The Financial Industry Regulatory Authority (FINRA) is considering eliminating the industry arbitrator from the arbitration panels that rule on disputes between customers and brokerage firms. FINRA is made up of member brokerage firms and is charged with responsibility for regulating its own securities-industry members. In most cases, when investors open a brokerage account they are required to sign a contract wherein they agree to resolve any dispute that they have with the brokerage firm through binding arbitration rather than through a lawsuit in court. Such disputes include recommendations and sale of unsuitable investments, churning or excessive trading, and misrepresentations as to the risk of a security.
Historically, any dispute between a customer and a brokerage firm that had more than $100,000 at issue was heard by a panel of three arbitrators consisting of two “public” arbitrators and one “non-public” arbitrator, which is FINRA’s term for an arbitrator who is affiliated with the securities industry in some way. For example, the “non-public,” or more appropriately, the industry arbitrator often is a current or former stockbroker, branch manager of a brokerage firm, compliance officer for a brokerage firm, or lawyer who represents the securities industry.
Many lawyers who represent investors in FINRA arbitration disputes against brokerage firms have complained for years that industry arbitrators ultimately protect the very industry that provides or provided them with their living. In other words, many investor lawyers believe that securities industry arbitrators are biased and do not find in favor that investors even when the evidence strongly reflects that a stockbroker or brokerage firm violated rules, regulations, or laws and caused investors to lose money. Many investor attorneys compare having a securities industry arbitrator on an arbitration panel to having a doctor serve as a judge or jury member in a medical malpractice case.
In recognition that some question whether securities industry arbitrators are biased, over the past two years, FINRA has been running a pilot program that allows investors to decide whether to include a securities industry arbitrator on the panel of arbitrators or to have three public arbitrators decide their dispute with the brokerage firm. FINRA Chairman and Chief Executive Richard Ketchum stated “I believe there are strong arguments for us to move to an environment where the parties can make a choice to only have public arbitrators.” FINRA is evaluating whether investors are choosing to eliminate the industry arbitrator and whether arbitration awards issued by three public arbitrators differ in any meaningful way from arbitration awards entered by panels that have a securities industry arbitrator. Many lawyers who represent investors expect the results to be that arbitration awards entered by three public arbitrators, i.e., where no securities industry arbitrator was on the panel, may be more favorable for investors.
If FINRA’s pilot program goes as many investor attorneys predict, the day likely will come when investors in FINRA arbitration proceedings will not be forced to have someone affiliated with the securities industry decide their case. This would be a significant development for investors defrauded by Wall Street brokers.