Many investors are completely unaware that when they open investment accounts with a broker-dealer, in addition to paperwork concerning their investment profile and objectives, they will also be required to sign a binding arbitration agreement. In the event of a dispute, that agreement will preclude the investor from bringing suit against the broker-dealer and its employees, forcing them instead to litigate within the confines of the FINRA arbitration forum.
A Panel of Insiders Rather Than a Jury of Your Peers
FINRA, the regulatory body that oversees the brokerage industry, is a self-funded by the industry itself. While that’s not necessarily a bad thing in general, when it comes to disputes and arbitration, it can be hard on retail investors. After all, arbitration panels are inevitably drawn largely from the ranks of former brokers and compliance officers who are not as sympathetic to investors as would be, for example, a jury of their peers. Further troubling the process is the fact that arbitrators who give big awards to investors are often unofficially “blacklisted” by brokerage companies in subsequent arbitration matters who are afraid they might be next.
Yet another, somewhat less well-known but equally problematic aspect of the FINRA securities arbitration process is the fact that, until recently, non-attorneys have been able to represent investors in the forum. However, that may be about to change.
Investor Advocacy Groups Want to End Non-Attorney Representatives in Arbitration
Under pressure from investor advocacy groups who have long pointed out that former brokers — including many who have been sanctioned or even banned from the industry by FINRA itself — have been known to re-imagine themselves as non-attorney representatives for investors, FINRA is now seeking to ban these so-called “NARs” from the forum.
Accordingly, last month FINRA sent an official request to its governing body, the SEC, asking for a decision. While seeking to ban NARs, the request does allow non-attorneys to represent investors pro bono, as well as for investors to represent themselves. FINRA is still awaiting the SEC’s final decision, but those close to the matter expect the SEC to come down in favor of the request, permanently banning paid NARs from the forum.
FINRA securities litigation is a niche practice area unfamiliar even to many of the largest law firms. The rules and regulations governing the securities industry and the FINRA arbitration forum are unlike other practice areas. Indeed, the fact that, until recently, non-attorneys have been permitted to represent investors is just one of the many “quirks” of the system. Investors who find themselves in a dispute with their broker-dealers or brokers would do well to consult attorneys who specialize in securities litigation within the FINRA arbitration forum if they wish to overcome the many obstacles — not to mention the structural bias — that faces them.
