FINRA Announces Pilot Program To Evaluate All-Public Arbitration Panels


In response to growing public and political pressure, in a news release dated July 24, 2008, the Financial Industry Regulatory Authority (“FINRA”) announced that it has launched a “pilot program” that scraps the “industry” arbitrator. For “eligible” claims filed on or after October 6, 2008, claimants who elect to participate in the pilot program may choose an arbitration panel composed of three “public” arbitrators instead of two “public” and one “industry” arbitrator (the typical panel composition in a case filed by a customer). Generally speaking, a public arbitrator is one deemed not to be affiliated with the securities industry by FINRA rules governing securities arbitrations. An “industry” arbitrator is affiliated with the securities industry.

Six firms ? Merrill Lynch, Citigroup Global Markets, UBS, Wachovia Securities, Morgan Stanley and Charles Schwab ? have agreed to participate in the two-year pilot program. Schwab has agreed to “contribute” only 10 cases per year for participation in the program, and the other firms have agreed to contribute 40 cases per year. The firms cannot decide which cases will participate in the program. As noted, the pilot program only applies to “eligible” claims filed on or after October 6, 2008. FINRA’s announcement did not clearly define what is meant by “eligible.”

The primary concern that led to the pilot program has to do with the fairness or unfairness of having an industry representative acting as an arbitrator in a customer case. Those who have pressed for the abolition of the industry arbitrator are of the opinion that, when the conduct of the broker or firm is at issue, an arbitrator who is or was a member of securities brokerage business may have a tendency to give the benefit of the doubt to the broker and the firm. In other words, the industry arbitrator may be biased in favor of the industry.

FINRA’s announcement is not clear on how it plans to evaluate the unfairness issue. FINRA states (somewhat cryptically): “The pilot program will be evaluated according to a number of criteria, including the percentage of investors who opt into the pilot and the percentage of investors who choose an all-public panel after opting in. FINRA will compare the results of pilot and non-pilot investor cases, including the percentage of cases that settle before award (and how quickly they settle). FINRA will also study the length of hearings and the use of expert witnesses in pilot and non-pilot cases.”

If FINRA wants to be perceived as a legitimate dispute resolution forum, instead of a trade association masquerading as a dispute resolution forum, it should, at a minimum, clearly and publicly identify in advance what outcomes will constitute a successful program.