The FINRA Dispute Resolution Task Force issued its final report last week, making certain recommendations designed to improve the arbitration process. More notably, however, the Task Force reported that it was unable to reach agreement on a number of more controversial issues, reflecting deep divisions among practitioners in this area.
The Dispute Resolution Task Force was formed in June 2014 to consider possible enhancements to the FINRA arbitration and mediation forum in light of the evolving needs of its users. Task Force members represented a number of constituencies and included attorneys who regularly represent investors as well as attorneys representing broker-dealers. The Task Force also solicited information and viewpoints from a variety of stakeholders.
The substantive recommendations made by the Task Force include the following:
- Increased compensation for arbitrations, with biennial increases tied to the consumer price index.
- Develop strategies to recruit aggressively applicants for the arbitrator pool to increase the depth and diversity of the pool and to provide increased training for chairpersons.
- Challenges for cause should be allowed where a potential arbitrator is appointed to multiple cases involving the same firm or the same product.
- An amendment to the rules to require arbitration awards to contain a brief explanation of the decision and the amount of damages awarded, unless any party notifies FINRA that it does not want an explained decision.
- A separate pool of arbitrators, trained to handle expungement cases.
- An automatic mediation process, subject to an opt-out by any party.
- An amendment to the rules to permit one additional category of pre-hearing motions to dismiss where the dispute has been previously concluded through adjudication or arbitration and memorialized in an order, judgment, award or decision.
In a number of other areas, the Task Force was unable to reach a consensus. For example:
- The Task Force was unable to reach consensus on whether or not FINRA arbitrators should be required to follow the law as proposed by the North American Securities Administrators Association, the association of state and provincial securities regulators. Task Force members had differing views on this issue and reached no agreement.
- The Task Force was unable to reach consensus on FINRA’s eligibility rule, Rule 12206(a), which provides that no claim can be submitted to arbitration if more than six years have elapsed from the occurrence of the event giving rise to the claim. Some argued that the rule should be eliminated and the issue of stale claims addressed solely through state statutes of limitations, while others believed that the rule should remain.
- The Task Force was unable to reach consensus on whether customer agreements providing for mandatory FINRA arbitration should continue to be permitted, as is the current practice, or whether investors should be given a choice of different forums. The Task Force believed it was important to take up this issue and considered four possible recommendations: (1) allowing investors to choose, post-dispute, between arbitration and litigation; (2) maintaining the status quo; (3) requiring broker-dealers to offer at least some customers an agreement without a mandatory arbitration provision; and (4) requiring broker-dealers to offer an alternative, non-industry arbitration forum, in addition to FINRA. Ultimately, the Task Force was unable to reach consensus on any of these alternatives.
- The Task Force was unable to reach consensus on whether to recommend the adoption of special procedures for large claims. A subcommittee of the Task Force studied this issue extensively and made a number of recommendations for large cases, including modifications to the arbitrator selection process, a limited number of depositions, and required pre-hearing briefs, among other recommendations. However, the full Task Force could not reach agreement on the subcommittee proposal.
- The Task Force could not reach consensus on whether there should be a FINRA representative participating in expungement hearings to represent the public interest.
- The Task Force reconsidered a 2014 proposal that would require broker-dealers to maintain insurance for the payment of awards to protect investors against the risk of unpaid awards but reached no consensus and made no recommendation in this area.
In what only can be described as a substantial understatement, the Task Force also observed that “scheduling delays is an intractable problem with no obvious solution.” As practitioners in this area know well, FINRA arbitrations have become increasingly lengthy, often requiring many more hearing days than originally anticipated, and potentially spanning an extended period of time, taxing the memories of the arbitrators and parties to recall evidence that was adduced many months earlier. Without additional rule changes specifically addressing the length of the hearing, the recommendations of the Task Force are unlikely to affect this trend.