Finra proposes to Illuminate arbitrator selection process

Finra proposes to Illuminate arbitrator selection process
The measure codifies Finra's practice for vetting arbitrators for conflicts of interest, and it requires a written explanation when a challenge to an arbitrator's seating is granted or denied.
JAN 04, 2023

Finra wants to make clear how arbitrators are chosen to preside over brokerage industry legal disputes following a court decision last year that vacated an arbitration award over alleged manipulation of the arbitration panel.

On Dec. 23, the Financial Industry Regulatory Authority Inc. filed a proposal with the Securities and Exchange Commission that would make changes to the arbitrator selection process.

The proposal would codify the current Finra practice of manually reviewing arbitrator conflicts that are not identified by the selection algorithm that Finra uses. If an arbitrator is conflicted out of a case, the algorithm would select a new arbitrator.

Under the proposal, the Finra arbitration director would provide a written explanation whenever a challenge to remove an arbitrator is granted or denied.   

The proposal also would make changes related to pre-hearing conferences and hearing sessions as well as to initiating, responding to and dismissing claims and cases and providing a hearing record. The proposal also would allow arbitrations of $50,000 or less to be conducted via video conference.

The reforms are in response to a report last year by the law firm Lowenstein Sandler, which reviewed Finra’s arbitrator selection process following a decision in a Georgia court that scuttled a Finra arbitration award because of alleged arbitrator tampering. The firm found no evidence of improper agreements to remove certain arbitrators from industry cases, but it did make recommendations for improving the selection process.

“Finra is proposing to amend the codes to provide greater transparency and consistency regarding the arbitrator list selection process, and to clarify the application of certain procedures and include expressly these procedures in various rules in the codes,” the rule proposal states. “The proposed rule change would enhance the transparency of the arbitration forum administered by Finra Dispute Resolution Services.”

Finra runs the arbitration system that adjudicates disputes between customers, registered representatives and brokerages.

The Public Investors Advocate Bar Association has been a leading proponent of arbitration reform. The organization had a positive initial reaction to the proposal.

“PIABA’s pleased that Finra is apparently taking the Lowenstein report seriously and making efforts to incorporate its suggestions into the rules,” said PIABA President Hugh Berkson.

Christine Lazaro, a professor of law at St. John’s University, said that the proposal essentially codifies existing Finra procedures.

“It’s small reforms,” said Lazaro, who also is director of the Securities Arbitration Clinic at St. John’s. “It’s a bigger reform in the context of transparency, less so in practice.”

Arbitration experts were just beginning to review the proposal this week, after it was filed with the SEC just prior to Christmas. The SEC must approve Finra rule changes.

Lisa Braganca, a Chicago securities attorney, took issue with Finra going straight to the SEC with the proposal rather than opening it to a public comment process first.

“I find it interesting Finra did not want to hear from investor advocates before they put the proposal in front of the SEC,” said Braganca, owner of an eponymous law firm and former president of the PIABA Foundation.

The SEC may seek public comment as it reviews the proposal.

“It is a little odd that [Finra] did not seek any input from anyone,” said Berkson, a principal at McCarthy Lebit Crystal & Liffman.

Finra said it is following its normal rulemaking procedure.

“Filing a proposal with the SEC — where there will be opportunities to comment — is one of the standard paths clearly spelled out in Finra’s rulemaking process,” Finra spokesperson Rita De Ramos wrote in an email. “Before this proposed rule change was submitted to the Finra Board of Governors for approval and then to the SEC for filing, it was reviewed by several Finra advisory committees, including the Investor Issues Committee, which includes consumer advocates, as well as the National Arbitration and Mediation Committee, which makes recommendations to Finra regarding recruitment, qualification, training, and evaluation of arbitrators and mediators.”

Braganca also criticized Finra for not revealing more about its arbitrator selection algorithm.

“Finra keeps that super secret,” she said. “That algorithm is really something that should be transparent. Arbitrator selection goes to the heart of the Finra dispute resolution process.”

The timeline for SEC review of the proposal is not clear.

‘IN the Nasdaq’ with Gregg Fisher, small-cap portfolio manager at Quent Capital

Latest News

Slow is smooth, smooth is fast
Slow is smooth, smooth is fast

Chasing productivity is one thing, but when you're cutting corners, missing details, and making mistakes, it's time to take a step back.

Edward Jones layoffs about to hit employees, home office staff
Edward Jones layoffs about to hit employees, home office staff

It is not clear how many employees will be affected, but none of the private partnership’s 20,000 financial advisors will see their jobs at risk.

CFP Board hails record July exam turnout with 3,214 test-takers
CFP Board hails record July exam turnout with 3,214 test-takers

The historic summer sitting saw a roughly two-thirds pass rate, with most CFP hopefuls falling in the under-40 age group.

Founder of water vending machine company, portfolio manager, charged in $275M Ponzi scheme
Founder of water vending machine company, portfolio manager, charged in $275M Ponzi scheme

"The greed and deception of this Ponzi scheme has resulted in the same way they have throughout history," said Daniel Brubaker, U.S. Postal Inspection Service inspector in charge.

Advisor moves: Raymond James, Wells Fargo reel in billion dollar-plus advisor teams
Advisor moves: Raymond James, Wells Fargo reel in billion dollar-plus advisor teams

Elsewhere, an advisor formerly with a Commonwealth affiliate firm is launching her own independent practice with an Osaic OSJ.

SPONSORED Delivering family office services critical to advisor success

Stan Gregor, Chairman & CEO of Summit Financial Holdings, explores how RIAs can meet growing demand for family office-style services among mass affluent clients through tax-first planning, technology, and collaboration—positioning firms for long-term success

SPONSORED Passing on more than wealth: why purpose should be part of every estate plan

Chris Vizzi, Co-Founder & Partner of South Coast Investment Advisors, LLC, shares how 2025 estate tax changes—$13.99M per person—offer more than tax savings. Learn how to pass on purpose, values, and vision to unite generations and give wealth lasting meaning