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Finra Starved For Arbitrators For Complaints

Financial Advisor

Investor plaintiff lawyers are increasingly ditching industry arbitrators in favor of using all-public panels, a trend that is again raising questions about whether Finra has enough public arbitrators to meet demand.

Since 2008, when Finra began a pilot program allowing investors to choose all-public arbitration panels, about half of eligible customers bringing cases have taken advantage of that option.

But that number has trended up of late—to about two-thirds of cases from the beginning of last year through May of this year, according to Finra’s data on decided cases.

Public arbitrators have no connections with the financial industry; non-public arbitrators have either current or recent industry affiliations.

Customer cases have traditionally been heard with one non-public panelist and two public ones. But plaintiff attorneys have never liked the inclusion of what they call the “industry” arbitrator.

“There is a certain perception that the industry arbitration pool is infested with pro-securities industry views,” said plaintiff attorney Andrew Stoltmann of the Stoltmann Law Offices in Chicago.

Consumers’ increasing turn to public panelists prompted Finra on June 22 to propose adding five more public arbitrators to the list of 10 proposed panelists given to parties in arbitration.

To some observers, the move is further evidence that the regulator has found it challenging to provide enough public panelists.

A Bigger Pool

“The pool of public arbitrators needs to be dramatically expanded,” Stoltmann said.
Adding to the problem was a recent rule change that tightened the definition of “public arbitrator” to mean someone who has never had any industry affiliations at any time. Industry and plaintiff attorneys were also recategorized as non-public.

A year ago, Finra began the process of reclassifying nearly 500 public arbitrators to non-public status—a move affecting about 14 percent of its total public pool of 3,567 people.

Before the rule change was implemented, state regulators and the Financial Services Institute, among others, expressed concerns about a diminishing pool of public panelists.

Because the change also put industry defense lawyers and plaintiff attorneys into the non-public category, the number of arbitrators qualified to chair hearings was especially affected, added Robert Banks, a plaintiff lawyer at Samuels Yoelin Kantor in Portland.
“If you’re in the non-public pool, you are not qualified to be a chair,” he said.

Case in point: Banks said seven of the 10 proposed chair-qualified people he got on a recent case were outside his home state of Oregon.

Ryan Bakhtiari, an investor attorney at Aidikoff Uhl & Bakhtiari in Beverly Hills, Calif., and chair of Finra’s National Arbitration and Mediation Committee, feels that the revamped non-public pool might actually relieve some of the demand for public panelists.

“We’re beginning to see a potential change in attitude about using all-public pools,” he said. “I believe [plaintiff lawyers] will be taking another look at the non-public list, which is not just branch managers and industry folks anymore.”

Meanwhile, Finra has been recruiting more public arbitrators.

The regulator “has been very aggressive in its recruitment efforts, which have resulted in a 14 percent increase in public arbitrators in the last year,” said Finra spokeswoman Michelle Ong in an e-mail.

To help attract and retain arbitrators, in late 2014 Finra increased arbitrator pay by 50 percent, to $600 for a full day, and raised hearing fees to cover the cost.

Nevertheless, a year later Finra’s own arbitration task force called for another bump, to $1,000 per day.

The current “below-market-rate … compensation acts as a disincentive in the recruitment of arbitrators and in the commitment of substantial time by arbitrators in executing their responsibilities,” said the task force, which included representatives from both the industry and plaintiff bar.

Finra should give improved pay its “highest priority” the task force said.