March 31, 2013

George Friedman responds to Dan Solin’s indictment of FINRA arbitration

By Jill Gross

Last week, author Dan Solin, a long-time critic of FINRA, published a column in U.S. News & World Report attacking the FINRA arbitration forum as biased, unfair to investors and shrouded in secrecy.  Presumably, the column was motivated by a federal judge’s recent decision to deny a FOIA request that PIABA (Public Investors Arbitration Bar Association) filed with the SEC to obtain what Solin describes as “very basic information about the way FINRA administers the arbitration process, including how it selected and removed arbitrators.”  See PIABA v. SEC, 2013 WL 987769 (D.D.C Mar. 14, 2013).

George Friedman, recently retired as FINRA’s Director of Arbitration, submitted the following letter to the US News editor as a scathing rebuttal (George gave me permission to print his letter in its entirety):

I just finished reading the op-ed/editorial “FINRA’s Win is Your Loss” (March 21).  Oh wait…the article was presented as news even though it was short on facts and long on opinion.

Somehow, the author – a frequent critic of arbitration — manages to cast FINRA’s arbitration program as being unfair and a threat to Americans’ retirements.  This reminds me of the period right after Hurricane Sandy; I thought it was just a matter of time before a chronic critic blamed FINRA arbitration for the storm.

To characterize the arbitration system as unfair and a threat to retirement plans is ridiculous.  In fact, the FINRA arbitration program is an exemplar of fairness in consumer
arbitration.  This isn’t my opinion; it’s fact.

FINRA has spent years amending the rules to ensure a level playing field.  Speaking of the rules, the author might have mentioned that FINRA’s rules must be approved by the SEC after being published in the Federal Register and after a public comment period.  He also might have mentioned that the SEC periodically inspects the arbitration program and responds to individual complaints.

The program is viewed as the model of fairness.  Don’t take my word for it.  Barbara Roper, Consumer Federation’s Director of Investor Protection, has spoken favorably about FINRA’s arbitration system.  See http://www.indisputably.org/?p=4234 and http://www.investmentnews.com/article/20120905/FREE/120909978.

FINRA’s arbitration program got high marks when measured against the “arbitration fairness index” created by Professor Tom Stipanowich, a leading authority in the arbitration field (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2004543http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2004543). His words are more eloquent than
mine:

“FINRA has tried to make its operations more transparent and to promote greater public understanding of and access to arbitration. FINRA regulates the content and
form of pre-dispute arbitration provisions in investor agreements, requiring highlighted language explaining to investors the implications of the arbitration agreement and “prohibiting agreements that would limit the ability of any investor to file any claim in arbitration or that limits the power of arbitrators to make any award,” including awards of punitive damages. It regulates fees to ensure that the securities industry bears the majority of administrative fees and waives hearing fees for investors who demonstrate
financial hardship. FINRA assists investors in serving claims on brokerage firms. It conducts hearings at any of seventy-two cities nearest the investor’s residence. It provides expedited arbitration for senior or seriously ill parties.” [footnotes omitted]

Having just retired after 14 years as director of FINRA’s arbitration program, I discussed with my financial advisers many potential risks to my retirement: low interest rates, inflation, market volatility, Social Security, taxes, sovereign debt, etc.  Not once did arbitration come up as a threat to my secure retirement!

I would expect US News to at least perform basic fact-checking before it publishes columns such as this.  You can do better.

George H. Friedman

PS:  I am an adjunct Professor of Law at Fordham Law School, where I have taught a course on arbitration for 17 years.  I also sit on the Board of Arbitration Resolution Services, Inc. of Coral Springs, Florida. This letter reflects my views and not necessarily those of either organization.

While George’s letter won’t silence any critics of FINRA arbitration or settle the long-standing dispute about whether mandatory arbitation of investor disputes is an investor protection policy success or failure, he does raise some very legitimate points about the frequent failure of FINRA arbitration critics to cite any actual data or factual support for their sweeping indictment of the forum.

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Comments

  • Dan Solin says:

    There is plenty of “actual data” and “factual support” for those of us who believe FINRA arbitration is a national disgrace. I cite to some of it in this blog post:

    http://www.huffingtonpost.com/dan-solin/mandatory-arbitration-armor_b_3214992.html

  • Jerome Stanley says:

    “he does raise some very legitimate points about the frequent failure of FINRA arbitration critics to cite any actual data or factual support for their sweeping indictment of the forum.”

    It is interesting that you would give a pat on the back in support of the above statement in light of the SEC’s refusal to respond to PIABA’s FOIA request for FINRA to provide information on its selection of arbitrators.

    What’s even more incredible is the basis on which the SEC claimed an exemption from the FOIA request — that FINRA is a “financial institution.”

    If FINRA is as “transparent” as Friedman (falsely) claims, why wouldn’t it urge the SEC to comply with the FOIA request to prove that its arbitrator selection process could survive scrutiny after full disclosure.

    FINRA has steadfastly refused over the years to provide any information concerning arbitrator selection. You have to wonder why that is ???

  • Elmer says:

    Friedman’s defense of FINRA is so emblematic of the FINRA mentality. FINRA is an organization designed and operated by and for securities brokers. And here we have the retired (receiving a generous FINRA pension, I’m sure) head of FINRA arbitration riding to the defense. I’ve had my own up close and personal dealings with FINRA. The system is corrupt, and the arbitrators are, in general , willing accomplices. For example, why is it that I can go into most any courtroom in the country and observe those on trial for the most heinous of crimes or egregious violations of civil law. Yet, FINRA prohibits all, other than the parties to the case, from observing FINRA arbitrations. The answer is that FINRA has a lot to hide, and they do a marvelous job of it. How about that for “transparency?” My case was so badly arbitrated that FINRA agreed to refund/forego all arbitration fees. However, they refused to do the right thing, which was to re-arbitrate the case. It is quite fantastic that Congress and the SEC have ceded so much judicial power to this cabal of highly-compensated employees of the securities industry.

  • Mark Mensack says:

    I published this article yesterday specifically to provide evidence substantiating the claims that FINRA is a corrupt kangaroo court. If nothing else, please listen to the arbitrator’s own words linked at footnote #4.

    http://econintersect.com/b2evolution/blog2.php/2014/01/31/finra-arbitration-kangaroo-court-or-model-of-fairness

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