Finra moves to tighten public arbitrator definition

Proposal would draw a bright line to exclude those with industry ties

Feb 11, 2014 @ 2:57 pm

By Mason Braswell

The Financial Industry Regulatory Authority Inc. is making a move to further limit Wall Street veterans' ability to serve as public arbitrators, according to sources with direct knowledge of the proposal.

The regulator plans to seek approval from its board Thursday for a controversial amendment that would draw a bright line preventing anyone who has been affiliated with the securities industry, including former brokers or attorneys, from representing themselves as a public arbitrator, sources said.

Finra spokeswoman Nancy Condon declined to comment on the board's agenda.

Under its rules, Finra allows industry veterans who haven't been associated with a brokerage firm in the past five years, and didn't devote 20 years or more of their career to financial services, to list themselves as a “public” arbitrator.

Similarly, attorneys, accountants and others who may have represented brokerage firms in the past could list as “public” provided that their firm didn't receive $50,000 in annual revenue from brokerage firms in the past two years.

The new proposal, however, would require individuals in both instances to report that they were “nonpublic,” or had industry ties, sources said.

Moreover, the rule also would require attorneys who represent investors in securities litigation to list themselves as nonpublic, sources said.

The move is designed to make the panels more neutral, according to Jeffrey Kaplan, an attorney with Diamond Kaplan & Rothstein, PA. He also serves on Finra's National Arbitration and Mediation Committee but wasn't speaking for the regulator.

“The whole goal is to create a neutral arbitration panel and perceived neutral public arbitrators,” Mr. Kaplan said. “If you have a bright-line rule, then there's no right or wrong of when someone becomes biased so to speak to the extent that bias actually exists.”

Estimates varied widely on how many of the 6,400 arbitrators would have to change their listing.

Mr. Kaplan guessed that it could be as high as 1,000.

Others declined to provide an approximation.

The move follows other efforts by Finra to address concerns that those with industry ties could be biased.

In 2011, the regulator lifted its rule that one of the three arbitrators on the panel had to be public and allowed claimants to select a panel comprised entirely of public arbitrators.

Attorneys argue, however, that the industry ties don't unnecessarily bias panels.

Finra dispute resolution statistics from last year show that in cases where the panel was all or majority public, investors won in just 43% and 44% of cases, respectively.

Industry trade groups claim that the concern over bias could cast non-public arbitrators in a negative light.

“Arbitrators with industry experience benefit both parties to a dispute,” said Kevin Carroll, associate general counsel at the Securities Industry and Financial Markets Association. “These individuals form an important part of Finra's roster of arbitrators, which must remain robust to preserve the efficiency and quality of the forum.”

The new rule could unnecessarily shrink the pool of arbitrators, said Bryan Ward of the law firm Sutherland Asbill & Brennan.

“You're having a diminished role of the nonpublic arbitrator, and at the same time that you're chipping away at the margins of who is an arbitrator, the effective pool there is getting smaller,” he said.

Debate over the proposal has been continuing since at least February 2013, said Bob Banks of Banks Law Office, who was familiar with the original proposal at that stage and is a member of the Public Investors Arbitration Bar Association, a trade group of lawyers representing investors, which supports the proposal.

If approved by Finra's board, the proposal would go to the Securities and Exchange Commission for public comment and ultimately be subject to the SEC's approval.


What do you think?

View comments

Recommended for you

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


CAIS's Brown: Big trends in wealth management

One of the biggest trends of 2017 was traditional institutional asset managers aiming their services at RIAs. How will this impact 2018? Matt Brown of CAIS explains.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Regulators showing renewed interest in cracking down on investment fees

SEC, Finra targeting high-fee share classes, 12b-1 fees and failure to give sales load discounts and waivers to investors.

Tax update: Brady says sales tax deduction in final bill

Taxpayers will be able to deduct state income taxes or state sales taxes in addition to property levies — up to a $10,000 cap.

Critics say regulation hasn't curbed overly rosy projections for indexed universal life insurance

They say rule didn't go far enough and more stringent measures may be necessary.

Broker, retirement groups make last-minute pleas to change tax legislation

Pass-through provisions are target of groups representing employee-model brokerage firms, as well as retirement plan advisers.

House and Senate reach tentative compromise for tax overhaul

Lawmakers still need to get a cost analysis of their agreement, so it's not yet definite, according to a source.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print