FINRA TO CONSIDER CHANGING RULES ON WHO CAN BE A “PUBLIC” ARBITRATOR

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It appears that finally the Financial Industry Regulatory Authority (“FINRA”) may be changing the rules for the better when it comes to “public” vs. “industry” arbitrators.   For those who don’t know, FINRA is the self-regulatory organization with membership consisting of all licensed securities brokerage firms and individual securities brokers in the United States.  It was established by Congress in the 1930s and has been charged with overseeing the investment brokerage business ever since.  If a brokerage customer has a dispute with their broker-dealer that cannot be resolved informally, the customer has the right (and usually the obligation) to file any formal disputes in arbitration before FINRA.  FINRA handles virtually every kind of dispute, including churning, fraud, negligence, breach of the so-called “suitability rule” – which is another form of negligence, breach of fiduciary duty, trading disputes, etc.   An exception is if the case is filed as a class action, it cannot be filed with FINRA.  FINRA also handles employment-related disputes between broker-dealers and registered representatives (individual brokers).

FINRA has a pool of arbitrators available to hear such disputes.  The arbitrators are generally segregated into “public” and “industry” arbitrators.  Public arbitrators tend to be attorneys or retired judges or former industry professionals who had been out of the business for more than five years.  Industry arbitrators are generally those who had been in the industry within the previous five years.  Industry arbitrators can also include attorneys who represent industry parties and meet other criteria.  FINRA usually sends a list of both public an industry arbitrators, along with some background information about each arbitrator to the parties to the dispute.  The parties review the list and strike out any arbitrators they don’t like – although the number of strikes is limited.

Now, FINRA is apparently considering changing the rules to make it much more difficult for former industry participants and lawyers to be designated as “public” arbitrators.  It is important because having someone from the industry on your panel, assuming you are a claimant, may be a problem.  Some former industry arbitrators may still have certain biases or skewed beliefs or perceptions that cause claimant to start the case with an unfair disadvantage.  Indeed, if two of the three arbitrators already believe most cases like yours are baseless or frivolous at the outset of the case – claimant is in a position of having to dig himself or herself out of a deep hole.  An important key to success in arbitration hearings is to select an unbiased panel of arbitrators to hear your case.  You want the arbitration panel to have an open mind and withhold judgment until the case is heard.  Keep in mind, arbitration is like the wild west in many respects.  Arbitrators do not have to follow the law.  In fact, they really need not follow anything.  They usually do what they (subjectively) feel is right.

So this is good news.  If FINRA does make the change to the qualifications for arbitrators to be designated as “public” arbitrators, that will be one more step to evening out the arbitration playing field.

Vincent D. Slavens is a partner at Krause, Kalfayan, Benink & Slavens, LLP and can be reached at 619|232-0331; or by email at vslavens@kkbs-law.com.