Finra's arbitration process: Challenging the system to find the right answers

The Financial Services Institute is pleased to see the regulator putting forward a broad-ranging slate of common-sense improvements, writes FSI CEO Dale Brown

Sep 6, 2016 @ 11:00 am

By Dale Brown

“That's the way we've always done it.” In business, this simple but dismissive mindset — if it becomes ingrained throughout an organization — can keep a company mired in the past, resistant to change and unresponsive to its customers' and employees' evolving needs. It takes a smart, disciplined organization to take an honest look at itself and its practices in order to prevent this inertia-inducing mentality from taking hold and spreading.

FSI applauds Finra for doing exactly that on the subject of its dispute resolution, or arbitration and mediation, process.

Over the past several years, Finra has embarked on a broad-ranging effort to improve the hallmarks of efficiency and fairness in its dispute resolution program, from revising its rules on who is eligible to serve as a public arbitrator to expanding the number of potential arbitrators provided to parties during the panel selection process.

Throughout this effort, FSI has been proud to serve as a source of industry expertise and insight to Finra in order to strengthen the arbitration process and drive better outcomes for firms, advisers, investors and arbitrators alike.

Our Finra Arbitration Task Force, made up of thought leaders from across the FSI community, has been working since 2013 to identify potential areas of improvement within Finra's dispute resolution program and to provide practical suggestions on how the regulator might modify the program to be more equitable and responsive to the needs of both industry members and investors.

Each of Finra's key changes and proposals to strengthen the arbitration process below followed extensive dialogue with both industry and public stakeholders, including FSI staff, our task force, and the regulator's own dispute resolution task force, among others:

• Expansion in choice of arbitrators: Finra is moving to expand the number of arbitrators on the list of choices provided to parties during the panel selection process from 10 to 15, and to boost the number of public arbitrators that parties may strike from four to six.

This seemingly small procedural change could have a significant impact on the general experience level of panel participants, since it reduces the likelihood that less seasoned or less qualified arbitrators will survive the strike process. For this reason, FSI submitted a comment letter in favor of this proposal in early August.

• Arbitrator recruitment and compensation: FSI's task force has long viewed new arbitrator recruitment as a priority, and we have been pleased with Finra's efforts in this area over the last several years. In 2013, Finra recognized that compensation for arbitrators had not increased in several years and was no longer in line with compensation levels that would attract potential panelists, much less qualified and interested panelists. Finra increased arbitrator honoraria to $300 to $600 depending on the length of the hearing and implemented important provisions ensuring that panelists would be compensated for claims that ultimately settled as long as they spent time on the claim. These changes have been essential in enabling Finra to recruit additional talented and interested arbitrators to serve on panels.

• Arbitration party portal: On July 27, Finra published a request for comment on a new proposal that would require parties involved in arbitration to file and serve correspondence on discovery requests via Finra's online dispute resolution party portal. Several of our members took part in a trial program to test the portal and provided feedback prior to the proposal.

FSI strongly supports this proposal, as well. Our task force has long advocated for measures that would alleviate the frustration many parties in arbitration feel in communicating with each other. This measure would represent a significant step toward accomplishing that goal, and would lead to more efficient and equitable arbitration proceedings by streamlining interactions among parties, arbitrators, mediators and Finra staff.

• Elimination of plaintiffs' attorneys from list of eligible public arbitrators: As recently as early 2015, plaintiffs' attorneys who generated a substantial portion of their revenue from representing claimants in arbitration cases were still eligible to serve as 'public' arbitrators, while members of our industry were not. Since many claimants chose the 'all public' option when determining the composition of panels to hear their cases, industry participants were effectively frozen out of many arbitration panels, while plaintiffs' attorneys continued to act as arbitrators.

Fortunately, after extensive conversations with our arbitration task force, FSI staff and other industry members, Finra proposed a rule change to remove these plaintiffs' attorneys from the pool of 'public' arbitrators. The change was approved by the SEC and went into effect in February of last year, immediately restoring a more equitable balance to arbitration proceedings.

As we have consistently emphasized in our dialogue with Finra, we wholeheartedly support efforts to advance the dispute resolution process' foundational goal of preserving integrity and fairness in arbitration proceedings in order to ensure the stability of our industry's legal framework. We are pleased to see Finra putting forward a broad-ranging slate of common-sense improvements (both those that have been enacted and those still in the proposal stage) to its current arbitration system based on its productive dialogue with our arbitration task force and other members of our industry as well as public and non-industry stakeholders.

We look forward to continuing to work with Finra to ensure its dispute resolution process maintains the essential hallmarks of fairness and efficiency for all parties involved.

Dale Brown is president and chief executive of the Financial Services Institute Inc.


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