Often times in FINRA arbitrations, one or more of the three arbitrators selected by the parties to resolve the dispute has to withdraw from the panel prior to the hearing.  Previously FINRA would simply select a replacement arbitrator from their database without the involvement of the parties.  This arbitrator became known as the “cram down” arbitrator (since the parties were not permitted to weigh in on whether this replacement arbitrator would be selected for the panel.  FINRA has recently revised its code of arbitration to give the parties an opportunity to to review a “short list” of potential arbitrators to find a replacement, rather than accept an extended list appointment.

The new provision provides that FINRA will first attempt to replace the arbitrator by reviewing the lists that the parties previously returned. FINRA then invites any arbitrators previously ranked by the parties to serve.

However, where no ranked arbitrators remain from the parties’ initial lists, or no remaining arbitrators are able to serve, parties may stipulate to use of the short list method to select a replacement arbitrator. If the parties proceed under the short list replacement option, FINRA staff will use the Neutral List Selection System (NLSS) to generate randomly a list of three potential replacement arbitrators. FINRA staff will prescreen the arbitrators to confirm their availability for scheduled hearing dates. FINRA then sends to all parties the list of three arbitrators along with a copy of each arbitrator’s Disclosure Report. Each side may strike one name from the list and may then rank all remaining arbitrators’ names in order of preference within a prescribed number of days. FINRA combines each side’s list to find the highest ranked replacement arbitrator. 

All parties must agree in order to use the short list option to select a replacement arbitrator. When a hearing is scheduled within five calendar days of an arbitrator’s withdrawal, removal, or unavailability, the parties also will need to stipulate to a postponement to use the short list option to select a replacement arbitrator. Parties may incur postponement fees pursuant to existing Customer Code Rule 12601 and Industry Code Rule 13601 when hearing dates are postponed. If the parties do not stipulate to use the short list option, FINRA staff will appoint a replacement arbitrator by generating randomly a replacement arbitrator’s name using NLSS. Parties may only challenge arbitrators selected by this method for cause.

FINRA will notify parties in qualifying cases by letter of the option to stipulate to the use of the short list to select a replacement arbitrator. When a hearing is scheduled within 30 calendar days of an arbitrator’s withdrawal, FINRA will contact parties about the short list option by email, overnight mail, fax and/or phone in order to expedite party notification in qualifying cases.

While this new process is not perfect, it is much better than the old method of simply selecting an arbitrator without involving the parties.

If you have questions about the new replacement arbitrator rule visit:

http://www.finra.org/ArbitrationAndMediation/Arbitration/SpecialProcedures/ShortListOption/

The foregoing information is provided by The White Law Group.  The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at http://whitesecuritieslaw.com.