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Reforms set to begin for process of choosing arbitrators for FINRA forums

On Behalf of | Feb 26, 2024 | FINRA Compliance

Beginning next Monday, the process of choosing arbitrators for Financial Industry Regulatory Authority forums will undergo some revisions, AdvisorHub reports.

FINRA is making the rules changes in response to an independent review by a law firm, which called for greater transparency and consistency in the process for selecting arbitrators for FINRA Dispute Resolution Services (DRS).  FINRA hired the firm, Lowenstein Sandler, 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 firm was retained after a judge in Georgia 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.

One change to the process starting next week will be 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.

Lowenstein Sandler also recommended that in order 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.

In addition, the amendments 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.  Special proceedings are to be conducted by video conference.

“Specifically, the amendments provide that a special proceeding will be held by video conference, unless the customer requests at least 60 days before the first scheduled hearing that it be held by telephone, or the parties agree to another type of hearing session,” according to FINRA.

The reforms were approved in September by the Securities and Exchange Commission.

The Georgia ruling that led to these reforms was overturned on appeal, and Lowenstein Sandler found no evidence that Wells Fargo and an outside lawyer had manipulated the pool of arbitrators.

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.