Finra approves rule to redefine public arbitrators

Regulator will send a proposal to the SEC that could limit those with industry ties from serving on panels

Feb 13, 2014 @ 12:54 pm

By Mason Braswell

As part of a round of sweeping rule changes approved by the Financial Industry Regulatory Authority Inc.'s Board of Governors Thursday, the regulator authorized a new rule that could reduce the number of Wall Street veterans who serve on public arbitration panels.

The proposed amendment, which will now head to the Securities and Exchange Commission for public comment and approval, draws a bright line around which of Finra's 6,400 arbitrators can call themselves “public.”

Under the new rule, anyone who “worked in the financial industry for any duration during their careers would always be classified as nonpublic arbitrators,” Finra said in a notice published to its website.

Finra's current rules state that those who have been out of the industry for five years and spent less than 20 years working in the financial services industry are allowed to participate as public arbitrators, providing that they don't have additional disclosure issues such as a close relative who represents the securities industry.

The rule also importantly blocks securities lawyers for either brokers, firms or investors for representing themselves as public arbitrators if they derive a “significant part of their business” from financial services cases, according to the notice.

That would diverge from current rules, which allow attorneys whose firms have more than $50,000 or more than 10% of revenue coming from financial services firms to serve after two years and don't restrict those who work with investors.

Attorneys, however, would have the option to reapply to serve as arbitrators a “cooling off” period, according to Finra's notice.

Finra spokeswoman Nancy Condon declined to define how long that could be.

“With this proposal we have tried to meet concerns that we have heard from both the industry and from investors about how we classify arbitrators,” said Jack Brennan, lead governor and chairman of The Vanguard Group Inc. “It feels like a good balance has been achieved here.”

As of the end of last year, Finra had 3,562 public arbitrators and 2,864 nonpublic arbitrators. The regulator doesn't disclose how many may have to reclassify if the new definitions received final approval.

Industry trade groups such as the Securities Industry and Financial Markets Association think that it could unfairly work to exclude industry experts as Finra has worked in past years to make it easier for claimants to request panels of all public arbitrators.

Investor protection groups, such as the Public Investors Arbitration Bar Association, which represents about 350 attorneys, said that they support the move, even if it means that some of their attorneys have to reclassify.

“Finra chose a bright-line rule as opposed to picking an arbitrary period of time,” said the group's president, Jason Doss of The Doss Firm. “And PIABA thinks that's a victory for claimants.”

The proposed amendment was moved forward along with rule proposals related to Finra's BrokerCheck link and the ability to condition settlements on expungement.

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