Update: FINRA Proposed Rule Change Concerning Definition of Public and Non-Public Arbitrators

lawBy Patricia Uceda, Spring 2015 Graduate Research Assistant

As we informed you a couple of months ago, FINRA has filed a proposed rule change (SR-FINRA-2014-028) to amend the definitions of “non-public” arbitrator and “public arbitrator” under Rules 12100 and 131000 of the Customer and Industry Codes. The SEC instituted proceedings to determine whether to approve or disapprove the proposed rule change on October 1, 2014 and requested comments from interested persons. Our Clinic submitted a comment letter on November 6th in opposition of the rule change.

The amendment would provide that persons who worked in the financial industry for any period of their careers would always be classified as non-public arbitrators. It would also provide that persons who represent investors or the financial industry as a significant part of their business would also be classified as non-public arbitrators, but could become public arbitrators after a cooling-off period of five years.

The Clinic’s comment letter expressed our belief that the proposed rule change would serve to diminish the availability of public arbitrators and remove qualified arbitrators with no ties to the industry from the pool of available arbitrators. This is very important to small investors since they may arbitrate their claims before an all-public panel, and the proposed change will decrease the amount of public arbitrators available to hear these types of disputes.

FINRA filed two responses to these comments in support of their proposed rule change. They stated that the public arbitrator pool would not be greatly reduced, and that only 384 public arbitrators out of 3,567 were likely to be effected. They pointed out that the public’s perceptions of neutrality of the public arbitrator roster is imperative to maintaining the integrity of the forum, and that fairness requires that FINRA address concerns of all forum users, industry and investor constituents alike.

The SEC’s time to conclude the proceedings has been extended to February 28, 2015, at which point they should render a decision. We will be sure to keep you informed of the outcome.