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FINRA’s Tweaks to Arbitrator Selection

The Financial Industry Regulatory Authority (FINRA) is set to implement significant reforms to its arbitrator selection process starting in 2024. These changes aim to enhance the fairness and transparency of the arbitration program, where most industry and customer disputes are resolved.

Background of the Reforms

In December 2022, FINRA proposed changes to the arbitrator selection process following recommendations from an external law firm. The goal was to improve the fairness and transparency of the program, which handles the majority of disputes within the securities industry.

Key Changes to the Arbitrator Selection Process

The reforms codify FINRA’s existing selection system, which combines an algorithm with a manual review of potential arbitrators for conflicts of interest before presenting a list to the disputing parties. Additionally, the amendments require a FINRA director to provide a written explanation for any decision to grant or deny a party’s request to remove an arbitrator from the selection list. These decisions must be made before the first hearing session.

Simplified Panels and Virtual Pre-Hearing Sessions

One notable change is the introduction of a simplified panel consisting of a single arbitrator for cases involving damages of less than $50,000. This amendment aims to streamline the arbitration process for smaller claims, making it more efficient and less burdensome for the parties involved. The reforms also formally permit virtual pre-hearing sessions, reflecting the growing acceptance of remote proceedings in the legal industry.

Approval and Reception of the Reforms

The Securities and Exchange Commission (SEC) approved FINRA’s proposed changes in September 2023. While a group of plaintiff lawyers representing investors in arbitration welcomed the reforms, they expressed a desire for FINRA to publish the list of arbitrators who were struck for conflicts, along with the director’s rationale for these decisions.

Context of the Reforms

These reforms were partly driven by a controversial ruling from a Georgia state judge, which overturned an arbitration award on the grounds that an outside lawyer representing a wirehouse had an agreement with FINRA to automatically remove arbitrators who had ruled against him in previous cases from the list of potential panelists. Although this state trial court ruling was overturned on appeal in August 2022, it sparked significant criticism of FINRA’s practices from lawmakers and investor advocates.

Ensuring Fairness and Transparency

In response to these criticisms, FINRA hired the law firm Lowenstein Sandler, LLP, to review its arbitrator selection process. While the firm found no evidence of manipulation of the arbitrator pool by the wirehouse or its lawyer, it recommended tweaks to enhance the fairness and transparency of the process. These recommendations have now been incorporated into FINRA’s reforms.

Looking Forward

As FINRA’s new arbitrator selection process takes effect, it is expected to bring more clarity and confidence to the arbitration system. By requiring written explanations for decisions on arbitrator removal requests and allowing for simplified panels and virtual sessions, FINRA aims to create a more equitable and efficient arbitration environment for all parties involved.

Contact Bakhtiari & Harrison for Expert Legal Support

At Bakhtiari & Harrison, our experienced securities attorneys are dedicated to helping clients navigate the complexities of arbitration and dispute resolution. If you need expert legal advice or representation in securities arbitration, contact us today. Our team is committed to ensuring that your interests are protected and that you receive fair and transparent treatment throughout the arbitration process.