FINRA, the Financial Industry Regulatory Authority, has proposed a change to the way that FINRA arbitrators are eliminated for conflicts of interest. In an investor arbitration with Wells Fargo, FINRA eliminated certain individuals as potential arbitrators at the request of Wells Fargo. This was not disclosed to the investor until after the arbitration was concluded.
FINRA is the broker-dealer self-regulatory body operating under the supervision of the US Securities & Exchange Commission. In addition to its activities as a regulator of brokerage firms and their employees/agents, it also operates the largest securities dispute resolution forum in the U.S. FINRA Dispute Resolution oversees an arbitration system for disputes that brokerage firms and their employees have with each other and with customers.
The selection of arbitrators is extremely important in FINRA Dispute Resolution. Arbitrators act as judge and jury in deciding the disputes before them. In FINRA arbitration the opposing parties are given lists of multiple arbitration candidates that they research, rank, and strike. The process by which FINRA generates those lists of potential arbitrators is a secret that FINRA and the SEC refuse to disclose. The process of generating those lists and striking individuals from those lists should be fully disclosed to all parties. The new rules proposed by FINRA would require that FINRA document its removal of any arbitrator from the list of potential arbitrators. That rule revision along with others are made in a December 2022 rulemaking proposal that FINRA filed with the Securities and Exchange Commission (SEC).
Often before filing this type of a proposed rule, FINRA seeks input from the public and stakeholders. In this case, FINRA decided to seek input from certain committees but not from the public at large. That means this is the only opportunity for non-insiders, including the public to comment on the proposed rules. Chicago securities attorney Lisa Bragança told InvestmentNews.com, “I find it interesting FINRA did not want to hear from investor advocates before they put the proposal in front of the SEC.”
She also criticized FINRA for not giving the public more details about the algorithm that generates the lists of potential arbitrators that are provided to parties. Click here to learn more about the proposal, the way FINRA selects its arbitrators, and why the process has become controversial.