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You could be the solution by becoming an arbitrator, adding to your practice without even having to look for new clients.
By Michael Bixby
Trial by jury is essential. It’s “a privilege of the highest and most beneficial nature,” the guardian “of public and private liberty.”[1] But where the defendant is a financial advisor accused of causing loss by making irresponsible or fraudulent investment recommendations, defrauded investors almost never see a jury, because nearly every brokerage account agreement includes a mandatory pre-dispute arbitration clause in front of FINRA, the private financial industry-designated arbitration forum.
FINRA arbitrators play a powerful and unique quasi-judicial function, acting as judge and jury over the entirety of the arbitration proceeding. It’s a prestigious post, and most arbitrators only serve on a part-time basis and are able to set the schedule of the proceedings. FINRA claims to protect investors and safeguard market integrity as the private self-regulatory organization of the financial industry. However, FINRA has a clear conflict of interest baked into its design: the same Wall Street firms FINRA regulates are the ones paying its bills.
Why do brokerage firms force their customers into FINRA arbitration? The reason is simple; these firms know they have a much better chance of limiting their liability in FINRA arbitration. FINRA is the same arbitration forum that repeatedly exonerated the “Wolf of Wall Street,” Jordan Belfort.[2] While some improvements have been made over the last 20 years, the FINRA arbitration forum is still tilted heavily in favor of the financial industry. In 2020, only 32% of Customers who tried their cases to a final arbitration award recovered even a dollar.[3] The numbers continue to get worse: as of Mid-May 2021 only 30% of Customers received any award of damages.[4] Even in the rare cases where FINRA Arbitrators award damages, the average amount awarded is typically 50 cents on the dollar or less.[5]
You might think the reason the industry usually wins cases is because liability is doubtful. Yet the industry frequently wins even where claims involve financial advisors who are in jail, are permanently barred from the industry, were fired for policy or rule violations, or are repeat offenders with multiple complaints.
Take a recent example involving an industry professional. He had been: (1) fired for violating firm policy and lying, (2) permanently barred from the financial industry , (3) criminally charged by the SEC, (4) pled guilty to bank fraud and (5) sent to prison.[6] Despite all that, FINRA arbitrators entered awards for investors as low as 5 cents on the dollar, every arbitration award was pennies on the dollar, and no arbitration panel awarded punitive damages.[7] If investors and their attorneys cannot get justice against an overwhelmingly disgraced convict in arbitration, perhaps the arbitration forum is not exactly fair.
My belief is that the slant in favor of the industry flows directly from the industry slant of FINRA arbitrators themselves. In-depth reports by organizations like the Public Investors Advocacy Bar Association have long pointed out substantial flaws and gaps in FINRA Arbitrator recruitment and the lack of diversity across the board among FINRA Arbitrators.[8] FINRA has made some headway in updating procedural rules in FINRA arbitration to be more fair and balanced for investor claimants, but the pool of FINRA-approved arbitrators is still far too often (1) filled with industry-connected members (retired stockbrokers, supervisors, defense counsel); (2) lacking qualified members in some geographic areas, which results in arbitrators traveling from other states that may be unfamiliar with state-specific laws or less sympathetic to its residents; and (3) lacking diversity in age, gender, race and occupation, resulting in an arbitrator pool that does not reflect the diversity of investor claimants.
To improve the system FINRA needs good, fair-minded individuals, to help fill the missing ranks in the existing pool of available arbitrators all around the country. I encourage you to consider applying as an arbitrator. Becoming an arbitrator is a great opportunity to grow professional skills and to help make FINRA arbitration more fair and equitable for all parties including retirees and investor claimants.
No previous arbitration, securities, or legal experience is required to apply. All you need is five years of paid work experience, and two years of college-level credits. There are 71 primary hearing locations. FINRA arbitrators are assigned to the hearing location closest to their primary residence.
As a practitioner in the FINRA Arbitration Forum, I encourage you to consider becoming a FINRA Arbitrator to help provide a more equitable forum to advance the mission of protecting investors and retirees. FINRA has staff to assist applicants in finalizing their applications. You can begin your application online at finra.org. For more information and assistance from FINRA directly, please contact Sitara Ahmed, a FINRA Recruiter and Trainer at (212) 858-4377.
