Arbitrator Selection Process in FINRA Arbitration

26.2.2 Selection of Arbitrators

In the realm of securities dispute resolution, the selection of arbitrators is a critical component of the FINRA arbitration process. Understanding how arbitrators are chosen, the roles of public and non-public arbitrators, and the strategic considerations involved can significantly impact the outcome of a case. This section provides a comprehensive overview of the arbitrator selection process, offering insights into the mechanics of panel composition and practical tips for effectively ranking and striking arbitrators.

Understanding the FINRA Arbitrator Selection Process

The Financial Industry Regulatory Authority (FINRA) administers the largest securities dispute resolution forum in the United States, handling thousands of cases each year. The arbitrator selection process is designed to ensure fairness, impartiality, and expertise in resolving disputes between investors and securities firms or between firms themselves.

FINRA’s Roster of Arbitrators

FINRA maintains a diverse roster of arbitrators, comprising individuals with various backgrounds and expertise. This roster includes both public and non-public arbitrators, each bringing unique perspectives to the arbitration process.

• Public Arbitrators: These individuals have no significant ties to the securities industry. They are typically professionals such as lawyers, accountants, or academics who can provide an unbiased perspective on disputes. Public arbitrators are preferred in cases involving investors to ensure impartiality.

• Non-public Arbitrators: These arbitrators have industry experience and may include current or former brokers, financial advisors, or other securities professionals. Their industry knowledge is invaluable in cases that involve complex securities issues or disputes between industry participants.

Panel Composition

The composition of the arbitration panel can vary depending on the nature of the case and the amount in dispute. Panels may consist of one or three arbitrators:

• Single Arbitrator Panels: For smaller claims, typically involving disputes of $50,000 or less, a single arbitrator is appointed. This arbitrator is usually a public arbitrator unless both parties agree otherwise.

• Three-Arbitrator Panels: For larger claims, a panel of three arbitrators is typically used. This panel generally includes two public arbitrators and one non-public arbitrator. However, parties can agree to have all public arbitrators if they prefer.

The Arbitrator Selection Process

The process of selecting arbitrators involves several key steps, each designed to ensure that the panel is fair and impartial:

1. List Selection: Once a case is filed, FINRA provides the parties with a list of potential arbitrators drawn from its roster. This list is generated randomly and includes both public and non-public arbitrators, depending on the case type.

2. Ranking and Striking: Parties have the opportunity to rank and strike arbitrators from the list. Each party can rank the arbitrators in order of preference and strike a certain number of arbitrators they find unacceptable. This process allows parties to influence the composition of the panel and eliminate potential biases.

3. Appointment of Arbitrators: After the ranking and striking process, FINRA appoints the highest-ranked arbitrators who have not been struck by either party. These arbitrators form the final panel that will hear the case.

4. Chairperson Selection: In cases with three arbitrators, a chairperson is selected from among the panel members. The chairperson is typically a public arbitrator with significant arbitration experience and plays a key role in managing the proceedings.

Public vs. Non-Public Arbitrators

Understanding the distinction between public and non-public arbitrators is crucial for parties involved in the arbitration process. This distinction affects not only the composition of the panel but also the dynamics of the arbitration proceedings.

Public Arbitrators

Public arbitrators are chosen to provide an independent perspective, free from industry biases. They are often selected for their ability to approach cases with neutrality and objectivity. Public arbitrators may include:

• Legal Professionals: Lawyers and judges who bring legal expertise and an understanding of procedural fairness to the panel.

• Academics and Educators: Professors and researchers who can offer analytical and theoretical insights into complex issues.

• Other Professionals: Accountants, economists, and business executives who contribute diverse perspectives and expertise.

Non-Public Arbitrators

Non-public arbitrators bring valuable industry experience to the arbitration process. Their familiarity with securities markets, products, and practices can be instrumental in understanding the nuances of a case. Non-public arbitrators may include:

• Current or Former Industry Professionals: Brokers, financial advisors, and compliance officers who have firsthand experience with industry operations and regulations.

• Industry Consultants and Experts: Individuals who provide specialized knowledge and insights into specific areas of the securities industry.

Tips for Ranking and Striking Arbitrators

The ranking and striking process is a strategic opportunity for parties to shape the arbitration panel. Here are some tips to consider:

• Research Arbitrator Profiles: Review the background, experience, and past arbitration decisions of potential arbitrators. FINRA provides detailed profiles that can help parties assess the suitability of each arbitrator.

• Consider Case Complexity: For complex cases, prioritize arbitrators with relevant industry expertise or legal knowledge. Their insights can be crucial in understanding and resolving intricate issues.

• Evaluate Impartiality: Look for arbitrators with a track record of impartiality and fairness. Avoid arbitrators with potential conflicts of interest or biases that could affect the outcome.

• Balance Expertise and Neutrality: Strive for a balanced panel that includes both industry expertise and independent perspectives. This balance can enhance the panel’s ability to render fair and informed decisions.

• Communicate with Counsel: Work closely with legal counsel to develop a strategic approach to ranking and striking arbitrators. Counsel can provide valuable insights into the arbitration process and help identify potential biases.

Case Studies and Scenarios

To illustrate the arbitrator selection process, consider the following scenarios:

Scenario 1: Investor vs. Brokerage Firm

An investor files a claim against a brokerage firm, alleging unsuitable investment recommendations. The investor prefers a panel with strong public representation to ensure impartiality. During the ranking process, the investor’s legal team prioritizes public arbitrators with legal expertise and a history of investor-friendly decisions.

Scenario 2: Industry Dispute

Two brokerage firms are involved in a contractual dispute over a complex derivative transaction. Both parties seek arbitrators with substantial industry experience to understand the intricacies of the case. They prioritize non-public arbitrators with a background in derivatives and securities trading.

Real-World Applications and Regulatory Scenarios

The arbitrator selection process is not only critical for the parties involved but also reflects broader regulatory and industry considerations. FINRA’s commitment to maintaining a diverse and impartial roster of arbitrators underscores the importance of fair and transparent dispute resolution in the securities industry.

Regulatory Framework

The selection of arbitrators is governed by FINRA’s Code of Arbitration Procedure, which outlines the rules and procedures for arbitration cases. Key regulatory considerations include:

• Impartiality and Independence: Arbitrators must disclose any potential conflicts of interest or biases that could affect their impartiality. This ensures that parties have confidence in the fairness of the arbitration process.

• Diversity and Representation: FINRA strives to maintain a diverse roster of arbitrators, reflecting a wide range of backgrounds, experiences, and perspectives. This diversity enhances the quality and credibility of the arbitration process.

• Transparency and Accountability: FINRA provides detailed information about arbitrators’ backgrounds, qualifications, and past decisions. This transparency allows parties to make informed decisions during the selection process.

Best Practices and Common Pitfalls

To navigate the arbitrator selection process effectively, consider the following best practices and common pitfalls:

Best Practices

• Thorough Preparation: Invest time in researching and understanding the backgrounds of potential arbitrators. This preparation can significantly impact the outcome of the case.

• Strategic Ranking: Develop a clear strategy for ranking and striking arbitrators, considering the specific needs and priorities of the case.

• Open Communication: Maintain open communication with legal counsel and other stakeholders throughout the selection process. Collaboration can enhance decision-making and ensure alignment with case objectives.

Common Pitfalls

• Neglecting Research: Failing to thoroughly research arbitrator profiles can lead to suboptimal panel composition and unfavorable outcomes.

• Overlooking Biases: Ignoring potential biases or conflicts of interest can compromise the impartiality of the panel and undermine the arbitration process.

• Inadequate Strategy: A lack of strategic planning in the ranking and striking process can result in a panel that does not align with the case’s needs and priorities.

Conclusion

The selection of arbitrators in FINRA arbitration is a pivotal step in the dispute resolution process. By understanding the roles of public and non-public arbitrators, the mechanics of panel composition, and the strategic considerations involved, parties can navigate the selection process with confidence and achieve favorable outcomes. As you prepare for the Series 7 Exam, remember that mastering the intricacies of arbitrator selection is not only essential for success on the exam but also for your future career in the securities industry.

Series 7 Exam Practice Questions: Selection of Arbitrators