FINRA Disputes: Analyzing the Benefits of All-Public Arbitration Panels

2012 was a year of significant change for the FINRA arbitration process.  Specifically, 2012 was the first full year in which investors initiating customer-complaint arbitrations in FINRA had the option of having their claims decided by an all-public panel.  According to statistics recently released by FINRA, investors received damages in 51% of the cases before an all-public arbitration panel, while investors who had a panel with a securities-industry affiliation panelist (non-public) received damages in only 45% of their cases.

However, FINRA has reported that in 2012, there were only 92 cases decided by all-public arbitration panels.  These statistics suggest that it is beneficial for investors to always demand an all public arbitration panel in their claims against registered representatives and broker / dealers; however, it is not always that simple for either side when selecting the panel that will decide the parties’ fate.

There are many considerations for investors, industry members and lawyers to consider when selecting a panel to decide arbitration claims.  For example, it is important to research the potential panelists’ prior panel experience and award history when ranking panelists for potential appointment to your case.  Furthermore, it is important to research the potential panelists’ education and employment background.  It is also worth researching the panelists experience as an investor himself or herself, for any experience and potential biases with the financial services industry as a whole.  Finally, it is important to know if any of the potential panelists have ever worked together on other panels, and if so, research the experience of the parties and counsel on those other matters.

Prior to February 2011 (when FINRA began allowing all-public arbitration panels), these were some of the main decisions to be made in selecting an arbitration panel; since February 2011, however, the type of panelists is now another issue for investors to consider.

Although it is easy to presume that an all-public arbitration panel will generally lean in favor of investors when issuing an award, such a conclusion is not always the case.  For example, industry members often read investment-based periodicals such as Investment News, and as such are more attuned to which members of their industry have been in the press regarding their business practices in case those members are also named as respondents in the arbitration.

Furthermore, industry members may have preconceived notions of how a registered representative should act or how a broker / dealer should operate, and if the respondent registered representative or broker / dealer acted in a contrary manner, they may be more inclined to issue an award against them for acting differently. Finally, the industry member panelists are likely familiar with the inner-workings of the various NASD, FINRA, NYSE and SEC rules and might have their own interpretations of what those rules require, prior to hearing any expert testimony during the final hearing.

However, public panelists may not have this experience, understanding or pre-conceived notions, and as a result, might be more willing to enter a final hearing with an open mind (whether intentionally or based upon their lack of experience).  Depending on the allegations and parties involved, such an open mind may actually benefit registered representatives and broker / dealers, especially where the investors can easily be made to look greedy or overreaching in their claims.  As a result, just because all-public panels issued awards to investors 6% more of the time than panels with an industry member, does not necessarily mean that all-public panels are always in the best interest of the investors, and panels with an industry member are always in the best interest of the registered representatives and broker / dealers.

Much like everything in the law, the selection of the best possible arbitration panel depends on the facts and circumstances at the time, and when selecting a panel, investors, industry members and lawyers must analyze all factors of their decisions.

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