FINRA’s Reclassification of Arbitrators
Overview
Who sits in judgment? What are their qualifications? How involved have they been in the securities industry? Since the 1980s, when securities arbitration changed from a voluntary to a mandatory process, practitioners, administrators and regulators have focused on arbitrators and their obligation to be as conflict-free as possible, in fact and but largely in appearance. In 2015, the SEC approved FINRA’s changes to the definition of its arbitrators, which errs on the side of the highly restrictive exclusion from the “public arbitrator” category of anyone who could possibly be considered to be involved with or influenced by the securities industry, whether as a current or former employee of a securities firm or as an attorney representing customers, brokers and/or firms.
Who is a Public Arbitrator and Who is a Non-Public Arbitrator (Rule 12100)?
Non-Public Arbitrator (known more commonly as an Industry Arbitrator)
(1) Securities Industry Association-Is or was associated with, including registered through, under or with:
(A) Brokerage Firms – A broker or a dealer (including a government securities broker or dealer or a municipal securities broker or dealer); or
(B) Commodities – The Commodity Exchange Act or the Commodities Future Trading Commission or a member of the National Futures Association or the Municipal Securities Rulemaking Board; or
(C) Investment Advisors – An entity that is organized under or registered pursuant to the Securities Exchange Act of 1934, Investment Company Act of 1940 or the Investment Advisers Act of 1940; or
(D) Mutual Funds – A mutual fund or a hedge fund; or,
(E) Investment Advisor – An investment adviser;
(2) Professionals – An attorney, accountant, or other professional who has, within the past five years, devoted 20% or more of his or her professional time, in any single calendar year, to any entities listed in paragraph (p)(1) and/or to any persons or entities associated with any of the entities listed in paragraph (p)(1); or
(3) Representatives – An attorney, accountant, expert witness, or other professional who has, within the past five years, devoted 20% or more of his or her professional time, in any single calendar year, to representing or providing services to parties in disputes concerning investment accounts or transactions or employment relationships within the financial industry; or
(4) Financial Institution Employee – Is, or within the past five years was, an employee of a bank or other financial institution who effects transactions in securities, including government or municipal securities, commodities, futures, or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities.
Public Arbitrator
A person who is otherwise qualified to serve as an arbitrator and is not disqualified from service as an arbitrator, as enumerated by any of the criteria below.
Permanent Disqualifications Based on a Person’s Own Activities – A person shall not be designated as a public arbitrator who is or was:
(1) Associated with, including registered through, under or with:
(A) Brokerage Firms – A broker or a dealer (including a government securities broker or dealer or a municipal securities broker or dealer); or
(B) Commodities – The Commodity Exchange Act or the Commodities Future Trading Commission or a member of the National Futures Association or the Municipal Securities Rulemaking Board; or
(C) Investment Advisors – An entity that is organized under or registered pursuant to the Securities Exchange Act of 1934, Investment Company Act of 1940 or the Investment Advisers Act of 1940; or
(D) Mutual Funds – A mutual fund or a hedge fund; or,
(E) Investment Advisor – An investment adviser;
(2) Professionals – For a total of 15 years or more, an attorney, accountant, or other professional who has devoted 20% or more of his or her professional time annually, to any entities listed in paragraph (u)(1) and/or to any persons or entities associated with any of the entities listed in paragraph (u)(1).
(3) Representatives – For a total of 15 years or more, an attorney, accountant, expert witness, or other professional who has devoted 20% or more of his or her professional time annually to representing or providing services to parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry.
(4) Financial Institution Employee – For a total of 15 years or more, an employee of a bank or other financial institution who effects transactions in securities, including government or municipal securities, commodities, futures, or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities.
Temporary Disqualifications Based on a Person’s Own Activities
(1) Controlled Company – A person shall not be designated as a public arbitrator who is employed by or is a director or officer of an entity that directly or indirectly controls, is controlled by or is under common control with any partnership, corporation, or other organization that is engaged in the financial industry unless the affiliation ended more than five calendar years ago.
(2) Professionals – A person shall not be designated as a public arbitrator who is an attorney, accountant, or other professional who has devoted 20% or more of his or her professional time, in any single calendar year, to any entities listed in paragraph (u)(1) and/or to any persons or entities associated with any of the entities listed in paragraph (u)(1) unless the calendar year ended more than five calendar years ago.
(3) Responsibilities – A person shall not be designated as a public arbitrator who is an attorney, accountant, expert witness, or other professional who has devoted 20% or more of his or her professional time, in any single calendar year, to representing or providing services to parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry unless the calendar year ended more than five calendar years ago.
(4) Financial Institution Employee – A person shall not be designated as a public arbitrator if the person is an employee of a bank or other financial institution and the person effects transactions in securities, including government or municipal securities, commodities, futures, or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities unless the affiliation ended more than five calendar years ago.
Temporary Disqualifications Based on the Activities of Others at a Person’s Employer
(1) Annual Revenue Metric Working for Industry – A person shall not be designated as a public arbitrator who is an attorney, accountant, or other professional whose firm derived $50,000 or more or at least 10% of its annual revenue in any single calendar year during the course of the past two calendar years, from any entities listed in paragraph (u)(1) and/or to any persons or entities associated with any of the entities listed in paragraph (u)(1), or from a bank or other financial institution where persons effect transactions in securities including government or municipal securities, commodities, futures, or options.
A person whom FINRA would not designate as a public arbitrator under this subparagraph shall also not be designated as a public arbitrator for two calendar years after ending employment at the firm.
(2) Annual Revenue Metric for Investor Representatives – A person shall not be designated as a public arbitrator, who is an attorney, accountant, or other professional whose firm derived $50,000 or more or at least 10% of its annual revenue in any single calendar year during the course of the past two calendar years, from individual and/or institutional investors relating to securities matters.
A person whom FINRA would not designate as a public arbitrator under this subparagraph shall also not be designated as a public arbitrator for two calendar years after ending employment at the firm.
Temporary Disqualification Based on the Financial Industry Affiliation of an Immediate Family Member (FINRA’s rule defines FINRA’s rule defines the term “immediate family member” to mean: (A) a person’s spouse, partner in a civil union, domestic partner, parent, stepparent, child, or stepchild; (B) a member of a person’s household; (C) an individual to whom a person provides financial support of more than 50% of his or her annual income; or (D) a person who is claimed as a dependent for federal income tax purposes.)
(1) Family Ties – A person shall not be designated as a public arbitrator if his or her immediate family member is an individual whom FINRA would disqualify from serving on the public arbitrator roster.
If the person’s immediate family member ends the disqualifying affiliation or the person ends the relationship with the individual so that the individual is no longer the person’s immediate family member, the person may, after two calendar years have passed from the end of the affiliation or relationship, be designated as a public arbitrator.