Tuesday, June 23, 2009


Attorneys for the Public Investors Arbitration Bar Association (PIABA) recently submitted a proposal to the SEC to eliminate the requirement that a securities industry arbitrator sit in on all public investor cases arbitrated before the Financial Industry Regulatory Authority (FINRA) in which the amount in controversy exceeds $100,000.00. PIABA claims that investors are unfairly disadvantaged when they are forced to arbitrate their securities claims before an arbitration panel which includes a member of the securities industry.

PIABA's proposal opines that in today's financial industry, the vast majority of agreements entered into between investors and brokers-dealers require that any disputes be brought in an arbitration forum before FINRA Dispute Resolution. Accordingly, investors do not have the option to bring their claims before a court of law, and instead are limited solely to FINRA arbitration proceedings. As such, the FINRA Code of Arbitration Procedure is basically binding on investors who bring suits against brokers-dealers.

Under the current FINRA Code of Arbitration Procedure, arbitration claims which exceed $100,000.00 must be heard by a panel of three arbitrators. Section 12401(c). Of those three, one arbitrator must be a “non-public arbitrator,” which is defined in relevant part as “any individual who currently works in the securities industry, worked in the securities industry within the past five years, or retired individuals who spent a substantial amount of their career employed in the securities industry.” Sections 12100(p), 12401(c), 12402(b).

To eliminate the inherent unjustness associated with FINRA's current mandatory rule, PIABA proposes that the SEC revise the FINRA Code of Arbitration Procedure and give the parties an option to choose whether a securities industry arbitrator sits on the panel. In support of its proposal, PIABA cites the United States Supreme Court's ruling in Shearson/American Express, Inc. v. McMahon, in which the Court held that the SEC has the power to regulate securities self-regulatory organizations (SROs), including the “adoption of any rules it deems necessary to ensure that arbitration procedures adequately protect statutory rights.” 482 U.S. 220, 233-34 (1987).

PIABA's proposal is likely to cause an uproar in the securities industry, which will no doubt do everything in its power to maintain its representation in FINRA arbitration proceedings. We will keep a close watch on this issue.

Click here to read PIABA's proposal in its entirety.

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