Bates Research | 07-07-22

Reg BI Makes FINRA’s Dispute Resolution Stats List and Other Notable Arbitration Developments

An inevitable—if somewhat subtle—milestone was reached this month for Regulation Best Interest. Posted on FINRA’s monthly dispute resolution statistics page are numbers related to the top 15 security types in customer arbitrations, and coming in at number 14 (through May 2022) was Reg BI. Other recent developments in dispute resolution include movement on rule proposals concerning accelerating processes for elderly claimants, and amendments to align the arbitration code with a new federal law on sexual assault and harassment. Further, FINRA committed to producing a plan to enhance the transparency of the arbitrator selection process, based on recommendations of an independent counsel report. Also notable, the SEC issued a new primer on arbitration and mediation. Here are the highlights to note:

Regulation Best Interest

According to the most recent FINRA Dispute Resolution statistics, thirty-seven cases related to Regulation Best Interest were reported through May 2022, meaning that Reg BI has now entered the list of the top 15 customer arbitration controversy types. This may represent a growing awareness of the SEC rule and is the first tranche of actionable claims since the final regulation went into effect on June 30, 2020. (See our charts below for the top 15 controversy and security types in customer arbitrations.)

© 2022 Bates Group LLC. Source: https://www.finra.org/arbitration-mediation/dispute-resolution-statistics

Also of note is FINRA’s comment on the continued pace of virtual hearings: “Since the postponement of in-person hearings, and as of May 31, 850 arbitration cases have conducted one or more hearings via Zoom (356 customer cases and 494 industry cases).”

FINRA Proposal on Arbitration and the Elderly

The comment period has now ended for FINRA’s proposed rule to speed up arbitration for seriously ill or elderly claimants. FINRA had proposed amendments to the Code of Arbitration Procedure to accelerate certain case processing deadlines. (See previous Bates’ post). Under the proposed rule, certain elderly claimants can request a determination to shorten the time it takes to complete steps throughout the arbitration. Comments were less than enthusiastic.

SIFMA responded that the proposed rules were unnecessary, given the flexibility of the current program and additional guidance that may be issued under it. SIFMA stated that the proposed rules were not warranted by a showing of investor harm to seniors or seriously ill parties. Further, SIFMA argued that (i) the proposed standard for granting accelerated arbitration proceedings was insufficient to prevent abuse; and that (ii) some of the proposed deadlines were “too short and would undermine the fairness of the process.”

The North American Securities Administrators Association (“NASAA”) supported accelerating the processing of arbitration proceedings, stating that “the proposal poses little risk for claimants if properly administered by FINRA’s dispute resolution staff.” However, NASAA reiterated its opposition to mandatory arbitration clauses in retail customer contracts, and argued that FINRA should discontinue its longstanding policy of allowing them. In particularly pointed language, NASAA stated: “The fact that the U.S. Supreme Court has upheld the validity of mandatory predispute arbitration agreements, even in contracts of adhesion, does not mean that permitting their use is good public policy. It is not, and NASAA encourages FINRA to fundamentally revisit its views on this issue.”

SEC Investor Bulletin on Arbitration and Mediation

In an investor bulletin issued on June 14, 2022, the SEC Office of Investor Education and Advocacy provided a tutorial on arbitration processes involving a customer dispute with a broker-dealer. The bulletin provides basic information on dispute resolution including describing the differences between arbitration and litigation, the requirements for simplified arbitration at FINRA, arbitrator selection, associated processes and awards, the use by numerous exchanges of FINRA’s dispute resolution forum, and fees. The bulletin also covers a series of specific questions including on filing claims, payment of settlements, choosing representation, and the decision to choose mediation.

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FINRA Proposal on Arbitration and Sexual Assault and Harassment

On March 3, 2022, the federal “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021” became law. The Act gives individuals who claim sexual assault or sexual harassment the ability to reject a predispute arbitration agreement and bring their claims directly to court. Under the Act, courts would determine whether the Act applies and whether the predispute arbitration agreement is enforceable. (Parties may still agree to arbitration after a claim has been asserted.)

On May 13, 2022, FINRA proposed rule changes to conform the FINRA Code of Arbitration for Industry Disputes to the new law. In the relevant section, the proposed amendments provide “that a party alleging a sexual assault or sexual harassment claim that has agreed to arbitrate before the dispute arose may elect post-dispute not to arbitrate the claim under the Code.” Consistent with the Act, the proposal provides that the claim may be arbitrated if the parties agreed to arbitrate it after the dispute arose. Additional amendments to the Code would conform the procedural rules imposed in statutory discrimination arbitrations to sexual assault and/or sexual harassment arbitrations.

FINRA to Produce Plan to Modify Arbitrator Selection Process

On June 29, FINRA published an independent counsel’s report, requested by FINRA’s Audit Committee of the Board of Governors, related to a case involving the arbitrator selection process. The report includes a series of recommendations to better “reflect the neutrality of the dispute resolution services forum [“DRS”] and to further promote uniformity and consistency among the different DRS regions.”

Among the recommendations are (i) ongoing and mandatory staff training; (ii) manual reviews for conflicts of interest (which would require amendments to FINRA rules); (iii) ensuring that FINRA rules and the dispute resolution manual are consistent with publicly available documents; (iv) requiring written explanations, upon request, whenever there is a causal challenge to the selection or removal of an arbitrator; (v) a procedural review of the algorithms used “to determine if FINRA’s current technology is still the most effective means in creating random, computer-generated arbitrator lists for the arbitrator participants;” and (vi) other updates to the dispute resolution manual to clarify staff roles and procedures. In a separate statement, the FINRA Board of Governors said it has “directed FINRA management to implement the recommendations contained in the report… and that FINRA management agrees with the recommendations and has committed to deliver a plan for implementation to the Board.” The Board also directed the Audit Committee to “monitor management’s progress in implementing these recommendations going forward.”

Conclusion

Perhaps the most interesting aspect of the SEC investor bulletin is its straightforward list of all the exchanges that are using FINRA’s forum to resolve disputes arising between customers and the members of the exchanges. That so much of the securities industry relies so heavily on the FINRA forum underscores the importance of staying current on amendments to the Arbitration Code. The proposal on accelerating processes for elderly claimants, and the amendments to conform the Arbitration Code to the new law on sexual assault and harassment are important developments. Similarly, FINRA’s commitment to changes in the rules, polices and procedures with respect to the arbitrator selection process must be closely watched.

The FINRA dispute resolution statistics page offers a glimpse of the kinds of disputes that have the greatest frequency and currency. That Reg BI has cracked the top fifteen customer dispute types should be widely noted. Bates will continue to keep you apprised.

Bates stands ready to support clients with their FINRA arbitration matters. Our Securities and Financial Services Litigation practice provides retail and institutional litigation consulting and data-driven analytic support and solutions for broker-dealer, RIAs, banks and insurance companies. Our quantitative analysis and qualitative case strategy, advice, and expert testimony cover the full spectrum of investment activity. We work closely with our clients to examine the issues, markets, industry, regulatory context, historical analogy, and other experts’ work product to develop thoughtful, precise, and dispassionate analysis and testimony based on experience and judgment. Bates also offers Arbitrator Evaluator™ – your source for FINRA arbitrator selection.