December 5, 2013 / 4:46 PM / 5 years ago

Investor advocates push to see trove of arbitration records

(Reuters) - A long-running battle over whether the top U.S. securities regulator should release records about its supervision of Wall Street’s arbitration process is about to go another round, this time with input from a vocal consumer advocate.

For nearly four years, a group of lawyers has been pushing the U.S. Securities and Exchange Commission to release documents about its oversight over how the Financial Industry Regulatory Authority selects arbitrators who hear legal disputes between brokerages and investors.

FINRA, the Wall Street industry-funded watchdog, runs the arbitration forum where investors and brokerages must resolve their legal disputes.

The Public Investors Arbitration Bar Association (PIABA), a lawyers’ group pushing for the release, has now enlisted lawyers of its own. The litigation arm of Public Citizen, a consumer rights group in Washington, filed a brief on PIABA’s behalf in a federal appeals court last week to overturn a U.S. district court’s earlier decision to keep the records a secret.

It is likely the PIABA’s last chance to get at the records. The group wants them “as a matter of transparency,” said Jason Doss, the PIABA president. Customers must sign documents when they open brokerage accounts that require them to resolve future legal disputes with firms through FINRA arbitration.

Consumers are “forced” into the process and should know how FINRA determines who hears their cases, Doss said.

So far, the group, whose members represent investors in securities arbitration cases, has lost its fight at every turn. It began with a Freedom of Information Act (FOIA) request to the SEC in February 2010 for documents related to the agency’s inspections of FINRA’s process for picking arbitrators and checking their backgrounds.

The FOIA gives the public access to federal agency records, but it carves out exemptions. In 2010, the SEC claimed such an exemption in turning down PIABA’s initial request. PIABA lost again after a second review by the agency.

The group then sued the SEC in the U.S. District Court for the District of Columbia, and lost last March.

Now PIABA is turning to Public Citizen because of its expertise in litigating FOIA requests, said PIABA’s Doss.


In June, FINRA changed its procedures for vetting its roughly 6,000 arbitrators. That came after Reuters reported that a FINRA arbitrator, who was hearing an investor’s case against Goldman Sachs Group Inc, had been criminally indicted months earlier but failed to properly disclose the legal run-ins.

Reuters also revealed that FINRA was not running follow-up background checks on arbitrators after an initial one, when potential arbitrators apply. The regulator has changed its policy to include, among other things, annual background checks.

While FINRA was created by Congress, it is private and does not have to answer FOIA requests. But the SEC, which supervises FINRA, is subject to the law.

Some of the information about the SEC’s oversight of FINRA arbitration could become public if PIABA wins its battle, said Michael Smallberg, an investigator for the Project on Government Oversight (POGO), a watchdog group in Washington that filed a “friend-of-the-court” brief this week in support of PIABA’s case. It is unclear if the SEC reviews the program at all, he added.

For Public Citizen, the case offers an opportunity to make new case law by convincing a court to tighten a broad exemption for financial regulators that the SEC invokes to keep its dealings with FINRA secret, said Julie Murray, a lawyer at Public Citizen Litigation Group who is handling the case. “This is going to be an important case,” Murray said.

FINRA, which is not a party to the suit, and the SEC both declined to comment.


Nothing is known about the 65 boxes of documents the SEC acknowledged it has - in an initial response to PIABA’s 2010 FOIA request.

The agency has been able to keep its dealings with FINRA under wraps by depending on a FOIA exemption that protects information contained in “examination reports” that federal agencies use to regulate financial institutions.

The exemption was aimed at protecting sensitive details, such as the private financial information of customers, that the government collects from the companies, according to court documents. For purposes of this exemption, FINRA is considered a financial institution.

The case, however, will come down to how the U.S. Court of Appeals for the District of Columbia Circuit defines the types of “examination reports” in the exemption.

The PIABA wants the appeals court to limit the definition to reports about an institution’s financial activities, not FINRA’s administrative functions, according to the brief.

It could be a struggle for PIABA because there is little existing law on the question, said Scott Hodes, a lawyer in Washington who handles FOIA cases but is not involved in this case.

“That’s the rub here. It’s all kind of new,” said Hodes. “These types of cases are not easy because they’re first impression,” Hodes said.

Editing by Linda Stern and Jeffrey Benkoe

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