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FINRA Dispute Resolution Task Force Issues Final Report: Some Major Changes Recommended, but No Consensus on Mandatory PDAA Use
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The FINRA Dispute Resolution Task Force issued its Final Report on December 16th, with significant recommendations on explained decisions, a raise for Arbitrators, expungements, paper cases and motions to dismiss. The group, however, could not reach a consensus on mandatory predispute arbitration agreements.

We have reported many times on the 13-member Task Force, which was formed July 2014 to focus on suggesting “strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum for all participants.” Chaired by Barbara Black - retired Professor and Director of Corporate Law Center, University of Cincinnati College of Law - the Task Force and its ten subcommittees met 57 times, and had its own area on FINRA’s Website and an email address for receiving constituent suggestions and comments. It issued an Interim Report in June.

Final Report

The Final Report, which was announced in a Press Release, runs 70 pages, including appendices, and contains 51 recommendations. While space doesn’t permit a full analysis here, an in-depth feature article by Board of Editors member David Robbins, will appear in an upcoming issue of the Securities Arbitration Commentator. We can, however, report on the key recommendations as identified by FINRA in its Press Release, and the Task Force’s rationale for each:

An increase in arbitrator honoraria from $300 to $500 per session (from $600 to $1000 a day), with adjustments for inflation every two years: “It is the unanimous, strongly held opinion of the task force that the most important investment in the future of the FINRA forum is in the arbitrators. The task force has concerns that the below-market-rate arbitrators’ compensation acts as a disincentive in the recruitment of arbitrators and in the commitment of substantial time by arbitrators in executing their responsibilities.”

Explained decisions as a default choice with any party having the right to opt out: “The confidential nature of arbitration and the paucity of explained awards result in a lack of transparency that can lead to misunderstandings about the FINRA forum.… The task force recommends changing the rule to require an explained decision unless any party notifies the panel before the IPHC [Initial Prehearing Conference] that it does not want it.”

Creation of a pool of trained, experienced arbitrators to conduct expungement hearings in settled cases and in cases brought solely for the purpose of seeking expungement: This group of arbitrators would conduct hearings on expungement requests and make determinations as to whether to grant expungement requests. All members of special arbitration panels should be experienced individuals from the chairperson roster who have received enhanced training on expungement…”

An automatic mediation process for cases filed in arbitration, subject to an opt-out provision: “The task force bases its recommendation for an automatic mediation track, subject to an opt-out, largely on the overall success of FINRA’s mediation program. Feedback from mediators, arbitrators and attorneys interviewed on the topic was uniformly positive.... The task force recognizes that, if this recommendation is adopted, the current 80 percent settlement rate may drop somewhat, but believes that is acceptable in light of the benefits of mediation.”

“Intermediate approach” for smaller cases. Not mentioned in the Release was another proposal we think is important. Noting that there is significant dissatisfaction with documents-only (“paper”) cases, “the task force recommends that the NAMC [National Arbitration and Mediation Committee] consider adopting an intermediate form of adjudication—more than the papers, but less than a full hearing—in which the claimant and respondent appear before an arbitrator and have the opportunity to explain their positions and respond to their adversary’s positions.”

Expanded grounds for motions to dismiss: Also not mentioned were changes that would expand the grounds upon which a party could request a motion to dismiss prior to the conclusion of a party’s case in chief. Although the Report states that, “based on the statistical evidence, the rule appears to be working as intended, and there is no evidence of abuse of the current rule,” the Task Force recommends a major change: specifically, that FINRA Rule 12504(a) “be amended to include one additional category for which motions to dismiss may be made before the conclusion of the case in chief: situations where the dispute has been previously concluded through adjudication or arbitration and memorialized in an order, judgment, award or decision.”

Lots of No-Consensus Items

There were several items where the Task Force could not reach a consensus or recommended that a proposal not be adopted. Key among them was use of mandatory PDAAs, which the group identified as an important issue. “The mandatory nature of SRO securities arbitration is a defining characteristic of the process that engenders controversy about its fairness. Despite considerable discussion, however, the task force was not able to reach consensus. It concludes that the debate over mandatory securities arbitration is to a large extent a philosophical or policy question about which thoughtful, informed individuals disagree and which the task force cannot settle.”

What’s Next?

The recommendations will be presented to the NAMC. Some procedural changes can be done without invoking the formal rulemaking process, while others will require rule changes.

(ed: *Kudos to FINRA and the Task Force! **There is much, much more to the Report. It’s worth reading and, of course, SAC subscribers can look forward to David Robbins’ forthcoming analysis in that newsletter publication. The full list of 51 recommendations, broken down by subject matter, appears on pages 53-57 of the Report. ***We were happy to see many of our transparency recommendations endorsed, especially this one: “the task force recommends that certain substantive decisions, such as injunctive orders or final dismissals, be treated as awards and be available in FINRA’s Arbitration Awards Online (AAO) database. Publication of these decisions would allow parties to obtain more information about arbitrators that may be relevant in selecting a panel.” Alas, the Task Force declined to include “all interim and other written decisions” by Arbitrators, citing confidentiality concerns.) (SAC Ref. No. 2015-47-01)

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