finanznachrichten.de (Reuters) (Sept 28, 2010) - Wall Street regulator FINRA has proposed changes to its dispute arbitration system that investor lawyers say will help customers win more cases against their brokers.

The Financial Industry Regulatory Authority said on Tuesday it wants all investors filing claims to have the option of an all-public arbitration panel. Currently, one of three panelists comes from Wall Street.

The proposal, to be filed with the Securities and Exchange Commission next month, would expand a two-year FINRA pilot program that gave some investors filing claims against select brokerage firms the all-public option.

'This is a tremendous idea,' said New York investor lawyer Jacob Zamansky. 'It will start to level the playing field for investors.'

FINRA's pilot program was in part a response to critics who said the arbitration system was not fair to investors. Starting in October 2008, 14 firms agreed to have some cases that did not involve individual brokers heard before all-public panels.

The industry-controlled watchdog noted that in the pilot program, investors still chose the traditional panels.

More than 60 percent of investors eligible to take part in the pilot program chose to do so, or 560 cases over two years. Of those cases, just half chose an all-public arbitration panel.

'Giving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process,' said Richard Ketchum, FINRA's chief executive officer.

SEC spokesman John Nester said the agency 'looks forward to receiving the proposal.'

The results of the pilot cases, in any event, may continue to fuel debate.

FINRA spokeswoman Nancy Condon said 23 of the pilot cases went through to a ruling, with the rest reaching settlements. Among 17 cases heard by all-public panels, investors were awarded damages 71 percent of the time.

Damages were awarded in three of the six cases heard by mixed panels.

FINRA said on Tuesday the 14 brokerages had agreed to extend the pilot program for an additional year while regulators study its proposal.

'We believe arbitration is fair and cost-effective and that it works for individual investors. Results from the pilot not only have reinforced that view, but show that non-public arbiters can contribute to fair outcomes,' said Andrew DeSouza, a spokesman for brokerage industry group SIFMA.

Arbitration has long been a controversial topic among U.S. investors and their advocates. Built into every brokerage customer account is an agreement not to take disputes to court, but instead to submit to FINRA-supervised arbitration.

'Having the industry arbitrator on the panel created the appearance, in the minds of some people, that the process was tilted to the industry. Giving investors the option of an all-public panel really addresses that,' said David Massey, who on Tuesday was named president of NAASA, a coalition of state securities regulators.

Critics contend that the arbitration system hurts investors, with most decisions favoring brokerages.

Even in cases where investors win, they usually do not fully recoup the losses they claimed.

'The deeper you drill down into what's behind the statistics, the more you see that having a win is not necessarily what a normal human being thinks of as a win,' said Massey, who is also director of North Carolina's securities division.

Through the end of August, 51 percent of 550 arbitration cases this year resulted in monetary damages awarded to customers, according to FINRA data. That is up from 45 percent of cases last year and 42 percent in 2008. (For a graphic on FINRA arbitration rulings and the percentage of cases won by investors, click: http://link.reuters.com/mag85p )

'This gives investors the right to choose whether they want an industry arbitrator or not,' said Scott Shewan, a California lawyer and current president of the Public Investors Arbitration Bar Association. 'Perception is reality, and if investors feel they have to contend with a slanted playing field, then it's a real problem. Investors have to feel they have a neutral and unbiased forum.'