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Giving Credit where Credit is Due: FINRA Improves Dispute Resolution Transparency
Posted on Categories ADR Generally, FINRA Task Force, News, Statistics & SurveysTags , ,

By George H. Friedman*

Almost a year ago I blogged here Sunlight is said to be the Best of Disinfectants, in which I encouraged FINRA to take several steps to increase transparency and constituent confidence in its dispute resolution program. This time of year, we tend to look back to see how we’ve done. With that in mind, I’m happy to report that FINRA has adopted several recommendations for improving transparency and perceptions of fairness.

A Report Card: Accomplishments

Quoting Supreme Court Justice Louis Brandeis from an article published over one hundred years ago titled What Publicity Can Do, I made this general recommendation:Shedding light on the system enhances perceptions of fairness and is a good idea. I believe strongly that perceptions of fairness, especially investor and employee perceptions, are improved by making public more information about the FINRA Dispute Resolution program…In this regard, I agree with Brandeis.…” I then offered specific recommendations, which are repeated below with a status update:

Status: Done! One of my transparency recommendations for the FINRA Dispute Resolution Task Force was posting on the FINRA Website the names and affiliations of the National Arbitration and Mediation Committee (“NAMC”) members, just as FINRA does for its Board and the Task Force. In its Interim Report released last spring, the Task Force encouraged more transparency generally and specifically recommended that: “FINRA reinstate its prior practice of disclosing on its Website the names of NAMC members.” During the summer, the Authority “went public” with the NAMC roster. Good!

  • Publishing the number of panelists by hearing location. I wrote, “Brandeis would especially love this one. Methinks that, had this information been public when the Puerto Rico bond fund problem surfaced, someone would have said to FINRA, ‘How on earth are you going to handle a surge in these cases with only a handful of arbitrators?’”

Status: FINRA will be posting this data very soon. In the meantime, the Authority went me one better on this one. Not only will more roster data soon be available, but starting with the October statistics, FINRA expanded greatly the statistics section of its Website, and has made it more user friendly. The revised statistics section now includes:

Information on the industry component of the caseload. For example, we learn that intra-industry cases account for 32% of case filings in 2015. Also, users can see that the top five controversy types in industry cases are: promissory notes, breach of contracts, compensation, libel or slander in the U-5, and wrongful termination.

Clarity on controversy and security types raised in customer cases: this data is now displayed in descending order of case filings, with customer information separated from industry.

  • Publish the Task Force’s Activities. I recommended last year that the Task Force keep the public up to date on its activities and, of course, results.

Status: Done! FINRA set up a dedicated Task Force area on the Website, and kept it updated. It identified initial topics for review, reported on meeting dates, and published its Interim Report. FINRA officials also promise that the Final Report, expected by the end of the year, will be made public.[1]

A Report Card: “Incomplete”

Three of my suggestions have not (yet) been implemented. I say “yet” because the Task Force’s Interim Report makes this recommendation in section XI(A), which may find its way into the Final Report:

FINRA should adopt a policy of promoting, to the maximum extent possible, transparency about its dispute resolution forum. FINRA should use its good judgment in evaluating what data and information can be released to the public, even if it requires some expense to redact or remove personal or confidential information prior to release. For example, FINRA might consider the release of arbitrators’ evaluations with redaction of identifying information because it could shed light on the performance of panels.

I repeat my prior suggestions here verbatim with a renewed suggestion that they be considered:

  • Airing “Recovery Rate Percentages.” To be clear, I think this is essentially a meaningless stat. Courts are not judged by it, and it presumes that every claim asserted is 100% valid. To begin with, that is a meaningless statistic. Don’t take my word for it. Seth Lipner, a prominent investors’ attorney and a past president of PIABA, published an article in 2006 demonstrating why it’s an unsound measure.[2] Nonetheless, grownups should be permitted to judge for themselves. I trust FINRA to add the appropriate disclaimer. Also, other similar arbitration fora such as the National Futures Association, already do this.
  • Publish Aggregate Arbitrator Performance Data. As I state above, data on individual arbitrator track records is already public for those willing to do the research or pay someone else [like SAC] to do it. I do suggest that FINRA publish aggregate data. How’s that? Toward the end of each case, FINRA asks participants to evaluate staff and arbitrator performance. It also asks arbitrators to evaluate each other. I suggest FINRA periodically publish the compiled results. For example, questions address views on arbitrator professionalism, ability, knowledge, hearing conduct, and overall performance. Making public the aggregate responses would go a long way toward bolstering perceptions of fairness.
  • Making public high-level results of NAMC meetings, just as FINRA does for its Board meetings.

The Bottom Line

My blog post from last January closed as follows: “FINRA should open the windows and let the sun shine in. In the end, the public will find there’s not much that needs disinfecting.” I applaud FINRA Dispute Resolution for taking some bold steps toward improved transparency. Kudos!

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*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional.

[1] I’m still irritated that the Ruder Task Force Report from 2007 is available, but only if users fork over $20 for a hard copy by mail. Why it should cost $20 is puzzling. A PDF should be available online for free in my opinion.

[2] See Lipner, Study of Arbitration Recovery Statistics, The Neutral Corner (June 2006) <available at http://www.finra.org/ArbitrationAndMediation/Arbitrators/CaseGuidanceResources/NeutralCorner/P016939>.

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