FINRA increases number of arbitrators on lists for parties to rank and strike

Effective September 27, 2010, FINRA’s Code of Arbitration Procedure will be amended to increase from eight to ten the number of arbitrator candidates parties will receive on each of the prospective panel lists (Chair-qualified, public and industry arbitrator lists) that FINRA generates during the neutral selection process.  FINRA proposed this change, and the SEC quickly approved it, in response to complaints voiced from parties and counsel that the neutral list selection system – in which parties may strike up to four names on each list and rank the remaining names — too often resulted in the appointment of an “extended list” arbitrator.  This appointment reduces parties’ input in and control over the arbitrator selection process, leading to disputant dissatisfaction with the arbitration panels that heard their disputes.  Recognizing that party selection of a neutral is a critical feature to arbitration, designed to be a consensual dispute resolution mechanism, FINRA proposed increasing the number of names on each list, so that even if each party to a two-party dispute struck four names different from the adverse party, two names would still remain eligible for selection, reducing the likelihood of an “extended list” appointment (known to some who practice frequently in securities arbitration as a “cram-down” arbitrator).  For more details, see FINRA Regulatory Notice 10-37

It will be interesting to review statistics from arbitrator appointments under this new regime to see how often FINRA still has to appoint “extended list” arbitrators.

2 thoughts on “FINRA increases number of arbitrators on lists for parties to rank and strike”

  1. FINRA’s decision to allow parties to choose from a list of ten arbitrators instead of only eight furthers the purposes of the arbitration process. Because each party can strike up to four arbitrators on the list, at least two arbitrators will now remain after the striking process, even if each party strikes four different arbitrators. One of arbitration’s main attractions is the ability it gives parties to design their own process. If parties are forced to use an arbitrator they did not select, they are no longer directing the process. If parties go into arbitration unhappy about who will be deciding their fate, they are less likely to buy into the outcome, thus decreasing party satisfaction and increasing the likelihood that these same parties will have future disputes. Another benefit of arbitration is the opportunity it gives parties to select decision-makers with industry knowledge or expertise who can incorporate this knowledge to make a decision tailored to the parties’ industry, including provisions that go beyond the law. If parties believe the selected arbitrators lack this special knowledge, the arbitration process starts to look more like a courtroom where a judge with only general knowledge on the matter makes a decision based on the law. While all of the issues that FINRA arbitrates will have a financial nature, and the arbitrators will likely all have financial backgrounds, certainly some will be better suited to resolve certain types of disputes than others. Of course, adding two arbitrators to the list will not end all party dissatisfaction with arbitration panels, but it is a step in this direction.

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