For Better or Worse? FINRA’s Attempt to Aid Investors Involved in Arbitration


By: Jayson Lewis

As the largest non-governmental regulator for securities firms doing business in the United States, the Financial Industry Regulatory Authority (FINRA) is committed to protecting investors and safeguarding market integrity. FINRA accomplishes these goals through regulation, compliance, training, instruction, and enforcement.

One of the most significant means by which FINRA strives to ensure that the securities industry continues to operate fairly and honestly is through its administration of the largest dispute resolution forum for securities brokers and dealers doing business with the public. Traditionally, under FINRA rules, arbitrations had to take place in financial centers and the arbitration panel had to consist of two public arbitrators (of which one was chair-qualified) and one non-public arbitrator. Recently, however, things have changed.

Earlier this year, the Securities and Exchange Commission (SEC) approved a rule change, which FINRA filed in October of last year, to provide customers in disputes with the freedom to choose between two distinct arbitration panel selection methods. Now customers can choose between the Optional All Public Panel method and the Majority Public Panel method. Under the Optional All Public Panel method, parties may strike all of the arbitrators on the non-public list provided to them by FINRA, thereby ensuring that the arbitration panel will consist of three public arbitrators. The Majority Public Panel method merely maintains the status quo.

Because the new rule went into effect just this year, it is too soon to determine whether the introduction of the Optional All Public Panel method truly favors investors. Nevertheless, it is quite clear that the rule, at the very least, has counteracted a perceived bias towards members of the securities industry. As Richard Ketchum, FINRA Chairman and Chief Executive Officer stated in 2010 when the new rule was still in its pilot phase, “giving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process.”

Even assuming that the new rule has cured the perception problem, it is doubtful whether the Optional All Public Panel rule will actually promote fairness in the arbitration process and if the rule is to the advantage of the parties. More specifically, given that arbitrators still are not required to draft a written document articulating the rationale behind their decision on how the matter should be resolved or the award rendered, transparency still is largely absent from the process. Thus, it is not entirely clear that FINRA’s dispute resolution mechanism has become any fairer as a result of the new rule. Moreover, by giving the parties the opportunity to select all-public panels, the specialized knowledge and perspective that industry panelists traditionally have offered in arbitrations largely may be eliminated from the process. Surely, allowing a panel of individuals who lack experience or expertise in the securities industry to assess the facts and render an appropriate award is not in the best interest of the parties, or, more generally, the securities industry.

The recent change to the FINRA arbitration process is a step in the right direction. Granting investors the power to have their cases heard by a panel of three non-industry participants certainly has helped to level the playing field. However, only time will tell if increasing investor choice in the arbitration program will actually improve the process. Perhaps these changes ultimately will encourage members of the industry to reconsider the more important question of whether these disputes are better off in a courtroom than in an arbitration hearing.


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Fordham Journal of Corporate & Financial Law