The Neutral List Selection Process
The FINRA Code is actually two codes. The Customer Code “governs arbitrations between investors and brokers and/or brokerage firms” and is the 12000 series. The Industry Code “governs arbitrations between or among industry parties only” and is the 13000 series.
Arbitrator selection timing. An arbitration may have multiple respondents, in which case each respondent may be served with the Statement of Claim by the director of the Office of Dispute Resolution at a different time. See FINRA Code of Arbitration Procedure Rules R. 12300(c)(1), 12302(c). A respondent’s answer is due 45 days after the respondent’s receipt of the claim. R. 12303(a). Therefore, in cases involving multiple respondents, the answers are not likely to be due all at the same time. Notwithstanding this, all parties will be provided with a list of potential arbitrators at the same time. Within 30 days after the last answer was due, the parties are presented with a list of arbitrators randomly generated by a computer system from FINRA’s roster of arbitrators from which to select their panel. R. 12402(c), 12403(b), 13403(c). This time period is not extended in cases in which the parties have agreed to extend the time to answer.
The list. The Neutral List Selection System is a computer system that generates random lists of arbitrators in an attempt to avoid conflicts with the parties in the case. R. 12402(b)(2), 12403(a)(3), 13403(a)(4). Therefore, it should not be the case that your opposing counsel or an employee of the party broker-dealer is on the list. If there is such a conflict, contact your FINRA administrator and request a new list. In addition to initially screening for conflicts, FINRA sends the parties a list of proposed arbitrators with biographies to permit the parties to review conflicts for themselves and to select a panel of arbitrators through a rank-and-strike system. R. 12402(c), 12403(b), 13403(c)(1).
The number of arbitrators. The number of arbitrators on a panel, and consequently the number of names generated by the Neutral List Selection System, will depend on the nature of the case and the amount in controversy. A case that alleges compensatory damages of $50,000 or less (the “Simplified Arbitration”) will be given a list of 10 arbitrators from which the parties will select one arbitrator. R. 12401(a), 13401(a). That single arbitrator will decide the case on the written submissions. If the case claims more than $50,000 in compensatory damages but less than $100,000, unless the parties agree in writing otherwise, they will be given a single arbitrator who will preside over a hearing. R. 12401(b), 13401(b). In both of these cases, the parties will be given a list of 10 arbitrators, from which each party may strike up to 4 arbitrators (without explanation) and rank the remaining arbitrators, with “1” being their first-choice arbitrator. R. 12402(d), 13402(d). The lowest-ranked arbitrator will serve as the arbitrator for that case.
The three-arbitrator case. In cases consisting of three arbitrators, the Neutral List Selection System will generate three lists. For customer cases, those lists will consist of the following:
(A) A list of 10 arbitrators from the FINRA nonpublic arbitrator roster;
(B) A list of 15 arbitrators from the FINRA public arbitrator roster; and
(C) A list of 10 public arbitrators from the FINRA chairperson roster.
R. 12403(a).
After the claim is served, FINRA will advise the customer that he or she has the right to elect the option of public arbitrators only. The customer then has 35 days in which to choose this option. R. 12403(b)(2). If this option is chosen, either party may choose to strike all nonpublic arbitrators and compose a panel of solely public arbitrators. R. 12403(b)(1).
The chair-qualified arbitrator. The “Eligibility for Chairperson Roster” is defined differently in the Customer Code than it is in the Industry Code. Specifically, the Customer Code defines it as follows:
In customer disputes, chairpersons must be public arbitrators. Arbitrators are eligible for the chairperson roster if they have completed chairperson training provided by FINRA and:
(1) Have a law degree and are a member of a bar of at least one jurisdiction and have served as an arbitrator through award on at least one arbitration administered by a self-regulatory organization in which hearings were held; or
(2) Have served as an arbitrator through award on at least three arbitrations administered by a self-regulatory organization in which hearings were held.
FINRA Customer Code R. 12400(c) (emphasis added).
The Industry Code defines it as follows:
Arbitrators are eligible to serve as chairperson of panels submitted for arbitration under the Code if they have completed chairperson training provided by FINRA and:
(1) Have a law degree and are a member of a bar of at least one jurisdiction and have served as an arbitrator through award on at least one arbitration administered by a self-regulatory organization in which hearings were held; or
(2) Have served as an arbitrator through award on at least three arbitrations administered by a self-regulatory organization in which hearings were held.
FINRA Industry Code R. 13400(c).
The other two categories, “public arbitrators” and “non-public arbitrators,” are defined in reference to each other, and they are in flux and will likely change by the time of the publication of this article or shortly thereafter. Therefore, the discussion regarding who falls within each category requires some background information.
Changes in arbitrator categories. FINRA, previously the National Association of Securities Dealers (NASD), once had a category system in which the three arbitration panel seats were defined as “public arbitrator,” who was an individual unaffiliated with the securities industry; “industry arbitrator,” who was an individual actively working for a brokerage firm, usually in a sales or compliance capacity; and the “chair,” who was in customer cases a public arbitrator with additional qualifications and training, and often an attorney. As time passed, advocates for public investors raised concerns that the “public arbitrator” category included individuals who were not employees but had some affiliations with the securities industry and were therefore perceived to have some bias in favor of the industry parties to the arbitration. In an effort to improve the perception of fairness, the NASD, and thereafter FINRA, moved these “public arbitrators” to the “industry arbitrator” category. However, the industry category soon became filled with individuals who were not industry affiliates. The category was renamed the “non-public arbitrators” category, but public investor advocates continued to argue it was still not public enough. Therefore, in 2015, FINRA removed from the “public industry” category any individual who once worked in the securities industry, had family members affiliated with the securities industry, represented industry members or associated persons in arbitrations or litigations, represented public investors against industry members or associated persons in arbitrations or litigation, or worked for entities where a fellow employee received $50,000 or more from the securities industry.
As a result, there were individuals who were otherwise qualified to be arbitrators who no longer fit within the definitions of “public arbitrator” or “non-public arbitrator.” They could not, therefore, serve in any capacity on a FINRA panel. On October 7, 2017, the nonpublic arbitrator category was amended to include anyone who did not fit into the “public” arbitrator category: a “non-public arbitrator” is “a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator.” SR FINRA-2017-05; FINRA Regulatory Notice 17-29).
The public arbitrator. The public arbitrator definition reflects fine-tuning that has occurred over the years. While long and complicated, the definition excludes individuals with perceived industry connections from the public arbitrator category, even if the connection is not direct.
The nonpublic arbitrator. Currently, the “non-public” arbitrator is defined as “a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator under paragraph (y).”
The single-arbitrator case. In a single arbitration case, the arbitrator will be “chair qualified.”
In customer cases, this individual will be a public arbitrator. R. 12402(a). In industry cases, the individual will be a nonpublic arbitrator. R. 13402(a)(1) (with certain exceptions discussed below).
The promissory note case. For the most part, as in customer cases, the number of panelists in industry arbitrations is determined by the amount in controversy. R. 13401. An exception to this rule is the promissory note case. Regardless of the amount at issue, promissory note cases are heard by a single arbitrator if the associated person does not file a counterclaim or third-party claim, or files a counterclaim or third-party claim for damages of less than $100,000. If the amount is below $50,000, the matter will be decided on the papers. If it is above $50,000, it is decided by a single arbitrator at a hearing. The chairperson will appoint three arbitrators to hear matters where the associated person files a counterclaim or third-party claim requesting either no damages or damages of $100,000 or more.
If the dispute is between only members (FINRA-registered broker-dealers are FINRA members), then the single arbitrator will be a nonpublic arbitrator selected from the chair-qualified list. If it is a three-person panel, all three will be nonpublic arbitrators. R. 13402(a)(1). However, if an associated person (member employees are associated persons) is a party, the single arbitrator will be selected from the public arbitrator list. R. 13806(c)(1). In industry arbitrations involving an associated person with a three-person panel, the chair will be selected from a public chair-qualified list and a second arbitrator will be selected from the public arbitrator lists. R. 13806(c)(2).
The arbitrators in statutory discrimination cases. Employment disputes between members and associated persons are governed by the Industry Code.
Statutory employment discrimination claims and statutory whistleblower claims are excluded from the pre-dispute arbitration agreement that binds employees to the FINRA forum under most circumstances. R. 13201. In employment discrimination cases (including sexual harassment), the arbitration agreement must explicitly cover statutory discrimination in order to be eligible for the FINRA forum. R. 13201(a). In statutory whistleblower cases, the parties must agree to the FINRA forum post-dispute. R. 13201(b).
A single arbitrator hears discrimination claims alleging damages of $100,000 or less. R. 13802(b)(1). Otherwise, claims will be heard by a panel of three arbitrators. R. 13802(b)(2). Absent agreement by the parties, the qualifications for arbitrators on these panels differ from other types of cases. Specifically, the rules provide that at least one arbitrator must have a law degree, membership in the bar of any jurisdiction, and 10 or more years of legal experience. In addition, that arbitrator “may not have represented primarily the views of employers or of employees within the last five years” with “‘primarily’ . . . interpreted to mean 50% or more of the arbitrator’s business or professional activities within the last five years.” R. 13802(c)(3), (4).
Vetting Your Arbitrators
Thirty days after the last served respondent’s answer is due, FINRA will upload onto the FINRA Party Portal a memorandum addressed to the parties’ counsel advising them that their case is ready for the appointment of arbitrators. It will advise that the parties’ rankings are due 20 days from the date of the communication and must be accomplished online through the FINRA portal. R. 12300(a). The communication will also have enclosed Arbitrator Disclosure Reports for each arbitrator on the list of proposed arbitrators. The disclosures will be accompanied by a table of contents that lists each arbitrator and his or her corresponding FINRA identification number and a ranking form (previously used for the actual ranking but now available for use as a worksheet in preparation for the online ranking).
Each arbitrator has an ongoing obligation to disclose information that may compromise his or her ability to be neutral. R. 12405, 13408. Therefore, on the disclosure report, each arbitrator will disclose identification information including name, arbitrator ID number, city, classification (public, nonpublic), chair status, skills, and whether the arbitrator is registered on the DR Portal (the arbitrator equivalent of the parties’ FINRA portal). The disclosure report will also give information relating to the arbitrator’s employment history, education, FINRA training (e.g., chairperson, discovery, expungement), and conflict information (including where the arbitrator has his or her securities accounts, the names of broker-dealers the arbitrator has been opposed to as a party or attorney, bar associations, online activities (blogs), etc.) The arbitrator will also provide a narrative describing his or her background and qualifications.
FINRA will provide the arbitrator’s publicly available awards, as well as cases that are still pending in which the arbitrator is on the panel. Parties may also access information regarding arbitrators who are licensed with FINRA through FINRA’s BrokerCheck. They may also, of course, access any publicly available information about the arbitrator.
In addition to this information, a party may access copies of the arbitrator’s past awards without cost on the FINRA website. A party may receive an analysis of an arbitrator’s award history through private vendors. A party may also ask FINRA to pose a question to an arbitrator if the background information provided is unclear. FINRA estimates that it takes about 10 days to respond to a party’s product-related request. The parties will then have 20 days from that response to the product-related request to rank the arbitrators. No other request will toll the parties’ initial 20-day period of time to rank the arbitrators.
With the information you gather you can, strategically determine which arbitrators you would like to have serving on your panel. You, therefore, now have the tools to strike and rank your arbitrators. While peremptory strikes are limited, strikes for cause are not. FINRA has given examples of when a challenge for cause will likely be granted.
Challenges for Cause
The following list, though not exhaustive, shows examples of circumstances where a challenge for cause would likely be granted. Generally, absent good cause, a party’s ability to challenge an arbitrator may be deemed waived if the challenge is not timely filed after a new disclosure is discovered by a party.
Opinion and Bias
- Arbitrator has a firm opinion or belief as to the subject of a case for which he or she is an arbitrator.
- Arbitrator has a personal bias toward a party or party representative.
Personal Relationships
- Arbitrator is or was related by blood or marriage to a party, its attorneys, or witnesses.
- Arbitrator is or was a party’s guardian.
Business Relationships
- Arbitrator is or was a business partner, vendor, customer, or client of a party.
- Arbitrator is a surety or guarantor of the obligations of a party.
- Arbitrator is currently a creditor or shareholder of any corporate party or has any business relationship with a party.
- Arbitrator is or was a conservator or conservatee, employer or employee, principal or agent, or debtor or creditor of either a party or an officer of a corporation that is a party.
- Arbitrator is the parent, spouse, or child of a person who is or was a conservator or conservatee, employer or employee, principal or agent, or debtor or creditor of either a party or an officer of a corporation that is a party.
Current Involvement
- Arbitrator is adverse to a party, its attorneys, or witnesses.
- Arbitrator is a party to or the subject of a complaint, arbitration, or litigation involving a securities investment.
- Arbitrator is currently an expert witness for a party.
Previous Involvement
- A party, its attorneys, or witnesses previously accused an arbitrator of wrongdoing in a prior action.
- A party, its attorneys, or witnesses filed a motion to vacate challenging an award in a case in which the arbitrator had participated and signed the award.
- Arbitrator issued a complaint against a party, its attorneys, or witnesses in an action instituted or resolved during the past five years.
- Arbitrator or any member, shareholder or associate of, or of counsel to his or her law firm, has had an attorney-client relationship with a party within three years of the filing of the arbitration claim.
- Arbitrator or any member, shareholder or associate of, or of counsel to his or her law firm, has had an attorney-client relationship adverse to a party within three years of the filing of the arbitration claim.
Financial Interest
- Arbitrator knows that he or she has, individually or as a fiduciary, a financial interest in the subject matter in controversy or in a party in the arbitration proceeding or any other interest that could be substantially affected by the outcome of the arbitration proceeding.
- Arbitrator’s immediate family member (as defined in Rule 12100) has a financial interest in the subject matter in controversy or in a party in the arbitration proceeding or any other interest that could be substantially affected by the outcome of the arbitration proceeding.
Expert Witnesses
- An arbitrator in this matter testified as an expert witness against a party during the past five years.
- An arbitrator in this matter testified as an expert witness for a party during the past five years.
- An arbitrator in this matter was retained as an expert witness (but did not testify) in an action involving a party during the past three years.
- An arbitrator in this matter was retained as an expert witness by a party’s counsel, or his or her law firm, in an action during the past three years (where no party in this matter was involved in the earlier action).
If you find your arbitrator has an actual conflict with your client, you must raise it as soon as you discover it. This will prevent the inadvertent waiver of the conflict. If you wait to see if you are victorious before raising what would have been an appropriate challenge to an arbitrator serving on your panel, you will likely have waived that challenge. See, e.g., Delta Mine Holding Co. v. AFC Coal Props., Inc., 280 F.3d 815, 821 (8th Cir. 2001) (holding that the party waived the issue of evident partiality by failing to raise it before the panel); Fid. Fed. Bank, FSB v. Durga Ma Corp., 386 F.3d 1306, 1313 (9th Cir. 2004) (holding that, by waiting until award issued, the losing party waived its right to claim evident partiality).
Conclusion
In arbitration, as in trial, there are many variables over which you have no control. Arbitrator selection is one variable into which you and your client have input, and for that reason, it is worth the extra effort it takes to know your audience. Treat your arbitrator selection as you would jury selection. With that effort, while you may not get your ideal trier of fact, you are also unlikely to get your worst trier of fact.
Sandra D. Grannum is a partner with with Drinker Biddle & Reath in Florham Park, New Jersey, and New York City, New York.