Indeks
The Financial Industry Regulatory Authority will test a change in how it resolves investor-broker disputes, removing industry representatives from three-person arbitration panels in select cases.
Six firms, including Merrill Lynch & Co., Morgan Stanley, and Citigroup Global Markets, volunteered to participate. More than 400 cases will be decided under the new rules during the two-year trial program, Finra said today.
Finra's step comes after a House Judiciary Subcommittee on July 15 approved legislation dubbed the Arbitration Fairness Act that would limit the use of binding-arbitration agreements in some consumer industries. A similar bill introduced last year by Senator Russell Feingold, a Wisconsin Democrat, was the subject of a hearing by the Senate Judiciary Committee.
``This pilot will give investors greater choice when selecting an arbitration panel,'' said Finra Chief Executive Officer Mary Schapiro. ``This program will allow us to see if a change in the way arbitration panels are selected is a better way to serve and protect the interests of investors.''
Investor lawyers said Washington-based Finra is floating a short-term fix before Congress throws out a system that is fundamentally unfair to the clients of brokerage firms.
``Why don't they just get rid of it altogether?'' said Seth Lipner, a founder of the Public Investors Arbitration Bar Association and professor at Baruch College in New York. ``It's purely to deflect the heat. They're trying to delay the day of reckoning.''
Binding Decisions
Investors doing business with brokerage and securities firms sign agreements to resolve complaints out-of-court. The binding arbitration panels, administered by Finra, include two public arbitrators and one from the industry.
Under the new rules, investors will have the option of having their cases heard by an all-public panel or the traditional Finra panel. Investors will be given a list of panelists and have a chance to strike those with ties to the industry. Participating firms won't have a say in which cases are chosen.
Under Finra's current arbitration rules, the industry representative has considerable sway on the three-member panels, said Andrew Stoltmann, a securities lawyer in Chicago who's handled about 500 arbitration claims. About 95 percent of the cases are decided on 3-0 votes, he said.
``The brokerage firms have guarded that industry arbitrator like a golden child,'' Stoltmann said.
Annual Case Load
Finra handles about 2,000 to 3,000 arbitration cases a year, said Theodore Eppenstein, a New York attorney who argued the 1987 Supreme Court case that sanctioned mandatory arbitration. That's down from almost 9,000 cases filed in 2003, according to the Finra Web site. Eppenstein said the system is unfair to customers.
``There are many people in the securities industry who are fair and try to do a good job,'' Eppenstein said. ``Our concern is because Wall Street is such a small street, the arbitrators who work in the industry are concerned if they put their name on a sizable award, they may have trouble getting their next job.''
Since July 21, five cases have been decided by arbitrators, according to Finra's Web site. Claimants asked for damages ranging from $9,170 to $690,000. They were awarded between $486 and $523,300.
UBS AG, Wachovia Corp.'s securities unit and Charles Schwab Corp. are the other firms to participate in Finra's program. The regulator is contacting ``a wide range'' of other companies to participate, according to its statement.
Review
Finra will review how many investors opt into the program. It will compare the results of cases decided by the new panels with other arbitration cases. The regulator said it will also study the duration of hearings and the use of expert witnesses.
Messages seeking additional comment from Finra weren't returned.
``We support the launch of this creative pilot program, which should provide some instructive and useful data on plaintiffs' view of industry arbitrators and how those arbitrators do or do not affect awards,'' said Kevin Carroll, managing director and general counsel at the Securities Industry Financial Markets Association, Wall Street's main lobbying group in Washington. ``We expect to review the results carefully when they are published.''
The North American Securities Administrators Association, a group of state regulators that has lobbied for changes in securities arbitration, said in a statement surveys show most investors view the existing system as biased and unfair.
``Only a select few customers will realize the benefit of having a panel where there is no mandatory industry representative, but thousands of others will not have that choice,'' Karen Tyler, the North Dakota Securities Commissioner who heads the group, said in a statement. ``Investor protection demands that all investors be given that choice immediately.''
Six firms, including Merrill Lynch & Co., Morgan Stanley, and Citigroup Global Markets, volunteered to participate. More than 400 cases will be decided under the new rules during the two-year trial program, Finra said today.
Finra's step comes after a House Judiciary Subcommittee on July 15 approved legislation dubbed the Arbitration Fairness Act that would limit the use of binding-arbitration agreements in some consumer industries. A similar bill introduced last year by Senator Russell Feingold, a Wisconsin Democrat, was the subject of a hearing by the Senate Judiciary Committee.
``This pilot will give investors greater choice when selecting an arbitration panel,'' said Finra Chief Executive Officer Mary Schapiro. ``This program will allow us to see if a change in the way arbitration panels are selected is a better way to serve and protect the interests of investors.''
Investor lawyers said Washington-based Finra is floating a short-term fix before Congress throws out a system that is fundamentally unfair to the clients of brokerage firms.
``Why don't they just get rid of it altogether?'' said Seth Lipner, a founder of the Public Investors Arbitration Bar Association and professor at Baruch College in New York. ``It's purely to deflect the heat. They're trying to delay the day of reckoning.''
Binding Decisions
Investors doing business with brokerage and securities firms sign agreements to resolve complaints out-of-court. The binding arbitration panels, administered by Finra, include two public arbitrators and one from the industry.
Under the new rules, investors will have the option of having their cases heard by an all-public panel or the traditional Finra panel. Investors will be given a list of panelists and have a chance to strike those with ties to the industry. Participating firms won't have a say in which cases are chosen.
Under Finra's current arbitration rules, the industry representative has considerable sway on the three-member panels, said Andrew Stoltmann, a securities lawyer in Chicago who's handled about 500 arbitration claims. About 95 percent of the cases are decided on 3-0 votes, he said.
``The brokerage firms have guarded that industry arbitrator like a golden child,'' Stoltmann said.
Annual Case Load
Finra handles about 2,000 to 3,000 arbitration cases a year, said Theodore Eppenstein, a New York attorney who argued the 1987 Supreme Court case that sanctioned mandatory arbitration. That's down from almost 9,000 cases filed in 2003, according to the Finra Web site. Eppenstein said the system is unfair to customers.
``There are many people in the securities industry who are fair and try to do a good job,'' Eppenstein said. ``Our concern is because Wall Street is such a small street, the arbitrators who work in the industry are concerned if they put their name on a sizable award, they may have trouble getting their next job.''
Since July 21, five cases have been decided by arbitrators, according to Finra's Web site. Claimants asked for damages ranging from $9,170 to $690,000. They were awarded between $486 and $523,300.
UBS AG, Wachovia Corp.'s securities unit and Charles Schwab Corp. are the other firms to participate in Finra's program. The regulator is contacting ``a wide range'' of other companies to participate, according to its statement.
Review
Finra will review how many investors opt into the program. It will compare the results of cases decided by the new panels with other arbitration cases. The regulator said it will also study the duration of hearings and the use of expert witnesses.
Messages seeking additional comment from Finra weren't returned.
``We support the launch of this creative pilot program, which should provide some instructive and useful data on plaintiffs' view of industry arbitrators and how those arbitrators do or do not affect awards,'' said Kevin Carroll, managing director and general counsel at the Securities Industry Financial Markets Association, Wall Street's main lobbying group in Washington. ``We expect to review the results carefully when they are published.''
The North American Securities Administrators Association, a group of state regulators that has lobbied for changes in securities arbitration, said in a statement surveys show most investors view the existing system as biased and unfair.
``Only a select few customers will realize the benefit of having a panel where there is no mandatory industry representative, but thousands of others will not have that choice,'' Karen Tyler, the North Dakota Securities Commissioner who heads the group, said in a statement. ``Investor protection demands that all investors be given that choice immediately.''
