Like a Hollywood movie trailer, imagine a world where the SEC used its Dodd-Frank authority to ban mandatory pre-dispute arbitration agreements (“PDAAs”) in customer-broker contracts. This was the topic discussed recently by an august panel of securities arbitration experts in the inaugural SAC podcast.
The video podcast was moderated by former FINRA Director of Arbitration and current SAC Board of Editors member George H. Friedman, and featured as panelists Michael Alford of Raymond James Financial, Melanie Cherdack of Genovese, Joblove & Battista, and David Robbins of Kaufmann Gildin & Robbins.
Assume Mandatory PDAAs are Forbidden in Customer-Broker Contracts
Recorded in early November, the video podcast, complete with a PowerPoint, assumes that the SEC has banned mandatory PDAAs and delves into how this act would play out. Said SAC President Rick Ryder in his introduction: “Believing this new regime -- where parties could arbitrate only by post-dispute election or agreements -- to represent a dramatic departure from today’s practice, we enlisted our panel’s considerable knowledge and experience to envision for readers what that new landscape would look like.”
What does Dodd-Frank say about customer arbitration?
Moderator Friedman, who also teaches arbitration at Fordham Law School, set the table by outlining what Dodd-Frank says about arbitration: “Section 921(a) and (b) of this very, very long statute, amends Section 15 of the Securities Exchange Act of ‘34, and Section 205 of the Investment Advisors Act of ‘40 to authorize, but not require the SEC, to do certain things. The Commission can prohibit or limit or impose conditions on the use of PDAAs arising out of the federal securities laws, the rules and regulations thereunder, and the SRO rules. The SEC is allowed to either prohibit or impose conditions or limitations, if it finds doing so is in the public interest or for the protection of investors.” The panel’s consensus was that, while SEC was not required to do a study, for all intents and purposes it really had to. Panelist Robbins believed that any retroactive application of a PDAA ban might run afoul of the Fifth Amendment’s Takings Clause. “By that, I mean that a ruling that retroactively invalidates contracts such as PDAAs, could be subject to challenge based on the impermissible governmental taking, absent a compelling governmental interest.”
Reactions from the Panel to a Commission Ban on PDAAs
The panel engaged in a lively debate over how FINRA’s dispute resolution constituents would behave in a voluntary post-dispute arbitration world. While not speaking for the customers’ bar, Ms. Cherdack believed that some but not all cases would be submitted to arbitration on a voluntary basis. “I think FINRA’s going to get small claims cases, or cases where there’s maybe a technical legal problem and the case is only good on the equities -- like a limitations issue, or a jurisdictional or venue issue. Or a case where there’s no clear-cut legal liability, but, equitably, the case cries out for a ruling on behalf of the claimant. The third category are cases where a quick resolution and a final resolution is necessary -- someone who’s in dire need of the money or you have an elderly or an infirm case.”
Mr. Alford stated: “To some extent, there’s probably a large number of industry representatives who would welcome an opportunity to take some of these cases, particularly some of the larger cases, back into court -- again, in our alternative reality where the SEC has banned all PDAAs. I would tell you that the practitioners believe arbitration continues to offer an efficient and fair method of resolving business and commercial disputes.” However, he challenged the assumption that FINRA Rule 12200, which allows customers to require arbitration with their broker, should survive a PDAA ban. “It’s my opinion that the industry would be willing to accept an SEC decision to arbitrate only on a voluntary, post-dispute basis, with one important proviso: And, that is, the decision to arbitrate, regardless of when it’s made in the process, must be mutual. What the industry is particularly concerned about is any proposal that would grant the unilateral right for investors to choose arbitration on a post-dispute basis without the consent of the firms.”
The panel was asked for predictions for the next five years. The panelists were unanimous in their view that the FINRA Dispute Resolution forum would survive a PDAA ban, but would be much smaller with fewer cases in general and larger cases going to court or competitors. Panelists also agreed that FINRA would need to adapt to remain competitive. Said David Robbins: “To think about what's going to happen in five years in FINRA’s program, look back at the past five years. They've significantly updated the discovery guide for parties.… Look how they've improved the Arbitrator’s Guide, which is online and advises their own arbitrators how to do a better job. In the past five years, all-public panels are now the default. If a customer claimant doesn’t want an industry person on a panel, the claimant doesn’t have to have an industry person on a panel. Another, which you'll see in the future, judging from the past couple of years -- FINRA has introduced and enhanced its online portals, with the goal of making them standard for all cases to eliminate paper. Rick Berry, the new Director of Arbitration, announced that FINRA’s policy now is paperless…And I think lastly, the fact they established that special task force is a reflection of FINRA’s desire to distinguish itself from mandatory arbitration systems that don’t afford due process, and that are, as I call, forums of adhesion.”
(ed: *This is the first in what we expect will be a series of roundtable discussions, in which people knowledgeable about and influential in the securities arbitration field will discuss issues and topics of moment in this area. **An edited write-up of this roundtable discussion was featured in our December 2014 edition of the Securities Arbitration Commentator (vol. 2014, no. 7). ***Listen to the full discussion! Click here to link to the video podcast. Check our Blog for a permanent link to this and future audio and video podcasts.)