Investor lawyers say Finra moving too quickly on arbitration unit

Proposal would bring its dispute resolution arm back in house

Nov 2, 2015 @ 1:56 pm

By Mark Schoeff Jr.

Plaintiffs' attorneys representing investors are calling on Finra to slow down a proposal that would bring its dispute resolution arm back in house.

The Public Investors Arbitration Bar Association said that the industry-funded broker-dealer regulator has not provided enough time to comment on the rule, which would re-integrate the now independent Finra Dispute Resolution Inc. with the organization's regulation subsidiary, Finra Regulation Inc.

The Financial Industry Regulatory Authority Inc. filed the proposal with the Securities and Exchange Commission on Sept. 29. The regulatory notice was published in the Federal Register on Oct. 13 with a comment deadline of Nov. 3.

The SEC is scheduled to decide whether to approve the proposal by Nov. 27.

The measure would reverse a move in 1999 to separate the dispute resolution function into a separate subsidiary in order to strengthen the perception of the independence, neutrality and credibility of Finra's 6,476 arbitrators who hear customer and broker disputes against financial firms.


“The proposed re-integration is a complete about-face,” Hugh Berkson, PIABA president, said in an interview. “We see a lot of buzzwords and catch phrases [in the proposal], but no detail. This was meant to fly under the radar. We can't study it the way it needs to be studied.”

A SEC spokesperson did not immediately respond to a question about the timing of the comment period.

A Finra official said the organization is taking public feedback in a way consistent with previous proposals.

“Our rulemaking process is very transparent and the comment period for this rule was handled no differently than what it has been for other rules,” said Finra spokeswoman Michelle Ong.

In the proposal, Finra argued that the merger would “reduce unnecessary administrative burdens” because the two arms — arbitration and regulation — share many of the same resources. It also would formalize on the corporate organizational chart what investors already think — that Finra is one entity.

“From the public's perspective, Finra Inc., Finra Regulation and Finra Dispute Resolution have the appearance of a single organization,” the proposal states. “Operationally, the three corporate entities largely function as a single organization.”


But that's the problem, according to Mr. Berkson. PIABA has raised many concerns about the fairness of the Finra arbitration process.

If the merger is approved, defense lawyers may be able to point to a regulatory move that Finra has made — such as issuing a no-action letter — to argue that the firm is innocent of a claim.

A lawyer could assert that Finra “has decided there's nothing to pursue,” Mr. Berkson said. “That is a concern.”

A former Finra official agreed with PIABA that more time should be taken to consider the rule change, but he supported the substance of what Finra is doing.

Finra's arbitration and regulation arms have the same board, said George Friedman, who was director of Finra arbitration from 1998-2013.

“As a practical matter, I think the rule change is meant to reflect the situation as it has been on the ground for many years,” Mr. Friedman said.


Should Finra bring its dispute resolution unit back in-house?

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