Finra should pay arbitrators more, require explanations for arbitration decisions, and implement an automatic mediation process to improve its ability to address customer and broker complaints against brokerage firms, a task force said Wednesday.
Those were among 51 recommendations made by a 13-member panel formed in June 2014 to analyze the arbitration system sponsored by the Financial Industry Regulatory Authority Inc.
Finra operates dispute-resolution forums that draw from a pool of more than 6,400 arbitrators, some of whom come from the financial industry and others who are deemed “public” arbitrators. More than
3,000 arbitration cases — each heard by three arbitrators – have been tried in each of the previous two years.
The primary way to improve the system is to increase arbitrator pay per hearing session from $300 to $500, the task force said.
“It is the unanimous, strongly held opinion of the task force that the most important investment in the future of the Finra forum is in the arbitrators,” the
task force report stated. “The task force has concerns that the below-market-rate arbitrators' compensation acts as a disincentive in the recruitment of arbitrators and in the commitment of substantial time by arbitrators in executing their responsibilities accordingly.”
Finra arbitration awards, although posted publicly, are often opaque. The task force recommended Finra require arbitrators to explain why they made their decisions, unless one of the parties in the dispute opts out.
“The task force believes that … the availability of explained decisions would improve the transparency of the forum,” the report stated.
The task force addressed the controversial issue of expungement, or the process by which brokers can remove disciplinary actions from their profiles on the public BrokerCheck database. The group said Finra should create a pool of arbitrators specifically trained to conduct expungement hearings.
The task force also recommended automatic mediation for arbitration cases unless one of the parties declines.
The arbitration system has been criticized for being biased toward the industry. Finra has made several reforms over the past few years and
formed the arbitration task force to examine what other changes are required.
Hugh Berkson, president of the Public Investors Arbitration Bar Association, said the report was balanced.
“They clearly addressed issues that are important to both sides,” he said.
The report offers a starting point for improving the expungement process, according to Mr. Berkson.
“Standing on their own, I don't think they go all the way forward in fixing the expungement problem,” he said. “Let's at least start with this.”
The task force did not reach a conclusion about the most controversial arbitration issue: the fact that it is mandatory in almost all brokerage customer contracts.
“Given the diverse nature of the task force, it's to their credit that the group reached consensus on so many issues that, if implemented, will significantly improve the Finra arbitration forum,” George Friedman, a former director of Finra arbitration, wrote in an email. “I'm not surprised they could not reach a consensus on mandatory arbitration. That ball is squarely in the SEC's court.”
The Dodd-Frank financial reform law gave the Securities and Exchange Commission the authority to prohibit mandatory arbitration clauses. The agency has not yet acted.
