SIFMA Recommends Reforms to FINRA Arbitration Process

SIFMA recommended a series of reforms to improve fairness and efficiency in FINRA's arbitration forum.

In a letter to the FINRA's Executive Vice President and Chief Legal Officer, SIFMA said the recommendations address longstanding concerns raised by SIFMA's member firms.

SIFMA proposed five reforms:

1. FINRA should permit agreements to adjudicate certain narrow categories of claims in alternative forums. SIFMA urged FINRA to allow firms and customers to opt out of FINRA arbitration for high-dollar or institutional investor claims. SIFMA argued that these cases don't raise typical investor protection concerns and are better suited for other forums. SIFMA also recommended letting firms and employees agree to alternative forums for industry disputes.
2. FINRA should permit agreements to preclude or limit punitive damages awards where permitted by applicable law. SIFMA criticized FINRA Rule 2268(d)(4), ("Requirements When Using Predispute Arbitration Agreements for Customer Accounts; Conditions") which currently prohibits firms from including any contractual limits on what an arbitrator may award, including punitive damages. SIFMA noted that recent FINRA arbitration panels had issued extreme punitive damages awards and emphasized that arbitration lacks adequate procedural safeguards to review or appeal these decisions.
3. FINRA should improve the fairness of adjudicating Form U5 defamation claims. SIFMA said arbitrators often apply the wrong legal standards in U5 defamation cases, leading to unfair awards. It recommended requiring findings of falsehood and malice, training arbitrators on defamation law and updating Form U5 to include standardized disclosures that could reduce liability.
4. FINRA should amend certain procedural rules governing arbitrations. SIFMA asked FINRA to allow early dismissal motions for ineligible claims and to modernize discovery processes, including appointing discovery experts for complex cases. It also urged stricter timelines, witness limits and support for arbitrators managing hearings.
5. FINRA should enhance requirements to improve arbitrator quality and accountability. SIFMA recommended stronger education and training requirements, better performance monitoring and higher pay for arbitrators handling complex cases. It also called for more oversight by FINRA staff and a clearer process to address poor performance. It cited a range of quality concerns—from arbitrators extending hearings unnecessarily to falling asleep during proceedings.