FINRA Dispute Resolution Task Force Issues its Final Report and Recommendations

As i blogged here and here,  in mid-2014, FINRA appointed a Task Force, Chaired by (retired) Professor Barbara Black, my former colleague and frequent co-author, “to consider possible enhancements to its arbitration forum to improve the transparency, impartiality and efficiency of FINRA’s securities arbitration forum for all participants.”  The 13-member Task Force includes forum arbitrators, representatives from the securities industry, investor advocates and attorneys, industry attorneys and a regulator.

The Task Force issued its Final Report and Recommendations to FINRA’s National Arbitration and Mediation Committee today.  According to the 57-page (70 pages including appendixes) Black Report, “[t]he task force looked at every aspect of FINRA’s dispute resolution forum as it relates to customers’ disputes and makes 51 recommendations to improve the system. Some of them would make significant changes to the forum; others would be small improvements. Some would require FINRA to invest substantial resources (both money and staff time).”

Key recommendations include:

  • Increase compensation to FINRA arbitrators, which is well-known to be far below market rates for arbitrators’ time and expertise, because of the Task Force’s “strongly held opinion… that the most important investment in the future of the FINRA forum is in the arbitrators”;
  • Increase the depth and diversity of the arbitrator and mediator pool through additional recruitment efforts;
  • Increase arbitrator training;
  • Adopt measures to encourage the writing of explained decisions, to improve transparency of the forum, including mandatory explained decisions unless one party opts out;
  • Improve arbitrator disclosure reports and checklists;
  • Change the rules to require automatic mediation of claims in arbitration unless one party opts out and financial incentives for early successful mediation;
  • Create a special arbitration panel to handle expungement requests;
  • Offer an affordable, truncated in-person hearing as an alternative to a paper arbitration for low-dollar-value claims;
  • Expressly bar class action waivers in customer agreements (i.e., codify the holiding by the FINRA Board of Governors in the Schwab disciplinary action); and
  • Consider funding law school securities clinics through FINRA fines and penalties.

While the Task Force did issue 51 important recommendations, the overwhelming majority of which I support or even championed (e.g., small claims; clinic funding), the Task Force was not able to reach consensus on a few important issues, including mandatory arbitration, expressly requiring arbitrators to follow the law, and  changing arbitrator selection rules.  Notably, the Task Force did take a policy position on an issue that is beginning to bubble up in the lower courts:  “The task force was in agreement that interpreting a forum selection clause as a waiver of a retail customer’s right to arbitrate pursuant to FINRA rules is against public policy.”  (This is the subject of one of my forthcoming articles.)

Hopefully FINRA’s NAMC will take up most of these recommendations in the coming years to continuously improve the forum.