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The Election Is Finally Over – What Does It Mean for Arbitration? New Love for FINRA Arbitration?
Posted on Categories Arbitration, Federal, Legislation, News, Rulemaking, Securities ArbitrationTags , , , ,

Resident futurist and SAC Contributing Legal Editor and Board Member George H. Friedman blogged in November on what the election results mean for arbitration. In the weeks leading to Inauguration Day, we will focus on one or another of his predictions, updating them as events transpire. This week’s installment – the last in the series – focuses on the prospects for renewed appreciation of the FINRA arbitration program.

He summarizes his views as follows: “President Obama once said: ‘Elections have consequences.’ If you like mandatory arbitration and less regulation, you’ll be happy. Otherwise, not so much.” (ed: The remainder of this article paraphrases or tracks the Friedman blog article on this single topic.)

New Love for FINRA Arbitration

DOL acted favorably – at least neutrally – about predispute arbitration agreements (“PDAAs”) in Best Interest Contracts for ERISA accounts when all these other federal regulatory agencies were taking hostile action. Perhaps the Department sees the securities business as a case apart? Right now, CFPB, DOL, and SEC/FINRA have a consistent approach to the financial arbitration area: PDAAs are OK but class action waivers are not. I point out here that this is precisely the approach FINRA has taken for years in Rule 2268(d), and Rule 12204(d). The latter provides that an industry party “may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action until: the class certification is denied; the class is decertified; the member of the certified or putative class is excluded from the class by the court; [or] the member of the certified or putative class elects not to participate in the class or withdraws from the class….”

Prediction: I’ve said for years FINRA has very consumer-friendly rules. Given the new political landscape, I believe opponents of arbitration will give up the anti-arbitration ghost and instead focus on ensuring a fair process incorporating the many consumer protections in FINRA’s arbitration rules. For example:

  • FINRA serves the claim on the broker with whom the investor has a complaint. This rule saves the investor time and money. Typically, other dispute resolution providers do not serve the claim on the respondents.
  • The fee structure favors the investor;
  • The hearing is sited where the investor lived when the underlying events occurred;
  • There are hearing locations in all 50 states (at least one in each state);
  • The process includes a motion-to-dismiss rule that severely limits motions made prior to the claimant resting his/her case and provides sanctions for frivolous motions;
  • Parties have access to the FINRA discovery guides and codified discovery provisions in the rules;
  • The customer has the option of an all-public panel;
  • In close calls, if the investor wants an arbitrator removed for bias, he or she is removed;
  • FINRA will enforce arbitration awards in the investor’s favor;
  • Awards are public, in a searchable database, and available free of charge on the web; statistical data on the program are available on the web; and
  • Investors can opt out of arbitration and into a class action.[1]

Post-election Update: No changes in my views, except to reaffirm them. On September 9, House Financial Services Committee Chairman Jeb Hensarling (R-TX) introduced the Financial CHOICE Act. If enacted, the massive H.R. 5983 would have essentially repealed and replaced Dodd-Frank. The bill was reported out of Committee in September, but the revised text was not posted until December 20. Unchanged in the latest draft was repeal of Dodd-Frank section 921, which authorizes SEC to ban, limit, or impose conditions on PDAA use.

The CHOICE Act wasn’t passed before the end of this Congressional Term – and thus expired –but perhaps it will form the template for President-elect Trump’s plan to repeal and replace Dodd-Frank in 2017? We will learn soon enough, because repealing and replacing Dodd-Frank is on the President-elect’s First Hundred Days list. I now think that the Commission probably will finally act in 2017 by doing a study of FINRA arbitration using FINRA’s follow-up activity on the Dispute Resolution Task Force’s 51 recommendations to improve the process. On the other hand, it may be just as likely that the SEC will not act on section 921 in 2017 until the Republicans move ahead on their plans to repeal and replace Dodd-Frank.

(ed: Mr. Friedman's statement that anti-arbitration forces might switch to moving for improvements in arbitration is tectonic! This could be the tertiary plateau for arbitration in its acceptance into this nation's jurisprudence: let's embrace arbitration but let's make it fair.)

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[1] The Consumer Financial Protection Bureau’s 34-page outline in support of its proposed class action waiver ban references FINRA’s class action rule on page 17.

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