Purshe Kaplan Sterling Investments Comment On Regulatory Notice 26-06
Jeff Mullen
Purshe Kaplan Sterling Investments
Assessment of FINRA Dispute Resolution Services and Proposed Process Reforms
1. Challenging the "Industry Bias" Narrative
The common assertion that the arbitration forum favors member firms is flatly contradicted by evidentiary reality. Data from 2025 reveals that in over 95% of resolved cases, claimants either secured a settlement they found acceptable or were granted an award by a panel. The notion of systemic unfairness is difficult to maintain when fewer than 5% of claimants are denied any form of restitution.
2. Ending "Private Punishment" (Punitive Damages)
The assessment of punitive damages is fundamentally a state function and has no place in a private dispute resolution forum.
Statutory Limits: The Securities Exchange Act of 1934 specifically restricts recovery to actual damages, yet the current system allows for "unconscionable" awards that far exceed the harm caused.
Due Process Concerns: Unlike court proceedings, arbitration lacks the rigorous safeguards and appellate oversight necessary to manage unpredictable, existential-level penalties.
Alternative Channels: If conduct requires deterrence, it should be addressed through FINRA’s disciplinary schematic, which provides the constitutional due process and regulatory expertise that an ad-hoc arbitration panel cannot.
3. Correcting the "Expertise Deficit" in Panel Selection
The current selection process has become an "illusory" exercise that allows claimants to systematically purge every industry-qualified professional from a panel.
The Necessity of Insight: Complex products and "Modern Portfolio Theory" require a level of sophistication that many public arbitrators lack. Without at least one industry expert, panels are highly susceptible to the influence of "guns for hire"—expert witnesses paid to advocate for a specific outcome.
Fair Strikes: To restore balance, the ability to strike non-public arbitrators should be capped at 40%, aligning their treatment with the rules governing public and chairperson lists.
4. Restoring Finality (The Statute of Repose)
The eligibility rule (Rule 12206) must be treated as a strict statute of repose, not a flexible guideline.
Temporal Boundaries: Claims should be strictly limited to a six-year window from the date of investment.
Hold Theories: Discretionary resets based on vague "implicit hold" recommendations distort the rule’s intent and force firms to litigate ancient claims where evidence is no longer reliable.
5. Jurisdictional Integrity: Defining the "Customer"
Arbitration is a contractual obligation that should not be expanded to non-parties.
Rule 4530 Alignment: FINRA should narrow its definition of "customer" to match Rule 4530, ensuring that firms are only required to arbitrate with individuals with whom they have actually engaged in securities activities.
Scope Protection: Firms must be protected from "fringe" claims involving associated persons’ unrelated outside activities where no account or execution relationship existed with the member firm.
6. Complexity and Choice
For high-stakes disputes involving damages of $5 million or more, or those involving "Qualified Purchasers," parties should have the option to seek relief in federal courts.
Discovery and Review: These complex cases require the robust discovery mechanisms and meaningful appellate review available through the judiciary, which the current FINRA forum cannot provide.
Transparency: Unilateral access to explained decisions should be standard; any party should have the right to understand the rationale behind an adverse award without requiring the consent of their opponent.
Summary: True modernization requires moving away from discretionary standards toward black-letter rules. By banning punitive damages, protecting the inclusion of industry experts, and enforcing strict jurisdictional and temporal boundaries, FINRA can ensure the forum remains a fair venue for both the investing public and the firms that serve them.
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Purshe Kaplan Sterling Investments Comment On Regulatory Notice 26-06
Assessment of FINRA Dispute Resolution Services and Proposed Process Reforms
1. Challenging the "Industry Bias" Narrative
The common assertion that the arbitration forum favors member firms is flatly contradicted by evidentiary reality. Data from 2025 reveals that in over 95% of resolved cases, claimants either secured a settlement they found acceptable or were granted an award by a panel. The notion of systemic unfairness is difficult to maintain when fewer than 5% of claimants are denied any form of restitution.
2. Ending "Private Punishment" (Punitive Damages)
The assessment of punitive damages is fundamentally a state function and has no place in a private dispute resolution forum.
Statutory Limits: The Securities Exchange Act of 1934 specifically restricts recovery to actual damages, yet the current system allows for "unconscionable" awards that far exceed the harm caused.
Due Process Concerns: Unlike court proceedings, arbitration lacks the rigorous safeguards and appellate oversight necessary to manage unpredictable, existential-level penalties.
Alternative Channels: If conduct requires deterrence, it should be addressed through FINRA’s disciplinary schematic, which provides the constitutional due process and regulatory expertise that an ad-hoc arbitration panel cannot.
3. Correcting the "Expertise Deficit" in Panel Selection
The current selection process has become an "illusory" exercise that allows claimants to systematically purge every industry-qualified professional from a panel.
The Necessity of Insight: Complex products and "Modern Portfolio Theory" require a level of sophistication that many public arbitrators lack. Without at least one industry expert, panels are highly susceptible to the influence of "guns for hire"—expert witnesses paid to advocate for a specific outcome.
Fair Strikes: To restore balance, the ability to strike non-public arbitrators should be capped at 40%, aligning their treatment with the rules governing public and chairperson lists.
4. Restoring Finality (The Statute of Repose)
The eligibility rule (Rule 12206) must be treated as a strict statute of repose, not a flexible guideline.
Temporal Boundaries: Claims should be strictly limited to a six-year window from the date of investment.
Hold Theories: Discretionary resets based on vague "implicit hold" recommendations distort the rule’s intent and force firms to litigate ancient claims where evidence is no longer reliable.
5. Jurisdictional Integrity: Defining the "Customer"
Arbitration is a contractual obligation that should not be expanded to non-parties.
Rule 4530 Alignment: FINRA should narrow its definition of "customer" to match Rule 4530, ensuring that firms are only required to arbitrate with individuals with whom they have actually engaged in securities activities.
Scope Protection: Firms must be protected from "fringe" claims involving associated persons’ unrelated outside activities where no account or execution relationship existed with the member firm.
6. Complexity and Choice
For high-stakes disputes involving damages of $5 million or more, or those involving "Qualified Purchasers," parties should have the option to seek relief in federal courts.
Discovery and Review: These complex cases require the robust discovery mechanisms and meaningful appellate review available through the judiciary, which the current FINRA forum cannot provide.
Transparency: Unilateral access to explained decisions should be standard; any party should have the right to understand the rationale behind an adverse award without requiring the consent of their opponent.
Summary: True modernization requires moving away from discretionary standards toward black-letter rules. By banning punitive damages, protecting the inclusion of industry experts, and enforcing strict jurisdictional and temporal boundaries, FINRA can ensure the forum remains a fair venue for both the investing public and the firms that serve them.