The Basics of FINRA Arbitrator Selection

Written By Andrew Winship

When disputes arise between investors and financial firms or brokers, the Financial Industry Regulatory Authority (FINRA) provides an arbitration process to resolve them. Central to this process is the selection of arbitrators—a step that can significantly influence the outcome of a case. Understanding how arbitrators are chosen can help participants feel more informed and empowered throughout the process.

What Is FINRA Arbitration?

FINRA arbitration is a forum for resolving disputes without going to court. It’s often faster and less expensive than litigation, and its rulings are binding. Arbitration is commonly used for cases involving alleged misconduct, breach of contract, or financial mismanagement by brokerage firms or individual brokers.

The Role of Arbitrators

Arbitrators serve as neutral decision-makers, reviewing evidence, hearing arguments, and rendering a final decision. They can be classified into two categories:

  1. Public Arbitrators: Individuals with no significant ties to the securities industry. This category ensures a level of neutrality, often including lawyers, accountants, or academics.

  2. Non-Public Arbitrators: Individuals with industry ties, such as former brokers, compliance officers, or investment advisors. Their expertise can be valuable in resolving complex technical issues.

The Arbitrator Selection Process

The process for selecting arbitrators involves several key steps:

  1. Initial Arbitrator Roster
    FINRA maintains a pool of arbitrators, each vetted for qualifications and impartiality. The parties involved in the dispute are provided with a list of potential arbitrators, which is tailored to the specifics of the case.

  2. Ranking and Striking
    Both parties review the list and can rank arbitrators based on preference. They can also "strike" arbitrators they deem unsuitable. This step ensures that each side has a say in determining the panel's composition.

  3. Panel Composition
    After the ranking and striking process, FINRA appoints the panel. For claims exceeding $100,000, the panel typically consists of three arbitrators—two public arbitrators and one non-public arbitrator. For smaller claims, a single arbitrator, usually a public one, presides over the case.

  4. Challenges for Cause
    If either party believes an arbitrator has a conflict of interest or bias, they can raise a "challenge for cause." FINRA then evaluates the challenge and may replace the arbitrator if the claim is substantiated.

Key Considerations in Arbitrator Selection

  1. Review Arbitrator Profiles: Each arbitrator's profile includes their professional background, case history, and any disclosures of potential conflicts. Parties should scrutinize these profiles carefully.

  2. Balance Expertise and Neutrality: While industry insiders bring valuable expertise, they may also have inherent biases. A well-rounded panel often includes both public and non-public arbitrators.

  3. Be Strategic in Rankings: Consider the nature of your case and the arbitrator’s experience. For example, technical cases may benefit from an arbitrator with a strong industry background.

Tips for Investors Navigating the Process

  • Work with Your Attorney: An experienced securities lawyer can guide you through the selection process and help identify the most suitable arbitrators for your case.

  • Understand the Rules: Familiarize yourself with FINRA’s Code of Arbitration Procedure, particularly the sections on arbitrator selection.

  • Be Proactive: Use your ranking and striking rights strategically to shape the panel composition.

Conclusion

The arbitrator selection process is a crucial part of FINRA arbitration, shaping how disputes are resolved. While the process is designed to ensure fairness, active participation by both parties is essential. By understanding the steps involved and working closely with legal counsel, investors and industry professionals can approach arbitrator selection with confidence and clarity.

This careful preparation sets the stage for a fair and efficient resolution of disputes, reinforcing trust in the arbitration process and the broader financial industry.


Andrew Winship