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Financial Industry Regulatory Authority Considering Changes to Facilitate Arbitration Process

Tuesday, April, 23, 2013


This week, the Financial Industry Regulatory Authority (FINRA) will discuss changes that would make the process of selecting an arbitration panel easier for investors undergoing the arbitration process.  These changes come in the wake of ongoing accusations against the regulatory agency that the system of arbitration currently in place shows favor to brokerage firms.

2011 also saw changes implemented for similar purposes.  That year, FINRA initiated a rule that allowed investors to choose all three arbitration panel members from a category labeled as “public” versus “non-public” (or insider arbitrators involved in the securities and exchange business).  Investors and investor advocates believed that this was a move in the right direction but have been pushing for further changes to tip the scales more toward a favorable balance between investors and brokerage firms. 

The current arbitration rules, according to FINRA, are that any dispute involving a securities purchase or exchange  worth more than $100,000 are settled in binding arbitration by a panel comprised of three arbitrators.  With the 2011 changes in place, an investor can decide upon an arbitration panel of two arbitrators who are insiders to the industry and one public arbitrator, or a panel made up of three public arbitrators.  

The changes that FINRA is currently considering are also related to the choice of arbitrators but will make the process even easier.  According to the new proposal, any investor bringing a dispute to FINRA to be arbitrated would receive a list of 30 arbitrators—10 chair-qualified public arbitrators, 10 securities industry-affiliated arbitrators, and 10 public arbitrators.  The investor would then be asked to strike out four arbitrators from each of the public lists and up to all of the arbitrators on the list that contains the names of industry-affiliated arbitrators.  The arbitration panel would then be chosen from the names that are not crossed off of the lists. 

According to data that has been gathered by FINRA and other sources, all-public arbitration panels tend to provide better results for investors involved in the arbitration process with a brokerage firm.  Data from 2012 shows that when investors chose an all-public panel of arbitrators, they received an arbitration award in 49% of the cases vs. 33% of the cases in which non-public arbitrators were chosen.