Arbitration in the Securities Industry

On January 31, 2011 in response to an outcry from investors and their attorneys, FINRA implemented a new rule that allows investors to choose whether they want an all-public arbitration panel, or a majority public panel, which includes a securities industry arbitrator.  Since this rule has been announced, investors have chosen all-public arbitration panels more often than not.  In the past, investors have felt that securities arbitration is biased against investors.  They felt that with at least one arbitrator having a history in the securities industry, there is a relationship between broker/dealers and the arbitrator.  Since this new rule has passed, investors no longer feel there is such a bias.  However, is all bias removed from securities arbitration?

Arbitration is still the mandatory form of resolving security disputes due to pre-dispute arbitration agreements that investors are forced to sign as part of customer agreements.  How fair is something that is mandatory?  Furthermore, FINRA, the agency that is meant to regulate broker/dealers and protect investors, is financed entirely by the broker/dealers that they regulate.  Thus, even though investors may have the option of being heard in front of an all-public panel, broker/dealers are still regulated by an agency that is funded by the securities industry itself.  In this paper I will illustrate how the perceived fairness of the new FINRA arbitrator panel rule leaves much to be desired. 

The first part of this paper will briefly discuss the history of arbitration in the securities industry.  The second part of this paper will discuss the new FINRA rule, its pilot program, and its results thus far.  The third part of this paper will question the fairness of the new rule and its possible effects.  Lastly, this paper will compare securities arbitration to arbitration in the entertainment and healthcare industries.

Read Article—
by Melissa Barcena

Melissa Barcena is a Law Clerk at Northrup Schlueter APLC, where she focuses predominantly on litigation and arbitration in the field of construction insurance defense. She will receive her Juris Doctorate from Pepperdine University School of Law and a Masters in Dispute Resolution from the Straus Institute in May of 2013. Melissa has been published on the Pepperdine Journal of Business, Entrepreneurship, and the Law. Graduated Magna Cum Laude from The Ohio State University with a degree in English, her hobbies include hiking, running marathons throughout Southern California, and trying new restaurants.