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.

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