Anyone who’s handled FINRA arbitrations is well familiar with panelists who regularly respond to evidentiary objections by overruling them, but with the admonition that they will only give whatever weight, if any, to the evidence that they deem appropriate. While that can sometimes be frustrating, it is understandable. The Federal Arbitration Act, and the many states that have adopted the Uniform Arbitration Act, include as one of the very limited available grounds for vacatur a panel’s refusal to admit relevant and admissible evidence. What this means is simple: no award will ever be vacated as a result of a panel’s decision to admit evidence, but an award is subject to vacatur if a panel elects to exclude evidence. Arbitrators know this, and so they act accordingly.
There is one piece of evidence, however, that apparently is so explosive, so potentially upsetting to the fairness of the hearing, that FINRA doesn’t trust panelists to hear it and to give it appropriate weight. Instead, FINRA says the mere effort by a respondent (whether firm or registered person) to introduce it will subject that respondent to a disciplinary referral. What is this stunning fact that even seasoned arbitrators are apparently unable to evaluate?
It is this: it is when FINRA performs an investigation of the respondent regarding the same conduct that is at issue in the arbitration, and decides not to bring any disciplinary action against the respondent. In fact, when a firm or an individual receives a letter from closing out an examination, announcing that FINRA has determined not to bring any formal or informal action, the letter expressly recites that the letter cannot be used by the respondent at an arbitration as evidence that the respondent has no liability to the claimant.
I find this baffling. I recognize that there may be several reasons why FINRA does not pursue any disciplinary action following an examination, and not all of those reasons have to do with the absence of misconduct by the subject of the exam. But, most of the time, that is exactly why FINRA takes no disciplinary action. I do not understand why respondents are forbidden from introducing this fact into the record, and allowing the panel to give it the weight – if any – it deserves. Why are panelists able to divine the appropriate weight to every other fact, but not this? Especially when claimants are free to introduce every item contained in a respondent’s Form U-4, no matter old, no matter how irrelevant, in an effort to prove that the respondent is somehow a recidivist. There is no rule against that; instead, FINRA lets the panel decide the weight such evidence deserves.
If an arbitrator is trusted enough to know how to deal with anything else that might come up during the course of an arbitration, I simply cannot figure out why FINRA draws the line at its own decisions not to pursue disciplinary action. Can it be that FINRA is embarrassed by some of the decisions it makes? That it doesn’t want its decisions not to file Enforcement actions subject to second-guessing? I don’t know the answer, but, in FINRA’s continuing effort to “level the playing field” on which arbitrations occur, it seems that this one exception has no place, and should be reconsidered.