Several investor advocacy and consumer organizations called on Finra Wednesday to release more data and information about its arbitration system for settling investor disputes with brokers.
Finra, the industry-funded broker-dealer regulator, should go beyond the
arbitration statistics it makes available on its website, the groups said in a letter to a
task force evaluating the Finra arbitration system.
The Public Investors Arbitration Bar Association released
the letter ahead of a meeting of the task force scheduled for Thursday. The 13-member panel consists of three investor attorneys, an investor advocate, a state securities regulator, four financial-firm officials and an industry attorney, among others.
The
Financial Industry Regulatory Authority Inc. should release studies, investigations and analyses it has conducted about investor understanding of arbitration, its selection of arbitrators, award collections, the number of times arbitrators find in favor of investors or brokers, and the claims on which investors tend to prevail, the groups asserted.
Additional information from the Securities and Exchange Commission and Finra would illuminate how well investors fare in the arbitration system, the groups said. Investors must have their claims against brokerages arbitrated in a process run by Finra, according to mandatory-arbitration clauses that appear in nearly every brokerage contract.
“Finra arbitration may be inherently biased against individuals,” the letter states. “The system is ripe for change to level the playing field and ensure that every investor has the right to access the court system. In the meantime, the task force has the ability to urge disclosure of critical information that will shed light on the Finra arbitration system.”
In addition to PIABA, the letter was signed by Americans for Financial Reform, Alliance for Justice, Center for Justice and Democracy, Consumers Union, National Association of Consumer Advocates, National Consumers League, Public Citizen and U.S. PIRG.
A Finra spokeswoman didn’t directly address the letter, but also didn’t rule out its recommendations.
“Finra asked the task force to work together to suggest strategies to enhance the transparency, impartiality and efficiency of Finra's securities dispute resolution forum for all participants,” Finra spokeswoman Nancy Condon said in a statement. “We look forward to the recommendations that they put forth.”
A former Finra official said he doubts that the system would become more transparent if Finra released all the data requested in the letter.
“Shedding light on the system enhances perceptions of fairness and is a good idea,” said George Friedman, who was director of Finra arbitration from 1998-2013. “But looking backwards in this massive data dump is not the way to do it.”
Instead, it would be better to focus on gathering new data or highlighting existing data, according to Mr. Friedman, owner of an eponymous consulting firm. For instance, Finra should reveal the number of arbitrators available by hearing location to indicate where they may be short-handed to hear disputes.
Mr. Friedman used Puerto Rico as an example.
“It would have been evident there weren't enough arbitrators in the area to handle the surge in Puerto Rico bond fund cases” if that data was available, he said.
The reasoning behind Finra arbitration panel decisions is not publicly released.
Over the last two years, PIABA has conducted studies that claim brokers can easily expunge their disciplinary history from their records in the online database known as BrokerCheck and that the Finra pool of about 6,300 arbitrators lacks diversity.
The SEC, which oversees Finra, has in the past declined to release to PIABA records related to the arbitration system, citing an exemption from the Freedom of Information Act.
“Despite the SEC's failure to disclose critical information, Finra can encourage release of this and other data for a proper and open appraisal of the system,” the letter states.
The Dodd-Frank financial reform law gives the SEC the authority to end mandatory arbitration of client claims. The agency has not yet addressed the issue.
