October 2, 2014 / 5:47 PM / 5 years ago

U.S. SEC to take deeper look at Wall St arbitration reform plan

Oct 2 (Reuters) - The U.S. Securities and Exchange Commission is taking the unusual step of extending its review of a plan to restrict industry veterans from serving as arbitrators in many legal disputes between investors and brokerages, citing questions about whether the proposal complies with securities laws.

The plan to revamp how arbitrators are selected was filed by the Financial Industry Regulatory Authority (FINRA) in June and must be approved by the SEC before it becomes a final rule.

The plan “raises questions” about whether it is in line with laws that require FINRA rules to protect investors, among other things, the SEC said in a notice published on Wednesday seeking additional input from the public.

FINRA, Wall Street’s industry-funded regulator, runs the mandatory arbitration system used by brokerages and investors to resolve legal disputes. Its proposal would tighten limits on those eligible to serve as “public arbitrators,” excluding those who have worked in the securities industry, even for brief periods.

Investors who bring claims against brokers are allowed to have their cases heard by panels composed solely by public arbitrators, a category that currently includes individuals who do not presently work in the securities industry but who may have earlier in their careers.

The SEC’s deeper review is an unusual step that may signal the proposal is in jeopardy, said George Friedman, an arbitration consultant and former director of FINRA’s arbitration unit.

The SEC solicited an earlier round of public input that ended in July. The SEC said in the notice that its review does not mean it has reached any conclusions about the plan. Strict timelines set by the Dodd-Frank financial reform law require the SEC to conduct the additional proceeding if it does not rule on a proposal within a certain time frame.

A FINRA spokeswoman declined to comment.

In the initial round of public input, some lawyers said the proposal could leave FINRA without enough qualified arbitrators, according to letters posted on the SEC’s website. Other critics said FINRA had not adequately analyzed the proposal’s costs and benefits.

In a letter to the SEC dated Sept. 30, FINRA said it is “confident” it has enough public arbitrators and is trying to recruit more.

FINRA would need to survey all of its 3,567 public arbitrators to determine the exact number whom the rule would exclude, wrote Margo Hassan, assistant chief counsel of FINRA’s arbitration unit. “If the SEC approves the proposed rule change, FINRA will conduct such a survey,” she wrote.

A review by FINRA of its arbitrator database found that roughly 10 percent of its 3,567 public arbitrators had either held a securities license at some point or had other affiliations with firms, according to the Sept. 30 letter. The nature of that review, and how it would differ from a future survey, are unclear.

Nonetheless, the interim analysis may not be enough to satisfy the SEC, Friedman said.

“I think when you are proposing a fundamental change to how arbitrators are classified, you do the comprehensive analysis before, not after, it is approved,” Friedman said in an email.

Comments to the SEC will be due within 45 days from when the SEC’s notice appears in the Federal Register. (Reporting by Suzanne Barlyn; editing by Linda Stern and Leslie Adler)

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