FINRA Amps Up Inspection of Arbitrators

An Aug. 8 article by Reuters reports that the Financial Industry Regulatory Authority (FINRA) may be stepping up efforts to more thoroughly inspect its arbitrators. The move is viewed by many as a necessary one in order to prevent arbitration rulings from being invalidated due to certain issues – including conflicts of interest – that some arbitrators fail to disclose.

Among the new steps that FINRA apparently plans to take on are Google searches and background checks.

FINRA’s new focus on arbitrators comes on the heels of recent allegations by an investor who lost a $1.4 million case against Goldman Sachs earlier this year. The investor in the case alleged that an arbitrator did not fully disclose his involvement in a criminal proceeding. The investor subsequently asked a federal court to overturn the ruling.

The changes proposed by FINRA follow a push from consumer groups and state securities regulators to restrict the practice of mandatory arbitration by brokerages regarding legal disputes with investors. A recently introduced bill takes the issue one step further by significantly amending the Dodd-Frank financial reform law.

Specifically, The Investor Choice Act of 2013 (H.R. 2998) would prohibit the use of mandatory pre-dispute agreements by broker/dealers and investment advisers that force investors to arbitrate disputes or otherwise surrender their right to pursue recourse in a forum of their choosing.

“Investors shouldn’t have to sign away their rights in order to work with a financial adviser or broker dealer to build a secure retirement,” said Representative Keith Ellison (D-MN) in a statement. Ellison is the bill’s author and a member of the House Financial Services Committee.

Many state securities regulators agree with Ellison.

“It would ensure that investors, at least, have a choice,” said A. Heath Abshure, president of the North American Securities Administrators Association (NASAA). “They [investors] can still pick arbitration, mediation or court, but they will pick a forum where they stand a fair shot,” Abshure said in the Reuters article.

“This legislation is all about preserving investor choice and ending an investor protection gap. The inclusion of mandatory arbitration provisions in broker/dealer and investment adviser customer contracts denies many investors the ability to pursue legitimate claims against fraudsters. Investors deserve better than the current ‘take-it-or-leave-it’ approach to securities dispute resolution,” Abshure added in a statement from NASAA.