In a surprising but welcome development, FINRA announced today that it will file a rule proposal next month with the Securities and Exchange Commission to make permanent its Public Arbitrator Pilot Program, in which investors are given the choice of selecting an all-public arbitrator panel in disputes with brokers, rather than a panel made up of two public and one non-public (i.e., industry-affiliated) arbitrator. FINRA is nearing the end of its two-year pilot, during which more than 60% of investors opted for an all-public panel in arbitration with one of fourteen participating brokerage firms. The Press Release quotes FINRA Chairman and Chief Executive Officer Richard Ketchum as stating, “Giving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process.” FINRA’s decision to propose converting this pilot to permanent rule status is no doubt driven, at least in part, by the provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act empowering the SEC to prohibit pre-dispute arbitration clauses in customer agreements if it concludes that FINRA arbitration is unfair to investors. Since the SICA Fairness Study I co-authored found that a substantial percentage of investors perceive that FINRA arbitrators are biased, eliminating perceptions of bias has been on FINRA’s “radar screen.” Perhaps this regulatory development will preempt any SEC action banning mandatory securities arbitration?

JG