Welcome to Financial Advisor IQ

Don’t Hold Your Breath for Arb Award Explanations

By Rita Raagas De Ramos October 11, 2017

One key recommendation of a Finra dispute resolution task force may not even see the light of day. The 13-member task force — formed to improve Finra’s arbitration and mediation forum — wants arbitration award explanations to be mandatory unless both parties opt out.

The recommendation is the polar opposite of Finra’s current opt-in arrangement for arbitration award explanations. Finra Rule 12904(g), implemented in April 2009, requires arbitrators to provide a brief, fact-based explanation of their award only when requested by both parties.

But the lack of explained awards has been a consistent criticism of those critical of Finra’s arbitration and mediation forum. From April 2009 to December 2015, there were only 37 requests for explained awards and 27 explanations issued out of roughly 5,000 eligible cases, according to the task force.

The task force believes that requiring arbitration award decisions — unless both parties opt out — is “one of the most important things Finra can do to increase transparency” in its arbitration and mediation forum. “Increased confidence in the fairness of the system would likely flow from that increased transparency.”

But at a Practicing Law Institute conference last month, National Arbitration and Mediation Committee (NAMC) chairman Steven Caruso said the committee is not in favor of this recommendation. The NAMC is Finra’s Standing Board Advisory Committee.

The NAMC’s stand on the matter is crucial because it is the committee’s job to discuss the task force recommendations and, in turn, recommend to Finra items to implement immediately, items that will require further discussion, and items that may not be feasible. That’s in line with the NAMC’s job of making recommendations on rules, regulations and procedures that govern the conduct of arbitration, mediation and other dispute resolution matters before Finra. NAMC members include investors, securities industry professionals and Finra arbitrators and mediators.

Finra says based on the feedback it is receiving, “practitioners on both sides — the public and the industry — don’t seem to want an explained decision.”

Finra hasn’t closed the book on this issue, as the NAMC has yet to formally submit its own recommendation to the regulator. “We’re still studying the issue at Finra,” the regulator says.

The task force has two more recommendations for arbitration award explanations. It recommends that the current, brief, fact-based format of the explanation should be retained but with the addition of some summary explanation of the reasons behind any damage calculation. It also recommends that, before any plan to expand the use of explained decisions is implemented, Finra must develop and administer a training program on how to write explained decisions.

The task force was formed in July 2014 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 recommendation of an opt-out arrangement for arbitration award explanations was among the 51 recommendations listed in its report that was released in December 2015.

Current Finra rules require awards be in writing and final awards be publicly available on its website. All final awards must contain certain bare-bones information, including the names of the parties, a summary of the issues, the damages and other relief requested, and the damages and other relief granted. Arbitrators have the discretion to provide a rationale in any case, although this is not the usual practice.

The task force report shows that compelling arguments were made both for and against explained decisions.


Among the most compelling arguments for expanding the use of explained decisions is the potential to bring greater transparency to a system that some view as opaque. Supporters also argue that the requirement to explain the decision would: improve the quality of decision-making; provide for better oversight of the system by Finra; and increase the consistency among awards, according to the report.

Among the most compelling arguments against explained decisions is the risk it will lead to increased appeals of arbitration awards, driving up the cost of the system and the length of time needed to resolve disputes, according to the report.

The task force notes that a common complaint among parties, particularly customers who are dissatisfied with the outcome of arbitration, is the absence of any explanation.

More generally, it says the absence of explained awards makes it difficult for observers to ascertain whether the system is functioning fairly and effectively in resolving disputes.

The task force evaluated evidence about appeals in other arbitration forums where explained decisions are more common. The report shows the evidence did not support the concern that expanding the use of explained decisions would increase significantly the number of appeals, but the evidence was limited and the experience was not fully relevant in light of the different qualifications of arbitrators.