The Past, Present and Future of Securities Arbitration between Customers and Brokerage Firms

Abstract

The Financial Industry Regulatory Authority (FINRA) is, for all practical purposes, the sole arbitration forum for resolving disputes between broker-dealers, associated persons and their customers. Over the years FINRA and its predecessors have amended the arbitration rules to provide fair procedures and to reduce the influence of the securities industry. In addition, the SEC must approve FINRA's arbitration rules upon a finding that the rules are consistent with the requirements of the Securities Exchange Act and its rules. FINRA has worked hard to increase investor confidence in the arbitration process, although doubts persist because of its mandatory nature.This paper recounts the evolution of the FINRA arbitration forum as a consequence of the Supreme Court's 1987 opinion in Shearson/American Express v. McMahon and increasing recognition that investor confidence requires a fair alternative to litigation. As predispute arbitration agreements have become universal, the forum has adopted a comprehensive set of procedural rules, with some sacrifice of arbitration's original virtues of informality, efficiency and speed. With the all-public panel option, customers have less reason to complain about industry bias.This history also shows that brokerage firms, which long campaigned for mandatory securities arbitration, have not hesitated to expend their considerable resources to create an arbitration forum that served their purposes, sometimes with little regard for maintaining investor confidence in the forum. Charles Schwab is only the most recent example. Indeed, the securities industry should breathe a sigh of relief over Schwab's defeat. If the firm had been permitted to enforce its class action waiver, detractors of mandatory securities arbitration would certainly have increased the pressure on Congress and the SEC to eliminate mandatory arbitration of customers' disputes with their brokerage firms.