In another sign that industry-affiliated arbitrators may be on their way out, the
Financial Industry Regulatory Authority Inc. wants to stop using industry panelists in most cases involving a registered representative and a brokerage firm.
In a rule filing published for comment this month, New York and Washington-based Finra proposed using two public arbitrators on its three-person panels for any type of broker-firm dispute, with the exception of discrimination claims.
Broker cases involving compensation or contract issues are heard by industry arbitrators. But that policy will change if the Securities and Exchange Commission approves Finra's proposal.
Finra spokesman Brendan Intindola declined to comment on the proposed rule change.
The proposal is a reflection of “the industry model [of arbitration's] moving to the public model,” said William Jacobson, director of the Securities Law Clinic at Cornell University Law School in Ithaca, N.Y.
Cases filed by, or against, individual investors are handled using a majority of public arbitrators.
Many of the industry cases that would be affected by the change are suits brought by firms against brokers for repayment of a forgivable loan.
In its rule filing, Finra said that the system can be manipulated by parties who include non-pay-related claims in their lawsuits, in order to get a majority public panel.
But it is unclear who is gaming the system.
Both firms and brokers may want to stick with all-industry panels, legal observers said.
Industry-specific issues “might get lost in the translation for public arbitrators who don't have industry experience,” said Marc Dobin, a partner at LaBovick & LaBovick PA in Palm Beach Gardens, Fla., who represents firms and brokers.
In the forgivable-loan context, it would probably take more time to explain to non-industry arbitrators how the recruitment packages work, said David Bartholomew, of counsel at Palmer Lombardi & Donohue LLP in Los Angeles, who represents firms.
“Overall, [the change would] probably be bad for employees,” said Mr. Jacobson, who formerly represented brokers in disputes with firms.
An all-industry panel “doesn't seem like it's even an option anymore,” he said. “That's what's most troubling to me.”
Brokers can get a majority of public arbitrators by asserting a counterclaim as a defense, which disqualifies the case from using an all-industry panel, Mr. Jacobson said.
Industry panels could still be used, however, if both sides agree, legal observers said.
Finra's proposal won't be “widely embraced by the business side,” Mr. Bartholomew said. “Most of the wirehouses would say we should be going the other way — using more industry [arbitrators] for any dispute involving industry people.”
In its filing, Finra also that the procedures for assembling panels are difficult to implement, because case administrators must determine what kind of lawsuit has been filed before lists of potential arbitrators are generated.
“I don't understand [Finra's] articulation that [its rules are] difficult to implement,” Mr. Bartholomew said.
Employee forgivable-loan cases “are fairly straightforward.”
“It looks like [Finra is] anticipating at some point doing away with non-public arbitrators completely, except in member-to-member cases,” Mr. Jacobson said.
The rule proposal seems odd, he said, because “I haven't heard anyone clamoring to get rid of industry arbitrators in industry cases.”
Use of industry arbitrators in investor cases has long been criticized by the investor plaintiff's bar and state securities regulators.
Last July, Finra began a pilot program in which major brokerage firms agreed to let a limited number of plaintiffs have all-public panels. The move was seen by some as a response to legislation in Congress that would bar mandatory-arbitration clauses in contracts.
Also, under terms of the auction rate securities settlements, investors can bring claims for “consequential damages” to a single public arbitrator.
Comments on the Finra rule proposal are due to the SEC by May 26.
E-mail Dan Jamieson at [email protected].
