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Investment Losses: Obama’s SEC Faces First Test on Securities Arbitration Reform

June 17th, 2009 by Madelaine Eppenstein

With the announcement on June 17 of a proposed federal agency tasked with a role in consumer protection as part of the revamping of the financial system; a new chair (from FINRA) appointed by President Obama to head the SEC; and a new Congress proposing to end mandatory FINRA arbitration (HR 1020, S 931)—the right to choose court over FINRA may be restored to investors.

But many investors might opt for a fair arbitration system instead of court if they had confidence in FINRA Dispute Resolution’s independence from the securities industry AND if new rules were imposed whereby investors could choose a panel of neutrals without the fear that at least one arbitrator might be appointed from a “non-public” or industry pool.


FINRA, faced with the dilemma of running a forum often described as a “stacked deck,” established (on October 6, 2008) an arbitrator selection method that might have offered a response to the unfairness investors perceive in the system that requires an industry arbitrator on panels (as documented in the empirical study commissioned by SICA, “Perceptions of Fairness of Securities Arbitration”).  The Public Arbitrator Pilot Program, however, has its limitations:


  • It is purely voluntary for FINRA’s thousands of broker dealers (only 11 firms have opted into the program);
  • It is limited to just 275 (approximately) cases in each of the two years of the program;
  • It does not include the brokers who FINRA registers and regulates (so that if a brokerage firm and its broker are sued, the case doesn’t qualify for the program;
  • FINRA wants to study the results of the program, which could delay its permanent implementation or expansion for years to come.


 The FINRA initiative is a positive step towards reforming the securities arbitration system to make it better for investors.  We’ve tested the system for our clients and think it provides a method for the elimination of those industry arbitrators who the customer doesn’t wish to chose, and for the customer to avoid an administrative appointment.  It also allows the customer—but only if the brokerage firm agrees—to choose a specific member of the industry pool to sit on the panel.


Investors shouldn’t have to wait for full and permanent implementation of the Public Arbitrator Pilot Program.


 See more about this subject in our next posting.

Posted in Securities Arbitration & Litigation

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