FINRA Fires Arbitrators after Ruling in Favor of Investors

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In a turn of events that illuminates what critics contend is the fundamental unfairness of arbitration proceedings, FINRA — the Financial Industry Regulatory Authority — has fired three arbitrators who found in favor of investors in a proceeding against Bank of America subsidiary Merrill Lynch in 2011.  Bloomberg News first reported the story here.  FINRA is the securities industry’s largest private dispute-resolution company, and it is specified in many arbitration clauses that private investors are bound by.

In the underlying matter, husband and wife investors alleged that Merrill Lynch was negligent in monitoring their investments, and sought over $640,000 in damages.  The case progressed through the individual arbitration process, pursuant to a mandatory arbitration clause.  Though rulings in favor of plaintiffs in arbitration are rare, and substantial awards even more so, the panel awarded $520,000 in damages to the investors.  Merrill executives complained to FINRA about the ruling, and the firings began shortly thereafter, staggered over a roughly 11-month period.  Two of the three ousted arbitrators had considerable experience.  One of the affected arbitrators, Irma Gormly, has initiated a “whistle blower” complaint with the SEC; thus far, however, the SEC has not responded.

Despite seemingly taking issue with the substance of the decision favoring investors, Merrill Lynch has made no attempt to attack the ruling itself.  No appeal has been filed, nor are there any grounds for such, according to another sacked arbitrator, Fred Pinckney.  Pinckney sums up the situation (quoted by Bloomberg News) thusly: “It’s unbelievable that they would take such an experienced panel and get rid of it.  To me, this undermines the credibility of the entire FINRA process — I didn’t say kangaroo court — but when you have three well-credentialed people, doing their job, and there were no meritorious grounds for an appeal, and we get handed the ‘black spot’ — and not all at once — it makes for a pretty cheap novel.”

Relief for consumers may be on the horizon.  The Consumer Financial Protection Bureau (CFPB), created in 2011 by the Dodd-Frank Act, is currently conducting a study into mandatory arbitration clauses and their adverse impact on consumers’ ability to seek remedies for consumer protection violations.  The study is intended to help the CFPB determine whether to issue regulations regarding the mandatory arbitration process.  The deadline to submit comments to the bureau has passed; however, the comments submitted by the public are available here.