Changes to FINRA Arbitrator Selection Process
In SR-FINRA-2024-022 (Proposed Rule Change to Amend the Codes of Arbitration Procedure to Make Clarifying, Technical and Procedural Changes to the Arbitrator List Selection Process), FINRA DRS sought to amend both the FINRA Code of Arbitration Procedure for Customer Disputes as well as the Code for Industry Disputes to make changes to certain provisions relating to the arbitrator list selection process. The Securities and Exchange Commission (SEC) has issued an order approving the proposed changes, though FINRA has not issued a regulatory notice providing for an effective date as of publication of this article.
In addition to the codification of a few practices outlined below, the amendments revise the list selection process in an effort to "increase the opportunity for public arbitrators who are not chair-qualified to be selected for the Public List." By way of background, FINRA DRS maintains three rosters of arbitrators: (1) chair-eligible arbitrators as provided by Rules 12400(c) and 13400(c), (2) non-public arbitrators as defined in Rules 12100(t) and 13100(r), and (3) public arbitrators as defined in Rules 12100(aa) and 13100(x). A public arbitrator is an arbitrator with no associations to the financial industry or to the regulatory bodies or no other significant professional relationship to the financial industry or to the regulatory bodies. Non-public arbitrators are arbitrators that are not eligible to be public arbitrators. Under the rules an arbitrator is chair-eligible if the arbitrator is a public arbitrator and either is a barred lawyer and served as an arbitrator through an award in an arbitration in which hearings were held at least once or served as an arbitrator through award in at least three arbitrations in which hearings were held. As such, chair-eligible arbitrators typically have more overall more experience with arbitration than other public arbitrators.
Under the previous process, the FINRA DRS list selection algorithm generated a list from the chair-eligible arbitrators and then another list from the roster of public arbitrators. If a candidate from the chair-eligible list was not selected by the algorithm, he or she was then eligible to be selected by the algorithm on the public arbitrator list, effectively giving chair-eligible candidates two chances to be selected for listing in a particular case. Because public arbitrators who were not chair-eligible could only be selected for the public list, they were less likely to appear on a list than chair-eligible arbitrators.
To address this issue, the rule amendments require that the list selection algorithm provide public arbitrators with two chances for selection to the public list. Chair-eligible arbitrators continue to also receive one chance to be selected to the public list so that each set would have two chances to be selected for the various lists in any one case. These amendments are set forth in new Rule sections 12403(b)(3) and 13403(b)(4).
Other Changes to Current Practices
In addition to this change, the amendments codify certain of FINRA DRS's current practices. In particular, they amend rules related to:
- Information Requests: A party can now request additional information about an arbitrator "at any state of the proceeding" through a request to be served to all parties and filed with the Director pursuant to new Rule sections 12402(c)(2)(A), 12403(b)(2)(A), and 13403(c)(2)(A);
- Anonymity: A party can now direct additional information requests to the arbitrators anonymously (unless the request is timely objected to). It further provides new timeframes to object to such requests (10 days) and the opportunity to withdraw such request before the Director forwards the request and any objections to the arbitrators (5 days after the deadline of serving objections). See FINRA Rule 12402(c)(2)(A)-(C), 12403(b)(2)(A)-(C), and 13403(c)(2)(A)-(C); and
- Prohibition on Disclosure of Removal Request: Opposing parties are now prohibited from disclosing another party's request to remove an arbitrator for cause and the requesting party must file a motion for removal of the arbitrator within 5 days of being aware of the disclosure. Absent extraordinary circumstances, such motion must be granted by the Director. As such if the opposing party violates this prohibition, the motion still allows the requesting party to seek its remedy. See FINRA Rules 12407(e) and 13410(e).
The amendments also address a few ministerial and codification issues.
Implications for FINRA Practitioners
The net effect of the changes in the Arbitration List Selection Process algorithm is that parties will see fewer chair-eligible candidates on public lists. As such, parties are likely to see lists of public arbitrators who have less arbitration experience than under the old algorithm.
In addition, the other rule changes and related guidance should provide greater clarity to all parties with regards to several issues, particularly in connection with requesting additional information and the arbitrator removal process.
Practitioners are advised to closely consider these developments. Additionally, practitioners should monitor FINRA's efforts to address concerns in this area as continued revisions seem likely.
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