How FINRA Arbitration Gives Firms the Upper Hand

By Robert Klasfeld

In theory, the Financial Industry Regulatory Authority (FINRA) arbitration process should be a fair way to settle disputes between claimants and firms, however, in practice, the process appears to give firms the upper hand.

Arbitrators vs. Jurors

For starters, a typical trial is decided by a jury of one’s piers, whom tend to be sympathetic to injured claimants. Arbitrators, on the other hand, are professionals who hear cases for a living and tend to be less emotional than ordinary jurors. Firms are also better at selecting arbitrators that are friendlier to them. Despite a randomly generated list of potential arbitrators, industry-friendly arbitrators are forty percent more likely to be selected than their consumer-friendly counterparts. Not to mention, the major brokerage firms are “repeat players” in the process. Therefore, arbitrators who wish to continue to be appointed to panels may be influenced by the fact that issuing a large award against one of these firms could cause them to be stricken from serving on future panels.

Lack of precedent

Unlike courts, arbitrators are not bound by precedent when making their decisions and there is a very limited case law post-McMahon. Thus, when industry-friendly arbitrators are chosen, they have virtually unlimited flexibility to interpret the law in favor of the firms. On top of that, firms can take positions that they would not take in court. The privacy and the confidentiality of arbitration protects firms, so they could take positions that are inconsistent with their public positions.

Limited Recourse

Additionally, FINRA arbitration has no appeals process and there is very limited recourse for faulty decisions. In certain instances, a court may hear a party’s appeal, however, the grounds for reversing an arbitrator’s decision is much more difficult to meet than a typical trial court appeal. In the rare instance where an appeal is warranted, firms are almost always more likely to have the necessary capital and resources to keep the case going.

Impact on Claimants

Thus, claimants are encouraged to settle for all the wrong reasons. Over the last five years, claimants have been awarded damages less than forty-one percent of the time. Even when claimants prevail, they often get just half of the damages they requested. In addition, 27% of arbitration awards from 2012 to 2016 went unpaid. Given these facts, eighty-two percent of cases settle before arbitration because investors understand that after going through all of FINRA’s procedural headaches, there’ a strong chance they will walk away empty handed; and even if they win their case, they are not likely to recover the full amount of their loss.


Unfortunately, FINRA arbitration removes important cornerstones of our judicial system that would normally protect injured claimants, such as jury trials, precedent, and recourse through appeals. Naturally, firms have taken advantage, and sadly, claimants feel the effects.