The Washington, D.C.-based Financial Industry Regulatory Authority’s (FINRA) dispute-resolution task force issued a report on Wednesday recommending that self-regulatory organization (SRO) needs to invest more in its adjudicators and improve the transparency of its decisions. However, the task force could not agree on whether arbitration should remain mandatory.
The FINRA task force’s report features 51 recommendations for improving the securities arbitration system. It calls on FINRA to invest more heavily in the arbitrators that hear client/investment industry disputes and to enhance the transparency of the system by routinely producing written explanations for their decisions.
“It is the unanimous, strongly held opinion of the task force that the most important investment in the future of the FINRA forum is in the arbitrators,” the report says. “The task force has concerns that the arbitrators’ below market rate compensation acts as a disincentive in the recruitment of arbitrators and in the commitment of substantial time by arbitrators in executing their responsibilities.”
Among other things, the FINRA task force’s report calls for an increase in arbitrator honoraria to $500 a session from $300 and to $1,000 a day from $600. The task force also makes several recommendations relating to the recruitment and training of arbitrators.
In the report, the task force also says that it believes that the writing of explained decisions is the second most important category of recommendations that it’s making, “because the availability of explained decisions would improve the transparency of the forum.” Although the report calls for a default to written decisions, it notes that this would require further training.
The report also tackles the issue of mandatory arbitration, noting, that “[t]he mandatory nature of SRO securities arbitration is a defining characteristic of the process that engenders controversy about its fairness.”
However, the task force was not able to reach a consensus on whether arbitration should be mandatory. Nevertheless, it concluded that “the debate over mandatory securities arbitration is, to a large extent, a philosophical or policy question about which thoughtful, informed individuals disagree and which the task force cannot settle. The task force, therefore, decided that it was a better use of its limited time and resources to focus on the current system of FINRA arbitration and propose recommendations to improve it.”
These proposed changes “will entail significant costs,” the task force’s report notes, which will be passed on to the users of the system.
FINRA’s standing advisory committee on the arbitration system will review the task force’s recommendations. It will make recommendations on reforms that could be implemented immediately; those that will require further discussion; and items that may not be feasible.
“FINRA convened the task force from a diverse group — representing a broad range of viewpoints — to look at all aspects of dispute resolution between investors and brokers,” says Richard Ketchum, FINRA’s chairman and CEO, in a statement. “It is clear from the report that [the task force] did a tremendous job examining all of the key issues and made important recommendations that will better position the forum in the long term.”