Securities dispute resolution: Selecting arbitrators

Selection of Arbitrators

Originally prepared by Lucia Benabentos of the Cornell Law School Securities Law Clinic.

An arbitration panel usually consists of either one or three arbitrators. FINRA provides that the number of arbitrators shall depend on the amount in controversy. Where the amount of a claim is $25,000 or less, the panel shall consist of only one arbitrator. Where the claim is more than $25,000 but not more than $50,000, the panel shall consist of one arbitrator unless any party requests otherwise. Where the amount of a claim is more than $50,000 or is unspecified, the panel shall consist of three arbitrators, unless the parties agree in writing otherwise. As of September 2008, FINRA proposed a rule that would increase the threshold values for the number of arbitrators and other matter relating selection of arbitrators. Thus, this particular rule could change in the near future.

Arbitrators are usually lawyers, accountants or members of the industry. They can also be people from all other industries, with different backgrounds and from all parts of the country. The composition of the panel is highly regulated. For a panel consisting of one arbitrator, FINRA requires the arbitrator to be a public person or a person not associated with the industry. For a panel consisting of three arbitrators, FINRA requires one non-public arbitrator or a member of the industry, and two public arbitrators. The selection of a member of the industry is important as it could afford the necessary expertise in understanding the standards and products of the securities industry and complex problems in the industry. These rules may be subject to change in the near future, as proposed rules are currently being considered. FINRA maintains a roster of arbitrators who are trained and approved by the institution. Some of them may even work in the securities industry.

FINRA will issue a list of potential arbitrators. The parties have 30 days to reply with a list of chosen arbitrators. Each party may strike four arbitrators from the list, but at least four must remain on the list. Then, the parties shall rank their preference for arbitrators. From these lists, a panel is chosen. The selection of arbitrators is a very important decision. Parties should consider the knowledge and experience potential arbitrators can bring to understanding and resolving the dispute, costs associated with having more than one arbitrator, the willingness of various arbitrators to collaborate, etc.

It is important to note that arbitrators do not work for FINRA, though they receive an honorarium from FINRA in recognition of their service. They are paid by the parties as part of the costs of arbitration.

The parties have the opportunity to challenge the arbitrators appointed to the panel, if the party determines the arbitrator to be unsuitable due to special circumstances that might preclude the arbitrator from making an impartial and objective decision. Available challenges include:

  1. Any direct or indirect financial or personal interest in the outcome of the arbitration;
  2. Any existing or past financial, business, professional, family, social, or other relationships or circumstances with any party, any party's representative, or anyone who the arbitrator is told may be a witness in the proceeding, that are likely to affect impartiality or might reasonably create an appearance of partiality or bias;
  3. Any such relationship or circumstances involving members of the arbitrator's family or the arbitrator's current employers, partners, or business associates; and 
  4. Any existing or past service as a mediator for any of the parties in the case for which the arbitrator has been selected. 

Additionally, arbitrators have a duty to disclose any interests, relationships, or circumstances that might preclude him or her from rendering an objective and impartial decision on the arbitration.

 

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