Back when I was a Director of NASD’s Atlanta District Office, I spent a lot of my time apologizing to the approximately 500 member firms my office regulated about the quality of the arbitration process. Almost uniformly, broker-dealers held the view that it was not just flawed but broken, that it was unfair (tilted in favor of complaining customers), and that it was neither cheap nor fast (the two principal reasons mandatory arbitration was upheld by the US Supreme Court). Today, 15 years later, nothing much has changed. The FINRA arbitration process is still subject to the same criticisms; interestingly enough, they come from by both claimants and respondents.
In an effort to address these criticisms, FINRA assembled a task force to take a look at the process, to see what was working and what wasn’t. Late last week, the task force issued its final report, and it is worth reading. There are 51 separate recommendations, and I will not go through each one, but here are the ones that will undoubtedly generate the most conversation.
The number one recommendation was for FINRA to increase the amount of money that its arbitrators receive, up from $300/session to $500 (meaning $1,000/day, since a full day is comprised of two sessions). Theoretically, this will (1) increase the number of qualified people willing to serve as arbitrators, and (2) increase the likelihood that good arbitrators will be willing to volunteer to sit on cases with hearings anticipated to last more than a couple of days. That may be true, but, sadly, it will undoubtedly also increase the likelihood that individuals who make lousy arbitrators will now want to participate, not to “give back,” but just to make some money. And, believe me, there are plenty of arbitrators in the current pool who already approach this as a job, not a service.
Second, the task force recommends that more arbitration awards be “explained,” with a disclosed rationale behind the decision, to achieve greater “transparency.” (Apparently, but unknown to me, a lot of people are concerned that arbitration is too “opaque.”) Presently, very, very few awards are explained. Both parties must agree for it to happen, and they almost never do. In addition, frankly, arbitrators generally hate the idea of having to prepare an explained award. Under the task force’s proposal, the requirement of an explained award would be presumed, unless either party opts out. Moreover, even when an award is not explained, the award will still include at least “some summary explanation of the reasons behind any damage calculation.” That last part sounds like a good idea to me, as we are often left guessing how a panel comes up with a damages figure, but I don’t imagine that parties will agree to an explained award any more than they do now, especially if they know it will displease the arbitrators.
The task force declined to eliminate the ability of a customer claimant unilaterally to dictate that no industry person be included on the hearing panel, which is unfortunate. But, the task force did recognize that when the all-public option is selected, meaning all ten of the industry members on the list are stricken, the resulting panel is often comprised of very low ranked panelists, i.e., individuals that neither party really wants. To address this, the task force recommends that when all the industry member are stricken, a new list of ten additional potential panelists then be circulated. This way, the panel is always selected from 30 possible names, not 20. This is a very positive development.
Regarding expungement, the task force recommended that in cases when expungement is the only relief sought, a separate pool of special arbitrators be created to hear them. The feeling was that expungement is supposed to be extraordinary, so it makes sense to have panelists with particular training in that area, to be able to understand the unique arguments raised that support the award of expungement. I am not necessarily against this idea, but it raises the question: what’s so special about expungement? If understanding expungement requires arbitrators with specialized training, how is that any different from other legal arguments heard in arbitrations, arguments that would be best understood by panelists with pertinent backgrounds and experience? Ironically, despite this recommendation, FINRA apparently has no problem with the elimination of the industry members from the panels, even though their background would clearly aid in the disposition of the case.
The task force has suggested that to increase the number of simplified arbitrations, which are decided on the papers alone, the Code of Arbitration Procedure be amended to add a quasi-mini-hearing, where the parties can look the panel in the eye and tell their stories, at least in some summarized, non-evidentiary fashion. Supposedly, this will make parties feel more comfortable with the result, because now, according to the task force, claimants mostly lose simplified arbitrations and aren’t very happy about it, because they have no interaction with the panel. And FINRA, of course, can’t tolerate unhappy claimants.
The existing rule on motions to dismiss – which basically eliminates the ability to file pre-hearing, dispositive motions to dismiss – is recommended to be maintained, yet another claimant-friendly decision. The task force did throw a bone to the respondents’ bar by suggesting that one additional ground for a motion to dismiss be added, and that is when the Statement of Claim has already been litigated or arbitrated and the claimant lost. It seems like an obvious proposition, but I can’t wait to hear from the claimants’ bar that, somehow, even this is unfair to customers.
Finally, in one of the more fascinating non-decisions by the task force, it debated whether nor not arbitrators should be instructed that they were required to strictly follow the applicable law. Like a judge does. Or a jury. This was too controversial for the task force, unfortunately. Instead, the task force observed that arbitration is an equitable forum, so strict adherence to the law may or may be necessary. I find this to be extraordinarily troubling. I concede that arbitrators should entertain equitable notions of fairness, but that does not mean that they should be able to disregard pertinent law – as claimants’ counsel often urge – and simply “do what’s right.” The law is the law, no matter whether one is in court or in arbitration; otherwise, the arbitral process is in serious danger of becoming a true farce.
 Interestingly, the task force declined to specify particular qualifications for panelists, and could not reach a consensus on whether arbitrators should more accurately reflect the characteristics of a judge – who, theoretically, knows the law and how to apply it – or a juror, who is not an expert in the law, but is, simply, a “peer” to the litigants.