Finra proposed on Wednesday to narrow the definition of a public arbitrator, making it impossible for anyone with financial industry experience to qualify for the category.
The move is another step by the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator, to tighten rules surrounding its mechanism for resolving investor disputes with financial firms. The process has come under criticism for favoring Wall Street.
Finra filed the proposal with the Securities and Exchange Commission, which must approval Finra rule changes. Last week, Finra asked the SEC to approve a round of fee increases related to its arbitration process.
Nearly every brokerage customer contract contains a mandatory arbitration clause. The parties choose a three-person arbitration panel from a list of arbitrators provided by Finra. There are a total of 6,392 Finra arbitrators: 3,555 public and 2,837 non-public.
Under Finra's new rule, anyone who has worked in the financial industry for any length of time cannot be classified as a public arbitrator. He or she can only be a non-public arbitrator. Current rules allow industry veterans to join the public list five years after ending their industry affiliation.
“Once Finra classifies an arbitrator as non-public, Finra would never reclassify the arbitrator as public,” the rule filing states. “Under the proposed rule change, there would be no exceptions to this provision.”
Finra also is making it harder for attorneys, accountants and others who devote 20% or more of their professional work representing financial firms or their employees from becoming public arbitrators. Under current rules, they can join the public list two years after they cut industry ties, as long as they have worked less than 20 years total. A tenure longer than 20 years would permanently disqualify them from being public arbitrator.
The new rule would extend the look-back period to five years, broadens the definition to include work for anyone associated with financial firms and permanently disqualifies professionals who have worked longer than 15 total years on behalf of industry clients.
“Finra is increasing the look-back period, and decreasing the number of years before it applies a permanent disqualification to ensure that these individuals are sufficiently removed from their industry affiliation before Finra permits them to serve on the public arbitrator roster,” the rule filing states.
The regulator also is tweaking the rule pertaining to attorneys, accountants and other professionals who devote more than 20% of their professional time to representing investors in securities claims! .
They had been allowed to serve as public arbitrators. Under the new rule, they would be classified as non-public.
They could switch to public five years “after their business mix changes,” as long as they haven't worked a total of more than 15 years, according to the rule proposal. After 15 years, they would stay on the non-public list permanently.
Under the new rule, Finra also would allow professionals affiliated with a mutual fund, hedge fund or investment adviser to serve as non-public arbitrators after a two-year cooling off period. Currently, they can serve as public arbitrators two years after they leave their firms.
Parties involved in an arbitration dispute choose three arbitrators from lists generated randomly by Finra. Last year, the SEC approved a Finra rule making an all-public panel the norm.
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