Why FINRA Might Overhaul Its Arbitration System

The brokerage referee is reconsidering how it calls fouls.

The Financial Industry Regulatory Authority, better known as FINRA, is weighing a potentially sweeping overhaul of its arbitration system, and it wants the public’s input. On Monday, the regulator asked for responses to dozens of questions related to the way it resolves disputes between brokerage firms and their customers. It’s an attempt by the brokerage industry’s self-regulator, a not-for-profit organization, to respond to critics who have complained about how the system works, and to openly ask whether some disputes, particularly complex cases or those involving large-dollar claims, should be routed elsewhere.

“Do participants still experience FINRA arbitration as less expensive and faster than litigation?” the body asks. “Are there changes that FINRA should consider making to its arbitration forum to make it more expeditious and cost effective relative to courts?”

New Year, New FINRA

FINRA’s arbitration forum is typically the default venue for resolving clashes between investors and brokerage firms. Critics, however, have claimed recently about a lax approach to dispensing punishments (a recent analysis found that in 2025, FINRA filed 127 fewer formal disciplinary actions than the year before) as well as a focus on smaller independent broker-dealers that often don’t have the resources to fight back. Last year, despite the dropoff in overall disciplinary actions, the body pursued 103 formal actions against small firms, defined as those with one to 150 representatives — a 27% increase from 2024, per the same report from CSG Law. “There’s long been a perception by small firms that they get treated more harshly by FINRA,” Lisa Colone, CSG Law’s chair, told InvestmentNews. “These statistics bolster that perception.”

Industry leaders also worry that, following FINRA disciplinary actions, “bad brokers” just go somewhere else. According to a recent study from asset management research firm Alpha Architect:

• About 30% of FINRA-sanctioned brokers remain active in the industry within two years.
• Firms that hire these brokers have a 25% higher rate of future misconduct than peers that don’t.

One Battle After Another. FINRA is also facing legal conflicts of its own. In November 2024, three federal judges blocked the agency’s attempt to expel a member firm, which would have effectively barred the firm from the securities industry, determining that the move required review by the US Securities and Exchange Commission.