NewsBusiness (Reuters) (February 26, 2015) -- The Securities Exchange Commission on Thursday restricted the ability of financial industry veterans to judge investor arbitration cases against brokerage firms, pleasing investors who claimed they injected pro-industry bias into the process.

The rule change, proposed by the Financial Industry Regulatory Authority (FINRA), an industry-funded group tasked by Congress to oversee securities firms, is one of the most significant changes to Wall Street’s system for resolving disputes between investors and brokerages in years, lawyers said.

It is the latest in a series of moves by FINRA to strengthen rules protecting investors. The SEC, which oversees FINRA, said in the order approving the new rules that they would help "maintain the integrity" of the arbitration system.

The rules exclude those who have worked in the securities industry, even for brief periods, from serving on three-member arbitration panels unless investors opt for a panel that includes an arbitrator with a securities industry background.

Lawyers for investors argued that the old system was unfair because it allowed veteran stock brokers and other industry professionals to serve as arbitrators in disputes pitting investors against brokerage firms.

Investors complained of bias in the mandatory arbitration system, which was implemented after a 1987 Supreme Court ruling upheld the practice. After that ruling, brokerages began requiring investors to sign contracts agreeing to resolve any future disputes in arbitration instead of court.

Arbitration is a private process for resolving legal disputes. Supporters of arbitration say it is more efficient and less expensive. Critics say it deprives investors of the right to a jury trial and to appeal the outcome.

Pro-investor groups praised Thursday’s rule change but said it did not go far enough.

"We would have liked to have seen other industry professionals excluded," such as marketers for securities issuers, said Joe Peiffer, president of the Public Investors Arbitration Bar Association (PIABA), a group of investors' lawyers that fought for the change.

Opponents of the change, including lawyers and lobbyists for the financial industry, argued that the new rules could leave FINRA without enough qualified arbitrators. Other critics said FINRA had not adequately analyzed the proposal's costs and benefits, a complaint that the industry has used successfully in recent years to convince courts to overturn other financial regulations they opposed.

In a nod to brokerages, the SEC rule will also apply to lawyers who have worked in the past for investors as well as for brokerages for more than 20 percent of their time.

(Reporting by Suzanne Barlyn; Editing by Charles Levinson and Cynthia Osterman)

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