Resolving Client Disputes

The couple’s lawyer alleged the Rothmans, who were declared incompetent in 1999, were told in three separate letters that the investment carried no fees or commissions. Evensky was amazed Merrill didn’t settle the case. Joseph Rothman died in 2004. In 2007, a jury awarded the Rothmans’ estate $6 million despite Merrill’s claim that the accounts within the annuity appreciated by more than $10 million. Merrill declined to respond to repeated phone calls.

Finra has no in-house appeals process in place. Parties unhappy with arbitrators’ decision have to take their cases to court, where judges rarely overturn awards handed down in binding arbitration.

“In arbitration, the process is final, the decision is made there,” says Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association (SIFMA). “It’s one of the key factors that makes arbitration less expensive than court-based litigation.”

While punitive damages are unusual in arbitration, claimants and investors should be able to recoup their losses, lawyers say. But awards are often a fraction of the loss. Furthermore, defendants are sometimes out of business by the time an arbitration proceeding is concluded, making the recovery of awards difficult if not impossible.

This year, 11%, a total of $51 million, of arbitration awards granted in 2011 remained unpaid. Many of the outstanding awards involve defunct small brokerages and advisors. Currently, if a firm or an advisor fails to pay an award, Finra can respond by revoking his or her securities license.

Because the arbitration is funded by the very industry it is tasked with regulating, Finra is an easy target for charges of corruption and bias. But that doesn’t mean the arbitration is unfair.

“I think that’s an overly simplistic argument,” Hyndman says. “I think Finra arbitrators are paid by the parties in the case, so they are paid in part by the investors. Finra has a strong interest in making the process at least look fair, because Congress can swoop in at any time and pass laws that make mandatory arbitration clauses no longer enforceable.”

Carroll, another defense attorney, says Finra’s structure prevents direct bias in arbitration decisions. “Finra is an independent regulator. Its governance is majority non-industry, so the argument that it is somehow biased for brokerages fails there,” Carroll says. “Everything that Finra does—all of their rules, activities and their arbitration—all of it is overseen and approved by the SEC. That hardly paints the picture of an entity that is captive to the industry. In fact, it’s the opposite: Finra serves investors. That’s their mission, that’s what they do, and there are controls in place to see that is how it functions.”

Hyndman adds: “One of the things that lawyers tell each other when we’ve reached a settlement is that if nobody’s happy, it’s probably a good compromise, and that’s my view on Finra arbitration.”

“It’s proven to be faster and less expensive than court-based litigation, and the case outcomes are fair,” Carroll says. “We see a well-functioning system and we don’t want to see that system upset without good cause.”