Recovering Losses caused by Investment Misconduct

FINRA Considering Change to Arbitration Panel Composition

Recent comments by Richard Ketchum, Chairman and Chief Executive of the Financial Industry Regulatory Authority (“FINRA”), suggest that FINRA may be moving toward allowing investors to choose to have an all public panel hear their disputes.

Under current FINRA Rules, if a case is heard by a three arbitrator panel, the panel will consist of one non-public arbitrator and two public arbitrators.  The non-public arbitrator is referred to as the “industry” arbitrator because he or she has worked in the securities industry.

In October 2008, FINRA rolled out a voluntary two-year Public Arbitrator Pilot Program ("Pilot Program"), which allowed investors filing cases against certain participating brokerage firms to have their cases heard by a panel consisting of three public arbitrators, instead of two public arbitrators and one non-public arbitrator.

Mr. Ketchum, speaking to Reuters, said “I believe there are strong arguments for us to move to an environment where the parties can make a choice to only have public arbitrators.”  Such a move would expand and make permanent the Pilot Program launched by FINRA in 2008. 

Mr. Ketchum stated that FINRA will take a closer look at the Pilot Program this year and evaluate the possibility of making a permanent rule change.  The Pilot Program is set to expire in October of 2010.

This is a welcome development in the investor arbitration world.  FINRA has been widely criticized over the years for requiring an “industry” arbitrator on panels involving investor disputes because of the perception of bias by the industry arbitrator in favor of Wall Street and its brokers.