1. Securities Experts Roundtable Annual Conference, Boston, MA, August 2-3, 2013 Kickoff Address: A Report from the Future Securities, Consumer and Employment Arbitration 2013 by George Friedman, Board Member Arbitration Resolution Services, Inc. (no claim to protected works)

2. Arbitration Resolution Services Copyright 2013 Short Bio Retired earlier this year as FINRAs Executive Vice President and Director of Arbitration, a position held from 1998. Previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. Adjunct Professor of Law at Fordham Law School; teaches course on alternative dispute resolution since 1996. Since early 2013, member of the Board of Directors of Arbitration Resolution Services, Inc. Board of Editors of the Securities Arbitration Commentator. BA, Queens College; JD, Rutgers Law School (Law Review). CRCP (Certified Regulatory & Compliance Professional), Wharton-FINRA Institute. Admitted in NY and NJ and US Supreme Court. 2 3. Arbitration Resolution Services Copyright 2013 A Prediction A day of reckoning is coming on predispute arbitration agreements in consumer arbitration. A dichotomy is developing between arms-length pre- dispute arbitration agreements and those imposed in an adhesion contract with consumers (and perhaps employees). This will be addressed in the next several years by the Supreme Court, Congress, the SEC or all. - George Friedman Law Class Lecture at Fordham Law School from 2005 3 4. Arbitration Resolution Services Copyright 2013 The Future (2013 - 18) My bold and fearless predictions for the future. You can disagree, but you cant definitively say Im wrong. Unless you claim to be from the future. In which case, lets talk later 4 5. Arbitration Resolution Services Copyright 2013 The Future (2013 - 18) And now, lets go. 5 6. Arbitration Resolution Services Copyright 2013 The Future (late 2013-18) 6 1985; 1990 Universal Pictures, Inc. 7. Arbitration Resolution Services Copyright 2013 The Future: headlines from 2013-2018 2013-5: Consumer Financial Protection Bureau bans PDAAs in many types of consumer financial contracts; SRO arbitration carved out for SEC 2014: FINRA better defines customer for arbitration purposes 2015: SEC acts on predispute arbitration agreements under Dodd-Frank 2017: Arbitration Fairness Act finally enacted (sort of) 2013-18: Supreme Court continues strong support for arbitration but this began to shift in 2017. 7 8. Arbitration Resolution Services Copyright 2013 2013-15: Consumer Financial Protection Bureau banned PDAAs in many types of consumer contracts Background: Dodd-Frank established a new Consumer Financial Protection Bureau, required it to study PDAAs in consumer contracts (section 1028(a)), and authorized it to limit or ban their use (section 1028(b)). By February 2013, CFPB had already banned PDAAs for mortgages and home equity loans, as Dodd-Frank mandated. Later, CFPB banned PDAAs in many types of consumer financial contracts: Car loans, consumer loans, credit card agreements, payday loans, rent-to- own contracts SRO securities arbitration programs were carved out for the SEC 8 9. Arbitration Resolution Services Copyright 2013 2014: FINRA better defined customer for arbitration purposes Anticipating that PDAAs might be banned, FINRA in 2014 clarified its definition of customer for purposes of its Rule 12200. This rule allows a customer to require a broker to arbitrate disputes arising out of the business activities of the broker After predispute arbitration agreements were banned -- first by the SEC in 2015 and later by Congress in 2017 -- FINRA Rule 12200 would become the investors only practical way into arbitration. There was a huge battle, with the securities industry saying it was unfair to let investors cherry pick which cases to take to arbitration. It called for the abolition of Rule 12200. In the end, FINRA and SEC stuck to their guns and Rule 12200 stayed. The securities industry sued FINRA and the SEC (more on that later) . 9 10. Arbitration Resolution Services Copyright 2013 2015: The SEC acted on predispute arbitration agreements under Dodd-Frank Background: Section 921 amended the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 to authorize but not require the SEC to: limit or prohibit use of pre-dispute arbitration agreements (PDAAs) arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors. 10 11. Arbitration Resolution Services Copyright 2013 SEC acted on predispute arbitration agreements under Dodd-Frank (contd) The Timeline (a/k/a The Letter of the Month Club): February 2013: Massachusetts's Secretary of the Commonwealth William F. Galvin urged the SEC to ban PDAAs in brokerage and IA agreements. March 2013: The North American Securities Administrators Association, the association of state securities regulators, urged the SEC to act under Dodd-Frank to ban mandatory PDAAs. April 2013: SEC Commissioner Luis Aguilar came out against mandatory PDAAs in brokerage and investment adviser agreements. 11 12. Arbitration Resolution Services Copyright 2013 SEC acted on predispute arbitration agreements under Dodd-Frank (contd) April 2013: Thirty-seven Democratic Senators and House members urged the SEC to prohibit brokerage firms from requiring customers to submit to arbitration. May 2013: The Public Investors Arbitration Bar Association, attorneys who represent investors in arbitration, urged the SEC to ban mandatory PDAAs. May 2013: SEC Commissioner Elisse Walter said that the SEC was unlikely to get to the PDAA issue in 2013. February 2014: A consortium of anti-arbitration types produced a Super Bowl ad featuring. 12 13. Arbitration Resolution Services Copyright 2013 SEC acted on predispute arbitration agreements under Dodd-Frank (contd) . Clint Eastwood and an empty chair singing All we are saying, is give choice a chance. 13 2013 New Yorker Magazine 14. Arbitration Resolution Services Copyright 2013 SEC acted on predispute arbitration agreements under Dodd-Frank (contd) . And this became the groups logo. 14 Photo 1971 Warner Brothers, Inc. 15. Arbitration Resolution Services Copyright 2013 SEC acted on predispute arbitration agreements under Dodd-Frank (contd) So, heres what happened: SEC studied mandatory PDAAs. It started in 2011 and finished in 2014. The rule went into effect in 2015. SEC found that securities arbitration was fair for investors. After allowing PDAAs in customer-broker contracts since 1987 (McMahon and Rodriguez), SEC would have been hard pressed to say securities arbitration was unfair. SECs Report to Congress cited everything George Friedman had been saying for years about fairness of the FINRA forum. But the SECs 2015 rule provided that perceptions of fairness dictate that investors have a choice of forum that is, going to court or arbitration. Turns out Commissioner Aguilar knew he had the votes. 15 16. Arbitration Resolution Services Copyright 2013 SEC acted on predispute arbitration agreements under Dodd-Frank (contd) So, the rule prohibiting brokerage firms and IAs from using or enforcing PDAAs in customer account agreements was a one-way street. It preserved FINRA Rule 12200, which gives customers of brokerage firms the right to take a dispute to arbitration. This immediately spurred litigation initiated by the securities industry against SEC and FINRA over whether FINRA Rule 12200 violates the Takings Clause of the US Constitution. Two years later, the industry challenged whether the Franken-Stein Arbitration Fair Play Act of 2017 (more on that later) trumped the SECs rule, meaning the investor had no right to require arbitration with their brokers under FINRA Rule 12200. Both matters are still unresolved. 16 17. Arbitration Resolution Services Copyright 2013 2017: The Arbitration Fairness Act was finally enacted (sort of) There were prior failed efforts -- going back at least to 2005 -- to amend the Federal Arbitration Act (FAA) to ban mandatory PDAAs in consumer, employment, and sometimes franchise contracts and civil rights claims. The FAA 9 U.S.C. 1 et seq. is a 1925 federal law enforcing predispute arbitration agreements and arbitration decisions involving interstate commerce. It enjoys strong support from the US Supreme Court. Even in 2009, when the Democrats controlled the White House and both houses of Congress (and Barney Frank, an avowed opponent of PDAAs in consumer contracts, chaired the House Financial Services Committee), the bills died. 17 18. Arbitration Resolution Services Copyright 2013 The Arbitration Fairness Act was finally enacted (sort of) So, heres what happened: AFA was reintroduced in 2013: it was introduced in both houses of Congress on 5-7-2013 (Franken-S; Johnson H). Hearings were held In the wake of the Supreme Courts decisions in Oxford and Amex. It failed to get out of committee. Reintroduced in 2015: AFA failed to get out of committee. Finally in 2017: spurred on by George Friedmans ground-breaking compromise proposed in an article published in the Securities Arbitration Commentator in the summer of 2013, the Franken-Stein Arbitration Fair Play Act of 2017 was enacted. after the Democrats regained control of Congress in the 2016 elections over the veto of President Christie It amended the Federal Arbitration Act to require that: 18 19. Arbitration Resolution Services Copyright 2013 The Arbitration Fairness Act was finally enacted (sort of) in a consumer contract, any predispute arbitration agreement must be separately signed or clicked by the consumer; a consumer cannot be denied goods or services if the consumer declines the arbitration option; in an employment contract that is not individually negotiated, any predispute arbitration agreement must be separately signed by the employee; a prospective or current employee cannot be denied employment if the employee declines the arbitration option; AND clear procedural fairness guidelines be followed in any consumer or employment arbitration. To avoid Constitutional challenges, the law was prospective. It applied to contracts entered into or revised after the effective date, but required that contracts be revised within two years of the effective date. 19 20. Arbitration Resolution Services Copyright 2013 2013-8: The Supreme Court continued its strong support for arbitration The Supreme Court continued its strong support for arbitration: continued erosion of the non-arbitrability doctrine supremacy of arbitration clauses over class action participation (see Amex) strong support of FAA preemption of state anti-arbitration laws more restrictions on court review of arbitration awards (see Oxford Health) continued impatience with frivolous motions to vacate This began to shift in a series of 5-4 decisions after Justice Hillary Clinton replaced Justice Scalia on the Court in late 2016. In 2017 Justice Clinton wrote the majority opinion holding that arbitrators must apply the law in deciding claims alleging violations of federal statutes The Court heard oral argument five years from now in June 2018 in SIFMA v. SEC and FINRA, a case dealing with the securities industrys challenge to FINRA rule 12200. I had to head back to 2013 before the case was decided. Sorry 20 21. Arbitration Resolution Services Copyright 2013 In conclusion Like the scene at the end of Back to the Future III: The future hasnt been written yet. No ones has. Your future is whatever you make it. So make it a good one. In my case, it turned out joining the Board of Arbitration Resolution Services was a good move. In 2015 I traded in my Chevy Volt for 21 22. Arbitration Resolution Services Copyright 2013 In conclusion (contd) 05/02/2015 22 A Tesla Model S! 23. Arbitration Resolution Services Copyright 2013 In conclusion (contd) See you in the future! 23