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Legal claims or lawsuits against stockbrokers for fraud, the sale of unsuitable investments, breach of fiduciary duty, and the failure to supervise, universally, and only in the rarest exception, are required to be litigated or arbitrated before FINRA, the Financial Industry Regulatory Authority, Office of Dispute Resolution, where until recently, at least one member of the arbitration panel sitting in judgment of a customer’s claim, was required to be an "industry" or "non-public" arbitrator employed by, or with some connection to, the securities industry.
In response to the perceived unfairness of securities arbitration, where generally less than 50% of customer claims going to a final hearing result in an award for the customer, for on average less than 60% of their actual losses, and to perhaps stave off Congressional action, i.e. The Arbitration Fairness Act, in October 2008, FINRA launched its all public arbitrator pilot program where 14 of the major wire houses or brokerage firms agreed each year to allow a handful of cases, on a first come, first served basis, would be arbitrated before an "all public" arbitration panel, without the required industry arbitrator.
On October 26, 2010, FINRA filed a rule proposal with the SEC that would allow all investors filing arbitration claims the option of having an all-public panel in arbitration claims filed before FINRA, to which of course, the securities industry vehemently opposes.
This week, however, it appears that FINRA released the results of its all public arbitrator pilot program, and the statistics are insightful as to why the securities industry does not want claims against them to be arbitrated by all public panels.
While FINRA is quick to point out that roughly one third, or 32% of cases eligible to participate in the public arbitrator pilot program, for whatever reason, decided not to participate in the program or in fact at least ranked one industry arbitrator on the list of proposed arbitrators that the parties get to strike or rank in connection with the appointment of an arbitration panel, it appears that arbitration claims before all public panels were almost 50% more likely to settle or not go to a final award (13% versus 19%), than cases where an industry arbitrator was assigned to the arbitration panel.
Most interestingly, however, FINRA reports that of the cases going to a final arbitration award in the public arbitrator pilot program customers prevailed 68% of the time, almost 40% more than customers that tried their cases at a final hearing before a panel of arbitrators consisting of at least one industry arbitrator.
FINRA also claims that because of the number of cases going to a final hearing before an all public arbitration panel is so small, "there is not yet sufficient award data to draw meaningful conclusions."
We disagree. While the presence of an industry or non-public arbitrator in some cases can assist the arbitration panel in understanding industry rules and practices, particularly in the most egregious cases, in many cases industry arbitrators, based upon their own experiences or experiences involving litigation against their masters, prejudge and are outright bias against the claims of public customers.
The statistical results of the public arbitrator pilot program suggests however that this bias or prejudice on the part of the industry arbitrator is very real where customer claims before arbitration panels consisting of all public arbitrators are almost 50% more likely to settle, or almost 40% more likely to win an Award than those cases where an industry arbitrator also serves on the arbitration panel.
Whether any bias is actual or merely a perceived bias that taints the legitimacy of the process, public customers ought to have the right to choose whether they want to have their claims tried before a Panel consisting of solely public arbitrators or with one person with an association with the securities industry.
Accordingly, we strongly support SR-FINRA-2010-053 proposed changes to amend the panel composition rule, and related rules, of the Code of Arbitration Procedure for Customer Disputes ("Customer Code"), to provide customers with the option to choose an all public arbitration panel in all cases.
Nicholas J. Guiliano, Esquire. The Guiliano Law Firm, P.C. For additional information and important disclaimers visit us at www.securitiesarbitrations.com.
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