The Securities and Exchange Commission yesterday approved a
Financial Industry Regulatory Authority Inc. proposal to give investor claimants the option of using all-public arbitration panels.
The approval follows a 27-month pilot program during which Finra gave certain investors the choice of eliminating the industry arbitrator on three-person panels and replace the arbitrator with a public panelist.
Public arbitrators are people with no recent ties to the securities industry.
Giving investors an option "will enhance the public's perception that the Finra securities arbitration process and rules are fair," the SEC said in approving the new rule.
"There was strong support from investor and consumer groups for giving arbitration customers the right to decide whether their panel should include a nonpublic member," Finra chief executive Richard G. Ketchum said in a statement today.
"This is a tremendous step in the right direction," said Peter Mougey, president of the Public Investors Arbitration Bar Association, which represents plaintiff's attorneys.
PIABA, along with state regulators, has pushed for the all-public option as well as the elimination of mandatory arbitration agreements in securities sales.
Within the broker-dealer community, though, the shift toward all-public panels has been controversial.
Many industry arbitrators themselves feel they can be tougher on truly bad actors, because as industry participants, they know how things are supposed to work.
"I absolutely believe that having an industry arbitrator enhances" the ability of a panel to reach the right conclusion, said Lisa Roth, chief executive of Keystone Capital Corp. and past chairman of the National Association of Independent Broker/Dealers Inc.
Ms. Roth, who serves as an industry arbitrator, said, however, that she supports the SEC's action.
"At the end of the day, the consumer should have the choice," she said.
Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association, said SIFMA "has been supportive of Finra's pilot program for all public panels, and we generally support the new rule making this a permanent choice for investors.”
According to Finra, a majority of investors in the pilot program still ended up using an industry arbitrator.
Meanwhile, Mr. Mougey, a shareholder at the the law firm Levin Papantonio Thomas Mitchell Echsner Rafferty & Proctor PA , said PIABA will continue to work toward eliminating the use of pre-dispute arbitration contracts by securities firms.
"Our ultimate objective is to make this [arbitration] forum optional," he said.
A section of the Dodd-Frank Act directed the Government Accountability Office to study the arbitration services provided by Finra.
The legislation also gave the SEC explicit authority to ban or limit pre-dispute arbitration agreements.
The rule change announced yesterday does not affect disputes between brokerage firms or brokers.
Firm-versus-firm cases are heard by industry panels, and industry cases involving an individual broker are heard either by a single public arbitrator or majority public panel.
