- Welcome to the first ever
Securities Arbitration
Commentator podcast.
I'm the president of Securities
Arbitration Commentator,
Richard Ryder.
SAC strives to be a pro arbitration,
party neutral force in arbitration.
What we hope to accomplish in
this and subsequent podcasts,
is to stimulate thinking about topics
and issues of interest in
securities arbitration.
And to do so, by bringing together people
who are knowledgeable
about and influential
in the securities arbitration industry,
in order to discuss these issues
and offer their personal
insights and opinions.
Listeners should keep in
mind that while our guests
work for and represent various
firms and organizations,
their views as expressed in this podcast
are not necessarily the
views of those organizations.
To introduce our guest
speakers and lead them
in today's discussion, we've invited
George H Friedman to be moderator.
George is an ADR consultant,
and SAC Board of Editors member.
He retired in 2013 as FINRA's
Executive Vice President
and Director of Arbitration,
a position held from 1998.
Before that, he held a variety
of positions and responsibilities
at the American Arbitration Association.
Most recently as Senior Vice
President from 1994 to 1998.
For the last 19 years, George
has been an adjunct professor
of law at Fordham Law
School, teaching arbitration.
He serves as Chairman of
the Board of Directors
of Arbitration Resolution Services, Inc.
And is also the principal
of George H. Friedman Consulting, LLC.
George holds a JD from Rutgers
Law School, is admitted
to several bars, and is
a certified regulatory
and compliance professional.
George, thank you for being here today.
- Thank you Rick, and
my mom would want to add
that I talked at the age
of 10 months, early on.
So, thank you all for joining us today.
Let me dispense with the
legalese, which I will not read.
But basically, don't steal this
and people are speaking for themselves.
So let's go to the introductions.
Dodd-Frank authorizes the SEC
to ban or impose conditions
on the use of pre-dispute
arbitration agreements
in customer-broker agreements,
if the SEC finds that
such prohibition,
imposition of conditions,
or limitations are in the public interest,
or for the protection of investors.
As we all know, pre-dispute
arbitration agreements
have been used for years
in the securities industry,
for not only investor-broker contracts,
but also disputes within
and among industry members.
So, in our podcast, which
will be very fast-paced,
it's going to run about 40
to 45 minutes, the panel
will discuss what might
happen if the SEC were to '
actually ban pre-dispute
arbitration agreements
in customer-broker contracts.
We're not going to debate
the if, but we're going to
make believe that at some
future point, the Commission
actually went ahead and
banned the use of pre-dispute
arbitration agreements in
customer-broker contracts.
We will use the term PDAAs
as indicated on the slide,
just so we don't take
longer than 45 minutes.
Now, let me introduce our
distinguished panel here.
To begin with, we have Mike Alford.
Mike's in the upper right corner there.
Mike is a Senior VP and
Deputy General Counsel
with Raymond James Financial
in St. Petersburg, Florida.
He's been active in securities
arbitration litigation,
both as a practitioner
and industry speaker
for more than 25 years,
or to make it sound
like a longer time, a
quarter of a century.
He's on SIFMA's National Arbitration
and Litigation Committee,
he's handled cases at FINRA
and the National Futures
Association, and currently serves
on the SIFMA Compliance and
Legal Executive Committee,
and recently got appointed
to the Editorial Board
of the Securities Arbitration Commentator.
Melanie Cherdack, down on
the bottom right corner,
is Counsel at the the Miami office
of Genovese, Joblove and Battista.
Before this, she worked at PaineWebber,
which now of course is UBS.
She's been a FINRA arbitrator
for about 20 years,
an NFA arbitrator, has been on
many, many, many arbitrations
as a panel member or chair.
And she primarily represents
individuals who bring
who bring securities arbitrations.
And then last but not least
is my friend, David Robbins.
David is a partner in the New York firm of
Kaufmann, Gildin and Robbins,
specializing in commercial
arbitration and mediation,
and represents all sorts
of parties, investors, brokers and firms.
He's been an arbitrator
for many, many years.
And for a gazillion years, around the PLI
Securities Arbitration Program.
Ok, here are some of the questions
we're going to be talking about today.
I'll pause for a moment
to let you take a look.
Now to get to these
questions, we have a vehicle.
We have four major discussion
topics, as indicated here.
We'll begin with a
background on Dodd-Frank,
and what it has to say
about consumer arbitration.
The panel will then react,
we'll then look to what's
gonna happen or what we think might happen
with the FINRA arbitration forum.
And then we're going to
close with my favorite part,
which is where the panelists predict
where we'll be five years from now.
It's my favorite part because,
people can disagree with you,
but they cannot definitively
say you're wrong,
unless they claim to be from
the future, which immediately
diminishes their credibility
with the audience.
So those are the four
topics that will help us
get to the issues that we've identified.
Now beginning with the first
one, the first major question,
the background of Dodd-Frank
and customer arbitration.
So, we're going to begin with some basics,
the first of which is,
well what does it say.
For that I'm going to
call on myself, George,
what does Dodd-Frank say
about customer arbitration?
Well, let's take a look,
Section 921a of this very, very,
long statute, amends the
Securities Exchange Act of 34,
and the Investment Advisors
Act of 40 to authorize,
but not require the SEC, but authorizes
the Commission to do certain things.
One is, the Commission can
prohibit or limit the use
of PDAAs arising out of the
Federal securities laws,
and the rules and regulations
they're under, NASR rules.
So one is, prohibit or
limit, the next part however,
adds another one, which
is impose conditions,
which I think is just sloppy drafting.
So it's allowed to either
prohibit, they can also
impose conditions, or
limitations, if they find doing so
is in the public interest,
or for the protection
of investors.
So to begin with, it's permissive,
and I think it's allowed
a third thing besides
prohibiting or limiting,
they can impose conditions as well.
That is what the statute
says, I'm not going to pause
for reactions just yet,
because the statute
speaks for itself.
I'd like to get on to the next question
and stop my monologue here.
The first question is, must the
Commission do a study first?
And again, looking at the
language, it says they can take
certain steps if they find
that it's in the interest
of protecting the investing public.
So let me start with Mike Alford.
Mike, do you think the Commission
has to do a study before it does anything?
- Thanks George, looking at
the language, which you've just
gone through, obviously there
is no explicit requirement
that any study be undertaken
in advance of any decision
or action by the commission.
And I think what's informative
is if we contrast that with
section 1028a of Dodd-Frank,
in which Congress mandated that
the Consumer Financial
Protection Bureau, or the CFPB,
conduct a study and provide
a report on pre-dispute
arbitration agreements in
connection with consumer
financial products and
services, such as credit cards,
bank accounts, checking
accounts and the like.
And in fact, if you look
online, you'll see at least
the preliminary report has
been published by the CFPB
as of last December.
I would tell you that
it's difficult to imagine
how the Commission would
determine whether proposed action
is in order, or in the public
interest in the absence
of a study, it would be
astute and called for by way
of Commission action.
But other than that, the
short answer is no, there's no
absolute requirement, I
can't imagine the Commission
moving forward without some kind of study.
And if you look at
correspondence by Mary Jo White
to Senator Franken and others,
back in 2013, she talks there
explicitly about receiving
feedback in response to
the Commission's release in
March of '13 and that her staff
is actively looking at
the letter responses.
- I agree, not that I'm going
to weigh in, agreeing or
disagreeing with every comment.
it seems to be implied that
they would have to do a study.
Also, I think politically,
if the Commission said,
you know what, without
doing a study, if they said,
you know what, we've been
oversighting the securities
arbitration system load
these many years, and we just
realized it's completely unfair
and changes need to be made.
That's untenable I would think,
I obviously don't speak for
the Commission, we didn't
say that but it goes
without saying, but it
certainly seems to be implied.
Well here's a more provocative
question, so the premise
of our podcast here today, is
suppose the Commission banned
pre-dispute arbitration
agreements, so avoiding
the if question, assuming
they did, do you think
they could make it
retroactive, in other words,
could the commission say,
pre-dispute arbitration agreements
are out, any agreements that
are in existence are nullified
and can not be enforced or used.
Any comments on that?
- George, I'm gonna plead the fifth.
- Hey in that, a ruling that
retroactively invalidates
contracts such as PDAA,
could be subject to challenge
based on the impermissable
governmental taking,
absent a compelling governmental interest.
You know, the fifth amendment
taking clause, states,
no person shall be deprived
of life, liberty or property
without due process of law.
So absent a government, a
compelling governmental interest,
I can't see that such a ruling
be applied retroactively,
and I don't see any
compelling interest to do so.
- There have been a couple
of cases that I've seen,
where my law professor
had, which would seem
on retroactivity would seem
to say, if Congress meant
something to be retroactive,
they would say it.
And certainly, Dodd-Frank
doesn't say that.
Now my own view is that it
was some sloppy drafting
But it would also create an
issue that probably doesn't
need to be there, which is,
if it were made retroactive,
I think it would spawn
challenges, I think there's
no question about it.
- It would be such a sea
change George, to then apply
retroactively would
really muddy the waters.
- Which by the way, it would
not stop FINRA from saying,
that may be, but the form
will not be available
for pre-dispute arbitration agreements.
That's been done before, it's
not retroactive, it's FINRA
saying good luck, but
we're not taking cases
under such clauses anymore.
- Alright, let's move on
to our next topic, which
are reactions from the panel.
The first would be, again
we're assuming the Commission
banned pre-dispute arbitration agreements,
so what would happen?
So, Melanie, let's get you
involved here, and again I know
you don't speak for all
customers, but what's your take on
whether customers would
use arbitration or not,
on a voluntary, post dispute basis.
- Well, I think my take
is that some would,
and some wouldn't, and it would depend
on a number of factors.
It's my belief that in the
last 10 to 15 years, that among
the claimant's bar there's
become kind of a negative
perception of FINRA arbitration
as the be all and end all
of the dispute resolution process.
In part, because there's
just an uncertain outcome
in the case, and you might
think you have a great case,
and you've proven
everything at the hearing
and you walk out and you get
a piece of paper 30 days later
that says you get nothing,
claim against nothing.
And you're sitting there
scratching your head,
you're thinking, geez, if I
was in court with this case,
I'm reasonably certain I
would have gotten something.
I think that's one factor,
I think the second factor,
that there's been negative
perception of FINRA arbitration
is that there's been a spate
of some bad discovery rulings,
because sometimes, for example, you have
non-lawyers making them, or
you have someone that doesn't
quite understand the
process or the product,
or the theory of your case,
and there's not recourse
and there's no right of appeal.
There's limited subpoena
and discovery power
in FINRA arbitration,
everybody knows there's no
depositions, it's very narrow what you can
find out as a claimant.
I think there's a common
belief among certain claimant's
lawyers that there's some
industry bias on behalf of
some of the arbitrators
who are fearful that they
might not get chosen again
by the respondent's counsel.
And there's a little push
by those people maybe not
to make such a claimant friendly award.
I'm not speaking on behalf of
everybody, but I think some
of these are widely held
negative perceptions, and I think
because of that, many
claimant's attorneys might opt
for litigating in court for
these reasons, that there's more
certainty of a legal ruling,
that there's a right to appeal,
there's broader discovery,
and I think significantly,
and this may be the number one reason,
the transparency of the process.
No one quite is a hundred
percent sure how arbitrators
get appointed to a case, or
how the lists get generated.
So if you know, if you file
a case in court, you know how
a judge is going to get appointed.
And you know there
generally is going to be no
last minute replacement
of that decision maker.
So there's a great transparency
of the process, and I think
that's a factor that
often gets overlooked.
But of course, all this comes
at a cost, it's expensive,
litigation goes on for years sometimes,
trials cost a lot of money.
So taking those other
factors into account,
the short answer is, who
do I think might arbitrate
and who do I think might litigate.
I think large damage
cases would get litigated
where the upside is great,
so a lawyer in a law firm
can afford to invest a lot in a case.
The second category would
be cases where there's a
clear right to a fee, like
a case where there's a clear
statutory right to an
attorney's fee if you win.
And you feel like you have all
the facts that are going to
enable you to win the case.
The third category would
be strict liability cases.
While they might be smaller cases,
but you can win them on summary judgement,
things like an unregistered
broker, unregistered security,
I think those cases would all go to court.
And so that would leave
for FINRA, as I see it,
I call it the land of the misfits.
I think FINRA's going to get
small claims cases, or cases
where there's maybe a technical
legal problem and the case
is only good on the equities,
like a limitations issue,
or a jurisdictional venue, or venue issue.
Or a case where there's no
clear cut legal liability,
but equitably the case
cries out for a ruling
on behalf of the claimant.
And the third category I
think are cases where a quick
resolution and a finite
resolution is necessary.
We have someone who's in
dire need of the money,
you have an elderly or an infirm case.
The likely scenario if there is a choice
to voluntary post-dispute arbitration.
- Again, another caveat,
I know Mike does not speak
to the industry or any institution,
but you're in the industry,
what's your take or your
personal view about whether
the securities industry
would use arbitration on the same basis?
And you could also address the
follow up which is, would it
depend on the size of the claim?
- Well you know it's interesting
George, because some of
the same sentiment that
Melanie has heard on the
investor side of the table,
we hear being discussed on the
industry side as well.
Specifically, a yearning,
if you will, for the days of
motions to dismiss and dispositive
rulings at the pre-trial
stage, the ability to hold the
opponent's feet to the fire
on rules of evidence, etc.
So I think to some extent there's
probably a large number of
industry representatives who
would welcome an opportunity
to take some of these cases,
particularly some of the
larger cases back into
court, into litigation.
Again, in our alternative
reality where the SEC
has banned all PDAAs.
Now as far as the
securities industry goes,
I would tell you that the
practitioners believe arbitration
continues to offer and
efficient and fair method
of resolving business
and commercial disputes.
And it's my opinion that the
industry would be will to
participate on a voluntary
post-dispute basis,
with one important proviso.
And that is, that the
decision to arbitrate,
regardless of when it's
made in the process,
be mutual or that the
agreement be bilateral.
What the industry is particularly
concerned about is any
proposal that would grant the
unilateral right for investors
to choose arbitration on a
post-dispute basis without
the consent of the firms.
This unfettered right to forum
shop, and you heard Melanie
kind of walk through it, I
believe she said, if my case
is strong on the law, then
I'm happy to go to court.
If I've got a quote, technical
legal problem, and I want to
and I want to just argue the equities,
then I'm more likely to go to arbitration.
And that kind of reminds
me of the old joke,
if your strong on the law, pound the law.
If you're strong on the
facts, pound the facts.
If your strong on
neither, pound the table.
- I'll give everyone a
chance to talk about 12-200
a bit later which is the
one that allows an investor
to insist on arbitration
with a brokerage firm.
We've skirted around another
issue which is litigation.
My personal view is that it
stinks, but is it that bad,
is it really that bad to litigate/
David, you've been on all
sides of the coin here,
so let's start with
you, any views on that?
- Well George, because I'm an
advocate of the arbitration
process, it doesn't mean
improvements aren't necessary,
they are.
We'll be talking about
that in a few minutes.
That said, litigation is
not an equitable forum,
arbitration is.
Many customers I think,
would forego litigation,
because of the damages alleged.
Last week I asked FINRA,
what's the percentage of cases
brought now that are under
a hundred thousand dollars?
And that's 16 percent,
so and I think it was
a little higher last year.
So I don't see any attorney
taking a case to court that's
under a hundred thousand dollars.
I think the time factors of
motion practice and discovery,
along with just the intrusive
nature of litigation discovery
will discourage customer
claims from being litigated.
I think the jurors,
who unlike arbitrators,
are not volunteers, are
probably more empathetic
to sympathetic investors,
they're less receptive to
Wall Street and FINRA public
and non-public arbitrators,
who are by and large
professionals with many years
experience and maybe have
some built-in hindsight bias.
Jurors may be less sympathetic
to upper middle class
and wealthy investors who
have cases with merit,
mainly product cases that have been heard
in arbitration the past few years.
This year, the second
circuit court of appeals,
the one in New York, came
forth with a bright line
definition of who a customer is.
FINRA doesn't define the term.
But I think other courts
will pick up on that.
As a result I think more
Ponzi cases will be compelled
to litigation, prompting
customer attorneys to only take
big ticket cases that don't
have that soft underbelly
of statute of limitations
issues that often happened
in Ponzi cases.
So is litigation really that
bad, no, but the bottom line
is that it's a forum of
law, not a forum of equity.
- Thank you, the next group of
questions concern, well what
will happen, again we're
assuming the SEC has banned
pre-dispute arbitration agreements.
So I have a series of questions
for us to ponder about
the FINRA forum and it's rules.
So the first one is, would
the forum survive and then
we'll get into other things
like what changes are needed.
George, let me ask you a
question, would it survive?
I think Melanie actually
answered this the way I would,
which is, I think it would survive.
I think it would become
a smaller claims forum.
Claims under a hundred thousand, or fifty,
we could pick a number.
I mean to me a hundred thousands
a lot of money if it's mine.
But it would be a smaller
forum, and I think it would be
smaller in general because
the case loads would decline
in a voluntary post-dispute world.
I agree with the comments
I made before that
larger cases would end
up probably in court,
or in competitors like Triple A or JAMS.
I know FINRA has made efforts via
a large, complex case pilot,
to capture larger cases.
But my view is, and it's a
view I held when I was at FINRA
and I still hold.
There's a perception that
you know, for larger cases,
that FINRA's a forum for
smaller cases, when you get to
large ones, it's not as well suited.
That my change, but that is the view now.
Now as to my comment that
the forum would get smaller,
and that the case loads would
decline, I turn to a comment
made by Linda Feinberg who
as you know is retiring
as President of FINRA's
dispute resolution.
About four years ago, at
an SEC investor advisory
committee meeting, that question came up.
I'll just read the quote.
That she expressed concern
that if small claims came
to arbitration, while larger
claims were pursued in court,
FINRA's arbitration forum
would lose money as it relies
on the filing fees and
costs of the larger claims
to fund it's operations.
So I do think it would be a
smaller forum, and the reason
I think it'll survive is
there is going to be a need
for the forum, about a third
of the cases that FINRA
gets now are not consumer
customer cases, they're industry
cases, most predominately employment.
And you want the forum
there if there's a fire.
As I've written a couple of
times, when there's a fire,
and you break the glass,
you want to be sure there's
a fire brigade that's going
to be around to respond.
My last comment in terms of
changes we would need to make,
clearly it's not economical
to do really small cases
through in-person hearings,
with people using paper
back and forth and going
somewhere for a hearing.
And I do think, I know FINRA is investing
in the technology that some
cases, typically smaller,
would have to be done on
line to save time and money.
That's one change I think they're
definitely going to have to make.
So it will survive, it will be different,
it'll be a smaller forum
no question about it,
and would have to make some changes.
Any other views by panelists of what
changes they might have to make?
David, any views on that?
- No, actually, with changes
in the process, ah yes,
I was thinking while you
were talking, how I could
summarize the changes,
and I think it's this way.
And they're down to five.
Greater ability for parties to
select their own arbitrators,
whether they're FINRA arbitrators or not.
And pay the arbitrators
more than FINRA honorarium.
Big criticism that parties have
on both sides is the arbitrators.
Their age, they're
sitting on too many cases,
the repetitive nature of them.
I think that if FINRA did
what the triple A does,
which is, select their own
arbitrators, and which FINRA does
for large complex cases,
under those rules.
I think that would go a long
way to improve the process.
I think also, if there's a
greater reduction of the director
and case administrator
involvement in cases,
permitting more transparency
between the parties
and the panel, that would
be a great improvement.
An example would be, making
mandatory direct communication
with the chairs, knowing
that by agreeing to assume
the role of the chair, they
will be called upon to consider
and decide pre-hearing issues.
FINRA now has a voluntary
direct communication role,
which in probably 98 percent
of cases are not followed.
When direct communication
is followed, it just works
beautifully, parties love it.
And I guess my third
and last one, is a point
that I discussed with the
new president of PIABA,
Joe Peiffer, and he's
in agreement on this.
Making arbitrator training on
substantive issues mandatory.
And have arbitrators be
required to take podcasts,
and attend podcasts, like this one.
On special educational
subjects that are put together
by PIABA and SIFMA, not by FINRA.
Those I think would be
just great improvements.
- Thank you, Mike do you
have any thoughts on that?
- Yeah George, just a follow
up on David's comments.
I think that the quality of
the arbitrator pool generally
is a legitimate and oft
expressed concern of all sides
of this discussion.
And I think that's something
that if FINRA, at least
the dispute resolution side
is to continue and thrive,
it really needs to take a look at that.
And maybe with the new
administration coming in,
we'll see a renewed and
greater willingness to really
drill down on that and
listen to the feedback,
not only from the claimant's bar,
but from the industry bar as well.
A couple of other points on the wishlist,
to follow up on David's,
would be taking a look at
not necessarily becoming
another JAMS or triple A,
but moving to that model
with a higher paid,
more sophisticated group of arbitrators
available to the parties.
I think a greater ability to
manage the selection process
would be greatly needed or
greatly appreciates as well.
And when I look at that, I sort
of look as a model for that,
the large and complex pilot program
that Raymond James is actually a part of.
We've been very satisfied
so far to the limited extent
we've been able to participate in that.
- Ok, thanks, let me move
to this second question
and to keep us moving here,
let me first move to what it
actually says we've
talked about, Rule 12200.
And it's a rather short and simple rule,
essentially it says, obviously
if there's a pre-dispute
agreement, that would not be the case,
in our future world that
we're talking about here.
But the rule says, if the customer
wants to arbitrate, the firm has to.
And I'm going to put aside a
debate on what the customer
and the courts have been
struggling with that.
My personal view is FINRA
should clear this up.
I've written an article to that effect.
But the question is, and
I'll ask the panelists
that I'm going to call on to be succinct
so we can keep moving.
Should this rule exist?
In other words, the FCC
bans pre-dispute agreements
so this rule or this part of
it that I'm pointing to here,
part number two, should
the customer still have
the unilateral right to require
arbitration with the firm?
We've heard from a couple of
the panelists already on this,
but I'll ask Mike and
then Melanie to succinctly
weigh in on it.
So let me start with Mike,
should the rule survive in it's
present form?
Again the first part will
be gone, we're assuming
pre-dispute agreements are gone.
So should investors have the
right to require arbitration.
- I would say that in the
absence of a voluntary
pre-dispute arbitration
agreement, or a decision
that is mutual at the time
the dispute arrives, no.
- Ok, Melanie?
- And I think that you all
could probably anticipate
that I wouldn't agree with that.
I think the problem with having
a mutual agreement is that
in most cases, you're going
to have two people with
diametrically opposed views
on whether a case belongs
a case belongs in arbitration or in court.
Just based upon kind of the
comments that Mike and I
made at the beginning of the podcast.
It would render the rule,
in my opinion, completely
useless if it required a
mutuality of that agreement.
The purpose of Dodd-Frank is
to make a forum that is more
helpful to investors, more
accessible to investors,
more investor-friendly.
And that's my reading
of what Dodd-Frank says.
You would have to let the
claimant decide which forum
to be in.
And I think by at least making
it not a mandatory thing,
it opens up a whole host of
choices, but again, without a
mutual agreement, with a
mutual agreement I think
it's unfair to the claimant.
- David, I'm going to put
you on the spot a little bit.
You weighed in a little
bit before on improvements,
that might be needed.
But again, now focusing on
this world where rule 12200
may not be around, if FINRA
needed to compete, what changes
would they need to attract both sides?
- As I said before George,
the parties need to feel
that they're participants to the process.
They need to feel that the administrators
do not have a central role in the process.
They need to feel and really
know that they have a hand
in the selection of
arbitrators who have no ties
to anyone except to this particular case.
That they're not sitting
on 15, 20 other cases.
I see that often, by the
way, when we are selecting
arbitrators, FINRA tells us
the other cases that these
proposed arbitrators are
sitting on, and it floors me.
And why there should be a
limit to the number of cases
we sit on is because it's
very hard to schedule hearings
when the arbitrator's
on so many other cases.
I think there's, I know
there's room for improvement.
FINRA put together a
spectacular special task force,
people from all over
the country are on it.
They're looking into ways
to improve the process.
I think it really speaks
wonderfully of Linda Feinberg
and having this idea of
putting this together.
They've started to meet, they've started
to question people throughout the country,
what can we do to improve the process?
So I think each year, you see
the evolution of the process.
I was involved in it
when it was voluntary,
when I was Director of Arbitration for
the American Stock
Exchange in the mid 80s.
And then once it became mandatory,
attorneys began being
involved in the process,
and the process improved tremendously.
I think every year it improves,
so I'm optimistic about
the process, especially
with this new task force.
- And the last question,
last bullet point here,
and we'll try to be succinct.
The rule 2268, that governs
content and placement of
arbitration agreements.
Our question is, if the
Commission were to ban pre-dispute
agreements, would this
rule still be around,
would it be necessary?
So let's take a look at the rule.
Basically, the first part
I'm pointing to here in A,
has certain requirements
about the arbitration clause.
Where it should be, what it should say.
I did not quote the entire rule, but it's
a very long section that I
call the Miranda warning,
that says hey look, there's
an arbitration agreement here,
and if you're agreeing,
understand you're losing
your right to go to court,
there's limited appeal,
so on and so forth.
Then in B1 there's a
requirement of warning people
that the arbitration agreement is there.
And then I just jumped
ahead to D, which I think
is important, this is what
caused the, this is behind
the Schwab dispute that
took place with FINRA.
But this section here says,
if you have an arbitration
agreement, it can and
can't do certain things.
So the question is, if
pre-dispute arbitration agreements
are out, would you need a rule
here governing post-dispute
arbitration agreements?
And I'll ask myself the
question, I think yes.
I think the rule would
still be there in some form.
Obviously, it wouldn't refer
to pre-dispute agreements,
but I think in such a world
where pre-dispute agreements
are banned, FINRA would
still have a rule that said,
look, if you're going
to offer arbitration on
a voluntary basis, you
the firm have to abide
by the following investor
protection steps.
For example, you have to
warn people what they're
getting involved in, you
can't hide the clause.
Maybe they're going to
require that the investor
separately click or sign it,
it may be questions about
timing, when you can offer it,
and other procedural safeguards.
It's like, even if it's on
a voluntary basis, you can't
eliminate things like punitive damages.
I do think there would be a
rule, it wouldn't look exactly
like this, but some rule
to protect investors,
even in a voluntary post-dispute world.
Any of the panelists
have thoughts on this?
Or have I been so erudite
that there's no question
it's going to happen that way.
Ok, I'd like to close, this
again is my favorite part
of the program, because as
I said, people can disagree,
they can't say it wrong.
I'm going to go last so
no one can say I'm wrong.
I will go in alphabetical order.
The question is, at a high
level, where to you think
we're going to be five years from now?
given all the things that are going on.
And again, in alphabetical
order, Mike gets
the first crack at the question here.
- Thanks George, well I
certainly think that in the next
five years, that the SEC will
indeed have embarked upon
their study of pre-dispute
arbitration agreements,
in the securities industry context.
I do not believe that the
debate will be concluded
by that point, but I think we'll be
a bit farther down the road.
I think that in an effort to
address concerns from it's
constituents on both sides
of the discussion that FINRA
will take a hard look at the
quality of the arbitrator pool
and begin to apply more rigorous
evaluation of it's ranks.
And we'll through the task force
perhaps, take some of these
recommendations that are
being made now into account.
And I think that an effort
to address arbitrator comp
will be forthcoming, so
we have something closer
to the triple A, JAMS model
or as you have talked about
earlier in the podcast, perhaps it
becomes a small claims court.
- Thank you, Melanie?
- Well, maybe I have a little
Pollyanna in me, but I think
that maybe we're going to
have a choice in the future.
I think that given that
this topic has become
such a hot button, that
claimants will be given a choice
to whether to arbitrate or litigate.
And going to kind of the second
prong of that, what's going
to happen to FINRA, I agree
with Mr. Alford and Dave Robbins
and I think everyone.
FINRA's a very dynamic organization,
I agree that every year
the forum has gotten better in responding
to people's concerns, as
trying to fix glitches.
I think that every year it's
gotten better and better.
The arbitrator pool has
gotten better and better.
The process has gotten better,
the discovery has gotten better.
So I think that FINRA itself
will morph into, I think
a kinder, gentler, more
transparent organization.
At least I hope so under Rick Berry.
And you know, we'll have
both, we'll have the best
of both worlds, a great
arbitration forum and the ability
to litigate those cases, like
in particular Ponzi scheme
type cases that really belong in court.
- Thank you, David?
- Well, five years from now I think
it will remain mandatory.
I also think that the average
FINRA arbitrator will be
in his mid 70s and maybe retired.
PIABA, the Public Investors
Arbitration Bar Association,
recently came out with a
study, a very in-depth study,
and found that the average
arbitrator is a 69 year old
white male, so five years from
now, he may not be around.
To think about what's going
to happen in five years
in FINRA's progam, look
at the past five years.
They've significantly
updated the discovery guide
for parties, boy that was
such a horrible headache.
It was such a pain going
through the discovery process,
until FINRA came out with a
discovery guide, which they've
also improved last year
to cover product cases.
Look how they've improved
the arbitrator's guide,
which is online and for
their own arbitrators
to do a better job.
In the past five years, all public panels
are now the default.
If a customer claimant doesn't
want an industry person
on a panel, the claimant
doesn't have to have
and industry person on a panel.
The other thing which you'll
see in the future, the past
couple of years, FINRA has
introduced and enhanced
it's online portals, with the
goal of making them standard
for all cases to eliminate paper.
A week or so ago, Rick Berry, the new
Director of Arbitration, starting
next month, announced that
FINRA's policy now is
paperless, so we'll see that.
And I think lastly, the
fact they established that
special task force is a
reflection of FINRA's desire to
distinguish itself from mandatory
arbitration systems that
don't afford due process,
and that are as I call,
forms of adhesion.
- Thank you, and I'll have the last say.
I actually agree with
many of the points here,
so I'll be very succinct.
I agree the Commission
has to do something,
even though Dodd-Frank doesn't say that.
I think politically it's untenable.
They've had a pass up until
now because they've had
mandatory steady rule-making requirements.
But it's three years later,
four years later almost
and they're going to have to do
something, at least a study.
I do think in the next five
years, and I'm often wrong,
but if past is prologue,
there'll be another crash,
and/or product failure, as David said,
look back five years
it just always happens.
That will cause another
increase in filings at FINRA.
And I think there'll be a
public arbitrator shortage.
So there's going to be a real focus
on having enough arbitrators as Rick Ryder
and others have already pointed out.
There'll be many more cases done online,
on the cloud, certainly smaller cases.
I think the idea of someone
packing up and going somewhere
is very quaint and anachronistic,
but it just doesn't make
sense in today's world.
I do think, someone I think
Melanie said, I think eventually
the arbitration fairness act
in some iteration is going to
be enacted, it's not necessarily
blue state/red state.
It's kind of a populous
issue in places like Alabama
and the Dakotas, and as
I said, I proposed in one
of my articles, I think
the choice will be given
to investors but I think
before the dispute,
at the time the contract
is signed, not after,
which I think is very difficult.
We'll see.
We can do this again in
five years and compare notes
because this is all being recorded.
So those are my
predictions, let me turn to
our concluding section here.
I want to thank our panel and
the Securities Arbitration
Commentator which to me
sounded like a great program.
You'll be the judge when you listen.
Mike, Melanie and Dave, a great job.
Thanks to anyone who's listening.
Again, we do think training at some point
will become mandatory in things like this.
Podcasts are a good way to educate
panelists and constituents.
Be sure to follow some of us on Twitter.
The Twitter handles are posted here.
Now our next podcast which
will come later in the fall.
We're going to make
believe, we like this theme
of let's make believe we're sitting down
and having a cup of
coffee with Rick Berry.
Congratulations Rick.
Rick's going to be the new
Director of Arbitration
at FINRA.
We're going to make
believe we're sitting down
and having a cup of
coffee and saying look,
for what it's worth, here are our views
about the challenges facing
the FINRA arbitration forum.
That will take place
sometime later in the fall,
and you'll here more
about that going forward.
Thank you again for
participating, and thank you for
following the Securities
Arbitration Commentator.
