More than a decade ago, as courts began enforcing class action waivers in arbitration agreements, it grew more and more apparent to me that disputants with arbitrable claims of small dollar value would proceed under the respective forum’s small claims arbitration procedures. This warranted a renewed focus on whether those small claims procedures provided disputants with sufficient access to justice.
In the securities industry, most disputes between brokerage firm customers and their firms are resolved in arbitration before the Financial Industry Regulatory Authority (“FINRA”), a securities self-regulatory organization. FINRA’s arbitration procedures for claims of small dollar value are codified in Rules 12800 of its Code of Arbitration Procedure for Customer Disputes and 13800 of its Code of Arbitration Procedure for Industry Disputes. Until very recently, FINRA’s “Simplified Arbitration” procedure permitted customers of broker-dealers (or employees of brokerage firms) to have their claims of $50,000 or less resolved by one arbitrator either based exclusively on paper submissions or following a full-blown live, in-person hearing. The former prevented parties from being heard orally; the latter involved arbitration forum fees that made the claims economically not viable to pursue.
To correct this procedural flaw that I believed decreased an investor’s (or employee’s) access to justice, about ten years ago I conceived of a hybrid option: a shortened telephonic or video-conference hearing that would offer procedural justice (i.e., an opportunity to be heard) to claimants yet provide a cost-effective method of dispute resolution. To convince FINRA to adopt this procedural reform, I embarked on what I now call the “CRAPP” method: Credibility, Repetition, Actual Evidence, Publish, and Patience. (I thank the ADR Conference “Embracing Our Legacy and Engaging the Future,” hosted by Pepperdine Law School’s Straus Institute in June 2019, for inspiring me to crystallize my thoughts reflected in this blog post.)
Starting in 2007, I published several articles, presented at conferences, and filed with FINRA and the SEC multiple comment letters proposing reforms to the Simplified Arbitration process. As a direct result of my efforts, eleven years later in the summer of 2018, the SEC approved FINRA’s proposal (filed in January 2018) to add a “Special Proceeding” option to its Simplified Arbitration process—to provide parties with an additional convenient and cost-effective hearing option for parties, effective September 17, 2018. (Because FINRA is a regulated entity, the SEC must approve any change to the FINRA arbitration codes, following a public rule-making process, including opportunity for public comment.) Under the revised rule, if a claimant who has filed a Simplified Arbitration selects a live hearing rather than the “paper” option, the claimant must select one of two hearing options: either a full-blown, in-person hearing identical to the one for non-simplified arbitration, or a “Special Proceeding”—a telephonic hearing of limited duration during which each party can present one witness, who would not be subject to cross-examination (though arbitrators can question the witnesses).
Since its passage and through July 24, 2019, 27 out of 147 eligible customer claimants and 76 out of 572 eligible industry claimants (18% and 13% of eligible claimants, respectively) opted for the Special Proceeding. This demand for the telephonic procedure demonstrates that disputants wanted another option.
Each of the “CRAPP” elements was critical to my success in altering the rules to better help investors of modest means pursue their claims in FINRA arbitration in a cost-efficient yet procedurally just manner:
Credibility – I have been either practicing or writing in the area of securities arbitration for more than 25 years, and have been an arbitrator in the forum for 20 years. I served a four year term on the National Arbitration and Mediation Committee of FINRA, on which policy and rule changes are vetted and debated. While on the NAMC, I built professional relationships with lawyers who represent both investors and broker-dealers, worked with FINRA staff, and approached issues with both idealism and pragmatism. Through all these activities (and others), I have tried to maintain my neutrality, covered the area fairly and objectively, and focused on FINRA’s successes as well as failures. I firmly believe this credibility strongly contributed to the success of my proposal.
Repetition – Another component to my strategy was repetition: keep presenting my idea at conferences, seminars and during informal conversations. I also repeated it to multiple audiences: regulators, FINRA DR staff, scholars, other securities clinic directors, arbitrators, and practitioners. In three separate comment letters to FINRA’s predecessor forums in 2007-08, I expressed concerns about the costs of a live hearing for a Simplified Arbitration. In March 2012, I filed a comment letter supporting the proposed increase in the threshold for Simplified Arbitration to $50,000, reiterated my concerns about the costs of the live hearing option, and offered publicly the telephonic option. In July 2014, FINRA convened a Dispute Resolution Task Force. Chaired by retired law professor (and my former colleague and frequent co-author) Barbara Black, the Task Force considered strategies to “enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum for all participants.” In the spring of 2015, I submitted comments to the FINRA Task Force, both via a writing and a telephone call, including a proposal to adopt a telephonic option for Simplified Arbitration. The Task Force’s December 2015 “Final Report and Recommendations” included a recommendation to offer an affordable, truncated in-person hearing as an alternative to a paper arbitration for low-dollar-value claims. In this day and age of much “noise” and inbox explosion, I have learned that repeating a suggestion is necessary for it to be heard by the right person/people.
Actual Evidence – A third component of my strategy was to cite to actual evidence that there was a “problem” needing fixing, rather than just an academic idea in a vacuum. I cited to an empirical study I had conducted (with Prof. Black) regarding investors’ perceptions of the fairness of securities arbitration. I also re-examined some of the raw data zeroing in on small claims and found that investors’ negative perceptions of fairness decreased even more in the context of Simplified Arbitration. This made sense in light of the procedural justice literature: in a proceeding where the only economically viable option was an opaque paper “hearing,” it stands to reason that parties would perceive it as more unfair.
Publish – A fourth component of the CRAPP method is to publish. I published a law review article and a shorter piece in a PLI publication offering and explaining the idea, with each publication reaching a different audience. In addition, as required by the rule-making process, each of my comment letters was published on the SEC’s website.
Patience – Fifth, to make change, one must have patience. I waited 11 years from my identification of the “problem” to the implementation of a solution. I did not jump up and down, criticize regulators for not moving faster, tweet sarcastic GIFs, or pull hair out of my head for not getting quicker results. I just kept pushing politely and respectfully. It was a long process from idea to policy change, but rewarding nonetheless. Similarly, future patience will be needed to refine the procedure. When proposing the telephonic option, I purposely did not specify the particulars of the revised hearing option, leaving it to the forum to design a procedure that worked best for its constituents. Some have criticized the provision that bars any cross-examination. However, with additional patience and experience, perhaps FINRA will re-examine and tweak that provision in the future.
In sum, by successfully lobbying FINRA to reform its arbitration code governing small claims, I believe I have made an impact and helped investors and employees of modest means. The CRAPP method worked. Upon reflection, the CRAPP strategy should work not just for ADR reform, but for any proposed change to public policy, the law, or people’s views. Consider using it.