SEC Seeks Additional Public Comments Over Proposed Changes to Who May Serve as a FINRA Public Arbitrator

On October 1st, the nation’s Securities and Exchange Commission (“SEC”) reportedly extended its review of a Financial Industry Regulatory Authority (“FINRA”) proposal to revamp how public arbitrators are selected in disputes between brokerages and consumers. Currently, securities industry veterans may serve as a public arbitrator on a FINRA panel following a prescribed “cooling-off” period. The proposed “Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Change Relating to Revisions to the Definitions of Non-Public Arbitrator and Public Arbitrator” would permanently exclude former industry employees from serving in such a capacity regardless of how long the individual was employed in the profession.

According SEC Release No. 34-73277,

Currently, FINRA Rule12100(p)of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and FINRA Rule 13100(p)of the Code of Arbitration Procedure for Industry Disputes (“Industry Code”) (collectively, “Codes”) define the term “non-public arbitrator;” and FINRA Rule 12100(u) of the Customer Code and Rule 13100(u) of the Industry Code” define the term “public arbitrator.” In general, the Codes classify arbitrators as “non-public” or “public” based on their professional and personal affiliations. Individuals affiliated with the financial industry are typically considered “non-public arbitrators.” Individuals unaffiliated with the financial industry are typically considered “public arbitrators.”

FINRA is now proposing to amend the Codes to revise and reorganize the definitions of “non-public arbitrator” and “public arbitrator.” The amendments would, among other matters, provide that persons who worked in the financial industry for any duration during their careers would always be classified as non-public arbitrators. The amendments 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. The amendments would also reorganize the definitions to make it easier for arbitrator applicants and parties, among others, to determine the correct arbitrator classification.

After receiving more than 300 comments on the proposal, the SEC made the rare decision to extend the written public comment period until October 31st. The FINRA proposal may not become a final rule unless it is formally approved by the SEC.

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