News & Developments
FINRA Expands Pilot Program to Benefit Investors
FINRA (the Financial Industry Regulatory Authority) Dispute Resolution announced in early October that it will expand its pilot program for eligible investors; the program allows investors to strike all industry arbitrators from the three-person panel selected to hear the investor’s case. Typical FINRA cases require panels to include two “public” arbitrators and one “industry” arbitrator, or someone who works in the securities industry. The two-year pilot program, started in 2008, now expands the number of broker-dealer companies who have agreed to participate in the program and the number of cases committed to the program. Broker-dealer firms must agree to participate and commit a number of cases they will place into the program, but the firms have no involvement in which cases actually are submitted to the FINRA pilot program. Instead, eligible investors decide whether to participate.
To be considered eligible, investors must name only a participating firm in their complaint and be entitled to a three-person panel. FINRA expects that the expansion will increase the number of cases arbitrated through the pilot program by nearly 505 to 411. Chase Investment Services, Oppenheimer & Co., and Raymond James Financial Services are the newest participating broker-dealers. Larger broker-dealers such as Citigroup Global Markets, Merrill Lynch and Morgan Stanley Smith Barney, and eight other firms, were the first companies to have agreed to participate. FINRA is monitoring the success of the program based both on the number of investors who elect an all-public arbitrator panel and the different results in awards between the all-public panels and public-industry panels.
Second Circuit Holds That Claims Under SOX Are Arbitrable
On October 2, 2008, the Second Circuit Court of Appeals affirmed a decision of the District Court of Connecticut holding that claims brought under the whistleblower protection provision of the Sarbanes-Oxley Act are arbitrable.
Hall Street Associates, L.L.C. v. Mattel
On March 25, 2008, the U.S. Supreme Court issued its decision in Hall Street Associates, LLC v. Mattel, Inc., holding that the Federal Arbitration Act (FAA) precludes expanding the grounds available for review of arbitral awards by agreement of contracting parties. While the U.S. Supreme Court rejected Hall Street's arguments of an expandable judicial review of arbitration awards by contract under an FAA analysis, it remanded to the district court for consideration other possible authority for the judicial enforcement of arbitral awards independent of the Federal Arbitration Act.
Preston v. Ferrer
On February 20, 2008 the United States Supreme Court issued its opinion in Preston v. Ferrer, where the question presented was whether parties were required to first submit their dispute to a state administrative agency before filing an action in court or submitting the matter to an arbitrator. The controversy between Preston and Ferrer arose after parties had a disagreement about whether certain commissions were owed, and whether the dispute had to be heard in the first instance by a California Labor Commissioner pursuant to a state statute, or whether the dispute should be resolved in arbitration as a result of the parties’ agreement which provided for arbitration pursuant to the rules of the AAA.
In an opinion by Justice Ginsburg, the Court held in an 8-1 decision that when parties agree to arbitrate all questions arising under a contract the FAA supersedes state laws which give primary jurisdiction in another forum such as a state administrative agency. The Preston case therefore reflects the Supreme Court’s continued endorsement and support of the arbitration process and arbitrators’ authority. The opinion is also important because it discusses whether the parties’ incorporation of the AAA’s Rules into their agreement trumps choice of law provisions which might dictate that disputes are resolved in a manner other than arbitration. In connection with that issue, the Court cited to Rule 7(b) of the AAA’s Commercial Arbitration Rules, which states that “[t]he arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a party.” That language, the Court held, infers an understanding among the parties that their dispute would not be heard by the Labor Commissioner pursuant to California law, but instead by an arbitrator.
The opinion also reaffirms a number of other important arbitration law principles that have been previously expressed by the Supreme Court. Specifically, the Court stated that a “recurring question” under the FAA is who decides whether grounds exist to invalidate an arbitration agreement, and that attempts to invalidate agreements as a whole are decided by arbitrators, and not courts, unless the attack is made on the arbitration agreement specifically. This outcome is not impacted where an administrative agency has been designated by state law as the forum where disputes are to be resolved, even if the matter could be submitted to an arbitrator subsequently. In addition, the Court emphasized that state laws cannot conflict with the FAA’s “dispute resolution regime” where they grant jurisdiction to an administrative agency or where they impose prerequisites on arbitration agreements that are not applicable to contracts generally.
