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Finra Moves to Fill Chairperson Gaps

Financial Advisor IQ

Self-regulator Finra held in May the first of a series of recruitment events this year for arbitrators who could potentially serve as chairpersons of arbitration panels that serve as de facto judges in cases filed by investors or industry participants.

The chairperson arbitrator recruitment event in Las Vegas, attended by FA-IQ, gathered around 70 prospects. The attendees were mostly lawyers and included some law students and non-law professionals.

The event is part of Finra’s efforts to increase the number of chairperson arbitrators in midsize cities in the U.S. Upcoming recruitment events will be held in Salt Lake City, Utah; Milwaukee, Wis.; St. Louis, Mo.; Birmingham, Ala.; New Orleans, La.; Buffalo, N.Y.; and Hartford, Conn.

Richard Berry, director of Finra’s Office of Dispute Resolution, tells FA-IQ the recruitment is in response to feedback from parties involved in cases brought before Finra’s arbitration and mediation forum.

“We heard from parties that they wanted more local chairpersons,” he says.

The participants have said non-local chairpersons are more likely to drop off a case, for example if scheduling conflicts develop or if they get sick, and this frustrates participants because they’ve already done the work of researching and ranking arbitrators.

Lawyers can serve as chairpersons in Finra’s arbitration panels if they have completed at least one case through to an award as an arbitrator and have finished a special chair training course. Non-lawyers can serve as chairpersons if they have completed at least three cases through to an award as an arbitrator and have finished a special chair training course.

To assign arbitrators to cases, Finra uses a “neutral list selection system” computer algorithm to randomly generate lists of arbitrators as well as chairpersons from its arbitrator roster. There must be at least 20 potential chairpersons in a location to generate a list of potential chairpersons for an arbitration case to be conducted in that location. If there are not enough chairpersons in a location to generate that list, the system pulls names of potential chairpersons from other locations – specifically, those who have agreed to travel for arbitration cases at Finra’s expense.

At the recruitment event in Las Vegas, Berry emphasized that Finra’s arbitration and mediation forum is the largest securities dispute resolution venue in the U.S. The forum handles more than 99% of the securities-related cases in the U.S. There are 71 hearing locations, including at least one in each state plus Puerto Rico and London.

Finra’s arbitrators are classified as public or non-public. Public arbitrators are not required to have specialized knowledge of the securities industry. Non-public arbitrators have worked in the financial industry, or provide services to financial industry clients or to parties engaged in securities arbitration and litigation. Cases are decided either by three-member arbitrator panels – made up of either all-public or majority-public arbitrators – or by a sole public arbitrator.

Berry told the prospective recruits in Las Vegas that Finra is looking for “fair-minded and intelligent individuals” who can “hear all sides of the dispute, study the evidence and then render a final and binding decision.”

When talking about the potential reasons to apply to become an arbitrator, Berry told the attendees the opportunity to serve as the “decision maker” or “judge and jury” in important disputes is among the key reasons. He added that the opportunity to “give back to your community by lending your knowledge and experience to the arbitration process” is another. Other reasons include developing “valuable” professional skills and expanding their network within and outside the securities industry.

Arbitrators receive a “modest” honoraria for their service, according to Finra. Arbitrators are compensated at the rate of $300 per hearing session, with an additional $125 per day if the arbitrator serves as the chairperson at the hearings.

Berry tells FA-IQ a primary goal of Finra’s arbitrator recruitment program is to identify and train a “well-qualified pool of potential arbitrators” from which parties can choose to hear their disputes.

Individuals who wish to join the Finra arbitrator roster must have at least two years of college-level credits and at least five years of paid work experience.

“The majority of applicants exceed these requirements,” and most have a college degree and many have earned advanced degrees, Berry says.

Berry says Finra regularly recruits professionals with established careers, including attorneys, professionals with MBAs, and business owners.

He says more than 3,500 of Finra’s estimated 7,400 arbitrators are attorneys. More than 100 arbitrators are currently or formerly judges. The National Arbitration and Mediation Committee – an advisory committee composed of investor, industry, and neutral (arbitrator and mediator) representatives – must approve each arbitrator applicant.

Finra’s arbitrator applicants are required to provide their complete educational and employment history. They must also disclose any relationships they have or had with entities in the securities industry.

The Office of Dispute Resolution is responsible for processing arbitrator applications, training arbitrators, and reviewing and updating arbitrator disclosure reports. This group performs various searches and checks to ensure that the disclosures included in an applicant’s arbitrator application are complete and accurate, according to Berry.

Berry says Finra provides a comprehensive required training program that new arbitrators must complete before serving. The training is free and is comprised of online basic arbitrator training, online expungement training and classroom training. The classroom training is offered at one of Finra’s regional offices or by live video.

Finra also provides chairperson training, a free course which instructs arbitrators on the added responsibilities of serving as the chairperson of the panel. Completion of this course is one of the prerequisites of serving as a chairperson.

“We are exploring ways to refresh and modernize this training module in the future,” Berry says.

Finra also provides advanced arbitrator trainings on a broad range of topics, which include:

  • Civility in Arbitration: Helps arbitrators evaluate their obligations before and during service on a case and set a proper tone for conducting fair and efficient hearings.
  • Direct Communication Rule: Provides an overview of Finra’s direct communication rule and its practical application.
  • Discovery, Abuses and Sanctions: Focuses on the respective duties of arbitrators and parties in the discovery process, explains the Discovery Guide, and helps arbitrators recognize and address discovery abuses.
  • Understanding the Prehearing Stage: Helps arbitrators manage and organize the Initial Prehearing Conference.
  • Your Duty to Disclose: Explains the importance of arbitrator disclosure and instructs arbitrators on how to make full and complete disclosures.

On top of the chairperson arbitrator recruitment program, Finra is also recruiting arbitrators from diverse backgrounds, professions and geographical locations. For this goal, Finra is conducting outreach to more than 100 minority and women’s groups, attending conferences that attract individuals of varied backgrounds, and networking and hosting events with diversity-based groups.