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On Friday, the Financial Industry Regulatory Authority published a letter on its website, notifying its members that on Thursday, the FINRA board had formally approved a plan to make the selection of arbitration panels easier. The plan has now been sent to the SEC for their review and final approval.
According to the letter posted on the FINRA website, parties to disputes arbitrating before a FINRA panel had long been confused about the selection procedure of arbitrators. Under current rules, a party to a dispute that has to be arbitrated before the FINRA can opt for either an all-public-arbitration panel or a panel with a member having connections with the finance industry or Wall Street.
An all-public arbitration panel means a panel of three arbitrators without any connection to the securities industry.
Both types of options have been criticized by lawyers. Some hold that a public arbitration panel without any member having a background from the securities and finance industry can lead to gross errors in arbitration. At the same time, others are of the opinion that a member, who has regular ties to Wall Street and sits in arbitration in a FINRA panel, can be prone to bias.
The new rule proposed by the FINRA would do away with the need to select an arbitration panel, but would allow parties to disputes to select arbitrators from three lists. One list will have the names of 10 people competent to chair the arbitration panel. Another list will have the names of 10 people who are public arbitrators and do not have any connection to the securities and finance industry, and the third list will have the names of 10 persons who can function as arbitrators, but also have connections to Wall Street.
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FINRA is of the opinion that the new system would provide more flexibility to parties in the matter of selecting the members of an arbitration panel, while at the same time reducing confusion.
Previously, parties to dispute were often unaware that opting out of the “public arbitration†option would inevitably mean a panel of arbitrators with at least one member having Wall Street connections.
