Tech & ADR – The Future Has Arrived (Really This Time)

By George H. Friedman*



Over twenty years ago, the author of this paper evaluated emerging technologies and predicted how they might impact alternative dispute resolution (“ADR”).[1]  Four years later, after the emergence of the internet, he updated his predictions to gauge the impact of this new medium.[2]  Now Chairman of the Board of Arbitration Resolution Services, Inc. (“ARS”) – the world’s first completely cloud-based ADR provider – he measures what really happened and predicts the future of emerging technologies on ADR in general and on insurance industry ADR in particular.


This paper discusses:


  • The past: how accurate were prior predictions about email, imaging, electronic fund transfers, computerization, and the “new” fax technologies? What other unforeseen technologies – like the web, digital audio recording, Wi-Fi, mobile apps, and videoconferencing – came upon the scene and impacted the ADR world?


  • The present: how is technology being used to improve the delivery of ADR services today in the insurance industry? What is the impact on the arbitration and mediation processes?


  • The Future: Where will we be ten years from now? Will cloud-based arbitrations and mediations overtake “brick and mortar” case filings?  Will the in-person hearing become a thing of the past?  What new technologies will emerge and how will they impact ADR?


Past Predictions and Present Realities


            Going back to check on past predictions – especially technology prognostications — is always fraught with peril and is often comical.  On the latter, a magazine published in 1950 made some bold predictions about the future.  It’s humorous to see not only how the authors overreached, but also what they didn’t see coming.  For example, we must have missed the advent of jet-propelled turbo cars.[3]  On the other hand, it seems that we have exceeded greatly the prediction by former IBM chairman Tom Watson who in 1943 said “I think there is a world market for maybe five computers.”[4]


The Future


            Now we come to the author’s favorite part: predicting the future.  Why?  Because, while you can certainly disagree with him, you can’t definitively say he’s wrong unless you claim to be a visitor from the future.  Bearing in mind that his predictions from 1993 were precisely on target, but that there were lots of things most of us just didn’t see coming, the author predicts that within the next five to ten years web-based ADR will overtake “brick-and-mortar” arbitration case filings.  Why?  The dramatic and rapid advances in technology will make the choice an easy one, much like Amazon and other web-based entities have challenged brick-and-mortar shopping as the preferred method of commerce.[5]  Put differently, why drag yourself to a hearing and wait around for snail-mail when you can accomplish the same things via the cloud in a fraction of the time and cost?[6]  And consumer demand will drive the shift to cloud-based ADR


Last, while phones will continue to continue to shrink in size and expand in functionality, the concept of a phone you hold in your hand will become viewed as a transitional technology, just like what happened with fax machines.  The author predicts that one day soon, phones will be worn as wristwatches and the web will stream to “heads-up” displays on eyeglasses.  And maybe audio will come with the glasses.  Oh wait…that’s already happening![7]




More than fifteen years ago, the author made the following prediction:


For years, commentators have predicted that the future would bring the benefits of online technology to our paper-laden method of resolving disputes. The future, quite clearly, has arrived.[8]


This time he really means it!
For more, read the full article as published by The Journal of American Law – Fall 2014 here.



* George H. Friedman, an ADR consultant and now 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 holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional (Wharton-FINRA Institute).  He is a frequent speaker and author on alternative dispute resolution, with articles appearing in publications such as The National Underwriter, and The Insurance ADR Manual.


[1] Friedman, George, Arbitration as an Effective Means of Resolving Construction Disputes, in Wiley 1993 Construction Law Update (O. Currie, N. Sweeney, eds.) 169, § 9.24  pp. 201-2.


[2] Friedman, George, Alternative Dispute Resolution and Emerging Online Technologies: Challenges and Opportunities, 19 Hastings Comm. & Ent. L.J. 695 (1996-1997), available at http://heinonline.org/HOL/LandingPage?collection=journals&handle=hein.journals/hascom19&div=30&id=&page= (fee) <visited 12/11/2014>.

[3] Francis, Devon, Will We Drive Turbo Cars?  156:6 Popular Science 98 (June 1950), available at http://www.rover.org.nz/pages/jet/jet2.htm <visited 12/24/2013>.


[4] See http://www.rinkworks.com/said/predictions.shtml <visited 12/11/2014>.

[5] See Retailers, Are You Ready? Cyber Monday Overtakes Black Friday (Nov. 30, 2012), available at http://blogs.teradata.com/teradata-applications/retailers-are-you-ready-cyber-monday-overtakes-black-friday/ <viewed 12/11/2014>.  Also Cheng, Andria, UPS, FedEx Forecasts Suggest Black Friday Weekend will Again be Key for Retailers, Marketwatch.com (Oct. 25, 2013), available at http://blogs.marketwatch.com/behindthestorefront/2013/10/25/ups-fedex-forecasts-suggest-black-friday-weekend-will-again-be-key-for-retailers/ <viewed 12/11/2014>, and Cyber Monday to be Busiest Day Ever for FedEx, CNN Money (Oct. 24, 2013), available at http://money.cnn.com/2013/10/23/pf/fedex-cyber-monday/ <viewed 12/11/2014>.

[6] See Friedman, George, “Road Trips” in Consumer Arbitration: there Must be a Better Way (Sep. 15, 2013) available at https://www.arbresolutions.com/road-trips-consumer-arbitration-must-better-way/#.VIn7E_ldX84 <visited 12/11/2014>.


[7] Id.  See Oremus, Will, The Dick Tracy Watch is Real, Slate (Sep. 4, 2013), available at http://gizmodo.com/5994737/here-are-google-glass-tech-specs (glasses) <visited 12/11/2014>, and http://www.bloomberg.com/news/2013-10-24/samsung-pursuing-glasses-that-answer-calls-in-google-challenge.html <viewed 12/11/2014>.


[8] Friedman, supra n. 2, at 716.


Post Midterm Elections Effect On Consumer Arbitration

The Elections are over: What it means for Consumer Arbitration
Five things to look for in 2015
By George H. Friedman*


Back when I was Director of Arbitration at FINRA, we used to have a “Crystal Ball Contest” where the staff would weigh in on predictions for the coming year. I usually did pretty well. Maybe that’s because I belong to the World Future Society[1] and have a blog there, and love thinking and writing[2] about the future. Or maybe it’s because people can disagree with you, but they cannot state categorically that you are wrong, unless they claim to be time travelers. My colleagues at Arbitration Resolution Services call me “The Oracle of Teaneck.” For example, my followers may recall that about a year ago, I said “I have no doubt the Republicans will retake the Senate and add to their majority in the House in the mid-terms next year.” So, pay attention. Here are my views on what the election results mean for consumer arbitration:


  • The Arbitration Fairness Act is DOA; so is the Investor Choice Act
  • The Consumer Financial Protection Bureau will ban mandatory arbitration in many types of consumer financial contracts
  • The SEC will finally act on mandatory investor-broker arbitration; so will FINRA
  • SCOTUS will rebuke the National Labor Relations Board on its anti-arbitration policy
  • Web-based ADR will become much more prevalent


  1. The Arbitration Fairness Act is DOA; so is the Investor Choice Act


In 1925, what’s now called the Federal Arbitration Act (“FAA”) was enacted. It made mandatory predispute arbitration agreements (“PDAAs”) enforceable as a matter of federal law, and the Supreme Court in recent years has steadfastly supported the FAA. Legislation called the Arbitration Fairness Act (“AFA”)[3] has been introduced in both houses of Congress that would amend the FAA to ban PDAAs outright in consumer contracts. While Senator Franken held hearings on the Senate bill, nothing else of consequence has happened.


Prediction: The AFA bills will die when this Congress fades to black the end of this year. And there is zero chance they will be enacted in the next Congress. The same fate is in store for the Investor Choice Act (H.R. 2998) introduced earlier this year by Rep. Keith Ellison (D-MN). This legislation, would end the use of mandatory pre-dispute agreements by broker-dealers and investment advisers, and would guarantee class action participation.


Why these predictions? Several attempts were made over the years to amend the FAA to limit or ban use of mandatory arbitration in consumer contracts. These failed when the Republicans controlled the White House and Congress, and have met a similar fate under Democratic control of these institutions as well. For example, in 2009 the Democrats regained the White House and control of both houses of Congress. The capital markets tanked, there were the Madoff and other scandals, and the economy crashed. But the Arbitration Fairness Act didn’t make it out of the House Financial Services Committee, which at the time was chaired by Barney Frank, an avowed critic of PDAAs in consumer contracts. If it didn’t happen then, it’s not going to happen next year with a Republican controlled Congress. You can book that one.


  1. The Consumer Financial Protection Bureau will ban mandatory arbitration in many types of consumer financial contracts


The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed fundamental consumer protection issues involving securities, banking, and indeed the US economy. The Act, known as Dodd-Frank, contains language governing the use of predispute arbitration agreements in consumer financial and investor contracts.[4] Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”) and charged the new federal agency with studying the use of PDAAs in consumer financial transactions and addressing PDAAs “if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers…” Note that the CFPB’s choices are not binary, “yes-or-no” decisions; it can ban PDAAs outright or limit their use or impose conditions for their use. For example, the CFPB could promulgate a rule that limited PDAA use to a class of transactions (limitation on use) or required that consumers separately initial or click a PDAA (condition for use).


The uproar earlier this year over General Mills’ decision to adopt and later retract a new policy by which consumers, by engaging in activities such as downloading a recipe, or participating in a contest, or “liking” the firm on Facebook, would unwittingly be agreeing to arbitrate, certainly refocused the spotlight on the prevalent use of mandatory, predispute arbitration in consumer transactions. Indeed arbitration clauses abound in the consumer context, showing up in a vast array of contracts for consumer goods and services. Applied for a credit card? You’ve likely agreed to arbitrate disputes with your bank. Got a new cell phone? Payday loan? Rented a car? Opened a checking or stock brokerage account? Arbitration is likely right there in your contract.


Prediction: CFPB has been busy this year, holding field hearings, issuing reports, and conducting surveys. It will very shortly be issuing the report to Congress required by Dodd-Frank. Based on what I have seen, there’s no doubt in my mind that the Bureau will promulgate regulations banning use of PDAAs in a range of consumer contracts, specifically credit cards, bank accounts, car loans and payday loans. At a minimum, CFPB will impose conditions on PDAA use. For example, I’ve proposed recently that CFPB write rules that impose conditions on the use of PDAAs in contracts for consumer financial products and services – but not ban PDAAs outright. Specifically, the rules should:


  • Give the individual a choice of agreeing to arbitrate, but at the time of contracting. My plan would state that no individual would be denied goods or services or employment if he or she declined the arbitration option. This would provide the consumer/employee a choice of whether to accept arbitration, but move it up to the time when the contract is signed to avoid the practical realities of getting a bi-lateral post-dispute agreement to arbitrate. This requirement would give the dominant party a reason to offer incentives to the weaker party to agree to arbitrate, and – dare I say it – sell the process. By following this approach, there would be meaningful choice, but in a practical way.


  • Ensure that there is a knowing and voluntary agreement to arbitrate by requiring that the consenting individual separately initial/click the arbitration agreement. The Friedman plan would deal with the problem of ensuring a truly “knowing and voluntary” agreement to arbitrate by requiring that the arbitration agreement be separately acknowledged. By so doing, we would eliminate any uncertainty that the weaker party didn’t know what they were getting into.


  • Ensure procedural fairness safeguards. We should also require that any consumer or employee arbitration system adhere to basic tenets of procedural fairness. These are not hard to find; the challenge if anything will be narrowing down the list.


While CFPB funding may be an issue in a Republican Congress (the agency is widely perceived to be anti-business), I don’t think Congressional animus will include the CFPB’s arbitration activities.


  1. The SEC will finally act on mandatory investor-broker arbitration; so will FINRA


Dodd-Frank takes a different approach to PDAAs used in securities customer-broker contracts. Although the operative language in Dodd-Frank provides similar guidance and direction to both the CFPB and SEC about what the agencies are to do about mandatory or forced use of PDAAs, there is a key difference: Dodd-Frank section 921 does not require the SEC to do anything about PDAAs in customer-broker contracts. Given the more than 90 mandatory study and rulemaking requirements the SEC has under Dodd-Frank, it is not at all surprising that arbitration is not high on the agency’s priorities list.


Prediction: In my view, it is politically untenable for the SEC to do absolutely nothing about PDAAs, especially in light of the pressure that’s been brought to bear on this issue by some in Congress, NASAA (the association of state and Canadian securities administrators), PIABA (the bar association for lawyers who represent customers in securities arbitrations), and others (for example the AFL-CIO). My view is that, at a minimum, the SEC will study the subject (it has since 2010 been accepting comments on the topic), and eventually require some changes (impose limits or conditions). It will not, in my opinion, ban PDAAs outright. Think about it. To ban PDAAs in customer-broker contracts, the SEC would have to find that doing so is “in the public interest and for the protection of investors.” Essentially, the SEC would be saying: “We’ve been supervising customer-broker arbitration for decades. But, you know, we just realized it’s a terribly unfair system.” On the other hand, a finding that says, “We’ve studied customer-broker arbitration and we’ve concluded that it’s a fair process. But, you know, these few changes will make it even better” is politically tenable. What might such changes be?


  • Give the investor a choice of agreeing to arbitrate, but at the time of contracting.


  • Ensure that there is a knowing and voluntary agreement to arbitrate by requiring that the consenting investor separately initial/click the arbitration agreement.


  • Ensure procedural fairness safeguards.


Sound familiar?

Et tu, FINRA?

During the summer, FINRA formed a Dispute Resolution Task Force to “suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum.” The Task Force’s area on the FINRA Website already reports news of the group’s first in-person meeting, held October 10th. The Task Force “agreed that it would be open to examine any issues that may affect the face of arbitration and mediation in the next 20 years and that no issue was off the table for discussion.” It also identified the initial topics it will examine, and created subcommittees to “gather information and viewpoints” on the topics and to report back to the full Task Force. The Task Force is soliciting written comments and may, based on the written submissions, conduct interviews with organizations and individuals. The update also advises that the Task Force plans to wrap up its work next fall.


Prediction: I believe the group will finally tackle the remaining major criticism of FINRA’s arbitration: the mandatory use of PDAAs in investor-broker contracts. In fact, I predict they will adopt he plan I’ve already articulated twice in this blog post.


  1. SCOTUS will rebuke the National Labor Relations Board on its anti-arbitration policy


OK, this one involves employment arbitration and not consumer, but it’s close enough. What’s happening here? The Supreme Court has upheld class action waivers in consumer arbitrations, and at least one federal circuit – the Fifth – has ruled the same way as to the employment context. Specifically, the Fifth Circuit reversed the Board’s policy in D.R. Horton, Inc. v. NLRB, No. 12-60031 (5th Cir. Dec. 3, 2013). “[W]e disagree and conclude that the Board’s decision did not give proper weight to the Federal Arbitration Act….The NLRA [National Labor Relations Act] should not be understood to contain a congressional command overriding application of the FAA. The burden is with the party opposing arbitration, Gilmer, 500 U.S. at 26, and here the Board has not shown that the NLRA’s language, legislative history, or purpose support finding the necessary congressional command. Because the Board’s interpretation does not fall within the FAA’s ‘saving clause,’ and because the NLRA does not contain a congressional command exempting the statute from application of the FAA, the Mutual Arbitration Agreement must be enforced according to its terms.”


Strong stuff, but despite the fact that a federal circuit court, relying heavily on several Supreme Court holdings, has expressly overruled the NLRB’s take on class action waivers, some of the Board’s administrative law judges have apparently not gotten the message, issuing several rulings ignoring Horton.


Prediction: There’s not much I remember from civics class or law school, but I do remember this: Congress passes laws, the president signs laws, the courts interpret laws, and, federal administrative agencies carry out and apply federal laws. It is my view that the NLRB is having a bit of an identity crisis, and that sooner or later, the Supreme Court will – in “read our lips” fashion – deliver the message that class action waivers in PDAAs are enforceable under the FAA … and the NLRA. Specifically, sooner or later, the Supreme Court is going to hit the NLRB with a 2 x 4 over its rulings on class action waivers in arbitration clauses in employment agreements. Now, I’m not predicting violence toward a federal agency; the Supremes’ actions will be entirely legal.


  1. Web-based ADR will become much more prevalent


There’s a great scene in the classic 1967 movie The Graduate where a family friend of new college graduate Ben Braddock (played by Dustin Hoffman) gives some sage advice about the future to young Ben. With great fanfare, he leads up to a one word prediction: “Plastics!


Prediction: Here’s my one-word prediction on technology and ADR: “C-ODR” which stands for complete – online dispute resolution services.  This is a term developed by Arbitration Resolution Services, Inc., whose Board I chair. On what basis do I make this prediction? The dramatic and rapid advances in technology will make this choice an easy one for consumers, much like Amazon and other web-based entities have challenged brick-and-mortar shopping as the preferred method of commerce.[5] Put differently, why drag yourself to a hearing and wait around for snail-mail when you can accomplish the same things via the cloud in a fraction of the time and cost?[6] At a minimum, I see this as a breakthrough year for web-based ADR. Case administration, from filing to conclusion – including hearings – will be done online, and paper will become passé. It doesn’t take a Nostradamus to see that improving technology will drive this change.


In fact, I see changes happening even before arbitrations are filed. That’s right, before. Insurance companies, securities firms, credit-based companies, and just about any firm that processes claims online will start to build web-based ADR into their claims handling processes. For example, if a customer’s claim is denied in whole or in part, I can see the company offering cloud-based ADR on a voluntary basis as the next online step. Oh, wait, that one has already happened! ARS did that earlier this fall.




If nothing else, the arbitration world is constantly changing. No doubt there are some things that will happen this year that I just don’t see coming right now. And of course, some of my predictions may not come to pass, at least not yet. We can compare notes in a year. In the meantime, see you in the future!





*George H. Friedman, an ADR consultant, 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 is Chairman of the Board of Directors of Arbitration Resolution Services, Inc. and serves on the Board of Editors of the Securities Arbitration Commentator. Friedman holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional (Wharton-FINRA Institute).


[1] I am also an environmentalist. Thus, I have recycled some material from my past blog posts and articles.

[2] See Friedman, George, Technology, Alternative Dispute Resolution, and the Insurance Industry: the Future Has Arrived (Really this Time), 2014:1 Journal of American Law 22 (Fall 2014), available at http://journaloflaw.epubxp.com/i/397972/22 <visited Nov. 17, 2014>.

[3] See Friedman, George, The Arbitration Fairness Act: a Well-intentioned but Potentially Dangerous Overreaction to a Legitimate Concern, 2013:1 Securities Arbitration Commentator 1 (June 2013), available at http://www.proffriedman.com/files/SAC_AFA_Article__final_06-2013_.pdf <visited Nov. 17, 2014>.

[4] For an in-depth analysis on what CFPB can and should do, see Friedman, George, What’s a Regulator to do? Mandatory Consumer Arbitration, Dodd-Frank, and the Consumer Financial Protection Bureau, 20:4 ABA Dispute Resolution Magazine 4 (Summer 2014), available at http://www.americanbar.org/publications/dispute_resolution_magazine/2014/summer/what-s-a-regulator-to-do–mandatory-consumer-arbitration–dodd-f.html <visited Nov. 17, 2014>.

[5] See Retailers, Are You Ready? Cyber Monday Overtakes Black Friday (Nov. 30, 2012), available at http://blogs.teradata.com/teradata-applications/retailers-are-you-ready-cyber-monday-overtakes-black-friday/ <visited 4/4/2014>. Also Cheng, Andria, UPS, FedEx Forecasts Suggest Black Friday Weekend will Again be Key for Retailers, Marketwatch.com (Nov. 17, 2014), available at http://blogs.marketwatch.com/behindthestorefront/2013/10/25/ups-fedex-forecasts-suggest-black-friday-weekend-will-again-be-key-for-retailers/ < visited 4/4/2014>, and Cyber Monday to be Busiest Day Ever for FedEx, CNN Money (Oct. 24, 2013), available at http://money.cnn.com/2013/10/23/pf/fedex-cyber-monday/ <visited Nov. 17, 2014>.

[6] See Friedman, George, “Road Trips” in Consumer Arbitration: there Must be a Better Way (Sep. 15, 2013) available at https://www.arbresolutions.com/road-trips-consumer-arbitration-must-better-way/#.VGo-x_ldX84 <visited 4/4/2014>.


The Camel And The Last Straw

The Camel and the Last Straw or the Frog and the Boiling Water: Pick Your Parable

By George H. Friedman*

The current issue of the Securities Arbitration Commentator has as its lead story an article I wrote with the title above.  For those who don’t subscribe, here is the Reader’s Digest version.  Or maybe the USA Today iteration.


We all know the two parables that title this article.  What do they have to do with securities arbitration?  It’s my concern that, if approved, FINRA’s recently announced arbitrator classification rule filing[1] – on top of the many rule changes over the last several years that have come at the expense of the securities industry[2] – may be the last straw for the industry and FINRA arbitration.  Stated differently, the securities industry may step back, see that the securities arbitration pot is boiling, and jump out in whole or in part.  And that would not be a good thing – for either side.


Fourteen years ago I wrote an article[3] in the Commentator contending that the securities arbitration playing field was in fact level and that, if anything, it was slightly tilted toward investors. Several changes took place after I wrote my article.  If the proposed classification rule is approved, I am concerned that the arbitration playing field will be taking on a Titanic-like list from the industry’s perspective.


 What’s not to like in the Proposed Rule?

There are aspects of the proposed rule that each side – including arbitrators[4] – may not like.  For example, the customers’ bar might not be thrilled to learn that the proposed rule would disqualify as public arbitrators individuals whose firms meet a 10 percent/$50,000 annual income threshold based on serving retail or institutional investors “relating to securities matters.”  But, I think the industry will be most unhappy.  Why?


  • If you ever worked in the Financial Industry, Once a Non-Public Arbitrator, Always a Non-Public Arbitrator

The first major change impacts arbitrators who worked in the financial industry for any amount of time. The new rule would essentially freeze an arbitrator’s non-public classification, if that individual ever worked for any duration in the “financial industry” The proposed rule has no exceptions.  FINRA says this change is meant to address concerns expressed by investor reps that some public arbitrators are not truly public.


Why this matters: an expanded non-public roster just when we don’t need it: The net effect of this rule change will be to effectively cleanse the FINRA roster of public arbitrators with any securities industry experience whatsoever.  This in turn will of course strain the public roster which, as discussed above, will also be shrinking. Let’s also remember that FINRA’s customer case filings are now at multi-year lows.  If past is prologue, a market downturn or major product failure will spike case filings, placing further demands on the public roster.


  • Professionals Serving the Financial Industry

Another key change involves lawyers, accountants, and other professionals who provide services to the industry. The proposed new rule expands, contracts and clarifies the current rule. Expanded is: 1) the look-back period, which goes from two to five years; and 2) the application of the rule not only to the financial industry but also to “persons or entities associated” with it. Contracted is the 20-year permanent disqualification criteria, which is reduced to 15 years. Clarified is the term “professional work,” which becomes “professional time” because it is easier for prospective arbitrators to calculate.


Why this matters: While the shorter permanent disqualification period lessens the impact of the proposed change, the net effect is that it will take three years longer for these individuals to become public arbitrators, and more arbitrators with diminished securities experience will be classified as non-public because of the broadened definition of what constitutes providing services to the industry.  This most likely will not be seen by the securities industry as a benign change.


  • Employment Attorneys and Other Professionals

The proposed rule would also disqualify as public arbitrators attorneys, accountants and other professionals who devote 20 percent or more of their professional time within the last five years to “serving parties in investment or financial industry employment disputes.” But another part of the proposed rule classifies these individuals as non-public. While most of these arbitrators could become public after the five-year cooling off period, they would stay non-public forever if they accumulated 15 years of service in their career.


Why this matters: As I read it, the proposed rule would classify as non-public attorneys making their living bringing claims on behalf of employees against the securities industry.  Just a hunch but I don’t see this sitting particularly well with the securities industry, especially when one bears in mind that FINRA intends all proposed changes to apply to the Industry Code as well as the Customer Code.


My Concerns about a Possible Industry Defection           

Although this rule change was endorsed by the National Arbitration and Mediation Committee and the FINRA Board of Governors – both majority-public bodies – I am nevertheless concerned that the proposed rule may cause the securities industry to rethink its support of arbitration, in whole or in part.  The industry might decide it is comfortable arbitrating smaller cases but not larger ones.  Why?  Because the stakes for the securities industry become much higher when dealing with: 1) large claims; 2) being heard by panels having questionable qualifications; 3) coupled with the very limited judicial review of arbitration awards available under the Federal Arbitration Act.  Granted, I may be totally off on this, but then again, I have a pretty good track record predicting future events and trends in the ADR field.[5]  Why, specifically, am I concerned? 


  • Brokerage firms do not have to use predispute arbitration agreements: It’s worth remembering that there is nothing in the FINRA rules that requires the securities industry to use predispute arbitration agreements (“PDAAs”), as long as they don’t attempt to extinguish the investor’s right to demand FINRA arbitration.
  • While large firms have strongly supported PDAAs, many small firms have not. While we tend to think of the securities industry as a monolith, it is not. Many smaller firms have been leery of arbitration, mostly because one arbitration award can put a smaller firm out of net capital compliance.[6]
  • The securities industry may give up on FINRA arbitration, at least for large cases. On top of the changes over the last several years, I am concerned that the arbitrator classification rule if approved is going to lead the industry to consider abandonment of PDAAs, at least those that solely list FINRA as the arbitration forum or send all cases to arbitration irrespective of size. The alternative might be PDAAs that offer other dispute resolution providers like AAA or JAMS or– dare I say it – going to court, for all or larger cases.  And in fact some brokerage firms already do not require institutional investors to sign PDAAs.[7]  Also, if the past is any indication, few investors would be attracted to a non-SRO arbitration forum such as AAA or JAMS.[8]  The demise or diminishment of FINRA arbitration would not be good for investors or for that matter the securities industry.
  • Arbitration filings – at least for larger cases – may dry up. If I am correct about the industry’s reaction, then FINRA arbitration case filings would likely dry up because the only source of cases would be Rule 12200.  An arbitral institution like FINRA might find it untenable to maintain its forum in a time of greatly reduced and inconsistent case volume.[9]  FINRA becoming a small claims forum would also pose problems. As I wrote in this publication a year ago, when you break the glass and ring the fire alarm, you want to be sure there’s a fire brigade to respond.[10]
  • FINRA Dispute Resolution is the fairest, most economical game in town. Private providers like AAA and JAMS are fair, but don’t come close to FINRA in terms of rules and fees.[11]  This point was well-made by former SICA chair Tom Stipanowich, a leading authority in the arbitration field.  FINRA’s arbitration program got high marks when measured against the “arbitration fairness index” he created.[12]
  • Court is usually no place for either party to be. Going to court is terrible for all parties, especially investors.  While a significant portion of the investors’ bar supports the idea of having the option to go to court, I suspect this rests on a belief that FINRA Rule 12200, which gives customers the unilateral right to require arbitration of disputes with their broker, will always exist.  As I’ve written in this publication, if PDAAs go away, the securities industry would surely call for the abolition of Rule 12200.[13]


If arbitration is eliminated, I stand by my belief that litigation would be a poor way for the parties to resolve their differences.  I recently blogged on this very topic, pointing out the top ten things critics of arbitration won’t tell you about the awful realities of litigation.  Again, bear in mind these realities apply to both sides.


What to do?

This rule proposal is clearly well-intended but in my opinion it could have negative consequences if approved.  I suggest FINRA go back to the drawing board:


  • Keep it Simple. The arbitrator classification system, as it exists and as it may exist in the future, is a complicated mousetrap with many moving parts.  I urge FINRA to try to keep things simple, something that can only help parties, arbitrators, and staff.  A reasonably good model to emulate is the AAA’s Securities Arbitration Supplemental Procedures, where arbitrators must fall into one of two categories, “affiliated with the securities industry” or “not affiliated with the securities industry,” or they can’t be arbitrators.
  • Move to “pure public” arbitrators as the rule proposes but do not designate all newly-reclassified arbitrators as non-public. Move these arbitrators to a “can’t be an arbitrator” category.  This is similar to how the Codes now handle individuals like spouses of brokers, or others disqualified from being public but who don’t otherwise qualify as non-public.
  • Do not keep arbitrators non-public forever. Move arbitrators to the “no-man’s-land/can’t be an arbitrator” status after they are not involved in or with the industry for a number of years.
  • Go back to an “affiliated with the securities industry” classification, especially for the Industry Code. If customers don’t want arbitrators from the industry they will strike them.  But we can’t expect the securities industry to accept a “non-public” roster bloated by arbitrators who don’t know the industry, or who are attorneys representing employees.
  • Do a cost-benefit analysis on the rule’s potential impact (or reveal the results if one has been done). Having spent fourteen years at FINRA and being very familiar with its corporate culture, my guess is that it conducted an impact analysis of some sort.  But, if FINRA has done such an analysis, it’s not referenced in the rule filing.  This leaves the first blush impression that the net impact of the proposal would be to reduce the number of public arbitrators – currently 3,562[14] – while demand for them increases because almost every customer case will end up with a public panel.  At the same time, it would appear that the ranks of the non-public roster will expand while demand for such arbitrators declines. [15]  If such an analysis has been done, FINRA should release the results.  If not, then FINRA must do one.  For that matter, a cost-benefit analysis of a potential elimination of PDAAs by the securities industry might be a good idea.
  • Have the newly-formed Arbitration Task Force review the rule filing: On July 17th, FINRA announced the formation of an Arbitration Task Force, whose role is “to consider possible enhancements to its arbitration forum to improve the transparency, impartiality and efficiency of FINRA’s securities arbitration forum for all participants.” Arbitrator classification should be its first order of business.


 Industry abandonment of arbitration for some or all cases might look like a good thing to some on both sides, but as Henry Ford’s once said, “If I had asked people what they wanted, they would have said faster horses.”[16]  The author realizes he is treading in a potential minefield.  After spending close to four decades building trust among a diverse group of constituents in the alternative dispute resolution community, it’s possible that, with this article, I will manage to offend my friends in both the customers’ bar and the securities industry, and at FINRA.  If I manage to unite all sides in their anger with me, perhaps some consensus will emerge. Who knows, we may see PIABA and SIFMA joining hands to craft an improved, simplified classification rule.  Then another parable – the lion and the lamb – will come into play.



[1] See SR-FINRA-2014-028, available at http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p532202.pdf.  Also, Federal Register vol. 17, no. 128, p. 38080 (July 3, 2014) Notice of Filing, available at http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p544264.pdf <both visited July 16, 2014>.

[2] And some rule changes that were proposed but abandoned.  For example, in 2005 NASD proposed a rule that would have given investors the unilateral right to require an explained decision from the arbitrators.  See New Arbitration Rule Requires Award Explanations upon Investor Request (Jan. 27, 2005), available at http://www.finra.org/newsroom/newsreleases/2005/p013145 <visited July 16, 2014>. The proposal was withdrawn after both sides didn’t support it, albeit for different reasons.

[3] See Friedman, George, The Level Playing Field, XI:12 Securities Arbitration Commentator 1 (July 2001), available at http://www.proffriedman.com/files/Level.PDF <visited July 16, 2014>.

[4] Yes, arbitrators, large numbers of whom may end up being disqualified or reclassified. Just how many one cannot say; FINRA provided no indication in the rule filing that it has conducted any impact analysis.

[5] See, Trust me on this, I’m from the Future! Confessions of an Accidental Futurist (Feb. 20, 2014), available at http://www.wfs.org/blogs/george-friedman/trust-me-one%E2%80%94im-future-confessions-accidental-futurist and Trust me on this, I’m from the Future! – Part II (Apr. 2014), available at http://www.wfs.org/blogs/george-friedman/trust-me-one%E2%80%94im-future-%E2%80%94-part-ii <both visited July 16, 2014>.

[6] See Briton, Diana, A Cautionary Tale: How One Arbitration Can Topple a Firm (July 8, 2011), available at http://wealthmanagement.com/legal-compliance/cautionary-tale-how-one-arbitration-can-topple-firm.  Also, Notice to Members 07-17, available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p018897.pdf, and in general the industry comments opposed to increasing the single-arbitrator threshold from $50,000 to $100,000, available at http://www.sec.gov/rules/sro/finra/2009/34-59340.pdf <all visited July 16, 2014>.

[7] See Ryder, Richard, Institutional Investors & PDAAs – Will the Twain Soon Meet?” 2009:3 Securities Arbitration Commentator 1 (April 2010).

[8] See Final Report, supra note 9, at 3A survey of investors eligible to participate in the pilot “reaffirmed the basic themes that higher costs, more familiarity with the SRO forums, and possible additional delays were the main reasons claimants did not choose the non-SRO forums.”

[9] See Gross, Jill, The End of Mandatory Securities Arbitration? 30 Pace L. Rev. 1174, 1189-93 (2010), available at http://digitalcommons.pace.edu/cgi/viewcontent.cgi?article=1736&context=plr <visited July 16, 2014>.

[10] Friedman, George, The Arbitration Fairness Act: a Well-intentioned but Potentially Dangerous Overreaction to a Legitimate Concern, 2013:1 Securities Arbitration Commentator 1 (June 2013), available at http://www.proffriedman.com/files/SAC_AFA_Article__final_06-2013_.pdf <visited July 16, 2014>.

[11] See, Leiby, Larry, What Does it Cost for AAA, JAMS, or CPR to Administer an Arbitration Case and how do the Initial Filings Vary? 88:7 Fla Bar Journal 1 (Jul/Aug 2014), available at http://tinyurl.com/nsf9gj4 <visited July 16, 2014>.

[12] See Stipanowich, Thomas, The Arbitration Fairness Index: Using a Public Rating System to Skirt the Legal Logjam and Promote Fairer and More Effective Arbitration of Employment and Consumer Disputes, 60 Kansas L. Rev. 985, 1024-5 (2012), available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2004543) <visited July 16, 2014>.

[13] See, Friedman, George, Defining who is a Customer in FINRA Arbitration: Time to Clear Things Up!” 2012:6 Securities Arbitration Commentator 1 (May 2013), available at http://www.proffriedman.com/files/Defining_Who_is_a_Customer.pdf <visited July 16, 2014>.

[14] Statistics available at http://www.finra.org/ArbitrationAndMediation/FINRADisputeResolution/AdditionalResources/Statistics/ <visited July 16, 2014>.

[15] These points are very thoroughly addressed in Peters, Sarah Scott, Ward, Bryan M. and McCormick, Andrew M.,  Everybody Out of the (Public Arbitrator) Pool, Law 360 (July 3, 2014), available at http://www.law360.com/articles/552840/everybody-out-of-the-public-arbitrator-pool <visited July 16, 2014>.

[16] See http://www.goodreads.com/quotes/15297-if-i-had-asked-people-what-they-wanted-they-would <visited July 16, 2014>.

Arbitration Resolution Services Appoints New Chairman and COO

CORAL SPRINGS, Fla. (October 1, 2014) Arbitration Resolution Services, Inc. (ARS), the world’s first cloud-based Complete Online Dispute Resolution (C-ODR™) provider, today announced the appointment of George Friedman as Chairman of the Board of Directors and Randall Wood as Chief Operating Officer.

ARS is a fully-automated legal solution that helps its users operate from their home or office to complete the arbitration and/or mediation process. Unlike the traditional legal methods for resolving claims, the ARS system manages resolving the dispute in an accurate, quick and impartial way with the help of unbiased and knowledgeable professionals.

“It’s an honor to be named as Chairman of the Board,” said George Friedman. “I joined the ARS Board of Directors in early 2013, and I’ve been incredibly impressed with its innovative approach to arbitration and mediation services.”

Mr. Friedman is a nationally-regarded authority in alternative dispute resolution. He is the principal of George H. Friedman Consulting, LLC, which provides expert advice on arbitration and mediation in general and the FINRA dispute resolution forum in particular. He is former Executive Vice President – Dispute Resolution of the Financial Industry Regulatory Authority (“FINRA”), a position he held through January 2013. He held the same title at NASD, which consolidated with NYSE Member Regulation to form FINRA in 2007. Prior to joining FINRA, Mr. Friedman was a senior officer at the American Arbitration Association. He is also an Adjunct Professor of Law at Fordham Law School, where he has taught a course on alternative dispute resolution since 1996. Mr. Friedman is frequently consulted with regulatory authorities, publication and media sources throughout the county.

As Chairman, Mr. Friedman will oversee the company’s arbitration services and provide strategic guidance on the company’s future initiatives. As the original provider of a cloud-based arbitration system, ARS continues to enhance its services to streamline the arbitration process for its clients.

The company also appointed Randall Wood as its Chief Operating Officer (COO). As COO, Mr. Wood will manage operations and oversee the company’s financial management strategy.

Mr. Wood is the co-founder of Citrix Systems (NASDAQ: CTXS), a global software company that has grown into a multi-billion dollar Fortune 500 publicly traded company. Citrix was originally created with the goal of developing software that enabled smaller computers to run programs previously only available to large mainframe systems. For the past 15 years, Wood has been a full-time investor, involved in the financing and oversight of numerous real estate and technology companies.

About Arbitration Resolution Services

Arbitration Resolution Services was created to revolutionize the way disputes are resolved throughout the country. By integrating state-of-the-art technology with experienced and knowledgeable professionals, ARS has developed the ideal environment to bring alternative dispute resolution, using binding arbitration, to virtually everyone, anywhere in the country. For further information, visit www.arbresolutions.com.

A George Bailey “Hat Trick” – Et Tu, 9th Circuit?

A George Bailey “Hat Trick” – Et Tu, 9th Circuit?

Several months ago in this blog I described a “hat trick,” which is a hockey term for when a player scores three (or more) goals in one game. For those who have somehow eluded ever seeing the holiday classic “It’s a wonderful Life,” the other George is shown what the world would have been like if had never been born, and realizes the world is different – and better off – with him in it. Lately, I’ve had these George Bailey moments where I conclude that the world is different – and in a better way – because I was born. And it’s happened three times….

A-Rod to NLRB to Ninth Circuit

No, this is not an obscure baseball double-play combination. In January and February I wrote here that A-Rod would fail in his efforts to overturn the arbitration award against him arising out of alleged violations of baseball’s drug policy. As we know, A-Rod dropped his suit, leading me to muse that he must be reading my blog. Then, I blogged about the National Labor Relation Board’s (“NLRB”) quixotic determination to essentially ignore a decision of the United States Court of Appeals for the Fifth Circuit holding that class action waivers in arbitration clauses did not violate the National Labor Relations Act and were consistent with the Federal Arbitration Act. Lo and behold, the NLRB later decided it had better ask for a rehearing en banc, causing me to conclude that they, too, read my articles and such. And now, the third goal has been scored. It comes in the form of the Ninth Circuit’s just-released decision that essentially adopts a definition I proposed in an article I wrote last spring.

My Article

Last May, I penned an article, “Defining Who is a Customer in FINRA Arbitration: Time to Clear Things Up!” that was published in the Securities Arbitration Commentator. Without going into great detail, I can describe the article’s topic as follows. FINRA’s arbitration Code has a rule that says a broker has to arbitrate at the demand of a customer. An issue that naturally arises is “who is a customer”? Problem is, the arbitration rules define customer by describing what is not a customer. Specifically, the rule in question – Rule 12100(i) – states “a customer shall not include a broker or dealer.” This of course is a very broad definition, and has led to much litigation over who or what is a “customer” for arbitration purposes. I close the article with a proposed definition.

The Ninth Circuit

The “customer” issue was front and center in Goldman Sachs & Co. v. City of Reno, No. 15445 (Mar. 31, 2014). Specifically before the court was whether Reno, which was issuer of auction rate securities, was a customer of Goldman, which served as sole underwriter and broker-dealer. In reading the opinion, I was struck by the customer definition adopted by the Ninth Circuit:

Accordingly, we conclude that a “customer” is a non-broker and non-dealer who purchases commodities or services from a FINRA member in the course of the member’s FINRA-regulated business activities, i.e., the member’s investment banking and securities business activities.

This seemed very familiar, so I went back and reread my article. There I suggested that for purposes of arbitration a customer be defined as:

… one, not a broker or a dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities insofar as those activities are regulated by FINRA—namely investment banking and securities business activities.

My Conclusion

Now, the definitions are not identical, but the meaning is the same. And although I crafted my proposed definition borrowing from those articulated in other Circuit Court opinions, I choose to believe I had something to do with the Ninth Circuit’s definition If the court later challenges my belief, I can always claim this blog post was an April Fool’s Day prank!

NY Trial Court To Parties (and Arbitrators): Settled Means Settled

NY Trial Court to Parties (and Arbitrators): Settled Means Settled

I don’t often write about lower court decisions, but it’s not every day a court vacates a nearly $11 million arbitration award, and throws in some strong words to boot.  The case, Citigroup Global Markets, Inc. v. Fiorilla, No. 653017/2013 (Sup. Ct., N.Y. Cty., Jan. 9, 2014), arose out of a FINRA arbitration involving the same parties, case no. 10-03616.[1] On its face, the FINRA award is pretty straight-forward:  the arbitration panel unanimously awarded over $10 million to be paid by Citigroup to Fiorilla, after holding many hearings from October 2012 to July 2013 (the individual broker was ordered to pay $250,000 to the claimant).

The story becomes more complicated when Citigroup and the individual broker sought to challenge the award in state court on the grounds of manifest disregard of law, and bias because two of the arbitrators failed to make required disclosures.  It turns out the parties appeared to have settled their dispute before the arbitration was commenced.  This the court seizes on without addressing the arbitrator disclosure issue.

“In light of the fact that this matter was in fact settled and that all parties so advised the panel and FINRA in writing …there is no need to delve into the troubling allegations of misconduct by the arbitrators.  This award must be vacated.”  Although the FINRA award does not reference the settlement issue as one raised before the arbitrators, the court thinks it was and has some harsh words for the participants.  First, he counsels the panel, stating “Had the panel abided by the FINRA Rules, as FINRA did, and acknowledged that this matter had been settled, the parties could have avoided needless litigation.”  Then he addresses the respondents, stating  “The respondents’ refusal to abide by the settlement…has resulted in a frivolous waste of counsel’s time and efforts, as well as a waste of the scarce resources available to New York’s Unified Court System.”

My take.  Although it’s not clear whether the court applied the Federal Arbitration Act or New York’s Civil Practice Law and Rules, Art 75, I’m not sure it was correctly decided either way.  Deciding whether there has been a settlement in my view a factual determination to be made by the arbitrators and, as per U.S. Supreme Court holdings, is to be given great deference by the courts. Also, readers should bear in mind the court system structure in New York State.  The Supreme Court is a trial court.  There are two more levels of appeal beyond that (the Appellate Division and the Court of Appeals).  Given the stakes, it would be surprising if an appeal is not taken here.

[1] Both the court decision and the underlying arbitration award are available at http://finraawardsonline.finra.org/ (search by the FINRA case number).

The Basics Of Securities Arbitration

George Friedman, a member of our Board of Directors, today presented “The Basics Of Securities Arbitration” to Seton Hall Law School’s Investor Advocacy Project.  You can preview his presentation here.  Friedman is also an adjunct law professor at Fordham University.


The Basics of Security Arbitration from Arbitration Resolution Services

Turns Out An Arbitrator’s Duty To Disclose Is Biblical In Nature

Judge Joyner’s August 1st ruling in Goldman Sachs v. Athena Venture Partners, LLC, no. 13-MC-130 (E.D. Pa.), underscored some fairly basic arbitration law:  the Federal Arbitration Act requires that arbitrators fully disclose to the parties anything that might cause a reasonable person to question the arbitrator’s impartiality.  In Goldman an arbitrator – who was an attorney — failed to disclose to FINRA or the parties some rather serious disciplinary actions taken against him. 

Nothing new there.  Going back to its 1968 decision in Commonwealth Coatings, the Supreme Court has made it clear that the FAA imposes on the arbitrator a clear duty to disclose.  Indeed, an arbitrator’s failure to disclose in the Court’s view creates an inference of bias, which is one of the limited grounds under the FAA for challenging an arbitrator’s award.

Having been in the arbitration field for close to 40 years, and having taught arbitration at Fordham Law School for over 17 years, I thought I had this issue down pat.  The arbitrator’s duty to disclose arises out of the FAA and the rules of the arbitration administrator.  Alas, I must confess I’ve had it wrong lo these many years. 

I learned last week that the duty to disclose might be Biblical in nature.  On August 9th I heard a radio broadcast featuring scholar Rabbi Benjamin Yudin of Congregation Shomrei Torah of Fair Lawn, New Jersey.  In analyzing the portion of the Torah (i.e., Old Testament) read August 10th in synagogues around the world, Rabbi Yudin pointed out that the first sentences require not only that individuals deciding cases must be substantively qualified, but that they must be “righteous.”  

And how do we define that term?  The great medieval Jewish scholar Rashi defines this as absolute, complete impartiality.  And what is the specific ground in the FAA that an arbitrator violates by failing to make a disclosure?  Evident partiality!  Specifically, 9 U.S.C. sec. 10(a)(2) states that an arbitrator’s decision will be vacated “where there was evident partiality or corruption in the arbitrators…”

I tie this all together to mean that besides the FAA and the arbitration rules the parties are using, the Almighty wants arbitrators to make full, accurate disclosures.  This should prove to be a powerful inducement for arbitrator disclosure!


The Future of Arbitration

Back in 1997, George Friedman, a member of the ARS Board of Directors, predicted and planned for the economic collapse of 2008, alternative energy needs, hybrid and electric cars, and now the future of arbitration.  Check out his predictions that were applauded at the 2013 Securities Experts Roundtable in Boston.

[slideshare id=24876769&doc=georgepptforsermeeting6-27-130802124737-phpapp02]

George Friedman’s Latest Rebuttal To New Criticism of FINRA by Dan Solin

In April, George Friedman responded to a US News & World Report column by Dan Solin criticizing the FINRA arbitration forum.  Solin, a long-time critic of FINRA, has just published a new article critical of FINRA executives’ compensation relative to investor performance.

Friedman, one of our Board Directors, is uniquely qualified to respond to this new criticism following his years of service as FINRA’s Director of Arbitration.  His latest rebuttal once again sets the record straight about FINRA’s arbitration program.  Friedman dissects Solin’s biased criticism item-by-item, eventually concluding that a brokerage firm being required to register with FINRA and pay fees, assessments, and fines to FINRA, does not equate to the securities industry controlling FINRA.

We welcome you to judge for yourself …

My reaction to Dan Solin’s latest broadside against FINRA, “FINRA’s Executives Prosper While Investors Suffer,” (US News; 7-11-2013) was similar to Ronald Reagan’s reaction to Jimmy Carter back in the 1980 presidential debates: “There you go again!”  Once again, we have an article making broad criticisms about FINRA’s arbitration program that aren’t backed up by substantial analysis or proof.  I’ll leave the debate about compensation to others, but as the recently retired FINRA Director of Arbitration, I have to set the record straight about the arbitration program.

The article calls the FINRA program unfair.  Really?  Let’s examine the facts, which I’ve backed up with links to sources.  And by the way, the offending statements in the article would still be wrong even if the FINRA folks were volunteers:

Predispute Arbitration Clauses

The article gives the impression that FINRA makes brokers put predispute arbitration clauses (“PDAAs”) in their customer agreements.  This simply is not true.  But, if a firm does want to use an arbitration clause, then FINRA rule 2268 has very clear requirements about where the PDAA may be placed and what should – and should not — be in it.  For example, among other protections for customers, contracts must contain a highlighted statement immediately before the signature line indicating that there is an arbitration clause, and where in the document it may be found.  Also, the PDAA cannot: 1) contradict the rules of a self-regulatory organization like FINRA; 2) limit the ability of a party to file an arbitration claim; or 3) limit the ability of the arbitrators to make an award.

Fairness of FINRA’s Arbitration Program

This paragraph in particular got me to thinking of “Dutch” Reagan:

Don’t confuse FINRA mandatory arbitration with arbitration by impartial administrators like the American Arbitration Association. Arbitration administered by these agencies can offer savings in time and cost to the participants. In contrast, FINRA-administered arbitration falls into an entirely different category. It’s the securities industry sitting in judgment of itself, with predictable results…

Not impartial?  Really?  Compared to what?  Having spent 22 years at the American Arbitration Association, I can attest that it is a very fair, impartial arbitration administrator.  But AAA does not regulate the securities industry.  Also, the only cases FINRA arbitrates are securities-related, while AAA has a very broad mission and handles all sorts of cases.  There are things FINRA can do because it regulates the securities industry that AAA simply cannot do.

Echoing points I made in an article I authored earlier this month in the Securities Arbitration Commentator, and without meaning to denigrate the AAA, below are some important facts your readers might want to know.  Where appropriate I’ve noted important differences between FINRA’s arbitration program and AAA’s:

  • FINRA is regulated by SEC (rule approval process; inspections, responding to investor complaints).
  • Rules are first approved by the National Arbitration and Mediation Committee, a majority of whom – including the chair – is not affiliated with the securities industry.  In fact, the past several chairs have been former presidents of PIABA – the bar association for attorneys who represent customers in the FINRA arbitration forum!
  • Rules are amended only after proposed rules are published in the Federal Register, the public is given a chance to comment, FINRA responds to the comments, and SEC approves the rules as being consistent with investor protection.
  • FINRA serves the claim on the broker under rule 12301(a); AAA does not serve the claim.
  • FINRA’s fee structure favors the investor; AAA’s does not.  In fact, the industry parties pay an overwhelming portion of arbitration fees under FINRA’s program.
  • Under FINRA Rule 12213, FINRA has the hearings at the hearing location closest to where the investor lived when the underlying events occurred.  AAA’s rules do not have a similar provision.
  • FINRA has hearing locations in all 50 states (at least one in each).
  • FINRA has a motion to dismiss rule that severely limits motions made prior to the claimant resting their case, and provides sanctions for frivolous motions.  AAA has no such rule.
  • FINRA has Discovery Guidelines and has codified discovery provisions in the April 2007 FINRA Code of Arbitration Procedure revisions; AAA does not have a comparable guide.
  • FINRA‘s rule 12403 gives the customer an option of an all-public panel.  So much for the article’s claim that the forum is “the securities industry sitting in judgment of itself.”  There’s no such rule at AAA (the parties must agree on an all-public panel).
  • FINRA rule 12407(a)(1) provides that in close calls, if the investor wants an arbitrator removed for bias, he or she is removed; AAA has no such rule.  
  • FINRA’s awards are public, unredacted, and available free of charge on the Web. The same can’t be said of AAA.
  • Finally, FINRA enforces awards against industry parties under rule 9554; AAA has no authority to enforce the award.  FINRA also enforces settlements.

Then there’s the article’s statement about results.  Query: what is the right result?  Also, looking at the outcomes reported on the FINRA web site, we see that “in 2012, approximately 78 percent of customer claimant cases resulted, through settlements or awards, in monetary or non-monetary recovery for the investor.”  Is that a bad thing?  Just asking.

Also, the old fairness study cited in the article, published in early 2008 – more than five years ago — is based on data from cases processed from 2002-2006, and thus does not reflect participant views of the current program.  For example, the study most certainly doesn’t reflect the 2011 rule establishing a customer’s right to require an all-public panel.  Further, the article fails to mention that the two law professors who administered the study, Barbara Black and Jill Gross, speak favorably of FINRA’s program. For example, in a 2011 paper Professor Black stated:

People who have studied the FINRA arbitration forum closely (including myself) give it high marks on most of the recognized fairness  standards for dispute resolution; the outstanding fairness concerns relate to the presence of an industry arbitrator on every three-person arbitration panel and lack of reasons for the arbitration panel‘s award.  While the system is not perfect, FINRA, under SEC oversight, has enacted major reforms in recent years to improve the fairness of the forum [footnotes omitted].

Finally, the canard that somehow the industry rigs the arbitration program is absurd and outrageous.  Just because brokerage firms have to be registered with FINRA, and pay fees, assessments, and fines to FINRA, doesn’t equate to the securities industry being in control of FINRA.  This is kind of like saying that because we pay to the IRS taxes, assessments, and fines, the IRS is a taxpayer advocacy group controlled by the taxpayers.  To quote the late New York Mayor Ed Koch: “Ridiculous!”

In closing, fair, objective criticism is always appropriate.  Unfair, slanted criticism is not.