Selecting an Arbitrator for a FINRA Arbitration
Assume you find yourself in the unfortunate situation where a current or former customer has filed a claim against you or your broker-dealer. The claim will proceed to arbitration, but who will make a ruling on the claims against you? There is no judge, there are no juries, just arbitrators and a panel. But who are these people and how are they selected? This article will explain the panel selection process for arbitration pending in the Financial Industry Regulatory Authority, or FINRA.
Arbitration is a form of alternative dispute resolution wherein a neutral third party called an arbitrator, or a panel of arbitrators, decides the case rather than a judge or jury. The arbitrator’s decision is final and binding just like a judge’s decision in court.
FINRA is a U.S. organization that regulates American broker-dealers and operates one of the largest securities dispute resolution forums globally. Through its arbitration services, FINRA provides fair and effective resolution to securities industry disputes between broker-dealers or associated persons and investors. FINRA arbitrations are available as a forum to resolve disputes between investors and their financial or investment advisors. In most customer agreements, FINRA arbitration is identified as the required dispute resolution forum. FINRA arbitrations are decided by a panel of arbitrators, who have received training in the standards that apply to advisors.
Roster of FINRA Arbitrators
Under the FINRA Code of Arbitration Procedure for Customer Disputes, which is referred to as the “Customer Code,” FINRA maintains a list of arbitrators who will conduct and decide disputes between investors and their financial representatives. The lists of arbitrators are part of FINRA’s arbitrator rosters under Rule 12400 of the Customer Code.
There are three rosters.
Roster of Public Arbitrators
A public arbitrator is a person who is qualified based upon his or her experience to handle disputes between investors and financial and investment advisors. Under Rule 12100(aa) of the Customer Code, a public arbitrator must also not be associated with or have worked for any broker/dealer, commodities or futures entity, an entity registered under the federal securities and investment acts, mutual or hedge fund, or investment advisor. There are additional limitations in Rule 12100(aa) that disqualify an arbitrator from being named as a “public” arbitrator.
Roster of Non-Public Arbitrators
A non-public arbitrator is a person who is qualified to serve as an arbitrator, but is disqualified from service as a public arbitrator under Rule 12100(aa). In other words, someone who currently or previously worked in the securities or investment industries in the capacities that disqualify an arbitrator from the “public” arbitrator roster.
Roster of Public Chairpersons
In order to serve as chairperson of an arbitration panel in a FINRA arbitration, the arbitrator must qualify as a “public” arbitrator and meet additional qualifications outlined in Rule 12400 of the Customer Code. These additional qualifications require that the arbitrator served on at least three arbitrations previously, unless the arbitrator is a lawyer in good standing. If the arbitrator is a lawyer, then he or she can serve as chairperson after serving as arbitrator once.
Number of Arbitrators
FINRA arbitrations are conducted by one to three arbitrators depending upon the amount of the claim. The claim amount is the amount of money the investor is seeking as relief for the alleged wrongs by the financial or investment advisor. When calculating the amount of the claim to determine how many arbitrators will make up the panel, interest on the amount of the claim is not included. Also not included are the expenses of the arbitration, including legal and filing fees.
Claims of $50,000 or Less
If the claim is $50,000 or less, the arbitration will be heard and decided by one arbitrator. The claim will also proceed under the simplified arbitration procedures of Customer Code Rule 12800.
Claims of More Than $50,000 Up to $100,000
If the claim is more than $50,000 and up to $100,000, the arbitration will take place with one arbitrator unless the parties agree in writing to a panel of three arbitrators. In other words, the investor, the advisor, and any other parties to the arbitration must all agree to a three-arbitrator panel.
Claims of More Than $100,000
For arbitrations involving claims of more than $100,000, the panel will have three arbitrators unless all the parties agree in writing to one arbitrator.
Claims for an Unspecified Amount or Non-Monetary Relief
If the claim does not seek monetary relief, or if the amount of money sought is unspecified, then the arbitration will be heard and decided by three arbitrators unless the parties agree in writing to one arbitrator.
Selection of the FINRA One-Arbitrator Panel
Rule 12402 of the Customer Code details the process for selection of the arbitrator. The Neutral List Selection System randomly generates a list of ten arbitrators from FINRA’s public chairpersons roster. The System excludes any arbitrator who has a conflict of interest for the specific case. This list of ten potential arbitrators is sent to all parties at the same time. Also sent to the parties is a disclosure form prepared by each arbitrator under Rule 12405, which is discussed in more detail below. The list and information are sent to the parties within 30 days of the date the last answer is due without regard to any agreement between the parties to extend the time to answer.
Striking and Ranking
The parties have 20 days to strike and rank the list of arbitrators and return the list to FINRA. Each party may strike up to four arbitrators from the list. After striking arbitrators, each party ranks the remaining arbitrators in numerical order, with “1” being the party’s first choice of arbitrator, “2” being the second choice, and so on.
Combined Rankings and Appointment
FINRA then creates a combined rankings list from the lists provided by the parties. Any arbitrator stricken by any party is automatically excluded from the combined rankings list. The available arbitrator with the highest combined ranking is appointed as the arbitrator. If no arbitrator on the combined rankings list is available, FINRA will appoint a randomly selected arbitrator chosen by the Neutral List Selection System.
If the appointed arbitrator steps down or is removed, FINRA will return to the combined rankings list and appoint the next highest ranked arbitrator to serve on the panel. If no arbitrator on the combined rankings list is available, FINRA will use the Neutral List Selection System to appoint a randomly selected replacement.
Selection of the FINRA Three-Arbitrator Panel
The selection process for the three-arbitrator panel begins the same as the selection for the one-arbitrator panel. Under Customer Code Rule 12403, the Neutral List Selection System generates lists of potential arbitrators. For the three-arbitrator panel, lists are randomly generated for three classes of arbitrators, again excluding any potential arbitrator who has a conflict of interest in the particular case.
- A list of 10 arbitrators from the FINRA non-public arbitrator roster,
- A list of 15 arbitrators from the FINRA public arbitrator roster, and
- A list of 10 arbitrators from the FINRA public chairperson roster.
While the public arbitrator roster can include chair-qualified arbitrators, any arbitrator on the chairperson roster will not be included on the public arbitrator roster for the same case.
Within 30 days of the date the last answer is due, the parties are provided with the three lists along with arbitrator disclosures for all 35 potential arbitrators.
Striking and Ranking the Non-Public Arbitrator List
The parties have 20 days to strike, rank, and return the non-public arbitrator list to FINRA. All parties can strike as few or as many arbitrators from the non-public list as they wish, up to all arbitrators on the non-public arbitrator list. If any arbitrators remain on the list, the party must rank the remaining arbitrators, with “1” being the first choice, “2” being the second choice, and so on.
Striking and Ranking the Public Arbitrator List
Within 20 days of receiving the list from FINRA, the parties must strike and rank arbitrators on the public arbitrator list of 15 potential arbitrators and return their rankings to FINRA. Parties may strike up to six arbitrators from the public arbitrator list so that at least nine public arbitrators remain on the list. Each party must rank the remaining arbitrators from “1” to at least “9.”
Striking and Ranking the Chairperson List
The parties have 20 days to strike, rank, and return to FINRA the chairperson list. Parties may strike up to four out of ten arbitrators on the list and must rank the remaining arbitrators from most preferred to least preferred.
Combined Rankings and Appointment
After receiving the rankings for all classes of arbitrators, FINRA creates combined rankings lists from the lists provided by the parties. Any arbitrator stricken by any party is automatically excluded from the combined rankings list. The available arbitrator with the highest combined ranking in each of the classes is appointed as the arbitrator for that class. If all non-public arbitrators were stricken, then the panel will consist of the two highest combined rankings public arbitrators and the highest combined rankings chairperson.
If no arbitrator on the combined rankings lists is available, FINRA will appoint an arbitrator chosen from the Neutral List Selection System.
If an appointed arbitrator steps down or is removed, the parties can agree to proceed with the two remaining arbitrators. If they do not agree, FINRA will return to the combined rankings list and appoint the next highest ranked arbitrator in the class to serve on the panel. If no arbitrator on the combined rankings list is available, FINRA will use the Neutral List Selection System to appoint a randomly selected replacement.
How to Rank Arbitrators: Required Arbitrator Disclosures
Arbitrators are also required to make certain disclosures to the parties by Rule 12405 of the Customer Code. FINRA shares this information with the parties. The kinds of information and circumstances that must be disclosed to FINRA include items like the arbitrator’s professional associations, any potential interest in the case’s outcome, and business and personal relationships.
In order to strike and rank the potential arbitrators, the parties will consider several sources of information. When the parties receive the lists of proposed arbitrators, they will also receive each arbitrator’s employment history for the past ten years. This information will guide the parties in determining whether each proposed arbitrator has the requisite knowledge that each party prefers for the decision-maker in the case. In addition, the parties will receive other relevant information for each potential arbitrator, which could include when the arbitrator joined FINRA, whether they serve as an arbitrator for any other alternative dispute resolution organizations like the American Arbitration Association, and a complete list of all FINRA customer and industry disputes in which the arbitrator has presided. The arbitrator disclosures also include information about any non-work-related activities that are relevant, such as service on a voluntary board.
Public vs. Non-Public Arbitrators: Which to Choose
Selecting the right arbitration panel is akin to selecting the judge and jury in civil litigation. In addition to hearing the factual and legal arguments of the parties at the final hearing, arbitrators hear discovery disputes and decide pretrial motions as well. Respondents, the broker-dealer or associated person, typically want a panel to include a non-public arbitrator because they have significant experience in the securities industry. A non-public arbitrator will most likely understand the products at issue and the different types of damages calculations. Claimants, on the other hand, typically strike all non-public arbitrators likely because they fear a non-public arbitrator will better relate to the broker-dealer or associated person
When choosing an arbitrator, it is important to consider the potential arbitrators’ backgrounds, experience, and knowledge. Combining that information with any possible sources of conflicts that must be disclosed by the arbitrators in the Disclosures Required of Arbitrators will guide parties to making the best choices in striking and ranking arbitrators.