The SEC recently approved FINRA’s proposed new rule changes to the definitions of public arbitrator (FINRA Rules 12100(u) and 13100(u)) and non-public arbitrator (FINRA Rules 12100(p) and 13100(p)), after receiving over 300 comment letters in addition to two letters from FINRA responding to the comment letters. The new rule significantly limits the pool of potential public arbitrators by, chiefly, permanently disqualifying any person who worked in the financial industry from being a public arbitrator. FINRA believes that this and other changes to the definitions of public and non-public arbitrators, as discussed below, address both investor and industry concerns about perceived bias and arbitrator neutrality.
FINRA defines and classifies arbitrators as either public or non-public based on their affiliations and ties to the financial industry. The recent rule changes to the composition of the Public Arbitrator pool is particularly important in certain types of FINRA arbitrations (i.e. customer cases) where the parties have the option to select an all public arbitrator panel by striking all non-public arbitrators from their list.
As mentioned, FINRA’s new rule permanently bars any persons who are or were affiliated with or employed by specified financial industry entities (e.g. a broker or a dealer) from becoming public arbitrators. The new rule also adds two new categories to the list of financial industry entities; namely, (1) employees of mutual funds, hedge funds, investment advisers, and (2) employees currently or in the future employed by any entity organized under or registered pursuant to the Securities Exchange Act of 1934, Investment Company Act of 1940, or the Investment Advisers Act of 1940.
In addition, under the old rule, attorneys, accountants and other professionals (“professionals”) who devoted 20% or more of their professional work in any single calendar year to providing services to the financial industry (“industry professionals”) were not permanently barred from serving as public arbitrators unless they provided a substantial portion of their professional services to the industry for 20 years or more over the course of their careers. Industry professionals not subject to the permanent bar could be re-classified from a non-public arbitrator to a public arbitrator subject to a two year cooling-off period. In contrast, under the old rule, professionals who represented or provided services to parties in disputes concerning investment accounts or transactions or employment relationships with the financial industry (“investor professionals”) qualified as public arbitrators.
Now, under FINRA’s new rule, investor professionals are treated the same as industry professionals and both are classified as non-public arbitrators. They are now permanently barred from serving as public arbitrators under the new rule if they provided such professional services for 15 years or more over the course of their careers. Industry professionals and investor professionals not subject to the permanent bar may qualify to serve as public arbitrators but only after a longer (5-year) cooling-off period.
With these new rule changes, FINRA seeks to change investor and industry perceptions about arbitrator neutrality. While supporters of the rule change commend them for creating bright-line groupings that avoid confusion and disputes, critics of these rule changes contend, among other things, that they seek to address a non-existent problem and serve as yet another pro-claimant shift that FINRA arbitration rules have taken in recent years.