Not long ago, if you were an investor seeking beat a financial scam you stood little, if any chance, of gaining justice. But the outright inquisition of scammed investors may end with a pilot program now being expanded by the Financial Industry Regulatory Authority (FINRA).
Begun after the 2008 market meltdown, the program overturns brokerage industry rules that forced investors to settle disputes through FINRA arbitration which consisted of a panel of industry insiders. Aggrieved investors were compelled to face a panel of biased industry insiders who made sure investors walked away either empty handed or with just pennies on the dollar. FINRA arbitration was a notorious one-way street where complaints went to die.
If the new FINRA proposal is approved, it will allow investors to select a three-person panel of non-industry judges to hear charges of fraud and malfeasance. The rule will apply to investor disputes against any financial services firm or individual brokers.
At present, most arbitration panels are composed of two "public" arbitrators and one industry representative. Despite the move to allow investors to select outsiders to hear their complaints, the arbitration process remains somewhat veiled. For example, the new setup does not place a fiduciary duty on arbitrators; they have no obligation to take into account the best interests of investors. Neither are they bound to produce written an explanation of the panel's decisions. In addition, unfavorable decisions can't be taken to a higher court. The panel's decision is the end of the road.
"Even with an all-public panel, arbitration is still an opaque process," according to a source inside FINRA, the brokerage industry's bought-and-paid-for "overseer."
Still, Pat Huddleston, chief executive of Investor's Watchdog, says the all-public panel is a "good step" but doesn't go far enough to protect investors. "Nobody but the parties understands what happens in that arbitration room," Mr. Huddleston says.
The proposal allowing all-public panels will be filed in November and must be approved by the Securities and Exchange Commission.
"Giving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the arbitration process," says Richard Ketchum, FINRA chairman and CEO. Mr. Ketchum's use of the word "perception" has caused some investors to express skepticism.
"What does 'perception' have to do with it," said one investor preparing for arbitration. He made his remarks anonymously for fear of prejudicing the FINRA panel before which he is scheduled to appear. "Perception is a murky term of art," he added. "It doesn't always add up to reality."
The current pilot program involves 14 firms that agreed to examine a number of investor cases that did not involve individual brokers. Under the new proposal, however, investors will be able to file complaints against any firm or individual broker. It will not apply to disputes involving only industry parties.
Since the Public Arbitration Pilot Program began in 2008, slightly more than 60 percent of investors opted in, resulting in 560 cases to date. Given the power to eliminate all non-public arbitrators, investors still chose to have one non-public arbitrator on their panel about half the time. If the new proposal is approved by the SEC, the program will be extended for one year.
Currently, there are 6,200 FINRA arbitrators -- 2,700 are non-public and 3,500 public.
"This is a wait-and-see process," Arnold Ripkin, an independent day trader who is suspicious of FINRA's motives. "People and organizations don't change overnight," he said. "FINRA has a long history as a bad actor, especially under (former FINRA chief) Mary Schapiro."
It was recently reported that Ms. Schapiro walked away from the organization with a $10 million golden parachute, despite having missed the $65 billion Bernard Madoff Ponzi scheme and the investigation of R. Alan Stanford's alleged $7 billion Ponzi operation. Ms. Schapiro now heads the SEC and was named the seventeenth most powerful woman in the country by Forbes, a notch below former Alaska Governor Sara Palin.
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