The Securities and Exchange Commission has approved a Finra proposal that would restrict more individuals in securities disputes from serving as public arbitrators, including lawyers who represent plaintiffs.
Under the rule, anyone who has worked in the financial industry at any point in his or her career would be classified as a nonpublic, or industry, arbitrator. Under current rules, they could be reclassified as public arbitrators five years after leaving the industry.
In another big change, the rule would move from the public to nonpublic arbitrator rolls anyone who has devoted 20% or more of his or her time to representing investors in securities claims over the previous five years, allowing them to re-enter the public roster after a five-hear cooling off period. But if they've been a plaintiff's attorney for more than 15 years, they are permanently disqualified as a public arbitrator.
Almost all customer claims against brokerage firms are settled in the Financial Industry Regulatory Authority Inc.'s
arbitration system, which includes a total of 6,359 arbitrators, 3,518 of whom are classified as public.
Each arbitration case is heard by a panel of three arbitrators. The parties determine the makeup of the panel by striking arbitrator candidates until they get to three. Any party can select an all-public arbitration panel.
Critics of the current system say it favors Wall Street. The new rule targets that worry.
“The commission believes that the proposed rule change would help to address any perceived bias of public arbitrators by classifying certain individuals with either financial industry experience or significant experience representing investors as nonpublic arbitrators,” the SEC said in its
Feb. 26 regulatory order. “Accordingly, the commission also believes that the proposal would enhance the perception of neutrality of the entire Finra arbitration forum.”
The new rule also would disqualify as a public arbitrator attorneys, accountants and other professionals who have worked for financial firms for more than 20 years. If their career has spanned less than that amount of time, they can re-enter the public roster five years after ending their service for financial firms, up from the current two-year look-back.
First
proposed by Finra last June, the measure received 330 comment letters. Finra is the industry-funded broker-dealer regulator.
One of the opponents of the change said too many arbitrators would be thrown into the nonpublic pool at a time when Finra has made all-public arbitration panels the default composition for case hearings.
“This classification change represents the latest in a series of rule changes aimed at raising the political correctness rating of the forum's roster at the cost of competence and adequacy of coverage,” said Rick Ryder, editor-in-chief of the Securities Arbitration Commentator.
By Mr. Ryder's estimate, the number of public arbitrators would decline by 600 under the new rule. He said only about 15% of seats in customer cases are available to nonpublic arbitrators. He warned that arbitration proceedings would be less efficient and effective.
“It dilutes the quality of the forum's performance,” said Mr. Ryder, a former director of Finra arbitration.
It is confusing to put people who represent plaintiffs into the same arbitrator pool as those who have industry background, said Jason Doss, owner of an eponymous law firm and former president of the Public Investors Arbitration Bar Association.
“This will hurt investors,” Mr. Doss said. “It will further reduce transparency about how Finra recruits and selects arbitrators to hear cases.”
