The best chance your client has to prevail in a FINRA securities arbitration is not necessarily dependent on the merits of the case but on the arbitrators selected by the parties to decide the case.
Like the voir dire process of jury selection, there is an art to selecting the most appropriate arbitrator for particular cases. There are unique procedures and unwritten practices attorneys must be conversant with before utilizing them to their clients’ advantage. And there are certain suggestions all practitioners should be aware of before returning to the list of proposed arbitrators.
Knowing the arbitration selection process, being aware of the ever-evolving definitions of public and non-public arbitrators and being sensitive to special factors depending on the nature of your case are all critical to your client’s success or failure. This article is based on my decades-long experience as an attorney representing investors, brokers and brokerage firms throughout the country and as an arbitrator selected to sit on these cases. This article is neither pro-investor nor pro-brokerage firm; its goal is to help practitioners do the best job possible in probably the most significant stage of a FINRA securities arbitration – the selection of the triers-of-fact.
This blog is the first of three parts describing FINRA’s arbitration selection process. That is followed by FINRA’s expanded and restricted definitions of its arbitrators. Those two parts are the foundation for the third and most important section: recommendations in the selection of FINRA arbitrators.
Part 1 – FINRA Dispute Resolution Rules on Selecting Arbitrators
Parties in FINRA arbitrations will have panels of either one or three arbitrators depending on the amount of the claimed damages and in customer (as opposed to industry) arbitrations, a three member panel can consist of three arbitrators defined by FINRA to be from the public (as opposed to being related to the securities industry or regularly involved in securities arbitrations).
1. Number of Arbitrators Depends on Size of Case – For claims of $50,000 or less, one arbitrator is selected and the claim will be subject to FINRA’s Simplified Arbitration Procedures (http://www.finra.org/arbitration-and-mediation/simplified-arbitrations). For claims of more than $50,000 up to $100,000, the parties will select and FINRA will appoint one arbitrator unless the parties agree to three. For claims of more than $100,000, the parties will select and FINRA will appoint three arbitrators. In customer arbitrations, FINRA Rule 12403 allows any party to select an all public panel of arbitrators.
2. The Computer Based Selection Process – FINRA uses the Neutral List Selection System (NLSS) to randomly generate lists of arbitrators from its rosters of public and non-public arbitrators. The selection process begins after the Respondent’s Answer is due, with FINRA generating three lists of arbitrators (for Chairpersons, public arbitrators and non-public arbitrators). FINRA’s transmission to the parties will include arbitrator background information on Arbitrator Disclosure Reports. Parties will review the information, strike up to four arbitrators from each of the three lists (leaving six on each list), rank the remaining choices and submit their ranked lists to FINRA, which combines the parties’ ranked lists and appoints the highest ranked available arbitrator from each list to serve on the panel (See: FINRA Customer Code Rules 12400-12403 and 12800 and Industry Code Rules 13400-13402 and 13800). In the event no ranked public Chairpersons remain on the combined list, or if all remaining public chairpersons are not available to serve, FINRA will randomly appoint a public Chairperson by using the NLSS.
3. Panel Composition for Customer Cases (See FINRA Customer Code Rules 12400-12401 and 12403) – By striking all of the arbitrators on the non-public list, any party can ensure that the panel will have three public arbitrators. FINRA will not appoint a non-public arbitrator to the panel who has not been selected by the parties; it will appoint the next highest ranked available public arbitrator to complete the panel.
- If none of the remaining arbitrators on the public list is available to serve, FINRA will appoint the next highest-ranked arbitrator appearing on the Chair-qualified public list to complete the panel. If none of the remaining arbitrators on the Chair-qualified public list is available to serve, FINRA will randomly appoint a public arbitrator using NLSS.
4. Panel Composition for Industry Cases (See FINRA Industry Code Rules: 13402-13406) – For arbitration claims that involve only industry parties and that do not contain a statutory discrimination claim, the arbitrators are selected by the parties as follows:
A. Disputes Between Brokerage Firms – For claims of more than $50,000 up to $100,000, the arbitrator will be a non-public arbitrator selected from the non-public Chairperson roster and FINRA will send one list with 10 chair-qualified non-public arbitrators to each of the parties. If no ranked non-public Chairpersons remain on the combined list, or if all remaining non-public Chairpersons are not available to serve, FINRA will randomly appoint a non-public Chairperson by using the NLSS. For claims of more than $100,000 and for unspecified or non-monetary claims, the three arbitrators will be non-public arbitrators, one of whom will be selected from the non-public Chairperson roster.
B. Disputes Between Brokers and Between or Among Brokerage Firms and Brokers – For claims of more than $50,000 up to $100,000, the arbitrator will be a public arbitrator selected from the public Chairperson roster. For claims of more than $100,000 or for unspecified or non-monetary claims, FINRA will send three lists – one with 10 Chair-qualified public arbitrators, one with 10 public arbitrators and one with 10 non-public arbitrators.
Other Types of Intra-Industry Claims
1) Statutory Employment Discrimination (Rule 13802) – If the amount of a claim in a case involving an employment discrimination claim is $100,000 or less, the panel will consist of one arbitrator. If the amount of a claim in a case involving an employment discrimination claim is more than $100,000, the panel will consist of three arbitrators, unless the parties agree in writing to one arbitrator. If the panel consists of one arbitrator, he or she will be a public arbitrator, unless the parties agree in writing otherwise, and if the panel consists of three arbitrators, they will all be public arbitrators.
- Special Statutory Discrimination Claim Qualifications – A single arbitrator or Chairperson of a three-arbitrator panel in a case involving a statutory discrimination claim must have the following qualifications: law degree; membership in the Bar of any jurisdiction; substantial familiarity with employment law; and, 10 or more years of legal experience, of which at least five years must be in either: law practice; law school teaching; government enforcement of equal employment opportunity statutes; experience as a judge, arbitrator or mediator; or, experience as an equal employment opportunity officer or in-house counsel of a corporation.
2) Promissory Note Proceedings (Rule 13806) – This rule applies to arbitrations solely involving a member’s claim that an associated person (i.e., stock broker) failed to pay money owed on a promissory note. The claim may not include any additional allegations.
- The Director of Arbitration will appoint one arbitrator if: the associated person does not file an Answer; the associated person files an Answer but does not allege any counterclaims or third party claims; or, the associated person files an Answer which includes any counterclaims or third party claims requesting money damages and the amount of the counterclaims or third party claims is not more than $100,000 (exclusive of interest and expenses). The arbitrator will be a public arbitrator selected from the Chairperson roster described in Rule 12400(c).
- The Director will appoint three arbitrators if the associated person files any counterclaims or third party claims and the amount of the counterclaims or third party claims is more than $100,000 (exclusive of interest and expenses), or is unspecified or if the counterclaims or third party claims do not request money damages. One arbitrator will be a public arbitrator selected from the Chairperson roster; one will be selected from the roster of public arbitrators; and, one will be selected from the roster of non-public arbitrators.
3) Permanent Injunctive Relief (Rule 13804) – A party seeking a temporary injunctive order from a court with respect to an industry or clearing firm dispute required to be submitted to arbitration under the Code must, at the same time, file with the Director a Statement of Claim requesting permanent injunctive and all other relief with respect to the same dispute in the manner specified under the Code.
- If a court issues a temporary injunctive order, an arbitration hearing on the request for permanent injunctive relief will begin within 15 days of the date the court issues the temporary injunctive order. The hearing on the request for permanent injunctive relief will be heard by a panel of three arbitrators. The composition of the panel will be determined in accordance with Rule 13402.
- In cases in which all of the members of the panel are non-public, the Director will generate and provide to the parties a list of seven arbitrators from the FINRA roster of non-public arbitrators. The Director will send to the parties the employment history for the past 10 years for each listed arbitrator and other background information. At least three of the arbitrators listed shall be lawyers with experience litigating cases involving injunctive relief.
- Each party may exercise one strike to the arbitrators on the list. Within three days of receiving the list, each party shall inform the Director which arbitrator, if any, it wishes to strike, and shall rank the remaining arbitrators in order of preference. The Director shall consolidate the parties’ rankings and shall appoint arbitrators based on the order of rankings on the consolidated list, subject to the arbitrators’ availability and disqualification.
- In cases in which the panel consists of a majority of public arbitrators, the Director will generate and provide to the parties a list of nine arbitrators from the FINRA roster of arbitrators. The Director shall send to the parties employment history for the past 10 years for each listed arbitrator and other background information. At least a majority of the arbitrators listed shall be public arbitrators, and at least four of the arbitrators listed shall be lawyers with experience litigating cases involving injunctive relief.
- Each party may exercise two strikes to the arbitrators on the list. Within three days of receiving the list, each party shall inform the Director which arbitrators, if any, it wishes to strike, and shall rank the remaining arbitrators in order of preference. The Director will combine the parties’ rankings, and will appoint arbitrators based on the order of rankings on the combined list, subject to the arbitrators’ availability and disqualification.
Short List Option to Reduce Extended List Appointments (http://www.finra.org/arbitration-and-mediation/short-list-option-reduce-extended-list-appointments. See more at: http://www.finra.org/industry/faq-short-list-option-reduce-extended-list-appointments-frequently-asked-questions#sthash.vo1h3x5N.dpuf) – What happens when an arbitrator withdraws after a hearing is scheduled? In an effort to increase the parties’ input into selecting replacement arbitrators, FINRA allows parties to agree to review a “short list” of potential arbitrators to find a replacement, rather than accept an extended list appointment.
- FINRA will first attempt to replace the arbitrator by reviewing the lists that the parties previously returned. FINRA then invites any arbitrators previously ranked by the parties to serve. However, where no ranked arbitrators remain from the parties’ initial lists or no remaining arbitrators are able to serve, parties may stipulate to the use of the short list method to select a replacement arbitrator.
- If the parties proceed under the short list replacement option, FINRA staff will use the Neutral List Selection System to generate randomly a list of three potential replacement arbitrators. FINRA will prescreen the arbitrators to confirm their availability for scheduled hearing dates. FINRA then sends to all parties the list of three arbitrators along with a copy of each arbitrator’s Disclosure Report. Each side may strike one name from the list and may then rank all remaining arbitrators’ names in order of preference within a prescribed number of days. FINRA combines each side’s list to find the highest ranked replacement arbitrator.
All parties must agree in order to use the short list option to select a replacement arbitrator. When a hearing is scheduled within five days of an arbitrator’s withdrawal, removal or unavailability, the parties also will need to stipulate to a postponement to use the short list option to select a replacement arbitrator. If the parties do not stipulate to use the short list option, FINRA will appoint a replacement arbitrator by generating randomly a replacement arbitrator’s name using NLSS. Parties may only challenge arbitrators selected by this method for cause.