Arbitration Selection: Do Your Own Due Diligence and Research

By Dylan Donley, Spring 2014 Graduate Research Assistant

While our title sounds rather intuitive – i.e., why wouldn’t you spend time researching arbitrators before choosing them to sit on your panel and hear your investment dispute claim – many investors fail to appreciate the importance of arbitrator selection in their FINRA proceeding. This blog series will describe the arbitrator selection process involved in FINRA arbitration and discuss the potential implications of failing to complete your own due diligence about a given arbitrator before making a decision to include the arbitrator on your arbitration panel. Today’s focus is on the arbitrator selection process.

What is the Arbitration Selection Process?

The arbitration selection process is just one of the steps in the overall FINRA arbitration process. Below is a flowchart describing the overall process of FINRA arbitration, demonstrating the timing of each step of the process. It is based on the more detailed FINRA information found here.

arbitration flow

Generally speaking, in the arbitration selection step, both the investor claimant and respondent will receive lists of potential arbitrators and select the panel that will hear their case. However, there are a number of FINRA rules that govern the arbitration selection process that are worth noting at the outset. For purposes of this blog post, we will be focusing on the rules governing customer disputes against brokers or brokerage firms; there are a different set of rules governing industry disputes under FINRA Rules 13400-13402 and 13800.

The number of arbitrators that will hear a case depends upon the amount and type of relief requested in the investor’s Statement of Claim. Under FINRA Rule 12401(a), if the amount of a claim is $50,000 or less, the arbitration panel hearing the case will consist of only one arbitrator and will be subject to simplified arbitration procedures under FINRA Rule 12800.

Under FINRA Rule 12401(b), if the amount of a claim is more than $50,000 up to $100,000, the arbitration panel hearing the case will consist of one arbitrator unless the investor claimant and respondent agree in writing to have three arbitrators.

Under FINRA Rule 12401(c), if the amount is $100,000.01 or more, if the claim does not specify an amount, or if the claim does not request money damages, the arbitration panel hearing the case will consist of three arbitrators, unless the parties agree in writing to one arbitrator.

In the arbitration selection process, depending on the number of arbitrators that will be chosen to sit on the panel for any given case, FINRA will provide a list (or lists) of arbitrators from its arbitrator rosters to each party generated from the Neutral List Selection System (NLSS), as provided in FINRA Rule 12400(a) and (b). The lists of arbitrators include background information about each arbitrator, called Arbitrator Disclosure Reports, for the parties to review. Upon receiving the randomly generated lists of arbitrators, both parties will select their panel through a process of striking and ranking the arbitrators. Rule 12400(a). Each party may strike up to four of the arbitrators from each list.

Once the parties have ranked their choices of arbitrators and exercised their strikes, the parties will submit their ranked lists to FINRA. At that point, FINRA will take the parties’ ranked lists and combine them, appointing the highest ranked available arbitrator from each list to serve on the panel for the case.

Be sure to check back in with us tomorrow when we’ll discuss the information that FINRA provides to parties concerning arbitrators.