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FINRA Takes Steps To Promote Investor Choice By Proposing To Eliminate the Industry Arbitrator

Perhaps in response to criticism by the public and regulators that investors do not get a fair shake in arbitration when they sue investment firms, FINRA took steps to level the playing field for investors by proposing to eliminate the much maligned industry arbitrator from arbitration panels. This proposal could significantly improve investors’ chances of recovering investment losses from financial services companies like Merrill Lynch and the myriad of other investment firms.

Most people do not know that they can sue to recover investment losses resulting from bad recommendations by financial advisors. Also, most customers of financial firms do not know that when an investment account is opened (e.g. IRA account), the customer agrees in the fine print to resolve any and all disputes in arbitration. The Financial Industry Regulatory Authority (“FINRA”) is the primary organization that provides the arbitration forum. Historically, arbitration panels have typically consisted of three arbitrators. One of the arbitrators is currently affiliated with the securities industry (i.e. “industry arbitrator”). The industry arbitrator is very influential in deciding cases because the other two arbitrators (“public arbitrators”) are not affiliated with the securities industry and often look to the industry arbitrator as a quasi-expert. Critics of the industry arbitrator have long believed and argued that customers do not get fair hearings because the perception is that the industry arbitrator is biased in favor of the industry. Statistics support the critics because approximately half of all cases that go to a formal hearing result in $0 for the investor. Furthermore, when the investor actually wins, he or she only recovers a fraction of the losses even when outright fraud is proven. This perception of unfairness attracted the attention of the Obama Administration and led to the passing of financial reform legislation that could allow investors the option to sue in court and bypass arbitration all together.

Yesterday, in an effort to improve the public perception of the arbitration process, FINRA announced a proposal that would give investors the right to choose an arbitration panel consisting of all public arbitrators. This could greatly improve investors’ chances of prevailing and increase the amount of money awarded.

If you believe that you have been a victim of bad financial advice or worse, financial fraud, please feel free to contact us for a free consultation.