FINRA has made
Some critics, however, see the industry regulator's arbitration reform effort as too slow and cautious, particularly when it comes to the transparency of the arbitration process and the qualifications of the arbitrators.
This week FINRA announced that it has taken action on 35 of the 51 recommendations set forth by a task force convened in 2014 to address deficiencies, though that figure includes the consideration of several recommendations that the self-regulator ultimately rejected.
Among them, FINRA said it brought on board 945 new arbitrators last year, well ahead of the goal it set out of 750 recruits. The authority also noted that it has brought on more women and African-Americans as part of its effort to increase the diversity of its arbitrator pool.
The regulator plans to ramp up scrutiny of bad brokers and electronic communications, among other new measures.
Other recommendations from the task force can’t be enacted by FINRA since they would entail a full-fledge rulemaking process that requires approval from the SEC. Under those restrictions, the self-regulator has completed two such rules, one expanding the roster of potential arbitrators in a given dispute to 15 from 10, and another clearing the way for cases to be dismissed earlier in the arbitration process.
One rulemaking is pending: FINRA would develop a mechanism for notifying state securities regulators when brokers make a request for an expungement of an arbitration proceeding from their record.
The organization is also developing a proposed rule that would provide for the expedited resolution of small customer and intra-industry disputes, defined as those cases involving claims of $50,000 or less.
In a statement, FINRA CEO Robert Cook touts the progress the self-regulator has made on implementing the task force's suggestions, adding that "we are diligently responding to the remaining recommendations."
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‘NOT IMPRESSED'
But critics of the arbitration process see FINRA's changes as minor, incremental tweaks to a system in need of fundamental reform.
"I am not that impressed with the report because it is yet another so-called status report that reflects the glacial pace of slugging progress," says Bill Singer, a veteran securities attorney who has represented investors and industry members in securities arbitration proceedings.
"It is all too safe and tepid," Singer says, noting that the reform effort is not engaging on big issues like the merits of FINRA's mandatory customer arbitration policy. "FINRA's arbitration doesn't need plaster and whitewash – it needs a wrecking ball. What we are getting is more make-work rather than meaningful reform."
"FINRA's arbitration doesn't need plaster and whitewash — it needs a wrecking ball."
Likewise, the update on arbitration reform does not address calls for a compensation fund to disburse the
"This is a complex issue and FINRA is looking at it in a fuller context, examining root causes like sufficiency of firm capital and other relevant aspects of this issue," spokeswoman Michelle Ong said in a statement.
FINRA's report does acknowledge that the reform efforts are a work in progress, and indeed some of the modest tweaks it has made to the arbitration system do seem small in scale.
In the area of disclosures, for instance, the organization has been making incremental changes aimed at improving the transparency of the arbitration process, including revisions to its appointment letter and training modules for arbitrators to add a stronger emphasis on disclosing conflicts of interest in response to a task force recommendation.
Later this year, FINRA is planning to roll out changes to its technology system for tracking the pending disputes that arbitrators are assigned to, and it has expanded the statistical information it makes available about the arbitration cases.
FINRA declined, however, to act on the recommendation to ease the process for challenging an arbitrator's assignment to a dispute based on their role in related pending cases, where conflicts could arise. It also rejected a recommendation to require all potential arbitrators in a pool for a dispute to submit comprehensive, case-specific disclosure reports during the panel-selection process, saying that such a requirement would be "burdensome" and "time-consuming" for the arbitrators, and "would likely slow the administration of the case and its ultimate outcome substantially."
