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How Finra is Trying to Improve its Arbitration Forum

By Rita Raagas De Ramos September 21, 2017

Finra has “doubled down” on its recruitment of new arbitrators from diverse backgrounds, regions and professions in line with its priority to improve its arbitration and mediation forum, according to Richard Berry, the self-regulator’s New York-based director of dispute resolution.

“It’s important that we have a diverse set of arbitrators, in gender, background, race, and occupation,” he says.

Constantly recruiting more arbitrators and being able to offer a diverse pool of arbitrators to parties has been one of Berry’s primary goals since he assumed his role as director of dispute resolution in December 2015, he says.

In line with this goal, Finra is holding an arbitrator and mediator recruitment event at the Congressional Black Caucus Foundation annual legislative conference in Washington, D.C. this week. The recruitment effort is taking place in part because of the support of Rep. Gregory Meeks, D-N.Y., who at a House Subcommittee on Capital Markets, Securities and Investments session earlier this week said the Black Caucus would like to “continue to have dialogue” with Finra to “figure out” how they can help with the self-regulator's diversity goals in recruitment.

Citing improvements, Berry says that among the new arbitrators added to the roster in 2015, 4% were African-American and 26% were women. Those percentages rose further in 2016, when 14% of the new arbitrators were African-American and 33% were women. Earlier this week, Finra launched a section of its website dedicated to providing information on arbitrator and mediator diversity, which includes those statistics.

"We are encouraged by the data we have seen so far that demonstrates the different tactics we are taking are working," Berry says. "While we are encouraged by the incremental progress made, we recognize this is a long-term effort and are fully committed to achieving our diversity goals."

Expanding the diversity of the Finra arbitrator pool was among the goals a 13-member dispute resolution task force formed in July 2014. That task force was created precisely to suggest strategies to “enhance the transparency, impartiality, and efficiency” of Finra’s arbitration and mediation forum, which has a roster of more than 7,000 arbitrators.

The task force – which looked at every aspect of Finra’s dispute resolution forum as it relates to customers’ disputes – is composed of individuals representing a broad range of interests in securities dispute resolution. In December 2015, that task force released a report that included 51 recommendations that ranged from “small” to “significant” measures needed to improve the arbitration and mediation forum. In February, Finra released a status report of the task force’s recommendations, announcing it had taken action on 35 of the recommendations.

It is the “unanimous, strongly held opinion” of the task force that the most important investment in the future of the Finra forum is in its arbitrators. The task force’s recommendations covered arbitrator compensation, recruitment and training, and required disclosures, among other things.

As well as diversity, Finra says the next priority for arbitrator recruitment is ensuring there are sufficient numbers of local chairs for arbitration panels in its mid-sized hearing locations. In 2017, priority locations include Portland and Indianapolis.

Finra is planning to embark on a special chair-focused recruitment effort next year in eight target cities: Milwaukee, St. Louis, Birmingham, New Orleans, Salt Lake City, Las Vegas, Buffalo and Hartford.

Lawyers can serve as chairs in Finra’s arbitration panels if they have completed at least one case through to an award as an arbitrator and have finished a special chair training course. Non-lawyers can serve as chairs if they have completed at least three cases through to an award as an arbitrator and have finished a special chair training course.


Aside from deepening and widening its arbitrator pool, Finra’s priorities also include the swifter resolution of disputes, Berry says.

“We are absolutely concerned that we maintain our edge in terms of speed,” he says, so that Finra arbitration “is faster and more efficient than court.”

Finra data shows that arbitration turnaround times – from filing to resolution – were generally faster in 2016 compared with the previous year. Cases were resolved after hearings in an average of 16.7 months in 2016 – shorter than the 17.9 months in 2015. Cases decided solely on document review were resolved in an average of seven months in 2016 – shorter than 8.2 months in 2015.

Berry says Finra was able to act on many of the recommendations of the task force – particularly those involving forum transparency, arbitrator recruitment and training, and case administration processes – because they did not require rulemaking. These include more arbitrator disclosure, increasing training for arbitration panel chairs and arbitrators, the naming of expert witnesses retained by a party, and expedited hearings for senior and seriously ill parties.

Among the actions that required changes in the rules – and have been approved by the SEC – are the number of public arbitrators parties may choose from, extending the arbitrators’ ability to grant a motion to dismiss in intra-industry disputes, and expediting the sending of lists of arbitrators to involved parties. Finra increased the number of public arbitrators included in the selection process to 15 from the previous 10 in cases with three arbitrators. Finra agreed that intra-industry cases should be added to motion to dismiss situations where the dispute has been previously concluded through adjudication or arbitration and memorialized in an order, judgment, award or decision. Finra also agreed to send the arbitrator selection lists to all parties within 30 days after learning all the names of the parties’ counsels.

There are three proposals in various stages in the rulemaking process: a review of procedures for notifying state regulators of expungement requests; the development of an intermediate form of adjudication for small claims that is more than reviewing papers but less than a full hearing; and monitoring the application of recently adopted definitions of public and non-public arbitrators. The last proposal comes after concerns that individuals with substantial process and subject matter expertise are often stricken from the list of public arbitrators.

Despite the improvements to Finra’s arbitration and mediation forum, Bill Singer, a New York-based lawyer who is of counsel at Gusrae Kaplan Nusbaum, believes customers and employees of the financial advisory industry would be better served by an independent arbitration system.

Singer says he has been an independent arbitrator for more than 20 years, including with the National Association of Securities Dealers, the New York Stock Exchange and the American Stock Exchange arbitration panels. Finra was created from the merger of the NASD and the regulatory arm of the NYSE.

Even if Finra doesn’t force its member firms to use its arbitration and mediation forum, says Singer, the self-regulator has still created a monopoly because most member firms opt to use the forum when they go into arbitration.

He says Finra should step away from arbitration and mediation. Instead, he suggests that a new, independent arbitration forum be created, and that membership in the rule-making board of this forum be equally represented by broker-dealer firms, industry and consumer groups, and customers or investors. “Everybody should feel that they can have a fair vote” in the rules-making process, he says.

Finra stands by the fairness and neutrality of its arbitration and mediation forum.

Dana Pescosolido, an Emilia Island, Fla.-based lawyer who has served as a mediator and consultant to parties involved in disputes for the past 18 months, disagrees that Finra should get out of arbitration and mediation. He was an arbitrator from 1995 to 2005 and the deputy general counsel at Legg Mason in Baltimore from 2005 until December 2015.

“I don’t think arbitration and mediation can be done as efficiently if taken away from Finra,” he says. “Plus, the SEC regulates Finra. If the SEC thinks Finra is doing something to hurt the public, the SEC can tell Finra to fix the problem. The SEC can’t do that to an independent arbitration party.”