PIABA slams SIFMA proposal for FINRA arbitration reform

The Securities Industry and Financial Markets Association has outlined a series of recommendations it says would improve the fairness and efficiency of the Financial Industry Regulatory Authority’s arbitration forum.

But the Public Investors Advocate Bar Association is urging FINRA to reject the proposals, warning they could weaken investor protections.

In a letter submitted to FINRA last month, SIFMA called for reforms in five areas, including allowing certain claims to be adjudicated outside the FINRA forum, permitting agreements to limit punitive damages, improving the process for Form U5 defamation claims, amending procedural rules, and enhancing arbitrator quality and accountability.

SIFMA argued that, for high-dollar or institutional investor claims, “small claim or general investor protection concerns do not apply,” and that such cases are better suited for alternative forums.

The group also recommended that FINRA allow parties to contractually preclude or limit punitive damages in arbitration, as permitted by state law, citing concerns about “recent extreme outlier punitive damages awards” and the lack of procedural safeguards for such awards in arbitration.

On procedural matters, SIFMA proposed allowing motions to dismiss before an answer is filed, stricter discovery guidelines, and the appointment of special discovery masters for complex cases.

The organization also called for a central contact point to assist arbitrators during hearings and recommended more stringent oversight and training for arbitrators, including higher compensation and expanded qualifications.

Reacting to the proposals on Monday, described SIFMA’s recommendations as “blatantly self-serving,” arguing that the changes would make it easier for firms to avoid responsibility and harder for investors to seek redress.

Adam Gana, president of PIABA, said, “SIFMA’s list of arbitration reform recommendations is so blatantly self-serving that it almost reads like a parody. SIFMA’s claim that this will improve FINRA’s ‘fairness and integrity’ is an insult to the intelligence of Main Street investors and folks saving for retirement.” 

PIABA’s letter to FINRA warned that allowing alternative forums for certain claims would fragment oversight and reduce transparency, while limiting punitive damages would remove a key deterrent against misconduct.

"There is no evidence that arbitrators are awarding excessive or inappropriate punitive damages," PIABA said. "In fact, punitive damages are awarded in less than 1% of FINRA arbitrations." 

The group also objected to expanding motions to dismiss and restricting discovery, saying such changes would “stack the deck against the customers who are often mom and pop retail investors and retirees seeking to recover losses of significant portions of their life savings.” 

Similarly, it argued that SIFMA's proposal would lead to more industry-dominated arbitration panels, further tilting the scales against investors.

"Investors are entitled to dispute resolution before a neutral and balanced tribunal," PIABA said. "FINRA must reject efforts that would turn its arbitration forum into a venue where the outcome is skewed before the case even begins."

While PIABA agreed with SIFMA’s call for better monitoring and training of arbitrators, it maintained that the overall effect of the proposed reforms would be to tilt the process in favor of the industry.

“If FINRA continues on this path, confidence in the arbitration forum – and the industry at large – will only continue to erode,” Gana said.