The Wall Street Journal (February 11, 2014 3:52 pm) -- Wall Street's self-regulator is planning new, tighter restrictions on the use of brokerage industry insiders as arbitrators in investors' disputes with brokers and brokerage firms, according to people briefed on the matter.

Wall Street's self-regulator is planning new, tighter restrictions on the use of brokerage industry insiders as arbitrators in investors' disputes with brokers and brokerage firms, according to people briefed on the matter.

Nonpublic arbitrators could have current ties, such as a job as a broker or banker or a spouse with such a job, or lawyers at securities litigation firms.

Under the new rules, any such connection, no matter how old, would disqualify someone with direct ties to the industry to be a public arbitrator, unless they were lawyers or accountants.

Three arbitrators typically serve on each panel hearing customers' claims against brokers for alleged damages. Traditional panels had to have a mix of public and nonpublic members but, responding to criticism that its system is biased in favor of the industry, Finra in recent years started allowing the use of panels composed entirely of public arbitrators. That initiative, combined with the new restrictions on who qualifies as a public arbitrator, would result in a significant reduction in insiders hearing cases.

Among those pushing for more use of all-public panels is a group of lawyers who specialize in representing investors in cases against brokers, the Public Investors Arbitration Bar Association.

However, under the proposed new rules, lawyers involved in the industry in any way—as attorneys for brokers and brokerage firms, or representing investors making claims against them—would be disqualified as public arbitrators if they received $50,000 or more in annual revenue over the past two years from such services, according to people briefed about the proposal. In the past, that rule only applied to lawyers who represented brokers and brokerages.

Unlike industry insiders, however, the new rule would allow such lawyers to become public arbitrators after a so-called "cooling off" period, according to people briefed on the matter.

Piaba sees the new restriction on industry insiders as "a big step forward," but doesn't favor the rule change regarding investors' lawyers, said the group's president, Jason Doss, an Atlanta-based lawyer. He called the proposal "a glass half full."

Finra says it has more than 6,000 arbitrators, who are paid $400 a day to hear cases. Finra doesn't disclose how many have ties to the industry and lawyers say it is difficult to estimate. Many arbitrators are lawyers or retired lawyers.

In arbitrations, both claimants and respondents are given a list of arbitrators and each can eliminate arbitrators from that list.

Some lawyers warn that excluding more arbitrators with ties to the industry eliminates expert knowledge, particularly about complicated securities transactions. "It's never a good thing to take qualified, knowledgeable people away from participating in the process" of Finra arbitrations, said Richard Magid, a partner with law firm Whiteford Taylor Preston LLP in Baltimore who represents investors and brokers.

"Client feel they get a fairer shake from somebody not in the industry," he acknowledged, but "sometimes the industry members on a panel are tougher on the industry than you'd believe."