Subject: File No. DF Title IX - Pre-Dispute Arbitration
From: Melinda Steuer, Attorney, Sacramento, California

August 18, 2010

I am a practicing attorney in California whose primary practice area involves representing customers/investors in disputes with their financial advisors. As an attorney who has litigated extensively in both court and FINRA arbitration, I am writing to urge you to end the unfair system of mandatory arbitration of customer disputes with their financial advisors and to restore customers' constitutional rights to a jury trial. While many FINRA arbitrators are fair and conscientious, the system as a whole is biased and is stacked in favor of the same brokers and broker-dealers who have wronged the customers in the first place, for the reasons explained below.

  1. Arbitration panels do not represent a jury of one's peers, and often lack the ability to empathize with the customers. Arbitration panels are largely composed of wealthy, white, highly educated men. It is difficult for them to relate to unsophisticated consumers who are easily taken in by unscrupulous financial advisors.
  2. One of the three arbitration panelists is always somebody from the securities industry. Not surprisingly, such people are more likely to relate to the advisor than to the customer. This is compounded by the fact that many of the "public" panelists are attorneys who represent securities brokers and broker-dealers, and therefore are not really public at all.
  3. Arbitrators do not have to follow the law, and often do not, to the detriment of the customer. For example, in California, financial advisors owe a strict fiduciary duty. Because arbitrators do not have to follow this law, this fiduciary standard is often ignored in arbitration, and brokers and broker-dealers are able to get away with arguments and defenses which would not pass muster if the case was in court. As another example, under California law, the remedy for unsuitable investment advice is the difference between how the investment would have performed if properly managed and how it actually performed. This law is routinely ignored by arbitrators. Instead, customers' recovery is usually limited to their "out of pocket" loss, by which they recover no more than if their money had been stuffed under a mattress instead of invested. That result would not occur if customers were allowed to bring cases in court where the law must be followed.
  4. There is no right of appeal. Some arbitrators are good, some are okay and some are horrific. If a customer has the bad luck to draw a horrific arbitrator/panel, there is no remedy because arbitration awards are almost impossible to overturn. In court, there is the right to appeal if something goes terribly awry. In addition, the fact that a judge has an appellate court looking over its shoulder usually prevents the worst abuses. There are no such checks and balances in arbitration.
  5. The "repeat player" syndrome is rampant in FINRA, to the detriment of the customers. There are only a couple dozen major broker-dealers. If a panelist rules against them too often, that person will be bumped from panels. That is not a concern with regard to customers who will likely only bring one claim in their lifetimes. As a result, panelists will sometimes "split the baby" when it is not warranted in order to ensure continued work as an arbitrator.
  6. Arbitrators do not have to explain their awards and usually do not. As a result, customers are left in the dark as to why they lost, or why they got so much less than their claim. An unexplained decision also allows a biased arbitrator to mask their bias, because they are not required to explain why they ruled the way they did.
  7. The customers have no meaningful choice with respect to arbitration. Brokers and broker-dealers often make a big deal about how the customers willingly agreed to mandatory arbitration. The reality is that every broker-dealer has a mandatory arbitration provision in their new account forms. A customer cannot invest anywhere nor with anybody without being required to give up their constitutional right to a jury trial.
  8. In assessing who the mandatory arbitration system truly favors, one need look no further than the fact that brokers and broker-dealers ALWAYS favor arbitration, and plaintiff/claimants oppose it. That would not be the case, if arbitration were the fair and equitable system which the securities industry claims it is.

I appreciate your consideration of this message.