Monday, March 2, 2015

New Arbitrator Rule - Customer and Firm Attorneys are No Longer Public Arbitrators

The SEC has approved a FINRA rule proposal which will dramatically change the composition of arbitration panels. For years attorneys who solely represent customers have been complaining that there are too many arbitrators with ties to the securities industry. From there, the argument assumes that those arbitrators will violate their duty, their obligations, and their oaths, and rule in favor of the brokerage firm involved in the dispute.

This argument is on its face outrageous, and an affront to the thousands of arbitrators who serve on arbitration panels. Coupled with the fact that customers win a significantly higher percentage of cases in FINRA arbitrations than they do in court, the argument is also specious, and self-serving.

There were hundreds of comment letters submitted, most of them from attorneys who spent their entire careers representing customers - for a percentage of the recovery. Their own bias in the process is clear, and there were many commentators who argued if we are going to assume that a former industry employee or attorney is biased, shouldn't we be assuming that attorneys who spend their time suing firms are also biased?

Let me repeat - I do not agree with this bias argument for a second. I have appeared before hundreds of arbitrators, and with a rare exception, I have found that FINRA arbitrators are dedicated to their role in the process, and are a fair and unbiased as anyone could possibly expect. I have appeared before one or two who seemed to be biased, but I have also appeared before judges who appeared to be biased.

Regardless, FINRA modified its rule proposal, and the SEC approved it. Industry employees are not public arbitrators. Attorneys who represent industry participants, and attorneys who represent customers against industry participants are also not public arbitrators.

Good for the goose is good for the gander? I suppose, but now we have the problem of a lack of qualified arbitrators. Think about it, at the urging of the customer attorneys, FINRA has just lessen the odds of having an attorney who has knowledge of the securities laws as an arbitrator in securities cases.

These attorneys can still serve as arbitrators, if the customer decides to use an industry panel. We will have to see how this plays out, but we can expect to see an increased cost for all parties, as the need for expert witnesses will substantially increase going forward
The rule approval is available at
The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We are all now considered to be non-public arbitrators, despite our decades of experience in securities arbitrations, Fortunately, our expertise is still available to our clients - brokers, advisers, and the truly aggrieved investor. For more information call 212-509-6544 or send an email.