A New Arbitration Option for Investors

The Securities and Exchange Commission approved a Financial Industry Regulatory Authority, Inc. proposal giving investors the option to have an all-public arbitration panel. Traditionally, FINRA arbitration panels contain three arbitrators: two public arbitrators and one industry arbitrator—with a “nexus to the securities industry.” The public arbitrators are those who do not have any recent ties to the securities industry.

Over the last 27 months FINRA has been testing a voluntary pilot program that presented investors with the option to eliminate the industry arbitrator and replace that arbitrator with a public panelist. Results from the FINRA pilot program showed that the all-public option was chosen about 60 percent of the time. Further, the findings revealed that having the ability to choose the type of arbitration panel improved investor-claimant’s perception of the process.

The SEC cites in its approval that this new all-public option “will enhance the public’s perception that the FINRA securities arbitration process and rules are fair.” Some State regulators and other investor and consumer groups have long-advocated for all-public arbitration panels. The president of the North American Securities Administration Association, David Massey, further supports this move, but suggests that it should go one step further and allow investors to choose between arbitration and litigation.

Although there has been a big push for all-public arbitration panels, the shift has been controversial for some in the industry. Some industry arbitrators argue that because they know how things are supposed to run in the industry, they are in a unique position to be tougher on bad actors, and that they enhance the ability of the panel to reach the correct conclusion.

The option for an all-public arbitration panel is only applicable to future arbitrations and those currently pending before FINRA where the investor has not yet received a list of potential arbitrators. It is important to note that this change does not apply to investor arbitration proceedings in other arbitration forums, such as JAMS or the AAA. The rule change also does not affect disputes between brokerage firms or brokers.

Additional information about the new arbitration rules is available here.