The idea is to increase public confidence in FINRA’s regulation of its members. “Any investor will have the power to have his or her case heard by a panel with no industry participants,” said Richard Ketchum, FINRA’s chairman and CEO.
That’s a big problem for advisers according to some industry observers. “The average person doesn’t know much at all about the investment world,” said Rick Rummage, president of recruiting firm The Rummage Group in Reston, Va. “It’s already a nightmare of advisers. Of course you should hold bad advisers liable, but arbitration can ruin a good adviser’s career over a single complaint. I can’t tell you how many advisers I can’t move because of a bogus complaint and the firm just decided to settle.” Rummage maintains that while there are some bad apples, the majority of cases come about simply because an investor lost money and wants it back.
Heywood Sloane, managing director of the
However, Alan Foxman, an attorney in Boca Raton, Fla., who previously worked in FINRA’s enforcement division for eight years, said brokers might receive a more sympathetic ear than they would from an industry insider. “Industry guys tend to be tougher on firms and reps than non-industry people,” he said. “As an attorney, I too might be harsher on another attorney for giving my industry a black eye, or for doing things differently than I would.”
On the whole, Foxman doubts all-public panels will make much difference. Arbitration panels currently consist of two members of the public and one industry insider, who might be a retired broker or an attorney who works with brokerage firms. That insider may be as unfamiliar with a new investment product or process as the public arbitrators.
Foxman adds that it’s not very likely the number of firms settling will rise—under the current system 80% of firms settle, so there’s not much higher it can go.
Chris Hickman, a former wirehouse broker who is now an independent advisor with Multi Financial Services in Del Ray Beach, Fla., said that rather than tweak the system for the sake of appearances, the entire process should be scrapped. “The whole FINRA system is a farce,” he said. “Nobody’s under oath; anyone can make anything up and they’re not accountable for it, and then it goes on the broker’s record forever. It’s not exactly fair.”
Hickman maintains that FINRA’s arbitration procedure is set up not to protect investors from bad advisors, or good advisors from false allegations. Rather, it’s in place to protect the firms whose membership fees pay for FINRA. “They just settle and throw the advisor under the bus,” he said. “I’d rather have a regular court system where everyone’s under oath.”
