FINRA Arbitrator Writes Explained Award To Create Precedent

Whether an arbitration award should include reasons, authorities or other explanation remains hotly debated. In securities arbitration, despite pressure from investor advocates to add transparency to the FINRA forum by requiring arbitrators to issue explained awards, FINRA’s current rule requires a panel to include an explanation in an award only upon a joint request from all parties. However, securing this agreement from all disputing parties has proven nearly impossible, with very, very few jointly requested explained awards since this rule was put into place (I believe fewer than ten in almost ten years.)

This past week, one arbitrator on a three-arbitrator panel in Tullis v. Ameriprise Fin. Serv.,  FINRA Arb. No. 16-01261, chose to add an explanation to the award, which his fellow panelists did not join.  The case was, at its core, about whether a brokerage firm’s recommendations to its customers (husband and wife of modest means) were suitable. The panel ultimately found that they were not, and awarded claimants the full amount of compensatory damages claimed –$191,772.00, plus post-award interest at 9%.

After the majority’s brief explanation, Arbitrator Paul Meyer wrote:

While the parties did not request a reasoned decision, this Arbitrator considers that most decisions deserve to be explained in order to create a body of precedent unavailable now that most courts no longer have jurisdiction over most securities litigation. Hopefully, this decision may help contribute to that body of law.

He then wrote an explanation far longer than the brief explanation of the majority panelists, stating “[p]rior decisions, even though not binding, are seldom available because FINRA arbitrators are seldom compensated for writing well-reasoned decisions.”

Arbitrator Meyer seemingly felt compelled to write a lengthy explanation because of the widespread misunderstanding about the state of the law with respect to duties that broker-dealers owe to their customers, and in what circumstances brokers are fiduciaries. He appeared particularly distraught at Respondents’ argument that ““when an account is non-discretionary and control of the account remains with the customer, such as the Claimants’ accounts, the duties owed by a stockbroker to the investor do not constitute a fiduciary relationship.’” Arbitrator Meyer wrote: “This rather widespread idea is not correct,” and then he wrote what he believed to be the state of the law on this topic.  [He dissented from the other two arbitrators only on the issue of what date the assessment of interest begins to run, arguing that it should be the date over a year earlier that the challenged securities were liquidated, not from the date of the award (June 27, 2017).]

I have no doubt that the law regarding broker-dealers’ obligations to customers is widely misunderstood because of the dearth of precedent in an industry where pre-dispute arbitration clauses are omnipresent.  On the other hand, can one arbitrator’s explained award in a sea of unexplained awards create precedent? More importantly, should it?

2 thoughts on “FINRA Arbitrator Writes Explained Award To Create Precedent”

  1. Professor Gross raises some interesting questions about whether FINRA explained awards do, or should, create precedent. I will leave those questions for future debate because there have been so few explained awards to date, notwithstanding the rules permitting them. But i will note that in my view, and the view of the Mediation Subcommittee of the FINRA Task Force which I chaired in 2015-16, the increased use of explained awards would do much to increase transparency in the FINRA dispute resolution process. That is why we recommended that once chairs are trained to be able to write explained awards, the default should be that all awards are explained unless one of the parties opt out. The feeling is that the increased use of explained awards will demonstrate to counsel that they are extremely useful in having clients understand what happened, and that the risk of vacature on appeal to courts will undoubtedly be very low, tracking the experience of the AAA and other organizations that have used explained and reasoned awards for many years. One of the major reasons counsel do not use explained awards now, though they can, is because of the fear of having decisions reversed because the rationale for them is spread on the record. But studies have shown that fear is not justified, so I am hopeful that more and more explained awards will be used, and that we can get to considering Professor’s Gross’s questions before too long about what precedential impact they should have.

  2. I believe the arbitrator was well within his rights to provide the explanation. As a securities litigation and finra arbitration attorney, I have seen written decisions go all over the spectrum from intelligent and well-reasoned, to completely off track and ruling based on a completely irrelevant issue as well known by both sides’ attorneys. The article is correct, that as more securities lawsuits fall under arbitration, there is less to guide the process for future arbitrators and attorneys seeking to advise their clients.

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