A public investor advocacy group is lobbying the Financial Industry Regulatory Authority to reject a proposal to reform the arbitration process between securities firms, their customers and their employees by the body representing those firms.
The Public Investors Advocate Bar Association fired back Monday on proposals made by the Securities Industry and Financial Markets Association in July via FINRA’s request for comment process. SIFMA’s reforms are aimed at creating a more efficient and fair process for FINRA to arbitrate claims made by clients or employees against broker/dealers, asset managers and other securities firms.
PIABA, which is made up of attorneys who represent clients in securities disputes, wrote in a letter to FINRA legal head Robert Colby that the reforms would only “dilute” the regulator’s role in safeguarding investor rights from the large banks, asset managers and brokerages.
“SIFMA’s list of arbitration reform recommendations is so blatantly self-serving that it almost reads like a parody,” Adam Gana, president of PIABA and managing partner of Gana Weinstein LLP, said in a statement. “These rule changes would make it easier for bad actors to escape responsibility and harder for their victims to seek justice.”
FINRA did not immediately respond to its consideration of the proposals and timeline. SIFMA did not immediately respond to a request for comment on PIABA’s letter.
FINRA rule 12200 requires member firms to arbitrate customer claims, and rule 13200 requires them to arbitrate disputes between members or associate parties, such as employees.
SIFMA’s proposal allowed some disagreements to be adjudicated outside FINRA arbitration. The securities body specifically advocates for allowing claims to be made outside of FINRA if of a “high dollar amount,” or if made by “institutional investors,” as opposed to claims by retail investors. SIFMA said the threshold for a “high dollar amount” could be determined later.
It also argues that disputes between firms and associated parties should be allowed to arbitrate outside of FINRA.
PIABA shot back on the recommendation, saying it would fragment and weaken FINRA’s oversight capacity.
“This proposal is a transparent attempt to circumvent FINRA’s established procedures—developed over decades with input from all stakeholders—and avoid liability in high stakes cases,” PIABA wrote.
It went on to argue that if large and small cases were split, investors “harmed by identical conduct” would not appear in the FINRA arbitration system.
PIABA also opposed the intra-industry proposal, arguing that FINRA must police the conduct of its members.
In another proposal, SIFMA urges FINRA to permit customer agreements to limit or prevent the award of damages in cases decided by FINRA. SIFMA argues that making FINRA arbitration panel decisions on damages mandatory and without appeal doesn’t provide safeguards for “obviously unreasonable awards” and is overkill when firms are also under federal and state regulation.
PIABA also shot back there, writing that there is no evidence of excessive or inappropriate damages, and takes the view that those damages are actually “far too infrequent and often insufficient.”
It also argued that customers often lose out in arbitration cases and are pushed for more damages, not fewer, for investors who bring claims.
SIFMA’s proposal also contained several suggestions for FINRA to change procedural rules. Among those were a call for FINRA to allow motions to dismiss cases before an answer is filed to widen the scope of resolution, modernize and speed up the discovery process for cases, and appoint a “central contact” for arbitration hearings to speed and improve the case schedule.
PIABA claimed that expanding motions to dismiss will not create efficiency but lengthen the arbitration process and add costs and time for those bringing claims. It also argued against what it called “limiting” the discovery process for claimants and “micromanaging” arbitrator hearings with a central point of contact.
Finally, PIABA fought against SIFMA’s proposal to improve the quality, training and licensing of arbitrators and their accountability for their rulings, including a “more transparent process for identifying and removing FINRA arbitrators” who don’t adhere to performance standards.
The group argued that increasing expertise and oversight would only tilt the balance toward the securities firms.
“Members of juries do not have to have any relevant experience in the securities industry, and neither do state or federal court judges for that matter,” the group wrote. “Efforts to create a more industry-tilted arbitrator pool will only further deteriorate the fairness of the forum where the industry presently wins nearly 75% of customer cases.”
SIFMA also lobbied FINRA to amend its process for terminated financial advisors to accuse a firm of making false or damaging claims about them, known as Form U5. SIFMA argues that Form U5s are too pervasive and not fairly arbitrated and calls for FINRA to review its processes and procedures.
PIABA did not weigh in on that recommendation.
In a separate development, an SEC committee is weighing whether registered investment advisors should have similar rules for arbitration as FINRA-regulated broker/dealers. In a draft of recommendations filed in May, but considered in June, the committee suggested several reforms for mandatory arbitration clauses in RIA contracts that mimic the rules in dispute between SIFMA and PIABA.
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