March 8, 2018

Via email to [email protected]

Eduardo A. Aleman
Assistant Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Re: SEC Release No. 34-82693; File No. SR-FINRA-2018-003
FINRA Proposed Rule Change re: Simplified Arbitration

Dear Mr. Aleman:

The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to comment on FINRA’s proposed rule change relating to Simplified Arbitration (the
“Proposal”).2 We offer the following observations and recommendations:

Fundamental fairness and due process require the right to cross-examination.

The Proposal would add a new “Special Proceeding” consisting of a limited telephonic hearing. One of the primary limitations of the telephonic hearing would be that members and associated persons could not cross-examine a customer claimant or his or her witnesses. We object to the absence of an opportunity to cross-examine.

Fundamental fairness and due process require that members and associated persons should have the right to explore, identify, examine, and highlight errors, omissions, and misstatements that bear upon the credibility, accuracy and completeness of a claimant’s or witness’s testimony. While, as the Proposal correctly points out, claimants may seek to avoid direct confrontation with their opponents, cross examination is a necessary element of an adversary proceeding – initiated by the claimant – which seeks in most instances to recover monetary damages from the respondent.

Cross-examination is likewise necessary to satisfy the due process rights of the firm and/or its associated persons, whose professional reputations, CRD records, and pecuniary interests are all at stake. Finally, arbitrators also benefit from cross-examination, which allows them to better assess the credibility, accuracy and completeness of testimony and thereafter assign it appropriate weight. Ultimately, this process allows the arbitrator to make better judgments about whether the respondent is liable and if so, the appropriate measure of damages. And when that happens, the quality and integrity of FINRA’s arbitration forum benefits as well.

Recommendation: For all the foregoing reasons, we recommend that the right to crossexamination be included in the Special Proceeding.

Notably, the current default option for Simplified Arbitration under FINRA Rules 12800 and 13800 does not involve a hearing and allows the arbitrator to render an award based on the pleadings and other materials submitted by the parties. Obviously, this “papers only” default not only denies firms and associated persons the right to cross examination, but also to have their day in court and to speak to the arbitrator directly to rebut the allegations. With the advent of the Special Proceeding, we believe it represents an opportunity to provide firms and their associated persons with an alternative to the “papers only” default that provides a modicum of due process in an efficient format.

Recommendation: Firms and associated persons should have the same ability as claimants to elect the Special Proceeding over the “papers only” default.

Poorly pled Statements of Claim that fail to plead with particularity and/or fail to state a claim impose significant due process risks on respondents in a Special Proceeding.

When a claimant elects the “papers only” default, the claimant’s Statement of Claim (“SOC”) either pleads facts with particularity and/or sufficiently states a claim upon which relief may be granted, or it does not. If it does, then the respondent can intelligently address the allegations and claims in the Answer, and the arbitrator can intelligently decide the case based on those papers. If it does not, then the respondent is generally at a loss for how to respond, but then again so is the arbitrator, and the respondent typically prevails in such cases.

A claimant with a poorly pled SOC who elects the Special Proceeding, however, imposes unnecessary and unacceptable due process risks on respondents. Our members report that nowadays it is common to see one-page pleadings, particularly from pro se parties. A pro se claimant, for example, could submit a SOC that simply states, “The firm treated me poorly and I lost $49K.” without any explanation or evidence as to how or why.

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1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 SEC Release No. 34-82693; File No. SR-FINRA-2018-003 (February 12, 2018), available at http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2018-003-federal register-notice.pdf.