Virtual Arbitrations Before FINRA: An Update and a Look Forward

Current Status of FINRA Hearings

In March 2020, FINRA barred in-person arbitration hearings due to COVID-19 concerns. A year later, as the pandemic dragged on into its second year, investor advocates began to push for the return of in-person hearings. In support of its position, the Public Investors Advocate Bar Association (PIABA) argued that a number of trial courts and two major arbitral forums had begun conducting in-person hearings. It also noted that panels were then denying roughly 30 percent of contested motions for a Zoom hearing. In connection with this issue, PIABA argued that claimants “should have the right to proceed with a video conference hearing if they request one,” presumably even over an objection by the respondent and without a decision by the panel.

In response to improving conditions across the country (and likely sensitive to the criticism received from investor advocates), FINRA lifted its total bar on in-person hearings for most locations in early July of 2021. As of August 2, 2021, all hearing locations were reopened for in-person proceedings. And all locations have remained open despite the recent surge in cases caused by the Omicron variant.

Since October 2021, FINRA has required all hearing participants to be fully vaccinated in order to attend in-person hearings. This includes all parties, counsel, arbitrators, and witnesses. FINRA recognizes an exception for participants with circumstances that prevent them from being vaccinated. Those individuals can instead provide proof of a negative COVID-19 test within 72 hours of the start of the hearing or mediation and every 72 hours during the course of the hearing or mediation.

FINRA also enforces a number of protective protocols, including selecting venues large enough to allow for social distancing and mask requirements. Reports from practitioners suggest that the measures are cumbersome, unwieldly, and somewhat of a distraction. As the Omicron variant (hopefully) continues to recede and the science around the virus and its transmission develops, presumably FINRA will take efforts to improve its protocols.

Of course, FINRA has also pivoted to allow for full, final evidentiary hearings held virtually via the Zoom platform. As FINRA notes in its Arbitrator Resource Guide for Virtual Hearings, hearings may be held virtually “upon request of the parties or order of the Panel[.]”

Once a virtual hearing is set, FINRA staff works with the arbitrators and parties to schedule the virtual hearing, provide technical support, and offer general guidance. As part of this effort, FINRA offers a number of additional resources, including its Arbitrator Resource Guide for Virtual Hearings, Arbitrator Training Videos for Virtual Hearings, and Neutral Workshop: Tips for Virtual Hearings.

FINRA has also started breaking down its award summaries between fully in-person hearings and virtual hearings. For 2021, FINRA reports that panels issued awards in 46 customer cases decided on the merits after a full in-person evidentiary hearing. Panels awarded some measure of damages in 22 of those cases (48 percent). In 2020, panels heard just 34 such cases and issued awards to claimants in exactly half of those cases.

With respect to customer cases heard virtually—or, more accurately, cases in which one or more evidentiary hearing sessions were held via Zoom—FINRA reports 136 such cases in 2021, up significantly from 30 in 2020. Claimants secured some amount of recovery in 60 of the 2021 cases (44 percent) and in 12 of the 2020 cases (40 percent).

In early 2022, FINRA announced two pilot programs relating to the administration of prehearing conferences via Zoom. In the first program, which is limited to cases being administered by the Boca Raton, Chicago, and New York FINRA Regional Offices, prehearing conferences on discovery motions and motions to dismiss will be heard on Zoom with video. All other prehearing conferences will be on Zoom with audio only. In the second, all prehearing conferences held in cases out of the Los Angeles Regional Office will take place on Zoom with video.

Where Are We Going?

FINRA has described its virtual hearing services for conducting video and telephonic hearings and sharing documents remotely as high-quality, secure, and user-friendly. I think this is generally a fair description, based on my firsthand experience. And based on this success and the presumed post-COVID landscape, it seems very likely that virtual hearings will remain an option to parties moving forward. What exactly that process will look like and what changes will be made are not as clear.

With respect to possible changes to the arbitration process, FINRA has not publicly engaged in any regulatory process initiating potential rule changes or officially sought input indicating that it is planning to do so. However, in addition to the prehearing conference pilot programs, FINRA has convened a Zoom task force of practitioners to consider improvements to its processes and the manner in which it is conducting virtual hearings. As noted by Richard Berry, executive vice president of FINRA’s Dispute Resolution Services, on a May 2021 episode of the FINRA Unscripted podcast, FINRA convened the Zoom task force to “improve the process” and “look at ways to use Zoom in new and better ways.”

Below are a few thoughts on a number of potential issues that FINRA should attempt to address moving forward:

• As noted above, virtual hearings are currently available at the joint request of the parties or by order of the panel. Unsurprisingly, PIABA has made clear that it would like for claimants to receive a virtual hearing upon request, including, presumably, one based simply on personal preference.
• If FINRA continues to require a panel order absent agreement of the parties, will FINRA establish criteria for use in deciding motions seeking virtual hearings? Possibilities could include COVID or other health-related concerns; amount in controversy; scope of documents to be entered into evidence; complexity of case; number, location, and availability of witnesses; travel restrictions; and guidance from the Centers for Disease Control or other governmental guidance.
• For cases being heard in person, parties often seek to have witnesses appear by telephone or virtually. In such cases, will FINRA offer guidance to arbitrators trying to determine whether or not a witness should be ordered to appear in person?
• How will FINRA modify its COVID precautions for in-person hearings and vaccination requirements as circumstances change and our knowledge about the virus continues to develop? How quickly will it respond to these developments?
• Can FINRA refine the process for submission of exhibits? Currently, exhibits are uploaded to the portal. However, the use of hard copies of exhibits and notebooks has long been a standard practice that retains some value even in a virtual hearing.
• I recently started a FINRA arbitration via Zoom in which the panel, claimant, and some witnesses were on Pacific time. Along with my client, my colleagues and I were on central time. And one of the key witnesses was on eastern time. Is it fair to expect that witness will be on the stand past 9:00 p.m.? Should panels be given guidance in similar circumstances?
• As any practitioner is surely aware at this point, Zoom fatigue is a real issue. Are built-in breaks enough to address this issue, particularly in complex cases that might take weeks to try?
• Hackers and bad actors are actively trying to steal the financial information of the general public. It seems only a matter of time before they turn their attention to FINRA’s Zoom platform. Are the security measures in place sufficient to combat these efforts? What happens if there is a breach?
• Will FINRA adopt different procedures for virtual hearings in smaller cases as it has already done with simplified and “special proceeding” cases?
• Are adjustments needed to hearing session fees? Or should distinctions for fees be drawn between hearings held in person or virtually?
• How will FINRA’s pilot programs discussed above be received? Will Zoom with video become the default for prehearing conferences and other hearings previously held via telephone?
• Should arbitrators be able to opt out of either in-person hearings or virtual hearings? Can this be done prior to submission of ranking forms? Should arbitrators be required to disclose their position on attendance in person or willingness to hear cases via Zoom?
• What consequences will arbitrators face if they are unable or unwilling to effectively use the Zoom platform?
• How might the move to Zoom for at least some hearings affect FINRA’s efforts to increase the diversity of its arbitrator pools, either positively or negatively?
• Will efforts be needed to address concerns relating to unequal access to technology, particularly with respect to Wi-Fi?
• A number of special circumstances could require consideration in a virtual hearing. For instance, the use of translators could be made more difficult via Zoom. Or parties to the arbitration whose vision or hearing is impaired might benefit from an in-person hearing. How are panels to take these issues into consideration?

Conclusion

As FINRA noted in a recent issue of Neutral Corner, “[t]he pandemic forced the world to re-evaluate how it works in a number of ways—and FINRA DRS is no exception.” Time will tell how successful FINRA is in its efforts to look at “at lessons learned, tips for practicing in a remote environment and plans for the future of arbitration and mediation.”

Josh Jones is a principal with Bressler, Amery & Ross, P.C., in Birmingham, Alabama. 

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