(Fixes typographical error in seventh paragraph.)
By Suzanne Barlyn
Jan 28 A proposal to limit when people with
certain ties to the securities industry are called to decide
cases of aggrieved investors is a step in the right direction,
but does not go far enough to please some arbitration lawyers.
Wall Street's industry-funded watchdog wants to exclude
people associated with hedge funds and mutual funds from being
on one of two rosters of people who hear - and decide - legal
disputes between brokerages and their customers. The Financial
Industry Regulatory Authority (FINRA) recently asked the U.S.
Securities and Exchange Commission to approve the measure.
The move, however, does nothing to address a longstanding
controversy over whether those with previous ties to the
securities industry should be allowed to decide cases as "public
arbitrators," a category of FINRA arbitrators who are not
required to have Wall Street experience. Public arbitrators -
who may include other kinds of professionals, like teachers or
interior designers - round out the perspectives of the
three-person panels that decide most cases.
Until recently, FINRA required those panels to include one
non-public arbitrator, who must have significant industry
experience. But since 2011 investors have been allowed, in some
cases, to choose a panel of all public arbitrators. Yet FINRA
allows people who have been out of the industry for at least
five years - and who have worked in it as many as 20 years - to
serve on such panels.
At issue is whether public arbitrators with Wall Street ties
may be biased toward the industry in investor actions. Brokerage
agreements typically require clients to resolve legal disputes
Public arbitrators who have left the securities industry may
still hold sympathetic views toward brokerages, said Robert Uhl,
a securities lawyer in Beverly Hills, California, who represents
"The eye of the needle is fairness and the appearance of
non-bias. That's all the public wants," said Uhl, who is also
director of the Investor Advocacy clinic at Pepperdine
University School of Law.
The most recent plan to bypass people associated with hedge
funds and mutual funds for its public pool is the latest in a
series of measures aimed at improving investor perceptions of
fairness, the regulator wrote in its SEC proposal. (FINRA made
other tweaks to its public arbitrator rules between 2004 and
The plan would also require that other professionals with
specific Wall Street ties, including certain lawyers who have
advised financial companies in investment disputes, wait two
years after ending those affiliations before serving as public
arbitrators. Comments to the SEC are due on Feb. 7.
Of FINRA's 6,000 arbitrator candidates, 3,600 are deemed
public arbitrators. The proposal formalizes a two-year-old
policy and would not affect a significant number of those
presently available, a FINRA spokeswoman said.
FINRA does not track how many of its public arbitrators have
industry experience, but some lawyers say the figure could be
close to 1,000. The regulator does require "cooling off"
periods. For example, non-public arbitrators who leave the
securities industry must wait five years before transitioning to
the public arbitrator list.
Yet the ultimate key to fairness, for many investors'
lawyers, is the amount of time public arbitrators spend in the
securities industry. Some believe public arbitrators should have
no ties to the securities industry, said Scott Ilgenfritz,
president of the Public Investors Arbitration Bar Association
(PIABA), a group of securities arbitration lawyers who represent
investors. Other lawyers have called for a five-year cap on
securities industry affiliations.
Lawyers have different criteria for selecting arbitrators,
depending on their claim, a FINRA spokeswoman said. Some like
arbitrators who understand how the industry works, while others
do not. Lawyers learn of arbitrators' backgrounds during a
selection process and can prevent them from serving, she said.
They can strike a limited number of arbitrators from the
candidate lists they receive. Some lawyers say they must strike
public arbitrators with industry experience in about a third of
Lawyers for brokerages say bias concerns stem from a faulty
assumption that arbitrators with industry ties are inclined to
help brokerages, said Marc Dobin, a lawyer in Jupiter, Florida.
Arbitrators who are knowledgeable about Wall Street are
sometimes even harder on the industry because they understand
certain nuances and procedures, he said. Industry knowledge also
helps the process move more swiftly - a benefit to both parties,
said Terry Weiss, a lawyer for Greenberg Traurig LLP in Atlanta.
Still, FINRA arbitration statistics released for 2012 showed
that in 210 cases it reviewed, customers were awarded damages in
49 percent of cases decided by three public arbitrators. Panels
including an industry-affiliated arbitrator awarded investors
damages in 33 percent of cases.
Thinning the ranks of former industry professionals from the
public arbitrator list would lead to even more favorable
settlements for investors, says Uhl, the Beverly Hills-based
"There's no question that barring any persons who have
significant industry experience will further improve the win
rates," Uhl said.
(Reporting by Suzanne Barlyn; Editing by Jennifer Merritt and