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Yet Another Modest Proposal 

You may have read about a recent ruling by a Superior Court judge in Georgia who discovered what I think we all knew: that FINRA runs its arbitration system like a kangaroo court, putting its thumb firmly on the side of the scales of justice that benefit its member brokerage firms.  I think it’s long past time for the financial planning community—and anybody who cares about protecting consumers—to call for an end to the arbitration agreements that the brokerage firms routinely had to their clients.  I could be talked into letting them require arbitration agreements, but only if the forum is actually neutral, like the American Arbitration Association.

The specific ruling was pretty serious; the judge actually dismissed an arbitration decision that had been reached and apparently settled two and a half years ago.  The FINRA arbitration panel ruled, in 2019, in favor of Wells Fargo against a customer who claimed the firm had mismanaged his account to the tune of $1.5 million.  But the customer presented evidence that the three arbitration panelists were not selected using a computer-generated process that supposedly randomizes who will be hearing the case.  Instead, the law firm representing Wells Fargo was allowed to veto some of the prospective panelists—making the judge-and-jury in the case anything but random.

What makes this a serious ruling is that these arbitration decisions are very seldom second-guessed in the courts; indeed, the whole idea of the arbitration clause is to keep the proceedings out of the courts.  That way, the case, the facts of the case, and the potential damage to the brokerage firms being sued can be kept confidential—as opposed to the public hearing that would ensue in a court of law.  Since there are anywhere from 5,000 to 8,000 arbitration cases heard each year, the tsunami of very specific client complaints, if they were reported in the press, might do serious damage to the reputation of the brokerage community.

But, of course, there’s another reason why FINRA wants to control how customer complaints are handled: the potential settlements themselves.  Securities attorneys have long complained that the arbitrators are inevitably selected as former brokers, brokerage firm executives and other friends of the industry, who will dismiss any case where the evidence is not overwhelming, and in the cases where there is undeniable misconduct, will shrug their shoulders, cut the baby in half, and give restitution that amounts to half of the damage the client suffered. 

Which means that even in cases where a court would find clear evidence of malfeasance, the broker and brokerage firm end up with a profit on the abusive business relationship.  And the arbitrators in the FINRA system have no obligation—and no inclination—to explain their decisions. 

Our system of justice is—theoretically, at least—supposed to avoid obvious instances of favoritism.  It’s very hard to see how the trade organization of brokerage firms could be allowed to serve as the only forum for resolving customer disputes against the FINRA member brokerage firms.  If FINRA manages to skate past this latest example of blatantly conflicted resolution processes, then I’d like to make a (very) modest proposal on how to fix the situation once and for all.  Let’s replace the cozy FINRA arbitration list entirely, with customers who have lost arbitration cases in the FINRA forum.  There are tens of thousands of them who, I believe, would eagerly serve on panels, hearing cases just like theirs, that they would be familiar with. 

I’m sure they would be just about as impartial as the system we have now.