(Photo: Reuters)

Wall Street's Financial Industry Regulatory Authority is cracking down on the policing of its 6,500 securities arbitrators after one of them was criminally indicted and suspended from the practice of law.

The industry-funded watchdog told Reuters that it was beefing up oversight, after one of Finra's arbitrators Demetrio Timban was indicted by the state of New Jersey for practicing law without a license and for writing bad cheques.

Finra said it has adopted a new policy of conducting annual background checks on its arbitrators and will conduct additional reviews before appointing arbitrators to a case.

Prior to the policy change, Finra only checked its arbitrators when they applied for the job, as of 2003. It also relied on arbitrators reporting on themselves, in order to gather new information, such personal legal troubles.

However, six years later, the regulator screened around 4,000 arbitrators, who had not been checked, because they were already serving as arbitrators when the new system came in.

Timban has become a central figure over recent years, after being a key person in a lawsuit between Goldman Sachs Group and a wealthy investor.

Although charges were later dropped under a state programme to deal with non-violent offences, New Jersey-based arbitrator Timban was reprimanded by a Michigan regulator for the New Jersey incident and passing $18,000 in bad cheques.

Finra said it did not know about the New Jersey indictment for five months and that Timban failed to tell it about the legal problems altogether, despite arbitrating the Goldman case at the same time.

Timban said in a Reuters' interview that he had closed his New Jersey office and the check-writing incident was "accidental," as a family member was supposed to wire funds to cover the check.

Timban's situation highlighted questions over how Finra polices its arbitrators and the reliability and bias of their decisions in cases.