The Public Investors Advocate Bar Association has sharply rebuked a counterpart’s suggested revisions to the Financial Industry Regulatory Authority‘s arbitration rules.
A provision through which high-dollar Finra disputes and certain others could be shifted to non-Finra forums, proposed limitations to punitive damages in arbitrations, and subject-matter requirements for arbitrators are just three areas in which Piaba has taken issue with arbitration-rule revisions proposed by the Securities Industry and Financial Markets Association.
Finra in March requested industry feedback regarding an initiative to modernize its rules. Sifma submitted proposed changes to the arbitration process in a letter to Finra last month, and Piaba on Monday responded with a rebuttal to Sifma’s proposals.
Among the issues dividing the two groups is the question of whether certain arbitration matters should be eligible for removal to other forums. Sifma in its letter, dated July 11, proposed two “narrow categories” of transferrable claims: those seeking damages “over a certain, high dollar threshold” and claims in which institutional investors are counterparties to the dispute. “[T]hese are precisely the types of claims that many stakeholders recognize are not best-suited for the FINRA arbitration forum,” Sifma Vice President and Assistant General Counsel Alyssa Pompei and Deputy General Counsel Kevin Carroll wrote in the July 11 letter.
Piaba on Monday rejected those carve-outs, saying the size of the claim often does not reflect the merit or complexity of the case. “This isn’t investor protection; it’s forum shopping by the industry to avoid accountability,” Piaba President Adam Gana, Executive Vice President Michael Bixby and Vice President Joe Wojciechowski wrote.
Similarly, Sifma proposed allowing customer agreements in which Finra member firms could preclude or limit punitive damages in claims, arguing that Finra arbitrators can more effectively punish a firm by referring cases to Finra’s enforcement unit for disciplinary proceedings.
Piaba in its response said that the industry has prevailed over customers in more than 70% of Finra arbitrations since 2023 and that the self-regulator needs to “expand access to justice for investors” rather than limiting damages.
Sifma also expressed concern regarding arbitrator expertise and performance.
“We have observed a spectrum of issues, ranging from arbitrators permitting hearings to continue for days past their scheduled end date or failing to issue timely decisions, to arbitrators who routinely fall asleep during proceedings,” the July 11 letter stated.
Sifma proposed enhancing Finra’s arbitrator-training process, particularly with regard to subject-matter training; increasing continuing-education requirements; revising the rule that permits customers to select arbitration panels composed entirely of public arbitrators; increasing arbitrator compensation; and enhancing oversight through more regular observation of arbitration proceedings and by implementing “a more transparent process for identifying and removing FINRA arbitrators who are not adhering to applicable rules or adequately performing their duties.”
Piaba agreed with Sifma’s call for increased monitoring of arbitration and greater measures for addressing poorly performing arbitrators, but it said Sifma’s push for improved arbitrator subject-matter expertise would shift the arbitrator profile farther from that of a typical juror or judge and “create a more industry-tilted arbitrator pool [that] will only further deteriorate the fairness of the forum.”
Earlier this year, Finra issued a more stringent set of qualifications for its arbitrators, requiring a four-year degree and at least five years of full-time paid professional work experience that requires advanced training and education.
“SIFMA’s list of arbitration reform recommendations is so blatantly self-serving that it almost reads like a parody,” Gana said in a statement released alongside Piaba’s letter.
“SIFMA’s claim that this will improve FINRA’s ‘fairness and integrity’ is an insult to the intelligence of Main Street investors and folks saving for retirement. These rule changes would make it easier for bad actors to escape responsibility and harder for their victims to seek justice,” Gana added.
A Sifma spokesperson told FA-IQ in an emailed statement that the group’s “recommendations to improve FINRA arbitration were made in good faith in response to FINRA’s interest in industry’s views on reform and would make the forum fairer and more efficient for the benefit of investors, industry, and FINRA.”
“We believe our recommendations balance the interests of all stakeholders in FINRA arbitration, and, above all, ensure investor protection,” the spokesperson added.
A Finra spokesperson told FA-IQ via email that the self-regulator “strives to provide a fair, efficient and effective arbitration forum for all participants. We engage with and welcome feedback from all practitioners of the forum to ensure that we are continuously improving it.”
Piaba and Sifma in their letters also addressed other aspects of Finra arbitration, with Piaba largely opposing Sifma’s suggestions to expand the circumstances in which a party can file a motion to dismiss a claim, to tighten discovery requirements, and to hold arbitration proceedings to their scheduled length and limit the number of witnesses each side can present.