Menzer & Hill, P.A. Comment On Regulatory Notice 26-06
Michael Hill
Menzer & Hill, P.A.
Re: Comment on FINRA Regulatory Notice 26-06 – Modernizing FINRA Arbitration Rules, Guidance and Process
Dear Ms. Mitchell:
I'm an attorney who regularly represents investment fraud victims in FINRA arbitration. I urge FINRA to stay true to its investor protection mission and reject the bulk of the recommendations in RN 26-06. Many of these proposals would benefit broker-dealers at the direct expense of investors — and that's not what FINRA is here to do.
Forum Selection / Customer Disputes (A(i))
Proposals to route cases to alternative forums based on claim "complexity" or investor type are fundamentally flawed. The line between "retail" and "institutional" is often drawn by the firm itself — brokers routinely advise clients to invest through LLCs or trusts to access certain products, without disclosing that doing so may strip them of regulatory protections. Letting firms steer cases to hand-picked forums creates an obvious incentive for bad actors. The current system — where all customers can access FINRA arbitration regardless of claim type — should stay intact.
Pre-dispute variances are especially problematic. Customers have no leverage to negotiate boilerplate contracts. Post-dispute flexibility, when the customer typically has counsel, is far less risky and should be permitted.
Eligibility and Motions to Dismiss (B(i))
The eligibility rule should not be converted into a hard statute of repose. Many cases — particularly involving private placements, non-traded REITs, and annuities — don't reveal their harm until years after the initial transaction, when artificially maintained NAVs finally collapse. A rigid time bar would reward firms that conceal misconduct.
Expanding pre-hearing dismissal rights would only invite abusive motion practice. FINRA's own guidance discourages early dismissals. Discovery should be completed before any dismissal motion is considered. The current framework protects investors — don't weaken it.
Arbitrator Qualifications and Selection (C & D)
I oppose the recent changes requiring a four-year degree and five years of professional experience for arbitrators. FINRA arbitration is a substitute for a jury trial, and the arbitrator pool should reflect that. Jurors don't need subject matter expertise. Raising the bar makes it harder to become a part-time arbitrator than to get a Series 7 license — that's backwards.
I also oppose any dilution of the "public arbitrator" independence standards. The 20% professional time threshold and cooling-off periods exist for good reason. Letting "industry-lite" arbitrators into the public pool undermines the forum's legitimacy. And Rule 12403(c)(1)(A) — which lets parties strike all non-public arbitrators — was a landmark investor protection win. It should not be touched.
One reform I do support: equalizing strikes so that all claimants collectively and all respondents collectively have the same number, regardless of how many separately represented parties are involved.
Arbitrator Training (E)
Procedural and ethics training for arbitrators is welcome. But training should not create hierarchies among customer claims or venture into substantive legal or investment product analysis. That crosses into putting a thumb on the scale. Substantive issues belong to the parties' advocates and expert witnesses.
Discovery (F)
The Discovery Guide is outdated and skewed toward respondents. Broker-dealers routinely use boilerplate objections to block access to exception reports, commission runs, and compliance documents — often misciting Gramm-Leach-Bliley as a shield. FINRA should clarify that objections to presumptively discoverable items are sanctionable, and update the Guide to mandate production of compliance manuals, regulatory investigation records, and all relevant communications including texts and emails.
I oppose creating a "discovery referee" role. The rules are already there — enforcement is the problem. Train arbitrators to use what they have and sanction repeat violators.
Insurance coverage should also be disclosed upon request, as it is in virtually every state and federal court. Investors deserve to know whether a potential award is collectible.
Hearing Efficiency (G)
No new case management structure is needed. The priority is enforcing timelines that already exist. If scheduling benchmarks aren't met, FINRA staff should proactively check in — removing the burden from parties to ask for help. A few practical improvements would also go a long way: a mobile app for counsel, faster billing, and a cleaner DR Portal with PACER-style docket filtering.
Punitive Damages (H)
Punitive damages are awarded in under 1% of cases. They serve a real deterrent function, and the industry's push to limit them reflects a reaction to a handful of cases where arbitrators found genuinely egregious conduct. Stripping this remedy would shield the worst misconduct from consequences.
No caps. No pre-dispute waivers. No bifurcated hearings or mandatory explained decisions — those are just procedural hurdles designed to discourage what is already a rare outcome. If arbitrators are trusted to dismiss cases and award damages against claimants, they're qualified to award punitive damages too. And a special appeals process for punitive damages would undermine the finality that makes arbitration worth using.
Arbitration Awards Online (J)
The AAO database is essential for investors, attorneys, and regulators to identify patterns of misconduct. Awards should not be removed or redacted. The expungement process already has serious problems — high approval rates, low opposition — and creating a "memory hole" would make things worse.
FINRA should instead invest in making AAO more useful: structured searchable data, integrated analytics, links to BrokerCheck profiles and court records.
Unpaid Awards (K)
Roughly 25% of investor awards go unpaid — about 37 cents on the dollar. This has been a known problem for decades. A national investor recovery pool funded by member firms is the most direct solution, and it's clearly feasible: FINRA has returned $150 million to the industry in the past ten months alone. Insurance mandates (which states like Oregon have shown don't reduce access to advisory services) are also worth pursuing. Legislative changes to prevent bankruptcy discharge of unpaid awards should follow.
I represented 7 claimant families that received a fair award but could not collect because the broker-dealer folded in wake of the award. Broker-dealers are already required to be adequately funded for safeguarding client assets but should similarly be required to sustain an adverse award to make clients whole from an award.
The moral hazard argument against a recovery pool doesn't hold up — intentional misconduct is typically excluded from coverage, and the pool would retain the right to pursue bad actors directly.
Conclusion
FINRA's rules should strengthen investor protection, not chip away at it. Many of the proposals in RN 26-06 would tilt an already uneven playing field further toward industry. I urge FINRA to reject them and recommit to the fairness and transparency that investors rely on.
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Menzer & Hill, P.A. Comment On Regulatory Notice 26-06
Re: Comment on FINRA Regulatory Notice 26-06 – Modernizing FINRA Arbitration Rules, Guidance and Process
Dear Ms. Mitchell:
I'm an attorney who regularly represents investment fraud victims in FINRA arbitration. I urge FINRA to stay true to its investor protection mission and reject the bulk of the recommendations in RN 26-06. Many of these proposals would benefit broker-dealers at the direct expense of investors — and that's not what FINRA is here to do.
Forum Selection / Customer Disputes (A(i))
Proposals to route cases to alternative forums based on claim "complexity" or investor type are fundamentally flawed. The line between "retail" and "institutional" is often drawn by the firm itself — brokers routinely advise clients to invest through LLCs or trusts to access certain products, without disclosing that doing so may strip them of regulatory protections. Letting firms steer cases to hand-picked forums creates an obvious incentive for bad actors. The current system — where all customers can access FINRA arbitration regardless of claim type — should stay intact.
Pre-dispute variances are especially problematic. Customers have no leverage to negotiate boilerplate contracts. Post-dispute flexibility, when the customer typically has counsel, is far less risky and should be permitted.
Eligibility and Motions to Dismiss (B(i))
The eligibility rule should not be converted into a hard statute of repose. Many cases — particularly involving private placements, non-traded REITs, and annuities — don't reveal their harm until years after the initial transaction, when artificially maintained NAVs finally collapse. A rigid time bar would reward firms that conceal misconduct.
Expanding pre-hearing dismissal rights would only invite abusive motion practice. FINRA's own guidance discourages early dismissals. Discovery should be completed before any dismissal motion is considered. The current framework protects investors — don't weaken it.
Arbitrator Qualifications and Selection (C & D)
I oppose the recent changes requiring a four-year degree and five years of professional experience for arbitrators. FINRA arbitration is a substitute for a jury trial, and the arbitrator pool should reflect that. Jurors don't need subject matter expertise. Raising the bar makes it harder to become a part-time arbitrator than to get a Series 7 license — that's backwards.
I also oppose any dilution of the "public arbitrator" independence standards. The 20% professional time threshold and cooling-off periods exist for good reason. Letting "industry-lite" arbitrators into the public pool undermines the forum's legitimacy. And Rule 12403(c)(1)(A) — which lets parties strike all non-public arbitrators — was a landmark investor protection win. It should not be touched.
One reform I do support: equalizing strikes so that all claimants collectively and all respondents collectively have the same number, regardless of how many separately represented parties are involved.
Arbitrator Training (E)
Procedural and ethics training for arbitrators is welcome. But training should not create hierarchies among customer claims or venture into substantive legal or investment product analysis. That crosses into putting a thumb on the scale. Substantive issues belong to the parties' advocates and expert witnesses.
Discovery (F)
The Discovery Guide is outdated and skewed toward respondents. Broker-dealers routinely use boilerplate objections to block access to exception reports, commission runs, and compliance documents — often misciting Gramm-Leach-Bliley as a shield. FINRA should clarify that objections to presumptively discoverable items are sanctionable, and update the Guide to mandate production of compliance manuals, regulatory investigation records, and all relevant communications including texts and emails.
I oppose creating a "discovery referee" role. The rules are already there — enforcement is the problem. Train arbitrators to use what they have and sanction repeat violators.
Insurance coverage should also be disclosed upon request, as it is in virtually every state and federal court. Investors deserve to know whether a potential award is collectible.
Hearing Efficiency (G)
No new case management structure is needed. The priority is enforcing timelines that already exist. If scheduling benchmarks aren't met, FINRA staff should proactively check in — removing the burden from parties to ask for help. A few practical improvements would also go a long way: a mobile app for counsel, faster billing, and a cleaner DR Portal with PACER-style docket filtering.
Punitive Damages (H)
Punitive damages are awarded in under 1% of cases. They serve a real deterrent function, and the industry's push to limit them reflects a reaction to a handful of cases where arbitrators found genuinely egregious conduct. Stripping this remedy would shield the worst misconduct from consequences.
No caps. No pre-dispute waivers. No bifurcated hearings or mandatory explained decisions — those are just procedural hurdles designed to discourage what is already a rare outcome. If arbitrators are trusted to dismiss cases and award damages against claimants, they're qualified to award punitive damages too. And a special appeals process for punitive damages would undermine the finality that makes arbitration worth using.
Arbitration Awards Online (J)
The AAO database is essential for investors, attorneys, and regulators to identify patterns of misconduct. Awards should not be removed or redacted. The expungement process already has serious problems — high approval rates, low opposition — and creating a "memory hole" would make things worse.
FINRA should instead invest in making AAO more useful: structured searchable data, integrated analytics, links to BrokerCheck profiles and court records.
Unpaid Awards (K)
Roughly 25% of investor awards go unpaid — about 37 cents on the dollar. This has been a known problem for decades. A national investor recovery pool funded by member firms is the most direct solution, and it's clearly feasible: FINRA has returned $150 million to the industry in the past ten months alone. Insurance mandates (which states like Oregon have shown don't reduce access to advisory services) are also worth pursuing. Legislative changes to prevent bankruptcy discharge of unpaid awards should follow.
I represented 7 claimant families that received a fair award but could not collect because the broker-dealer folded in wake of the award. Broker-dealers are already required to be adequately funded for safeguarding client assets but should similarly be required to sustain an adverse award to make clients whole from an award.
The moral hazard argument against a recovery pool doesn't hold up — intentional misconduct is typically excluded from coverage, and the pool would retain the right to pursue bad actors directly.
Conclusion
FINRA's rules should strengthen investor protection, not chip away at it. Many of the proposals in RN 26-06 would tilt an already uneven playing field further toward industry. I urge FINRA to reject them and recommit to the fairness and transparency that investors rely on.
Michael Hill
Managing Partner
Menzer & Hill, P.A.