FINRA is the Financial Industry Regulatory Authority. It touts itself as an independent regulator governing the conduct of all securities firms doing business in the U.S. Given the predatory conduct of the securities industry, it’s obvious that FINRA is falling far short of its mandate.
The most insidious role of FINRA is running the mandatory arbitration system that adjudicates disputes between investors and their brokers. Most investors are unaware of the fact that, as a condition to opening a brokerage account, they are required to give up their constitutional right to a jury trial, and agree to submit all disputes to the FINRA-run arbitration system. So far, efforts to abolish this requirement—which is inherently unfair to investors—have been unavailing. The securities industry is a powerful lobby. The last thing they want is a forum where claims against its members will be judged fairly and impartially.
FINRA professes openness and transparency, but the reality is quite different. While you can obtain copies of arbitration decisions, it won’t permit access to its database so that academics can conduct an analysis of the overall process.
On the other side of the philosophical world from FINRA is the Public Investors Arbitration Bar Association (PIABA), an association of attorneys who represent the interest of investors in securities arbitrations run by FINRA. (Full disclosure: I was a member of PIABA for many years.) Many members of PIABA have long believed the FINRA mandatory arbitration process is biased and rigged against investors.
In an attempt to pierce the shroud of secrecy zealously embraced by FINRA, PIABA filed a Freedom of Information Request with the Securities and Exchange Commission (SEC). The SEC has responsibility for supervising the activities of FINRA. The request sought very basic information about the way FINRA administers the arbitration process, including how it selected and removed arbitrators.
The SEC refused to provide these documents. PIABA sought a court order requiring it to do so. In a decision dated March 14, by Beryl A. Howell, United States District Judge for the United States District Court for the District of Columbia (Public Investors Arbitration Bar Association v. Unites States Securities and Exchange Commission, Civil Action No. 11-2285), the Court sided with the SEC and affirmed its right to refuse to produce these documents. The Court noted that it was “sympathetic to the plaintiff’s parade of horribles” concerning the FINRA process, but found that the requested documents fell with an exemption to the Freedom of Information Act and therefore did not have to be produced.
FINRA’s win is your loss. Everything about a process that affects the retirement goals of millions of Americans should be in the public domain. FINRA and the SEC should waive its legal protection, open its files to the American public and allay (or validate) concerns about the fairness of the mandatory arbitration process.
You don’t have to take this loss lying down. Write your member of Congress and demand an end to the mandatory arbitration process. A kangaroo court has no place in America, especially when it has such an adverse effect on millions of investors. You have a right to a fair trial of your disputes with your broker. You are being deprived of this right by this cozy, secret system.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now, was published on Dec. 31, 2012.
The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information, and content on this blog is for information purposes only and should not be construed as an offer of advisory services.