Broker Arb Lessons From Animal House and Brian Hamburger

Heck, there's even an exemption in the '40 Act that says brokers don't have to put their clients' interests ahead of their own—or their firms'—when they are "selling" securities.

Of course, brokerage clients don't always understand that they are being sold, rather than being "advised." And some brokerage tactics, such as using the term "advisor" to describe brokers (or even "trusted advisor") or allowing to brokers to be "part-time" advisers during a single client engagement do seem to contribute to the confusion of their clients.

That brings us to "cc's" statement: "I think [Clark] woefully underestimates how many claims are frivolous." I'm sure some investor claims are frivolous. But considering that the results (and the reasoning behind) FINRA arbitration cases are not disclosed to the public, nor to the claimants, it's curious how "cc" comes to the conclusion that "most" are. (And further increases my suspicion that he/she might be a FINRA insider, with access to that information.) 

It also seems to me that "frivolous" is another of those dismissive labels that our society seems to use and accept these days sans factual support or evidence of any kind. That raises the question: Who determines which investor complaints are "frivolous?" Forgive my cynicism here, but my support for the brokerage sales industry does not extend to blindly accepting its characterization of client complaints against its member firm, and/or their brokers. 

To get an insider view of FINRA arbitration, I talked with securities attorney Brian Hamburger, CEO of Market Counsel, and managing partner of the Hamburger Law Firm, in Englewood, New Jersey. Hamburger has served on many FINRA arbitration panels, and chaired more than a few. He told me that he's heard of investors representing themselves in arbitration, but never seen any himself. And because the vast majority of investors are therefore represented by legal counsel, they aren't very likely to file "frivolous" claims. "We discourage our clients from filing claims that are without merit," he told me. "It just isn't worth our time, or theirs. And simply filing isn't cheap, either." 

He also thinks the notion of "frivolous" claims is a matter of perception. "Many claims are filed by investors who simply aren't getting the information they want from their broker; often about costs," he said. "From an industry perspective, those claims weren't 'necessary.' But from the client's perspective, they often don't feel that they had any other choice." 

Which brings us to the real issue here: you, me, "cc," nor anyone else—save a handful of FINRA (and possibly SEC) insiders have no idea about the voracity of investor claims against member firms and their brokers And that's solely because FINRA (an SRO, plain and simple) runs its mandatory arbitration as a black box: unlike most other legal proceedings, its decisions, awards, and basis for either, are not made public or even made available to the parties involved.  

Consequently, no one outside of FINRA has any basis to determine the fairness of the decisions or awards of its arbitration panels. Apparently, "cc" is comfortable with FINRA's position of "trust us." I'm a bit more skeptical.

In fact, it seems to me that because the lack of transparency in FINRA's arbitration proceedings is the direct result of the SRO's own policies, the presumption must be that they are acting in the interest of their member firms, rather than those of their investor. That will be the case until they offer some pretty darn persuasive evidence to the contrary.

Which to my mind would include openly publicizing the proceedings of all client arbitration claims: the investors' claims, the BDs' defense, the evidence submitted, and the reasoning for the decision by the arbitrators. And no, this doesn't mean I'm "badmouthing" America: only its broker-dealer SRO.