FINRA offers some arbitration fixes; bigger issues still unresolved

SAN DIEGO – FINRA has announced a string of reforms to its troubled arbitration dispute resolution system, such as a plan to hire 1,000 more arbitrators, but a recent presentation on the changes yielded few new details on some of the biggest issues raised by its critics.

At the annual meeting of the Public Investors Arbitration Bar Association, FINRA’s director of dispute resolution Richard Berry, gave little indication about whether or not FINRA will launch a fund to cover the estimated one third of arbitration awards to investors that go unpaid. In these cases, investors receive no compensation for their losses, which are sometimes caused by unscrupulous or incompetent brokers. In some cases, the brokers who harmed them go on to work at other firms.

More work needs to be done before such a fund could be created, Berry said at PIABA’s annual meeting, though he sought to reassure PIABA members that the regulator is taking significant steps behind the scene. PIABA is one of FINRA's sharpest and most persistent critics,

"We've expanded our look to not only focus on a potential fund, but also on how do you knock down the number of cases that go unpaid?" Berry said about a relief fund. "So it's a broader effort."

The problem with unpaid awards has been a persistent one. PIABA first authored a report on the shortfall 10 years ago, says outgoing PIABA President Hugh Berkson, who says it’s time for FINRA to do something concrete about it.

"I know they are 'working on it,' but we need results," he added.
On the pressing issue of the high number of brokers who succeed in removing disciplinary marks from their public BrokerCheck reports, which FINRA operates, Berry had a similar response to what he’d said about the arbitration fund.

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"I can tell you that the BrokerCheck issue is something that FINRA is very concerned about and looking into," Berry responded.
Reforms that FINRA has made to its arbitration process, according to Berry, include:

1. "Public" arbitrators can no longer have industry experience. PIABA members complained that too many arbitrators that FINRA classified as "public" had previously worked in financial firms. In response to these concerns, FINRA reclassified arbitrators with industry experience as non-public.

2. Adding 1,000 more arbitrators this year. One side effect of the decision to remove many arbitrators from the public classification has been a drop in the overall number of arbitrators. In response, FINRA is adding 1,000 arbitrators this year and plans to add still more in years to come.

3. New advertising campaign to attract public arbitrators. FINRA debuted a video that asks for members of the public who want to serve "your neighbor and your country" to become FINRA arbitrators.

4. Increased size of public arbitrator list. Parties to arbitration disputes are given lists of arbitrators from which to choose. Frequently, one side will strike all 10 options presented for the public arbitrator slot. In response, the size of that list is increasing from 10 to 15 names.

Ann Marsh

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