Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, August 11, 2009

FINRA Tells SEC It's Premature to Mandate Elimination of Industry Arbitrator in Customer Disputes

One of the persistent criticisms of arbitration of customer-broker disputes before FINRA Dispute Resolution is the requirement that one of three arbitrators must come from the securities industry.  Many investors and their advocates are suspicious of an industry-sponsored mandatory dispute resolution system that mandates industry representation on the arbitration panel.  Defenders of the system argue that an industry arbitrator adds expertise and knowledge of industry practices to the panel. 

Beginning in October 2008 FINRA launched a two-year pilot program that allows investors to choose a panel consisting of three public arbitrators.  Eleven brokerage firms volunteered to participate in the pilot program, each contributing a set number of cases sto the pilot per year for two years. In June the Public Investors Arbitration Bar Association (PIABA) filed with the SEC a proposed rule change petition requesting the SEC require by rule that the parties in an arbitration have the power to select an all-public panel in any investor claim in which the amount in controversy exceeds $100,000.  In essence, PIABA seeks to make the key elements of the pilot program permanent before the pilot's expiration in October 2010.

FINRA filed a response to PIABA's petition, which the SEC has posted on its website.  As described by FINRA , PIABA's petition incorporates most aspects of the pilot, with one notable exception.  PIABA would mandate the pilot rules for all investor cases rather than providing investors with a choice in panel composition.  FINRA notes that investors and their counsel in many pilot-eligible cases have elected not to participate in the pilot, suggesting that choice is important to preserve.

FINRA's position is that the pilot program should continue for its two-year term, after which the SRO would study its results and assess its effectiveness.  It plans to survey participants in the pilot and seeks input on other ways to measure the results.  In short, FINRA argues that it is premature for the SEC to mandate elimination of the industry arbitrator.

(hat tip:  Jill Gross)

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