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Written by *George H. Friedman

FINRA’s Office of Dispute Resolution (“ODR”) Director of Arbitration Richard Berry in a March 7 interview with Bloomberg BNA laid out the Office’s key objectives for 2016.  FINRA operates the world’s largest dispute resolution forum for securities disputes, administering almost all such cases – 99%. Because dispute resolution changes at the FINRA often portend changes in the rest of the alternative dispute resolution (“ADR”) field, I summarize the forum’s plans below.

Dispute Resolution Task Force recommendations:  FINRA in July 2014 formed a 13-member Task Force to focus on suggesting “strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum for all participants.” Chaired by Barbara Black – retired Professor and Director of Corporate Law Center, University of Cincinnati College of Law – the Task Force and its ten subcommittees, met 57 times and released a Final Report in December that runs 70 pages including appendices, and contains 51 recommendations. Here are some of the major recommendations:

  • An increase in arbitrator honoraria from $300 to $500 per session (from $600 to $1,000 a day), with adjustments for inflation every two years: “It is the unanimous, strongly held opinion of the task force that the most important investment in the future of the FINRA forum is in the arbitrators. The task force has concerns that the below-market-rate arbitrators’ compensation acts as a disincentive in the recruitment of arbitrators and in the commitment of substantial time by arbitrators in executing their responsibilities.”
  • Explained decisions as a default choice with any party having the right to opt out: “The confidential nature of arbitration and the paucity of explained awards result in a lack of transparency that can lead to misunderstandings about the FINRA forum… The task force recommends changing the rule to require an explained decision unless any party notifies the panel before the IPHC [Initial Prehearing Conference]that it does not want it.”
  • An automatic mediation process for cases filed in arbitration, subject to an opt-out provision: “The task force bases its recommendation for an automatic mediation track, subject to an opt-out, largely on the overall success of FINRA’s mediation program. Feedback from mediators, arbitrators and attorneys interviewed on the topic was uniformly positive… The task force recognizes that, if this recommendation is adopted, the current 80 percent settlement rate may drop somewhat, but believes that is acceptable in light of the benefits of mediation.”
  • An “Intermediate approach” for smaller cases. Noting that there is significant dissatisfaction with documents-only (“paper”) cases,[1] the Task Force recommended that the FINRA consider adopting an intermediate form of adjudication—more than the papers, but less than a full hearing—in which the claimant and respondent appear before an arbitrator and have the opportunity to explain their positions and respond to their adversary’s positions.”
  • Expanded grounds for motions to dismiss: The Task Force would expand the very limited grounds upon which a party could request a motion to dismiss prior to the conclusion of a party’s case in chief. Right now FINRA Rule 12504(a) limits motions to dismiss made prior to the claimant completing the case in chief to three grounds: 1) a previous settlement; 2) where the broker was not associated with the accounts, securities, or transactions at issue; or 3) more than six years has elapsed from the events giving rise to the arbitration. Although the Report states that, “based on the statistical evidence, the rule appears to be working as intended, and there is no evidence of abuse of the current rule,” the Task Force recommends a major change. Specifically, that Rule 12504(a) “be amended to include one additional category for which motions to dismiss may be made before the conclusion of the case in chief: situations where the dispute has been previously concluded through adjudication or arbitration and memorialized in an order, judgment, award or decision.”
  • Creation of a pool of trained, experienced arbitrators to conduct expungement hearings in settled cases and in cases brought solely for the purpose of seeking expungement: I define expungement below, but these arbitrators “would conduct hearings on expungement requests and make determinations as to whether to grant expungement requests. All members of special arbitration panels should be experienced individuals from the chairperson roster who have received enhanced training on expungement…”

Goal: The forum’s top goal this year is evaluating and later implementing the recommendations of the FINRA Dispute Resolution Task Force. The National Arbitration and Mediation Committee, a FINRA committee that provides guidance to the Authority on the operation of its dispute resolution forum, will evaluate the recommendations. It met earlier this month to start the process. Some changes will require rule changes, while others can be implemented by staff.

Portal expansion: In 2004 FINRA launched a voluntary online claim filing portal. Over the years it has added several components, so that today parties and arbitrators can use the portal to handle virtually all aspects of case administration, such as claim, answer, and counterclaim filing, arbitrator selection, scheduling hearings, and of course correspondence. Individuals can apply online to become arbitrators and update their biographical information, and can access docket information on assigned cases. This is similar to the web-based comprehensive system offered by Arbitration Resolution Services (sorry, as ARS Chairman of the Board I couldn’t resist).

Goal: Later this year ODR intends to make mandatory use of its online portal for all except pro se parties.

Customer service focus: Mr. Berry said that the dispute resolution forum remains focused on improved customer service. Wonder if expanded online ADR is in the offing?

Expanded arbitrator recruitment: FINRA exceeded its 2015 recruitment goal of 650 new arbitrators. Mr. Berry said “we’re already on target to beat that.”

Goal: FINRA intends to add another 750 arbitrators this year. Expanding the roster’s diversity remains an overarching objective for FINRA.

Unpaid awards: Although FINRA will discipline – up to throwing them out of the industry – brokers who don’t pay or mount a legal challenge to arbitration awards, a stubborn percentage of awards remain unpaid. Past Government Accountability Office studies of the issue show that defunct firms are the prevalent offenders. This problem remains important to FINRA, something highlighted in a recent report from PIABA – the bar association of attorneys who represent investors in arbitration. PIABA is urging that an unpaid awards fund be established. Others have advocated an insurance requirement or raising the “net capital rule” – currently as low as $5,000.

Goal: Mr. Berry said that FINRA is weighing several options, something echoed recently by FINRA Chairman and CEO Richard Ketchum.  

Expungement remains a “high priority” for FINRA. What is expungement?  When an arbitration claim is filed against an industry party, this fact is reported on the Central Registration Depository (“CRD”) – kind of a brokerage industry “permanent record” FINRA maintains for the States – and FINRA’s public BrokerCheck® system. FINRA describes CRD as “the central licensing and registration system for the U.S. securities industry and its regulators. The system contains the registration records of more than 3,935 registered broker-dealers, and the qualification, employment and disclosure histories of more than 640,795 active registered individuals.” Under certain very limited “extraordinary” circumstances, arbitrators can recommend that the entry be deleted or expunged. This has been a political hot potato in recent years, with FINRA periodically tightening things up. From time to time, FINRA has amended the expungement guidance and training it gives arbitrators.

Goal: FINRA intends to propose a rule change that would codify and formalize FINRA’s guidance to arbitrators by putting it in the rules.

Conclusion

Shakespeare’s wrote in The Tempest, “What’s Past Is Prologue.” Having served as FINRA’s Director of Arbitration from 1998-2013, and having seen this movie a few times before, I can attest that many of the changes FINRA implements will eventually be adopted by others in the ADR world. Already, some predictions are coming to pass. New FINRA case filings dropped 11% last year, but are up 17 percent through February due to recent market instability. Just as I predicted in a blog post six months ago.

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*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator.  He is also a member of the AAA’s national roster of arbitrators.  He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional.

[1] The Task Force Report states, “FINRA Rule 12800 provides a simplified arbitration procedure for small claims, currently defined as arbitrations involving $50,000 or less, excluding interest and expenses. The purpose of the simplified arbitration procedure is to make the process less expensive and faster. The principal differences between simplified and standard arbitration is that one arbitrator from the chairperson roster decides the case and there is no hearing unless requested by the customer. In the absence of a hearing the arbitrator decides the dispute based on

the pleadings and other documents submitted by the parties. In recent years, approximately 5 percent of cases were closed after review of the papers…”

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