The Public Investors Arbitration Bar Association, a trade group for attorneys who represent investors in securities arbitrations, has formally asked the Securities and Exchange Commission to end the mandatory use of industry arbitrators.
In a recent rulemaking petition filed with the SEC, Norman, Okla.-based PIABA asked the regulator to give investor plaintiffs the right to strike industry arbitrators from proposed lists of panelists.
Under current
Financial Industry Regulatory Authority Inc. arbitration rules, investor cases alleging $100,000 or more in damages are heard by three-person panels, one of whom has industry ties. In choosing a panel, both parties get three lists with the names of eight possible arbitrators on each list. The names are pulled from pools of public and industry-affiliated arbitrators. Each party can strike four names from each list. The remaining choices are ranked, and a panel is put together based on those rankings.
PIABA, together with state securities regulators, has been pushing to get rid of industry-affiliated arbitrators. That's because they see them as potentially biased.
Finra spokesman Herb Perone declined to comment on PIABA's rulemaking petition, as did John Nestor, a spokesman for the SEC.
In such a petition, any group or individual may ask the SEC to create new or change existing regulations. While the commission usually rejects such petitions, the act of filing a petition does force the SEC to address sometimes controversial topics.
“Our hope is that [the petition] does increase pressure on the SEC” to make industry panelists optional, said Scott Shewan, PIABA's president-elect and a partner at Born Pape & Shewan LLP in Clovis, Calif.
PIABA's petition essentially calls for the expansion of a Finra pilot program that began last October. As part of that two-year pilot, 11 major brokerage firms agreed to let up to 276 investor plaintiffs a year choose all-public arbitration panels.
That's not a lot, given the growing number of case filings, said plaintiff's attorney Ted Eppenstein, a senior partner at Eppenstein and Eppenstein PLLC in New York.
Year-to-date through May, 3,163 arbitration cases were filed with Finra, up 85% from the same period last year, according to the Washington- and New York-based regulator.
In a departure from the pilot program, PIABA is asking that claimants be allowed to seek an all-public panel — even when an individual broker is named in the lawsuit.
Travis Larson, a spokesman for the Securities Industry and Financial Markets Association of New York and Washington, said: “The PIABA [petition] is premature.” He said the pilot program should be allowed to run its course.
“We're gathering data now,” Mr. Larson said of the pilot. “We should allow it to come in, and make decisions based on informed choices.”
While the SEC usually rejects rulemaking petitions, the existence of the pilot program, coupled with a bill pending in Congress to ban pre-dispute arbitration agreements with consumers, might compel the SEC to act, Mr. Shewan said. SEC Chairman Mary Schapiro's support of the pilot program last year when she served as Finra's chief executive also bodes well, he added.
“We feel it's a good time for this,” Mr. Shewan said. “We're seeing a lot of product cases,” such as those involving subprime-related bonds and auction rate securities, “and the real danger in having an industry arbitrator on a panel is that an industry arbitrator can say maybe technically and legally it was wrong, but everyone was doing it,” he said.
But getting rid of industry arbitrators is a bad idea, said Matt Fornshell, a partner at Schottenstein Zox & Dunn Co. LPA in Columbus, Ohio, an industry defense attorney and a former state enforcement director.
“These cases often involve issues that are industry-specific,” he said. “It's helpful to have at least one person on a panel who understands how things work. The notion that an industry arbitrator [is always] biased is misplaced.”
In its petition, PIABA argues that industry arbitrators create at least an appearance of conflict and should not be acting as expert witnesses, because plaintiffs do not have an opportunity to hear or challenge their conclusions.
But whether or not an arbitrator has industry experience, “everyone is bringing some baggage with them” in hearing a case, Mr. Fornshell said. But that doesn't mean they'll be biased against investor plaintiffs.
Mr. Shewan said the rule change would not eliminate industry-affiliated arbitrators.
An investor's attorney would not have to strike all the proposed industry panelists, leaving the door open for some to be appointed to a panel.
“We're not trying to get rid of the industry arbitrator,” Mr. Shewan said. Industry people would serve “only if both sides want it,” he said.
Last month, Finra proposed making the use of industry panelists optional in most cases involving registered representatives and brokerage firms.
E-mail Dan Jamieson at [email protected].
