Friday, April 3, 2009

FINRA Changing Arbitration Rules on EFL - Note Cases

Once upon a time, securities arbitration was an expedient, fair and cost effective way of resolving disputes in and with the securities industry. Over recent years however, the NASD and now FINRA, have tinkered with the process in so many ways, that the process is becoming seriously flawed.

We just recently had a rule change that created the unprecedented result that a motion to dismiss a complaint can no longer be filed. Yes, if you are named in an arbitration, you are going to file an answer, go through discovery and go to a hearing over the course of the next 18 months, and there is not a thing you can do about it. Not only are you going to carry the allegations on your CRD record for those 18 months, you are going to pay attorneys fees and costs throughout the whole process.

Let's add some insult to that injury. It seems that the process does not move fast enough. Well, it doesn't move fast enough if you are a firm suing the former employee that you forced out of the firm on his promissory note. So, FINRA decided to "fix" that problem, and we now have a proposal to fast track promissory note cases.

You heard it right. FINRA is abrogating its rules to benefit its member firms that are trying to collect on promissory notes. If the broker does not file a counterclaim for a sum in excess of $100,000, the case goes fast-track. Single arbitrator, simplified discovery, quick hearing, bingo, award.

The proposal completely ignores the defenses that a broker has in an promissory note case, and ignores a recurring issue in this cases - fraudulent inducement. FINRA points out that the promissory note case is relatively simple - and it is. UNLESS the broker has a claim for fraudulent inducement - a claim that says you lied to me in order for me to take the position, and fraudulently induced me to accept the position.

Or, a claim by the broker that the firm breached the employment contract related to the promissory note. Branch managers have been known to promise the world when they are recruiting. Sales assistants, access to large accounts, corner offices, additional bonuses, enhanced payouts.

Those claims require discovery, and where the promissory note claim is in excess of $100,000, the broker is ENTITLED under FINRA rules, to a panel of three arbitrators, regardless of the amount of his counterclaim.

Well, no more. If the SEC approves the rule change, there will be little discovery, a single arbitrator and a quick hearing. No fuss, no muss.

And no due process.

The promissory note arbitration rule proposal is at

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