Meyer Wilson

Major Blow to Transparency Efforts of SEC Oversight of FINRA Arbitration

The U.S. Court of Appeals for the District of Columbia Circuit recently affirmed a trial court's order denying an investors' rights group's Freedom of Information Act request for certain documents relating to the Securities & Exchange Commission's (SEC) oversight of Wall Street's mandatory arbitration program.

At issue was a request by the Public Investors Arbitration Bar Association (PIABA), a nationwide organization of attorneys who represents investors in securities arbitration disputes, for documents relating to the SEC's oversight of the arbitration program administered by the Financial Industry Regulatory Authority (FINRA). FINRA is a self-regulatory organization funded by Wall Street and charged with regulating brokerage firms. The SEC oversees and examines FINRA.

In 2011, PIABA submitted a FOIA request to the SEC for documents relating to the SEC's audits, inspections, and reviews of FINRA's arbitration program, in particular documents relating to how arbitrators are selected by FINRA to hear customer disputes. The SEC denied the request, contending that the documents constituted "examination reports" that were exempt from disclosure under FOIA.

PIABA filed suit in U.S. District Court against the SEC seeking to compel disclosure of the requested records. The district court ultimately ruled in favor of the SEC.

By affirming the district court's ruling, the D.C. Circuit Court struck a major blow to efforts to bring some transparency to the SEC's oversight of FINRA's arbitration program.

Investors are forced into the arbitration process when signing agreements to open their brokerage accounts. Under that process, FINRA randomly selects potential arbitrators who are then reviewed and scored by the parties.

At a minimum, investors should be able to know how FINRA randomly selects arbitrators to hear their cases.

Unfortunately for investors, pending further court review, that process will remain shrouded in secrecy.


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