FINRA is proposing all-public arbitration panels in a rule it's
filing with the Securities and Exchange Commission next month,
following a two-year pilot program.
The idea is to increase public confidence in FINRA's regulation
of its members. "Any investor will have the power to have his or
her case heard by a panel with no industry participants," Richard
Ketchum, FINRA's chairman and CEO explained in a statement.
That's a big problem for advisors according to some industry
observers. "The average person doesn't know much at all about the
investment world," said Rick Rummage, president of recruiting firm
The Rummage Group in Reston, Va. "It's already a nightmare of
advisors. Of course you should hold bad advisors liable, but
arbitration can ruin a good advisor's career over a single
complaint. I can't tell you how many advisors I can't move because
of a bogus complaint and the firm just decided to settle." Rummage
maintains that while there are some bad apples, the majority of
cases come about simply because an investor lost money and wants it
Heywood Sloane, managing director of the Bank Insurance and
Securities Association added that more public the process, the more
likely it is that firms will settle sooner, regardless of the
merits of the case. "Firms will definitely settle faster, and if
that besmirches an advisor unfairly, that's not a good thing."
However, Alan Foxman, an attorney in Boca Raton, Fla., who
previously worked in FINRA's arbitration department for eight
years, brokers might receive a more sympathetic ear than they would
from an industry insider. "Industry guys tend to be tougher on
firms and reps than non-industry people," he said. "As an attorney,
I too might be harsher on another attorney for giving my industry a
black eye, or for doing things differently than I would."
On the whole, Foxman doubts all-public panels will make much
difference. Arbitration panels currently consist of two members of
the public and one industry insider, who might be a retired broker
or an attorney who works with brokerage firms. That insider may be
as unfamiliar with a new investment product or process as the
Foxman adds that it's not very likely the number of firms
settling will rise-under the current system 80% of firms settle, so
there's not much higher it can go.
Chris Hickman, a former Bank of America broker who is now an
independent advisor with Premier Client Investments, clearing
through Multi Financial Services, in Del Ray Beach, Fla., said that
rather than tweak the system for the sake of appearances, the
entire process should be scrapped. "The whole FINRA system is a
farce," he said. "Nobody's under oath; anyone can make anything up
and they're not accountable for it, and then it goes on the
broker's record forever. It's not exactly fair."
Hickman maintains that FINRA's arbitration procedure is set up
not to protect investors from bad advisors, or good advisors from
false allegations. Rather, it's in place to protect the firms whose
membership fees pay for FINRA. "They just settle and throw the
advisor under the bus," he said. "I'd rather have a regular court
system where everyone's under oath," and could be charged with
perjury for lying. While FINRA witnesses also swear in, the worst
that could happen if they're caught lying is they could find
themselves the wrong side of another FINRA arbitration panel.
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