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FINRA Proposes to Increase the Number of Arbitrators Available for Ranking and Selection

By: George C. Miller, Esq., Shustak Reynolds & Partners, P.C., California and New York July, 2010       

The Financial Industry Regulatory Authority (FINRA) recently submitted a proposal to the Securities and Exchange Commission (SEC) to increase the number of arbitrators available for ranking and selection in an arbitration claim. If, as anticipated, FINRA’s proposal is approved by the SEC, it will amend Rules 12403 and 12404 of the Customer Code2, and Rules 13403 and 13404 of the Industry Code3, to increase the pool of arbitrators provided to the parties from eight to ten per category.

Under the current rules, FINRA’s computer system randomly generates lists of eight arbitrators from several categories – including chairpersons, public, and non-public “industry” arbitrators – depending on the type of claim asserted and the amount in dispute. Claims involving less than $100,000.00 in dispute generally are heard by a sole arbitrator, meaning the parties need only rank or strike one group of eight arbitrators. Claims over the $100,000.00 threshold are heard by a three arbitrator panel chosen from a pool of twenty-four.

By adding two arbitrators to each category, FINRA will greatly reduce the likelihood that a random arbitrator (colloquially referred to as a “cram-down”), whom none of the parties have had an opportunity to vet, will be appointed. Instead of striking four of eight arbitrators per category, each side will strike just four of ten potential panelists, meaning there will always be two arbitrators remaining. Presumably, counsel will have had the benefit of vetting and ranking all potential panelists, including these two.

The rule, however, will not prevent random arbitrators from being appointed in all circumstances. In cases involving multiple Claimants or Respondents represented by different attorneys, the ranking and striking process still could result in the parties striking all arbitrators in one or more categories, since, collectively, there could be twelve or more strikes exercised on each category of ten arbitrators. Moreover, as panelists are sometimes recused for conflicts of interest or personal reasons, FINRA occasionally may be required to appoint a random alternate panelist.

While their involvement prior to hearings is somewhat limited, having a fair panel is advantageous when making or opposing discovery and other pre-hearing motions. Of course, the panel also will decide the ultimate fate of a case if it goes to hearings. Though imperfect, FINRA’s proposal will bring a welcome change to the current system, as the arbitrator ranking and selection process is an important aspect of preparing a claim for hearings.

Schedule a free initial consultation by calling Shustak Reynolds & Partners, P.C. toll free at 888-748-8748, or contact us online

1 Mr. Miller is an associate based in the firm’s San Diego office. His practice focuses on securities arbitrations, business and corporate litigation, contractual disputes, and real estate litigation.

2 See http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4141 and http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4142.

3 See http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4238 and http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4239.

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