Academic journal article Journal of Corporation Law

Beyond the Brokerage Fee: The Hidden Cost of Investment through Brokerage Firms-Due Process Protection

Academic journal article Journal of Corporation Law

Beyond the Brokerage Fee: The Hidden Cost of Investment through Brokerage Firms-Due Process Protection

Article excerpt


Millions of Americans rely on individual brokers or brokerage firms to invest their money hoping to better support their families and eventually retire. For the many Americans unfamiliar with investment strategies, a broker may be the only means of accomplishing these goals. While most investors are willing to pay a reasonable brokerage fee to increase the likelihood of a return, investors entering into brokerage contracts must also sacrifice a substantial possession beyond the fee: their basic due process rights should the deal sour.

The reason for this, at its simplest, is that investors entering into brokerage contracts are forced to sign pre-dispute arbitration clauses. The Financial Industry Regulatory Authority (FINRA) is responsible for all dispute resolutions involving brokers, and as a private entity, FINRA is not required to abide by governmental due process guarantees. Thus, the individual investor signing a brokerage contract is simultaneously signing away his due process protections.

This Note examines the development and effectiveness of FINRA's regulatory regime, as well as the due process rights it curtails. In doing so, it not only outlines the potential due process deprivations of FINRA's dispute resolution mechanisms, but also explores how these deprivations have already occurred in practice. After concluding that these deprivations cannot be justified for a myriad of reasons, this Note offers two recommendations to protect investors' due process rights and create a more effective broker-investor dispute resolution process.


Before determining the extent to which pre-dispute arbitration clauses in brokerage contracts affect a claimant's due process rights, it is first necessary to outline the regulatory framework governing securities disputes.1 First, this Part describes the development,2 functional authority,3 and arbitration processes4 of FINRA. Then, this Part proceeds to explain the development and use of pre-dispute arbitration clauses in the brokerage industry.5

A. The Development of FINRA

Today, FINRA is the largest private securities regulator in the United States.6 FINRA writes and enforces regulations that every brokerage firm, and every broker, must abide by-4400 securities firms and 630,000 brokers in total. 7 Although FINRA is a non-profit, self-regulatory organization (SRO), its assets total over $2.2 billion,8 and in 2014 alone it levied $166.3 million in fines.9 Today, then, the nation's predominant securities regulator10 is a private SRO worth billions of dollars; 11 it took decades of legal developments, however, to arrive at this regulatory format.

For over 200 years, securities exchanges in the United States have enjoyed selfgovernance over all members listing securities on their exchange. 12 While keeping the selfregulatory platform, however, the Securities Exchange Act of 1934 (the Exchange Act), required every securities exchange in the United States to register with the newly created SEC.13 The Exchange Act gave the SEC oversight of the activities of stock exchanges, such as the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE);14 however, enforcement mechanisms for securities violations and violations of membership rules remained within the SRO itself.15 In 1938, the government expanded its regulatory reach to over-the-counter securities markets, thereby giving the Securities Exchange Commission (SEC) oversight of both exchanges and nonexchanges.16 At this time, the NASD registered with the SEC regulatory authority and retained control over its members, and eventually the National Association of Securities Dealers Automated Quotations (NASDAQ).17 Concurrently, the NYSE continued to monitor its members internally through an enforcement division.18 This changed in 2007 when "FINRA assumed the NASD's enforcement and regulatory functions and the NYSE and NASD dispute resolution programs were consolidated under FINRA 's authority. …

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