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Industry arbitrators may not disappear, after all

Jan 20, 2013 @ 12:01 am

By Dan Jamieson

Kevin Carroll
+ Zoom
Kevin Carroll

Some observers have speculated that industry arbitrators may become a thing of the past.

Three-person arbitration panels administered by the Financial Industry Regulatory Authority Inc. usually have one panelist who is affiliated with the industry. But the growing use by investor claimants of an option that lets them pick a panel of all-public arbitrators, together with further restrictions on who can serve as a public arbitrator, have led some to wonder whether fewer industry people will have an opportunity to sit on cases.

Although it is true that the use of public panelists is growing, a closer look at the trends indicates that industry arbitrators may not disappear anytime soon.

For one thing, win rates with all-public panels don't seem all that much higher than in cases with an industry arbitrator — 49% versus 45% last year, according to data Finra released last week.

"4-POINT DIFFERENCE'

“It's impossible to say that the 4-point difference is attributable to the fact that no industry members were on the arbitration panels,” said Scott Ilgenfritz, a partner at Johnson Pope Bokor Ruppel & Burns LLP and president of the Public Investors Arbitration Bar Association, which represents plaintiff's attorneys.

And of the 210 claimants who chose the option of an all-public panel last year, a bit more than half ended up using an industry arbitrator anyway. Finra's all-public program gives investors the option of using just public panelists, but they are still free to choose an industry person.

“I'm glad to hear we're not being automatically kicked out,” said W. John Chesney, Jr., a financial adviser with Raymond James | Morgan Keegan who serves as an industry arbitrator.

“I really feel we have a place,” he said. “I'm hypercritical of our industry and want the bad brokers out.”

The Securities Industry and Financial Markets Association supported the all-public-panel proposal from the beginning, but “we also continue to support industry arbitrators who contribute necessary expertise” to arbitrations, Kevin Carroll, SIFMA's associate general counsel, wrote in an e-mail.

ALL-PUBLIC PANELS

Despite the conviction of industry panelists that they play an important role, the use of all-public panels is expected to grow.

In 2011, just 30 claimants opted for the all-public option, but that jumped to 210 last year.

“As claimants' attorneys, we're all choosing public panels,” said David Robbins, a partner at Kaufmann Gildin Robbins & Oppenheim LLP, who thinks the higher win rate is significant, and predicts that the use of industry panelists will diminish.

PIABA is encouraging Finra to make the all-public program “the default option” for investor claimants, Mr. Ilgenfritz said.

And plaintiff's lawyers want Finra to relax its educational requirements for arbitrators and simplify its application in order to get more public arbitrators into the pool.

Separately, last week, Finra filed a proposed rule change with the Securities and Exchange Commission to tighten up its definition of a public arbitrator.

Finra wants to exclude people associated with a mutual fund or hedge fund from its pool of public arbitrators and require professionals who have done a certain amount of work for securities firms to wait two years after ending an industry affiliation before being classified as public.

Finra already has a five-year waiting period for former securities industry employees who wish to serve as public arbitrators, and bans those who have been associated with the industry for at least 20 years from ever becoming public arbitrators.

Claimants' attorneys want anyone associated with the industry in the past to be disqualified from serving as a public arbitrator.

“PIABA will continue to work until the word "public' means an arbitrator who does not have any ties to the securities industry,” Mr. Ilgenfritz said.

djamieson@investmentnews.com Twitter: @dvjamieson

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