In 1987 the Supreme Court ruled that customary brokerage customer agreements calling for arbitration of customer disputes were enforceable. As a result most customer disputes went to the NASD (National Association of Securities Dealers). Accordingly, if you have a dispute with your broker your only option is arbitration through FINRA (Financial Industry Regulatory Authority). FINRA is a SRO (self- regulatory organization) that has the power and responsibility to supervise broker-dealers and brokers thru the Securities and Exchange Commission (SEC).
A typical arbitration panel consists of three non-judges and often non-attorneys, all of whom come from a list of individuals approved by FINRA. FINRA categorizes all their arbitrators as either “Public” or “Industry”. The distinction is often fuzzy.
Until recently all customer dispute panels were required to include one “industry” arbitrator. An industry arbitrator is a person who is working directly for the financial services industry. A recent rule makes the industry arbitrator optional with the option in favor of the customer. I always now elect to select from the “all public” arbitrator lists.
St. Louis is the headquarters of three of the biggest brokerages in the country: Wells Fargo, Stifel Nicolaus, and Edward Jones. All of the supervisors at Edward Jones are located in St. Louis. Their supervisors were required to become FINRA arbitrators and have done so. As a result, it is virtually impossible in St. Louis to select a panel that does not include someone from Edward Jones as the industry arbitrator or other arbitrators that are related in some way to Wells Fargo or Stifel Nicolaus. Often these people dominate FINRA panels.
The potential for bias and actual prejudice on the part of industry arbitrators is obvious and has been so for a long time. The industry of influence on panels, however, has not ended with the change now allowing FINRA panels consisting of all “public” members. It is simply more subtle.
What do the public arbitrators look like? Many of them are lawyers who either are employed by firms that represent brokerages, want to represent brokerages, or do primarily defense work. Non-lawyers are predominately from the corporate world, conservative and often retired. Approximately 40 people in St. Louis are certified as eligible to be public arbitrators. I am certified as a public arbitrator and I am the only person in St. Louis clearly identified as an advocate of customers. I have never been selected in a customer dispute.
What are the results? Less than 50% of customers receive anything and if there is any award there is usually just a few cents on a dollar. Notwithstanding that my personal record is substantially better; I doubt that the results in St. Louis are unique.
Do you think the system is fair?
To learn more about Stuart Berkowitz, visit him at www.sberkowitz.com.