FINRA Dispute Resolution Task Force Final Status Report & Recommendations

In June 2014, FINRA formed a Dispute Resolution Task Force to consider possible enhancements to its arbitration and mediation forum. A year earlier, FSI had also formed our own Arbitration Task Force to develop recommendations for FINRA on how to improve their dispute resolution program. FSI’s task force submitted these recommendations to FINRA in early 2014 and these recommendations were in turn provided to FINRA’s Dispute Resolution Task Force to assist in their work. FINRA charged their task force to work together to suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA’s dispute resolution forum. The Final Report by the FINRA Dispute Resolution Task Force included 51 recommendations on how to improve FINRA’s forum.

On February 8, 2017, FINRA released a Status Report on the actions it has taken regarding the 51 recommendations originally made by their Dispute Resolution Task Force. As of the February report, FINRA has taken action on 35 of the 51 recommendations. Of the 51 recommendations in the initial report, several were also recommendations made to FINRA by FSI’s Arbitration Task Force. Thus, several of the improvements already made or in the process of being made are consistent with FSI’s Arbitration Task Force recommendations and FSI expects even more improvements to be made in 2017. We continue to see that the work of FSI and our Arbitration Task Force is impactful in making significant changes to improve the process for all parties.

FINRA TASK FORCE RECOMMENDATIONS AND ACTIONS TAKEN

The Status Report provides an in-depth summary of all the actions taken by FINRA in response to all of the FINRA Arbitration Task Force recommendations. We encourage our members to read FINRA’s full report. Below we have summarized some select recommendations that are directly related to or similar to recommendations made by FSI’s Arbitration Task Force.

  • Biennial increases in arbitrator compensation tied to the Consumer Price Index (CPI).
    • FSI’s Arbitration Task Force recommended an increase in arbitrator honoraria to attract more participants.
    • In December 2014, FINRA increased arbitrator honoraria by 50%, to $300 for half-day dispute hearings and $600 for full-day sessions.
    • FINRA does not believe honoraria should be increased automatically, as they are tied to fees paid by users. FINRA will re-evaluate arbitrator compensation every two years.
  • In those instances where all non-public arbitrators are struck from the arbitrator selection process, a new list of ten public arbitrators should be generated for that seat. In that way, selection of the all public panel will be made from lists containing 30 potential arbitrators.
    • FSI’s Arbitration Task Force recommended this course of action to increase the arbitrator pool in cases where an all-public panel is the default selection.
    • The SEC has approved Rule SR-FINRA 2016-022, which increases the number of public arbitrators made available to parties during the arbitrator selection process from 10 to 15, for panels that will have three arbitrators.
  • Monitor the application of the recently adopted definitions of public and non-public arbitrators in light of concerns that individuals with substantial process and subject matter expertise are stricken from the list of public arbitrators.
    • FSI’s Arbitration Task Force recommended that the definition of non-public and public arbitrators be reexamined so that plaintiffs counsel could not qualify as public arbitrators, just as industry participants cannot qualify for the public panel. FINRA made this important change in May 2015 but allowed plaintiffs counsel to eventually re-qualify for the public panel while industry participants were permanently barred from qualifying as public arbitrators.
    • In response to the FINRA Task Force recommendation to monitor the impact of this change, FINRA will amend the non-public arbitrator definition to state that “a non-public arbitrator is a person who is otherwise qualified to serve as an arbitrator, and is disqualified from classification as a public arbitrator.” The rule change will be filed with the SEC in 2017.
  • All arbitrators should be encouraged to complete continuing education programs on a periodic basis.
    • FSI’s Arbitration Task Force recommended that arbitrators be required to complete continuing education requirements both to ensure that panelists are up-to-date on various securities-related issues and knowledge and to ensure that potential arbitrators are those who remain interested in participating in the process.
    • FINRA reports that they regularly supply information to arbitrators about to new opportunities for additional training, including those developed through bar associations. In addition, FINRA staff has worked with the American Bar Association to provide free or discounted training to arbitrators.
    • Additionally, FINRA has proposed that an attorney arbitrator to be eligible for the arbitration chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration. While the role has not yet been finalized, we will continue to monitor its progress.
  • Review of procedures for notifying state regulators of expungement requests.
    • FSI’s Arbitration Task Force recommended that FINRA improve the expungement process so that those individuals named in an action who were not actually involved in the issue that caused the complaint could more efficiently have the matter expunged from their record. This recommendation was not adopted by FINRA.
    • Rather, FINRA has approved amendments to Rules 12805 and 13805, which will require FINRA to notify the appropriate state regulators of all requests for expungement relief.
  • Explained decisions should be the default unless any party notifies FINRA that it does not want an explained decision.
    • FSI’s Arbitration Task Force recommended that FINRA require arbitrators to explain their decision, regardless of whether they granted or denied the claim.
    • The Task Force believed that expanding the use of explained decisions could increase transparency in the system and that increased confidence in the fairness of the system would likely flow from increased transparency. However, forum users (including investor and industry counsel) expressed reservations about making explained decisions the default award type. In order to remove a potential obstacle to parties requesting an explained decision when they want one, FINRA now waives the $400 fee for an explained decision. FINRA implemented the waiver on January 3, 2017. FINRA will monitor the number of parties agreeing to explained decisions after January 3, 2017 to determine if the fee waiver makes an impact. FINRA will also continue to evaluate the feasibility of making explained decisions the default award type at the forum.
  • Continue efforts to develop effective strategies to recruit aggressively applicants for the arbitrator pool, with a view to increasing both the depth and the diversity of the pool, and to monitor the results.
    • FSI’s Arbitration Task Force recommended that FINRA aggressively work to recruit new arbitrator panelists and to eliminate those from the roster who were no longer interested or capable of serving as arbitrators.
    • FINRA implemented procedures to recruit additional arbitrators including, hiring additional staff for arbitrator recruitment, retaining a consultant for recruitment advice, and expanding the use of social media and direct marketing. Data shows that these efforts have been successful and FINRA will continue to aggressively recruit new arbitrators.

FINRA has stated that their staff will continue working on recommendations related to new staff procedures, technology enhancements, and rulemaking. FINRA will provide periodic updates on its progress going forward and we will keep our members apprised of those updates.

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