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Classification Rule Comment Period Ends. An Eclectic Array of Comments – Analysis, Part I
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The comment period for FINRA’s classification rule proposal expired on July 24th and, although there were several expressions of unequivocal support, a majority of those commenting on the proposal expressed concerns or suggested changes. This week we provide a high level analysis of the comments; next week we will review suggestions for changes offered by some commenters.

We have reported previously on SR-FINRA-2014-28 (see SAAs 2014-24 and 23). As described on the website, “the amendments would, among other matters, provide that persons who worked in the financial industry for any duration during their careers would always be classified as non-public arbitrators, and persons who represent investors or the financial industry as a significant part of their business would also be classified as non-public, but could become public arbitrators after a cooling-off period. The amendments would reorganize the definitions to make it easier for arbitrator applicants and parties, among others, to determine the correct arbitrator classification." We said previously that the proposed rule gives all constituents – investors, the securities industry, the parties’ representatives, and arbitrators – aspects to like and aspects to dislike. The comments validate our assertion.

Comments – An Overview

As usual, we first thought to analyze the 19 comment letters along constituent lines, but it turns out the comments cannot be so neatly categorized. At a very high level, they break down this way: six commenters urged approval without reservation, five opposed the proposal, and eight support some aspects of the proposal but oppose others.

Strange Bedfellows?

The comments were by no means split along party lines. For example, NASAA, PIABA, SIFMA, the American Association for Justice (formerly the American Trial Lawyers Association) and the Financial Services Institute (“FSI”) submitted comments supporting the proposal in whole or in part. Two former Directors of Arbitration, Richard Ryder of this publication, and immediate past FINRA Director of Arbitration George Friedman, oppose the proposal outright. As will be discussed in next week’s installment, Ryder is concerned that there has not been a cost-benefit analysis – at least on the face of the rule filing – especially as to whether FINRA will have enough arbitrators. Friedman lists many concerns expressed further in an article in this month’s Securities Arbitration Commentator: The Camel and the Last Straw or the Frog and the Boiling Water: Pick Your Parable. While several investors’ attorneys (Phil Aidikoff, Ryan Bahktiari, Steve Caruso and Glenn Gitomer) support the proposal without reservation, the Pace/John Jay Clinic, Christopher Mass and Richard A. Stephens, and independent financial adviser James Mabutt, have reservations or suggested changes. Arbitrators, too, were of mixed views. Public Arbitrators Daniel Bacine and Gary Hardiman oppose the rule outright, while Non-public Arbitrator Blossom Nicinski and Public Arbitrator Stephens believe there are better ways to address concerns about perceptions of public arbitrator neutrality. One individual, Robert Getman, who has been both a public and non-public Arbitrator, also opposes the rule change.

A Caveat from SIFMA?

Although SIFMA supports the proposed rule change, its comment makes clear that, if the core elements of the proposal unravel, it reserves the right to rescind its agreement. What is the core deal? In exchange for an arbitrator who ever worked in the financial industry being classified as non-public forever, attorneys who do significant work representing investors would no longer be public arbitrators. Says SIFMA, “our support is predicated on passage of both of the two major components of the Proposal – both the ‘worked-in-the-industry’ and the ‘claimant’s representative’ provisions…. We emphasize this point in particular only because we have begun to see in the publicly available comments on the Proposal, as we anticipated, attacks by claimants’ lawyers on the ‘claimant’s representative’ provision in the Proposal.” Along those lines, readers should be aware that NASAA, PIABA, and FSI are already suggesting changes…. We will analyze these and other comments in next week’s Alert in Part II.

(ed: *Yogi Berra is rumored to have said, “It’s déjà vu all over again.” We’re getting the nagging feeling that we’ve seen this movie before. How so? Years ago, one of the early compromise deals on amendments to the Discovery Guide fell apart when changes started to be proposed to the key elements of the compromise proposal. Might this rule proposal suffer the same fate? **Given formation of the FINRA Arbitration Task Force (see SAA 2014-26), perhaps FINRA should have the Task Force analyze the comments and consider changes? ***The American Association for Justice letter contained a whopper of an error, where it states, “…there is no requirement that forced arbitration decisions be made public…” We suggest they check Rule 12904(h), which very plainly states, “All awards shall be made publicly available.”) (SAC Ref. No. 2014-28-01)


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