SEC Approves FINRA's Proposed Amendments to Customer and Industry Code Definitions of Non-Public Arbitrator and Public Arbitrator

Securities Law Alert

On February 26, 2015, the Securities and Exchange Commission (“SEC”) approved FINRA’s proposed amendments to the definitions of non-public arbitrator and public arbitrator contained in Rule 12100(p) and (u) of the FINRA Code of Arbitration Procedure for Customer Disputes and Rule 13100(p) and (u) of the FINRA Code of Arbitration Procedure for Industry Disputes. See http://www.sec.gov/rules/sro/finra.shtml at SEC Release No. 34-74383, File No. SR-FINRA-2014-028. Among the more significant changes to the rules which the SEC has approved are that: (i) a person who was associated with a securities broker-dealer at any point during her career will now be permanently classified as a non-public arbitrator, thereby eliminating the five year cooling off period; (ii) a person who was employed by a bank or other financial institution who effects securities transactions or supervises or monitors the compliance of such employees will now be subject to a five year cooling off period before she can be classified as a public arbitrator, except that any such person who was employed in such capacity for a total of 15 non-consecutive years will now be permanently classified as a non-public arbitrator; (iii) an attorney, accountant or other professional who has devoted 20% or more of her professional time in a single calendar year to representing or providing services to securities broker-dealer clients will now also be subject to a five year cooling off period before she can be classified as a public arbitrator, except that any such person who has devoted 20% of her time annually to representing or providing services to securities broker-dealers will now be permanently classified as a non-public arbitrator where such person provided such services for a period of 15 non-consecutive years; and (iv) an attorney, accountant, expert witness or other professional who has devoted 20% or more of her professional time in a single calendar year to representing or providing services to investors in securities cases or associated persons in employment cases will now likewise be subject to a five year cooling off period, except that any such person who has devoted 20% of her time annually to representing or providing services to such individuals will now similarly be permanently classified as a non-public arbitrator where such person provided such services for a period of 15 non-consecutive years.

In approving the proposed amendments, the SEC concluded that “the proposed rule change would help to address any perceived bias of public arbitrators …,” finding that “the public interest would be served by addressing concerns of fairness and neutrality for all forum users.” SEC Release No. 34-74383 at 39. In response to the concern that reclassifications of public arbitrators as non-public arbitrators caused by the rule changes “may temporarily reduce the number and quality of the public arbitrator pool …,” the SEC preliminarily found FINRA’s plan to engage in “aggressive arbitrator recruitment” of public arbitrators to “mitigate such delays [to be] appropriate….” Id. at 39-40 and 41. The SEC did, however, leave the door open to future review of the amended rule in the wake of the concern that FINRA did not perform a cost-benefit analysis prior to proposing the rule changes and FINRA’s representation that it would “perform future cost-benefit analysis to prevent burdening its arbitrators prior to the effectiveness of the proposed new rule change.” Id. at 42-43. Observing that it “will be interested in the results of FINRA’s future cost-benefit analysis,” the SEC concluded that “the staff will monitor the consequences of approval of the proposed rule change.” Id. at 43.

For more information, please contact David J. Libowsky.