Prehearing Issues Raised by Virtual Hearings of FINRA Arbitrations

The Financial Industry Regulatory Authority (FINRA) has made significant changes to the arbitration process in response to the COVID-19 pandemic. On March 25, 2020, FINRA initially postponed all in-person arbitrations scheduled through May 31, 2020. Subsequent announcements have extended these adjournments through April 30, 2021, unless all parties and arbitrators agree to proceed via an in-person hearing. FINRA has indicated that it is reviewing whether or not to resume in-person hearings on a location-by-location basis and will do so “when public health conditions would permit[].”

As an alternative, FINRA notes that arbitration hearings may proceed “telephonically or by Zoom when the parties stipulate to such an approach or the arbitration panel orders it.” In addition to FINRA staff providing technical support and resources, FINRA has provided parties and arbitrators several resources, including an Arbitrator Resource Guide for Virtual Hearings, Arbitrator Training Videos for Virtual Hearings, and Neutral Workshop: Tips for Virtual Hearings.

FINRA has recently touted the success of its move to a virtual platform. Richard Berry, director of FINRA’s Office of Dispute Resolution, was quoted in Financial Advisor IQ as noting that FINRA has received positive feedback from both plaintiff’s counsel and respondent’s counsel, as well as arbitrators who have participated in Zoom proceedings thus far. They have expressed their desire that we continue to offer Zoom hearings after the pandemic. I think it’s fair to say Zoom is here to stay. We believe Zoom will be a popular option post-pandemic.

Time will tell if Zoom is the “new normal” or if post-COVID hearings will largely return to the in-person format with which parties and arbitrators are most familiar.

Considerations in Deciding Whether to Proceed Virtually

As adjournments have continued to be extended, parties appear to have become somewhat more comfortable proceeding via Zoom. Counsel for both respondents and claimants have taken a variety of positions on proceeding virtually, including objecting as a matter of course in every case, objecting or consenting on case-by-case basis, allowing presumptive consent, and refusing consent or not affirmatively objecting.

As an initial matter, panels are generally granting motions to proceed via Zoom, though a significant number of such motions are also being denied. FINRA has provided the following statistics through the end of 2020 in cases in which a panel has ruled on a motion to proceed via Zoom:

While 69 percent of motions to proceed via Zoom have been granted overall in customer cases, this percentage is trending downward. The percentage peaked at 76 percent in August and, looking only at the last three months of 2020, was down to 63 percent. Parties are presumably giving consideration to a number of factors in determining whether or not to agree to a request to proceed virtually. These could include the following:

• witness issues, including the number of potential witnesses and their availability to appear virtually or in person (or both);
• concerns with particularly complex or unique cases such as multi-claimant cases, product cases, and document-intensive cases, including past experience with such issues in similar cases;
• claimed damages;
• makeup and preference of the panel;
• concerns with resetting in-person hearings and the potential resulting case crunch;
• potential waiver of possible grounds for vacatur; and
• global strategic considerations, including whether consent might be used against the firm or counsel (or both) in later cases.
  But it seems likely that the parties’ most obvious consideration is whether or not they believe their likelihood of success is affected by proceeding virtually.

FINRA does not provide statistics on awards in cases heard virtually. However, our firm has been closely tracking this information through the awards published on FINRA’s website. As of the end of 2020, a total of 40 awards were released that involved at least one virtual hearing session (31 fully virtual and 9 partially virtual). Those 40 cases comprise 24 customer claims and 16 industry claims. Of the customer cases, 17 (71 percent) resulted in a complete denial of the claims. The success rate was just the opposite for industry claims: 11 (69 percent) resulted in damages being awarded to the claimant. Additional details on these results can be found in our earlier Law360 article and November 23, 2020, update. Securities Litigation & Consulting Group, an expert witness firm that often testifies on behalf of investors bringing claims in FINRA arbitration, has provided additional analysis and commentary that may be of interest to practitioners.

Potential Objections to Motions to Proceed Virtually

As outlined above, panels are denying motions to proceed virtually in roughly a third of the cases in which they are filed. Here are some of the arguments being made in opposition to such motions:

• There are practical objections regarding the number of witnesses, the complexity of the case, and other factors that would make proceeding virtually particularly difficult or unwieldy based on the facts of and parties to a particular case.
• Arguably, FINRA panels may lack the authority to order the parties to proceed via Zoom under the FINRA rules or the parties’ contractual agreement to arbitrate.
• A party’s right to a fair hearing includes the ability to confront accusers and be given the opportunity to fully present its case. The Public Investors Advocate Bar Association has acknowledged that in-person hearings are better suited to ensuring that the parties have a full opportunity to do so. This discussion could also include potential psychological grounds for concern about the effectiveness of virtual presentations, including screen fatigue and “Zoom gloom.”
• Potential security risks associated with a virtual hearing generally and with the Zoom platform specifically could warrant the denial of a motion. This is particularly true in cases with significant amounts of personal and confidential information, which firms are obligated to protect under Gramm-Leach-Bliley and other laws and regulations.
• Parties can argue for a lack of prejudice in cases in which a hearing is being rescheduled quickly. In particular, current vaccine distribution could suggest that in-person hearings can resume sooner than might have been hoped a few months ago. Factors weighing against this argument could include elderly witnesses, expedited case treatment, multiple adjournments, and the inability of the parties, counsel, or the panel to reset the hearing in a timely manner.
• In certain jurisdictions, parties cannot subpoena third parties to appear by video. See Managed Care Advisory Grp., LLC v. CIGNA Healthcare, Inc., 2019 WL 4464301 (11th Cir. Sept. 18, 2019). Third-party testimony must be in person. In cases in which a key witness is neither a party nor registered with FINRA within the last two years, this line of cases would preclude a party from going to federal court to seek a subpoena requiring such witnesses to testify at a virtual hearing.

A few virtual hearing issues have also been raised in litigation in connection with potential temporary restraining orders as well as on vacatur. As with any arbitration, courts appear to be reluctant to restrain an ongoing arbitration. Attempts to do so have been made in at least one customer case and with respect to an ongoing disciplinary proceeding. See Legaspy v. Fin. Indus. Regulatory Auth., Inc., No. 20 C 4700, 2020 WL 4696818 (N.D. Ill. Aug. 13, 2020); Alpine Sec. Corp. v. Fin. Indus. Regulatory Auth., No. 2:20-cv-00794 (D. Utah Aug. 12, 2020) (request withdrawn). Neither was successful in their initial efforts, though litigation is ongoing in both. As noted by the Legaspy court, parties seeking to enjoin an ongoing arbitration have a high burden in establishing irreparable harm and a likelihood of success on the merits.

With respect to vacatur, parties face a similar uphill climb. In one vacatur petition arising from a FINRA arbitration held in part via Zoom, the respondent argued that the arbitrators were guilty of misconduct in typing and eating during the course of the presentation, blocking a screen, walking away from a screen, and appearing to be inattentive and not following the proceedings. Though apparently not at issue in that case, other potential grounds for vacatur could include cases involving (1) the inability to compel the attendance of important witnesses virtually such that it constituted refusal to hear evidence pertinent and material to the controversy under 9 U.S.C. § 10, (2) refusal to postpone the hearing upon sufficient cause shown, and (3) the panel’s inability to consider evidence presented virtually to such a degree that it prejudiced the rights of a party.

Conclusion

A host of factors come into play when deciding how to approach FINRA hearings in a COVID world. While many have reported positive experiences with Zoom hearings, the praise is certainly not universal, and a number of potential pitfalls surround the option to proceed virtually. To best navigate these mostly uncharted waters, parties, arbitrators, and counsel must stay up to date on the ever-changing landscape of issues that span health, technological, legal, and practical matters.

This article originally appeared in American Bar Association’s Alternative Dispute Resolution section on March 15, 2021.

Joel Everest

Joel Everest devotes the majority of his practice to defending brokerage firms, RIAs, and financial professionals in regulatory investigations and customer-filed claims in court and arbitration. He has handled matters in more than half of the states, Washington D.C., and Puerto Rico related to all manner of securities issues and virtually…

Josh Jones

Josh Jones' priority is making his clients’ work lives easier. His main goal is to provide effective, efficient, and quality legal work with no surprises, prompt responses, regular updates, accurate budgeting, and sound strategy to help each client meet their internal obligations. Brokerage firms, investment advisers, and other financial institutions…