As I’ve written before, I have a grudging respect for the securities industry and its self-regulatory organization, FINRA: If he were alive today, Lex Luthor couldn’t do it any better.
FINRA’s latest caper comes in the form of the “Final Report and Recommendations of the FINRA Dispute Resolution Task Force,” which was released Dec. 16, 2015, after 17 months of deliberation. According to the report, “The task force looked at every aspect of FINRA’s dispute resolution forum as it relates to customers’ disputes and makes 51 recommendations to improve the system.”
At the risk of leading with the punch line, 12 of those 51 recommendations suggest FINRA continue doing what it is already doing (that’s bureaucrat-ese for “do nothing”). Of the remaining 39 recommendations, the most concrete is to — wait for it — give the arbitrators a raise: “from $300 to $500 per session” with “biennial increases in arbitrator compensation tied to the Consumer Price Index.”
Who’s Protecting Who?
To fully understand the brilliance of FINRA’s play here, we need to start with the reason for the task force’s report. To do that, we need to go back to 2010 and passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In Section 921, Congress and President Barack Obama, who signed it into law, gave the SEC the “authority to prohibit or to impose conditions or limitations on the use of agreements that require customers or clients [...] to arbitrate any future dispute between them arising under the federal securities laws, the rules and regulations thereunder, or the rule of a self-regulatory organization, if it finds that such prohibition, imposition of conditions or limitations are in the public interest and for the protection of investors [emphasis added].”
That, of course, was only five and a half years ago. To be fair, the SEC has been busy circumventing its Dodd-Frank Section 913 mandate to create a standard of protection for the clients of brokers that is “no less stringent” than that of RIAs under the ’40 Act. We’re all still holding our collective breath on that one.
To solve the problem of the SEC’s inaction, FINRA has stepped up (a cynical mind might speculate at the urging of the SEC) to suggest how it can better conduct its own contractually required arbitration of brokerage customer complaints. The report explains it this way: “While to date the SEC has taken no action, Dodd-Frank has revived the debate over the fairness of its pre-dispute arbitration agreements or PDAAs” — at least in the minds of people who haven’t completely forgotten about that small part of Dodd-Frank or died in the intervening years.
If they look hard enough, clever minds can find opportunity in any crisis, and FINRA doesn’t disappoint on this occasion: “The fairness of PDAAs is not the only important issue affecting the future of securities arbitration,” states the report. It enumerates these other issues, including “questions about the qualifications, training and incentives of arbitrators”; “the need to tailor procedures for different groups of investors”; “the separate mediation code”; and “the use of technology, [which] has the potential for greater efficiencies that have not yet been fully realized.”
Less clever observers might scratch their heads while trying to figure out what relevance these issues have to the “fairness of FINRA’s arbitration” or to the SEC’s mandate to “prohibit or to impose conditions or limitations on the use of agreements that require customers or clients to arbitrate” should the commission find that any of these fail to “protect investors” or are against “the public interest.”
Despite the fact that FINRA acknowledges its task force was formed to fill the void of the SEC’s inaction on its Section 921 mandate, the SRO isn’t bashful about tweaking that mandate just a bit: “Accordingly,” the report states, “FINRA formed this task force in June 2014 to consider possible enhancements to its arbitration and mediation forum so that the forum would meet the evolving needs of its users.”
Did you catch that? According to the task force’s report, the problem at hand is no longer the fairness of the arbitration system or protecting investors, as Dodd-Frank suggested; it’s now that users’ needs are evolving. As I’ve said before, these guys are good. Very good.
A review of the 39 recommendations (the ones that don’t suggest doing nothing) reveals that 19 involve the arbitrators themselves, including the aforementioned pay raises, plus their recruiting, training and selection. The remaining 17 address nine “procedural issues,” largely about timely hearings, mandatory mediation, small claims and motions to dismiss.
In fairness (somebody’s got to focus on fairness here), FINRA does include in its report three issues that address the fairness of its arbitration process: