In my February Investment Advisor Column (Is FINRA the Fox Guarding the Henhouse? and the follow-up Feb. 23 blog, Broker Arb Lessons From Animal House and Brian Hamburger), I wrote about the FINRA Dispute Resolution Task Force’s Dec. 16 recommendations for improving its mandatory dispute arbitration system. Despite acknowledging that FINRA has a bit of a PR problem with the “debate over the fairness of its pre dispute arbitration agreements,” the vast majority of the Task Force’s 51 recommendations deal instead with issues such as training and paying arbitrators, to “considering, studying, reviewing, or monitoring” other issues.
A few of those recommendations purported to address the “lack of transparency” of the arbitration decisions: which to my mind, is the primary source of the distrust of the mandatory system. But none of them came close to suggesting that FINRA arbitration cases be publicly disclosed, like other legal hearings. That would cover the claims, the defense’s responses, the panel’s decisions, its reasoning and the amount of the awards. That way, we could all decide for ourselves how “fair” the system really is.
To get a more informed opinion about why FINRA doesn’t do this, I had a subsequent conversation with securities attorney Brian Hamburger, CEO of the RIA compliance firm Market Counsel, and senior partner of the Hamburger Law Firm. Brian pointed out that “the lack of transparency of FINRA arbitration cases is intentional. By making the case records public, the increased scrutiny would invite challenges to the decisions, requiring an appeals system like we have in the courts.” In turn, he said, that would drive up the costs of disputes, “which the arbitration system is intended to keep down.”