The Neutral Corner, Volume 6—2008
Dispute Resolution News
Case Filings
Arbitration case filings from January through September 2008 reflect a 46 percent increase compared to cases filed during the same nine-month period in 2007 (from 2,382 cases in 2007 to 3,469 cases in 2008). Customer-initiated claims during this nine-month period increased even more, by 73 percent. In recent months, we have received numerous cases claiming that losses were incurred from investments holding subprime mortgages (typically claims that funds were over-concentrated in these investment vehicles without adequate disclosure) and “failed auctions” for auction rate securities. Through September 2008, parties have filed 567 subprime mortgage cases and 247 auction rate securities cases.
From January through October 2008, the average processing time from service of claim to issuance of award for arbitration cases (hearing and simplified) declined to 13 months (from 13.8 months in 2007).
Public Arbitrator Pilot Program
On October 6, 2008, FINRA launched a two-year pilot program that will allow some investors making arbitration claims to choose a panel of three public arbitrators, instead of the current option of two public arbitrators and one non-public arbitrator. So far, 11 firms have agreed to contribute 10 to 40 cases each, per year, for two years.
During the course of the pilot, we will evaluate the results according to a number of criteria, including the percentage of investors who opt into the pilot and the percentage of investors who choose an all-public panel after opting in. Ultimately, this program will allow us to see if a change in the way FINRA selects arbitration panels better serves and protects the interests of the investors.
Read our Public Arbitrator Pilot Program Frequently Asked Questions for more information.
Panel Composition in Auction Rate Arbitration Cases
Consistent with our current practice, auction rate securities (ARS) cases in which damages claimed are $50,000 or more will be heard by a panel of two public arbitrators and one non-public arbitrator1. However, effective August 11, 2008, individuals who, since January 1, 2005, have either sold or supervised someone who sold ARS or worked for a firm that sold ARS will not serve as the non-public arbitrator on ARS cases.
Endnote:
1 FINRA recently filed a rule proposal to raise the amount in controversy that will be heard by a single, chair-qualified arbitrator to $100,000.
Auction Rate Securities Settlements—Special Arbitration Process
The Securities and Exchange Commission (SEC) and some individual states recently announced settlements in principle with several firms that would repurchase ARS from individual investors, small businesses, charities and other entities. The SEC and the involved states must finalize and approve the terms of the settlements. Under the terms of the settlements, if a customer has incurred consequential damages, the customer may elect to participate in a special arbitration process.
FINRA will administer this special arbitration process, where a single, public arbitrator will hear the claim. The firms will not contest liability for misrepresentations and omissions concerning ARS, but they may challenge the existence or amount of any consequential damages. This arbitration process is voluntary on the customer’s part, and if a customer elects not to take advantage of these special procedures, the customer may pursue all other available legal or equitable remedies.
Importance of Filing Submission Agreements
FINRA has found that some firms and associated persons named as respondents fail to submit Submission Agreements. As previously stated in our Regulatory Notice 04-11, a party’s failure to sign and submit the Submission Agreement may cause confusion, lead to ancillary litigation and undermine the enforceability of arbitration awards.
When parties move to confirm their awards in court, for example, the applicable statute normally requires that parties attach their agreement to arbitrate to the motion. FINRA’s Initial Prehearing Conference Script requires arbitrators to remind parties to file their Submission Agreements and to advise them that the arbitrators may impose sanctions for failure to file Submission Agreements absent a specific jurisdictional challenge.
2008 Fall Securities Conference
FINRA hosted its annual Fall Securities Conference from October 22 to 24 in Carlsbad, California. FINRA staff and other regulators, as well as securities market participants, addressed regulatory updates and facilitated a wide range of workshops.
Dispute Resolution introduced participants to FINRA's arbitration and mediation programs, using a hypothetical arbitration claim. Presenting this highly interactive program were: Linda D. Fienberg, President of FINRA Dispute Resolution; Richard W. Berry, Vice President and Director of Case Administration; Robert S. Banks, Jr., Banks Law Offices, P.C.; Linda Drucker, Vice President, and Associate General Counsel, Charles Schwab & Co.; and John Ohashi, Ohashi ADR.
SEC Filing
Proposed Rule Change to Raise the Amount in Controversy Heard by a Single, Chair-Qualified Arbitrator
On September 18, 2009, FINRA filed a proposed rule change with the SEC to amend Rule 12401 of the Code of Arbitration Procedure for Customer Disputes (Customer Code) and Rule 13401 of the Code of Arbitration Procedure for Industry Disputes (Industry Code). The rule change proposes to raise the amount in controversy that will be heard by a single, chair-qualified arbitrator to $100,000.
On October 2, 2008, the SEC published the proposed rule filing in the Federal Register. Comments were due on October 23, 2008.
SEC Approvals
Adoption of NASD Rules in the New Consolidated FINRA Rulebook
In recent months, FINRA began proposing new consolidated FINRA rules in phases for approval by the SEC as part of the rulebook consolidation process. The new FINRA rules will apply to all firms, unless such rules have a more limited application by their terms.
On September 25, 2008, the SEC approved a proposal to move the arbitration and mediation rules into the FINRA rulebook.* The proposal will change all references within the arbitration and mediation rules from NASD to FINRA and make other conforming changes. The FINRA rulebook will now include the old Code of Arbitration Procedure (Rule 10000 Series), which continues to apply to cases filed before April 16, 2007; and the three new Codes that apply to cases filed on or after April 16, 2007: the Customer Code (Rule 12000 Series), the Industry Code (Rule 13000 Series) and the Mediation Code (Rule 14000 Series). FINRA adopted the three new Codes prior to the consolidation as part of a complete revision of the rules to arrange them more logically, to use plain English and to tailor the rules to specific types of cases.
The changes will be effective on December 15, 2008.
*SEC Rel. No. 58643 (Sept. 25, 2008), 73 Fed. Reg. 57174 (Oct. 1, 2008) (File Nos. SR–FINRA–2008–021; SR–FINRA–2008–022; SR–FINRA–2008–026; SR–FINRA–2008–028 and SR–FINRA–2008–029).
Submissions to Arbitrators after a Case Has Closed under Limited Circumstances
On October 6, 2008, the SEC approved the adoption of new Rules 12905 and 13905 which strictly limit when parties may make submissions to arbitrators in closed cases.
Under the new rules, parties may not submit documents to arbitrators in cases that have closed except under the following limited circumstances: 1) as ordered by a court; 2) at the request of any party within 10 days of service of an award or notice that a matter has been closed for typographical or computational errors, or mistakes in the description of any person or property referred to in the award; or 3) if all parties agree and submit documents within 10 days of service of an award or notice that a matter has been closed. The rule became effective on November 24, 2008.
Web Site Update
FINRA has updated the look and feel of its Web site, creating a more comprehensive and user-friendly site. The new site provides improved navigation, layout and design. The site has also been reorganized for investors, industry professionals and those who need assistance with dispute resolution services.
FINRA’s Arbitration Awards Online system, which is available to the public free of charge through FINRA’s Web site, was included in this upgrade. Among other changes, we made the following improvements to the Arbitration Awards Online system:
- added a calendar icon to the search screen;
- excluded “contract” from search terms because it yielded too many results;
- increased the search results data field from 300 to 500 characters; and
- identified how users can search for ARCA awards.
We continue to receive excellent feedback on our Arbitration Awards Online system. The system continues to receive more than 100,000 hits per month, and has received more than 2 million hits since its inception.
Update on Proposed Rules to Address Expungement Relief Requests
As previously reported in Volume 3—2008 of this newsletter, FINRA filed proposal SR-FINRA-2008-010 with the SEC to adopt Rule 12805 of the Customer Code and Rule 13805 of the Industry Code on March 13, 2008. The SEC approved these rules on October 30, 2008. These rules will establish new procedures that arbitrators must follow when considering requests for expungement relief under NASD Conduct Rule 2130. FINRA will announce the effective date of the new rules in mid-December. The new procedures will require arbitrators considering an expungement request to:
- hold a recorded hearing session by telephone or in person;
- provide a brief written explanation of the reasons for ordering expungement;
- in cases involving a settlement, review the settlement documents to examine the amount paid to any party—and any other terms and conditions of the settlement that might raise concerns about the associated person's involvement in the alleged misconduct—before awarding expungement; and
- assess forum fees for hearing sessions held solely for the purpose of considering expungement against the parties requesting the relief.
The new procedures are designed to: (1) make sure that arbitrators have the opportunity to consider the facts that support or weigh against a decision to grant expungement and (2) ensure that expungement is an extraordinary remedy that occurs only when the arbitrators find and document one of the narrow grounds specified in Rule 2130.
FINRA will notify all arbitrators of the effective date of the rule change. At such time, we will (i) update our online training program to reflect the new expungement procedures and encourage all arbitrators to take the training; (ii) send arbitrators written materials with questions and answers; (iii) send arbitrators with current email addresses on file a broadcast email with questions and answers; (iv) publish a Regulatory Notice; and (v) publish a more detailed article in the first 2009 issue of The Neutral Corner explaining the new rules.
Additionally, on December 10, 2008, FINRA will conduct a Neutral Roster call-in workshop during which staff will discuss the rule change and answer questions previously submitted by arbitrators and mediators. Details about the workshop can be found in the next item of this newsletter.
FINRA will require arbitrators to certify in writing that they have familiarized themselves with the new rules by: Taking the revised online training program; reviewing the written materials mailed to them, a broadcast email with questions and answers or FINRA’s Regulatory Notice (as mentioned above); participating in the December 10 call-in workshop; or, reviewing an article to be included in the first 2009 issue of The Neutral Corner, which will explain the new rules.
Arbitrator Call-in Workshops
Update on June 2008 Workshop: “Civility and Demeanor”
During the June 19, 2008 Neutral Roster Call-In Workshop on Civility and Demeanor, hosted by Executive Vice President, George H. Friedman, neutrals posed difficult hearing scenarios to arbitration experts, Professor Constantine "Gus" Katsoris2 and David E. Robbins3. A highlight of their discussion appears below.
Representative Demeanor
Occasionally during the hearing, attorneys or representatives may act in ways that jeopardize the civil tone of the hearing. They may attempt to turn the informality of arbitration to their advantage. For example, they may try the following:
- ask leading questions (questions that imply the desired answer) to their own witnesses and, in some cases, try to testify on behalf of the witnesses;
- introduce repetitive evidence with the hope that the more often they make a statement, the more likely you are to believe it;
- make speaking objections that suggest to the witnesses how to answer the question; or
- shout, use profanity or make gratuitous remarks.
Opposing counsel will typically object to the disruptive behavior. The arbitrators should generally sustain these objections. Sometimes arbitrators may need to be more proactive to maintain decorum. The chairperson can do the following:
- Remind the attorneys or representatives that—to maintain a proper record—only one person should speak at a time.
- Ask the attorneys or representatives to direct their comments and questions to the panel instead of to each other.
- Call a recess to allow the parties to cool down. When the hearing reconvenes, instruct the representatives to maintain decorum, so the hearing can proceed.
- If the attorneys continue to argue with each other, excuse the parties from the hearing room while the attorneys remain. Advise the attorneys, preferably off the record, that bickering is counterproductive, that it distracts the arbitrators from the issues and will not be tolerated. Let the representatives know that the panel would rather not put its comments on the record in front of their clients, but it will if the bickering persists.
Party Demeanor
Along the same lines as representative demeanor, sometimes the parties may act inappropriately. For example, parties may disagree with the facts presented by the opposing party’s witness and voice their disagreement during the witness’s testimony. Arbitrators should instruct the party representatives to counsel their client(s) about proper behavior that is expected during the hearing. When addressing the representatives or parties, arbitrators should keep their language as neutral as possible. The parties may perceive strong language as adversarial, which could lead to arguments between the representatives and the panel.
Canon I of the Code of Ethics for Arbitrators in Commercial Disputes directs arbitrators to prevent any disruption of the arbitration process. If a party is overly emotional or contentious at the hearing, take a break and ask the party’s attorney to have a talk with his/her client. Advise the attorney that the arbitrators are able to distinguish facts from emotion but that the client needs to help the arbitrators understand what happened.
Keep these suggestions in mind the next time you encounter a difficult situation. Check our Web site for future call-in workshops and issues of The Neutral Corner for additional tips on handling challenging situations. Our next workshop is scheduled for December 10, 2008.
Endnotes:
2 Professor Katsoris is Chairperson of the Securities Industry Conference on Arbitration (SICA) and a Professor of Law at Fordham University Law School.
3 Mr. Robbins is a partner in the law firm Kaufmann, Feiner, Yamin, Gildin & Robbins LLP and author of the Securities Arbitration Procedure Manual.
Report on September 2008 Workshop: “Investor Education and Emerging Regulatory Issues”
FINRA hosted a call-in workshop on September 23, 2008, entitled "Investor Education and Emerging Regulatory Issues.” Linda Fienberg updated listeners on current developments in Dispute Resolution. Ms. Fienberg then moderated a discussion with FINRA staff members, John Gannon, Senior Vice President, FINRA Office of Investor Education, and Laura Gansler, Associate Vice President, FINRA Emerging Regulatory Issues. The panel discussed new investment products, new causes of action and FINRA’s Investor Education initiatives, such as BrokerCheck and Investor Alerts.
If you missed it, you may listen to a recording of the workshop.
Announcing New Workshop: “FINRA Arbitration 2009—the Year in Review, Road Ahead and Expungement Update”
Wednesday, December 10, 2008
12:00 p.m. – 1:15 p.m. Eastern Standard Time
FINRA Dispute Resolution's next call-in workshop will review this year's accomplishments and preview FINRA Dispute Resolution's planned activities for 2009. We will also review new rules and procedures going into effect in late January that arbitrators must follow when considering requests for expungement relief. Your attendance at the call-in workshop will satisfy the training requirement for the new rules.
Katherine Bayer, Deputy Regional Director of FINRA Dispute Resolution’s New York office, will moderate the workshop and pose questions to a panel of three FINRA professionals:
- George H. Friedman, Executive Vice President and Director of Dispute Resolution;
- Richard W. Berry, Vice President and Director of Case Administration; and
- Barbara L. Brady, Vice President and Director of Neutral Management.
The panel will also answer neutrals’ questions submitted online before the call.
How to Submit Questions Before the Call
We encourage you to send us questions that might be of interest to neutrals. Please send your questions in advance of the workshop.
On the Day of the Call
Since we expect a large number of participants on the call, please dial in at least 10 minutes before it starts. If you dial in less than 10 minutes before the call, you may miss the beginning of the workshop because of dial-in delays.
- Dial the toll-free number: 1-877-918-6629
- Enter the participant passcode: 8486237
- Neutrals do not need to register before the call
If You Miss the Call
You will be able to access a recording of the phone-in workshop by December 17.
New Arbitrator Training Course: Civility in Arbitration
FINRA Dispute Resolution is offering a new, voluntary online arbitrator training course, developed as part of its comprehensive Arbitrator Training Program: Civility in Arbitration.
The course presents scenarios that focus on the challenges arbitrators face during an arbitration, such as how to:
- properly evaluate your obligations as an arbitrator, before and during service on a case; and
- set a proper tone for conducting fair and efficient hearings.
The tuition is $25, and the course is available 24 hours a day, seven days a week. To access the course, you must first complete and submit the enrollment form, which can be found on the Arbitrator Training page. After you have completed the course, FINRA will add it to your Arbitrator Disclosure Report, which is provided to the parties.
FINRA is committed to the education and training of its arbitrators. Visit our Web site and this newsletter for announcements of future learning opportunities.
Question and Answer: Monetary Sanctions Made Payable to FINRA
Question: Should a panel issue monetary sanctions against a party—to be made payable to FINRA Dispute Resolution?
Answer: No, panels should not make monetary sanctions payable to FINRA Dispute Resolution under any circumstances. FINRA Dispute Resolution is not a party to the arbitration, and panels should therefore not make monetary sanctions payable to FINRA Dispute Resolution. The forum believes awards containing monetary sanctions payable to FINRA Dispute Resolution are inappropriate, and may result in a court vacating an arbitration award.
Question and Answer: New Mediator Payment Process
Question: What is the new payment process for mediators, and how does it benefit them?
Answer:
On September 22, 2008, FINRA updated the payment process for FINRA mediators. We now pay mediators upon completion of the FINRA mediation case. We no longer require mediators to wait for FINRA to collect the payments from the parties in order to be paid for FINRA mediations. Mediators may now simply submit a Mediator Payment Form that serves as their invoice, and we will promptly pay their mediator fees and expenses. With this new approach to mediator payment, FINRA removes from its mediators the burden of collecting payments as well as the risk of non-payment. Prior to each mediation conducted through FINRA, staff will send a Mediator Payment Form for mediators to submit at the conclusion of each mediation. Upon receipt, staff will enter the invoice information into its finance system, and mediators should generally receive payment for their mediator fees and expenses within 15 business days.
FINRA values the mediators on our roster and instituted these changes to enhance the services we provide to our neutrals. Mediators benefit by:
- receiving prompt payment for their mediation sessions and expenses;
- saving time and resources in collection efforts for mediation services; and
- taking advantage of FINRA’s streamlined billing procedure that allows for easy processing and tracking of payments.
Please contact a mediation administrator if you have any questions regarding this new benefit.
Mediation and Business Strategies Update
Mediation Outreach Efforts
Kenneth Andrichik, Director of Mediation, participated throughout the year as a member of the CPR (Conflict Prevention and Resolution) Institute National Task Force on Diversity in ADR. In September, Mr. Andrichik guest lectured at the Fordham Law School Securities Arbitration Clinic.
In August, Julie Crotty, Assistant Director of Mediation, co-taught a mediation program with Richard Fincher at Scheinman Institute of the Cornell School of Industrial and Labor Relations. Ms. Crotty also served as a guest lecturer and coach at a mediation training provided by the NYC Office of Administrative Trials and the New York University Law School. In November, she was a guest lecturer on FINRA mediation at the Securities Arbitration Clinic at Cornell Law School.
Mediation Settlement Month
FINRA held its annual Mediation Settlement Month event during October, offering incentives designed to promote mediation and to educate potential parties about the benefits of the program. Hundreds of mediators agreed to reduce their normal fees for Settlement Month, allowing FINRA to offer substantial savings to parties.
Mediation Settlement Day
FINRA’s Mediation Department was the major force in organizing the seventh annual Mediation Settlement Day, which took place on October 16, 2008. Over 100 non-profit, government, court and academic organizations sponsored the event, which introduced participants to the benefits of mediation.
National and Regional Updates
National Update
We are pleased to welcome Leslie Leutwiler to the Department of Neutral Management as an Associate Director. Ms. Leutwiler joined FINRA’s Northeast Regional Office in October 2000, where she held several positions culminating with her appointment as a Mediation Administrator in 2003. In 2004, she joined the Department of Neutral Management as a Neutral Recruiter and served in that position until 2005, when she joined the MATRICS team to help develop the new case management system for Dispute Resolution. Now that she has returned to Neutral Management, Ms. Leutwiler will work to maintain the excellence of the neutral roster through special projects focused on quality control, retention and recruitment.
Regional Updates
NOTE: Participants must successfully complete the online portion of the Basic Arbitrator Training Program before attending an onsite training program. FINRA generally requires a minimum of nine attendees to conduct an onsite session.
Northeast Regional Update
Arbitration Outreach
On September 18, 2008, Katherine M. Bayer, Deputy Regional Director of the Northeast Regional Office, delivered a presentation at the Nassau County Bar Association’s Annual Securities Arbitration Updates 2008 program.
Arbitrator Training
During the next three months, the Northeast Regional Office will conduct the following in-person Basic Arbitrator Training programs:
| Newark, NJ | December 11, 2008 |
| New York, NY | January 28, 2009 |
| Hartford, CT | February 18, 2009 |
If you are interested in attending a Basic Panel Member Training program, please contact Cicely Moise at (212) 858-3963.
Midwest Regional Update
During the next three months, the Midwest Regional Office will conduct the following in-person Basic Arbitrator Training programs:
| Chicago, IL | December 3, 2008 |
| Oklahoma City, OK | January 21, 2009 |
| Dallas, TX | February 10, 2009 |
| Louisville, KY | February 18, 2009 |
If you are interested in attending a Basic Panel Member Training program, please contact Deborah Woods at (312) 899-4431.
West Regional Update
During the next three months, the West Regional Office will conduct the following in-person Basic Arbitrator Training programs:
| San Francisco, CA | December 10, 2008 |
| Phoenix, AZ | January 13, 2009 |
If you are interested in attending a Basic Arbitrator Training program, please contact Hannah Yoo at (213) 229-2362.
Southeast Regional Update
During the next three months, the Southeast Regional Office will conduct the following in-person Basic Arbitrator Training programs:
| Tampa, FL | January 16, 2009 |
| New Orleans, LA | February 4, 2009 |
If you are interested in attending a Basic Arbitrator Training program, please contact Lanette Cajigas at (561) 447-4911.
Arbitrator Tip: Discard Outdated Training Materials
Since FINRA frequently updates its procedures and trainings, you should not rely on old training materials when making case-related decisions. Discard any outdated materials, and check for current information about arbitration procedures by obtaining the most recent version of the Code of Arbitration Procedure, Arbitrator's Reference Guide and other valuable arbitration resources.
Messages from the Editor
Amendment
In Volume 5—2008 of The Neutral Corner, we advised arbitrators to notify FINRA when their professional licenses (e.g., state bar memberships, CPA, etc.) expire, become suspended or inactive. Additionally, we advised arbitrators that this change to the status of a professional license would not prohibit an arbitrator from remaining on our roster.
We would like to clarify our initial notice that arbitrators would not be prohibited from serving on our roster. While this statement applies to arbitrators serving in most jurisdictions, arbitrators serving in any of our California hearing locations are bound by additional requirements set forth under Rule 2.30 of the Rules and Regulations of the California State Bar. Rule 2.30 states that arbitrators who are also attorneys and members of the California State Bar must be on active status in order to act as arbitrators or mediators in California cases. Therefore, arbitrators in California—who are also attorneys licensed to practice law in California—must be on active status with the California State Bar to be eligible to serve on FINRA’s roster of neutrals. Rule 2.30 does not apply to arbitrators and mediators who are not attorneys or attorneys who are admitted to a bar other than California.
FINRA Continues its Efforts to “Go Green”
In its continuing efforts to be environmentally friendly, FINRA will no longer print hard copies of this newsletter. Beginning with the first issue in 2009, The Neutral Corner will only be available through FINRA’s Web site. Arbitrators with current email addresses on file will receive notices from FINRA as new issues become available online. If you do not have a current email address on file with FINRA, we encourage you to update your arbitrator record using the Arbitrator Profile Update form.
Comments, Feedback and Submissions
In addition to comments, feedback and questions regarding the material in this publication, we invite you to submit suggestions for articles and topics you would like addressed. We reserve the right to determine which articles to publish.
Please send your comments to:
Jisook Lee, Editor
The Neutral Corner
FINRA Dispute Resolution
One Liberty Plaza
165 Broadway, 27th Floor
New York, New York 10006
You may also email Jisook.
Directory
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Linda D. Fienberg George H. Friedman Kenneth L. Andrichik Jean I. Feeney Dorothy Popp Richard W. Berry Barbara L. Brady Elizabeth R. Clancy |
Judith Hale Norris Rose Schindler James Schroder Scott Carfello Jisook Lee Editorial Board David Carey - Case Administration Julie Crotty - Mediation Nicole Haynes - Northeast Region Mignon McLemore - Office of Chief Counsel Nene Ndem - Southeast Region Rina Spiewak - West Region Patrick Walsh - Midwest Region |
FINRA Dispute Resolution Offices
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Northeast Region Southeast Region |
West Region Midwest Region |