New figures about a watershed change to Wall Street's securities arbitration system are raising questions about a widely-held belief among consumer lawyers that arbitrators with ties to the industry can have bias against investors.
The figures, published this week by the securities industry-funded watchdog, showed investors in 2013 were as likely to win cases against brokerages when a Wall Street affiliated arbitrator hearing the case, as they were when arbitrators had no industry ties.
The Financial Industry Regulatory Authority (FINRA), which published the statistics, also runs the arbitration forum where investors must resolve legal disputes against brokerage firms.
Investors agree to the requirement when signing documents to open their brokerage accounts.
A FINRA rule change in 2011 eliminated a controversial requirement that one of the three arbitrators who hears investors' claims involving $100,000 or more must have securities industry affiliations.
That can mean anything from currently working in the industry to being an outside lawyer who advises the industry.
Investors can now choose between a panel that includes an arbitrator with industry ties or one composed of three "public arbitrators," who do not have industry affiliations but may have previously worked in the securities industry.
The 2013 data, compiled through last November, showed panels composed of three public arbitrators ordered brokerages to pay investors damages in 43 percent of cases that ended with a ruling.
Panels that included an arbitrator with industry ties awarded damages to investors in 44 percent.
"I'm not surprised that the results are similar," Jonathan Uretsky, a lawyer in New York who represents brokerages, said in an email. "Facts are facts, and law is law. The panel's composition won't change that."
The Public Investors Arbitration Bar Association (PIABA), a Norman, Oklahoma-based group of lawyers who represent investors, pushed for the change for roughly 20 years, saying industry ties can give rise to bias against investors and conflicts of interest, or the appearance of unfairness.
Those who support the requirement for one arbitrator with industry ties say they bring much-needed expertise to disputes that often involve complex financial dealings.
PIABA, however, is not backing down.
"The problems of the results go deeper than simply the removal of the industry arbitrator," said Jason Doss, the group's president and a lawyer in Marietta, Georgia.
The system is fundamentally unfair to investors if less than half of the cases that proceed through a hearing end with an award in their favor, Doss said.
What's more, brokerages are more inclined to settle cases heard by panels with three public arbitrators, said Doss. PIABA does not keep that data.
FINRA's figures covered 221 arbitration cases that proceeded to a final ruling last year, a fraction of the thousands filed annually by investors with the watchdog. Many cases settle or were not included because they involved smaller claims decided by solo arbitrators rather than a panel.
FINRA does not track the amounts investors requested compared to how much they received, as their demands may be unrealistic or change, said Linda Fienberg, who heads the watchdog's arbitration unit.
Investors who chose panels of all-public arbitrators also scored fewer wins in 2013 than in 2012. Those panels awarded damages to investors in 49 percent of cases in 2012, compared to 43 percent of cases in 2013.
However, the decline may be partly due to difficulties some attorneys may have had adjusting to the new rules.
Cases heard by all-public panels in the first year might have been brought by more experienced lawyers, who were more adept at requesting a public panel, Fienberg said.
The process was streamlined last year so investors can get all public panels simply by choosing from three lists of arbitrators that lawyers for both parties receive.
The data also showed arbitrators with industry ties are "perfectly able to be fair," Fienberg said.
Nonetheless, allowing investors to choose panels composed solely of public arbitrators was necessary to improve investors' perceptions about the process among investors, Fienberg said.
Lawyers who opposed eliminating the requirement for mandatory industry arbitrators say they found the results frustrating.
"We did all this to accommodate an all-public panel and for this year, it seems it didn't make a difference," said Marc Dobin, an arbitrator and lawyer in Jupiter, Florida who represents brokerages.
"What was this whole exercise in creating an all public panel for?"
(Reporting by Suzanne Barlyn; Editing by Linda Stern and Sophie Hares)