If Broker Arbitration Is Good for Investors, Why Is It Mandatory?

That’s certainly a fair point, and frankly, one I hadn’t thought of. Yet to me it raises the question of why securities arbitration needs to be mandatory in the first place. If FINRA’s arbitration system and its lower costs are, as it claims, as fair to investors as it is to brokerage firms, why not leave it up to either party—the investor or the BD—to opt, instead, for a more costly but transparent and appealable venue? If, given the choice, most investors with grievances against their brokers and/or their firms choose arbitration on their own, then no harm done, and the FINRA arbitration system is vindicated. But if many investors chose the higher-priced system, that would send a message, too. 

The bottom line here is that as a de facto self-regulatory organization, FINRA and its member broker-dealers inherently have a massive public relations problem—one that isn’t going to go away with some lipstick and a bit of makeup. Forcing its investor clients into FINRA-run arbitration to resolve their disputes with its member firms isn’t helping the industry’s image: no matter how much they pay arbitrators or “study” their procedures.   

Hamburger suggests that FINRA could solve the problem by using an outside arbitration system, such as the one administered by the American Arbitration Association. That would certainly help. But it wouldn’t solve the “lower cost through lack of transparency and right to appeal” problem. And, consequently, I doubt it would have much of an impact on the seemingly widespread distrust of the system by investors and other outside observers.

If the securities industry really wants to “solve” its PR problem on arbitration, it’s going to have to give investors the choice of venues for resolving disputes with their BDs. Without choice, all the talk just appears self-serving.