FINRA Enhances Its Arbitrator Vetting Policy

The Financial Industry Regulatory Authority is refining its new policy for looking into its arbitrators. The move is seen as even more essential in the wake of a court’s decision to dismiss an arbitration ruling that was decided on in part by someone who was indicted during a case against financial firm Goldman Sachs (GS).

Among the steps to be implemented is the use of Google to run searches on arbitrators right before they are appointed to a FINRA arbitration case. The SRO is also preparing to run annual background checks on its 6,500 arbitrators even after being checked when they applied for the arbitrator position.

The industry-funded watchdog’s actions are coming into effect at the same time as lawmakers are upping the pressure to put a stop to broker-dealers making investors arbitrate disputes-an agreement they consent to when they agree to work with the brokerage firm. This causes customers to forfeit their right to go to court over the disagreement. Meantime, consumer groups have been pressing the SEC to place restrictions on the arbitration agreement practice, and a new bill introduced by US Rep. Keith Ellison (D-MN) would modify the Dodd-Frank Wall Street Reform and Consumer Protection Act so that these mandatory agreements are banned.

State regulators support this legislation, which would give investors options, including arbitration and mediation. The bill also would not restrict a brokerage firm customer’s ability to submit a class action securities claim.

Right now, FINRA and Charles Schwab (SCHW) are still in a dispute because the latter decided to make its customers wave their right to file a class action lawsuit. While the SRO lost the enforcement case against the financial firm-the watchdog accused Schwab of violating industry rules that bar arbitrators from hearing class actions-it is appealing the ruling. Earlier this year, Schwab eradicated the waiver language, which can no longer be found on customer agreements.

While arbitration decisions tend to be binding, there are limited reasons that can allow a party to have a ruling dismissed. The U.S. District Court for the Eastern District of Pennsylvania vacated and remanded a securities arbitration decision that went in favor of Goldman Sachs Group Inc. The investor wants to get back $1.4M in purported losses.

Following the FINRA arbitration ruling, the investor went to federal court where Judge J. Curtis Joyner threw out the award after finding that the plaintiff’s legal rights as an investor were compromised because arbitrator Demetrio Timban did not give proper disclosure about being indicted for practicing law without authorization, which disqualified him from arbitrating the case. Goldman has since taken up the matter with the U.S. Court of Appeals for the Third Circuit.

Securities Arbitration Lawyer William Shepherd notes that “even within the legal community many believe that securities arbitration is simply an informal dispute resolution process where ‘mom and pop’ investors can try to recover some of their losses. While that is actually true, securities arbitration is also much more, and can involve cases of tens or even hundreds of millions of dollars.”

As an example, Mr. Shepherd points to a recent case in which a FINRA arbitration panel told Citigroup (C) and an ex-branch manager to pay over $11 million over losses involving an investment in a foreign bank. Read our previous institutional investor fraud blog post for more details.

Judge tosses out Goldman ruling, points to arbitrator, The Boston Journal, August 1, 2013

More Blog Posts:
FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, August 7, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013