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<xTITLE>FINRA DRS Postpones In-Person Hearings through April. Are Virtual Hearings Driving Down Customer Recoveries? These Researchers Say “Yes”</xTITLE>

FINRA DRS Postpones In-Person Hearings through April. Are Virtual Hearings Driving Down Customer Recoveries? These Researchers Say “Yes”

by George Friedman
February 2021 George Friedman

This article first appeared on the Securities Arbitration Alert ('SAA') blog, here.

FINRA’s Office of Dispute Resolution Services (“DRS”) has again administratively postponed all in-person arbitration and mediation hearings, and a new report – not from FINRA – concludes that virtual hearings may have harmed investor recovery rates.

The February 5 FINRA announcement on in-person hearing postponements now includes hearings through April 30; the previous date was April 2. The Authority also tweeted the news on February 8, stating: “We're postponing all in-person arbitration and mediation proceedings scheduled through April 30, 2021 unless the parties stipulate to proceed telephonically or by Zoom or the panel orders that the hearings will take place telephonically or by Zoom.” As was the case before, the DRS Website notice adds: “Please note that postponing a hearing will not affect other case deadlines. All case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise.” The updated announcement offers fee waivers for stipulated postponement of hearings set through July 31, 2021. Why the latest date pushback? Says DRS: “Currently, none of the 69 hearing locations demonstrate public health conditions that are consistent with CDC guidance for activities such as in-person hearings.”

Are Virtual Hearings Driving Down Customer Recoveries?

In March, it will be a year since the COVID-19 pandemic drove FINRA arbitrations to virtual hearings via Zoom. A January research report by Craig McCann and Chuan Qin of Securities Litigation and Consulting Group, Inc., The Impact of ZOOM on FINRA Arbitration Hearings -- the first research we’ve seen on the topic -- contends that this transformation has not been beneficial to customer recovery prospects. The chart and link-rich report has five conclusions (presented verbatim): “1) Investors Win Much Less Often in ZOOM Hearings than in In-person Hearings. 2) Investors Recover Less in ZOOM Hearings than in In-person Hearings When They Win. 3) There is Marked Geographic Variation in the Decline of Investor Win Rate. 4) Investors are Settling on Less Favorable Terms in the ZOOM-era than Previously. 5) While Investor Claimants Suffer Under ZOOM, Broker Claimants are Having Even More Success with Expungement Requests. One finding is particularly striking: “In the pre-ZOOM-era, Investors won 43.7% of the time and recovered 65% of their requested amount when they won. This implies a 28.4 cents per dollar average recovery in cases decided after a hearing in the pre-Zoom-era. In the ZOOM-era, investors win only 27.9% of the time and recover only 33.3% of their requested amount when they won. This implies a 9.3 cents average recovery in cases decided after a hearing in the ZOOM-era.” The authors also assert that there are significant regional variations.

And a Cautionary Tale

We close with a humorous tale about the potential pitfalls of virtual hearings. Readers have seen plenty of advice about how best to conduct a hearing (arbitration, mediation, or litigation) by Zoom, and what practices to avoid. This video of an actual court proceeding definitely adds another item to the “don’t do this” list!

(ed: *As we’ve said many times before, with the ongoing spike in COVID-19 we’re not surprised by the latest administrative postponement from DRS. In fact, despite vaccines being rolled out, things are still moving in the wrong direction. **While the Report’s data speaks for itself, query whether there’s another factor reflected in the numbers? By that, we wonder whether a significant number of customers who believe they have strong cases have declined the virtual hearing option, preferring instead to await resumption of in-person hearings? ***Author McCann told the Alert: “Recoveries are down more than 65% in the ZOOM-era compared to average over the same periods from past 5 years. This is not due to isolated cases or any particular type of case. We now have enough data to conclude the dramatic decline is due to the remote interface rather than in-person hearings.”)





George H. Friedman is the publisher and Editor-in-Chief of the Securities Arbitration Alert, a weekly online publication covering the latest developments in financial services arbitration and mediation. He is also the principal of George H. Friedman Consulting, LLC, providing expert advice on arbitration and mediation in general and the FINRA dispute resolution forum in particular.

He is former Executive Vice President - Dispute Resolution of the Financial Industry Regulatory Authority (“FINRA”), a position he held through January 2013. He held the same title at NASD, which consolidated with NYSE Member Regulation to form FINRA in 2007. In this capacity, he was in overall charge of FINRA's dispute resolution program, carried out by the company's four regional offices and 72 hearing locations in the United States and abroad, 200 employees, and an annual budget of $50 million. He also served as Secretary of the Securities Industry Conference on Arbitration. He has been referred to by the U.S. Court of Appeals—4th Circuit as a “leading arbitration expert.” He is a member of the American Arbitration Association's National Roster of Neutrals.

Mr. Friedman is an Adjunct Professor of Law at Fordham Law School, where he has taught a course on alternative dispute resolution since 1996. He is Chairman of the Board of Directors of Arbitration Resolution Services, Inc. of Coral Springs, Florida. Arbitration Resolution Services is an innovative online arbitration services company facilitating an affordable alternative to costly courtroom litigation and in-person arbitration for resolving Business-to-Business, Business-to-Individual, and Vehicle and Property Damage disputes. ARS is unique in that its entire process can be completed online through the company website.

In his extensive dispute resolution career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He joined NASD in 1998 as Senior Vice President of NASD's Dispute Resolution Division, and was named Executive Vice President in 2002.

Mr. Friedman received a B.A. in Political Science from Queens College, and a Juris Doctor from Rutgers Law School - Newark, where he was an editor of the Law Review. He is admitted to the New York and New Jersey Bars and the United States Supreme Court, and is a Certified Regulatory and Compliance Professional. Mr. Friedman is a member of the Securities Experts Roundtable, and of several bar associations. He is past chair of the Committee on Alternative Dispute Resolution of the New York County Lawyers Association. He is a member of the Banking Advisory Committee of Bergen (NJ) Community College.

Mr. Friedman has lectured extensively on the subject of alternative dispute resolution, and has the distinction of being one of the architects of the American Arbitration Association’s Due Process Fairness Protocols for both employment arbitration and health care dispute resolution, and assisted in creating the Consumer Due Process Protocol. He has published often, with articles appearing in the Securities Arbitration Commentator, the ABA's Dispute Resolution Magazine, the New York Law Journal, the Rutgers Law Review, and the National Law Journal. He has blogs at Arbitration Resolution Services, Inc., the Securities Arbitration Commentator, and the World Future Society, among others.

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