The New Year is Here: What’s in Store for Arbitration and the Financial Services Field?
Posted on Categories ADR Generally, Arbitration, Legislation, Non-FINRA ADR, RegulationTags , , , , ,

By George H. Friedman*

SAC Contributing Legal Editor and Board of Editors Member

With the new year here, it’s time for my annual predictions. The blog post that follows is an update of my November post, The Midterm Elections are Over: What’s in Store for Arbitration and the Financial Services Field? The Democrats have taken over House leadership in the new Congress, while the Republicans enjoy an expanded majority in the Senate. What might this mean for arbitration and the financial services? Not much in terms of legislation being enacted, but lots in terms of process:

  • The anti-Arbitration Bills will be Back, with the Same Outcomes
  • FINRA and SEC Staff Should Invest in Good Walking Shoes
  • … and the CFPB Folks, Too
  • Repeal of Dodd-Frank is Kaput
  • The SEC will Finalize Reg Best Interest
  • Smooth Sailing for President Trump’s Nominees

Read on, my friends.

The anti-Arbitration Bills will be Back, with the Same Outcomes

The Democrats in 2017 introduced several anti-arbitration Bills that have predictably gone nowhere far as described in my blog post, Baseball Season is Here! You Can’t Tell the Anti-Arbitration Bills Without a Scorecard. These Bills again went nowhere in the 215th Congress, which expired early January, just as occurred in 2016… and 2015… and 2014...

Prediction: The Bills will undoubtedly be reintroduced in the new Congress, and some may pass the House. They will, however, for the most part be DOA in the Senate.

The lone exception? In the wake of seemingly daily accusations of workplace sexual harassment, bipartisan Bills were introduced December 2017 in both Houses of Congress that would have amended the Federal Arbitration Act to ban predispute arbitration agreements (“PDAAs”) covering sexual discrimination disputes. Specifically, S. 2203 and H.R. 4570 -- the Ending Forced Arbitration of Sexual Harassment Act -- were introduced by Sen. Kirsten Gillibrand (D-NY) and Rep. Cheri Bustos (D-IL). Specifically, the Bills, which had bipartisan support in both institutions, would have banned PDAAs for “a dispute between an employer and employee arising out of conduct that would form the basis of a claim based on sex under title VII of the Civil Rights Act of 1964 (42 U.S.C.2000e et seq.) if the employment were employment as defined in section 701(b) of that title regardless of whether a violation of title VII is alleged…”

Prediction: Some iteration[1] of the law will be passed by the new Congress when it’s reintroduced, and I sense that the President will sign it.

FINRA and SEC Staff Should Invest in Good Walking Shoes

Just because the anti-arbitration Bills were not be enacted doesn’t mean the road to oblivion will be smooth. How so? Rep. Jerrold Nadler (D-NY) now chairs the Judiciary Committee and Rep. Maxine Waters (D-CA) the Financial Services Committee.

Consider this: SCOTUS in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (May 21, 2018), held that the Federal Arbitration Act (“FAA”) permits employers to use arbitration clauses containing class action waivers, notwithstanding the National Labor Relations Act’s (“NLRA”) protections of workers’ rights to act collectively. On October 30th Rep. Nadler introduced H.R. 7109, the Restoring Justice for Workers Act, that would have amended both the FAA and the NLRA to ban mandatory predispute arbitration agreements with class action waivers in the employment context. The preamble stated that the proposed legislation intended to overrule Epic Systems, which it said was decided “contrary to the plain text of the law and congressional intent.” The Bill would also have banned retaliation against an employee refusing to agree to a post-dispute arbitration agreement. It had 58 cosponsors, all Democrat, and is certain to be reintroduced in the new Congress... and be assigned to the Judiciary Committee … Chaired by Rep. Nadler.

And of course SRO and financial services industry oversight is by the Financial Services Committee. There will be lots of House hearings, including some on the SEC’s proposed Regulation Best Interest (more on this below). Also, look for increased Government Accountability Office examination and oversight activity of FINRA, the SEC, and the financial services industry, after Chairpersons Waters and Nadler assume power.

Prediction: There should be lots of hearings in 2019 on SRO oversight, and on Bills like the certain-to-be-reintroduced Arbitration Fairness Act.

… and the CFPB Folks, Too

As for the Consumer Financial Protection Bureau,[2] a bipartisan coalition of over thirty State and Territorial Attorneys General wrote to then-Acting Director Mick Mulvaney urging the Bureau to reconsider its policy on enforcing the Military Lending Act (“MLA”). The October 24th letter came in response to a CFPB announcement last summer that it would only investigate specific complaints based on the MLA, a step back from its former practice of systemic inspections and investigations. Said the AGs: “We write to express our concern about recent reports that the Consumer Financial Protection Bureau (CFPB) will no longer ensure that lenders are complying with the Military Lending Act (MLA) as part of its regular, statutorily mandated supervisory examinations. We believe that such a move would significantly harm the servicemembers who live and work in our states and that it would be contrary to the CFPB’s statutory mandate.”

The MLA is a George W. Bush-era statute that among other things bans mandatory predispute arbitration agreements. Dodd-Frank gives the CFPB enforcement authority. Again, expect Congressional hearings. This is a truly purple initiative that should cause the Bureau to pay attention. This is especially so given the President’s strong support of servicemembers.

Prediction: There will be CFPB hearings. In fact, Rep. Waters has already validated this one;  there were several media reports on December 20th that the Financial Services Committee will be holding hearings on the CFPB.

Repeal of Dodd-Frank is Kaput

In June 2017, the House of Representatives by a 233–186 strictly party-line vote approved the reintroduced Financial CHOICE Act. Not a single Democrat voted “Yea” and only one Republican voted “Nay.” Among other things, the 602-page Act (H.R. 10) would have repealed and replaced Dodd-Frank, and would have eliminated the authority granted to both the CFPB and SEC to limit or eliminate predispute arbitration agreements, or set conditions for their use. Also, the Act would have renamed the Consumer Financial Protection Bureau the Consumer Law Enforcement Agency and transformed it into an executive agency with a Director terminable at will by the President. The Senate Banking Committee held hearings, but the full Senate did not act and the Bill expired with the old Congress.

Prediction: I very much doubt the new Democratic House would approve a reintroduced FCA.

The SEC will Finalize Reg Best Interest

With the Department of Labor's Fiduciary Standard Rule dead and buried by the Fifth Circuit in Chamber of Commerce of the United States v. Department of Labor, 885 F.3d 360 (5th Cir. Mar. 15, 2018),  the SEC is indeed moving ahead with its own Rule, as authorized by Dodd-Frank section 913(g)(1). Specifically, the SEC published in May 2018 three proposals to establish a uniform fiduciary standard:  Regulation Best Interests, Vol. 83, No. 90, Page 21574 (17 CFR Part 240); Standard of Conduct for Investment Advisers, Vol. 83, No. 90, Page 21203 (17 CFR Part 275); and Form CRS Relationship Summary and Form ADV, Vol. 83, No. 90, Page 21416 (17 CFR Parts 240, 249, 275 and 279). Federal Register Publication triggered a 90-day public comment period that expired August 7, 2018.

The SEC’s Investor Advisory Committee (“IAC”) met by conference call on November 7th. The sole Agenda item for the 35-minute meeting was: “Discussion of the SEC’s Proposed Regulation Best Interest and Form CRS Relationship Summary (which may include a Recommendation of the Investor as Purchaser Subcommittee).” The IAC voted 16-3 with one recusal to adopt the recommendations submitted by a majority of the Investor as Purchaser Subcommittee “to strengthen and clarify” the proposed rules.

Prediction: Next is consideration by the SEC staff, along with the public comments received and the Committee’s recommendations (the SEC received over 6,000 comments (3,000 of which were unique) on Reg-BI and related materials). At some point in 20`19, the proposed SEC rule will be finalized.

Smooth Sailing for President Trump’s Nominees

With an expanded GOP 53-47 majority in the Senate – and with Senators Corker (R-TN) and the late John McCain (R-AZ) replaced by more reliably pro-Trump Senators – the President should have an easier time getting his judicial and agency head nominees approved by the next Senate. For example, the President’s nominee for the SEC Commissioner vacancy coming later this year with the imminent departure of Democrat Kara M. Stein should sail through a solidly-GOP Senate. And, last but by no means least, President Trump added to SCOTUS two pro-arbitration Justices, Neil Gorsuch[3] and Brett M. Kavanaugh.

Prediction: I’m certain if there are any further vacancies on the Court, Mr. Trump’s nominees will be pro-arbitration and will be approved by the new Senate. In the meantime, federal District Court and Court of Appeals nominees should have relatively smooth sailing.


I’m a bit reluctant to make so many bold predictions, given how wrong the pollsters and pundits were on election night (again). On the other hand, my past arbitration predictions over the years have been pretty good, so here they are.


 *George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc., and an ADR consultant retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, is a Certified Regulatory and Compliance Professional, and is admitted to practice in New Jersey and New York, several U.S. District Courts, and the United States Supreme Court.

[1] The old Bill was too broadly drafted. It will I’m sure be cleaned up before being reintroduced.

[2] Speaking of the CFPB, former Director Richard Cordray lost his bid to become Governor of Ohio.

[3] Need proof? Justice Gorsuch authored the majority Opinion in Epic Systems.