Securities Arbitration Awards: Is It Worth Asking for An Explained Decision?

Tuesday, December 30, 2014

The default in securities arbitration administered by FINRA is that the arbitrators will not explain the reasoning behind their awards.  Among other things, the award identifies the parties, provides a very general description of the claims, and contains an number, starting with zero (all relief denied) to whatever compensation the arbitrators decide to award in favor of the claimant. If the goal is to inform the parties whether they won or lost, the awards do that but not much more.

FINRA Rule 12904(g) provides that parties may require the arbitrators to write an explained decision.  An explained decision is a fact-based award stating the general reasons for the arbitrators' decision. It does not need to include legal authorities and/or damage calculations.  If the parties submit a joint request for an explained decision at least 20 days before the first scheduled hearing date, the chairperson is required to draft an explained decision and will receive an additional honorarium of $400.  

The arbitrators can always decide on their own to write an explained decision, even without such a request.  Any arbitrator may also concur, concur in part, dissent, or dissent in part from an award -- and explain why.  If an arbitrator decides to explain his or her reasons without being asked to do so, FINRA will not pay any additional honorarium.

John Duval suggests that the Rule be amended to allow either party to request an explained award and that a larger body of explained awards would promote transparency.  His view, "What is missing in FINRA Awards is transparency.  When judges instruct juries, there is transparency.  When jurors are interviewed after a court decision, there is transparency.  There should be similar transparency in FINRA Awards."  There is something to this point.  The typical arbitration award in FINRA securities arbitration is opaque: it is often impossible to know how the arbitrators reached a result, particularly how they calculated a damages number.  FINRA has recognized that explained awards can increase investor confidence in the fairness of the arbitration process.  This is true. 
It is also true that many considerations have to be factored into a decision whether to request an explained award.  A major consideration is that an explained award may provide grounds for appeal.   Ultimately, the decision whether to request an explained award is a tactical judgment that should be made by experienced counsel in consultation with the client.

Appeals from FINRA Securities Arbitration Awards: A Proposal for Reform

Monday, December 15, 2014

The arbitrators in your securities arbitration have spoken.  You have an award.  But it's not the award you wanted and, not only that, it's an award the defies common sense, is absurd, and just plain crazy.  It's an award that is the product of outright and undisclosed bias.  It's an award compromised by procedural or evidentiary defects.  The arbitrators refused to compel the production of evidence needed to defend (or prosecute) the claim.  The arbitrators excluded evidence that was not only relevant but of critical importance to establishing your position.  The bottom line is that you want to appeal the award.

Right now you don't have a right to an "appeal" as such -- you have to file a new lawsuit in state or federal court to vacate (toss-out) the arbitration award.  That's a whole new round of litigation, subject to a very exacting standard of review.  The grounds for vacating an arbitration award are narrow and arbitration awards are seldom vacated -- and they shouldn't be vacated lightly, either (but that's another story). 

Is there an alternative to filing a new lawsuit to challenge an arbitration award?  Not right now, but John Duval proposes that FINRA create and administer an in-house arbitration appeal process .  This would be much less expensive, faster, and potentially subject to a different standard of review than what now applies in court.  A FINRA process would be better suited to correcting technical errors in appointment of arbitrators, selection of arbitrators or, more generally arbitrator misbehavior prejudicial enough to compromise the integrity of the process. 

There is ample precedent for arbitration appeals.  The American Arbitration Association offers rules for arbitration appeals.  Federal administrative agencies also build into the administrative decision-making process an appellate stage, for example the Environmental Appeals Board, which handles appeals from administrative law judge decisions in environmental enforcement proceedings.

John's proposal deserves consideration and could be a useful way of giving parties to FINRA securities arbitraiton proceedings a streamlined, expedited, and cost-effective option for correcting serious arbitration errors without going to court.