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Finra Wants to Expand Arbitrator Pool Choices

Financial Advisor IQ

The securities industry’s self-funded watchdog is moving forward with a rule to bump up the number of arbitrators available to be selected for panels judging claims against brokers.

In a filing to the SEC earlier this month, the Financial Industry Regulatory Authority proposed to increase to 15 from 10 the number of “public” arbitrator candidates available for advisors and claimants to consider when compiling a panel to hear complaints.

At the same time, Finra plans to boost the number of such outside candidates that parties can cross off – or strike – to six from four. The increase is aimed at keeping the same proportion of strikes consistent with an expanded list of potential public arbitrators, say legal experts. (See proposal here.)

While either party can strike an arbitrator, most of the time it’s defense lawyers who use the provision, notes Scott Matasar.

“This new rule will only make the process worse for advisors – it’s going to dilute the quality of the whole arbitration process,” says the Cleveland-based defense attorney who specializes in regulatory issues.

In late 2013, he points out, Finra imposed a new rule that let claimants strike all “non-public” arbitrator candidates. Since non-public arbitrators are characterized as panelists with industry knowledge, Matasar says “in effect, that opened the door for claimants to be heard by panels dominated by arbitrators with only a layman’s understanding of the securities industry.”

Finra’s proposed change is sidestepping a key issue, adds Matasar: the need to create more robust competency guidelines for selecting outside arbitrators.

“My job used to be to help select the most qualified arbitrators,” he says. “Now my job increasingly centers on making sure that I keep the most unqualified candidates off the panel.”

Right now, about 70% of the time parties are choosing all-public panels, notes Rick Berry, who heads Finra’s dispute resolution program. While declining to discuss the group’s new proposed rule change, he did say that generally Finra strives to provide “a wide variety of arbitrators to choose from, not less.”

In claims of $100,000 or more, panels are typically chaired by public arbitrators, according to Finra. As the process currently is set up, parties are given a list of 10 “chair qualified” candidates, and each side is allowed up to four strikes to remove candidates.

Advisors and claimants alike are also provided lists of 10 potential public candidates, again with four strikes per party permitted for each case. Then, another list of 10 non-public names is provided. But that list has no restrictions on strikes allowed.

As a result, supporters of Finra’s proposed new rule see a need for more names of possible teachers, educators and other non-industry professionals to be included in the selection process.

But Craig Zafis, a San Diego, Calif.-based defense lawyer who specializes in working with advisors on regulatory cases, argues that many times outsiders just don’t have enough knowledge of securities law and products to make informed decisions.

“There are some good public panelists, for sure,” he says. “But the per diem – which is due to be raised – still isn’t enough to attract the cream of the crop.”

The pendulum might be shifting too far to the claimant’s’ side, warns Zafis. “I would like to have at least one industry panelist – like it used to be,” he says.

Other industry observers, however, contend that protections are already built into the system to protect against hearings becoming too general in nature.

He served on a 15-member Finra task force which has studied ways to tweak the system.

If approved by the SEC, the proposed language would be published in the Federal Register. A public comments period — typically around three weeks — is expected by regulatory experts to be the next step in Finra’s push to make such a rule change permanent.