How Independent is FINRA?
As arbitration becomes more popular and industry-sponsored arbitration systems are developed, the potential for abuse poses a greater risk to plaintiffs who seek redress of important claims. Wall Street, the center of much financial scandal these days, provides a recent example.
Holders of brokerage accounts must agree that, in the event of a dispute with the broker, the claims will be resolved not in the courts but in an arbitration process overseen by Finra (Financial Industry Regulatory Authority), a private organization that derives the bulk of its $1 billion in revenue from the Wall Street companies that are its members. So when a Merrill Lynch account holder sued the brokerage house for failing to properly monitor his accounts, the matter was submitted to a three-judge FINRA arbitration panel. The panel – made up of securities attorneys and/or financial executives – awarded the plaintiff $520,000.

Little did they know, however, that this award would cost them their jobs on the panel. Two months after the award, one arbitrator was summarily removed from the roster of FINRA arbitrators. Seven months later, the second member of the three-judge panel was removed from the roster and, one year after the award, the third was struck. None was given an explanation. One of the dismissed arbitrators requested a hearing and reported the incident to the SEC, but has received no response. “It’s unbelievable that they would take such an experienced panel and get rid of it,” one of the arbitrators said. “To me, this undermines the credibility of the entire Finra process — I didn’t say kangaroo court — but when you have three well-credentialed people, doing their job, and there were no meritorious grounds for an appeal, and we get handed the ‘black spot’ — and not all at once — it makes for a pretty cheap novel.”
This is the predictable result when an industry finances its own regulatory agency and governs who gets to impose discipline on the industry. The important question remains whether this conflict of interest, which has now been put in plain view, will be permitted to continue or if the right to a day in court will be restored.