Subject: File No. SR-FINRA-2010-053
From: Timothy C Karen
Affiliation: Attorney

December 1, 2010

This is to comment on the proposal to eliminate the industry panel member on FINRA investor arbitration cases.

I have been an attorney in private practice in California for about 26 years. Since 1985 I have represented investors in arbitration proceedings filed with either the NASD or FINRA. I have handled many such arbitration cases. On numerous occasions, attorneys who were representing the brokerage industry respondents in these in arbitration proceedings have told me in one way or another that they and their clients put a low settlement value on a case filed in arbitration, as compared to cases pending in a trial court. It has in fact been my experience that if I have an investor claim in Court, it will probably result in a better outcome for my client than a case in arbitration. It seems very clear to me after many years, that investors do better in Court than in arbitration, in nearly all cases.

Part of the problem, in my opinion, is the notion that a different set of rules and ethical standards exist in the brokerage industry for codes of personal conduct by brokers, than the rules that are applied to brokers in court cases. For example, in California, the Supreme Court of California has ruled that brokers owe their clients a fiduciary duty, as a matter of law. However, I have handled arbitration cases in which a stockbroker has expressed the view that no such duty existed between my client and the broker. In other words, I believe that people who work in the securities industry may have a different view of their legal obligations to clients than would a court would say exists. If feel this is probably prevalent and part of the culture of the industry.

If I am right, and it is true that people employed in the securities industry perceive their obligations to be different from what the Courts would say is required, then obviously, having a person from the securities industry on an arbitration panel consisting of three arbitrators, could potentially shift the balance of fairness more toward the brokers. This is particularly true because from my experience, the people who are public arbitrators in FINRA proceedings may defer to the opinions of industry insiders on matters outside of the scope of their personal expertise. In other words, the panel might rely upon the "industry expertise" of a panel member, in coming to important conclusions in the case. This could, and probably does, work to the disadvantage of investor claimants.

I believe that part of the reason why Court cases are valued so much higher than arbitration cases is the fact that there is a perception among the bar that there is a systemic bias against investors in FINRA arbitration cases. I believe that a comparison of the outcomes of Court securities cases versus FINRA investor cases would show that investors do in fact fair better in Court cases than in arbitration. Part of this may be due to the presence on the arbitration panel in FINRA cases of an industry insider.

Therefore, in the interests of fairness and objectivity, I think that the elimination of the industry panel member represents a very important step in the right direction.


Timothy C. Karen
Law Offices of Timothy C. Karen