July 24, 2014
I am the immediate past FINRA Director of Arbitration, having retired in 2013. I submit this comment with respect to SR-FINRA-2014-28 (Proposed Rule Change Relating to Revisions to the Definitions of Non-Public Arbitrator and Public Arbitrator). For the reasons articulated below I believe the proposed rule as drafted now needs more work and should not be approved.
Arbitrator classification is an important and challenging issue. This rule proposal is clearly well-intended but in my opinion it could have negative consequences if approved. Rather than articulate here at length my concerns, I submit (comments attached) an attachment an article I authored on the proposed rule, "The Camel and the Last Straw or the Frog and the Boiling Water: Pick Your Parable," that will be published as the lead article in early August in the Securities Arbitration Commentator. It is being released in advance with the permission of and thanks to its publisher, Richard Ryder.
In short, I suggest FINRA go back to the drawing board:
1) Keep it Simple. The arbitrator classification system, as it exists and as it may exist in the future, is a complicated mousetrap with many moving parts. I urge FINRA to try to keep things simple, something that can only help parties, arbitrators, and staff. A reasonably good model to emulate is the AAA's Securities Arbitration Supplemental Procedures, where arbitrators must fall into one of two categories, affiliated with the securities industry or not affiliated with the securities industry, or they can't be arbitrators.
2) Move to pure public arbitrators as the rule proposes but do not designate all newly-reclassified arbitrators as non-public. Move these arbitrators to a can't be an arbitrator category. This is similar to how the Codes now handle individuals like spouses of brokers, or others disqualified from being public but who don't otherwise qualify as non-public.
3) Do not keep arbitrators non-public forever. Move arbitrators to the no-mans-land/can't be an arbitrator status after they are not involved in or with the industry for a number of years.
4) Go back to an affiliated with the securities industry classification, especially for the Industry Code. If customers don't want arbitrators from the industry they will strike them. But we can't expect the securities industry to accept a non-public roster bloated by arbitrators who don't know the industry, or who are attorneys representing employees.
5) Do a cost-benefit analysis on the rules potential impact (or reveal the results if one has been done). Having spent fourteen years at FINRA and being very familiar with its corporate culture, my guess is that it conducted an impact analysis of some sort. But, if FINRA has done such an analysis, it's not referenced in the rule filing. This leaves the first blush impression that the net impact of the proposal would be to reduce the number of public arbitrators – currently 3,562 – while demand for them increases because almost every customer case will end up with a public panel. At the same time, it would appear that the ranks of the non-public roster will expand while demand for such arbitrators declines. If such an analysis has been done, FINRA should release the results. If not, then FINRA must do one. For that matter, a cost-benefit analysis of a potential elimination of PDAAs by the securities industry might be a good idea.
6) Have the newly-formed Arbitration Task Force review the rule filing: On July 17th, FINRA announced the formation of an Arbitration Task Force, whose role is to consider possible enhancements to its arbitration forum to improve the transparency, impartiality and efficiency of FINRA's securities arbitration forum for all participants. Arbitrator classification should be its first order of business.
The author realizes he is treading in a potential minefield. After spending close to four decades building trust among a diverse group of constituents in the alternative dispute resolution community, it's possible that, with this comment letter and article, I will manage to offend my friends in both the customers bar and the securities industry, and at FINRA.
But a good friend tells his or her friends when they are heading for trouble. On the other hand, annoying both sides is a well-known mediator's tactic to drive the parties together with a common cause. So, if I manage to unite all sides in their anger with me, perhaps some consensus will emerge. Who knows, we may see PIABA and SIFMA joining hands to craft an improved, simplified classification rule. Then another parable – the lion and the lamb – will come into play.