Update: SEC Approves Proposed Rule Change Regarding Definition of Public and Non-Public Arbitrators

By Patricia Uceda, Spring 2015 Graduate Research Assistant

As you may recall, last year FINRA filed a proposed rule change (SR-FINRA-2014-028) to amend the definitions of “non-public” arbitrator and “public arbitrator” under Rules 12100 and 13100 of the Customer and Industry Codes.

The amendment proposed that persons who worked in the financial industry at any point in their careers would always be classified as non-public arbitrators as would persons who assist parties in certain investment disputes for 20% or more of their professional time (though they could become public arbitrators after a cooling-off period of five years). This latter category would move attorneys who represent investors in securities arbitration matters from the public arbitrator pool.

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 because it was our belief that the proposed rule change would only serve to diminish the availability of public arbitrators and remove qualified arbitrators with no ties to the industry from the pool of available public arbitrators.

FINRA filed two responses assuring commenters that the public arbitrator pool would not be greatly reduced. They stated that the public’s perceptions of neutrality of the public arbitrator roster is imperative to maintaining the integrity of the forum, and that these changes will serve to lessen perceptions of bias in the forum for all participants.

The SEC rendered a final decision on February 26th approving the rule change, finding that it was consistent with the goals and purposes of federal securities law. They stated that the proposed rule change adequately and fairly addressed concerns regarding the perceived neutrality of the public arbitrator roster raised by both investor representatives and financial industry representatives, and that it would help maintain the neutrality and integrity of the arbitration forum.