An organization of attorneys representing investors is calling on the Financial Industry Regulatory Authority to change its practice of allowing brokerage firms to request that arbitrators be removed from cases solely on the basis that they have previously arbitrated disputes involving that firm.
The group, the Public Investors Advocate Bar Association (PIABA), sent a letter to FINRA detailing its views on the issue, according to Advisor Hub.
The move comes after FINRA granted a request by Stifel Financial to remove two arbitrators from a list of potential panelists in an upcoming case. Stifel is challenging a decision by a FINRA arbitration panel that awarded Stifel clients $132.5 million in a dispute over the structured note strategy of Miami broker Chuck A. Roberts. Stifel contended the two prospective arbitrators were biased because each had ruled against the firm in prior cases involving Roberts.
In its letter to FINRA CEO Robert Cook, the PIABA said FINRA must revise its “unlawful and absurd application” of existing rules, arguing it “tilts the scales in favor of the industry” and “undermines the arbitration system.”
It said allowing parties to remove prospective arbitrators from ranking lists if they previously ruled against them in a similar case unfairly benefits large brokerage firms and can intimidate arbitrators who decide against them.
“Ultimately, it also punishes arbitrators who award damages against brokerage firms and sends an intimidating message that holding brokerage firms accountable for misconduct is frowned upon and may result in removal from future cases,” PIABA President Michael Bixby said.
Bixby cited what PIABA saw as a “serious and recurring problem” with FINRA’s application of Rule 12407 (a), which governs when a director can remove an arbitrator due to “conflict of interest or bias.” According to the rule, the bias must be “definite and capable of reasonable demonstration, rather than remote or speculative.”
According to the PIABA, FINRA Dispute Resolution has been taking an arbitrator’s prior service in FINRA cases and on prior awards into consideration when ruling on removal under the rule and has “repeatedly” removed arbitrators solely because of their work on another case. The association said allowing these removals “significantly deviates from case law.”
In granting Stifel’s request to remove the two prospective arbitrators, FINRA said, “It is reasonable to infer” that arbitrators “are biased or lack impartiality” when they have earlier awarded “substantial damages and attorneys’ fees” in cases that involve the same firms, financial advisor, supervisors and products.
Bixby called the practice “not merely legally incorrect, but practically unworkable and leads to absurd results,” questioning if this meant that anytime an arbitrator hears a case involving Wells Fargo, the arbitrator could no longer serve on proceedings involving the wirehouse.
Representatives from FINRA declined to comment, the PIABA said.
Under FINRA rules, both sides receive three lists of potential panelists and can remove a set number from each for any reason. Stifel can now preserve its number of strikes following FINRA’s decision to eliminate the two arbitrators from its list of prospective panelists.
The attorneys at Hyman Cotter PC have handled hundreds of arbitrations before FINRA, the Chicago Board Options Exchange, the Chicago Board of Trade, JAMS, the American Arbitration Association and other self-regulatory organizations nationwide. We have also appeared in courts throughout the United States in various securities-related matters. For more information about our arbitration and litigation services, please contact Hyman Cotter PC at 312-291-4600 or through our online contact form.
