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First Actions by NAMC on DRTF Report Emerge: FINRA Takes Aim at “Phantom Retention”
Posted on Categories Arbitration, FINRA Task Force, NewsTags , , ,

The work of the Dispute Resolution Task Force (DRTF) was completed in December 2015 with the publication of a detailed final Report and the reference of some 51 recommendations for action to FINRA’s National Arbitration & Mediation Committee (NAMC); the NAMC had its first meeting on the DRTF Report and we’ve learned of at least one recommendation that has been implemented.

The NAMC held a two-day meeting on March 2-3, in order to consider its approach and its initial recommendations to the FINRA staff and the Authority’s Board of Governors. Just what was decided by the NAMC at the end of its first meeting was not publicly disclosed. In part, we believe this first effort was aimed at established priorities for action and categorizing recommendations into those that will require rulemaking, those that are procedural or administrative in nature and can be implemented without rulemaking, and those that fit another category. We also believe that FINRA will, at some near-term point, begin to publish progress reports on the actions the NAMC has taken or intends to take.

Background – SER Letter

Those disclosures have not begun yet to issue, but we did hear about one item through the folks at the Securities Experts Roundtable (SER). In March 2015, when the Task Force was soliciting suggestions for its consideration, then SER-President Richard M. Leisner wrote a letter to Task Force Chair Barbara Black, advising that the SER Board of Directors had adopted the recommendations contained in a “position paper” written by SER’s immediate past President Stuart Ober, concerning “phantom retention” (see SAC 2015-03(10) for more details). Phantom retention, the Leisner letter explained, describes the unethical practice by parties or party representatives of listing “an expert witness during the 20-day exchange, without the knowledge or consent of the listed expert and without actually retaining the expert.”

Mr. Ober more extensively described the nature of the practice, the incidence of occurrence, judging from a survey of SER members, and the adverse consequences for experts, arbitrators and parties arising from phantom retention. Here’s an example cited by Mr. Ober, as described by the expert witness to whom it occurred: “This practice became known to me personally when I was asked by a client why I was involved in a case against them. I had no idea what they were talking about. Without this ‘heads-up,’ I would never have known, as is the case of many experts who remain unaware of this practice.” SER suggested seven different approaches to FINRA, mostly of a consciousness-raising nature, including a change to the Initial Pre-Hearing Conference Script, a shout-out to PIABA and SIFMA, an article in The Neutral Corner, and a Notice to Parties discouraging the practice.

DRTF Recommendation/NAMC Action

On Page 42 of its Report, in a section entitled “Phantom retention of experts,” the Task Force tracks the language used by SER in describing phantom retention and advises “an addition to the IPHC script to strongly discourage this practice.” The Task Force also made the suggestion directly to PIABA and SIFMA that these groups “periodically remind their members that this practice is disfavored.”

The NAMC acted on the proposal from DRTF at its March meeting and FINRA-ODR reacted immediately. Directly following the Committee meeting, FINRA notified SER that the IPHC script was changed to address the issue of the ‘phantom retention’ of experts as was recommended by the DRTF. We checked the online copy of the current IPHC script and it now contains a revised Section “R: Witness Lists,” which adds, in a separate paragraph, the admonition to the other instructions about witness list preparation and submission that: “A party should only identify the name of an expert witness that the party has actually retained.”

(ed: *SER should be honored. This appears to be the first-ever approved recommendation of the DRTF; we compared an older copy of the IPHC script to a current copy and, while the DRTF Report contains a bunch of suggested changes to the script, this was the only one we could spot. **Members of the DRTF met in subcommittee and full committee meetings 57 times over the one year-plus the Task Force was in operation. Should the NAMC be as diligent, we can expect to see many more changes implemented or proposed over the coming year, as the NAMC’s work accelerates. ***One hopes that PIABA’s Board and the Executive Committee of SIFMA C&L will heed the Task Force and remind their members periodically of the need to avoid this discredited practice.) (SAC Ref. No. 2016-10-01)

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