- 1. Securities Experts Roundtable Annual Conference, Boston, MA,
August 2-3, 2013 Kickoff Address: A Report from the Future
Securities, Consumer and Employment Arbitration 2013 by George
Friedman, Board Member Arbitration Resolution Services, Inc. (no
claim to protected works)
2. Arbitration Resolution Services Copyright 2013 Short Bio
Retired earlier this year as FINRAs 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. 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. 2 3. Arbitration Resolution Services Copyright
2013 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 4.
Arbitration Resolution Services Copyright 2013 The Future (2013 -
18) My bold and fearless predictions for the future. You can
disagree, but you cant definitively say Im wrong. Unless you claim
to be from the future. In which case, lets talk later 4 5.
Arbitration Resolution Services Copyright 2013 The Future (2013 -
18) And now, lets go. 5 6. Arbitration Resolution Services
Copyright 2013 The Future (late 2013-18) 6 1985; 1990 Universal
Pictures, Inc. 7. Arbitration Resolution Services Copyright 2013
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) 2013-18: Supreme
Court continues strong support for arbitration but this began to
shift in 2017. 7 8. Arbitration Resolution Services Copyright 2013
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 9.
Arbitration Resolution Services Copyright 2013 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 investors 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 10. Arbitration Resolution Services Copyright 2013
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 11. Arbitration Resolution
Services Copyright 2013 SEC acted on predispute arbitration
agreements under Dodd-Frank (contd) 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. April 2013: SEC Commissioner Luis Aguilar came out
against mandatory PDAAs in brokerage and investment adviser
agreements. 11 12. Arbitration Resolution Services Copyright 2013
SEC acted on predispute arbitration agreements under Dodd-Frank
(contd) April 2013: Thirty-seven Democratic Senators and House
members urged the SEC to prohibit brokerage firms from requiring
customers to submit to arbitration. May 2013: The Public Investors
Arbitration Bar Association, attorneys who represent investors in
arbitration, urged the SEC to ban mandatory PDAAs. May 2013: SEC
Commissioner Elisse Walter said that the SEC was unlikely to get to
the PDAA issue in 2013. February 2014: A consortium of
anti-arbitration types produced a Super Bowl ad featuring. 12 13.
Arbitration Resolution Services Copyright 2013 SEC acted on
predispute arbitration agreements under Dodd-Frank (contd) . Clint
Eastwood and an empty chair singing All we are saying, is give
choice a chance. 13 2013 New Yorker Magazine 14. Arbitration
Resolution Services Copyright 2013 SEC acted on predispute
arbitration agreements under Dodd-Frank (contd) . And this became
the groups logo. 14 Photo 1971 Warner Brothers, Inc. 15.
Arbitration Resolution Services Copyright 2013 SEC acted on
predispute arbitration agreements under Dodd-Frank (contd) So,
heres 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. SECs Report to Congress cited everything
George Friedman had been saying for years about fairness of the
FINRA forum. But the SECs 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 16. Arbitration Resolution Services Copyright
2013 SEC acted on predispute arbitration agreements under
Dodd-Frank (contd) 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 the
SECs rule, meaning the investor had no right to require arbitration
with their brokers under FINRA Rule 12200. Both matters are still
unresolved. 16 17. Arbitration Resolution Services Copyright 2013
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 18.
Arbitration Resolution Services Copyright 2013 The Arbitration
Fairness Act was finally enacted (sort of) So, heres what happened:
AFA was reintroduced in 2013: it was introduced in both houses of
Congress on 5-7-2013 (Franken-S; Johnson H). Hearings were held In
the wake of the Supreme Courts decisions in Oxford and Amex. It
failed to get out of committee. Reintroduced in 2015: AFA failed to
get out of committee. Finally in 2017: spurred on by George
Friedmans 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: 18 19. Arbitration
Resolution Services Copyright 2013 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. 19 20. Arbitration Resolution Services
Copyright 2013 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 June 2018 in SIFMA v. SEC and
FINRA, a case dealing with the securities industrys challenge to
FINRA rule 12200. I had to head back to 2013 before the case was
decided. Sorry 20 21. Arbitration Resolution Services Copyright
2013 In conclusion Like the scene at the end of Back to the Future
III: The future hasnt been written yet. No ones 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 2015 I traded in my Chevy Volt for 21 22. Arbitration
Resolution Services Copyright 2013 In conclusion (contd) 05/02/2015
22 A Tesla Model S! 23. Arbitration Resolution Services Copyright
2013 In conclusion (contd) See you in the future! 23