August 18, 2010
Public customers should not be required to arbitrate disputes with broker-dealers (or CFPs or RIAs) at FINRA.
The securities industry – acting via FINRA -- has absolute control over arbitration proceedings involving securities disputes. FINRAs board decides how public customer claims will be handled – and its the securities industry that selects most of the members of FINRAs board. True, the SEC reviews the arbitration rules proposed by the securities industrys representatives – but that purported SEC review is not meaningful at all. Has there ever been even just one time where the SEC stood in formal opposition to a FINRA dispute resolution rule proposal, by instituting proceedings for disapproval? I cannot find just one such instance.
Public customers currently have no choice but to assert their claims against broker-dealers in FINRA arbitration. Public customers can choose to either stand up for their rights -- which requires filing in FINRAs forum -- or completely forego any hope of justice. All public customers of FINRA members are required to execute predispute arbitration agreements, if they wish to have stock accounts. They have to have stock accounts, of course – FINRA member firms spend billions a year to convince all of us of that all we have to do is open a stock account and we can live richly.
Once the securities account is opened and the arbitration agreement signed, public customers have no further choice. Any claims they have must be arbitrated, and must be arbitrated at FINRA. There is no middle ground, there is no alternate forum the terms of the predispute arbitration agreement are non-negotiable, the terms of the uniform submission agreement are non-negotiable, and FINRA Dispute Resolution rules are non-negotiable.
As a further example of the unfairness of the regulatory and dispute resolution environment in which public customers are required to seek justice, many FINRA associated persons and FINRA member firms have been found liable to public customers over the years, only to disappear without paying a dime of what was owed. In many of those cases, the only thing the public customers received was a bill from FINRA.
The numbers themselves show how unfair FINRA arbitration is to the public customer. Public customers prevail in FINRA arbitrations approximately 48% of the time for this year so far, according to FINRAs statistics. But when they prevail, public customers actually receive less than 40% of their damages, on average. Oftentimes they receive considerably less. Nonetheless, if a public customer is awarded a $1.00, and is ordered to pay $5,000 in FINRA fees, thats a win in FINRAs statistics. So when public customers are required to file at FINRAs forum – without any negotiations as to the terms of the submission -- what should the public customer do? Fight the good fight, in face of 16% or 20% probability of a full recovery? Or should they just abandon their pursuit of justice?
To be fair, FINRA dispute resolution must be completely independent of the securities industry. FINRA is not.
To be fair, FINRA must provide competent, well-trained, independent arbitrators for every case. FINRA does not.
To be fair, public customers must have the post-dispute right to choose a private dispute resolution provider, or to go to court. Customers of FINRA members do not have that choice.
To be fair, FINRA must ensure that its members and former members will pay the damages that are awarded. Many awards – even settlements -- remain unpaid.
FINRA arbitration should not be mandatory for the public customer.