FINRA Dealing With Repercussions From Undisclosed Arbitrator Misconduct

Monday, August 12, 2013

According to Reuters, the Financial Industry Regulatory Authority (FINRA), Wall-Street’s industry-funded watchdog, is in high-gear to ensure it vets the backgrounds of its arbitrators before appointing them to cases. This, after an incident last June where an investor who lost a $1.4 million case against Goldman Sachs asked a federal court to overturn the ruling. The reason: he alleged that the arbitrator did not fully disclose his involvement in a criminal proceeding. A judge for the U.S. District Court for the Eastern District of Pennsylvania agreed, throwing out the arbitration ruling in a decision focusing on the arbitrator's misconduct.

In response, FINRA is running Google searches on arbitrators immediately before appointing them to cases. It is also gearing up to run yearly background checks on its 6,500 arbitrators, who were previously put through the process only when they applied for the job.

The goal is to prevent future arbitration rulings from being invalidated due to problems with arbitrators, including last-minute details that undisclosed by arbitrators. These “details” could include everything from a conflict of interest triggered by an employment change, or even an arrest.

This recent revelation also added fuel to the fire for those who oppose the current practice of mandatory arbitration in disputes between brokers and investors. This practice, which investors agree to when they open a brokerage account, bars them from bringing an action in court.

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