Part 10: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time. Forum Access, Unpaid Awards, Frivolous Motions to Vacate, Requiring Arbitrators to Apply the Law, and the Proposed FINRA-DR Merger.

alexhughesBy: Alexandra Hughes, Spring 2016 Graduate Research Assistant

  1. Forum Access

Although the task force did not make any recommendations regarding forum access in FINRA arbitration proceedings, the task force did discuss the following issues:

  • Definition of “Customer”

A customer, according to FINRA Rule 12100(i), “shall not include a broker or a dealer.” Although this definition has been subject to criticism, the task force found reformulating the definition not necessary because the issue is being addressed by the courts.

  • Forum Selection Clauses
    • Federal appeals courts are currently split on whether a forum selection clause providing for litigation in federal courts can trump a customer’s right to chose arbitration pursuant to FINRA Rule 12200. Although providing no formal recommendation, the task force agreed that a forum section clause could not waive a retail customer’s right to arbitrate. However, the task force did not agree as to whether a sophisticated investor could negotiate around FINRA Rule 12200 or whether waiver of the right violated 29(a) of the Exchange Act.
  • Inclusion of Investment Advisers/ Firms in FINRA’s Forum
    • The task force considered whether FINRA’s authority should extend to investment advisers in additional to the already regulated member firms and associated persons. The task force did not make a recommendation because this issue is a highly charged political question and because the task force does not have experience regarding investment advisers. For an explanation of investment advisers and registered representatives, visit FINRA’s website.
  1. Unpaid Awards

Although an arbitrator may award an investor damages for a claim, that doesn’t necessarily guarantee the investor will receive payment. In order to help make sure claimants get their awards paid, FINRA imposes suspension or threatens suspension on active firms and associated persons. However, penalties don’t always seem to be enough. This is especially true when the firm or associated person is no longer in business. Currently, FINRA does the following to help investors: alerts the investor prior to filing the claim that the firm or associated person is not in business, prohibits the firm or associated person from enforcing written agreements mandating arbitration in a FINRA forum, and providing streamlined default proceedings.

Despite these measures, some investors still leave FINRA empty handed. In 2013, of 539 investor arbitration cases with awarded damages, 75 awards were not paid, leaving a total of $62.1 million damages missing in action for investors. Of those 75 awards, 51 awards were against firms or associated persons no longer registered in the securities industry. To help remedy these concerns, FINRA considered, in 2014, imposing an insurance requirement for the payment of awards. The task force discussed reconsideration of the insurance requirement, but reached no consensus.

  1. Frivolous Motions to Vacate

FINRA Rule 12904(j) provides: “all monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction.” A motion to vacate allows the party responsible for paying the award to challenge the award in court. A court will grant a motion to vacate (or overturn) the award on limited grounds. For more information, visit FINRA’s website.

Although the task force heard concerns about securities firms filing excessive and baseless motions to vacate, the task force found no evidence of this misconduct. The task force only recommended that FINRA continue to monitor filed motions to vacate, especially those motions to vacate explained decisions.

  1. Requiring Arbitrators to Apply the Law

FINRA’s long standing position is that the FINRA forum is equitable and therefore arbitrators cannot be restricted by the written law in reaching arbitration decisions. However, the idea that arbitrators do not have to apply the law does not sit well with other organizations. The task force heard comments from the North American Securities Administrators Association (NASAA) that arbitrators should be required to base their arbitration awards on the strict application of applicable state and federal laws.

The task force could not reach consensus on whether arbitrators had to strictly apply the law and subsequently made no recommendation. The FINRA position still applies.

  1. Proposed FINRA-DR Merger

In October 2015, the Federal Register published a notice of filing of a proposed rule change to merge FINRA Dispute Resolution, Inc. into FINRA Regulation, Inc. In 1999, the FINRA dispute resolution program was moved into a separate entity in order to ensure its independence and credibility. The task force heard concerns that if the dispute resolution program once again became part of FINRA Regulation, Inc., its independence, as well as investor perception of the neutrality of FINRA’s forum, would be jeopardized. The task force did not make a recommendation on the proposed merger due to time concerns and an inability to fully analyze the issue and its implications. On December 22, 2015, the proposed merger was approved. FINRA believes that the merger will reduce administrative costs but will not impact the services and benefits the dispute resolution provides.

Again, this blog series is a summary of the FINRA Dispute Resolution Task Force report. It highlights the task force’s recommendations as well as those areas that received no recommendations, but are still of great importance to ensuring the transparency, impartiality, and efficiency of FINRA’s forum. The full report is available online.