by Brian Mahany
William Cohan, a journalist and author of a popular column on Bloomberg View, calls for the end of FINRA arbitration panels. For those readers not familiar with FINRA, the acronym stands for the Financial Industry Regulatory Authority. Virtually anyone who has opened a brokerage account has signed an agreement saying that all disputes with their broker must be arbitrated before FINRA.
Recently there was quite a stir when FINRA fired 3 arbitrators after they found in favor of an investor and against brokerage giant Merrill Lynch. The securities bar (lawyers like us that represent victims of fraud) cried foul. After listening to the tapes of the proceeding (and the outcry from plaintiff’s lawyers), the 3 were reinstated.
Cohan wrote a widely circulated piece advocating the end of FINRA’s arbitration program. Quoting former Supreme Court Justice William Brandeis who said, “Sunlight is said to be the best of disinfectants,” Cohan called for allowing victims to take their disputes directly to court and a jury of their peers instead of panelists picked by the very industry that they are accusing of fraud.
Is Cohan right? Maybe.
We are not so quick to call for the abolishment of arbitration. For one thing, its fast and inexpensive. People with marginal, smaller or tough cases might not find a lawyer to take a case on contingency if the case must be litigated. Court cases are expensive and the big brokerage firms have very deep pockets and can wage a war of attrition. Court cases can drag on for years while the average FINRA arbitration is resolved in about a year.
We also believe that most of the public arbitrators (and many of the industry ones) want to do the right thing. They don’t like bad apples ruining the reputation of the industry.
Having arbitrated and tried securities cases in front of a jury, there is something comfortable about having a jury of one’s peers hear the case, however. Juries may not understand the financial industry but they are pretty good about smelling a rat. And when they smell a rat, a jury is far more likely to award punitive damages than an arbitration panel.
Clearly there are plusses and minuses to both arguments. Unless customers are allowed to make a choice, we are not ready to abandon FINRA arbitration system just yet. Hopefully Cohan’s commentary and the ever vigilant investors’ bar is enough to keep the system honest.
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