Subject: File No. SR-FINRA-2014-028
From: Richard P. Ryder, Esq.
Affiliation: President, Securities Arbitration Commentator, Inc.

July 24, 2014

July 24. 2014

Thank you to the Commission for offering this opportunity to comment on the above FINRA proposal. I have seen the impact of comments from the public on the Commissions deliberations in past rulemaking matters and FINRA, too, may be influenced, despite its belief in what it has proposed, by the suggestions and points that commenters express during this process. I appreciate the privilege and hope that my comments have value.

I write to urge the Commission to decline approval of the current FINRA initiative to, once again, reduce its Public Arbitrator ranks without conducting and disclosing a cost-benefit analysis that will show the effects of this further exclusion of an unknown number of Public Arbitrators. The Commission is subject to statutory requirements that require it to do fact-finding and quantitative analyses before it engages in rulemaking. As FINRAs rules require this Commissions approval, and such approval gives FINRA rules a status equivalent in some ways to federal law, I see no reason why FINRA should not be held to similar standards. With respect, I also cannot understand how the Commission would proceed without having the information it truly needs to make a fair evaluation of this proposals impact.

I think it quite possible that the adoption of these new restrictions on who qualifies as a Public Arbitrator, combined with FINRAs persistent move towards making the Non-Public Arbitrator a diminishing presence in its arbitrations, will render FINRA a forum that is less able to handle increased caseloads effectively, especially in customer disputes. I think this, but I cannot demonstrate it to the Commission, because FINRAs proposal is devoid of quantitative data to permit such an analysis. That leaves commenters – and, presumably, the Commission -- without the tools it needs to gauge whether this change will decimate the Public Arbitrator ranks and deprive FINRA of the human capital it requires to function with speed and efficiency.

Lets look at the facts we know (since FINRA supplies no data). FINRA is proposing to adopt a rule change that will pull arbitrators from its Public Arbitrator ranks and move them into the Non-Public category. It is also proposing that Public Arbitrators who have had any industry experience at all in their backgrounds be re-classified as Non-Public Arbitrators. FINRA has previously tightened the definition of who may be a Public Arbitrator several times in past rulemaking and, on other recent occasions, it has imposed training and background check requirements that have caused Public Arbitrators to drop off the roster or to become disqualified. Whereas FINRA once had 9,000 arbitrators on its roster, it now has 6,398.

Understand that, of those 6,398 arbitrators, only 3,562 are classified as Public Arbitrators. In more than 80% of the arbitrator appointments FINRA will make in the coming year, the forum will be restricted to appointing a Public Arbitrator. The opportunity for Non-Public Arbitrators, even now, to serve on FINRA panels has diminished by more than half in recent years. This has been a phenomenon of the aughts and of growing concern to those who support SRO arbitration (see, generally, SAC 2008-03, Disappearing Non-Public Arbitrator).

With the steady uptick in the public markets since 2008, case volume at FINRA, especially on the customer side, has subsided considerably. In 2013, only 3,714 cases were filed, compared to 7,137 in 2008 and almost 9,000 in 2003. While all cases that enter FINRAs docket are not decided by arbitrators, the large majority of cases need to be empaneled. We do not know the percentage, because FINRA does not say, but it does report that about 84% of its cases are settled between the parties or decided by a panel. Since most settlements occur late in the case, the ranking and appointment of arbitrators occurs prior to resolution much more frequently than not.

In 2013 – again, one of FINRA Arbitrations slowest years – FINRA reports that 1,028 arbitral decisions were issued by its arbitrators. Some 236 of those were classified as Simplified Arbitrations (using one Public Arbitrator per case) and 235 were customer cases that generally required three arbitrators. Thats as much as FINRA provides in its public reports, but, from that alone, one can tell that FINRA needs between 1,498 and 2,612 arbitrators just to empanel cases that will be adjudicated. Add to that another couple thousand cases that need to be empaneled in order to proceed and one can see the pressures that probably already delay hearings – in a slow year

Is the Commission aware that FINRAs meager caseload has sufficiently stymied its operations, so that it now takes 18.7 months on average for a case to be heard by a panel and decided (that excludes the paper or on the documents decisions)? That figure has reached almost 20 months in recent times and has risen from 16.6 months just two years ago. The staff points out that parties and arbitrators control the timing of a case, but have parties and arbitrators changed their habits dramatically? We suspect, but are unable to know from the information FINRA discloses, that arbitrator shortages are already impacting the average turnaround times, not only for decided cases, but for all cases (ATTs for cases Overall and for Simplified Decisions have also risen, albeit less dramatically).

It should begin to be evident why more data and analysis from FINRA is necessary. The forums performance – its ability to deliver services – may be at stake in permitting FINRA, in the name of investor protection, to further cull arbitrators from the ranks of that classification most likely to be deployed in servicing disputes. FINRA has posted on a monthly basis the number of Public Arbitrators on its national roster and, despite sincere, costly, and vigorous efforts to recruit arbitrators, that number has been stubbornly stagnant. It was 3,584 in January 2013 and 3,567 in January 2014. What cannot be measured from the available data is, in how many of its 80-plus hearing locations, FINRA is suffering an acute shortage of Public Arbitrators.

We know that, when the Morgan Keegan RMK Fund cases hit, FINRA was unable to empanel cases in many of its hearing locations in the South and Midwest without recruiting arbitrators from other hearing locations. We know, too, that FINRA had a roster in the single digits in Puerto Rico, when the recent surge occurred in Puerto Rico bond disputes. This is not to say that FINRA did not make near-Herculean efforts to address those shortages, but the shortages did cause delays. One needs to understand that 3,562 Public Arbitrators are not available for each case that requires empaneling. Only those Public Arbitrators in the city where the dispute may be heard are available for empaneling.

Perhaps, the Morgan Keegan and Puerto Rico cases were one-off instances and not representative, but one cannot know without data. NASD Arbitration used to make publicly available its roster numbers by hearing location, broken out by Public and Non-Public Arbitrators. This helped recruiting efforts and allowed practitioners to understand where shortages lay. FINRA does not make that information public any longer. Yet, there are increasing indications that shortages in some, perhaps many, hearing locations are affecting forum performance. Should FINRA in these circumstances be proposing rules and re-definitions that will worsen its performance?

These definitional revisions FINRA is proposing are not necessary they may be desirable, but they are not critical to FINRAs mission. What is critical is optimal performance in processing cases on a timely basis and optimal competence in the corps of people who decide cases. FINRA is refining what it views as an ideal here and it should not be permitted to indulge in that cosmetic exercise if the results could be inimical to the forums true mission. Of course, I cannot say that it will be, but I urge the Commission to put FINRA to the test.

FINRA should be required to report how many Public Arbitrators will be lost by making the changes it proposes. It should be required to assess in what hearing locations those losses will occur. If they are in a busy hearing location that is currently under stress from arbitrator shortages already, that factor should be calculated and evaluated. If the losses will occur in smaller hearing locations that already have too few arbitrators, should FINRA suspend the use of that hearing location until recruiting efforts make it operationally fit to service investor-disputants? Such data and considerations should be taken into account in deciding whether these changes will benefit users of the forum or whether they will actually detract from forum performance, overall turnaround times, and the forums attractiveness to investors with disputes.

Investors perceptions of fairness do not always improve through exercises in looking more innocent perceptions of fairness have all to do with expectations of justice and those expectations, when it comes to arbitration, are rooted in real factors that relate to performance and quality of decisionmaking. There are indications that these changes will, if approved, cause arbitrator shortages. The Commission should require FINRA to develop and evaluate the data that will demonstrate the real costs of proceeding to approval.

Respectfully submitted,

Richard P. Ryder, Esq.
(Past NASD Director Arbitration Litigation Manager, PaineWebber President, Securities Arbitration Commentator, Inc.)