The Basics of Security Arbitration

Securities Arbitration Class
Seton Hall Law School, October 11, 2013
“Hot Topics in Securities Arbitration”
© 2013 by George Friedman, Board Member – Arbitration Resolution
Services, Inc. (no claim to protected works)

Arbitration Resolution Services  Copyright © 2013
Short Bio
 Retired earlier this year as FINRA’s Executive Vice President and Director of
Arbitration, a position held from 1998.
 Previously held a variety of positions of responsibility at the American Arbitration
Association, most recently as Senior Vice President from 1994 to 1998.
 Adjunct Professor of Law at Fordham Law School; teaches course on alternative
dispute resolution since 1996.
 Since early 2013, member of the Board of Directors of Arbitration Resolution
Services, Inc.
 Board of Editors of the Securities Arbitration Commentator.
 Member of Securities Experts’ Roundtable.
 BA, Queens College; JD, Rutgers Law School (Law Review).
 CRCP (Certified Regulatory & Compliance Professional), Wharton-FINRA Institute.
 Admitted in NY and NJ and US Supreme Court.
 Follow me on Twitter @GFriedmanADR and at http://blog.arbresolutions.com
2

A Prediction
“A day of reckoning is coming on predispute arbitration
agreements in consumer arbitration.
“A dichotomy is developing between arms-length pre-
dispute arbitration agreements and those imposed in an
adhesion contract with consumers (and perhaps
employees).
“This will be addressed in the next several years by the
Supreme Court, Congress, the SEC or all.”
- George Friedman –Law Class Lecture at Fordham Law School
…from 2005
3

The Future (2013 - 18)
My bold and fearless predictions for the
future.
You can disagree, but you can’t
definitively say I’m wrong.
Unless you claim to be from the future.
In which case, let’s talk later…
4

The Future (2013 - 18)
And now, let’s go……….
5

The Future (late 2013-18)
6
© 1985; 1990 Universal Pictures, Inc.

The Future: headlines from 2013-2018…
2013-5: Consumer Financial Protection Bureau bans
PDAAs in many types of consumer financial contracts;
SRO arbitration carved out for SEC
2014: FINRA better defines “customer” for arbitration
purposes
2015: SEC acts on predispute arbitration agreements
under Dodd-Frank
2017: Arbitration Fairness Act finally enacted (sort of)
2018: Cloud-based ADR overtakes “Brick-and-Mortar”
2013-18: Supreme Court continues strong support for
arbitration, but this began to shift in 2017
7

2013-15: Consumer Financial Protection Bureau
banned PDAAs in many types of consumer contracts
 Background: Dodd-Frank established a new Consumer Financial
Protection Bureau, required it to study PDAAs in consumer
contracts (section 1028(a)), and authorized it to limit or ban their
use (section 1028(b)).
 By February 2013, CFPB had already banned PDAAs for mortgages
and home equity loans, as Dodd-Frank mandated.
 Later, CFPB banned PDAAs in many types of consumer financial
contracts:
 Car loans, consumer loans, credit card agreements, payday loans, rent-to-
own contracts
 SRO securities arbitration programs were carved out for the SEC
8

2014: FINRA better defined “customer” for
arbitration purposes
 Anticipating that PDAAs might be banned, FINRA in 2014 clarified its
definition of “customer” for purposes of its Rule 12200.
 This rule allows a customer to require a broker to arbitrate disputes arising out
of the business activities of the broker
 After predispute arbitration agreements were banned -- first by the SEC
in 2015 and later by Congress in 2017 -- FINRA Rule 12200 would
become the investor’s only practical way into arbitration.
 There was a huge battle, with the securities industry saying it was unfair
to let investors “cherry pick” which cases to take to arbitration. It called
for the abolition of Rule 12200.
 In the end, FINRA and SEC stuck to their guns and Rule 12200 stayed.
 The securities industry sued FINRA and the SEC (more on that later) .
9

2015: The SEC acted on predispute arbitration
agreements under Dodd-Frank
 Background: Section 921 amended the Securities Exchange Act
of 1934 and the Investment Advisers Act of 1940 to authorize but
not require the SEC to:
 limit or prohibit use of pre-dispute arbitration agreements (PDAAs)
arising under the Federal securities laws, the rules and regulations
thereunder, or the rules 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.”
10

SEC acted on predispute arbitration agreements
under Dodd-Frank (cont’d)
 The Timeline (a/k/a “The Letter of the Month Club”):
 February 2013: Massachusetts's Secretary of the Commonwealth
William F. Galvin urged the SEC to ban PDAAs in brokerage and IA
agreements.
 March 2013: The North American Securities Administrators
Association, the association of state securities regulators, urged the
SEC to act under Dodd-Frank to ban mandatory PDAAs. Repeats
the demand in a May letter to SEC Chair White.
 April 2013: SEC Commissioner Luis Aguilar came out against
mandatory PDAAs in brokerage and investment adviser agreements.
 April 2013: Thirty-seven Democratic Senators and House members
urged the SEC to prohibit brokerage firms from requiring customers to
submit to arbitration.
11

 May 2013: The Public Investors Arbitration Bar Association,
attorneys who represent investors in arbitration, urged the SEC to
ban mandatory PDAAs.
 May 2013: Then-SEC Commissioner Elisse Walter said that the
SEC was unlikely to get to the PDAA issue in 2013 due to other
pressing Dodd-Frank requirements (mandatory rulemaking and
studies).
 May 2013. SEC Chair Mary Jo White responded to the April letter
from the 37 Congressional Democrats. She agreed that mandatory
securities arbitration was “an important issue for investors,” but
echoed Commissioner Walter on timing. She added that the JOBS
Act has similar rulemaking requirements for the SEC.
 February 2014: A consortium of anti-arbitration types produced a
Super Bowl ad featuring….
12

…. Clint Eastwood and an empty chair singing “All we are saying, is
give choice a chance.”
13
© 2013 New Yorker Magazine

…. And this became the group’s logo.
14
Photo © 1971 Warner Brothers, Inc.

So, here’s what happened:
 SEC studied mandatory PDAAs. It started in 2011 and finished in
2014. The rule went into effect in 2015.
 SEC found that securities arbitration was fair for investors.
 After allowing PDAAs in customer-broker contracts since 1987 (McMahon
and Rodriguez), SEC would have been hard pressed to say securities
arbitration was unfair.
 SEC’s Report to Congress cited everything George Friedman had been
saying for years about fairness of the FINRA forum.
 But the SEC’s 2015 rule provided that “perceptions of fairness dictate
that investors have a choice of forum” – that is, going to court or
arbitration.
 Turns out Commissioner Aguilar knew he had the votes.
15

 So, the rule prohibiting brokerage firms and IAs from using or enforcing
PDAAs in customer account agreements was a one-way street. It
preserved FINRA Rule 12200, which gives customers of brokerage
firms the right to take a dispute to arbitration.
 This immediately spurred litigation initiated by the securities industry
against SEC and FINRA over whether FINRA Rule 12200 violates the
“Takings Clause” of the US Constitution.
 Two years later, the industry challenged whether the Franken-Stein
Arbitration Fair Play Act of 2017 (more on that later) trumped Rule
12200 because it was essentially a PDAA, meaning the investor had
no right to require arbitration with their brokers under this FINRA Rule.
 Both matters are still unresolved.
16

2017: The Arbitration Fairness Act was finally
enacted (sort of)
 There were prior failed efforts -- going back at least to 2005 -- to
amend the Federal Arbitration Act (“FAA”) to ban mandatory PDAAs in
consumer, employment, and sometimes franchise contracts and civil
rights claims.
 The FAA – 9 U.S.C. §1 et seq. – is a 1925 federal law enforcing predispute
arbitration agreements and arbitration decisions involving interstate
commerce. It enjoys strong support from the US Supreme Court.
 Even in 2009, when the Democrats controlled the White House and
both houses of Congress (and Barney Frank, an avowed opponent of
PDAAs in consumer contracts, chaired the House Financial Services
Committee), the bills died.
17

The Arbitration Fairness Act was finally enacted (sort of)
 So, here’s what happened:
 AFA was reintroduced in 2013: It was introduced in both houses of
Congress on 5-7-2013 (Franken-S; Johnson –H).
 August 2013: The Investor Choice Act of 2013 (HR 2998) was introduced in
the House by Rep. Ellison (D – Minn.). The bill would prohibit stockbroker
and investment advisory firms from using mandatory PDAAs.
 Hearings were held on both bills in the wake of the Supreme Court’s
decisions in Oxford and Amex.
– Both failed to get out of committee.
 AFA reintroduced in 2015: Failed to get out of committee.
18

The Arbitration Fairness Act was finally enacted (sort of)
 Finally in 2017: Spurred on by George Friedman’s ground-breaking
compromise proposed in an article published in the Securities Arbitration
Commentator in the summer of 2013, the Franken-Stein Arbitration Fair
Play Act of 2017 was enacted.
– after the Democrats regained control of Congress in the 2016 elections
– over the veto of President Christie
 It amended the Federal Arbitration Act to require that:
19

The Arbitration Fairness Act was finally enacted
(sort of)
 in a consumer contract, any predispute arbitration agreement must be
separately signed or clicked by the consumer;
 a consumer cannot be denied goods or services if the consumer
declines the arbitration option;
 in an employment contract that is not individually negotiated, any
predispute arbitration agreement must be separately signed by the
employee;
 a prospective or current employee cannot be denied employment if
the employee declines the arbitration option; AND
 clear procedural fairness guidelines be followed in any consumer
or employment arbitration.
 To avoid Constitutional challenges, the law was prospective. It applied to
contracts entered into or revised after the effective date, but required that
contracts be revised within two years of the effective date.
20

2018: Cloud-based ADR overtakes “Brick-and-Mortar”
Background: Starting in the 1990s, technology improved the way
arbitrations and mediations were processed.
 Early 1990s: The first fax machines and simple email systems were
introduced.
 Mid-1990s:The advent of the web spurs the major ADR providers to
establish web sites.
 Circa 2000: Improvements in technology lead to awards becoming
available online at AAA and FINRA at the dawn of the millennium.
 Mid-2000s: Further improvements in technology lead to online case
filing systems at providers such as AAA and FINRA.
 2008: Digital recording supplants analog taping at FINRA.
 2011: Major ADR providers begin rolling out robust web-based “self-
help” case administration systems.
21

Cloud-based ADR Overtakes “Brick-and-Mortar”
 2012: First mobile ADR apps appear.
 2012: Arbitration Resolution Services, Inc. (ARS) is formed.
 The world’s first cloud-based ADR provider where the entire process can be
completed online.
 2012: JOBS Act passed.
 Allows crowdfunding portals such as Kickstart and Indiegogo to issue stock.
 Requires SEC to write rules first.
 2013: George Friedman retires from FINRA. Joins the ARS Board.
 2013: SEC seeks public comments on its JOBs Act rulemaking.
22

 April 2013: North American Association of Securities Administrators
(“NASAA”) President Heath Abshure says, at the “NASAA, SEC 19(d)
Conference” in Washington:
“Arbitration doesn’t make sense for a $10,000 investment, much less a
$2,000 investment—which is the size contemplated by the crowdfunding
provisions in the JOBS Act.”
 July 2013: ARS EVP and GC Mark Norych files a comment letter with
the SEC pointing out that most disputes arising out of crowdfunding will
be relatively small, and that traditional “brick-and-mortar,” paper-based
arbitration is not a solution. He concludes:
“We urge the SEC to consider rulemaking that establishes an efficient, fair,
inexpensive cloud-based means for resolving crowdfunding disputes.”
 July 24, 2013: Rules go into effect; say nothing about dispute resolution
(17 CFR Parts 230, 239 and 242).
23

So, here’s what happened:
 2013: AAA, FINRA and JAMS launch voluntary web portals that shift
some of the ADR process to an online environment.
 Late 2013: For the first time in recent history, both the stock and bond
markets crash at the same time.
 2014: FINRA is inundated with crash-related claims. Case filings break
the old record of 8,945 set in 2003 in the wake of the “tech wreck.”
 Early 2014: SEC promulgates revised crowdfunding rules. The rules
permit use of arbitration, including PDAAs, but leaves the choice to
investors (foreshadowing what was to come regarding securities
arbitration in general), but require that arbitrations be conducted online.
 Mid-2014: ARS launches the first online ADR platform for crowdfunding
disputes that meets the SEC standards. Case filings soar.
24

 Late 2014: To address the growing post-crash caseload at FINRA, SEC
promulgates a rule giving investors the option of a completely web-
based ADR system for “simplified” cases involving under $50,000.
 Early 2015: ARS launches the first online ADR platform for simplified
disputes that meets the SEC standards. Case filings soar.
 March 2015: A little-noticed provision in the Patient Protection and
Affordable Care Act (a/k/a “Obamacare”), requiring that health insurers
establish external review of claims decisions, leads to massive claims
with nowhere to be filed.
 June 2015: Congress amends Obamacare to give patients the right to
require “expedited online arbitration” of disputed healthcare claims with
their insurers.
 August 2015: ARS launches the first online ADR platform for
Obamacare disputes that meets the Act’s standards. Case filings soar.
25

 Fall 2015: Hurricane Ella devastates the mid-Atlantic.
 Late 2015: Congress, which had to be relocated after the storm, passes
the “Hurricane Ella Relief Act” giving insureds the right to require
“expedited online arbitration” of property-damage claims with their
insurers.
 January 2016: ARS launches the first online ADR platform for
Hurricane Ella disputes that meets the Act’s standards. Case filings
soar.
 2018: Fueled by the explosive growth of ARS’ caseload, cloud-based
ADR case filings for the first time eclipse paper-based filings.
 February 27, 2018: Friedman retires.
 Again.
26

2013-8: The Supreme Court continued its strong
support for arbitration
 The Supreme Court continued its strong support for arbitration:
 continued erosion of the non-arbitrability doctrine
 supremacy of arbitration clauses over class action participation (see Amex)
 strong support of FAA preemption of state anti-arbitration laws
 more restrictions on court review of arbitration awards (see Oxford Health)
 continued impatience with frivolous motions to vacate
 This began to shift in a series of 5-4 decisions after Justice Hillary
Clinton replaced Justice Scalia on the Court in late 2016.
 In 2017 Justice Clinton wrote the majority opinion holding that arbitrators
must apply the law in deciding claims alleging violations of federal statutes
 The Court heard oral argument five years from now in 2018 in SIFMA
v. SEC and FINRA, a case dealing with the securities industry’s
challenge to FINRA rule 12200.
 I had to head back to 2013 before the case was decided. Sorry
27

In conclusion
 Like the scene at the end of Back to the Future III:
“The future hasn’t been written yet.
No one’s has.
Your future is whatever you make it.
So make it a good one.”
 In my case, it turned out joining the Board of Arbitration Resolution
Services was a good move.
 In 2018, after ARS went public, I traded in my Chevy Volt for…
28

In conclusion (cont’d)
05/02/2018
29
A Tesla Model S!

In conclusion (cont’d)
See you in the future!
30

The Basics of Security Arbitration

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Destacado

Destacado (12)

Similar a The Basics of Security Arbitration

Similar a The Basics of Security Arbitration (20)

The Basics of Security Arbitration

Notas del editor