Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, January 14, 2013

FINRA Proposes to Tighten Definition of "Public Arbitrator"

FINRA has filed with the SEC a proposed rule change that would further tighten the definition of a "public arbitrator" to exclude persons associated with a mutual fund or hedge fund from serving as public arbitrators and to require individuals to wait for two years after ending certain affiliations before they may be permitted to serve as public arbitrators. FINRA believes that the proposed changes "would improve investors’ perception about the fairness and neutrality of FINRA’s public arbitrator roster."  FINRA has amended the definition of public arbitrator a number of times since 2004 to exclude from the definition individuals with connections to the securities industry.  In the accompanying release, FINRA states that recently investor representatives have raised concerns that they do not perceive certain arbitrators as public because of their background or experience.  This proposed rule change is in response to those concerns.  Although the public arbitrator definition does not expressly prohibit individuals associated with mutual funds and hedge funds from serving as public arbitrators, FINRA believes that, because of their association with the financial services industry, they should not serve as public arbitrators.  Its current practice is to exclude these individuals from the public roster.

FINRA also proposes to add a two-year "cooling off" period before FINRA permits certain individuals to serve as public arbitrators.  This change would affect, among others, attorneys, accountants and other professionals whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to certain financial industry entities relating to any customer disputes concerning investments.  Under the current rule, the individual may begin serving as a public arbitrator as soon as the individual ends the affiliation that was the basis for the exclusion.  FINRA notes that in one instance an individual applied to be a public arbitrator just one month after retiring from a lengthy career at a law firm that represented securities industry clients. (Download 34-68632[1])

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