In July 2014, the Financial Industry Regulatory Authority formed a Task Force composed of three claimants lawyers, five defense lawyers from the securities industry, a state securities regulator, an arbitrator, a mediator, an academic, and a representative of the Consumer Foundation of America.
It appears that the Task Force was organized to enhance the efficiency, transparency and perceived fairness of the FINRA Dispute Resolution, particularly following the last Task Force Report in 1996, known as the Ruder Report after its Chairman, former SEC Chairman David S. Ruder which concluded that the securities industry should be permitted to continue to use Pre-Dispute Arbitration Agreements because “even with its flaws, securities arbitration is clearly preferable to civil litigation.”
In a 2007 Report Card assessing the post-Ruder Report reforms, NASD stated that it had implemented “nearly every key recommendation” contained in the Ruder Report, in addition to a number of initiatives that were not generated by the Ruder Report, with the objective of “preserv[ing] and respect[ing] the basic elements of a fair and efficient dispute resolution system, while embracing the adjustments needed to enhance the system and effectively serve an evolving customer base.” David Ruder concluded that the 2007 FINRA arbitration system was “greatly improved” over the 1996 system.
It was the securities industry that pushed for arbitration, which following the Supreme Court’s decision in Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987). Securities arbitration has been widely received and criticized as Wall Street’s Kangaroo Court.
In fact, the perceived unfairness of arbitration, and particularly, the “unwillingness” of the judiciary to earnestly examine “egregious” arbitration awards, has motivated Congress to seek to make these arbitrations “voluntary.” On July 12, 2008, Congress introduced Senate Bill 1782, entitled the “Arbitration Fairness Act,” based upon a Congressional finding that:
Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators’ decisions. With the knowledge that their rulings will not be seriously examined by a court applying current law, arbitrators enjoy near complete freedom to ignore the law and even their own rules.
Senate Bill 1872 at Section 2 (July 12, 2008, 110th Congress, First Session).
So to avoid having their kangaroo court closed, the industry supports some superficial changes, and the best way to effect these changes, and placate the masses, is to appoint a task force that can apparently not agree with anything important.
What they actually agree on:
Pay arbitrators more money. Encourage diversity. Avoid “cram-down” arbitrators appointed from a secret list when an arbitrator resigns. Train arbitrators better. Make sure they update their disclosures including when they get arrested, die or become disbarred. Allow parties to ask questions concerning the arbitrators, which they are free not to answer. Allow brokerage firms to challenge arbitrators for cause on the ground that an arbitrator has been appointed to serve on multiple related cases, i.e. involving the same broker-dealer or the same product. Encourage arbitrators to educate themselves. Require compulsory training for arbitrators with a record of poor evaluations. Rather than just saying who wins or losses or how much, require arbitrators to explain their awards, unless any party does not want an explained award, then there will be no explained awards. After the claimant settles, and the lawyers go home, have separate panels hear unopposed expungement requests. Make small investors, typically pro se investors, with claims of less than $50,000 happy and let them have their day to “explain their positions and respond to their adversary’s positions.” Offer financial incentives for early mediation, everyone loves mediation. Allow motions to dismiss for cases that have already been dismissed. Include brokerage firm insurance documents as part of presumptively discoverable discovery, like in all 50 states and under the federal rules. Improve “transparency” not by making pleadings or dockets public, nor reveal how the neutral roster actually works, but instead “FINRA should adopt a policy of promoting, to the maximum extent possible, transparency about its dispute resolution forum” whatever that means, and of course, “Consider funding of law school arbitration clinics through FINRA fines and penalties.”
Certainly an awful lot. The task force met as a group in four in-person meetings and five telephonic meetings. They established ten subcommittees, each of which had between three and five in person or telephonic meetings, and this is what they could apparently all agree upon.
What they do not agree upon
However, perhaps it is more telling as to the current state of affairs that which they could not agree upon.
Require explained awards “to bring greater transparency to a system that some view as opaque.”
Be clear about “eligibility.” For example, although a customer purchased stock 10 years ago, there are allegations of ongoing fraud starting with the purchase, but continuing to a date within six years of the date the claim was filed.” Some members of the task force believed that the eligibility rule should be eliminated and the issue of stale claims addressed through applicable statutes of limitations. Others believed that the rule should be a rule of repose. The task force spent a considerable amount of time debating the issue, but reached no consensus. Accordingly, it makes no recommendation. Whether Broker-dealers should be required to offer at least some investors a “plain-vanilla” customer agreement that does not include a PDAA. The customer should knowingly agree to arbitrate, and the customer should not be denied an account if he opts not to agree to arbitration. Clarify the Definition of “Customer,” recent litigation has criticized this definition as unhelpful and has provided more content to the definition. Apply the law: the “Task force members had differing views on whether FINRA arbitrators must strictly follow the law and reached no consensus on this issue.” The task force also heard complaints about poor performance by compensated nonattorney representatives and doubts about whether they provide a service to investors. The task force recommends that a study be conducted to determine how many jurisdictions allow compensated non-attorney representatives and whether are competent or provide a service to investors with small claims who otherwise would not be able to obtain representation.
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