FINRA has filed with the Securities and Exchange Commission a proposal to narrow the definition of a public arbitrator, precluding anyone with financial industry experience from qualifying for the category. Brokerage customer contracts contain mandatory arbitration clauses that for the most part, prevent customers from suing brokerage firms in court. The parties instead choose a three-person arbitration panel from a list of arbitrators provided by FINRA. Customers have the option of demanding a panel consisting of two public arbitrators and one non-public (i.e., industry) arbitrator or an all-public panel.
We always opt for an all-public panel. It’s almost never a good idea for an aggrieved brokerage firm customer to have someone who worked in the brokerage industry sitting in judgment of the customer’s claims. Unfortunately, because current rules allow financial professionals to join the public list just five years after ending their industry affiliation, it can be difficult to ensure that a public panel is free of industry veterans.
Under FINRA’s new rule, anyone who has worked for a brokerage firm for any length of time must be classified as a non-public arbitrator. And once FINRA has classified an arbitrator as non-public, the arbitrator would never be reclassified as public.
FINRA also is making it harder for certain attorneys, accountants and other professionals normally classified as non-public to become public arbitrators. Currently, those who devote 20% or more of their professional work representing financial firms or their employees can join the public list just two years after they leave the industry, as long as they have worked less than 20 years total on behalf of brokerage firms. Tenure longer than 20 years permanently disqualifies them from being public arbitrators. The new rule would extend the two-year look-back period to five years and would permanently disqualify professionals who have worked longer than 15 total years on behalf of industry clients.
The new rule also targets attorneys, accountants and other professionals who devote more than 20% of their professional time to representing investors in securities claims. Under the new rule, they would be classified as non-public arbitrators. They could switch to public five years after their business mix changes, as long as they haven’t worked a total of more than 15 years representing investors. After 15 years, they would be permanently classified as non-public.
FINRA Ruling Whittles Away Investor Protections
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.