Thursday, September 6, 2012

Is FINRA Arbitration Constitutional?

By Paul Meyer, MA

Since 1987, when the Supreme Court upheld the mandatory arbitration provision found in brokerage customer agreements (Shearson/American Express v. McMahon - 482 U.S. 220 (1987)), most disputes between broker-dealers and their customers or employees have been adjudicated through the FINRA Dispute Resolution process. Their proceedings are not open to the public, no public record is kept, and most decisions are not explained. FINRA arbitrators come from all walks of life, although many are attorneys. Most FINRA arbitrators have little or no experience in the securities industry.

Recently a federal judge in Philadelphia ruled that a judicial-arbitration program used in the Delaware Court of Chancery is unconstitutional. She found that the arbitration process was “essentially a civil trial” and that under the First Amendment the public has a right to access the proceedings. “Public accountability encourages honesty from witnesses and reasoned decision-making by jurists.” Interestingly, she made her finding in spite of the fact the parties mutually agreed to binding arbitration. Clients of brokerage firms, by contrast, are compelled into arbitration.

In too many cases, FINRA arbitration has become “essentially a civil trial.” It is not unusual for cases to take a year or longer to be heard, nor is it uncommon for hearings to span several weeks. At the end of the process the litigants do not get a reasoned award (with rare exceptions).

Opposition to mandatory arbitration is widespread, especially among the claimants’ bar, in part because there is very little real accountability built into the FINRA arbitration process. It will be interesting to see if this judge’s view of First Amendment rights gains traction in other similar forums.

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