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FINRA Makes All-Public Option Permanent
Posted by: Robert Rex
February 10, 2011

Just over 3 months after FINRA initially filed its proposal to give investors the choice of selecting an all-public panel in arbitration, the SEC has permanently approved the rule change.

In a statement on their website, FINRA CEO and Chairman Richard Ketchum said that his organization "believe(s) that giving investors the ability to have an all-public panel will increase public confidence in the fairness of our dispute resolution process."

The speed with which this proposal was approved could be seen as a response to increasing pressure faced by these regulatory authorities from lawmakers and investor advocacy groups. The SEC had previously been tasked by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to conduct a study to evaluate the effectiveness of existing regulatory structures as they applied to brokers, dealers, and investment advisers (this study was released just last month). Section 921 of the Act also gave the SEC the power to prohibit the practice of requiring customers to sign agreements committing them to mandatory binding arbitration in the event of a dispute, which today is nearly ubiquitous among broker-dealers.

These developments may well have factored into FINRA?s decision to do away with the requirement that 1/3rd of every arbitration panel be composed of agents representing the financial services industry. An in-depth study published by the University of Cincinnatti College of Law in 2008 found that a majority of the investors surveyed who had gone through the arbitration process perceived that it was both unfair and biased.

We believe this is a step in the right direction and hope it will serve to make the FINRA arbitration process fairer and more favorable to investors.

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