[ by Howard Haykin ]

Can a person with Wall Street experience serve as a "Public Arbitrator?"

Should a person with Wall Street experience be allowed to serve as a "Public Arbitrator?"

Until recently, cases initiated by customer complaints against a brokerage firm and/or its associated persons, usually required 3 arbitrators – 2 public arbitrators and one non-public arbitrator who must have significant industry experience.  Here, the public arbitrators are not permitted to have past Wall Street experience.

Now, however, when an investor chooses to have an all-public arbitrator panel hear the case – a practice that began in 2011 - FINRA Dispute Resolution will allow a Public Arbitrator with past Street experience to serve on the panel – so long as that individual::

• Has been out of the industry for at least 5 years;  and,
• Worked in the securities industry for no more than 20 years.

Current Proposal.   Wall Street's industry-funded watchdog is recommending that FINRA adopt a proposal that would 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.  FINRA recently asked the SEC to approve the measure.  That proposal is a step in the right direction, but not far enough for some arbitration lawyers.

There need to be certain restrictions on those one-time Wall Streeters who would serve as public arbitrators.  California securities lawyer Robert Uhl believes that public arbitrators who at one time worked on Wall Street, may still hold sympathetic views toward brokerages.  Mr. Uhl adds:  "The eye of the needle is fairness and the appearance of non-bias. That's all the public wants."

Another Proposal Under Consideration.   In addition to the above plan that would bypass people associated with hedge funds and mutual funds for the FINRA public pool, there is a plan that would require certain professionals with specific Wall Street ties - e.g., certain lawyers who have advised financial companies in investment disputes - to wait 2 years after ending those affiliations before serving as public arbitrators.  The SEC comment period just ended, so a decision may soon be made.  FINRA would have little or no concern with this plan because it would not cause a shortage in the number of arbitrators who are available to hear cases.   Presently, FINRA has 6,000 arbitrator candidates - 3,600 of whom are deemed public arbitrators.

Some Statistics to Chew On.   Based on FINRA arbitration statistics released for 2012 showed that, in a review of 210 cases,

• Customers were awarded damages in 49% of cases decided by 3 public arbitrators.
• Customers were awarded damages in 33% of cases when the panel included an industry-affiliated arbitrator.

So, on a non-scientific basis, it would appear that thinning out the ranks of industry (non-public) arbitrators may make forum conditions more beneficial to customers/investors. 

For further details, go to:  [Reuters, 1/28/13].