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Spotlight on Arbitrator Selection: FINRA-ODR “Tells All” About the NLSS Mechanics of Randomness
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FINRA has posted a detailed account on the forum's Website explaining how it goes about selecting arbitrators for inclusion on the ranking lists that are distributed to parties at the close of pleadings.

Most people understand that FINRA selects arbitrators "randomly" from its Neutral Roster of 7,000 arbitrators, but "random" doesn't explain it all. After all, we all understand that FINRA selects the hearing location before selecting the arbitrator nominees. That narrows the choices to those arbitrators who are listed or certified for service in that situs.

We also know that FINRA classifies arbitrators as "Public," "Chair-Qualified," and "Non-Public," and those categories are tightly defined -- not random at all. FINRA's Office of Dispute Resolution has recently enhanced its Hearing Locations map on the monthly online statistical report, so that the number of local arbitrators by arbitrator classification is now provided separately from the non-local arbitrators. As we learn from the FINRA guidance on “Arbitrator Selection,” recently added to the FINRA-ODR Website, FINRA looks to its local arbitrators first and randomly searches that group before randomly searching the non-local group.

New Effort at Transparency

So, there's a lot to learn about how FINRA's Neutral List Selection System (NLSS) selects the candidates for service in one's case. The "Arbitrator Selection" guidance begins by describing how the process works in "Investor Cases" (those with one arbitrators and those with three) and "Industry Cases" (those between firms and those where brokers are involved) with one or three arbitrators.  The number of arbitrator candidates on one's list and the number of strikes one may exercise vary in every instance, depending upon the type of case.

NLSS Mechanics

After NLSS separates the roster for arbitrators in the hearing location, prioritizes local vs. non-local arbitrators, and categorizes by classification, the staff excludes from the selection lists arbitrators with "known" conflicts of interest; FINRA staff document these replacement decisions. In order for NLSS to choose from the local list first, there must be at least double the number of candidates in each classification for the lists to be populated (ed: makes sense - otherwise, "random" would not mean very much...). When that is not the case, it gets more complicated. NLSS then engages in what FINRA calls "passes." It first looks to local arbitrators, then to local and non-local arbitrators and, finally, to other hearing locations. The third pass, FINRA states, is used in "extremely rare circumstances."

Defining “Local” and “Non-Local”

Now, what does FINRA mean by local and non-local. Local arbitrators are those who reside within 75 miles of a hearing location. An arbitrator can be "local" for more than one hearing location. Non-local arbitrators are recruited and screened by FINRA staff, when they determine a need exists and, in that circumstance, the staff selects another hearing location and approaches all of the arbitrators in a chosen classification. They have an equal chance to volunteer for service and, if they do, they are pre-screened and eligible to serve when a second "pass" is necessary.

FINRA adds that "Special Pools" are necessary "periodically" to deal with a surge in cases in a particular hearing location. That has been the case, it notes, in the Puerto Rico situs; in that instance, it will canvass multiple hearing locations to gather a sufficient number of candidates for service. What one sees when viewing the table chart of arbitrators by hearing location is that, except for truly busy, robust locations (e.g., Boca Raton, Chicago, Los Angeles, New York, Newark, San Francisco), virtually every situs sports supplemental numbers of non-local arbitrators. With this latest enhancement, parties may also see at a glance whether their primary situs will definitely pull a "second pass" to include non-local arbitrators.

(ed: *Selecting one's arbitrators has been called the most important decision parties make in the course of an arbitration proceeding. So, the more FINRA can tell us about those arbitrators, how they are nominated for service, and how well-supplied with available arbitrators a chosen hearing location stands, the more comfortable parties can be with the forum. FINRA's increased attempts at full transparency on this topic adds immeasurably to the parties' sense that the FINRA forum strives for fairness. **Today, arbitrators can be "local" in more than one hearing location (think Newark, NYC and Stamford, CT). They can also serve in nearby hearing locations, if called upon as "non-locals" and many in the Southeast have been recruited for the Puerto Rico "special pool." So, the opportunities for service have multiplied -- at least for public arbitrators -- from past times when arbitrators were limited to one, at most two, hearing locations.) (SAC Ref. No. 2017-11-01)

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