In December, Ulmer & Berne is hosting four financial services webcasts, the first of which I will be presenting along with my partner, Michael Gross: FINRA 2019: A Look Back, and Thoughts About What Lies Ahead (Wednesday, December 04, 2019, 2:00 PM EST). The others are The Anatomy of a Whistleblower Action: Procedure, Practice Pointers, and Avoiding Pitfalls (Thursday, December 05, 2019, 2:00 PM EST); Hot Topics in SEC Regulation and Enforcement (Wednesday, December 11, 2019, 2:00 PM EST) and Data & Privacy in the Financial Services Industry: How Can You Stay Current? (Thursday, December 12, 2019, 2:00 PM EST). They are free, and look pretty interesting. I invite you to register to attend any or all of them by clicking this link. – Alan
As I have mentioned before, several times, PIABA is deathly concerned with the fact that sometimes customers who prevail in arbitrations are unable to collect their awards, which typically happens when the respondent firm and/or the RR leaves the industry (thus eliminating the leverage supplied by the FINRA rule that requires arbitration awards to be satisfied within 30 days or else face expulsion). Putting aside my view that PIABA’s true interest in the subject is not that customers receive nothing but, rather, the fact that non-payment of an award means no legal fees are collected – 40% of 0 is, alas, 0 – it is pretty stunning how FINRA continues to cater to PIABA’s views, even when those views are in direct derogation of those of FINRA’s consitutent member firms.
Case in point: FINRA announced this week that it is proposing amendments to the Code of Arbitration Procedure that are directly in response to PIABA’s complaints about unsatisfied arbitration awards. The amazing, but, I suppose, unsurprising thing is that these amendments are so one-sided in terms of who they benefit. If you were to use your one guess to say, “the customers?” you would be correct.
Some of the proposed amendments are vanilla. For instance, they allow a customer that has filed an arbitration against a firm or an individual who is no longer registered, or who becomes unregistered after the arbitration has been commenced, to withdraw the case and get his money back. That’s not a bad idea, and I have no problem with the concept.
A much thornier issues arises from FINRA’s proposal to allow customers who don’t want to withdraw their arbitration instead – without seeking any leave from the hearing panel – to amend their Statement of Claim to add a new party. Under the current rules, once the panel has been appointed, a claimant may only add a party by seeking and obtaining the panel’s consent. The proposed amendment eliminates that requirement.
Perhaps that doesn’t sound like a big deal to you. I would suggest that it is. For a few reasons.
First, by allowing a claimant unilaterally to add a party to the case after the panel has been appointed, it means the new party has been effectively precluded from participating in the process of selecting the arbitration panel. And, frankly, in many cases, that process is the single most important aspect of the defense strategy. You can have a fantastic defense case, but if your panel is bad – and believe me, it is difficult to overstate just how bad a panel can theoretically get if the wrong people are not stricken – you will still have an uphill battle to prevail.
FINRA recognizes this problem, but blithely shrugs it off:
In this scenario, FINRA would provide the arbitrator disclosure reports of the sitting panelists to the parties and permit the parties to raise any conflicts they find with the panel. If a party discovers a conflict, the party may file a motion to recuse the arbitrator. The arbitrator who is the subject of the motion to recuse would consider whether to withdraw from the case and rule on the motion. The party may also request removal of the arbitrator by the Director, under certain circumstances.
This provides absolutely no protection to the newly added party against simply bad arbitrators who are not conflicted out. Moreover, it’s not like this is some effort by FINRA to compromise; rather, it is simply pointing out a right that any party to an arbitration has under the rules, regardless of when they become a party, and that is to exclude from the panel any arbitrator who has a conflict. Unfortunately, it would not be a conflict meriting recusal if, say, the appointed chair of the panel was a member of PIABA with a long history of awarding money to claimants. In that circumstance – which is not hypothetical – the newly added party would be stuck with a chair that, had he been offered a chance to participate in the ranking process, would have immediately been struck.
The other problem is that despite its protestations to the contrary, it sure seems like FINRA is actually encouraging claimants to amend their Statements of Claim to add a new respondent not because the new party has any real culpability, but simply because the new party is seen as having the fiscal means of potentially satisfying the claim. It’s not like FINRA has done any real analysis on the subject. Indeed, the most comfort that FINRA offers to prospective respondents is this, buried – appropriately – in a footnote: “FINRA does not believe, however, that the proposed amendments would cause member firms and associated persons to be named without having a connection to the case.” Ha! I have no idea on what FINRA bases its “belief,” but clearly it has not been paying attention to the real world, where people and firms are named as respondents despite having had had nothing to do with the issues underlying the complaint.
FINRA attempts to amplify this statement, but the upshot of my criticism does not change:
FINRA does not believe that the proposed amendments would encourage claimants to add members or associated persons who have no nexus to the arbitration case as some commenters fear. While the proposed amendments to FINRA Rule 12309 would remove the requirement for arbitrator or panel approval prior to adding a claim or party, FINRA Rule 12309(d) permits any party, whether existing or newly-added, to respond to an amended pleading after it is filed by filing an answer and raising any available defenses. Thus, if the claim or party to be added has no connection to the arbitration case, the respondents would have an opportunity to make that argument to the arbitrator or panel. It would not be in the claimant’s interest, therefore, to add frivolous claims or unnecessary parties, as doing so would likely increase a claimant’s costs in supporting the amended pleading and would delay the outcome of the case.
It is very telling that FINRA’s explanation is provided strictly from the claimant’s perspective, but that’s way incomplete. The more important perspective, the one that FINRA flatly ignores, is that of the newly added party. That person or entity, now a party in an arbitration with a panel it had zero role in selecting, has to spend the time, the money, and the effort to defend itself. It has to hire counsel, then file an Answer, and maybe also a Motion to Dismiss. Maybe have to appear at the hearing before it can even raise a defense on the merits? And, yet, FINRA thinks this is a mere inconvenience, one that’s trumped by the purported need for customers to augment the likelihood of collecting if/when they prevail?
Once again, FINRA has shown how little it thinks of its own members, and how it wants to hold itself out to the world. Once again, members’ interests are subordinate to those of the investing public. Once again, FINRA has demonstrated its view that a procedure is fair so long as complaining customers benefit by it. In short, there is no level playing field in FINRA arbitrations. Time and time again, when PIABA speaks, FINRA listens, no matter what price member firms pay for that obsequiousness.