Securities dispute resolution: Selecting arbitrators

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Arbitration Panel Size
An arbitration panel consists of either one or three arbitrators.  The Financial Industry Regulatory Authority (FINRA) provides that the number of arbitrators shall depend on the amount in controversy.  Where the amount of a claim is $50,000 or less, the panel shall consist of one arbitrator.  Where the claim is more than $50,000 but not more than $100,000, the panel shall consist of one arbitrator unless the parties agree to three arbitrators in writing.  Where the amount of a claim is more than $100,000, a claim is unspecified, or a claim is non-monetary, the panel shall consist of three arbitrators, unless the parties agree to one arbitrator in writing.

Arbitrators’ Backgrounds
There are over 6,000 FINRA arbitrators.  FINRA classifies them as either public or non-public.  While public arbitrators need not have securities industry knowledge, non-public arbitrators typically have a background in securities.  Generally, FINRA arbitrators must have at least five years of business or professional experience and at least two years of college-level education.  FINRA recruits arbitrators from diverse professions, including lawyers, doctors, accountants, securities professionals, and members of other industries.  Arbitrators are independent contractors and are not employees of FINRA.  Arbitrators receive an honorarium from FINRA in recognition of their service and are not paid by the parties directly.

Arbitrator Selection Process
After the respondent’s answer is due, FINRA’s Neutral List Selection System (NLSS) generates one or three lists of potential arbitrators depending on the panel size.  FINRA distributes the list(s) and the arbitrators’ background information to the parties for review.  Each separately represented party may strike arbitrators it does not want within the limits set by the FINRA rules, and rank the remaining choices.

For a panel consisting of one arbitrator, FINRA requires the arbitrator to be a Chair-qualified public person or a person not associated with the securities industry, unless the parties agree otherwise.  FINRA randomly generates and sends one list with ten public arbitrators to the parties.  The maximum number of arbitrators that each separately represented party may strike is four.  Thus, each separately represented party will rank anywhere from six to ten remaining arbitrators.

For a panel consisting of three arbitrators, FINRA randomly generates one list with ten non-public arbitrators and two lists, each with ten public arbitrators, one of which lists is Chair-qualified.  Under Rule 12403, FINRA permits any party to select three public arbitrators for the whole panel.  The maximum number of public arbitrators that each separately represented party may strike from each public list is four.  Each separately represented party, however, may strike an unlimited number of arbitrators on the non-public list.  Thus, if a party does not want any non-public arbitrator on the panel, the party may strike all the ten arbitrators on the non-public list.

The parties have twenty (20) days to return their ranked lists to FINRA.  After combining the parties’ lists, FINRA appoints the arbitrators for the panel.  During this process, if no arbitrator can be selected from a list because of the parties’ strikes, FINRA will randomly select and appoint a public arbitrator using the NLSS.

The following FINRA rules contain details of the procedures for this selection process:

The selection of arbitrators is an important decision as it could afford the necessary expertise in understanding the standards, products, and complex problems of the securities industry.  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, and the willingness of various arbitrators to collaborate.

Challenging the Appointed Arbitrators
Before the first hearing session, an arbitrator may be removed for conflict of interest.  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.    

Arbitrators have a continuing duty to disclose any circumstances that might preclude them from rendering an objective decision on the arbitration.  These circumstances are stated in Rule 12405(a) as the following:

  • Any direct or indirect financial or personal interest in the outcome of the arbitration.
  • 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.
  • Any such relationship or circumstances involving members of the arbitrator's family or the arbitrator's current employers, partners, or business associates.
  • Any existing or past service as a mediator for any of the parties in the case for which the arbitrator has been selected.

After the first hearing session, an arbitrator may be removed only based on information such as the aforementioned circumstances that the arbitrator should have disclosed but failed to do so under Rule 12405.

For more information, see: