IRVINE, Calif. — Critics of the industry arbitration system want the
Financial Industry Regulatory Authority to require that “public” arbitrators have no ties to the industry.
In a rule awaiting approval at the Securities and Exchange Commission, New York- and Washington-based FINRA has proposed limiting to $50,000 a year the amount of revenue a public arbitrator could receive from brokerage firms for handling customer disputes.
The proposal is intended to allow defense attorneys with limited industry work to continue to serve as “public” panelists.
Most arbitration panels are made up of two public members and one industry panelist. But the plaintiff’s bar has long complained that public members are not really public.
In comment letters, many investor lawyers called for FINRA to adopt a “zero tolerance” policy on industry ties by public arbitrators.
Currently, public arbitrators are allowed to receive up to 10% of their annual revenue during the previous two years from clients involved in securities-related activities.
There is a concern, however, that “an arbitrator classified as public might work for a very large law firm that derived less than 10% of its annual revenue from broker-dealer clients but still receives a large dollar amount of such revenue,” FINRA said in its rule filing.
The $50,000 cap is a step in the right direction, plaintiff’s attorneys said. But calling arbitrators with any kind of industry connection “public” is misleading, they said.
“If you’re going to give someone a classification as a neutral arbitrator, they should have zero ties to the industry,” said Steven B. Caruso, president of the Public Investors Arbitration Bar Association of Norman, Okla., and a partner at Maddox Hargett & Caruso PC in Fishers, Ind.
State regulators are raising the same issue. FINRA “should take forthright and comprehensive action to remove all bias, and appearances of bias, from its arbitration forums,” Bryan Lantagne, chairman of the arbitration working group of the North American Securities Administrators Association Inc. in Washington, said in a comment letter last month.
Mr. Lantagne, who is also director of the Massachusetts Securities Division in Boston, told FINRA that using any arbitrators with industry affiliations “subverts the concept of a neutral arbitration forum.”
NASAA has been pushing FINRA to drop the use of industry arbitrators.
FINRA spokeswoman Sarah Bohn declined to comment about the proposed rule.
In terms of current practice, she said that when arbitrators are appointed, they review their need to disclose conflicts. If an arbitrator refused to respond to “meaningful” questions about conflicts, “FINRA may determine to remove the arbitrator from the case,” Ms. Bohn said.
Stuart D. Meissner, a plaintiff’s attorney with Stuart D. Meissner LLC of New York, said that FINRA has said that a zero-tolerance policy would deplete its pool of public panelists. But FINRA needs to recruit more public arbitrators, he added.
A zero-tolerance standard would be easy for arbitrators to apply, Mr. Meissner added.
The Securities Industry and Financial Markets Association of New York and Washington hasn’t commented on the proposed rule, spokesman Travis Larson said.
The SEC, meanwhile, is in the process of analyzing comments and has no timeline for action on the rule, according to spokesman John Nester.
The SEC is unlikely to act on the proposal before the end of the year, Mr. Caruso said.
