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FINRA Stockbroker Arbitration Changes May Be Good for Investors

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Washington, DCChanges to the Financial Industry Regulatory Authority's (FINRA) stockbroker arbitration process may be good news for investors. Arbitration is used by investors who have a dispute with their broker or financial firm, such as complaints about stockbroker fraud. Although the stock fraud arbitration process can be beneficial for investors, the changes may further strengthen consumers' rights.

In February 2011, FINRA announced that the Securities and Exchange Commission (SEC) approved FINRA's proposed rule change, which would allow customers the opportunity to have an all-public panel of arbitrators. Some, although not all, FINRA arbitrations are heard before panels of three arbitrators.

"Historically, in cases with three arbitrators, the panels have been comprised of two public arbitrators and one arbitrator with a nexus to the securities industry," a news release from FINRA (02/01/11) stated. The new rule means that the panel does not have to include an arbitrator with a connection to the securities industry.

A pilot program conducted over a two-year period showed that investors who were given the opportunity of an all-public panel of arbitrators chose such a panel approximately 60 percent of the time.

"This change will give investors an additional choice in selecting their arbitrators when they file claims," said Richard Ketchum, FINRA Chairman and Chief Executive Officer. "We believe that giving investors the ability to have an all-public panel will increase public confidence in the fairness of our dispute resolution process," (02/01/11).

FINRA recently awarded a claimant more than $2 million in compensatory damages, interest, punitive damages and attorney's fees and costs after finding that a broker of Wedbush Securities misrepresented information about investments and made unauthorized redemptions and withdrawals on the investor's account. According to On Wall Street (08/31/11), the FINRA panel wrote in its decision that the respondent's conduct was "premeditated, egregious and unconscionable and part of a plan or scheme to defraud her customers." The panel further noted that her conduct bordered on criminal misconduct.

The claimant alleged that the respondent sent him false monthly statements, forged his signature, bought unsuitable variable annuities and then sold them, all the while profiting from the fees and commissions generated by the transactions. Although financial statements indicated the claimant had approximately $1.8 million in his account, he in fact had less than a third of that.


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