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New FINRA Rule to Have ‘Detrimental Impact’ on Arb Process: Sutherland

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The Securities and Exchange Commission’s recent approval of the Financial Industry Regulatory Authority’s rule stating that individuals who worked in the financial industry for any duration will be called nonpublic arbitrators “will have a detrimental impact on FINRA’s arbitration process,” argues S. Lawrence Polk, partner with Sutherland Asbill & Brennan.

FINRA’s rule amends the customer and industry codes of arbitration procedure to refine and reorganize the definitions of “nonpublic” and “public” arbitrator.

As it stands now, FINRA has 3,567 approved public arbitrators, Polk says, and the new rule will “disqualify a significant number of arbitrators from a ‘public’ classification.”

According to the SEC’s approval order, FINRA estimates that only 13% of current public arbitrators will be disqualified, however, Polk says that he believes it’s more likely that “25% of the pool will be disqualified,” resulting in an “insufficient number of arbitrators to hear and decide upcoming disputes, especially in smaller hearing locations where there already are a limited number of available arbitrators.”

Considering that approximately 85% of FINRA customer arbitrations are heard by all-public panels, “it will be very difficult if not impossible for FINRA to provide public arbitrators for all of the upcoming hearings, especially if there is another market disruption leading to a spike in new filings such as we saw during the ‘research case’ era, or in the aftermath of the 2008 financial crisis,” Polk says.

FINRA’s new rule 12100(p)(2) will permanently disqualify from serving as a public arbitrator persons (including attorneys) who previously represented broker-dealers, whereas proposed new rule 12100(p)(3) does not permanently disqualify a claimants attorney from serving as a public arbitrator; that person would be allowed to resume serving as a public arbitrator five years after they stopped devoting 20% of their professional time to representing claimants.

Polk says that it’s “illogical to permanently disqualify as a public arbitrator an attorney who has represented a financial institution, yet allow a similar attorney who represents claimants to return to the pool after a ‘cooling off’ period.”


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