Bruce Kelley over at InvestmentNews.com reported last week that FINRA Dispute Resolution wil be opening its arbitration forum to handle disputes involving registered investment advisor (RIA) firms, provided that such RIA agreed to utilization of the forum.
Until now, the arbitration forum was llimited to resolving disputes between investors, broker-dealer firms, and associated/registered people. Under FINRA's rules, disputes among these parties were available for resolution through FINRA's arbitration and mediation system, and most broker-dealer employment agreements and client agreements require that disputes be resolved in this forum. While an investor or other party could seek to file arbitration against a RIA or other entity that was not a FINRA member broker-dealer, the suits against such non-member would not be resolved through arbitration.
It does not appear that a formal announcement of this policy has been made yet by FINRA. When it is, I would imagine it to be straightforward: RIAs that want to resolve their disputes through FINRA's forum, could agree to abide by the arbitration/mediation rules and pay the associated costs.
But should an RIA do this - should it seek to resolve a client dispute through FINRA arbitration? The answer to that would be case specific, and depend on a variety of factors. While arbitration can be less expensive and more timely than a lawsuit in court, participants in the forum have less discovery tools available to them. Discovery is, in my view, more sweeping and thorough in court than in FINRA's forum. Further, choice of arbitrators may be more limited as well. And, the litigation itself may be significantly different, inasmuch as motions to dismiss customer claims in FINRA's forum are generally discouraged and not favored until after the client has presented their case in chief. So, while court or another resolution forum may be more expensive, it may offer more favorable options to an RIA.
Some RIAs may find that some cases would be appropriate for resolution through an arbitration forum such as this. But that type of decision should be made with the help of legal counsel and evaluated on a case by case basis. I'm not knocking FINRA arbitration; sometimes the system works very well and is a good choice for brokers, firms, and investors. But when it is not mandatory as it is in the broker-dealer world, we'll have to see where this goes when RIAs are given the choice that their broker-dealer counterparts do not have.
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