The Financial Industry Regulatory Authority (“FINRA”) has filed a proposed rule with the Securities and Exchange Commission (“SEC”) to revise the definition of a “public” arbitrator. FINRA states the proposed amendments are intended to improve the perception of neutrality of the arbitrators on its public roster.
FINRA’s Codes of Arbitration Procedure for Customer and Industry Disputes (collectively “Codes”) classify the arbitrators on FINRA’s roster as either “public” or “non-public.” Non-public arbitrators, generally referred to as “industry” arbitrators, are or were affiliated with the securities industry or provide professional services to clients in the securities industry (e.g., lawyers who represent brokerage firms.) Public arbitrators have no ties to the securities industry.
Currently, the Codes specify that the following individuals may not serve as public arbitrators:
- Investment advisers;
- Attorneys, accountants or other professionals whose firm received 10% or more of its annual revenue in the past 2 years from securities entities;
- Attorneys, accountants or other professionals whose firm received $50,000 or more in the past 2 years from professional services rendered to securities entities relating to customer disputes concerning an investment account or transaction;
- Employees of, or the immediate family member of a person employed by, an entity that is affiliated with a securities industry entity; and
- A director or officer of, or the immediate family member of a person who is a director or officer of, an entity that is affiliated with a securities industry entity.
FINRA’s rule proposal pending with the SEC adds individuals who are associated with a mutual fund or hedge fund to the list of persons who are ineligible to serve as public arbitrators. In addition, the proposed rule adds a 2 year “cooling-off” period. Meaning, an individual who ends his or her affiliation with one of the bulleted entities above cannot be designated as a public arbitrator for 2 calendar years after ending the affiliation.