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Finra delays decision on public arbitrators

8/5/2014

InvestmentNews

The Securities and Exchange Commission will not act until at least this fall on a Finra proposal that would limit the number of people who qualify as public arbitrators to settle investor disputes.

On July 3, the Financial Industry Regulatory Authority Inc. published the rule in the Federal Register. At that point, the SEC had 45 days to make a decision on the measure. But on Monday, Finra extended the deadline to Oct. 1.

The SEC must approve all rule proposals made by Finra, the industry-funded broker-dealer regulator.

The delay is designed to give the SEC more time to sift through the 20 comment letters it has received on the proposal.

“There’s been a lot of interest in this rule, and that’s what gives rise to this delay — to give the SEC and Finra time to really study the comments,” said Ryan Bakhtiari, a partner at Aidikoff, Uhl & Bakhtiari and chairman of Finra’s National Arbitration and Mediation Commission.

The delay does not signal that the proposal is in jeopardy, according to George Friedman, owner of an eponymous consulting firm and director of Finra arbitration from 1998-13. Under the Dodd-Frank financial reform law rules, the SEC is put on a tight deadline to act on proposals from self-regulatory organizations such as Finra. In this case, the agency needs more breathing room.

“It’s benign,” Mr.Friedman said of the delay. “It just means they need more time given how complicated the filing is and the scope of the various comments they received.”

The next step likely is Finra’s response to the comments rather than an SEC decision on approval or disapproval of the rule.The rule, designed to address the perception of bias in the three-person arbitration panels that adjudicate investor claims against brokerages, would prohibit anyone who has ever worked in the securities industry from serving as a public arbitrator. They would instead be classified as “nonpublic” arbitrators. Under current Finra rules, people with an industry affiliation can join the public roster five years after leaving the industry.

The kicker for investor advocates is that the rule also would not allow attorneys, accountants or other professionals who have devoted 20% or more of their time to industry — or investor — clients over the past five years from serving as public arbitrators. It would also bar them from that category permanently if they have worked in that capacity for 15 years or more.

Comment letters to the SEC highlight the rift caused by classifying investor advocates the same way as people with an industry background.

In a July 24 letter, Andrea Seidt, Ohio securities commissioner and president of the North American Securities Administrators Association, wrote that those representing investors “provide a distinctly public perspective to arbitration claims and should be allowed to serve on panels as public arbitrators.”

Ms. Seidt said the Finra arbitration process — which is mandatory in almost all customer agreements at brokerage firms — is already thought to be tilted toward the industry.

“Any effort to strike or dilute what few investor-friendly components exist to counterbalance the perceived inequity of the system should be highly scrutinized with a critical eye by the commission,” Ms. Seidt wrote.

The Securities Industry and Financial Markets Association, the major Wall Street trade association, backs the rule because it treats investor and industry attorneys the same.

“These two major proposed rule changes address opposite sides of the same coin,” Kevin Carroll, SIFMA managing director and associate general counsel, wrote in a July 24 comment letter. “In doing so, the proposal appropriately recognizes that arbitrator bias has the potential to run in either or both directions.”

Jenice L. Malecki, owner of Malecki Law, said the rule “helps to clean [the arbitrator] pool and make it much clearer in terms of where the lines of demarcation are.”

Ms. Malecki said the rule is a “step in the right direction” and that it is OK for the SEC to take a few extra weeks of deliberation.

“We would like the rule to go into effect sooner rather than later, but we don’t think it’s an unreasonable delay,” Ms. Malecki said.

Mr. Bakhtiari agrees that this latest rule establishes a “bright line” between public and nonpublic arbitrators.

“Public really means public now,” he said.

Finra has been trying to reform the arbitration system for years, including implementing a rule that makes all-public arbitration panels the default approach to adjudication. Currently, there are 6,398 arbitrators in the Finra pool, with 3,562 public and 2,836 nonpublic.


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