The annual half-day program on securities arbitration and mediation, sponsored by the Association of the Bar of the City of New York, took place earlier this year. With thanks to the staff at the City Bar, we were able to listen to a video webcast of the Program and make some notes about the proceedings.
Roger Deitz, Program Moderator, led a lively faculty in discussions that ranged from the work of the NAMC on the Dispute Resolution Task Force (DRTF) recommendations to the plight of senior investors to recent moves by broker-dealers to arbitrate ex-FINRA. FINRA’s head of the Office of Dispute Resolution, Richard Berry, opened the Panel discussion with a review of case statistics at the FINRA forum. Customer cases are driving this year’s 23% rise in new case submissions, Mr. Berry reported; driving the surge in customer claims, he added, are more Puerto Rico bond cases and claims relating to failed oil and gas investments.
DRTF Recommendations Implemented
Mr. Berry also discussed the approach taken by the NAMC – FINRA’s National Arbitration & Mediation Committee – to deal with the cascade of 51 recommendations in the December 2015 DRTF Report. The Committee doubled up for a two-day meeting in March 2016 and convened again in June to complete an initial review of the proposals. Two items have so far reached Board level – one, a rule proposal that results from the fact that, in 70% of the eligible cases, one or another party – usually customers – are striking all of the proposed Non-Public Arbitrators. With that in mind, FINRA has proposed to nominate 15 names, instead of the current 10, on the Public Arbitrator lists; six strikes will be permitted, instead of the current four.
Another rule change driven by the DRTF recommendations deals with a new exception to the general proscription against pre-hearing motions to dismiss – when a claimant seeks to re-litigate a previously adjudicated claim. The text of that proposal has not yet been aired or filed with the SEC.
Not all of the DRTF recommendations will require SEC approval. FINRA has already taken numerous steps to enhance the transparency of its operation. It now lists the names and affiliations of NAMC members on the FINRA Website. Its monthly statistical report has been broadened in a variety of ways, including more information about industry cases and an inter-active map that shows the number of arbitrators assigned to each hearing location and a tally of pending cases.
Finally, Mr. Berry mentioned a proposal floated by the Securities Experts Roundtable (SER) and embraced by the NAMC at its initial meeting. SER reported that a survey of its members had disclosed a disturbing number of instances of “phantom retention,” whereby parties name experts on the 20-day witness exchange list who have not been contacted or retained by that party. At the DRTF’s urging, FINRA added a hearing script admonition against the practice, will follow up with training, and will feature a lead article on the subject in the June edition of FINRA’s arbitrator newsletter, The Neutral Corner. (ed: We reported on that article, written by Greg Curley and Ryan Bakhtiari – two NAMC members – in SAA 2016-25.)
Employment Cases/Promissory Note Dynamics
While customer cases are running at a stronger pace than last year, employment cases are down 3%, Mr. Berry reported. Promissory note collections are the primary type of claim. Panelist Sandra Grannum (Drinker Biddle-NJ) noted that statutory employment discrimination disputes are not arbitrable at FINRA under the Form U4 agreement, so a separate agreement is needed. Often, though, such claims will arise as counterclaims where a promissory note claim constitutes the primary claim. Panelist Ross Intelisano (Rich Intelisano-NY) described some other types of counterclaims – fraudulent inducement, constructive discharge, and detrimental reliance – to which Andrew Melnick (RCS Capital-NY) added claims of defamation, which may also come in the form of a preemptive strike. Where the broker has a strong defense in these promissory note cases, the panelists agreed, those cases will be the ones to settle. This partially explains the great statistical results that Award surveys find for firms arbitrating these note disputes.
The more difficult cases are those where regulatory complications are present. Massive fines, regulatory full-court presses, and heightened compliance sensitivities are leading to broker terminations that trigger note collections. Post-Madoff, regulators are opening inquiries far more frequently. Managing the Form U5 language is more difficult, too. In the words of one Panelist, firms would rather have the broker mad at them than FINRA. There is a lot more pressure on U5 disclosures. Generally today, the firms are trending towards just telling the story and eschewing labels.
While the arbitrators do not see the regulatory pressure in the dynamics of the case, the parties are often aware of that component. Still, regulatory events are regularly driving the issue in arbitration; the overlay in these cases is common. As a Panelist put it, the broker is fighting because s/he wants the next job; the firm is fighting to show that it did the right thing.
(ed: We will continue our report on this seminar in next week’s Arb Alert.)
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