FINRA Seeks to Revamp Controversial Arbitration Rules

Thinkadvisor.com

 

By Melanie Waddell

March 02, 2026 at 04:39 PM

What You Need To Know

  • FINRA could overhaul rules on punitive damages and Form U5-related defamation claims.
  • The attempt to modernize arbitrations focuses on “key issues that one or both sides have been complaining about for years,” says attorney Brian Rubin.
  • Michael Bixby, president of PIABA, sees the potential changes as granting “the industry’s wish list to make arbitration more unfair for investors.”

The Financial Industry Regulatory Authority said Monday that it’s seeking feedback by May 1 on ways to modernize its arbitration rules, including making FINRA’s arbitration forum more expeditious and cost-effective relative to courts as well as changing arbitrator qualifications.

In just-released Regulatory Notice 26-06, FINRA states that it’s “committed to making changes to its rules, guidance and processes, and addressing challenging issues facing its arbitration forum.”

FINRA’s notice “appears to be a transparent attempt to gut a host of key investor protection safeguards at the demand of the securities industry,” Michael Bixby, president of the Public Investors Advocate Bar Association, a group of lawyers representing investors in disputes with the industry, told ThinkAdvisor Monday in an email.

Brian Rubin, partner at Eversheds Sutherland in Washington, added in another email Monday that FINRA’s attempt to modernize arbitrations focuses on “key issues that one or both sides have been complaining about for years.”

These hot-button issues, Rubin said, include:

  • Whether to allow limits on punitive damages.
  • Whether to allow opt-outs for high-value claims and institutional disputes. For instance, “going to court or another arbitration forum [with] expanded discovery options like depositions and interrogatories,” Rubin said.
  • Whether firms should receive qualified or absolute immunity for required regulatory disclosures.
  • Whether to allow drop-down menus instead of narrative fields to reduce defamation exposure. For example, Forms U4 or U5 might contain information about why a rep was terminated or details from a customer complaint. “A rep might seek expungement of information from the [Central Registration Depository] and monetary damages for defamation,” Rubin said. “A drop-down could be viewed as a safe harbor, so that the firm isn’t making subjective characterizations.”

Bixby called the proposal to limit or eliminate punitive damages “particularly egregious.”

Investors, Bixby said, “rarely win their cases in the first place, and punitive damages award are exceedingly rare. The industry is up in arms over just a couple of recent punitive damages awards in cases where the industry committed gross misconduct. But any honest review of the facts of those cases will demonstrate that they involved the precise type of egregious misconduct which calls for an award of punitive damages.”

The industry “has effectively complained that the broken clock was right twice a day, and they want to completely break the clock,” Bixby continued. “The industry cannot both claim arbitrators are sophisticated enough to interpret the legal rulings and laws to deny investors claims 70% of the time while claiming these same arbitrators do not have the know how to award a full cup of justice to devastated investors.”

Bixby added that “the forum selection provisions that potentially allow FINRA Members to force arbitrators into other non-FINRA forums is also particularly insidious.”

Such a move “would allow FINRA member firms to escape the basic level of regulatory oversight and transparency that is offered by FINRA Arbitration,” Bixby said, and allow the industry to “force investors into even more unfair and broken private arbitration systems that take all the worst aspects of FINRA arbitration and amplify them, often creating barriers to entry which entirely deny access to justice for retail investors.”

Industry ‘Wish List’

FINRA’s arbitration notice “is an absolute disaster for investor protection,” Bixby added.

In the arbitration forum “where investors only win less than 30% of the time, FINRA is openly considering the industry’s wish list to make arbitration more unfair for investors and roll the clock back thirty years,” Bixby continued.

“PIABA will stand and oppose any and all blatant attempts to trample on the rights of retirees and mainstreet investors. FINRA clearly needs to be reminded of its duty and mission that FINRA is increasingly straying from more and more aggressively.”