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 The plan by the U.S. brokerage industry self-regulator, the
Financial Industry Regulatory Authority (FINRA), would mean that
investors could opt to have their cases heard by a panel of three
so-called public arbitrators who would not include people who had
past industry ties.
That would not only exclude former bankers and brokers but also
others, such as lawyers who worked on behalf of brokerages, even for
brief periods in their careers, the person said.
FINRA allows people who have been out of the industry for at least
five years — but who may have worked in it as many as 20 years — to
hear cases as public arbitrators.
Under the plan, these people could instead become "non-public
arbitrators," required to have industry experience and typically
hear disputes between industry entities.
A spokeswoman at FINRA, which regulates U.S. retail brokerages and
runs the securities arbitration forum in which investors and
brokerages must resolve their legal disputes, declined to comment.
Of FINRA's 6,400 arbitrators, more than 3,500 are deemed public
arbitrators. While it is unclear how many public arbitrators have
past industry ties, some lawyers have pegged the figure at about
1,000.
FINRA data shows that there is no significant difference in outcomes
of cases decided by solely public arbitrators instead of those with
public and non-public arbitrators.
But clients' attorneys have complained that the public arbitrators
may have come from Wall Street and therefore have an industry bias.
This new proposal would address that concern.
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The move would require approval by FINRA's board and then by the
U.S. Securities and Exchange Commission.
FINRA's effort to broadly redefine its public arbitrator category
marks a major shift for the Wall Street watchdog, which has long
grappled with controversy over the issue.
Until 2011, FINRA required arbitration panels to include one
non-public arbitrator, but has since changed its rules to let
investors choose a panel of all public arbitrators.
In 2013, the regulator excluded people who were associated with
hedge funds and mutual funds from being on the public arbitrator
roster. FINRA also beefed up its policing of arbitrators last year
to detect possible criminal conduct and conflicts, among other
issues.
Brokerage industry lawyers have defended arbitrators with industry
experience, arguing they have a better understanding of complex
financial instruments and industry practices.
(Reporting by Suzanne Barlyn; editing by
Linda Stern, Martin Howell and Grant McCool)
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