SEC Approves Revision to the Definition of “Public Arbitrator” in FINRA’s Customer Code of Arbitration

FINRA has issued Regulatory Notice 13-21 announcing that the Securities and Exchange Commission (“SEC”) has approved amendments to FINRA’s Code of Arbitration concerning the definition of “public arbitrators.”  FINRA classifies arbitrators as either “non-public” or “public.”  Non-public arbitrators are affiliated with the securities industry either through their current or former employment in the securities industry or by providing professional services to those in the securities industry.  Public arbitrators do not have any significant affiliation with the securities industry.

Under the revised definition, persons associated with, including registered through, a mutual fund or hedge fund cannot serve as “public” arbitrators.  Also, there is now a two-year “cooling off” period before certain non-public arbitrators may be reclassified as public.  Revised Rule 12100 of the Customer Code of Arbitration provides:

(u) Public Arbitrator

The term “public arbitrator” means a person who is otherwise qualified to serve as an arbitrator and:

(1) is not engaged in the conduct or activities described in paragraphs (p)(1)–(4);

(2) was not engaged in the conduct or activities described in paragraphs (p)(1)–(4) for a total of 20 years or more;

(3) is not an investment adviser, or associated with, including registered through, a mutual fund or hedge fund;

(4) is not an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past two years from any persons or entities listed in paragraphs (p)(1)–(4);

(5) is not an attorney, accountant, or other professional whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to any persons or entities listed in paragraph (p)(1) relating to any customer disputes concerning an investment account or transaction, including but not limited to, law firm fees, accounting firm fees, and consulting fees;

(6) is not employed by, and is not the spouse or an immediate family member of a person who is employed by, 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 securities business;

(7) is not a director or officer of, and is not the spouse or an immediate family member of a person who 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 securities business; and

(8) is not the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (p)(1)–(4). For purposes of this rule, the term immediate family member means:

(A) a person’s 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 percent of his or her annual income; or

(D) a person who is claimed as a dependent for federal income tax purposes.

A person whom FINRA would not designate as a public arbitrator because of an affiliation under subparagraphs (3)-(7) shall not be designated as a public arbitrator for two calendar years after ending the affiliation.

For purposes of this rule, the term “revenue” shall not include mediation fees received by mediators who are also arbitrators, provided that the mediator acts in the capacity of a mediator and does not represent a party in the mediation.

(Revisions emphasized).  These revisions take effect July 1, 2013.