All-Public Arbitration Panels May Be New Option For Investors

Investors who file arbitration claims against a broker or investment firm may soon have the option of getting their case heard before an arbitration panel comprised of all public arbitrators. The Financial Industry Regulatory Authority (FINRA) plans to file the new rule proposal next month.

Most arbitration cases are now heard by a three-person panel, with one of the members typically affiliated with the securities industry. Many people have suggested that the mandatory presence of an industry arbitrator gives the appearance of tilting the process in favor of the securities industry. At the very least, investor advocates contend that the industry affiliation creates possible bias or conflict of interest.

If approved by Securities and Exchange Commission (SEC), the new change would apply to all investor claims in a two-year-old pilot program by FINRA that has given investors, in certain cases, the option of choosing an all-public panel.

“This would represent a monumental advance of the interests of fairness for investors who are required to arbitrate their disputes with the securities industry,” said Steven B. Caruso, a securities lawyer with Maddox Hargett & Caruso, P.C. in New York, in a Sept. 29 article in the Wall Street Journal.

Recently released statistics from FINRA affirm Caruso’s sentiment. As reported in the Wall Street Journal article, investor cases heard by all-public panels have, in fact, fared better than cases heard by panels that included an industry arbitrator. Arbitration panels have ruled in 23 of the cases filed through FINRA’s pilot program. Of those, 17 cases were heard by a public panel, while six were heard by a panel that included an industry arbitrator. Investors won in 71% of the cases heard by a public panel, compared with 50% of the cases in which the panel included an industry arbitrator.