Can parties expect changes to FINRA Arbitration? Arbitrators can.

On December 16th, the Financial Industry Regulatory Authority (FINRA) posted the final report prepared by FINRA’s Arbitration Task Force, which was assigned the responsibility of reviewing FINRA’s arbitration and mediation forum for areas of improvement. The task force, formed in July 2014, consisted of 13 individuals from the public and industry sectors who met regularly to address strategies “to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum for all participants.” The task force maintained an email inbox to solicit comments and received written comments from more than 30 interested organizations and individuals. After establishing topics for review and creating subcommittees to hone in on those topics, the task force gathered sufficient information to prepare its final report containing 51 recommendations.

The report submitted by the task force states that “the most important investment in the future of the FINRA forum is in the arbitrators.” As such, the task force raises concerns with the “below-market-rate” arbitrators earn in compensation and recommends an increase in their compensations, along with a number of recommendations relating to the recruitment and training of arbitrators and disclosures from arbitrators essential to greater transparency. Some of the task force’s concerns stem from comments made during the public comment period related to arbitrator training, competence and professionalism, which the task force proposes is linked to the level of arbitrator compensation.

The task force’s second most important category of recommendations pertains to encouraging arbitrators to provide written explanations or “rationale” for their decisions.  Currently, arbitrators are not obligated to do so.  Instead, arbitrators are only required to supply “bare-bones information,” including the names of the parties, summary of the issues, damages and other relief requested, and the damages and other relief awarded. The task force believes that explained decisions would improve the transparency of the forum.  Commentators also argued that the added requirement to explain decisions would improve the quality of decision-making, would provide better oversight of the systems by FINRA, and would increase the consistency among awards.  However, the leading counter-argument, rejecting explained decisions, is that such decisions will lead to increased appeal of arbitrations awards, which would drive up the cost of the system and period of time to resolve the underlying action. The evidence collected by the task force in similar forums contradicted this concern that expanding the use of explained decision would significantly affect the number of appeals.

After considering how FINRA could increase the use of explained decisions whether by requiring it in all cases where both parties agree to it, at either party’s request, or whenever requested by the investor, the task force ultimately recommended changing the rule to require an explained decision unless any party notifies the panel otherwise. The task force noted though that it does not intend that explained decisions “should carry any precedential value in subsequent arbitration cases.” In effect, the explained decisions may serve the limited purpose of satisfying the “why?” that may be raised by the particular parties to an action as they react to a decision and as the task force contemplates, it may “improve transparency.”

The other key topics of the report include expungement, small claims versus large claims, mediation, motions to dismiss, procedural issues in case management, public availability of information, transparency, class action waivers, mandatory arbitration (Rule 12200), forum access, unpaid awards, frivolous motions to vacate, whether arbitrators should be required to apply law, professionalism, funding to law school arbitration clinics, and proposed FINRA – Dispute Resolution Merger.  Based on these topics, the task force enumerated additional recommendations, including establishing a pool of trained, experienced arbitrators to conduct expungement hearings in settled cases where the associated person is not named as a respondent, developing an intermediate forum of small claims that is not exclusively on the papers, and creating an automatic mediation process for cases filed in arbitration with a financial incentive for parties who settle in mediation. To review the full report visit:

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