Stay up to date on everything mediation!

Subscribe to our free newsletter,
"This Week in Mediation"

Sign Up Now

Already subscribed No subscription today
<xTITLE>The Elections are (Finally!) Over: What’s in Store for the Arbitration and the Financial Services Worlds</xTITLE>

The Elections are (Finally!) Over: What’s in Store for the Arbitration and the Financial Services Worlds

by George Friedman
February 2021 George Friedman

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

At long last the 2020 elections are behind us [bipartisan cheer], and the Democrats have taken over the White House, Senate and House. What might this mean for arbitration and the financial services worlds? In a word: lots.

  • The anti-arbitration bills will be back, this time with enactments
  • Repeal of Reg BI and the DOL’s rule are on the table
  • A revitalized CFPB – with a new director and a new arbitration rule
  • FINRA and SEC staff should invest in good walking shoes
  • SCOTUS will remain arbitration-friendly … unless the court is packed

Read on for a summary.

The Anti-arbitration Bills will be Back, this Time with Enactments

The Democrats in the last Congress introduced several anti-arbitration bills that predictably went nowhere. The bills will undoubtedly be reintroduced in the new Congress, but the outcomes will be different this time, with the Democrats in charge of Congress and the Oval Office. The Democrats’ agenda is clearly anti-mandatory predispute arbitration in the consumer and employment areas, so expect at least some bills to pass and President Biden to sign them.  My guess is that, rather than again attempt wholesale changes to the Federal Arbitration Act, bills will be introduced targeting specific federal laws protecting parties like consumers, investors,  and employees. For example, one of the bills introduced in the last Congress was the Investor Choice Act, which would have amended the 1934 Act and the Investment Advisers Act of 1940 to ban mandatory PDAAs in customer and shareholder relationships. Hopefully, the proposed laws will not be retroactive; I continue to think that retroactive nullification of existing PDAAs invites legal challenges based on the Constitution’s Takings Clause.

Repeal of Reg BI and the DOL’s Rule are on the Table

Two relatively new regulations impacting financial services may not be long for this world. The SEC issued its final Reg Best Interest (“Reg BI”) rule package in June 2019, and published the items in the Federal Register on July 12, 2019. Also, the Department of Labor’s (“DOL”) final fiduciary standard rule for those offering retirement investment advice – Improving Investment Advice for Workers & Retirees – was published last December in the Federal Register (Vol. 85, No. 244. P. 82798), and goes into effect on February 16, 2021. The exemption, which is harmonized with Regulation BI, allows Investment Advice Fiduciaries to engage in certain prohibited transactions that would otherwise be disallowed under ERISA and the Internal Revenue Code (see our analysis in SAA 2020-25 (Jul. 8)). The long-term fate of both rules is unclear at best, but I suspect the Democrats will attempt to jettison and replace both Reg BI and the DOL rule. And indeed it’s already in the offing. On December 4 House Financial Services Committee Chairwoman Maxine Waters (D-CA) wrote to then President-elect Biden urging that Reg BI and Form CRS be rolled back. How do we know?  Under the heading “Investor Protection and Capital Markets,” appears this one-word recommendation about Reg BI: “Rescind.”

A Revitalized CFPB – with a New Director and a New Arbitration Rule

The Consumer Financial Protection Bureau (“CFPB”) under the Obama administration aggressively exercised its authority under Dodd-Frank § 1028(b) to restrict, eliminate, or set conditions on the use of PDAAs in consumer financial products and transactions. This was embodied by a 2017 regulation that would have: 1) permitted predispute arbitration agreements in contracts for consumer financial goods and services; 2) banned class action waivers in PDAAs; and 3) required regulated financial institutions to file customer claims and awards data with the CFPB, which the Bureau intended to publish in redacted form. Later that year, the CFPB’s arbitration rule was retroactively nullified, when President Trump signed into law H.J. Res. 111, a Joint Disapproval and Nullification Resolution (see SAA 2017-41). Congress had exercised its authority under the Congressional Review Act, 5 USC §§ 801 et seq., which allows Congress to legislatively nullify any regulation within 60 legislative/session days of its publication. Without question, the Biden CFPB will resurrect the Rule, perhaps this time taking on PDAAs as well as class action waivers. My recommendation would be to build on the old rule, rather than to start from scratch.

Perhaps not waiting for the inevitable, Trump-era Director Kathy Kraninger on January 20 tweeted that she had resigned at the request of President Biden, and the White House immediately announced that the new President had appointed David Uejio to serve as Acting CFPB Director. Mr. Uejio, who has been at the Bureau since 2012, was the CFPB’s Chief Strategy Officer. There are already several media reports that Mr. Biden intends to nominate Federal Trade Commission member Rohit Chopra as the next Director. Mr. Chopra is viewed as a protégé of Sen. Elizabeth Warren (D-MA) – a founder of the CFPB who is anti-mandatory PDAA use in the consumer and financial contexts.

FINRA and SEC Staff Should Invest in Good Walking Shoes

Once the COVID-19 vaccines are fully deployed, FINRA and SEC staffers need to invest in good walking shoes. In the meantime, they should take a skills course on Zoom. Why? First, with a plethora of anti-arbitration bills sure to be introduced, both institutions will be hauled before various Congressional committees non-stop. For those keeping score, in the Senate: Sen. Dick Durbin (D-IL) heads up Judiciary and Sherrod Brown (D-OH) chairs Banking, Housing and Urban Affairs. In the House: Rep. Jerrold Nadler (D-NY) heads the Judiciary Committee and Rep. Maxine Waters (D-CA) the Financial Services Committee. Also, look for increased Government Accountability Office examination and oversight activity of FINRA, the SEC, and the financial services industry.

SCOTUS will remain Arbitration-Friendly … Unless the Court is Packed

With a 6-3 conservative majority, and no vacancies anticipated in the conservative wing, we should expect SCOTUS to remain pro-arbitration. This is significant, given that many landmark arbitration-themed decisions from SCOTUS were decided by 5-4 votes. Newer Justices Gorsuch and Kavanaugh have already authored pro-arbitration opinions, and as I blogged last fall based on a very limited sampling Justice Coney Barrett seems to lean pro-arbitration. And, if a SCOTUS vacancy occurs during the Biden presidency’s first two years, with the slimmest Democrat Senate majority, a vehemently anti-arbitration, anti-business nominee would likely have a rough time being confirmed. But if the Democrats go ahead with packing the Court, all bets are off….

Conclusion

I’m a bit reluctant to make so many bold predictions, given how wrong we all were in 2020. For example, show me anyone who predicted that FINRA for nearly a year would be canceling in-person arbitration and mediation hearings and using videoconferencing instead. On the other hand, my past arbitration predictions over the years have been pretty good,** so we can compare notes in a year.

Biography


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.



Email Author
Author Website

Additional articles by George Friedman