Finra should review ban on in-person arbitration hearings

One industry group is now calling on Finra to end the remote hearings it says are harming investors. Two hundred and sixty-three hearings have been conducted remotely as of the end of March.

When the Financial Industry Regulatory Authority Inc. decided to shut down in-person arbitration hearings last March, claimants and respondents embraced the idea of resolving disputes from the comfort of home via the convenience of a Zoom call.

Participants and legal teams quickly adapted to virtual hearings and Finra — which runs the arbitration system that adjudicates claims made by customers against brokerages and registered representatives — extended the postponement through July 2 of this year.

One industry group is now calling on Finra to end the remote hearings it says are harming investors. Two hundred and sixty-three hearings have been conducted remotely as of the end of March, according to Finra arbitration statistics. While there are efficiencies to be gained by litigating cases online, significant issues have also cropped up.

Most notably, respondents can delay claims against them by objecting to a remote hearing, according to the Public Investors Advocate Bar Association. Since both parties have to agree to move proceedings online, brokerage firms or registered investment advisers can effectively suspend those legal actions until face-to-face meetings resume.

While brokerage firms may have an incentive to postpone claims, there are significant issues with delaying arbitration. There are concerns about the growing backlog of cases currently piling up, and several lawyers have said they worry that some claimants — especially elderly ones — can’t afford to have their cases prolonged by the pandemic. An analysis of Finra statistics by the Securities Arbitration Alert found that pending arbitration proceedings increased to 5,062 in July of last year, up from 4,781 in March.

Respondents have been allowed to drag their feet because “they have no incentive to proceed with the case if they can push off a determination indefinitely,” PIABA President David P. Meyer wrote in a public letter addressed to Richard W. Berry, Finra executive vice president and director of Finra Dispute Resolution Services. As InvestmentNews senior reporter Mark Schoeff Jr. hashed out in an article last month, justice delayed may be justice denied.

Although Zoom hearings can be an efficient way to speed up the process, lawyers also cite shortcomings that keep them from being widely embraced. Zoom can’t effectively capture body language, for example, making it difficult for some lawyers to lay out their case. They argue that face-to-face communication can be a crucial part of complex arguments, especially ones that hinge on the credibility of a claimant or respondent.

With Covid-19 vaccinations well underway, it’s time for Finra to consider resuming in-person hearings as long as those meetings take place safely and in accordance with local health guidelines. The self-regulator should loosen up blanket postponements that are becoming increasingly obsolete — and may have come with unintended consequences that delay fair and timely resolutions.