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.

Part 9: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time. Large Claims, Time Limits, Class Action Waivers, and the Mandatory Nature of Arbitration.

alexhughesBy: Alexandra Hughes, Spring 2016 Graduate Research Assistant

Parts 2-8 of this series discussed those topics with task force recommendations. Parts 9 and 10 discuss topics without task force recommendations. Although the task force made no recommendations for these issues, they are no less important and can still be improved upon to make the FINRA arbitration and mediation forum more efficient, transparent, and impartial.

  1. Large Claims

Large claims raise two questions: (1) whether the FINRA forum is meeting the needs of the parties (which are often large sophisticated financial institutions) and (2) whether large cases place a disproportionate burden on the FINRA forum. To help with these concerns, FINRA launched a voluntary program for large cases with claims of at least $10 million. The program allows the parties to agree to different methods of: arbitrator appointment, discovery, hearing facilities, etc. and assigns a specially trained case administrator to help the parties plan their case. Since the program has launched, it has been underutilized.

Although recognizing that the program has been underutilized, the task force was unable to reach consensus on procedures for large claims. Namely, the task force disagreed on adoption of mandatory procedures for large claims which would include: an alternative method of selecting arbitrators, increased compensation for arbitrators, rights to take only one deposition, and ability to modify the discovery rules and hearing location.

  1. Time Limits

FINRA Rule 12206(a)—the 6-year eligibility rule—provides: “no claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this Rule.” The eligibility rule only prohibits a claimant from pursuing a claim in FINRA arbitration and does not bar a claimant’s ability to pursue remedies in court. The eligibility rule has long been a topic of debate. In the 1990s and early 2000s, the debate focused on whether the eligibility rule should be decided by an arbitrator or could be decided by a judge in court. In 2002, the United States Supreme Court in Howsam v. Dean Witter Reynolds, Inc. held an arbitrator should decide the procedural question of eligibility raised by the rule. Today, debate over the eligibility rule continues. For example, there are questions about when the 6-year time limit begins to run.

Task force deliberations surrounded whether the eligibility rule should be eliminated and stale claims issues be addressed by applicable statutes of limitations or whether the eligibility rule should be a rule of repose. If the 6-year eligibility rule is eliminated and replaced by applicable state statutes of limitations, the time for which a claimant can bring a claim may be decreased. If the 6-year eligibility rule became a rule of repose, the 6-year time limit would begin to run from the time the defendant’s act occurred, as opposed to the time the plaintiff’s injury occurred. Thus, transformation into a rule of repose could also decrease the time a claimant has to bring a claim. Although the task force substantially discussed these issues, no consensus was reached, and no recommendation made. For more information on the difference between a statute of limitations and rule of repose, and how it affects the securities industry, click here.

  1. Class Action Waivers

In 2011, Charles Schwab & Co. amended its customer agreement to include a class action waiver. This class action waiver provision prohibited customers from bringing judicial class actions to recover from any causes of action against Charles Schwab & Co. A class action waiver affects the rights of customers with small claims because it requires such customers to pursue individual arbitration in FINRA—which may be economically unfeasible—instead of being part of a larger class action suit. Charles Schwab’s class action waiver violated FINRA Rules 12204 and 2268. However, in February 2013, a FINRA hearing panel held FINRA’s rules prohibiting class action waivers were unenforceable because they were in conflict with the Federal Arbitration Act (FAA).

Subsequently, FINRA’s Board of Governors reversed the hearing panel’s decision, found the FAA did not prohibit such rules, held §15A of the Exchange Act allowed FINRA to regulate the dispute resolution process, of which prohibiting class action waivers was included. Eventually, Charles Schwab settled the case and paid a $500,000 fine to FINRA. Because the Schwab case was settled, there remains uncertainty whether FINRA’s Board of Governors will be reversed by a federal circuit or the Supreme Court. The task force, not able to make a recommendation on this issue, endorsed the decision of the Board of Governors that class action waivers are prohibited.

  1. Mandatory Nature of Arbitration

FINRA Rule 12200 provides mandatory arbitration if: (1) it is required in a written agreement—like a Predispute Arbitration Agreement (PDAA)—or requested by the customer; (2) the dispute is between a customer and a member or associated person; and (3) the dispute arises in connection with the business activities of the member or associated persons. The task force discussed the long-standing argument regarding the mandatory nature of FINRA arbitration—the argument between investor choice and the status quo.

Investor choice supporters don’t like the mandatory nature of FINRA arbitration because they believe: (1) investors should be able to chose the forum in which they seek remedies; (2) PDAAs are impermissible restrictions on investor’s rights; (3) arbitration makes it more difficult for investors to obtain necessary documents in discovery; and (4) customers don’t always achieve fair outcomes in arbitration. Conversely, status quo proponents like that firms can secure rights to arbitrate in PDAAs (just as customers can choose to arbitrate pursuant to Rule 12200). Status quo proponents also like FINRA arbitration because they find the forum a commercially reasonable dispute resolution forum. Despite fundamental disagreement between investor choice and status quo proponents on FINRA’s mandatory nature, the groups do agree that FINRA arbitration has advantages and disadvantages. Advantages include: regulatory oversight by the SEC, prompt payment of awards, and the ability to select an arbitrator. Disadvantages include: lack of developed legal authority and lack of system transparency.

The task force discussed the mandatory nature of FINRA arbitration and developed four proposals. However, the task force produced no recommendation because: the task force could not reach a consensus on any of the proposals, the task force believed the issue was a policy question, the task force didn’t have any empirical evidence available, and the task force felt improving the current FINRA forum was a better use of limited resources.

The full task force report is available online.

Part 8: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time. Professionalism and Funding to Law School Arbitration Clinics.

alexhughesBy: Alexandra Hughes, Spring 2016 Graduate Research Assistant

  1. Professionalism

The task force received complaints concerning the unprofessional conduct of attorneys at arbitration proceedings. These complaints recommended that badly behaving attorneys be punished for their inappropriate conduct by being ineligible to practice within FINRA’s arbitration forum. The task force declined to follow these recommendations and instead stated that attorney bad behavior is best handled by the chairperson or state disciplinary authorities—in Georgia, this is the State Bar of Georgia.

Additionally, the task force received complains about the poor performance of compensated non-attorney representatives (NARs). In 2007, pursuant to FINRA Rule 11208(c) FINRA allowed parties to begin being represented by a non-attorney unless: state law prohibits it, the person is suspended or barred from the securities industry, or the person is suspended or disbarred from the practice of law. Because the task force received comments about whether NARs actually provide a service to investors, the task force recommended a study be conducted to determine:

  • How many jurisdictions allow NARs to represent customers in FINRA arbitration and mediation
  • Whether NARs provide a service to investors with small claims otherwise unable to obtain representation
  • Whether NARs are representing investors competently
  1. Funding to Law School Arbitration Clinics

The task force also received comments regarding funding to law school arbitration clinics. The FINRA Investor Education Foundation provides three-year grants to law schools desiring to establish clinics which provide assistance to customers with small claims unable to acquire other legal representation. Law school clinics fill this important niche in the securities industry. Each law school clinic grant is $250,000. The Georgia State University Investor Advocacy Clinic is one such law school that received a grant and is the first investor clinic in the state of Georgia.

Although the task force received reports that some clinics would be forced to close after the three-year grant period, the task force did not give a recommendation to expand funding for law school clinics. The task force did not want to second-guess the Foundation’s policy of limiting grants to three-years. However, the task force did recommend using collected FINRA fines and penalties as a source of funding for law school clinics otherwise unable to sustain themselves outside of the three-year grant period.

The full task force report is available online.

Part 7: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time. Public Availability of Information and Transparency.

alexhughesBy: Alexandra Hughes, Spring 2016 Graduate Research Assistant

  1. Public Availability of Information

As discussed in Part 4 of this blog series, the task force recommended amending FINRA Rule 12904 to require explained decisions unless a party affirmatively opts out. However, requiring explained decisions does not in and of itself ensure increased public availability of information in FINRA’s arbitration forum—improvements in the information content of explained awards is also a necessary component. As such, FINRA recommended the following to enhance the content of arbitration awards:

  • Educate arbitrators about the importance of providing a detailed summary of the issues and products involved in the case in the explained award decision
  • Provide a template for arbitrators to follow which sets out a minimum standard for an explained award decision. For example, arbitrators should describe the claims and defenses presented at the hearing and not just summarize those claims and defenses in the parties’ briefs.

Additionally, the task force recommended expanding the substantive decisions which qualify as awards and thus end up on FINRA’s Arbitration Awards Online Database (AAO). The task force recommended FINRA include: (1) injunctive orders and (2) final dismissals in its database. The public availability of these decisions give parties more relevant information about an arbitrator and therefore enable the parties to better select an arbitrator during the selection process. Although injunctive orders are already noted in final awards, they are not discussed with any specificity.

The task force declined to make recommendations of the following issues related to public availability of information:

  • Making interim and all other written decisions available to parties
  • Posting AAA and JAMS awards to its database
  • Adding monthly statistical reports to its website allowing parties to identify bottlenecks or other delays at particular hearing locations
  1. Transparency

One of the task force’s major objectives was to enhance the transparency of FINRA’s arbitration and mediation. The current lack of transparency is due in part to the nature of the process. Traditionally, arbitration is a confidential process. The parties present their cases in front of an arbitrator, not a public courtroom. Likewise, mediation is a private settlement negotiation between the parties. In order to enhance the transparency of FINRA’s forum, the task force recommended:

  • FINRA adopt a policy promoting the transparency of its arbitration and mediation. Such a policy would promote releasing more data and information to the public, even if the information has to be redacted for personal or confidential information. The task force discussed releasing arbitrators’ evaluations.
  • FINRA reinstate its practice of disclosing the names of the NAMC

The full task force report is available online.

Part 6: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time. Motions to Dismiss and Case Management.

By: Alexandra Hughes, Spring 2016 Graduate Research Assistant

alexhughesMotions to Dismiss

FINRA Rule 12504(a) governs motions to dismiss prior to the conclusion of a party’s case in chief. Such motions are highly discouraged because of the nature of arbitration—claimants are not required to state legal claims and arbitrators can broadly apply the law, which depends on a hearing on the merits. Therefore, Rule 12504(a) allow an arbitrator to grant such a motion in only two instances: (1) “the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release” or (2) “the moving party was not associated with the account(s), security(ies), or conduct at issue.” The first exception concerns cases already settled between the parties and no longer in need of resolution. The second exception concerns cases involving issues of misidentification.

The task force recommended amending Rule 12504(a) to include a third exception: “situations where the dispute has been previously concluded through adjudication or arbitration and memorialized in an order, judgment, award or decision.” This third exception would allow respondents to obtain early dismissal of a case that had been previously resolved. It is similar to the policy reasons behind the first exception—the case has already been resolved and there is no need to resolve the same case again. However, the task force noted that if an arbitration award without an explained decision previously concluded the case, the arbitrator would still need to decide whether the claims were actually resolved in the prior instance.

The task force declined to amend section (b) of Rule 15204, governing motions to dismiss after conclusion of a party’s case in chief. Although specifying a briefing schedule in Rule 15204(b) would provide guidance to practitioners, this benefit was outweighed by the risk of encouraging filings of boilerplate briefs.

Case Management

The task force discussed the procedural issues facing case management in FINRA arbitration and made the following recommendations:

  • Scheduling delays:
    • For all cases, FINRA should review its procedures to better ensure expedited scheduling
    • For expedited cases (usually selected because a party is a senior or seriously ill), FINRA should implement procedures ensuring an expedited process and hearing
    • FINRA Rules 12402 and 12403 provide that the Director will send out arbitrator lists to the parties within approximately 30 days after the last answer is due. FINRA should amend these rules to use the first answer due date rather than the last answer due date to speed up the arbitration process
  • Last-Minute Recusals
    • Because there is a problem with arbitrators double-booking hearings and then recusing themselves from one hearing at the last minute because of the scheduling conflict, FINRA should:
      • Emphasize to arbitrators through training, appointment letters, and other communications that late-recusals and double-booking are to be avoided
      • Send reminders to the panel, approximately 75 days before a hearing, of the hearing date
      • Develop a formal disciplinary process for arbitrators who continue to double book and engage in late recusals
    • Discovery

FINRA should amend the document production list to provide that all insurance policies applicable to a customer’s claim are presumptively discoverable

  • Use of Technology
    • FINRA should make clear to the parties that they can agree to modify initial prehearing conference procedures, which may include use of technology
  • DR Portal
    • FINRA should create a feature for its online portal allowing the parties to see their costs on an on-going basis
  • Phantom Retention of Experts
    • FINRA should strongly discourage the parties from the practice of using phantom experts (experts which a party lists on their expert list without the consent, knowledge, or retention of the expert) at the initial prehearing conference

The full task force report is available online.

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.