FINRA Proposal Confines, Confounds Plaintiff Lawyers

Oct 2014 // Texas Lawyer

For some veteran plaintiff lawyers, opportunities could be rarer to serve on arbitration panels for disputes between investors and brokers. That will be true if the Securities and Exchange Commission approves a rule change proposed this summer by the Financial Industry Regulatory Authority. The SEC has extended a comment period until Oct. 1 on the FINRA proposal.

With that possible rule change and others in the same proposal, FINRA, a broker-dealer self-regulating body, has misconstrued the notion of what constitutes impartiality among arbitrators, according to Houston’s Tom Ajamie and other members of the Public Investors Arbitration Bar Association (PIABA).

FINRA’s proposal errs in that it threatens to allow more arbitrators on panels who share the “mentality” of the securities industry, rather than that of the investing public, argues Ajamie, the managing partner of Houston’s Ajamie, and other plaintiff lawyers.

Not surprisingly though, a different opinion exists among Texas lawyers who regularly defend brokers, including Houston’s Don Littlefield.

Littlefield believes that securities industry veterans often make the most informed and objective arbitrators.

“I think most of the time investors would benefit from a person having industry knowledge. I don’t think industry knowledge creates a bias. Knowledge is a good thing,” said Littlefield, a partner in Houston’s Ballard & Littlefield.

Generally, most investor-broker disputes are resolved through FINRA-governed arbitration panels since almost all brokerage customer contracts in the United States contain a mandatory arbitration clause. Under FINRA arbitration rules, both sides select a three-person panel, picking from pools of “public” arbitrators, ones without ties to the industry, and “non-public,” ones with ties to the industry.

Under the FINRA proposal, attorneys, accountants and other professionals who devote more than 20 percent of their professional time to representing investors in securities claims would be barred from entering the pool of “public” arbitrators and confined to the “nonpublic” pool.

In a July 24 letter submitted to the SEC, PIABA president Jason Doss of The Doss Firm in Marietta, Georgia wrote that his organization “takes issue with proposed [changes] under which attorneys and other professionals who service investors in securities disputes would be prevented from serving … Such change would mark a radical departure from the historical logic of designating arbitrators….”

Specifically, Doss wrote that PIABA objects to the exclusion of attorneys who have previously represented investors in securities disputes from the pool of potential “public” arbitrators. PIABA objects to the FINRA proposal, Doss continued, because it includes “additional categories of individuals with substantial ties to the securities industry” who would “escape the proposed ‘non-public’ definition” and “be allowed to be classified as ‘public,’ despite having close ties to the financial services industry.”

FINRA spokeswoman Nancy Condon did not return a call by press time.