On the FINRA website, under the Overview section of “FINRA Arbitration and Mediation,” FINRA describes the Dispute Resolution process as "typically less costly and faster to use as a way to settle a dispute than to take a case to court." The site goes on to state that "FINRA has extensive experience providing a fair, efficient and effective place to handle a securities-related dispute." What am I missing?
It is hard to argue successfully whether FINRA arbitration the system is "fair," as one man's fairness is another man's unfairness. However, it is easy to comment on whether the process is "less costly," "faster" and "efficient.” Clearly, it is not.
David Robbins, one of the foremost experts on FINRA and the arbitration process, in his recent article It’s the Arbitrators, Stupid!, posted by Securities Arbitration Alert in FINRA Task Force, Securities Arbitration on December 29, 2014, writes that the system is severely flawed and suggests several ways to fix it. Robbins is 100% accurate in his analysis. Like Robbins, I suffer the same frustration, aggravation, and hair loss from the FINRA arbitration process. My problem with the system, however, is not as wide spread as Robin’s issues. My issue – and hence this blog post -- is limited to the fact that this “streamlined” system that FINRA touts is far from “fast.” Indeed, it is as fast as this country’s railway system … chugging along at an embarrassing pace. While often times Respondents do want to delay any award against them (why then would Roth write this article???), they also are aware that a quicker one, like removing a band aide from the skin, minimizes the pain and, in this case, the legal fees, which is an additional source of pain.
This article aims not to complain about the process but, as Robbins does, to suggest ways to fix the broken system.
In 2003, the NASD (n/k/a FINRA) had 8,260 case filings. In 2004 there were 7,575. In 2014, however, there were 3,538 new case filings – almost half as many as there were a decade ago. Yet, according to FINRA, the “turn around” time, defined as the amount of time it takes all cases to be resolved, is 14.8 months. What’s worse, when FINRA eliminates the Simplified Arbitration procedures, it prides itself that it takes, on average, 18.2 months to obtain an award. That is fast???
There are predominantly three reasons why the system is stalled; they relate to the discovery process, the hearing scheduling, and the arbitrators’ general desire to allow into evidence everything and the kitchen sink. Here are some suggestions on how to fix the slowness problem.
- Discovery: FINRA should mandate that within 30 days of the service of the Answer to the Statement of Claim, all parties are mandatorily obligated to serve a discovery request. It should also be mandatory that those responses be served 30 days thereafter. Currently, the parties wait months for the pre-hearing conference to take place before any discovery requests are served. Accelerating those dates is an easy first step to moving cases along.
- Enforcement of Notice To Members 99-90: Another suggestion related to discovery is to enforce NASD (n/k/a FINRA) Rule 99-90. On September 2, 1999, the SEC approved the use of the “Discovery Guide” in NASD arbitration proceedings involving customer disputes with firms and associated persons. The Discovery Guide, which includes Document Production Lists, “provides guidance to parties on which documents they should exchange without arbitrator or staff intervention, and to arbitrators in determining which documents customers and member firms or associated persons are presumptively required to produce in customer arbitrations.” See Notice to Members 99-90. Pursuant to that notice, the NASD mandated that 30 days after service of the Answer, all sides must serve documents and information pursuant to Rule 99-90. That Rule, with regard to timing, has been virtually ignored. That is, no one produces Rule 99-90 documents within the allotted time period and Panels rarely compel that timely production.
- Expeditious Hearing Days: The single largest reason for the inordinate delays is the scheduling of hearing dates. When in Court, an individual wearing a robe with a gavel in his or her hand will inform you when you have to appear and for what time period. Arbitrators regularly allow parties to delay, delay, and delay the arbitrations, thereby causing that “turn around” time to enlarge. Certain attorneys claim that they cannot be out of the office for five days straight. That shouldn’t cut it with arbitrators. The parties that are entitled to, as FINRA puts it, a “fair, efficient and effective” hearing process. Arbitrators should put counsel and their clients to the task of setting continuous hearing dates and should, at all times, move the case on.
- Communication Must be Direct: As Robbins notes in his article, at times there is an inordinate delay in the process because every communication goes from counsel to FINRA and then from FINRA to the Panel. There is no real reason for this delay. All communication should be sent directly to the Panel with FINRA copied, of course, so that applications and rulings are expedited.
- Tougher Arbitrators: Arbitrators should take responsibility for moving the case forward. Generally, arbitrators are afraid to cut off counsel during hearings. The theory is that if they somehow decline to hear evidence, then any award they render is susceptible to being overturned by a court. Perhaps the arbitrators should be reminded of the judicial wisdom that the ability to overturn an arbitration award is commonly referred to as the “snowball chance in hell” standard. For that reason, arbitrators must streamline attorneys, even if it means cutting attorneys off during the trial. Arbitrators must tell them when they should move along. Let them know when arguments and facts being presented are cumulative or wholly irrelevant and, dare I say, even exclude rank hearsay material. The common belief that arbitrators should let everything into evidence under the premise that if they do so they won’t be reversed on appeal significantly retards the hearing process.
The bottom line is that both FINRA and the arbitrators must realize that the so-called “streamlined process” is broken. It is time for both FINRA and its arbitrators to step up and cut in half the time from inception of a matter to hearing. Then maybe – and only maybe – can FINRA tout the process as being “fast, fair, efficient and effective.”
Richard Roth is the founder and president of The Roth Law Firm, PLLC, a boutique litigation firm that concentrates in litigating securities arbitrations and SEC/FINRA enforcement actions.