In the past several years, many FINRA arbitration cases have been filed against Morgan Keegan, a regional investment firm. The cases are heard in a small number of locations with relatively small arbitrator rosters. On February 25, 2010, a Tennessee Chancery court vacated a FINRA arbitration award against Morgan Keegan citing the presence of two arbitrators who served on other Morgan Keegan cases involving the same products in the dispute before it. On March 2, 2010, another court denied the identical motion to vacate by Morgan Keegan in a separate arbitration where an award was granted against Morgan Keegan. Responding to the uncertainty concerning the finality of arbitration awards in such cases, FINRA has sought to solve the problem by recommending that parties avail themselves of FINRA rules for challenging arbitrator appointments. Unfortunately, each of the likely players in such arbitration disputes-investment firms and investors-has significant incentive problems from the perspective of challenging arbitrator appointment. This Note argues that FINRA may be more successful in addressing challenges to arbitration awards by screening arbitrators to automatically eliminate those who have presided or are currently presiding over cases involving identical products and parties.
Part I of this Note summarizes the mechanics of FINRA arbitrator selections and identifies the methods through which parties may challenge arbitrator appointment. Part II explores the result of such challenges in the Morgan Keegan line of cases, reviews the subsequent impact on FINRA proceedings, and outlines an alternative "auction rate case" model of screening arbitrators. Finally, Part III argues for an arbitrator selection system featuring the automatic screening method based on the "auction rate case" model as the solution to the basic risk inherent in high volumes of cases based on singular financial products.
Since the late 1980s, the Supreme Court has favored the arbitration process, particularly in the securities industry, because arbitration provides an efficient method for settling disputes. Going forward, arbitration will likely remain the predominant method through which securities claims are resolved. In response to challenges to arbitration practices under the Federal Arbitration Act ("FAA"), the Supreme Court has repeatedly described the FAA as establishing "a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary"4 and "embod[ying] [a] national policy favoring arbitration."5 In 1987, the Court emphasized that arbitration is a just and expeditious method of resolving securities claims.6 The Supreme Court has recently reiterated that the principal purpose of the FAA is to assure contracting parties that the terms of their private arbitration agreements will be enforced.7 In light of such legal precedent, the practice of arbitration is here to stay and will remain a significant force in the realm of securities disputes.
The Financial Industry Regulatory Authority ("FINRA") draws its power most directly from statutes and a long history of self-regulated organizations, and should be assessed through the lens of self-regulated organization policies.8 Despite the efforts of the Securities Exchange Act of 1934 ("Exchange Act") to curb abuses in the market in the wake of the market crash of 1 929, a regulatory void existed, prompting the enactment of the Maloney Act in 1938.9 This law amended the Exchange Act to create a system based upon joint regulation, in which the task of regulating over-the-counter markets was principally performed by representative organizations (e.g. investment bankers, dealers, and brokers) under SEC supervision.10 The Securities and Exchange Commission ("SEC") was tasked with exercising appropriate supervision in the public interest and exercising supplementary powers of direct regulation when necessary. …