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A Jury of Peers for Disputes With Your Broker?


The scenario is not unlike those Olympic lowlights of yore: A Soviet gymnast flubs the floor exercise; a moment later, the Soviet judge scores the routine a perfect 10. Such has been the experience for many investors as they’ve sought compensation from their brokerage firms for everything from alleged misrepresentation to supposed breaches of fiduciary duty. For years, the rule was, investors claiming harm had to present their case to an arbitration panel that included one arbiter who worked in the very industry the panel was tasked with judging.

But thanks, in part, to sharp pressure from some investor advocates, that system has now gone the way of Olympic live-pigeon shooting. A rule change made last year by the Financial Industry Regulatory Authority now gives investors the option of bringing disputes to a three-person jury in which none of the arbiters is a brokerage-industry employee — a move that “goes a long way toward leveling the playing field that was tilted against investors,” says Ryan Bakhtiari, president of the Public Investors Arbitration Bar Association. Indeed, investors are quickly taking advantage of the option: In the time since the new rules took effect, 76 percent of all complainants have chosen to bring their cases to a wholly non-Wall Street panel. And, at least in one test of the new program, investors who selected an all-public panel fared slightly better than those who faced a jury with one industry arbitrator (though the numbers were too small to be statistically significant).

Some arbitration insiders, however, say that while the playing field may be more even now, the odds are still stacked against investors. “It’s putting lipstick on a pig,” says Dan Solin, senior vice president at Index Fund Advisors and coauthor of a report analyzing the results of securities arbitration. For one thing, the process remains administered by Finra, the brokerage industry’s self-regulator. Even with an all-public panel, critics say, investors are not exactly being judged by their peers — while “nonindustry” arbitrators don’t currently work for financial firms, many are retired lawyers and accountants recruited by Finra, says Louis Straney, a securities litigation consultant who wrote a book on the topic. And although win rates are improving, such numbers don’t tell the whole story. Even if an investor wins, says Solin, the average amount recovered has historically been only about 20 percent of the original claim. “Investors are seldom made whole,” adds Straney.

Finra says the recovery figure doesn’t include cases that have been settled (the vast majority) and that the process, including the selection of arbitrators, is unbiased and fair. Be that as it may, advises Solin, if you do bring a dispute against your broker, be sure to hire an experienced arbitration lawyer. The new rule is “definitely a step in the right direction,” he says, “but the odds still favor the house.”