The Financial Industry Regulatory Authority (FINRA) has postponed in-person arbitration hearings and mediations through January 1, 2021. The latest FINRA administrative postponement follows the health crisis’ evolving nature and affects all active cases scheduled for a hearing before a FINRA arbitration panel through that date. In response, customers have sought to hold virtual securities arbitration hearings via Zoom. The goal of these customer requests is to avoid unnecessary delays and resolve their claims in a timely manner by keeping their original hearing dates on the calendar. Virtual hearings are particularly critical for elderly investors or investors in poor health. Yet, arbitration panels have denied investors’ requests for a virtual arbitration hearing in 27% of cases. That means that almost 3 in 10 investors who wished to proceed with a virtual hearing were prevented from doing so. FINRA should take bolder action, and as an equitable forum, it should act to address this uneven disposition by arbitration panels, which unfairly prejudices nearly a third of investors. FINRA should amend its rules and automatically convert in-person hearings canceled due to COVID-19 to virtual hearings.
Seventh Circuit Court of Appeals Precedent and the Potential for Indefinite Delays
There is already precedent out of the Seventh Circuit Court of Appeals in favor of virtual hearings. Clunkier than an in-person hearing? Sure. But both sides will deal with logistical challenges, ruled a Federal Judge. There is no unfair prejudice to either party in holding a hearing on Zoom. The way the system is currently set up, motion practice is required. Both the Claimant and the Respondent present their arguments for or against holding a virtual hearing, and the arbitration panel then issues its order. A uniform solution by the regulator, albeit a temporary one, seems better than arbitration panels granting some motions for virtual arbitration hearings while denying others. It makes little sense, particularly at a time of uncertainty and health risks for everyone involved in the process.
These motions should all be granted at least until FINRA can resume safe in-person hearings.
Other Considerations
Investors currently face volatility in the stock market, partially tied to whether a stimulus deal will be reached before the election. Investors should consider whether brokers and broker-dealers are ignoring the real risks associated with a delayed economic recovery on Main Street. A resurgence or second wave of the virus further threatens investors.
The pandemic has also increased instances of investment fraud. Both FINRA and the Securities Exchange Commission (SEC) have warned investors about increased risks of fraud and taken disciplinary action against investment firms and individuals for securities violations. These violations range from unsuitable trading to concentration in high-risk products. MarketWatch reported that the SEC saw a whopping 45% surge in investor complaints between March 15 and June 15, 2020. It typically receives between 17,000 and 20,000 such complaints in a year.
FINRA customer complaints will likely soar in the coming months. How does the failure to adopt a virtual hearing standard play out in the context of cases that have not yet been filed? How does this affect the roster of arbitrators who may have to travel for an in-person hearing? FINRA has a goal of scheduling hearings within nine months or less of the initial pre-hearing conference. It is not implausible that some FINRA locations may not be safe to reopen based on health guidelines in nine months. What framework are those investors who bring a claim now working with? Or do they simply have to hope for the best, like 3 out of 10 investors today, with some uncertain and unknown future arbitration date?
The COVID-19 pandemic has altered the way we do things in the securities arbitration field. Zoom videoconferences with colleagues and clients have become the norm. Investors with active claims pending resolution through FINRA deserve better. Investor protection – one of FINRA’s primary goals – should also include implementing effective practices aimed at swiftly resolving customer claims.