Securities arbitration draws fire
Arbitration in the brokerage industry is run by the Financial Industry Regulatory Authority, which regulates brokerage firms.
One investor who has been through securities arbitration said it wasn’t a consumer-friendly experience.
"It’s still overwhelming when you go through the process," said C.B. Lee, a banker from Sherman, Texas, who went to arbitration in 2007 over his claim that his stockbroker was churning his account.
Lee had more than $1 million in his brokerage account at one point and "was left with a fraction of that amount after the broker’s conduct," said Richard Lewins, Lee’s attorney in Dallas. Lee ultimately settled his claim.
Lewins, a former stockbroker, said everything about securities arbitration put investors at a disadvantage.
"The forum is run by the industry’s self-regulatory organization, FINRA," said Lewins.
"One-third of the people deciding your case come from the industry you are bringing your claim against, and the remaining two-thirds are business professionals who rarely look like the people they are asked to relate to, the claimant free credit report and score."
Through July, 45 percent of cases that went before FINRA arbitrators this year resulted in the customer’s being awarded damages, according to the agency.
FINRA’s officials defend their arbitration process as fair.
Cases involving more than $100,000 are heard by three arbitrators — two "public arbitrators" with no ties to the brokerage business and one who does.
"The industry arbitrator often can recognize bad conduct when he or she sees it and offer that expertise to the panel," said George Friedman, FINRA executive vice president and director of dispute resolution.
"We think the industry arbitrator has value, but we’re doing something to address the perception," he added.
Todd Saltzman, deputy director of case administration at FINRA, said the agency was conducting a two-year pilot program to see if there was a better way to appoint arbitration panels in investor cases.