A proposal to strengthen the arbitration process that aggrieved investors use against securities brokers is running into obstacles just as the Securities and Exchange Commission prepares to consider it. The plan, submitted in June by the Financial Industry Regulatory Authority, would ban securities industry veterans from serving as public arbitrators on the panels that decide cases filed by investors against their brokerages. But now some investors’ attorneys who had pushed for the new rule are taking issue with the fact that it could apply to them as well. Other critics say the rule could be so stringent as to leave FINRA, an industry watchdog funded by Wall Street, without enough qualified arbitrators for the dispute resolution system it runs. The SEC would have to approve the FINRA proposal for it to become a final rule. FINRA arbitrators typically are considered “public” — those presently unaffiliated with the securities industry — and “nonpublic” — those with Wall Street ties. Many investors and their lawyers want a panel of three public arbitrators to hear their cases because non-public arbitrators may be biased in Wall Street’s favor, they say. FINRA’s arbitration system has faced criticism for everything from not thoroughly vetting arbitrators to making it too easy for brokers for clean up their records. The plan addresses investor advocates’ criticisms that some arbitrators can be deemed “public” even if they previously worked in the securities industry for years. The SEC solicited public opinions on the rule with a comment period that ended July 24. Separately, a new FINRA task force is conducting a broader review of the arbitration system. Investors’ Lawyers Bite Back One of Wall Street’s largest trade groups backs the proposal, but with a big condition. In a July 24 letter to the SEC, the Securities Industry and Financial Markets Association said lawyers who represent investors should also be prohibited from acting as public arbitrators. Firms and brokers would view arbitrators who have counseled investors as being biased against the industry, SIFMA wrote. That view, already embodied in FINRA’s proposal, could hurt members of the Public Investors Arbitration Bar Association, a group of 450 lawyers who represent investors and a key force behind the push to weed out public arbitrators with Wall Street ties. Under FINRA’s proposal, investors’ lawyers would not qualify as public arbitrators if they devoted more than 20 percent of their time within the past five years representing investors in disputes. Similar restrictions would also apply to accountants and expert witnesses. They could become public arbitrators again, subject to certain restrictions, such as a hiatus from practice. Lawyers and other professionals who have worked on behalf of the financial industry would be bound by similar rules. But PIABA is already pushing back. The group has asked the SEC to reject language that would exclude lawyers and others who work on behalf of investors from being public arbitrators, according to its July 24 letter. FINRA cites no evidence that professionals who serve investors would be biased, wrote Jason Doss, PIABA’s president. What’s more, the “non-public arbitrator” label has traditionally applied to arbitrators who have industry ties, he wrote. FINRA declined to comment. It is unclear how many of FINRA’s 3,560 public arbitrators would be deemed non-public. But too few arbitrators would strain the system. That is especially true when markets tank and claims spike, said George Friedman, an arbitration consultant and former director of FINRA’s arbitration unit. “At the end of the day, we’re looking at fewer public arbitrators when we’re likely to need more going forward,” Friedman said.