By now, it should be clear, we are oft to criticize FINRA in this blog. Much of that criticism is self-inflicted by, in our view, their unfair or unreasonable decisions. But, in a departure from the norm, I want to recognize an instance when FINRA is getting something right.
Effective this Friday, there will be a new definition of who will be considered a “public” arbitrator. See Regulatory Notice 15-18. Under the current definition, folks like me who represent broker-dealers and their associated persons are considered non-public arbitrators. Essentially, because of my representation, I’m considered an industry insider. What is odd, though, is an attorney who sits on the opposite side of the arbitration table and represents investors is not considered a non-public arbitrator. The impact of this can be profound.
For those of you that don’t know, the arbitrator selection process works like this. FINRA Dispute Resolution provides each party with a list of ten chairpersons, ten public arbitrators and ten non-public arbitrators. From each of the first two lists, the claimant and respondent can strike up to four of the potential arbitrators; from the non-public list, the parties are free to strike as many as they want.  The parties then must rank in order of preference the remaining arbitrators. The chairperson candidates cannot include arbitrators designated as “non-public.” From the lists of ranks and strikes provided by each party, FINRA attempts to compose a three-person panel. In some instances, though, due to conflicts and/or availability, FINRA is unable to create a panel from the names provided to the parties and it must appoint another candidate from its pool of eligible arbitrators. When this happens, the parties have no role in the selection process. But…this can result in the appointment to the panel of an attorney who represents investors for a living.
I’m not exaggerating when I say that the vast majority of lists of potential arbitrators FINRA provides include an attorney that represents claimants in FINRA arbitrations and/or a member of the Public Investors Arbitration Bar Association (PIABA). It is common for us to finish an arbitration hearing, only to find the claimant’s counsel from the previous week’s hearing appear as a potential public arbitrator on the next list we see. Of course, as a matter of routine, we strike those claimant’s attorney-arbitrators. An attorney who represents investors against broker-dealers (often arguing in favor of a fiduciary duty that doesn’t exist) isn’t likely to give a member of the industry any benefit of the doubt.
As a party can only strike four public arbitrators, this provides the customer with a distinct advantage in the ranking process, allowing them to strike other objectionable candidates and rank the biased-claimant’s attorney. The inclusion of claimant’s attorney-arbitrators is particularly troublesome when he/she is appointed by FINRA after the ranking process fails to yield three arbitrators. The representation of claimants is not deemed a conflict by FINRA and, many times, the industry is stuck with these individuals on their panel. Talk about starting with the deck stacked against you!
But on Friday, this practice will come to an end.
The new definition of a non-public arbitrator will include “professionals who regularly represent or provide services to investor parties in disputes concerning investment accounts or transactions.” This means that the industry will no longer find a claimant’s counsel sitting on an arbitration panel deciding their dispute with a customer. Again and again, FINRA seems to succumb to the pressure levied by PIABA and other investor lobbying groups. But in this instance, and despite PIABA’s cries in opposition, FINRA got it right.
 As a result of this ability to strike all non-public arbitrators, claimants are able to dictate that their case be heard by an “all-public” panel, i.e., a panel without anyone from the industry. Since that rule changed in September 2013, the default arbitrator selection process has been the “all-public” arbitrator panel. This means that for a non-public arbitrator to serve on a FINRA arbitration panel involving a customer dispute, the customer must affirmatively indicate that non-public arbitrators should be included on the panel. Since Claimant attorneys view non-public arbitrators as partial to the industry, non-public arbitrators rarely (i.e., never) serve on a panel to decide a customer dispute. Non-public arbitrators, however, still serve on panels involving intra-industry disputes.