According to its website, “FINRA is not part of the government. [It’s] an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.”
As part of its operations, FINRA provides a forum for arbitration. The FINRA website provides a thorough account of what cases are eligible for, or require, arbitration in FINRA’s forum. This account is reproduced below.
Eligible Cases
Arbitration cases are eligible to be heard in FINRA's forum if the following criteria are met:
• For disputes with investors:
o The cases involve an investor and an individual or entity registered with FINRA, such as cases between investors and brokers, between investors and brokerage firms, and between investors and brokers and brokerage firms; and
o The claim is filed within 6 years from the time the events giving rise to the dispute occurred.
• For disputes involving industry parties only:
o The cases involve an individual or entity registered with FINRA, such as cases between brokerage firms, between brokers, and between or among brokerage firms and brokers; and
o The claim is filed within 6 years from the time the events giving rise to the dispute occurred.
Required Investor Arbitration
An investor must arbitrate at FINRA if:
• The arbitration is required by written agreement;
• The dispute is with a member of FINRA, which could be a broker and/or brokerage firm; and
• The dispute involves the securities business of the broker and/or brokerage firm.
Required Industry Arbitration
A broker or a brokerage firm must arbitrate at FINRA if:
• The dispute arises out of the securities business activities of a broker and/or a brokerage firm; and
• The dispute is between or among the following members of FINRA: brokerage firms, brokerage firms and brokers, or brokers.
If an investor requests arbitration, a broker or a brokerage firm must arbitrate at FINRA.
Exception to required industry arbitration:
If you are a broker and your dispute involves an issue of employment discrimination, including sexual harassment, the dispute is not required to be arbitrated unless the parties agreed to arbitrate it, either before or after the issue arose.
Despite FINRA’s self-described independence and self-stated mandate of protecting America’s investors, FINRA has been harshly criticized on both fronts.
Earlier this year, on March 21, 2013, an op-ed/editorial entitled “FINRA’s Win is Your Loss” was published in U.S. NEWS & WORLD REPORT. According to the op-ed/editorial, FINRA “touts itself as an independent regulator governing the conduct of all securities firms doing business in the U.S.” However, or so the op-ed/editorial argues, “[g]iven the predatory conduct of the securities industry, it’s obvious that FINRA is falling far short of its mandate.”
To support the op-ed/editorial’s basic premise, “that FINRA is falling short of its mandate”, the op-ed/editorial posits that FINRA’s “running [of a] mandatory arbitration system that adjudicates disputes between investors and [] brokers” is insidious. The op-ed/editorial qualifies this statement by arguing that such a system requires investors to “give up their constitutional right[s] to [] jury trial[s]” for a proceeding where they will be judged by arbitrators that are neither fair nor impartial.
Moreover, the op-ed editorial appears to take special exception to the fact that FINRA does not “permit access to its database so that academics can conduct an analysis of the overall process.” The op-ed/editorial insists “[e]verything about a process that affects the retirement goals of millions of Americans should be in the public domain.”
“FINRA’s Win is Your Loss” did not go unnoticed. George Friedman, the previous Director of FINRA’s Arbitration, wrote a letter to U.S. NEWS & WORLD REPORT to rebut “FINRA’s Win is Your Loss.”
The theme of this letter is aptly displayed in the following excerpt:
To characterize the arbitration system as unfair and a threat to retirement plans is ridiculous. In fact, the FINRA arbitration program is an exemplar of fairness in consumer arbitration. This isn’t my opinion; it’s fact.
Mr. Friedman argues “FINRA has spent years amending the rules to ensure a level playing field. “ And furthermore, “FINRA’s rules must be approved by the SEC after being published in the Federal Register and after a public comment period.” Even more, the “SEC periodically inspects the arbitration program and responds to individual complaints.”
Finally, Mr. Friedman cites favorable words from the “Consumer Federation’s Director of Investor Protection” and “a leading authority in the arbitration field” as support for FINRA’s fairness and impartiality.
In my opinion, Mr. Friedman’s arguments are superior to “FINRA’s Win is Your Loss”’s. “FINRA’s Win is Your Loss” appears to oppose arbitration generally, not just FINRA’s arbitration procedures individually. “FINRA’s Win is Your Loss” implies that the inherent privacy of arbitration proceedings alone suggests corruption and impartiality. While I sympathize with “FINRA’s Win is Your Loss”’s disdain for “take-it-or-leave-it, binding-arbitration” clauses, these clauses are hardly confined to the context of FINRA’s arbitration procedures.
What are your thoughts? Do you agree with “FINRA’s Win is Your Loss” or Mr. Friedman?
Sources:
FINRA’s website
http://www.indisputably.org/?p=4524
http://money.usnews.com/money/blogs/On-Retirement/2013/03/21/finras-win-is-your-loss
I feel that it is the mandatory nature of arbitration which the preceding article's disdain is based upon. The concept that one cannot enter a market without forfeiting certain rights associated with any other dealings in life is prima facie a troubling one.
ReplyDeleteHowever, I agree with your sentiments James that this is coming to the problem from an anti-arbitration perspective. Arbitration's key benefits, speed and economy are likely to benefit those individuals being forced from the courts. If one comes to the table accepting that it is possible for arbitration to equitably achieve these benefits, then the whole context of the argument changes. Now we must ask a factual question of whether these benefits are being achieved, or if the cost is too great. In this case, as the article in rebuttal points out, FINRA is under constant supervision by the SEC to ensure this is the case.
We must overcome our conceptual idea that traditional rights are always better. If mandatory arbitration reaches more equitable outcomes than judicial proceedings factually, then the fact that certain pre-conceived ideas of due process are lost need not mean that is a negative.
Great post, Alex. I absolutely agree with you that the more well-reasoned opinion is Friedman's in this case. The op-ed does not cite any particular arguments for concern about FINRA other than the fact that it's mandatory arbitration. As far as I can tell, FINRA is also constantly working to make sure that the arbitration process is as fair as possible to consumers. For example, the institution recently allowed arbitration panels to be composed entirely of public arbitrators (rather than individuals from the securities industry). However, as I've been reading about FINRA, I've noticed a few key considerations that might be pause for concern and room for more investigation. For example, the fact that many individuals have their retirement savings in some form of securities or large banking enterprise might be grounds for making sure that contracts of adhesion are not taking place here. 37 members of Congress recently asked for the repeal of the enforceability of mandatory FINRA arbitrations. In addition, for investors with large claims, they will only see an expected return of 12% of their claims from an arbitration (see http://www.huffingtonpost.com/dan-solin/judge-slams-finra-arbitra_b_1352865.html). And recently, the news has been reporting how brokers can have their settlements expunged from their records. This is in keeping with the idea that arbitration is more confidential, but it might also raise the general concern that arbitration hides important disputes that public consumers and investors should be aware of. I'm not sure about the merit that any of these factors carries, but I think that these are some great places to start in terms of really evaluating the fairness of FINRA arbitration.
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