Arbitration panels made up entirely of people without financial industry ties are likely to become the norm in customer cases against brokerage firms under a new rule.
On Wednesday, the Securities and Exchange Commission
approved a proposal by the Financial Industry Regulatory Authority Inc. that would make an all-public panel the default option for choosing the three arbitrators deciding cases involving a claim of $100,000 or more.
Previously, the plaintiff and defendant could select a process that guaranteed that at least one industry arbitrator would serve on their panel. Alternatively, one of the parties could require an all-public panel.
Now the parties will have to opt out of an all-public panel. If they want to appoint an industry representative, they can do so by working with Finra staff.
Since 2011, Finra has given customers filing cases against brokers the option of selecting all-public panels. They've done so 66% of the time over the past two years, according to Finra statistics. Those that used a public-industry panel usually did so by default because they didn't affirmatively select an all-public panel.
The upward trend in using public arbitrators will accelerate under the new rule, according to experts.
“Now there's absolutely no chance you're going to have an industry professional on your arbitration panel,” said Patrick Mahoney, owner of an eponymous law firm. “Claimants' lawyers will love it. Defense lawyers will hate it.”
Removing the requirement that customers actively select all-public panels will help them and lawyers who are new to the Finra system.
“The change will not affect those of us who regularly represent customers in cases, because we almost universally chose the [all-public] option anyway,” said Robert S. Banks Jr. of Banks Law Office PC. “It will benefit attorneys not experienced with Finra rules and investors who choose to represent themselves. The change recognizes that there are very few instances in which it is not to a customer's advantage to be able to decide whether to include an industry arbitrator.”
The drawback of the new selection process is that it will diminish the role of industry arbitrators and the expertise they bring to the panels, according to S. Lawrence Polk, a partner at Sutherland Asbill & Brennan LLP.
“In many cases, that industry arbitrator can be the harshest critic of the brokerage firm,” Mr. Polk said. “You're going to see an emphasis on expert witnesses.”
Finra has a pool of approximately 6,000 arbitrators, about 4,000 of whom are public. With thousands of cases being filed each year, the system could be strained under the all-public approach, according to Mr. Polk.
“It's going to be a real struggle to find enough public arbitrators to hear all these cases if we're eliminating the industry,” he said.
Arbitration cases involving a registered representative against a firm will continue to be heard by two public arbitrators and one industry arbitrator.
