Reach Out and Touch Someone: Proposed Special Proceedings for Simplified Arbitration Can Help Bridge the Gap Between FINRA Decisions on the Pleadings and Full Hearings

By Andrew Zuckerman

Presently, if you are an investor with a claim against your broker for $50,000 or less (excluding interest and expenses) you have two options for pursuing your claim through FINRA’s arbitration process. The first and default method is to seek a decision by a single arbitrator based on the pleadings. Alternatively, parties can request a full hearing with a single arbitrator. Both methods have benefits and costs that individual investors must carefully consider when making the decision as to whether to pursue their claims and how best to do so.

Decisions on the Pleadings:

Claimants may currently seek a decision on the pleadings which is dependent solely on the parties’ pleadings and other submitted materials. The cost to claimants is generally limited to filing fees and the legal fees and costs of preparing the submitted materials. In 2017, the average turnaround time for simplified decisions was significantly shorter than for hearing decisions (7.1 months compared to 16.3 months for hearing decisions). While a decision on the pleadings may offer claimants lower costs and a quicker turnaround, studies have shown that customers whose cases were decided on the papers were the least satisfied of any group of forum users. Additionally, the success rate for claimants is dismal:  an average of only 40% of all “paper” cases filed with the support of an attorney result in an award for the claimant. Without an attorney, claimants on average recover in only 24% of “paper cases.”

Full Hearing with a Single Arbitrator:

A full hearing is also dependent on the pleadings and submitted materials of the parties. In addition to the materials submitted, claimants have an opportunity to present their case, typically in-person, to an arbitrator. The costs of a full hearing may be prohibitive for many claimants. In addition to the costs to prepare the pleadings and materials, claimants will also incur arbitration hearing sessions fees. Since these hearings are in person, claimants may also face significant travel and lodging expenses, lost income, and dependent care expenses. Because the maximum claim amount is $50,000 under simplified arbitration, the fees and expenses of a full hearing can easily eat up much of any potential award.

Although claimants generally experience better results with full hearings and feel greater satisfaction by having an opportunity to air their grievances before an arbitrator, there are also non-financial considerations that encourage many claimants to seek a decision on the papers as opposed to a full hearing. As mentioned previously decisions by hearing have a substantially longer turnaround period. In addition, a full hearing invites the possibility of cross-examination by an opposing party. This threat of confrontation can be a deterrent for pro se, senior and seriously ill claimants.

Compromise on the Horizon:

The Financial Industry Regulatory Authority (“FINRA”) has recently proposed to amend FINRA Rules 12600 and 12800 of the Code of Arbitration Procedure for Customer Disputes and 13600 and 13800 of the Code of Arbitration Procedure for Industry Disputes to provide an additional hearing option for parties with claims of $50,000 or less, excluding interest and expenses.

The proposal seeks to combine all the advantages of both currently available arbitration procedures for simplified cases, while reducing or eliminating the prohibitive costs. Claimants will still have the option of choosing a decision on the papers or a full hearing but will also under the proposal have a third option for a Special Proceeding for Simplified Arbitration. The Special Proceeding will give claimants an opportunity to argue their case in front of an arbitrator. The proceeding would be held either by telephone, videoconference, or in person at the discretion of the parties thus reducing the costs of having to appear in-person—if they so choose. Each side would have a limited amount of time to present their case so that the entire hearing could be completed within one day. Furthermore, neither side would be permitted to question the opposing parties’ witnesses which would help eliminate the intimidation factor that may have deterred claimants from pursuing a full hearing. Because each side is prohibited from questioning the other side’s witnesses, the arbitrator in a Special Proceeding will have to take a more active role in asking each party questions and will receive special training on how to deal with pro se, and elderly clients to help ensure their voices are heard.  The filing and administrative costs for the Special Proceeding would be greater than the costs of a case on the pleadings but less than a full hearing.

The proposed Special Proceeding is an exciting compromise that seeks to provide an additional option for claimants to pursue their claims. If implemented, claimants will no longer have to make the hard decision over whether to incur large expenses and risk having to pay a substantial portion of a potential future award in fees just to have their voice heard by an arbitrator in a full hearing. Additionally, claimants will no longer feel intimidated into seeking a decision on the papers simply because they fear being examined by a hostile opposing counsel. All claimants, regardless of the size of their claim, deserve an opportunity to have their voices heard. For some cases, this can be achieved effectively by a decision on the papers. For others, the Special Proceeding will provide a cost effective, efficient, and non-intimidating forum for claimants to “reach out and touch” the arbitrators evaluating their claims. This new procedure will result in better outcomes for claimants, greater transparency, and investor confidence in the arbitration process.