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Market Integrity, Investor Confidence: The Case for Pure Public Securities Arbitration –Now!

September 22nd, 2008 by Madelaine Eppenstein

We are witnessing unprecedented upheaval in the financial markets and investor insecurity.  Sadly, against this backdrop in a few days FINRA will launch a wholly inadequate band aid for its own broken arbitration system, the so-called “Public Arbitrator Pilot Program,” in response to mounting Congressional and public pressure to eliminate mandatory securities arbitration and to remove the required industry arbitrator panelist.  FINRA purports to study the impact of a panel’s composition on various “outcome” criteria – instead of taking bold action to benefit all investor participants in the FINRA arbitration system.  But the last thing we need in order to truly foster public confidence in this compulsory system for the adjudication of most investor claims is yet another study.

FINRA’s two-year pilot program slated to begin October 6, 2008, which will limit the choice of a “pure public” arbitration panel to a relatively small number of investors entering the industry’s dispute resolution system, is too little, too late.  Only ten firms so far have agreed to commit, in a limited number of cases (some as low as 20, others up to 80 over two years), to an all public panel if the investor so chooses.  Ironically, numerous studies, including the recent one commissioned by FINRA itself, SICA’s* “Perceptions of Fairness of Securities Arbitration: An Empirical Study,”** have demonstrated the perception of unfairness of the SRO system in which industry arbitrators have a role on every three member panel deciding investor disputes.

This perception of unfairness is held by a majority of investors surveyed who have already participated in the system, according to SICA, of which FINRA is a member.  The great majority of investors users of the SRO system, and the attorneys who prosecute their claims in arbitration, has complained for two decades about the mandatory industry panelist.

All public investors seeking to adjudicate their complaints at FINRA should be given the choice of selecting a panel of neutral arbitrators with no affiliation or connection with the financial services industry.  Creating a level playing field is especially important now, in the midst of the global financial crisis, when investor confidence is under extreme duress and investor claims at FINRA are on the rise.  The idea of a two-year pilot, which would only serve to reinforce and possibly perpetuate what has already been established as the weakest link in the system, is merely an excuse for delay.

When will FINRA get it right?

*The Securities Industry Conference on Arbitration.

**Barbara Black, Jill I. Gross, “Perceptions of Fairness of Securities Arbitration: An Empirical Study” (2008).

Posted in Securities Arbitration & Litigation

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