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Changes to FINRA’s arbitrator selection process set to take effect next month

On Behalf of | Feb 14, 2024 | FINRA Compliance

The Financial Industry Regulatory Authority has notified member firms of amendments that have been made to its arbitrator list selection process, ThinkAdvisor reports.

In Regulatory Notice 24-03, FINRA said it was making the changes in response to a report from Lowenstein Sandler LLP, which called for greater transparency and consistency in the process for selecting arbitrators for FINRA Dispute Resolution Services (DRS).  FINRA hired the firm to review how DRS complied with its rules, policies and procedures for arbitrator selection. DRS administers an arbitration forum to assist in the resolution of disputes involving investors, securities firms and their registered employees.

The Lowenstein Sandler firm was retained after a judge vacated a decision by FINRA arbitrators in favor of Wells Fargo in a dispute with a former client. The judge said that FINRA had permitted Wells Fargo and its counsel to manipulate the arbitrator selection process.

In response to the recommendations in the law firm’s report, FINRA said it is amending its Codes of Arbitration Procedure to change the process for selecting arbitrators.

One amendment will provide that a list selection algorithm will randomly generate the lists of arbitrators from the DRS roster of arbitrators for the selected hearing location for each proceeding, and exclude arbitrators from the lists based upon current conflicts of interest identified within the list selection algorithm.

In addition Lowenstein Sandler recommended that, to improve transparency, DRS should consider amending its policies to require a written explanation whenever a challenge to remove an arbitrator is granted or denied, if a written explanation is requested by either party.  The amendments codify this practice by providing that the Director shall provide a written explanation of the Director’s decision to grant or deny a party’s request to remove an arbitrator.

The amendments also specify that when the Director sends the arbitrator ranking list generated by the list selection algorithm to the parties, but before the first hearing session begins, the Director may remove an arbitrator for conflict of interest or bias.

Furthermore, FINRA said it will make technical changes to requirements in the codes for holding prehearing conferences and hearing sessions, initiating and responding to claims, motion practice, claim and case dismissals, and providing a hearing record.

The amendments are effective for arbitration cases filed on or after March 4.

The attorneys at Lewitas Hyman have handled hundreds of arbitrations before FINRA, the Chicago Board Options Exchange, the Chicago Board of Trade, JAMS, the American Arbitration Association and other self-regulatory organizations nationwide. We have also appeared in courts throughout the United States in various securities-related matters. For more information about our arbitration and litigation services, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.