FINRA's proposed amendments to the Panel Composition Rule and Related Rules of the Code of Arbitration Procedures for Customer Disputes are intended to enhance confidence and increase the perception of fairness in the FINRA arbitration process.  But what if the changes aren't fair to individual broker respondents?  Patricia Cowart, who chairs the SIFMA Arbitration Committee, writes in a SIFMA comment letter that this is a real problem.  SIFMA, of course, is responding to FINRA Rule Filing 10-53, dated 11/5/10.

    FINRA Pilot Program.   FINRA’s rule proposal essentially expands, and makes available to all investors, the FINRA pilot program that gave investors filing arbitration claims against certain firms the option of choosing an all-public panel.  The Pilot was made possible by the voluntary agreement of SIFMA member firms to participate in it - beginning with 11 firms in 2008, and expanding to 14 firms in 2009.  SIFMA particularly supports the provision of the Proposal that preserves for customers who select the “Optional All Public Panel” the flexibility to strike all, some, or none of the arbitrators on the non-public arbitrator list.

    Increasing the Perception of Fairness.   FINRA’s stated reason for launching the Pilot was to address customer advocates’ concern that mandatory inclusion of a non-public arbitrator raised a perception that securities arbitration was unfair to customers.  Encouragingly – but not surprisingly - the Pilot hasn't revealed any evidence or indication that the alleged perception has any basis in objective reality.  And, empirical evidence has proven that investors’ claims are more likely to be heard on the merits, more quickly and with less cost, in securities arbitration than they are in federal or state court.

    Preserving Safeguards for Individual Brokers.   The current Pilot applies only to disputes between customer claimants and brokerage firms - it doesn't apply to disputes by customer claimants that name individual brokers as respondents.  The Proposal, however, would extend to all disputes between customer claimants, on the one hand, and brokerage firms and/or individually named brokers, on the other.  SIFMA opposes the Proposal with respect to cases involving individually named brokers, for several reasons, which include the following 3 points:

• As proposed, Code of Arbitration rules would be revised to enhance fairness for, and the protection and rights of, individuals.  Unfortunately, those same measures are not provided to individually-named brokers.  The 637,000 individual registered reps face potentially significant reputational and career damage, economic loss, and perhaps the loss of their very livelihood, when they enter into an arbitration proceeding.  In fact, these individuals, who are compeled to arbitrate any disputes with their customers, may often have as much, if not more, at stake as the claimant who brings the dispute.  Accordingly, reasonably expect that adequate procedural protections will be afforded to them under those rules so that they may properly defend themselves.

• Second, as noted, the Pilot did not include cases where an individual broker was named as a respondent.  Thus, we don’t have the benefit of 2-plus years of pilot program data to inform us on how those cases fared, or whether they would be appropriate for inclusion in the Pilot – much less whether it is now appropriate to simply lump these cases into the Proposal without the benefit of any study, data, legal or policy analysis, or even discussion.  

• Finally, the case for allowing individually-named brokers to have a non-public arbitrator on their panel is even more compelling in cases where the individual broker is named alone, and is no longer associated with a brokerage firm. In such cases, the resources and records of the broker’s prior firm may well be critical to mounting the individual broker’s defense, but also may well be unavailable or far less available to the individual broker in preparing his or her case.  Under these circumstances (among others), the inclusion of a non-public arbitrator would likely benefit both parties to the dispute as well as the public panelists, by appropriately educating them about the relevant financial products and services, industry customs and practices, and other legal industry-related issues.  The non-public arbitrator may also reduce costs for both parties by obviating the need for the parties to call expert witnesses to educate the panel about certain products or industry practices.

For SIFMA's complete comments on the proposed rule, click onto:   [SIFMA Comment Letter on 'Code of Arbitration', 12/3]