FINRA arbitrators—neutral, qualified individuals—serve as
decision makers, weigh the facts of each case presented and render a final and
binding decision. Arbitrators have long been classified as “public” or “non-public.”
Public arbitrators are individuals who are not required to have knowledge of
the securities industry, but often do. Non-public arbitrators are individuals
who have worked in the financial industry or regularly provide services to
brokers, broker-dealers, their customers, and others in the financial industry.
But the line-drawing exercise delineating who qualifies as
“public” or “non-public” is fairly arbitrary, and often excludes qualified
neutrals who fall through the cracks in that they are not primarily financial
industry professionals, but also for one reason or another do not meet the
“public” definition. The proposed rule change aims to cure this problem.
Some history on arbitrator classifications sets the stage
for the recent change. In 2015 the SEC
approved amendments to the definition of non-public arbitrators and public arbitrators.
Among other things, the amendments provided that persons who worked in the
financial industry at any point in their careers would always be classified as
non-public arbitrators. The amendments also
added new disqualifications to the public arbitrator definition relating to an
arbitrator’s provision of services to parties in securities arbitration and
litigation and to revenues earned from the financial industry by an arbitrator’s
co-workers. The amendments also broadened disqualifications based on the activities
or affiliations of an arbitrator’s family members. The proposed rule change was
intended to address concerns about arbitrator neutrality.
A key focus of the 2015 amendments was the elimination of
certain individuals from the public arbitrator roster. However, FINRA’s intent
was not to prevent these individuals from serving in any capacity. Many
arbitrators or arbitrator applicants who formerly qualified to serve as public
arbitrators are now unable to serve even as non-public arbitrators. As a result,
the pool of eligible arbitrators has decreased.
FINRA has turned away many candidates who would have been eligible to
service but for the 2015 amendments.
On July 10, 2017, FINRA
filed a proposed rule change with the SEC, (SR-FINRA-2017-025),to revise the
non-public arbitrator definition. Specifically, the proposal would define a
non-public arbitrator to mean a person who is otherwise qualified to serve as
an arbitrator, and is disqualified from service as a public arbitrator under
the Codes. The proposed rule change would expand
the pool of candidates eligible to serve as non-public arbitrators. The change
would permit these previously eligible persons to serve as non-public
arbitrators.
A practical
result of the rule change will be that parties skeptical of “non-public”
arbitrators should take a closer look.
The roster of non-public arbitrators is likely to include an increasing
number of neutrals with limited “industry” background, but who for one reason
or another do not qualify as “public.”
For example, a well-qualified former judge affiliated with a larger law
firm may not qualify as “public” if the law firm has any significant financial
industry clients, as is likely, but may be impeccably qualified and neutral to
a fault.
