U.S. PIRG Consumer Blog: Securities arbitration-- still stacked against the public

Two weeks ago the FINRA, the self-regulatory apparatus of the investment sector (Financial Industry Regulatory Authority), announced a new pilot program so that investors could choose all three of the arbitrators hearing their securities disputes from a list of "public" members; today, in regular practice, at least one of the three arbitrators on each panel is industry-affiliated. But there's a catch, a big catch: all those so-called public arbitrators come from a list that is industry pre-approved in some non-transparent, closed internal FINRA process. Highly praised FINRA CEO Mary Schapiro should have done better for small investors. A pilot program should take a bigger step. In today's Washington Post, longtime syndicated financial columnist Jane Bryant Quinn explains some of the problems in securities arbitration, in a column on arbitrator selection.

Her column applies to the main system, not the small pilot program: From Arbitration Favors Firms Over Investors:

Say that you have an auction-rate case against UBS and get stuck with a Merrill Lynch branch manager as your required industry panelist. How can that Merrill manager bring in a large award, or indeed any award? His own firm is up against the same charges. He might worry that if he finds for you, it could cost him his promotion or even his job.

Quinn concludes her column with an unanswered question:

When trying to remove Wall Street's thumb from the scale during arbitration, "you're up against some of the best-funded lobbying in the country," [investor attorney Philip] Aidikoff says. "Where are the people who speak for individual investors?" Where, indeed.

Well, for now, those people are in Congress. They are led by Rep. Hank Johnson (D-GA) and Sen. Russ Feingold (D-WI), but include many others who are seeking to reform arbitration by banning "mandatory pre-dispute" arbitration in numerous forms of contracts. They are making progress. On July 15, a subcommittee approved three bills for full House Judiciary Committee action:

H.R. 6126, the "Fairness in Nursing Home Arbitration Act of 2008"

H.R. 5312, the "Automobile Arbitration Fairness Act of 2008" and

H.R. 3010, the "Arbitration Fairness Act of 2007" (Johnson's sweeping reform bill).