Over the years, to respond to criticism that its arbitrators are biased in favor of the securities industry, FINRA has implemented a series of reforms to its arbitration rules. It tweaked the definition of “public” and “non-public” arbitrators (the two classifications FINRA uses) to decrease the chance that a “public” arbitrator would have any affiliation with the securities industry, it adjusted the composition of panels in customer cases to guarantee an investor an “all-public” panel, and it improved methods of arbitrator selection to increase choice for disputants (i.e., increased number of strikes; “short list” selection). The two animating principles behind these reforms were increased party choice of neutrals and ensuring neutrality – both actual and perceived – of panelists. FINRA justified the dual classification system as a means to make available to parties arbitrators with expertise in the practices of the securities industry who could apply industry norms and practices to the decision (labeled by FINRA as the non-public arbitrator, but known by practitioners as the “industry” arbitrator).
Most recently, FINRA has filed a rule change proposal with the SEC to once again change the definitions of the two classifications. For the first time, however, it has proposed that an attorney who represents investors in securities disputes be classified as “non-public.” If the SEC approves the proposal, FINRA’s “non-public” arbitrator roster will include arbitrators without industry expertise or experience. This proposal appears to place at a premium (rather than balance equally) the animating principle of actual and perceived neutrality at the expense of party choice of neutrals. But the more “neutral” an arbitrator is (because of his or her distance from the subject matter of and parties to the dispute), the less expertise the arbitrator has in the subject matter of the dispute.
In my view, this is a perversion of the whole purpose of FINRA’s arbitrator classification system. Arbitration is supposed to be a private dispute resolution process using third-party neutrals who have — if the parties choose — expertise in the subject matter of the dispute. If the arbitration forum cannot supply neutrals with expertise, then the parties don’t get one of the primary benefits of arbitration. The forum should throw in the garbage its classification system and start from scratch with just one roster of arbitrators, and add far more party choice (via a larger list; more strikes; easier challenges for cause, etc.). If the forum insists on having two arbitrator classifications, it should call a spade a spade and label them “expertise” and “novice.”
George Friedman, formerly of FINRA Dispute Resolution, in his comment letter to the rule proposal (in the form of an article), offers this and additional persuasive arguments why this rule proposal is a bad idea. The SEC should take heed.
