The Secret Battle to Save Arbitration

Lost in the debate over a fiduciary standard for brokers was a little reported and largely ignored ruling by the SEC to allow disgruntled investors the option of choosing a “non-industry related” arbitration panel. The SEC acted on a proposal by FINRA to expand its two-year pilot program testing these rights to all investors.

I’ve been accused of being overly skeptical of anything proposed by FINRA, but over the years, I’ve come to the conclusion that one can’t be “too” suspicious of the brokerage industry’s SRO. In this case, the timing alone of FINRA’s proposal (which they’ve had over two years to make) leads one to suspect some correlation with the Dodd-Frank broker/advisor reregulation: Perhaps an attempt to head off any thought that a broker fiduciary standard would create investor grievances outside of its arbitration system?

The effect of a new fiduciary standard on arbitration was not addressed in Section 913 of the Dodd-Frank Act nor, as far as I can tell, in the SEC’s report on implementing the new law. Still, many of us who advocate cleaning up the brokerage industry’s abusive client practices hope that the current arbitration system would be swept out with the rest of the trash. Apparently, FINRA fears much the same thing.

Securities arbitration is hard to criticize due to the scant information that FINRA releases about individual cases or even general results. Ironically, this “black-box” treatment of arbitration cases by FINRA has become the focus of some of the most pointed criticism of it: How can anyone outside of FINRA tell if it’s actually working to protect investors? Given FINRA’s track record on investor protection, it’s not exactly entitled to the benefit of the doubt.

As the next best thing to real data, I am acquainted with more than few industry folks who serve as FINRA arbitrators, and have talked with many of them about their experiences. The overwhelming consensus seems to be, as one arbitrator