Bates Research - 02-28-17

FINRA Dispute Resolution Update: 2017 Arbitration Reform

On February 8, the Financial Industry Regulatory Authority (FINRA) released a new report on the status of recommendations made by the FINRA Dispute Resolution Task Force. The 13-member Task Force was formed in July 2014 to “improve the transparency, impartiality and efficiency of FINRA's securities arbitration and mediation forum.”

The scope of the effort was ambitious. FINRA operates the largest securities dispute resolution forum in the United States, handling “more than 99 percent” of all securities-related arbitrations and mediations. As stated in the Task Force Final Report, released in December 2015, “FINRA is, for all practical purposes, the sole arbitration forum in the United States for resolving disputes between broker-dealers, associated persons, and customers.”

The Final Report sent 51 recommendations to FINRA’s standing advisory committee, the National Arbitration and Mediation Committee (NAMC), for prioritization and action. Since the issuance of the Final Report, the recommendations have been vetted through FINRA constituencies, including investor and industry counsel, other advisory committees and the FINRA Board. This latest progress report states that “FINRA has taken action on 35 of the 51 recommendations” with another 16 still pending.  

Certain recommendations related to the arbitration rules require approval by the SEC, which must determine if they are consistent with the requirements of the Securities Exchange Act of 1934 and its rules. Certain recommendations need Board review, but some recommendations – in the form of “enhancements” – do not require SEC or Board rulemaking.  Many of these enhancements, according to the update, have already been implemented by FINRA staff. 

SEC Adoption of Arbitrator Recommendations

FINRA’s status report highlighted SEC approval of two FINRA recommendations concerning arbitrators.

The first rule change increased the number of public arbitrators from which parties may choose during the panel selection process.  In cases with three arbitrators, FINRA will now provide 15 public arbitrators for consideration instead of 10. The rule change went into effect January 3, 2017.

The second SEC-approved rule change permits arbitrators to grant a party's motion to dismiss if the arbitrators determine that the non-moving party previously brought a claim regarding the same dispute against the same party, and the claim was fully and finally adjudicated on its merits. The rule change went into effect January 23, 2017.

Dispute Resolution Process “Enhancements”

The FINRA status report identified a number of staff-implemented recommendations that did not require rulemaking. These include “enhancements” on forum transparency, arbitrator recruitment and training, and case administration processes. A handful of these are described briefly:

  • More Arbitrator Disclosures

The Task Force recommended disclosure reforms for arbitrators including requiring more information on arbitrator status, on assigned cases and on case-specific (subject matter) disclosures earlier in the selection process. FINRA responded by adopting procedures requiring arbitrators to certify the accuracy of their profile information and to provide contact information for counsel on open cases. FINRA did not adopt the recommendation to require arbitrators to provide case summaries for early case-specific disclosure, deeming it to be “time consuming” and “unduly burdensome.” 

The Task Force recommended improved procedures for advising arbitrators about proposed and adopted rule changes. FINRA responded by adopting procedures to provide improved notice through the FINRA arbitrator and mediator newsletter, monthly emails, the Dispute Resolution web page, and an arbitrator subscription feed.

  • Training for Chairs and Arbitrators

The Task Force recommended increased training for chairpersons. FINRA responded by developing additional resources (including a roster of experienced chairpersons) and implementing a mentoring program for new chairpersons.

Similarly, the Task Force recommended that arbitrators complete continuing education programs. FINRA responded by creating new procedural reminders for upcoming training programs and will develop additional resources including free training modules and reduced rates for FINRA regulatory compliance training programs.

  • Expert Witnesses

Regarding recommendations related to case management, the Task Force suggested adding language to the Initial Pre-Hearing Conference script to discourage the problematic practice of so-called “phantom retention” of experts.  FINRA staff revised the Script and form letters to state that a party should only identify the name of an expert witness that the party has actually retained.  

  • Expedited Hearings for Senior and Seriously Ill Parties

Regarding expedited case management of hearings for senior or seriously ill parties, FINRA staff sped up the processing of providing arbitrator lists, shortened the time for arbitrators to accept such cases, updated tracking reports to note expedited cases, and provided checklists of procedural stipulations to expedite case administration. 

There is some disagreement as to whether the recommendations, as implemented, represent the needed reform for the system as a whole. (See, for example, this recent Heritage Foundation Report.) There is little doubt, however, that the procedural details will impact every aspect of the arbitration process.  For practitioners, the changes represent new tools to use on behalf of clients, such as greater choice in selecting arbitrators, greater opportunity to seek and obtain dismissals, more relevant and timely disclosure, more confidence in the competence and training of arbitrators and chairpersons, and more ways to expedite procedures for vulnerable parties, among others. That said, it will take time to determine the full effects of the implemented changes, let alone the changes still to come.

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