Update on Securities Arbitration Administered by FINRA

This is by no means verbatim, but presents the highlights of a town hall meeting with Rick Berry, Director of FINRA’s Arbitration Services and Manly Ray, Director of FINRA Arbitration’s Southeast Regional Office and the head of FINRA’s Mediation program, and Sam Edwards, President of the Public Investors Arbitration Association.

Has FINRA seen a spike in cases as a result of stock market volatility and the economic downturn?  Not yet.  FINRA expects a 3-6 month lag, or possibly longer as a result of delays caused by the COVID-19 situation.  So far in 2020, customer case filings are down 7%.

How fast are expedited cases moving?  They are moving as fast as allowed by the Code.  FINRA is considering changes to the Code to speed up cases for claimants over age 75 or with very serious medical conditions.

Has the mix of securities at issue in arbitration changed?  Yes.  In 2020, claims related to common stock, private equity, REITs are the top three claim types, followed by bonds and bond funds.  In recent prior years the top cases by volume were bond and bond fund cases.  The number of cases that go to hearing as a percentage of total cases continues to trend lower, perhaps driven by pre-hearing settlement of many bond cases.

Updated on commitment to diversity?  Of the new arbitrators added to the list in 2019, 39% were women, 19% were African-American, and 3% were Asian.  Many newer arbitrators are younger.  Mediator diversity is also improving.

What portal improvements are in the works?   FINRA is working toward offering a real-time fee display.  FINRA is working toward more clear and frequent invoicing.  FINRA will also move toward electronic expense, billing, and invoicing.  TAll arbitrator selection, including short lists, will be through the portal sometime next year.

Any progress toward reforming the expungement process?  Last week the SEC approved a new filing fee for expungement, $1575 fee.  The FINRA Board approved in Fall, 2019 a special roster of arbitrators to handle expungement cases.  They will have enhanced training and a certain amount of experience will be required.  Comments from SEC are pending.  FINRA is moving toward codifying Expanded Expungement Guidance, which currently describes the best practices arbitrators should follow when deciding expungement requests.

What's going on with unpaid arbitration awards?  FINRA has done three things to attack the issue of unpaid awards.  First, stopping bad conduct from taking place on the front end--targeting firms with significant history of misconduct.  Second, rule changes would give investor claimants more options in pursuing claims against firms/brokers that become inactive at any stage of the case; to withdraw a claim and go to court or to amend claims.  The proposal is meant to provide more flexibility in proceedings against defunct or inactive parties.  Third, the Membership Application Program (MAP) incentivizes the timely payment of arbitration awards and prevents an individual from switching firms, or a firm from using asset transfers or similar transactions to avoid payment of arbitration awards.  FINRA continues to weigh other options.

When will insurance information be discoverable?  The issue remains under study at FINRA, and there is no set deadline to update Code to require discovery of insurance information.  This will require further action by the FINRA Board. 

How successful has the simplified arbitration process been?  The rule became effective September 17, 2018.  It has not been a big success.  As of June 1, 2020, 66 cases have been administered under this rule.  11 of 66 cases were closed by award; 1 case awarded damages.  FINRA is considering moving to video as a default or at least making video optional.

FINRA Response to COVID-19.

Aside from in-person hearings and mediation, FINRA continues to move forward with remote hearings and electronic filings as normal.  The schedule and pace of cases has not slipped, with one exception ... FINRA postponed all hearings through July 31.  FINRA has also offered to waive hearing postponement fees through September 4, 2020.   By joint agreement, hearings can be conducted via Zoom.  The same is true for mediation (with added incentive of reduced fee mediation).

In customer cases, FINRA arbitrators have heard 18 contested motions by Zoom (in all cases 28 motions have been heard).  No customer cases have been heard in their entirety by Zoom; one case had a final hearing date by Zoom but the vast majority of the case was presented in-person.  One industry case was heard stem-to stern by Zoom.  The Zoom recording (audio only-not video) will be the official hearing record.

FINRA has been encouraging Zoom mediation.  FINRA's reduced fee mediation program has been working well since May 6.  Fee is $100/hr split by the parites.  FINRA waives all filing and administrative fees.  To date only 4 cases have opted in, but 20 or so are scheduled.  Some mediators use a mix of Zoom and telephone.

FINRA staff will host and facilitate Zoom hearings.  FINRA has substantial familiarity with Zoom and has been using it for several years. 

Arbitrators are presenting best practices for use of Zoom in "The Neutral Corner."  FINRA is finalizing a Zoom Guide for Arbitrators, and recording three instructional videos (3-5 minutes each): introduction to Zoom, technical instructions, and Zoom etiquette.  

For practitioners who prefer a remote hearing platform other than Zoom, the parties can file a motion with the panel and propose an alternative.  FINRA has thoroughly vetted Zoom and that is the default, but FINRA has not ruled out using other platforms if preferred by the parties or ordered by an arbitration panel.

The future of in-person hearings is revisited on an ongoing basis.  The lodestar is public health and safety.  FINRA is considering geographic differentiation; moving forward with in-person hearings in some locations, but not others.  FINRA is also considering venues that would accommodate social distancing.  It is considering whether to require masks at hearings and other changes when in-person hearings begin.