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CAN FINRA’S NEW RULE EXCLUDING INDUSTRY ARBITRATORS MAKE SECURITIES ARBITRATIONS MORE FAIR TO CONSUMERS?

As investment values dropped due to the recent market downturn, investor lawsuits against financial advisers and their firms have been on the rise. According to today’s Wall Street Journal article entitled New and Improved Arbitration?, investor claims are up 110% this year through May compared to the same period in 2008.

The main complaint is that “firms sold funds with more risk in them then they were told.” This trend started in 2008 when the subprime crisis began and it has continued into 2009. According to the article, some of the more common claims brought by investors involve losses in bond funds issued by Regions Bank (RMK funds), Oppenheimer Funds (Oppenheimer’s Champion Income Fund) and Charles Schwab (Yield Plus funds). These types of claims are generally referred to as suitability claims.

Many investors do not know that when they open an account with brokerage firms, they sign an agreement that contains a pre-dispute arbitration clause. These clauses force investors to resolve their disputes in arbitration, which is outside of the court system. For years, investor advocates have claimed that the securities arbitration system is fundamentally biased against the investor. For example, statistics provided by FINRA, the organization that facilitates the arbitration forum for securities claim, show that from January to May of 2008, investors prevailed only 42% of the time. In addition, of those investors who prevailed, they typically only receive a portion of their requested damages.

These poor results caught the attention of the Obama adminstration, which recently proposed legislation that would give the SEC the authority to examine whether mandatory arbitration harms investors.

According to today’s Wall Street Journal article, FINRA recently implemented a rule and pilot program that allow more investors to have their case heard by arbitrators who are not affiliated with the securities industry. It may be pure coincidence but investor claims that prevail are up from 42% to 47% through May of this year.

For more information about typical claims brought in securities arbitration, visit our Investor Resource Center. For more information about our firm, please click here.