engaged in the transportation industry.

As reported in SAA 2024-05 (Feb. 15), the Supreme Court on February 20 heard the oral argument in Bissonnette. The audio is here and the transcript can be found here.

Certiorari Petition

The July 2023 Petition states: “The Federal Arbitration Act exempts the ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’ 9 U.S.C. § 1. The First and Seventh Circuits have held that this exemption applies to any member of a class of workers that is engaged in foreign or interstate commerce in the same way as seamen and railroad employees—that is, any worker ‘actively engaged’ in the interstate transportation of goods. The Second and Eleventh Circuits have added an additional requirement: The worker’s employer must also be in the ‘transportation industry.’ The question presented is: To be exempt from the Federal Arbitration Act, must a class of workers that is actively engaged in interstate transportation also be employed by a company in the transportation industry?”

Several amicus briefs were filed. Noteworthy briefs were filed by Amazon.com, the California Employment Law Council, and the Chamber of Commerce of the United States.

The Oral Argument

With a full complement of Justices, the oral argument in this case was audio livestreamed via the SCOTUS Website. The discussion focused squarely on Congress’ intent on the scope of the  FAA section 1 exemption, with several references to the situation when the FAA was enacted in 1925. (ed: who knew that a coal strike caused a famine in Chicago in 1903?) Bissonnette’s counsel Jennifer Dale Bennett urged that the Court reject an additional requirement that a company be part of the transportation industry: “Less than two years ago, in Southwest versus Saxon, this Court carefully examined the text and history of the Federal Arbitration Act’s worker exemption, and it held that the exemption applies to ‘any class of workers directly involved in transporting goods across state or international borders.’” Traci L. Lovitt, Counsel for the Respondent, led with: “[i]n Circuit City, this Court said that the Section 1 exemption should be read narrowly and should be interpreted with reference to the ejusdem canon, context, and history, all three of which demonstrate that the exemption is limited to transportation industry workers. After all, in 1925 … seamen and railroad employees were defined by the industry in which they work. And that commonality should carry through to the residual clause. Context and history tell you why this line makes sense.” The Court’s pro-arbitration wing was relatively quiet, with the bulk of the questions coming from Justices Kagan; Jackson, and Sotomayor (although Justice Thomas was atypically active). Several Justices on both sides struggled with additional complications posed by defining the “transportation industry.”

Unanimous Court Rejects Transportation Industry Requirement

Chief Justice John G. Roberts’ unanimous opinion rejects the argument that an individual must work in the transportation industry to be exempt under FAA section 1:

“In other words, any exempt worker ‘must at least play a direct and “necessary role in the free flow of goods’ across borders.’” 596 U. S., at 458 (quoting Circuit City, 532 U. S., at 121). These requirements ‘undermine[] any attempt to give the provision a sweeping, open-ended construction,’ instead limiting §1 to its appropriately ‘narrow’ scope. Id., at 118. * * * A transportation worker need not work in the transportation industry to fall within the exemption from the FAA provided by §1 of the Act. The Second Circuit accordingly erred in compelling arbitration on the basis that petitioners work in the bakery industry.”

Closing Caveat

The opinion closes with this limiting language:,

“We express no opinion on any alternative grounds in favor of arbitration raised below, including that petitioners are not transportation workers and that petitioners are not “engaged in foreign or interstate commerce” within the meaning of §1 because they deliver baked goods only in Connecticut.”

(ed: *Our old editorial comment referenced a February 21 Reuters blog post, US Supreme Court Seems Unlikely to Limit FAA Exemption to Transportation Companies, and added: “We’re with Reuters.” **For an excellent analysis, see this April 12 CPR blog post, Supreme Court Expands Federal Arbitration Act Exemption from ADR. ***The Court also granted certiorari in another arbitration-related case, Coinbase v. Suski, No. 23-3, which was heard February 28. A decision should be issued soon, we think.)