Proposed FINRA Rule Change to Shift Professionals without Ties to Securities Industry into “Non-public” Arbitrator Pool

By Sunny Desai

In a proposed FINRA rule change, persons who worked in the financial industry for any duration during their careers would always be classified as non-public arbitrators, as well as persons who represent investors or the financial industry as a significant part of their business. This would mean removing certain attorneys, accountants, and other professionals from the public arbitrator classification and into the non-public arbitrator classification. As such, the Public Investors Arbitration Bar Association (PIABA) is not as highly enthusiastic about the proposed rule change.

The proposed change, that would essentially shift attorneys and other professionals without ties to the securities industry into the non-public arbitrator pool, will “harm the integrity of the arbitration process” according to PIABA. PIABA takes issue with the fact that the proposed rule change would prevent attorneys and other professionals who service investors in securities disputes, from serving as public arbitrators.

Currently, a non-public arbitrator is one who is associated with the financial industry, either by being registered through a broker or dealer, spending a substantial amount of his/her career engaging in the securities industry, or working in a financial institution with securities and commodities, etc. A public arbitrator is one who is not an investment advisor and is not engaged in securities or commodities. As of now, attorneys and accountants who service investors would be classified as public arbitrators, but this proposed rule change would re-classify those individuals as non-public arbitrators.

PIABA’s letter to the Securities and Exchange Commission (SEC) asserts that the categorization of a proposed arbitrator as public and/or non-public has always focused on the nature and extent of the individual’s relationship to the financial industry. This was borne solely out of the perceived bias on the part of the industry and in the interest of protecting the investing public.

How would this proposed rule change help investors in the arbitration process? According to PIABA, it simply wouldn’t. As stated in PIABA’s letter to the SEC, “placing arbitrators with no ties to the securities industry into the non-public pool makes no logical sense and would harm the integrity of the arbitration process because parties would not have accurate disclosure information to rely on in selecting arbitration panels.” Under FINRA’s proposed rule change, arbitrators with no ties to the securities industry would be mistakenly believed to have ties to the securities industry, as they would be categorized as non-public arbitrators.

According to PIABA, this would hurt and undermine FINRA’s own stated goal of arbitrator neutrality. With investor confidence already shaken, how can investors have faith in arbitration if the parties do not have accurate disclosure information when selecting arbitration panels?