In a recent New York Times article, certain investors who failed to prevail on their claims against their broker complained about the arbitration panel’s actions at the hearing. Specifically, arbitrators struggling to stay awake or being heard laughing about the facts of the case.
In response to numerous investor complaints, the Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulatory organization, announced last week the formation of a 13-member task force to consider possible enhancements to its arbitration process to improve the transparency, impartiality and efficiency.
The FINRA system has been criticized for a pro-industry bias, lack of transparency, and inefficiency. Arbitration is typically mandatory in cases where customers feel a broker is responsible for investment losses. Participants are denied their right to trial in a court of law, and instead have their dispute resolved by an arbitrator, a generally impartial person who is knowledgeable about the areas of controversy.
Arbitration has its pros and cons, and investors are often surprised at how the process works. Arbitration is considered an “equitable forum,” for instance, which means arbitrators don’t have to strictly apply the law. “The court applies the law to the facts and makes a decision,” said Jonathan Morris, chief legal officer at Dynasty Financial, who has served as an arbitrator. “In arbitration, they might not rule all for one side or another. The investor can be partially right and partially at fault and arbitrators can split the difference.” And, almost always, courts decline to reverse an arbitration panel’s award. On the other hand, some legal experts argue that some states’ laws are not investor-friendly, meaning that many investors wouldn’t have a chance to be heard if it weren’t for arbitration. Also, arbitration is generally faster and cheaper than going to court.
The group of public advocates, securities lawyers, and industry executives is expected to come together for the first time in late September or early October, decide what issues to focus on, and wrap up recommendations of how to better protect investors and their shaken confidence in capital markets within one year. As the New York Times article concludes, perhaps the FINRA task force might start with figuring out ways to make the process more equitable for small investors, for whom every last dollar counts.
- Taking a Broker to Arbitration – New York Times, July 18, 2014
- Advocates, Industry Execs to Probe FINRA Arbitration System – Wall Street Journal, July 17, 2014
- FINRA Press Release – July 17, 2014
- FINRA’s Dispute Resolution Process
- Arbitration Overview – National Arbitration Forum