FINRA Talks Dispute Resolution - Offers Tips and Advice to Counsel and Arbitrators

On February 3, 2020, the New York County Lawyers Association hosted its “21st Annual FINRA Listens and Speaks” panel. The panel members discussed recent statistics, proposed regulations, and tips for counsel and arbitrators on the agency’s dispute resolution efforts. Katherine Bayer, Northeast Regional Director of FINRA’s Dispute Resolution Office, and Arthur Baumgartner, Senior Case Administrator, FINRA Dispute Resolution, delved into details of the inner workings of the Office and responded to comments from moderator and arbitrator Martin Feinberg. Bates takes a closer look at what you need to know.

Recent Statistics

FINRA’s case load has been on the decline for a number of years. In 2019, 3,757 new claims were filed – a decrease of 13 percent from 2018. Customer cases made up 63 percent of the filings and intra-industry cases made up the remaining 37 percent. On average, cases took 14.2 months to conclude – no change from the prior year. However, cases that went through to hearing averaged 16.9 months (slightly longer than the year before), and cases decided on the pleadings alone – with no hearing – averaged 5.8 months, which was a decline from the previous year.

A new category of “special proceeding” cases focusing on small claims were resolved in an average of 7 months. The 1-day telephonic hearings using a single arbitrator went into effect a year and half ago. In 2019, 46 customer cases were decided under the special proceedings. Director Bayer stated that she believes that it is likely the number of these cases will increase as they become better known.

In 2019, 16 percent of the cases closed by award, a low figure and one trending downward. Each year since 2016, the number of cases closed by award went down. Cases closed by settlements and through mediations of customer cases, however, represented 74 percent of the cases adjudicated, which has increased year over year. Mediation case filings also went up last year, with 592 new mediation cases filed (up from 16 percent from the prior year). Director Bayer noted that cases from San Juan, Puerto Rico comprised of more than a third of the mediation case filings. Mr. Feinberg noted that this statistic was the result of the filings from disputes on Puerto Rico bonds.

Rule and Proposed Rule Changes

Director Bayer highlighted a number of recent rule and proposed rule changes affecting FINRA dispute resolution. Those include:

• New rules extending the time for non-parties to object to an Order of Subpoena or Order of Production of Documents (to 15 days upon receipt from 10 days upon service).
• Proposed changes to member application program (MAP rules) related to pending arbitration claims and awards. The proposed rule change would create a rebuttable presumption that an application for new membership should be denied if the applicant is subject to a pending arbitration claim. The presumption can be overcome by a demonstration of the ability to satisfy an unpaid claim, unpaid award, or unpaid settlement.
• The above proposed rule also applies to an existing member seeking a specified change in ownership or control of business operations. Resolution would require a “materiality consultation” – to ensure that the member seeking the change can satisfy an unpaid claim or award. Director Bayer noted that the issue addresses when a firm sells its assets to another firm, and the new firm declines any liability for previously unpaid claims or awards. The rule also requires that an applicant notify any pending arbitration claim before a decision on an application. Comments were completed on January 21, 2020. FINRA is expected to act on it soon.
• Proposed changes placing restrictions on non-attorney representatives (NARs) practicing in a FINRA dispute resolution. Law school clinics, family members, and non-compensated friends are not subject to the restrictions in the proposed rules. FINRA will file a formal amendment with the SEC sometime soon. Director Bayer also clarified that under FINRA rules, an out-of-state lawyer can practice in a FINRA dispute resolution proceeding subject to state law restrictions. Mr. Feinberg noted that the original reasoning behind NARs concerned fully qualified, non-lawyer union representatives representing individuals in a labor dispute.
• Proposed changes to amend the Code of Arbitration Procedures to expand a customer’s option to withdraw an arbitration claim and file in court in situations where the member firm becomes inactive before a claim is filed, or during a pending arbitration claim. The current rule states that a customer is not required to arbitrate a dispute involving a terminated member. The proposed rule allows a customer to amend pleadings, postpone hearings, and receive refunds of filing fees. Staff is in the process of reviewing comments.
• Proposed rule change to the Code of Arbitration Procedures to increase various arbitrator fees and honoraria. To cover the fees, the proposed rule would increase member surcharges in case processing under certain circumstances. The proposed amendments are to be filed soon with the SEC.

Director Bayer also announced the inclusion of case-specific contact information to be delivered at the time the Notice of Panel is announced. The contact sheet includes names of the case administrator, case coordinator (who handles scheduling), and a case specialist (who handles the case when its first is filed, when the answer is filed, and, in general, the motions docket).

Tips for Counsel:

• Director Bayer emphasized the importance of, the improvements to, and the expectations for arbitrators to utilize the FINRA arbitration portal. Director Bayer encouraged arbitrators to trust the portal for documents sent and received that will automatically provide a confirmation in the submissions folder. She stated that it speeds up the process, prompts required disclosures (and disclosure updates), and creates automated processes that generate required notices to parties and updates relevant arbitrator disclosures in other cases.
• Send Submission Agreement with your Answer. Arbitrator Feinberg stated, “distributing an Answer without a Submission Agreement can do great harm to the parties later on after the case closes and if claimant wants to vacate an award.”
• Provide copies of Settlement Agreements to FINRA – they are relevant in expungement proceedings.
• “No action” letters (e.g., from an investigation) should not be submitted as evidence in customer arbitration cases.

Tips for Arbitrators:

• Complete and execute the Arbitrator Oath on the portal – it starts the disclosure process.
• Make disclosures early and throughout the life of the case. Director Bayer stated that “everything is out there these days.” If you are not sure, it is best to disclose.
• Avoid withdrawals. Withdrawals are very disruptive to the parties. Director Bayer explained that FINRA staff track withdrawals and patterns emerge, particularly close to hearing dates, FINRA may remove the arbitrator from the roster.
• In ruling on motions that include fees (e.g., adjournments), arbitrators should be deciding at the time of the decision who should be responsible for the fee or on any waivers of fees. Director Bayer stated that deferments on assessment of fees may cause problems at the end of the case.
• Rulings on motions (e.g., a Motion to Compel) should not be made before an initial pre-hearing conference (even though the arbitrator may have the authority to do so after the filing of the Oath).
• Avoid ex parte communications, or any interaction – no matter how innocent – that may be interpreted as bias.

Diversifying Arbitrator Panels

Director Bayer reported that her Office is beginning to see results of outreach efforts to find diverse candidates to serve as arbitrators. She said an outside firm conducts a voluntary confidential demographic survey of the arbitration population. The results are then published on the FINRA website. In the 2019 survey results published in January, significant increases occurred in the diversity of the new arbitrator roster: 39 percent were women, 19 percent African American, 6 percent Latino, 3 percent Asian, and 4 percent LGBT.

Conclusion

The “FINRA Listens and Speaks” panel is an important outreach effort to communicate current thinking on arbitration processes and procedures. The decline in case filings is noteworthy given the longevity of the strong markets. FINRA’s efforts to diversify its arbitrator roster is laudable. FINRA distinguishes itself as one of the few forums in the country that has made progress in addressing and tracking the issue. Director Bayer and Administrator Baumgartner’s tips for practitioners and arbitrators demonstrate a continuing commitment to improve and clarify FINRA’s adjudicatory process. Their repeated admonitions to “trust the portal” should not be ignored. 

Learn more about Bates Group’s Litigation Services, including expert testimony, damages analysis, and our Arbitrator Evaluator™ selection tool.