FINRA Signals Possible Overhaul of Its Arbitration System

FINRA has begun a broad review of the rules governing its arbitration forum. In Regulatory Notice 26-06 (“RN26-06”) (https://www.finra.org/rules-guidance/notices/26-06), FINRA requested public comment on a wide range of potential changes to arbitration procedures and policies. The request forms part of the organization’s broader FINRA Forward initiative, which aims to modernize FINRA’s rulebook and regulatory systems.

FINRA did not propose specific amendments in the notice. It instead opened a wide policy discussion about how the arbitration forum operates and potential areas for improvement. The outcome of this review could lead to significant structural changes in the coming years.

FINRA arbitration serves as the primary dispute resolution forum for most disputes involving broker-dealers, registered representatives, and investors. Virtually all brokerage agreements require customers to arbitrate disputes rather than litigate them in court. FINRA rules also require arbitration of many disputes among member firms and associated persons.

A typical case proceeds through the filing of a statement of claim and answer, discovery, motion practice, evidentiary hearings, and ultimately a written arbitration award. One or three arbitrators hear the case depending on the size and type of dispute.

For decades, this system has served as the backbone of dispute resolution within the securities industry. At the same time, practitioners and policymakers have debated whether certain aspects of the process require reform.

Regulatory Notice 26-06 invites comment on nearly every stage of the arbitration process. FINRA specifically requested input on several key areas of the forum. These areas include eligibility requirements for claims, dispositive motion practice, arbitrator qualifications and selection, discovery procedures, hearing practices, the role of technology, punitive damages, publication of awards, enforcement issues related to unpaid awards, and the treatment of certain employment-related disputes.

The breadth of these topics suggests that FINRA is undertaking a comprehensive review rather than a narrow rule revision. Lawyers, arbitrators, and industry participants therefore have an opportunity to shape the direction of future arbitration procedures.

FINRA has already taken several steps in recent years to update aspects of its arbitration system. For example, the organization strengthened the eligibility standards for new arbitrators by requiring a four-year college degree and at least five years of professional experience. FINRA also enhanced procedures for replacing arbitrators and clarified the circumstances under which the Director of Arbitration may remove an arbitrator when the parties agree. The organization has also implemented reforms to the expungement process for customer dispute information and initiatives designed to strengthen compliance with arbitration awards.

In addition, FINRA has continued to study discovery practices through its National Arbitration and Mediation Committee and related working groups. These efforts demonstrate that arbitration reform has become an ongoing priority.

Implications for Lawyers, Arbitrators, and Industry Participants

The issues raised in RN26-06 indicate that FINRA may consider significant adjustments to the operation of its arbitration forum. Any future rule changes could affect the filing of claims, the management of discovery, the selection and training of arbitrators, and the conduct of hearings.

Lawyers who represent broker-dealers, associated persons, and investors should monitor these developments closely. Changes to motion practice, discovery standards, or case management procedures could materially affect litigation strategy in arbitration. Arbitrators may also see adjustments to qualification standards, training requirements, and expectations regarding the management of hearings and prehearing proceedings. Prospective claimants and industry respondents should likewise pay attention to these developments, as changes to forum procedures could influence both the timing and cost of arbitration proceedings.

After reviewing the public comments, FINRA may propose specific amendments to its arbitration rules. Any proposed changes would proceed through the standard rulemaking process, including review by the Securities and Exchange Commission and additional opportunities for public input.

Because FINRA arbitration remains the central dispute resolution mechanism for the securities industry, this modernization initiative represents an important development for public investors and securities industry professionals alike.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.