(Reuters) - Wall Street veterans would no longer be allowed to act as arbitrators in many legal disputes between investors and their brokerages under a proposal that a U.S. regulator will present to its board on Thursday, a person familiar with the matter said.
The plan by the U.S. brokerage industry self-regulator, the Financial Industry Regulatory Authority (FINRA), would mean that investors could opt to have their cases heard by a panel of three so-called public arbitrators who would not include people who had past industry ties.
That would not only exclude former bankers and brokers but also others, such as lawyers who worked on behalf of brokerages, even for brief periods in their careers, the person said.
FINRA allows people who have been out of the industry for at least five years - but who may have worked in it as many as 20 years - to hear cases as public arbitrators.
Under the plan, these people could instead become "non-public arbitrators," required to have industry experience and typically hear disputes between industry entities.
A spokeswoman at FINRA, which regulates U.S. retail brokerages and runs the securities arbitration forum in which investors and brokerages must resolve their legal disputes, declined to comment.
Of FINRA's 6,400 arbitrators, more than 3,500 are deemed public arbitrators. While it is unclear how many public arbitrators have past industry ties, some lawyers have pegged the figure at about 1,000.
FINRA data shows that there is no significant difference in outcomes of cases decided by solely public arbitrators instead of those with public and non-public arbitrators.
But clients' attorneys have complained that the public arbitrators may have come from Wall Street and therefore have an industry bias. This new proposal would address that concern.
The move would require approval by FINRA's board and then by the U.S. Securities and Exchange Commission.
FINRA's effort to broadly redefine its public arbitrator category marks a major shift for the Wall Street watchdog, which has long grappled with controversy over the issue.
Until 2011, FINRA required arbitration panels to include one non-public arbitrator, but has since changed its rules to let investors choose a panel of all public arbitrators.
In 2013, the regulator excluded people who were associated with hedge funds and mutual funds from being on the public arbitrator roster. FINRA also beefed up its policing of arbitrators last year to detect possible criminal conduct and conflicts, among other issues.
Brokerage industry lawyers have defended arbitrators with industry experience, arguing they have a better understanding of complex financial instruments and industry practices.