FINRA board approves plan to simplify selecting arbitrators

Sat Apr 20, 2013 12:34am IST

Traders react as SeaWorld Entertainment begins trading following the company's IPO at the New York Stock Exchange, April 19, 2013. REUTERS/Brendan McDermid

Traders react as SeaWorld Entertainment begins trading following the company's IPO at the New York Stock Exchange, April 19, 2013.

Credit: Reuters/Brendan McDermid

(Reuters) - The Financial Industry Regulatory Authority's board approved a proposal that could simplify the process for investors choosing arbitrators who hear disputes against securities brokerages, according to a letter posted Friday on FINRA's website.

The board, in a meeting on Thursday, authorized FINRA to send the arbitration proposal to the Securities and Exchange Commission, which must review and approve all changes to FINRA's rules, according to the letter to brokerages.

Agreements to open a brokerage account usually require investors to resolve future legal disputes with firms in FINRA's arbitration unit instead of going to court. FINRA runs the forum where investors and brokerage firms resolve those cases.

A three-person FINRA arbitration panel hears cases filed by brokerage customers involving disputes over $100,000 or more. Under current rules, investors must decide when filing the case whether to have a panel in which one arbitrator has Wall Street ties, or a panel with three "public arbitrators," a category of arbitrators who do not need to have industry experience.

Under the proposed rule, the parties would skip that step and begin to select arbitrators from the outset. All parties would choose from three lists of potential arbitrators, including 10 eligible to be the panel's chairman, 10 public arbitrators, and 10 with industry ties, according to FINRA's letter. A party would be able to select a panel of all public arbitrators by rejecting all arbitrators with industry ties.

Lawyers for investors have long expressed concern that arbitrators with Wall Street ties may show bias toward the industry in investor's cases. But other lawyers say that industry expertise can be helpful to both parties, especially in cases about complex securities.

The proposed rule change helps investors because they will not risk having their case heard by an arbitrator with Wall Street ties simply because they did not select the all-public arbitrator option at the start, said Scott Ilgenfritz, president of the Public Investors Arbitration Bar Association, a group of lawyers who represent investors in securities arbitration cases.

That scenario is more likely to happen among investors who represent themselves, he said. Nonetheless, they will still need to know under the new process to reject the industry-affiliated arbitrators in order to choose an all-public panel, Ilgenfritz said. Investors would need an explanation from FINRA about that process, said Ilgenfritz.

A FINRA spokeswoman was not able to immediately comment on further specifics of the proposal.

(Reporting by Suzanne Barlyn; editing by Andrew Hay)