Investor Arbitration Process Changes May Threaten Neutrality, Fairness: Lawyers

A group representing stock broker fraud attorneys are expressing concerns about a newly proposed rule by the independent financial system regulatory agency that presides over investor arbitration claims, indicating that the changes may reduce fairness and skew results more in favor of brokerage firms and the financial industry.

The Financial Industry Regulatory Authority (FINRA) published a Federal Register notice (PDF) on October 13, indicating that it plans to merge FINRA Dispute Resolution, Inc. with its main regulatory arm.

The public comment period for the proposed rule change was only open until Tuesday, and a final decision is expected to be made by the U.S. Securities and Exchange Commission (SEC) by November 27.

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FINRA is a non-governmental regulatory agency that oversees the financial industry and resolves disputes between investors and stock brokers or brokerage firms, including arbitration claims for fraud, breach of contract, breach of fiduciary duty, negligence, misrepresentation, unauthorized trading and other claims that investments were improperly handled.

The agency originally broke off the Dispute Resolution division as a means of ensuring that the agency’s more than 6,000 arbitrators would treat disputes between customers and brokers fairly and independently. Critics say that this new move undoes those efforts, and may result in firms using decisions by FINRA Regulation, Inc. against customers, which was supposedly never intended.

On November 2, the Public Investors Arbitration Bar Association (PIABA) objected to the move in a press release, saying it threatens the fairness and neutrality of the investor dispute resolution process. The group also objected to the swift speed toward a decision and the short comment period, which only provides a little more than two weeks.

“What is the rush here?” asked PIABA President Hugh Berkson in the statement. “Why leave the impression that this is being slammed through before the public can get wind of this change? Why would the SEC even consider taking further chances with investor confidence in the already troubled FINRA arbitration system?”

Berkson called for an extension of the public comment period to give concerned parties time to actually study the proposed change and comment.

FINRA was created in July 2007, as a successor to the National Association of Securities Dealers (NASD), handling all disputes between investors and stockbrokers or other financial firms. Investors are required to pursue claims against stock brokers or brokerage firms through the FINRA arbitration process, as opposed to pursuing the cases in court.

According to the Federal Register notice: “FINRA believes there is no longer a need to maintain separate subsidiaries to execute its regulatory and dispute resolution functions. The proposed merger would align the corporate legal structure with current public perception and organizational practice. It would also reduce unnecessary administrative burdens required to maintain separate legal entities.”

The SEC approved the separation of the dispute resolution arm of FINRA in a 2000 decision, when FINRA was known as NASD. The SEC said that the change was designed to prevent fraudulent and manipulative actions, and make the process more independent.

PIABA officials are asking what changed.

“Basically, we think FINRA and the SEC got it 100 percent right 15 years ago when they created the independent subsidiary now known as FINRA Dispute Resolution,” Berkson said. “However, real concerns exist today about the fairness and neutrality of FINRA-run arbitration. As such, the proposed rule change would be a huge step backward to, in essence, put the chicken coop back into the fox den.”


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