Brokerdealer.com blog update courtesy of extract from 07.19 NY Times “Your Money” column by Tara Siegel Bernard
Image courtesy of NY Times and Robert Neubecker
While arbitration has its share of benefits — it’s much quicker and cheaper than litigation — some securities lawyers who represent investors argue that they would get better results before a jury of their peers. But other legal experts point out that many investors wouldn’t have a chance to be heard if it weren’t for arbitration; federal securities laws, along with some states’ laws, are not always investor-friendly.
“From the investor’s perspective, the great advantage of the Finra model is that arbitrators might be able to find a remedy for investors that is not supported by law,” said Barbara Black, a professor at the University of Cincinnati College of Law.
But it doesn’t always work in investors’ favor, according to securities lawyers. And on Thursday, Finra acknowledged that its arbitration process, which has come under recent criticism, could be improved when it announced a 13-member task force to look into improving transparency, impartiality and efficiency.
So how do investors fare in arbitration right now? Last year, about 18 percent of customer cases, or 499 claims, were decided in arbitration. Customers received monetary or nonmonetary damages in 42 percent of those cases. But 77 percent of customer cases — including settlements between the parties and arbitration awards — resulted in some sort of monetary or nonmonetary relief (such as canceling a stock purchase and getting money back).
Investors’ lawyers say, however, that even a $1 win would be considered an award so the statistics don’t necessarily provide the full story. “It is seldom that you see a home run,” even on stronger cases, said Robert Rex, who typically represents retirees in Boca Raton, Fla.
“One of the big deficiencies in the process is the quality of dedication of the arbitrators,” Mr. Rex added. “You can have some that are very smart and they try to do the right thing. And then you have people in there who are career arbitrators, and know if they give a big award they won’t get on another case” because the brokerages will not choose them to be on their panels.
The leading reason consumers pursue arbitration is because of claims of a breach of fiduciary duty, which is the legal way of saying the broker did not act in a customer’s best interest. There were nearly 1,900 of those cases last year, according to Finra, followed by lesser numbers of cases involving claims of negligence and misrepresentation. Problems involving stock investments were the most frequent, followed by mutual funds and variable annuities.
Investors are often surprised at how the process works. Arbitration is considered an “equitable forum,” for instance, which means arbitrators don’t have to strictly apply the law. “The court applies the law to the facts and makes a decision,” said Jonathan Morris, chief legal officer at Dynasty Financial, who has served as an arbitrator. “In arbitration, they might not rule all for one side or another. The investor can be partially right and partially at fault and arbitrators can split the difference.”
Depending on the circumstances, the lack of a legal standard can help or hurt your case. Someone like Phil Ashburn, whose case was arbitrated last year, may have done better if his case had been heard by a jury, at least by his lawyer’s estimation, because the laws in his home state, California, are more favorable for investors.
For the entire column from the NY Times, please click here.