The brokerage industry's regulator will place more scrutiny on its arbitrators who hear disputes between firms and investors after one who participated in a recent major case did not disclose his own legal problems.
The
Financial Industry Regulatory Authority Inc. will conduct annual background checks on its pool of about 6,500 arbitrators and review them before they are appointed to hearing panels, Finra spokeswoman Michelle Ong said today.
Previously, Finra did background reviews only when people applied to be added to the organization's roster of arbitrators. Three arbitrators are chosen from the list for cases brought before Finra. Nearly every brokerage contract with a client includes a mandatory-arbitration clause for complaints that investors file against the firm.
“The procedures we are putting in place will help ensure not only that parties receive the information that they should but also that Finra's active arbitrators are eligible to serve,” Ms. Ong wrote in an e-mail.
The arbitrator review policy was changed recently due to a situation involving Demetrio S. Timban Jr., one of Finra's so-called “public” arbitrators, who have no connection to the financial industry. Mr. Timban was arrested and indicted in New Jersey in October 2011 for practicing law in the state without being licensed there.
Finra did not receive notice of his arrest until Feb. 29, 2012, according to Ms. Ong. The regulator removed Mr. Timban from its list of available arbitrators on March 1 of that year.
Mr. Timban, who did not report his legal problems to Finra, was one of the arbitrators who participated in a case involving alleged investor fraud in a private-investment fund sponsored by
Goldman Sachs & Co. A claim for $2.4 million, which was later reduced to $1.4 million, was filed by Athena Venture Partners LP on Aug. 12, 2009.
Last March, the arbitration panel denied Athena's claim. Finra sent updated background information to the parties; the information included Mr. Timban's legal problems. The parties did not challenge him, and he remained on the case, according to Ms. Ong. Mr. Timban participated in panel deliberations and agreed with the panel's conclusion.
He did not sign the arbitration decision. The other two arbitrators — Kathleen K. Murphy and Edward T. Borer — did.
Mr. Timban could not be reached for comment.
The charges for practicing law without a license in New Jersey were later dropped, according to an article by Reuters, which first reported Finra's policy change. In addition, he ran into problems in Michigan for writing checks without sufficient funds.
Finra's new policy of reviewing arbitrators' backgrounds annually was welcomed by some who deal with Finra's arbitration system.
“I think it's important that Finra ensure that its arbitration pool is as clean as possible,” said Marc Dobin, founder of Dobin Law Group PA. Mr. Dobin represents both brokerage firms and investors in arbitration cases.
“Arbitrators are the judge and jury, and we have a limited right of appeal," he said.
Daniel Nathan, a partner at Morrison & Foerster LLP, also backs the greater scrutiny.
“The appearance of impartiality depends on these arbitrators,” he said.
Finra has been responsive to criticism of the arbitration system, according to Mr. Nathan.
For instance, in 2011, the organization started allowing arbitration participants to choose all-public panels rather than including an industry representative. As of July 1, the regulator will exclude anyone associated with a
hedge fund or mutual fund from serving as a public arbitrator and require those formerly affiliated with such funds to wait two years before they can serve as public arbitrators.
“They have been fairly flexible and forward-looking in what they do,” Mr. Nathan said.
