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Fourth SAC Podcast Tackles “The FINRA Dispute Resolution Task Force Has Issued Its Final Report. Now What?”
Posted on Categories Arbitration, FINRA Code of Arbitration, FINRA Task Force, Rulemaking, Video PodcastsTags , , ,

The key recommendations of FINRA’s Dispute Resolution Task Force (“Task Force”), and where things may be headed in reaction to those proposals, were the core topics discussed recently by an experienced panel of securities arbitration experts in the fourth SAC Podcast. We cover here just a few of the topics discussed.

The video Podcast was moderated by former FINRA Director of Arbitration and current SAC Board of Editors member George H. Friedman, and features as panelists Professor Barbara Black, who served as Task Force Chair; Steven Caruso, of Maddox Hargett & Caruso, PC; David C. Franceski, Jr., of Stradley Ronon, Stevens & Young, LLC; Professor Jill I. Gross, Professor of Law, Pace Law School; and Noah Sorkin, General Counsel of AIG Advisors Group. Recorded in April, the video Podcast, complete with a PowerPoint, examines the core Task Force recommendations, what motivated them, the process for evaluating and implementing the recommendations, and the panel’s predictions for the future.

A long list of recommendations

Securities Arbitration Commentator (“SAC”) President Rick Ryder kicked off the Podcast, noting that this was the fourth in a series of SAC Podcasts, all of which can be found on SAC’s Website. This Podcast, he said “focuses on the work at the FINRA forum, now known as the Office of Dispute Resolution, as it studies how to implement the 51 recommendations for change that recently issued from the Task Force.” Professor Black added that the Task Force and its ten subcommittees met 57 times, “had its own area on FINRA's website, and an email address for receiving suggestions and comments.”

The “Core Four” recommendations

The panel first discussed the major Task Force recommendations, which it defined as: 1) Improving arbitrator professionalism – What’s the intended impact? 2) Explained decisions as a default choice – Why do this? 3) An “Intermediate approach” for small claims – What’s changed since the Uniform Code’s creation in 1980? and 4) Encourage greater use of mediation – Making a good thing better?

Arbitrators are the Key

The panel coalesced around the core concept that the key to a successful arbitration program is the panel. Said Professor Black: “It was the unanimous, strongly held opinion of the Task Force that the most important investment in the future of the FINRA forum is in its arbitrators. The responsibilities and time commitments expected from arbitrators have increased in recent years and we expect they will continue to increase.” Among the key recommendations were

increasing arbitrator honoraria; the Task Force proposed a boost from $300 to $500 per hearing session, with adjustments for inflation every two years. Regarding a recommendation to create a pool of trained, experienced arbitrators to conduct expungement hearings in settled cases and in all cases where claimants did not name the associated person as the respondent, Mr. Caruso said: “I think the idea of having specially-trained arbitrators, who understand the significance of expungement and understand the long-term ramifications for investor protection, is a very viable alternative.”

Explained decisions as a default choice

Next discussed was the recommendation that the FINRA rules be amended to require explained decisions, unless any party notifies FINRA prior to the initial pre-hearing conference that it does not want an explained decision. In response to Moderator Friedman’s observation that industry parties might invariably opt out, Mr. Sorkin said “At first, I thought that the answer here would be yes… that many firms would always opt out of having an explained decision… But after giving it more thought, I'm not sure that I'm correct on that… I think the bottom line here is that the decision to opt out of an explained award will probably vary depending upon the facts of the case and the particular strategy that defense counsel and plaintiff's counsel bring to bear.”

“Intermediate approach” for small claims

The panel was generally supportive of this recommendation, which Professor Black described as “more than papers, but less than a full hearing, in which the claimant and the respondent would appear before an arbitrator and have the opportunity to explain their positions and respond to their adversary's positions.” Professor Gross said “I cheered when I saw [the recommendation] in the Report. It's something I've been advocating for a number of years now. My research and my experience with small claims claimants was that they felt a strong lack of an ability to be heard. There was no affordable option for them to actually appear before a live person, to have their cases heard. It is particularly important to be heard in very fact-based cases, where credibility of the respective parties can be critical.”

Encourage greater use of mediation

The last of the “Core Four” recommendations, consisting of several measures to expand use FINRA’s mediation program received overwhelming support from the panelists. Moderator Friedman asked Professor Gross to react to the recommendation for automatic mediation for cases filed in arbitration, subject to an opt-out provision by any party: “I think small investors, the kind that the clinics represent, will welcome the mediation process. Sometimes it's hard for the clinics to persuade the opposing party to agree to mediate, so this is a way to get into the mediation process without having to show their hand. Obviously it would be case-by-case, but assuming it's good for the client, then, for sure, the students will have the opportunity to get through, as you said, the life cycle of the case from beginning.”

What happens with the major “no-consensus” items?

The Podcast turned to a discussion of items on which there was no consensus, which Professor Black confirmed were not overlooked but issues that the Task Force considered. The panel discussed two of the major topics where there was no consensus: mandatory arbitration and unpaid awards. On the former, there was a surprising level of agreement among the panelists that broker-dealers will continue to utilize and enforce pre-dispute arbitration clauses in customer agreements. Mr. Caruso said: “My belief, George, is that mandatory arbitration is here to stay. Which is fine by me, I'm an advocate for arbitration. I believe in the process. I believe in the integrity of the FINRA forum and I think it provides a very cost-efficient method of dispute resolution, even recognizing that it's not a perfect system.” On the industry side, both Mr. Franceski and Mr. Sorkin agreed with Mr. Caruso, with Mr. Sorkin adding: “The only other comment I would make is that, if we can also add to this mix -- along with mandatory arbitration -- the possibility of giving investors a wider choice of dispute resolution forums to choose from, then I think that the requirement that an investor go to arbitration, or that any party go to arbitration, probably won't be perceived as being so draconian.”

The panelists’ predictions for the future

The Podcast closed with each of the panelists being asked to weigh in on where they think we're going to be three years from now. During this round, the panelists made predictions with respect to virtually all of the items discussed. The speakers were properly respectful of the Task Force’s work and generally considered its recommendations important to maintaining the quality and integrity of the FINRA arbitration process. As for their specific predictions, we commend readers to our YouTube Channel, with the following exception, because we think it states perfectly why the Task Force’s work will remain an important contribution to securities arbitration’s continued welfare.

The Last Word

Moderator Friedman closed by offering his views on the future. “I think the importance of the Task Force’s work is that it now gives the SEC a path for dealing with its Dodd-Frank responsibilities… So, now, the Commission has an opportunity to build on what the Task Force did, and I think at some point, they will study arbitration, make note of whatever changes FINRA is going to implement from the Task Force, and then say, like Department of Labor, ‘we conclude the process is fair. These other changes make it even better. Have a nice day.’”

(ed: *A full write-up of the video podcast is featured in the current issue of the Securities Arbitration Commentator (vol. 2016, no. 3; May 2016). **Click here for a link to the video, and check our Blog for a permanent link to this and future audio and video podcasts. ***What’s next? Professor Black described the evaluation and implementation process: “Any change to a FINRA rule has to go through the customary vetting process. Our Task Force Report is now before the National Arbitration and Mediation Committee, and my understanding is that they have already begun to consider our recommendations. FINRA also has various other channels that they vet proposals through. Their constituents, other advisory committees, and of course, the FINRA Board. Finally, of course, any rule change would have to be approved by the SEC.”)