Part 5: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time: Small Claims and Mediation.

By: Alexandra Hughes, Spring 2016 Graduate Research Assistant

alexhughesSmall Claims

FINRA Rule 12800 provides simplified arbitration procedures for claims of $50,000 or less. The purpose of simplified arbitration is to provide small claims claimants with a faster and less expensive avenue to recoup damages. However, this faster and less expensive process doesn’t guarantee satisfaction. In fact, the task force found claimants who participated in the simplified arbitration process were the least satisfied group of users of FINRA’s arbitration forum. The task force found such dissatisfaction for small claims claimants may be the result of:

  • Lower win rates for small case claimants—only 37% of small claims are won on the papers and only 34% of small claims are won at hearings
  • Many claimants being pro se and may having an unrealistic view of their case and their chances of recovering in arbitration
  • Successful claimants losing large percentages of their recovery to fees and costs
  • 43% of claimants choosing to present their claim on the papers and forgoing the opportunity to have a hearing, meaning the claimant does not have the opportunity to tell their story in person to the arbitrator and the arbitrator cannot assess the credibility of the parties
  • Small claims awards having no explanation, which leaves the claimant wondering why they didn’t receive certain damages

Acknowledging the need to improve satisfaction rates of small claims claimants in FINRA arbitration, the task force recommended that FINRA consider adopting an intermediate approach. This intermediate approach would allow the claimant and respondent to appear before an arbitrator (whether in person, phone, or video conference), ask and answer questions posed by the arbitrator, explain their positions and argue their case, and respond to the positions of the opposing side. This approach would fill an intermediate niche because it would be more than a claim on the papers but less than a full hearing. Essentially, this approach would enable the oft dissatisfied claimant the opportunity to have personal contact with the arbitrator without incurring the time and expense which often accompanies a full hearing. In recommending this intermediate approach, the task force discussed the need to have a time limit, so that arbitrators could hear several cases in the course of the same day. In recommending the intermediate approach, the task force presented only a framework and left much of the substance of the new approach to the expertise of FINRA’s NAMC. For example, the task force discussed allowing fact witnesses to be present at the intermediate approach appearance but did not answer whether fact witnesses could be cross examined, submit additional documents, or be compelled to attend.


Mediation is an alternative to arbitration—think of mediation like arbitration’s informal cousin who just wants the parties to settle and be on their way. Arbitration is an adjudication. This means the parties present evidence and a third party (the arbitrator) decides what, if any, award either party is entitled to. Mediation, on the other hand, is an opportunity for the parties to meet voluntarily and informally with a mediator, who helps the parties negotiate, so that an agreeable settlement can be reached. For an explanation of the differences between mediation and arbitration, visit FINRA’s website.

FINRA’s mediation forum has been incredibly successful—over 80% of cases brought to mediation are settled. However, FINRA’s mediation forum has been significantly underutilized. In order to encourage use of FINRA’s mediation forum, the task force recommended:

  • An automatic mediation process for all cases filed unless one party explicitly opts out.
  • Financial incentives for parties who resolve their case through mediation. Specifically, the task force developed a framework that refunds parties portions of their FINRA arbitration fees and mediation fees (if mediated through FINRA) depending on how early the parties are able to settle. The proposed framework is laid out below.


Timing of Settlement % of Fees Refunded to the Parties
Pre-Answer 100% of FINRA Arbitration Fee and 100% of Mediation Fee
Pre-List Selection 80% of FINRA Arbitration Fee and 80% of Mediation Fee
Pre-IPHC (Initial Pre Hearing Conference) 65% of FINRA Arbitration Fee and 65% of Mediation Fee
Pre-Discovery Cut Off 50% of FINRA Arbitration Fee and 50% of Mediation Fee
Pre-20 Day Exchange Parties are not required to pay postponement fee or pay arbitrators for reserving their time.


  • Training: (1) Formal, mandatory, continuing education program for new mediators and voluntary continuing education program for all mediators; (2) More Mediation Months; and; (3) Formal mentoring program
  • Increasing the racial and gender diversity of mediators
  • Special Mediator Rosters, which would encourage mediator expertise by allowing mediators with expertise in a specific area to be listed on special rosters
  • Training mediators about alternative forms of mediation, such as med-arb, arb-med, and ENE
  • Continued participation of FINRA mediators in the mediator self-assessment program

The full task force report is available online.

GSU Students: Learn More About the Investor Advocacy Clinic

Investor Advocacy Clinic Shoot

GSU Law Students: Are you interested in learning more about the Investor Advocacy Clinic?  There are two new opportunities to learn about us and what we do:

  • First, join the Spring 2016 Investor Advocacy Clinic student interns for a presentation on Representing Investment Fraud Victims on February 15 at noon or 5pm. Student interns will discuss the types of cases the clinic handles and the experiences they gain during their time working with real clients from initial intake, case evaluation, filing a claim, discovery, mediation and preparing for final hearings.  Food will be provided.  Join us in Room 139 (12:00 pm) and Room 245 (5:00 pm).
  • Second, the Experiential Course Information Fair will be held on February 17 at 12:00 p.m. or 5:00 p.m. in the atrium.  Clinic representatives will be on hand to answer your questions.





Part 4: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time: Explained Awards and Expungement.

By: Alexandra Hughes, Spring 2016 Graduate Research Assistant

alexhughesExplained Awards

Final arbitration awards can be found online at FINRA’s website. Arbitrators are required to make their awards in writing. However, they are not required to explain their awards. Thus, most final awards only contain “certain bare-bones information,” unless requested by both parties pursuant to FINRA Rule 12904(g), which entitles the parties to a “brief, fact-based explanation.” Critics of the current system argue that requiring more explained decisions would promote transparency, improve decision-making, enhance oversight of the system, and increase consistency among awards. Customers especially find it difficult to perceive the current system as fair when they are dissatisfied with an arbitration outcome, whether due to lesser damages than requested or no damages at all, and have no explanation from an arbitrator to explain how or why the arbitrator reached the outcome she did. Conversely, some believe that expanding use of explained decisions will only lead to increased appeals of arbitration awards, which will undermine the current advantages of the arbitration system over regular civil litigation: low costs and more expeditious resolution.

The task force recognized that expanding the use of explained decisions was one of its most important tasks because it would promote transparency and confidence in the system, especially for customers. After considering a number of different approaches, the task force landed on its recommendation—requiring an explained decision unless any party notifies the panel before the initial prehearing conference (IPHC) that they do not want one. Although the task force recommended keeping the current “brief, fact-based” format of Rule 12904(g), it did add that arbitrators should include an explanation for damages, which will undoubtedly help customers understand why they did or did not receive certain damages. Finally, the task force recommended FINRA create a training program for arbitrators on how to write explained decisions to keep overturn on appeal low.


The Central Registration Depository (CRD®) is an online registration and licensing database for the securities industry. FINRA’s BrokerCheck® allows individuals to access this database information by entering in the name of an associated person or brokerage firm. BrokerCheck® contains information about: criminal matters, regulatory disciplinary actions, civil actions, customer complaints, arbitration claims and awards, and other background information. However, a member or associated person can obtain an order of expungement of customer dispute information under FINRA Rule 2080, which removes the customer dispute information from the CRD® and BrokerCheck®.

While expunging customer dispute information from the CRD is beneficial for securities firms and associate persons, it isn’t necessarily good for customers. Expungement permanently removes the information from the record, like the complaint never existed—think having a court ordered expungement of a DUI from your driving record. The SEC has made clear that expungement is an “extraordinary remedy that is permitted only where the information to be expunged has no meaningful investor protection or regulatory value.” Thus, FINRA has strict rules on how and when expungement can occur. For more information about the current standards, consult FINRA Rules 2080, 2081, 12805, and 13805. Despite these rules, there are still questions about who should preside over an expungement proceeding. Some commentators have suggested that the responsibility of expungement should reside with state regulators, not FINRA arbitrators. Because considerations of converting the expungement process into a regulatory procedure are still under way, the task force took no position on whether switching to a regulatory procedure would be better. Instead, the task force focused on how to improve the expungement process within FINRA.

The task force recommended the creation of a special arbitration panel. This special arbitration panel would consist of arbitrators, conduct hearings specifically on expungement requests, and then make determinations to grant or deny such requests. The special panel would be especially important in cases requesting expungement where (1) the case has not been heard on the merits or (2) the customer has not named the associated person as a respondent in the claim. In these situations, the customer either has little incentive to participate in an expungement hearing or does not have notice of the expungement hearing. Such circumstances impair the arbitrator from being able to fully consider the facts of the underling claim from both sides. The special arbitration panel would remedy these deficiencies by being specially trained to make a decision about whether grounds exist for expungement and would ensure that customers are notified and have an opportunity to participate in the expungement hearing. Additionally, the task force recommended reviewing the procedures used for notifying state regulators of expungement requests.

The full task force report is available online.

Part 3: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation at a Time: Arbitrators Continued.

By: Alexandra Hughes, Spring 2016 Graduate Research Assistant

alexhughesThe task force readily identified issues affecting arbitrators as those of greatest importance to the task force, especially when looking into the next 20 years of the FINRA arbitration and mediation forum. This post is a continuation of Part 2. Arbitrators and summarizes the remaining issues the task force considered. Continue reading

Part 2: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time: Arbitrators.

By: Alexandra Hughes, Spring 2016 Graduate Research Assistant

alexhughesAs noted by the task force, the “quality of dispute resolution at the FINRA forum depends greatly on the abilities and commitments of the individuals who serve as arbitrators.” Due to the task force’s extreme focus on arbitrator issues, and in an effort to be comprehensive, arbitrator issues will be discussed in Part 2 and Part 3 of this blog series. The following are summaries of those issues the task force considered, along with any proposed recommendations. Continue reading

FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation at a Time

By: Alexandra Hughes, Spring 2016 Graduate Research Assistant

alexhughesHandling 99 percent of securities arbitrations and mediations in the United States makes the Financial Industry Regulatory Authority’s (FINRA) Dispute Resolution division the largest securities dispute resolution forum in the country. However, FINRA is always looking for ways to improve its arbitration and medium forum. In June 2014, FINRA created a task force to propose recommendations that would “enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum for all participants.” The task force was composed of public and industry sector individuals to ensure representation of all viewpoints and interests.

FINRA created the task force recognizing “the need to reflect on what its dispute resolution forum will look like in the next 20 years.” As such, the task force was unlimited in its examination of topics. However, noting the 2008 financial crisis, passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the current lack of transparency of FINRA arbitration, the task force largely focused its attention on issues concerning customers of brokerage firms. Thus, the task force is particularly relevant to the Investor Advocacy Clinic, an organization dedicated to representing investors. Continue reading

Clinic Comments on FINRA Proposal Concerning Communication to Investors Related to Account Transfers

Investor Advocacy Clinic graduate research assistant Alexandra Hughes recently filed a comment on SR-FINRA-2015-057, a proposal to adopt FINRA Rule 2273, Educational Communication Related to Recruitment Practices and Account Transfers.

The Clinic’s comment, available in full here, supported the proposed rule change to the extent it aims to protect investors who may be moving a financial account after their representative changes firms. The Clinic suggested several changes to increase the proposal’s efficacy.  First, we advised that the rule include disclosure of representative compensation plans or the provision of information concerning compensation on the investor’s request.  Second, we believe that the rule should apply to all customers who decide to transfer assets, whether they are current, new or former clients.  Third, we believe that moving brokers should provide information about the risks of transfers for a longer period of time and before the investor receives account transfer documentation.  Finally, the Clinic noted that the rule should require that firms ensure that the educational communication is delivered to the customer.

The Investor Advocacy Clinic represents the voice of small consumer investors.  In addition to providing legal representation of small investors who have claims against their brokers, the Investor Advocacy Clinic evaluates and comments on proposed rules that impact the small investor and engages in educational outreach for investors and professionals who work with investors.