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Securities Compliance Sentinel Analysis of cutting-edge securities industry issues

So Do You Really Want To Arbitrate Customer Claims

Posted in Arbitration, Broker-Dealer Regulation, Compliance and Supervision, FINRA Compliance, FINRA Enforcement, Public Customer Arbitrations, Securities Litigation

In the 17 plus years of defending broker-dealers in FINRA arbitrations, I and my clients have relied upon the fact that at least one arbitrator would have industry experience.  In my experience, having that presence did not create an unfair advantage for the firm.  Instead, it provided the panel with a knowledgeable resource that would be familiar with the issues. 

 That benefit of industry arbitration has, as of July 1, gone by the way of the dinosaur with Notice to Members 13021 and the amendment to the definition of public arbitrator.  That definition now excludes anyone having any affiliation with mutual funds or hedge funds from being a “public arbitrator”. 

This definition, coupled with Rule 12403 which gave investors the option to select an “all public” panel, effectively does away with having any industry experience on the panel.  In other words, firms defending themselves and their registered representatives will have a much more difficult job explaining the reasonable basis for the investment decisions at issue. 

What can firms do protect themselves leading up to this new-style arbitration.  All firms should revisit their “know your customer” written supervisory procedures. 

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Over the years, I have given many classes to registered representatives and investor advisors and have stressed that the best way to protect yourself is to document everything that you do because, as the old adage goes, “the film does not lie.”  As reflected in my guidebooks, detailed know your customer analysis creates a solid paper trail.

 

* photo from freedigitalphotos.net

 

Having a solid paper trail will make explaining what happened to an uninformed panel a much easier task to handle.  Make sure your policies and procedures require ample documentation and enforce those policies, or suffer the consequences of no industry experience on your arbitration panel.