Out with the Old: FINRA’s New Rules

July 01, 2008
By Helen Kearney
On Wall Street

The Financial Industry Regulatory Authority is moving ahead with its biggest task to date—the consolidation of the rulebooks of the National Association of Securities Dealers and New York Stock Exchange regulatory unit.

As a result, FINRA’s new rule concerning who is eligible to serve as a public arbitrator in customer and industry disputes went into effect on June 9. The rule addresses a charge from critics who complained that the so-called public arbitrator often had significant ties to the securities industry and an interest in the outcome of the proceedings.

Under the current arbitration rules, investors can have their complaints heard by either a single public arbitrator or by a three-person panel, which includes two public arbitrators and one “non-public” arbitrator who is usually a representative from the industry.

The new rule—designed to ensure that people whose firms earn significant fees advising on arbitration issues can no longer act as public arbitrators—excludes any attorneys, accountants or other professionals whose firms earned $50,000 or more in annual revenue over the past two years helping brokers or their firms deal with customer disputes.

Linda D. Fienberg, president of FINRA Dispute Resolution, says the change will have minimal effect, making ineligible just 60 arbitrators—or 2% of all public arbitrators—and those will only be barred for two years. (They can become eligible to act as arbitrators again if, during that period, their firms don’t undertake arbitration-related work worth $50,000 per year.)

But not everyone is satisfied. “The look-back window of two years isn’t significant,” says Lawrence Klayman, a securities attorney and founding partner at Boca Raton, Fla.-based Klayman & Toskes P.A. “They could have been involved in heavy representation four or five years back.” Klayman, who represents investors in claims against their brokers, says he’s faced public arbitrators with an unfair interest in the outcome a number of times and would like to see stricter guidelines.

He says even people whose firms earned $10,000 doing arbitration-related work could be seen as biased, particularly if they were likely to get future work from brokerage firms.

Fienberg disagrees, noting that, after FINRA consulted with a number of investor attorneys, a two-year cut-off period was deemed sufficient and $50,000 “was the lowest amount people thought necessary to affect a public investor.” She adds, “We’ve had almost no negative comment and no pushback from arbitrators.”

In a separate matter, FINRA has also released a proposal for comment clarifying supervision requirements for certain branch managers. The old NASD rule laid out a complex system for determining who qualified as a “producing branch manager” and who could supervise that manager’s activities. The new version simplifies the principle to prohibit branch managers from supervising their own activities or being supervised by someone who reports to them. In addition, under the old rule, branch managers producing a significant percentage of their office’s revenues were subject to “heightened supervision,” such as more frequent or onerous reviews.

Marc Menchel, FINRA’s general counsel for regulation, says that, under the new rule, heightened supervision procedures should be reserved for supervising those with conduct issues, rather than high-producing managers. “We understand there may be conflicts when supervising [someone who] produces more revenues, but you must put those aside and you can’t lessen your supervision,” he says.

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