The question of mandatory arbitration again is hitting the headlines. Recently, Securities and Exchange Commission member Luis A. Aguilar spoke publicly against mandatory arbitration, arguing that allowing investor choice between Financial Industry Regulatory Authority Inc. arbitration or the court system would enhance investor protection. Subsequently, Sen. Al Franken, D-Minn., argued that it would be fairer to investors if they were allowed to choose a forum for their disputes.

“Investor choice” certainly sounds fair. However, we should scrutinize whether ending mandatory arbitration truly would lead to fairer results before making any changes.

There is no question that we need a system that allows legitimately aggrieved investors to obtain redress as easily and efficiently as possible. We must be careful, though, not to assume that every investor claim is legitimate.

Mixed in with cases of true wrongdoing by firms or financial advisers are cases in which firms and advisers are wrongly accused. Just as it is extraordinarily painful for an investor to be victimized by an unscrupulous adviser, it also is extraordinarily painful for a wrongly accused adviser to fight to have her or his name cleared.

Indeed, mere allegations of wrongdoing can result in regulatory inquiries, scrutiny from a firm's compliance officer and supervisor, and a mark on a Form U4.

CHOOSING THEIR FORUM

The current talk is to scrap mandatory arbitration in favor of allowing investors to choose the forum in which they want to bring their claim. This is a significant change because Finra arbitrations and the court differ in many ways.

Some examples of differences are that Finra arbitrations are more private, limit pre-hearing dismissals, limit discovery and aren't required to follow the rules of evidence. Taken as a whole, some of the differences may benefit investors, some may benefit firms and advisers, and some depend on the particular facts and circumstances of a case.

One difference that generally benefits investors is limits on pre-hearing relief. Unlike courts, in which claims can be dismissed for various reasons before an investor ever is able to be heard, Finra provides for dismissal of a case prior to an arbitration hearing in an extremely limited number of circumstances.

In other words, unless a Finra arbitration case is settled, a complaining investor pretty much is assured of the right to testify before the arbitration panel. Even in a case in which the allegations of wrongdoing are too thin or too unsupported to survive dismissal in court, an investor will have the ears of a Finra arbitration panel.

This can affect the result, especially where the investor is particularly sympathetic.

The private nature of arbitrations, on the other hand, is more likely to benefit the adviser. Finra arbitrations are closed to the public, and there is a limited publicly available paper trail relating to the claim.

Indeed, while an investor complaint might contain pages and pages of allegations, those allegations will be only briefly summarized on Finra's BrokerCheck, and in the arbitration award. And even then, one can find the information only by searching for a particular adviser.

In court, by contrast, members of the public, including the press, can attend the trial and generally obtain papers filed in the case. Moreover, many courts publish a list of cases filed each day that includes, among other things, the identities of plaintiffs and defendants.

Thus, one need not be searching for a particular adviser to learn that she or he was sued. Although the threat of adverse publicity can induce a firm or adviser to settle a court case, that threat loses its punch when it comes to Finra arbitration.

Limits on discovery can benefit either side, depending on the case. It is rare, for example, for Finra arbitration panels to permit depositions.

Thus, neither side will have an opportunity to examine the other side in-person before the final arbitration hearing. Additionally, it is more difficult to obtain documents from entities or individuals other than parties that Finra regulates in arbitration than in court.

These limits can reduce costs for the parties. At the same time, they can limit the parties' ability to prove their claims or defenses, particularly where, in order to prove a claim or defense, a party needs to obtain documents from an uncooperative third-party.

HELPED OR HURT

An investor can be helped or hurt by the way Finra arbitrations operate. It depends on the particular facts and circumstances of the case.

Where investors are sympathetic but have only slim facts to support their claims, they may fare better in arbitration because their cases are unlikely to be dismissed before the final arbitration hearing. On the other hand, an investor with a checkered past may have a tougher time in an arbitration because his past will be more open to attack.

Because each case is unique, it is difficult to determine whether, taken on the whole, investors do better in Finra arbitrations than they would do in court.

Imagine a system in which, instead of mandatory arbitration, investors had the choice between bringing claims before Finra or before a court. Investors would be able to analyze their claims, the nature of what they need to prove their claims, and the personalities and histories of those involved before deciding where to pursue their claims.

Investor has a weak claim? Choose arbitration.

Is the firm sensitive to bad publicity? Choose court.

Adviser has a checkered history? Choose arbitration.

Investor has checkered history? Choose court.

In all likelihood, offering investors the choice of court or arbitration will lead to increased payouts to investors and their attorneys. Whether such a system is fairer to investors, firms and advisers alike is a question that should be considered before changes are implemented.

Howard Rosenburg is a principal with Kopecky Schumacher Bleakley Rosenburg PC.