Most retail investors have never heard of FINRA, or the Financial Industry Regulatory Authority, until they’ve lost a lot of money due to broker misconduct or investment fraud. The first time they are likely to learn about the financial industry’s watchdog is when they attempt to sue their broker in a court of law and find that they can’t.
Why not?
Brokerage Firms Require Investors to Sign Binding Arbitration Agreements
Because nowadays nearly every brokerage firm in the United States has clients sign a binding arbitration agreement that prevents those clients from taking a dispute through our justice system. Instead, clients must go through FINRA’s arbitration forum. The legality and ethics of these arbitration agreements continues to be debated; for now, however, they are the law of the land in many industries, not just securities.
The good news is that the arbitration process is typically less costly and more expeditious than pursuing litigation in court. The bad news is that the forum is industry-funded, and the arbitrators are former industry professionals who may not have a lot in common with the average retail investor.
A Jury of Your Peers Vs. a Panel of Experts
Unlike in a court of law, where your case will be heard in front of a judge and a jury of your peers, in FINRA arbitration, if your claim is large enough, you will be heard by a panel of three arbitrators who usually have an outstanding history within the industry. Many panelists are former financial professionals, including compliance officers, brokers, and defense attorneys. Their experience and expertise in finance and law is not necessarily a bad thing: they are uniquely well-suited to understand the complexities of securities litigation.
On the other hand, their experience and expertise can make them less likely to understand how an unsophisticated might be susceptible to predatory actions by an unscrupulous advisor or broker. Since they are not, like a jury, typically the “peers” of the clients bringing an action, they can be somewhat less sympathetic to the plight of the investor and in the awarding of damages to the investor.
Industry Created, Industry Maintained
Another disincentive for panels to take the claimant’s side in a securities dispute in FINRA arbitration is that, especially if the panelist gives a huge award to the aggrieved investor, defendants within the industry will be inclined to strike or pass them over when it comes to arbitration panel selection. Since awards are public information, defendants have the opportunity to see which panelists have made major awards on behalf of investors in the past, and they will often strike these panelists from possible selection.
These are only some of the disadvantages facing investors who bring actions through the arbitration forum. It is not an exaggeration to say that the arbitration process favors the industry. After all, who do you think created the system in the first place? And why do you imagine they have forced clients to sign binding arbitration agreements that push them out of the court system and into arbitration?
The best way for investors to counterbalance the industry advantage is to work with an attorney who understands the FINRA arbitration forum. It’s a relatively specialized area, and not every attorney, no matter how talented or how large a law firm they work for, are suited for the niche.
Pennsylvania & New Jersey Securities Litigation Law Firm
If you or someone you know has been a victim of investment fraud or broker misconduct, please contact our securities litigation team immediately for a free consultation at 215 462 3330 or by using our online contact form.
