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Independent Broker Dealer Consortium

FINRA Tackles Arbitration Procedure Issues

FINRA is stepping up its efforts to address a number of longstanding procedural issues in its arbitration forum. With proposals to (i) increase the likelihood of recovery on unpaid arbitration awards, (ii) tighten the process to expunge customer dispute information, (iii) eliminate fees for explaining certain arbitration decisions and (iv) change procedures for arbitrating small claims, regulators are attempting to both protect investors and strengthen the securities arbitration forum. Here’s a top-line brief on the headlines:


FINRA proposed several approaches to address the issue of a party’s failure to pay after an award has been granted. The SRO’s arbitration and mediation forum covers 99 percent of the securities-related cases in the United States, thereby making it the dominant dispute resolution venue in the country.

As noted in a FINRA Discussion Paper on Customer Recovery, context is important. In the majority of FINRA customer cases, “approximately 69 percent result in settlements reached by parties and approximately 18 percent of cases proceed to award.”

FINRA reports that “… customer arbitration cases decided by award represent a small subset of all cases filed. For example, of the 2,457 arbitration cases involving customer disputes in 2016, only 389 (16 percent of all cases) closed by award; and of those awards, 44 (two percent of all cases) went unpaid.”

This data does not include awards levied against non-FINRA members, which is likely a reason why FINRA couched its considerations in broad terms, “taking into account the different channels through which customers receive financial services,” and with “hopes to advance the broader dialogue on customer recovery… [as well as] the continued enhancement of its own forum.” That said, improving recovery rates on arbitration awards is important to FINRA’s ongoing efforts to increase confidence in the forum and its more than 7000 registered arbitrators.

Drilling down on the issue, FINRA published statistics on unpaid customer arbitration awards over a five year period. From 2012 through 2016, between 22 and 30 percent of all awards went unpaid. The totals of unpaid awards ranged from $14 million out of $119 million awarded in 2016 to $75 million unpaid awards out of $181 million awarded in 2013.

Currently, FINRA uses its authority to suspend member firms and individuals for non-payment. FINRA states, however, that it is “constrained in its ability to help enforce collection of an unpaid award against an inactive firm or individual,” and that “most unpaid customer arbitration awards are rendered against firms or individuals whose FINRA registration has been terminated, suspended, cancelled, or revoked, or who have been expelled from FINRA.” (See Discussion Paper, pp. 9-11)

FINRA is proposing new amendments to its Membership Application Program rules. The proposal would allow FINRA to deny new member applications in the event the applicant or its associated persons are “subject to pending arbitration claims.” The amendments home in on member firms who hire individuals with pending arbitration claims knowing there are concerns about payment, and member firms with substantial arbitration claims who attempt to avoid payment by moving assets to another firm. Comments on the proposal are due April 9th.

In a published analysis, FINRA offered a number of broader recommendations, some of which would require SEC or legislative action. The assortment of possible fixes includes an SEC rulemaking to require firms to maintain additional capital to cover unpaid awards, legislation that would oblige firms to carry insurance to cover unpaid awards, legislation to expand the scope of the Securities Investor Protection Corporation (“SIPC”) to include unpaid customer arbitration awards, legislation that would establish a second brokerage industry fund, amendments to firm disclosure requirements to include unpaid awards, and legislation amending the Bankruptcy Code to prevent arbitration awards from being discharged in bankruptcy.

An alternative solution comes from Senator Elizabeth Warren, who recently introduced legislation to require FINRA to use its authority to directly compensate investors for unpaid awards. The Compensation for Cheated Investors Act would require FINRA to pay unpaid final arbitration awards through a pool funded by penalties from broker-dealer members.


Comments on a December FINRA proposal to amend the procedures for expungement hearings related to customer dispute information have been submitted.

Through the expungement process, associated persons will still be able to apply to remove allegations made by customers from the Central Registration Depository (“CRD”) and from the FINRA BrokerCheck system. Under the FINRA proposal, associated persons can seek the expungement of customer dispute information, but under more strict procedures. Among several important changes, the proposal limits the hearing requests to a one-year period after the underlying case closes, would establish a roster of arbitrators with specific training and experience to serve at the expungement hearings, and would require a unanimous decision by a three arbitrator panel to decide that expungement is appropriate and that the customer dispute information has no investor protection or regulatory value.

A review of the commentary by one industry publication suggests strong opposition to the proposal by registered representatives and broker-dealers. The article highlights their key objections to the proposal, including the perceived unfairness of a one year time limitation, the required unanimity of the arbitrators needed to grant an application, the increased costs on representatives and brokers who seek to protect their reputations – FINRA is proposing to impose a minimum $1,425 filing fee to have an expungement case heard (up from $50 in certain instances) – and (from SIFMA) the imposition of “inconsistent adjudicatory standards and procedures applicable only to expungement applications.”


FINRA proposed the elimination of a $400 fee charged to the parties in  FINRA arbitration who elect to have arbitrators provide an “explained decision.” The term is a reference to “a fact-based award outlining the reasons for the arbitrator’s decision.” The rule change had an effective date of February 21, 2018.


FINRA proposed amending its arbitration procedures to provide an additional hearing option for parties with claims involving $50,000 or less. Under the proposed rule change, FINRA would offer an intermediate option to argue a case before an arbitrator in a shorter, limited hearing format conducted via telephone. According to FINRA, the proposed option would limit the cost and burdens for participants.


FINRA’s new proposals, concerning changes both large and small to its arbitration procedures, demonstrate the SRO’s intention to strengthen its dispute resolution forum. There may be many reasons for FINRA to propose solutions at this time, including the political pressure to do so, internal efforts to produce greater efficiencies, or to provide greater confidence in FINRA’s arbitration and mediation services. Bates Group will continue to track these and other arbitration related procedural developments.

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