By Ranon Altman
On February 26, 2015, the Securities and Exchange Commission (“SEC”) approved the Financial Industry Regulatory Authority’s (“FINRA”) proposed amendment to FINRA Rules 12100(p) and 12100(u), which define “non-public” and “public” arbitrators. FINRA arbitrators are decision makers that hear opposing sides of disputes, study the evidence, and render final decisions. Generally, public arbitrators do not have experience in the securities industry, while non-public arbitrators do.
Under former rule 12100(u)(2), individuals who provide professional assistance to investors in securities disputes are allowed to serve as public arbitrators. Under new rules 1200(p)(3), 1200(u)(3) and (7), professionals who have devoted 20 percent of their professional time within the past five years to serving parties in investment disputes, will be classified as non-public arbitrators.
In determining whether to approve FINRA’s proposed rule change, the SEC submitted the proposal for comment. Among those that submitted a comment was the University of Miami Investor Rights Clinic (“IRC”). Although the IRC supported the rule changes in part, it opposed the proposed changes that would render professionals who serve investors in customer disputes as non-public arbitrators.
The rationale behind the reclassification was to eliminate a perceived investor-sided bias. One commenter felt that this was necessary with the advent of the all-public-panel rule, which allows investor disputes to be decided by a panel of all public arbitrators. By this reasoning, it would be unfair to industry members if customer disputes were resolved by an all-public panel that included, for example, an attorney who represents investors. However, there was not a level-playing field prior to the implementation of the all-public-panel rule. On the other hand, as the IRC pointed out in its comment letter, arbitration is essentially “the industry’s forum.” Indeed, virtually all customers are forced into arbitration by pre-dispute arbitration clauses. Any balancing of perceived biases should take into account the industry’s clear advantage.
The IRC also noted that reclassifying investor advocates as “non-public” would bring confusion, as those representing investors in disputes “have been known as the voice of the public.” It further argued that the reclassification would reduce an already limited pool of public arbitrators, which is especially troubling in light of the fact that that 75 percent of customers request an all public panel. Other commenters argued that there is no evidence in the first place that professionals serving investors in disputes have any bias against the industry.
FINRA explained that its reclassification of “investor advocates” as non-public, arises from concerns about the neutrality of public arbitrators raised by both investor and industry representatives. FINRA stated that it must address both investor- and industry-perceived bias to “better safeguard the integrity of its arbitration forum.” In response to commenter concerns regarding unfair industry-sided bias, FINRA explained that parties in customer cases would still be able to use their unlimited strikes on the list of non-public arbitrators. It also asserted that parties would continue to receive extensive disclosures describing each arbitrator’s background.
The SEC ultimately sided with FINRA because it felt the proposed rule change “would help address forum users’ perceptions of neutrality in, and maintain the integrity of, the arbitration forum.”