Mandatory Securities Arbitration vs. Court? The Debate Rages Past the Quarter-Century Mark

Should investors have the option to resolve their securities claims not just in arbitration but also in court? Recently, Senator Al Franken (D-Minn) voiced his opinion that offering investors both options would be fairer. His comment came weeks after SEC Commissioner Luis Aguilar publicly spoke out against mandatory arbitration, noting that letting investors choose between the court system or Financial Industry Regulatory Authority arbitration would give them better protections. Right now, investors have to agree to resolve any disputes that arise with a brokerage firm or investment adviser through arbitration rather than litigation before their working relationship can go forward.

However, as Claimant Investors’ Attorney William Shepherd noted, the debate of whether to go to the court or arbitration is a debate that has going on for some time now: “This dispute began in 1987 when the U.S. Supreme Court first decided that, because arbitration had become ‘fair,’ investors could no longer choose court if an arbitration agreement had been signed.”

Is it fair to let investors choose between having their claims heard in arbitration or by the judicial system? We definitely need a legal process that lets investors get redress efficiently and with the least amount of struggle.

FINRA Arbitration or The Court?
Getting rid of mandatory arbitration and letting investors choose what forum they’d prefer would be a huge change because FINRA arbitration and the court differ significantly. FINRA arbitrations tend to be more private, limits discovery and pre-hearing dismissals, and doesn’t obligate participants to obey the rules of evidence. Whereas courts will throw claims out over different reasons even before an investor gets his/her day in the, in a FINRA arbitration case, unless a settlement is reached first, an investor with a dispute will generally get to go before the arbitration panel even if the matters involved are the ones that a court would have dismissed.

That said, it is the advisers that have more to gain from the privacy granted by FINRA arbitrations, which are not open to the public. Also the paper trail accompanying such cases tend to be limited to a short summary on FINRA’s BrokerCheck that will include any award amount granted-unlike with a lot of courts, which will publish not just the names of the plaintiffs and defendants, potentially providing bad publicity for the latter. Also, when a lawsuit is resolved in a manner that doesn’t favor a firm or adviser, this can open the doorway for more securities lawsuits to follow. (Having to battle out a securities case before the public in court might even encourage some advisers to settle rather than go through the fallout that comes with losing litigation.)

Since each securities case is unique, it is hard to know in general whether FINRA arbitration or the court is the better option. However, if an investor has the choice, then he/she can pick the venue most favorable for his/her claims.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our securities lawyers represent investors in both FINRA arbitration and the courts. Contact us today.

Details missing in the arbitration versus court debate, Investment News, July 7, 2013

SEC’s Aguilar Calls for End to Mandatory Arbitration Clauses, The Wall Street Journal, April 16, 2013

Sen. Franken Leads Charge to Protect Consumers’ Legal Rights Against Wall Street, Franken.Senate.Gov, April 30, 2013

More Blog Posts:
FINRA Delays Audit Trail Plan, Proposes Arbitration Rule Changes, Asks for Firm’s Social Media Use Data, Warns About Cybersecurity Breaches, Stockbroker Fraud Blog, June 28, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013

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