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The FINRA and its role in Securities Arbitration

FINRA stands for National Association of Securities Dealers. All securities salespersons must be licensed through the FINRA. The FINRA tells the public that their mission is to protect the integrity of the market place as well as to educate and discipline securities salespersons. The FINRA is perceived as the entity that regulates the securities markets, under the auspices of the Securities and Exchange Commission.

Sometimes the FINRA is perceived as being self dealing, meaning that they place the interests of their membership, which includes, of course, all the big firms, such as Merrill Lynch, Morgan Stanley, UBS, Citigroup and so forth, before that of the public. They occasionally do deserve criticism, but they also operate under the authority of the Securities and Exchange Commission, and therefore are sometimes, but incorrectly, perceived as a government watchdog.

The problem is that the public erroneously believes the FINRA will protect them and in truth, that is not what the FINRA always does. More often than not the FINRA comes in after the damage has already taken place. For example, it was only after the Attorney General of New York, Elliott Spitzer, filed his now infamous complaint against ten of the largest securities firms in the country for publishing misleading research ratings, that the FINRA decided to do anything about it. If Elliott Spitzer had done nothing, there is no evidence we are aware of that the FINRA would have done anything about it either.

In truth, the FINRA sometimes has a difficult time regulating the securities markets. Let's face facts, if the securities markets were better regulated we might be out of work. The FINRA can therefore best be described as a trade organization, and like the oil industry and the pharmaceutical industry and other big businesses, the FINRA simply can not always draw that line in the sand separating their regulatory mission of protecting the public, from their memberships' interests in making profits.

If a dispute arises between a customer and his financial advisor, or stock broker, the FINRA administers arbitration proceedings. These FINRA arbitration proceedings take place all over the country. The FINRA appoints arbitrators and tries to provide the public with fair hearings, quick and inexpensively. Sometimes these arbitration hearings are fair, and frankly, sometimes they are not.

FINRA arbitrations are subject to the same types of bias and prejudices that any dispute resolution forum has, because FINRA arbitrators are human. Nevertheless, we believe that given our lengthy experience (over 1100 completed arbitrations) since 1991, and our knowledge of the arbitration process itself, the respect we receive from defense counsel from nearly all major firms, and how to best maneuver within the FINRA arbitration process to our clients benefit, the arbitration process can work for you. In fact, our claims settle, on average about 80% of the time. Of the remaining 20% or so that go to hearing, which usually are the more difficult claims, our win rate is about 50%.

Therefore, the results we have obtained for our clients in FINRA arbitration over an almost 15 year time span, are that 90% obtain a settlement or arbitration award! FINRA arbitration, under these circumstances, clearly works. However, not everyone is going to experience the same relative results in FINRA arbitration, and some may be disappointed. However, FINRA arbitration is most often about one thing, and that is apportioning responsibility.

FINRA arbitrators therefore, look closely at a customers' previous investment experience. Sometimes education and work experience come into play as well, but the most important factor, is whether or not you had the wherewithal to understand the risks that you were exposed to, and whether or not you acted reasonably. Against that backdrop, FINRA arbitrators should, but not always, weigh what you were told, and whether or not your financial advisor acted with your best interests at heart and whether or not he or she was properly supervised.

Lastly, FINRA arbitrators will weigh what happened against what the securities markets were doing during the actual relative time period in which you lost money. In short, FINRA arbitration is usually not a simple case of black or white, but a much more introspective look at who said what to whom and whether your actions and reliance upon your financial advisor was reasonable.

Richard Sacks

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