Compliance and Regulatory Alerts | 03-02-23
FINRA Arbitration Update - February 2023
FINRA proposed amendments to the Codes of Arbitration Procedures for Customer Disputes and Industry Disputes that would affect the arbitrator list selection process. The proposed amendments would also make clarifying changes on administrative practices. The amendments stem from a report published in June, 2022, that was commissioned by FINRA’s Audit Committee of the Board of Governors (“the Lowenstein Report”). Based on an analysis of a recent case involving the arbitrator list selection process, the report made recommendations to better “reflect the neutrality of the DRS [dispute resolution services] forum and to further promote uniformity and consistency among the different DRS regions.” (See prior Bates coverage.)
Arbitrator Selection Process
Substantive aspects of the proposed amendments address potential conflicts of interest in the arbitrator selection process. The proposed amendments would:
- Specifically state that prior to sending to the parties an arbitrator list generated randomly from the DRS roster of arbitrators, the DRS’s Neutral Management Department “shall conduct a manual review for conflicts of interest”;
- Clarify that the Director will exclude arbitrators from the lists after a review of current conflicts of interest not identified within the list selection algorithm;
- Codify that the Director provide a written explanation to the parties of a decision to grant or deny a party’s request to remove an arbitrator; and
- Clarify that the Director may remove an arbitrator for conflict of interest or bias, either upon request of a party or on the Director’s own initiative, any time after the arbitrator ranking lists are sent but before the first hearing session begins.
The proposed amendments would also make procedural and clarifying changes on administrative practices, as to prehearing conferences or special hearings (by video,) and hearing sessions (in person), protection of personal confidential information (redactions); responding to claims (including amendments and third-party claims), motions practice (to ensure all parties have timely filings and notifications), dismissals (insufficient service and awards), and hearing recordkeeping (on distributing copies and executive sessions). If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice.
Efforts at ensuring fairness and transparency in processes can only strengthen FINRA’s dispute resolution system as a trusted venue to resolve claims. For practitioners, these detailed changes in practice and procedure must be reviewed thoroughly. Bates will keep you apprised.
Bates stands ready to support clients with their FINRA arbitration matters. Our Securities and Financial Services Litigation practice provides retail and institutional litigation consulting and data-driven analytic support and solutions for broker-dealers, RIAs, banks and insurance companies. Our quantitative analysis and qualitative case strategy, advice, and expert testimony cover the full spectrum of investment activity. We work closely with our clients to examine the issues, markets, industry, regulatory context, historical analogy, and other experts’ work product to develop thoughtful, precise, and dispassionate analysis and testimony based on experience and judgment.
Bates also offers Arbitrator Evaluator™ – your source for FINRA arbitrator selection. It summarizes disclosure reports into one easy-to-read document, helping to streamline your arbitrator ranking and selection process. Powered by 30 years of SAC awards data and FINRA arbitration decisions, Arbitrator Evaluator saves you research time and provides essential information and links to awards for better decision making.
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