FINRA Five Years Later

Aug 2012 // Texas Lawyer

By: Brenda Sapino Jeffreys

At the end of July, the Financial Industry Regulatory Authority (FINRA) turned five years old. The dispute resolution organization for securities cases was created from the combination of the National Association of Securities Dealers and the regulatory function of the New York Stock Exchange (NYSE). And one of FINRA’s 11 district offices is in Dallas.

FINRA has been active. In a midyear review made public on Aug. 9, Sutherland Asbill & Brennan found that FINRA fines and disciplinary actions in 2012 are in line to exceed those in 2011. The review indicates that during the first half of 2012, FINRA levied a total of $39.4 million in fines against broker-dealers and others associated with them. According to the review, 609 cases were reported during the first half of 2012. That means business for Texas lawyers on both sides of securities disputes. Plus, recent high-profile criminal prosecutions in large financial fraud cases — R. Allen Stanford and Bernie Madoff are prominent examples — lead investors to seek restitution when they lose money in investments.

With FINRA marking its five-year anniversary, Texas Lawyer emailed questions to two lawyers who represent clients in FINRA arbitrations: Tom Ajamie of Ajamie LLP in Houston represents pension funds, hedge funds, wealthy individuals and others who lost money at a bank or brokers firm or financial institution. Ajamie recently was appointed to serve on FINRA’s National Arbitration and Mediation Committee, which he says recommends and advises on the rules that govern the FINRA arbitration system. Jack Ballard, a partner in Ballard & Littlefield of Houston, defends brokers and financial institutions in FINRA arbitrations. He has defended financial institutions in hundreds of arbitrations and court cases stemming from unsuccessful investments or employment issues.

Ajamie’s and Ballard’s emailed responses are below, edited for length and style.

Brenda Sapino Jeffreys, senior reporter, Texas Lawyer: The Financial Industry Regulatory Authority just marked its five-year anniversary. The agency has imposed some new rules during that time. Which of the new rules do you like, and which do you dislike and why?

Thomas R. Ajamie, managing partner, Ajamie LLP, Houston: I am pleased that FINRA now allows aggrieved investors to select a three-person arbitration panel comprised of members of the public. Until recently all arbitration panels included one person from the financial industry and only two members of the public. Since the institution of the new rule allowing all public arbitrators and no industry members, we have seen in an increase in the size and frequency of awards for investors.

The rule that I dislike is one that classifies a member of the public as anyone who has been out of the securities industry for five years or more. Too many arbitrators are people who spent 20 years or more in the industry, retire for five years, then decide to become arbitrators. Those type of people still have a bias favoring the financial industry and have difficulty seeing the industry’s faults. They should not be classified as members of the general public.

Jack D. Ballard, partner, Ballard & Littlefield, Houston: I have a favorable view of what FINRA has done in the discovery area through recent changes to its Discovery Guide and Document Production Lists (Rule 12506). By consolidating requests applicable to certain types of claims, FINRA has streamlined the discovery process for the parties and counsel. In general, FINRA’s revised Discovery Guide provides important information to counsel or parties who may not be familiar with the process. It also allows those of us on the side of the industry to generally know the parameters of the discovery which will be allowed.

I dislike the limitations FINRA has imposed on motions to dismiss (Rule 12504), and FINRA’s voluntary approach to the selection of industry panelists in customer disputes (Rule 12403). In my view a claim which would be legally barred in court should be barred in arbitration, with a motion to dismiss available to a party seeking such relief. But that is not the case in FINRA arbitration. I also always thought the industry arbitrator served a valuable role in investor cases, both in recognizing spurious claims and in policing misconduct. Those positives are for the most part history now that the participation of an industry arbitrator is entirely optional at the election of the investor/claimant.

TL: Do you think disputes between investors on one side and brokers and financial institutions on the other side should be handled in a FINRA arbitration or in the courtroom?

Ajamie: I prefer handling all financial cases in the courtroom where a judge and jury decide the outcome. The U.S. Supreme Court, however, has clearly ruled that the financial industry has the right to compel arbitration.

Ballard: FINRA arbitration. Many investor cases would not be brought if they had to be filed in court due to the expense of deposition discovery, court appearances, court reporting costs, and the complexity and expense of a jury trial. I might change my mind if our courts limited deposition discovery to parties and key witnesses, allowed telephonic hearings on routine motions, and adopted standard jury instructions in investment-related cases.

TL: Is FINRA work a growing practice area for Texas lawyers? If so, why?

Ajamie: This is a booming practice of law. Just pick up the paper on any given day, and you will read about yet another financial debacle or scam. Madoff, Stanford. . . . The list goes on. Investment News reports that people continue to lose billions of dollars of savings every year. . . . All investors are vulnerable and, frankly, seeing what I see every day, I’m not sure where money is safe to deposit. The financial industry still runs rogue, and that presents an opportunity for lawyers to step in and deliver justice.

Ballard: Sometimes it is! FINRA work ebbs and flows with the ups and downs of the markets. Most people are happy with their brokers when the market is going up, so the volume of cases tends to decline then.

. . .

TL: FINRA arbitrations are generally closed to the public. Do you wish they were open, and why?

Ajamie: I really cannot believe that these hearings are still closed and that a process like this actually exists in the United States. . . . Too much abuse occurs in any secret judicial system. I have tried to challenge the closed system in many ways. Once I invited reporters from The Wall Street Journal, Business Week and Investment News to attend one of my arbitration hearings at the New York Stock Exchange. That caused a huge controversy at the NYSE. . . . No one had ever dared to challenge the closed process like I did. Ultimately NYSE security blocked the press from attending. Fortunately I didn’t get tossed out. The public has the right to know what is happening in this system, and investors who have lost their money deserve an open hearing.

Ballard: I am glad they are closed but will confess to mixed feelings on this question. Most of our cases involve a financial adviser who could be significantly harmed if an investor’s unproven allegations became public. However, in some cases I have wondered if public disclosure might have prevented some folks from having such a creative recollection of past events.