FINRA, the Securities Industry's Mandatory Arbiter, Shouldn't Be Allowed to Expand

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The Financial Industry Regulatory Authority describes itself as "an independent regulatory organization empowered by the federal government to ensure that America's 90 million investors are protected." Nothing could be further from the truth. A better description would be that the group, known as FINRA, is a trade organization that gives the securities industry a mechanism to avoid effective regulation by the federal government.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%All investors are required to submit their disputes with brokers to arbitration run by FINRA. But the fairness of these panels has been a subject of intense debate. William Galvin, the highly respected Secretary of the Commonwealth of Massachusetts, characterized the process as "... an industry-sponsored damage-containment and -control program masquerading as a juridical proceeding," in testimony before a House subcommittee.

Investors who go before FINRA panels for arbitration face rough sledding. More than 50% of the time, they get nothing. When they do win, they are awarded a fraction of their requested damages. It's not surprising that a comprehensive study found most participants in these arbitrations believed the sessions were biased and unfair.

FINRA's mandatory arbitration process is so bad that the North American Securities Administrators Association announced its support for a ban on mandatory arbitration, noting that FINRA's system is "inherently unfair to investors." NASAA's membership includes securities administrators in all 50 states.

Legislation pending in Congress would ban all mandatory-arbitration clauses in consumer agreements, including agreements with brokers. Naturally, FINRA isn't exactly throwing its support behind such a change. Why should clients of brokers get an impartial hearing?

Bringing FINRA's Pro-Corporate Bias to New Venues


Against this disturbing backdrop comes the stunning news that FINRA is seeking to expand its arbitration business to nonsecurities matters. According to a recent announcement soliciting business from corporate clients, FINRA notes that "employee disputes can be distracting and deter from the primary goal of running your business." It claims that its expanded services can help employers who are "looking for a faster, more efficient way to address customer complaints."

Scot D. Bernstein, a securities arbitration lawyer with vast experience arbitrating disputes before FINRA panels, views the organization's expanded services with skepticism. "FINRA's announcement doesn't promise its prospective corporate clients that customers who suffer harm will be compensated fairly," he says. "I doubt that omission is a coincidence."

FINRA should be shrinking -- not expanding -- its toxic arbitration services. Industry-run arbitration of securities disputes should be optional, not mandatory. The current system re-victimizes hapless clients who have been harmed by the misconduct of their brokers.

FINRA's expansion plan gets my nod for the worst idea for 2010.



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