FINRA Considers Stricter Reforms for Arbitration

The FINRA arbitration system is a valuable part of the regulatory process, giving clients and brokers a way to settle disputes without the hassle of going to court. However, the current rules for the process have been criticized for being a bit misleading to investors. Consequently, FINRA is now considering stricter rules for choosing who can serve as an arbitrator.   

The Current Arbitration System

When an investor wants to handle a broker dispute through arbitration, the investor and the broker choose a panel of arbitrators to hear the argument. Arbitrators are labelled as either Public or Non-Public. Non-Public arbitrators are industry insiders while Public arbitrators are supposed to be from outside the industry. Investors can request a panel of only Public arbitrators if they are worried about an industry bias in their case.

After hearing from both sides, the panel decides on an outcome which is legally binding, unless either party decides to challenge the decision in court. Ideally, arbitration offers a quick and more cost effective way to settle disputes.

The Problem with Arbitrators

Under the current rules, people who leave the investment industry can be classified as Public arbitrators five years after they leave. In addition, lawyers, accountants, and other professionals who mainly work with the investment industry are still classified as Public. This could be a problem because then these supposedly unconnected arbitrators do in fact have an industry connection.

Proposed Changes

  1. Those who have worked in the industry could never be classified as Public.
  2. Professionals could qualify as Public, only if less than 20 percent of their business comes from the investment industry. Otherwise, they would be Non-Public arbitrators.

FINRA has launched a 13-person task force of lawyers, academics, and industry representatives to consider these proposed changes and possibly make a decision in 2015.

Impact on the Investment World

The goal of the proposed changes is to make the arbitration process fairer for investors. If investors elect to have Public arbitrators unconnected to the industry, FINRA wants to ensure that they get it.

Opponents argue that the changes would prevent people with a thorough understanding of the investment business from participating in hearings, creating a worse process overall.Brokers and investment advisors should keep an eye on this review.

If the proposed changes go through, they could expect to deal with arbitrators with limited knowledge of the current investment industry.


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