FINRA’s new rules for arbitrators will take effect on July 1, 2013.
The amendments change the definition of “public arbitrator” to exclude persons associated with a mutual fund or hedge fund from serving in the role. The new rules also require individuals to wait for two years after ending certain affiliations before FINRA may permit them to serve as public arbitrators
FINRA classifies arbitrators under the Customer and Industry Codes of Arbitration Procedure as either “non-public” or “public.” Non-public arbitrators are affiliated with the securities industry either through their current or former employment in a securities business, or because they provide professional services to securities businesses. Meanwhile, public arbitrators do not have any significant affiliation with the securities industry.
FINRA requires individuals who chair arbitration panels to be public arbitrators in investor cases. Similarly, a single, public arbitrator serves as the sole arbitrator on smaller claims involving customers. A three-arbitrator panel considers larger investor claims. Customers in cases that proceed with three arbitrators have the option to have an all-public arbitration panel or a majority-public panel decide their claim.
FINRA’s existing rules already excluded advisers and certain attorneys, accountants or other professionals who derive substantial revenue from financial industry entities. The goal of the most recent changes is to improve investor perception about the neutrality of the arbitrators on the public roster. While this is a noble objective, and, as the saying goes, perception is other people’s reality, one wonders whether excluding those most familiar with the industry makes sense. It may just mean that the entire process may become more cumbersome and less efficient.
Eckerle Law offers legal advice in a variety of transactional and regulatory matters and serves companies’ plenary business law needs. Its founder, Bettina Eckerle, is a veteran of Debevoise & Plimpton and Wachtell, Lipton, Rosen & Katz. She also served as the General Counsel of two companies en route to IPO. Please visit the Eckerle Law website for more details.