InvestmentNews (May 9, 2016) -- The board agreed to modest reforms to its arbitration system based on recommendations by a special task force set up to examine it

Finra last week made modest reforms to its arbitration system that would expand the list of public arbitrators who could be selected for each case and enable attorneys to chair dispute panels.

The changes were approved by the board of the Financial Industry Regulatory Authority Inc. last week and posted on its website Friday.

As a result of the rule changes, Finra would increase the number of public arbitrators from 10 to 15 on the list from which dispute participants can choose and attorneys can chair after having participated in one rather than two arbitration cases.

The board also OK'd a measure that would make it easier to dismiss arbitration cases that had previously been settled.

The board's actions were its initial move to address the 51 recommendations on improving Finra arbitration proposed last year by a special task force set up to examine the system.

“Each [change] by themselves sounds small, but they will move the process in the right direction,” Finra chairman and chief executive Richard G. Ketchum said in a video following the board meeting. “Most importantly, it's really the first step in responding to terrific recommendations from the task force.”

But a group that has been pushing Finra to overhaul its arbitration mechanism said the changes don't address the larger perception that the process is opaque and not fair to individual investors.

“I'm all in favor of every small step to improve the system,” said Hugh Berkson, president of the Public Investors Arbitration Bar Association. But “these [changes] don't begin to touch the underlying transparency issues.”

Mr. Berkson, a principal at McCarthy, Lebit, Crystal & Liffman, cited a recent PIABA study that shows one out of three investors who win arbitration awards are not paid by the defendant brokers and firms.

A former director of the Finra arbitration system said last week's decisions show the board is taking the task force report seriously.

“It is a harbinger of more changes coming from the task force recommendations,” said George Friedman, head of Finra arbitration from 1998-2013 who now runs an eponymous consulting firm.

Finra provides an arbitration forum that consists of about 6,400 arbitrators — some of whom are public and some of whom work in the securities industry — who hear thousands of cases annually.

Panels of three are selected by plaintiffs and defendants to hear arbitration cases. Mandatory arbitration clauses are included in brokerage contracts with customers.

Mr. Friedman said expanding the public arbitrator list and letting attorneys chair panels will help increase the arbitrator pool.

“I think it's driven by making sure there are enough arbitrators,” Mr. Friedman said.