Highlights from the September 23, 2008, FINRA Dispute Resolutions Neutral Call-In Workshop

Linda Feinberg, President, Financial Industry Regulatory Authority, Inc. (“FINRA”) Dispute Resolution, Inc.; John M. Gannon, Senior Vice President, FINRA Office of Investor Education; and Laura Gansler, Associate Vice President, FINRA Emerging Regulatory Issues, shared program updates with over 1,700 arbitrators yesterday during a FINRA – sponsored phone-in workshop. The focus of yesterday’s workshop was to inform arbitrators about various investor education initiatives and emerging regulatory issues, and included noteworthy updates on the proposed expansion of single-arbitrator hearings, a spike in case filings, and FINRA’s active monitoring of financial products and related potential arbitration issues.

Proposed Rule Change to Increase the Single Arbitrator Threshold to $100,000 

  • FINRA is filing a proposed rule change with the SEC to raise the amount in controversy in cases to be heard by a single arbitrator to $100,000. Specifically, FINRA’s proposal amends Rule 12401 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and NASD Rule 13401 of the Code of Arbitration Procedure for Industry Disputes (“Industry Code”). Under the present rules, single arbitrators are appointed to claims of $25,000 (excluding interest and expenses) or less, but may hear cases of up to $50,000 unless one of the parties requests a hearing by a three-arbitrator panel in its initial pleading. FINRA proposes to amend the rules by allowing claims greater than $25,000, but less than $100,000, to be heard by a single arbitrator. Additionally, claims in this category would only be heard by a three-arbitrator panel if both parties agree in writing. This means that investor claims for up to $100,000 will be heard by a public, chair-qualified arbitrator. The proposal is available at http://www.finra.org/Industry/Regulation/RuleFilings/2008/P117044.  

FINRA believes the proposed changes will increase efficiencies and decrease costs for the parties as well as FINRA. FINRA notes several anticipated cost reductions in the proposed rule including reduced case processing times given the flexibility of coordinating schedules with only one arbitrator; reduced research of arbitrator disclosures and histories; and reduced hearing session fees. Fundamentally, FINRA believes the rule changes will make FINRA arbitrations more expeditious and efficient.

Arbitration Claims Have Increased Since Last Year

  • Arbitration case filings overall were up 39% as of mid-September, with a 67% increase in customer filings. Although Linda Feinberg did not explain the methodology for defining various types of claims, she said that claims related to sub-prime mortgages comprised the greatest number of cases totaling 493 in the period between January 1, 2008, to mid-September. Auction-rate securities (ARS) cases totaled 231 for this same period. Feinberg did not discuss how the global resolution of the ARS cases would impact FINRA’s numbers, but she did say that FINRA has a new case management system, MATRIX, that she hoped would allow her staff to manage cases more efficiently.

FINRA Closely Monitoring New Financial Products, Especially Those Marketed to Seniors

  • FINRA’s Emerging Regulatory Issues Office is closely monitoring new financial products marketed by firms in recent years. Laura Gansler shared that while FINRA encouraged innovation, products that are complex and hard to understand by investors (and perhaps the registered representatives who sell them) are getting increased attention. The problem, according to Gansler, is that products that were once only marketed to institutional clients have been made available to retail investors, citing hedge funds and funds of hedge funds as examples. She mentioned that FINRA has investigated the processes firms use to vet new products and published a list of best practices for firms to follow, NASD NTM 05-26, http://www.finra.org/Industry/Regulation/Notices/2005/p013756. She encouraged all arbitrators to review these best practices.
  • Gansler also expressed concerns about investments sold to seniors, noting Variable Life Settlements as an example because “the market is opaque and the product is complicated.” Gansler and Feinberg also referred to the larger problem of registered representatives improperly marketing themselves with titles such as “Certified Senior Specialist.” FINRA advised arbitrators that such titles often do not represent real credentials.