FINRA Opposes Rule Change Regarding Industry Arbitrator

Representing Investors Nationwide

A recent Wall Street Journal article details the the Financial Industry Regulatory Authority (FINRA) resistance to the elimination of the industry arbitrator from panels hearing customer complaints. The Plaintiffs bar has long advocated the elimination of the industry arbitrator on the perceived bias the industry arbitrator may bring to the proceeding. FINRA put a pilot program in place last year but it is too early to tell if eliminating the industry arbitrator will have any bearing on customer awards. In the meantime, FINRA is opposing any further changes at this time.

The full article appears below:

NEW YORK (Dow Jones)–The retail brokerage industry’s self regulatory organization urged the SEC to allow a pilot program for securities arbitration to conclude before considering a rule change petition filed by investor advocates that would eliminate industry arbitrators from certain panels.

The Financial Industry Regulatory Authority, or Finra, says it supports the goal of an arbitration system that’s fair to investors, but a two-year pilot program in which certain investors can opt for three-person panels comprised of all public arbitrators, instead of a panel that includes an industry arbitrator, should be allowed to continue until October 2010, wrote Linda D. Fienberg, president of Finra dispute resolution.

Finra submitted the Aug. 3 letter to the SEC in response to a June 11 rule change petition filed by the Public Investors Arbitration Bar Association, or Piaba, a Norman, Okla.-based group of attorneys who represent investors. The petition requested the SEC require that parties in an arbitration be empowered to select an all-public panel in any investor claim exceeding $100,000.

Feinberg wrote that allowing the pilot to conclude would allow Finra to analyze data from the program and “make an informed decision on how to proceed concerning panel composition in investor cases heard by three arbitrators.” Criteria for evaluating the program will include the percentage of investors who elected to participate in the program, the length of hearings, and results of pilot and non-pilot cases.

Eleven brokerages are participating in the pilot, which launched in 2008, each contributing a set number of cases per year, during the two-year period. Feinberg wrote that Finra will try to expand the number of brokerages that participate and the cases they contribute.

As of July 17, Finra noted 444 cases that were eligible for the pilot program. Of those, 52% of investors chose to participate in the pilot program, resulting in 233 pilot cases, according to the letter. Parties have completed the arbitrator selection process in 193 of those cases. Investors chose not to eliminate industry arbitrators in half of those cases, according to the letter.

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