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FINRA Takes ‘First Step’ to Improve Arbitrator Selection Process

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The Financial Industry Regulatory Authority is seeking approval from the Securities and Exchange Commission to provide greater transparency and consistency regarding arbitrator list selection.

In a rule filing with the SEC, FINRA has proposed to change references in the Codes of Arbitration Procedure from the Neutral List Selection System to the list selection algorithm.

“This is FINRA’s first step in improving its transparency in the arbitrator selection process,” Michael Edmiston, president of the Public Investors Advocate Bar Association, or PIABA, told ThinkAdvisor Thursday in an interview. “I believe this is the initial effort to make the selection of arbitrator process easier to understand for all users.”

As FINRA explains, from November 1998 until October 2006, the Neutral List Selection System “was the computer system that generated lists of arbitrators from FINRA Dispute Resolution Services’ rosters of arbitrators for the selected hearing location for each arbitration proceeding.”

In October 2006, DRS replaced the NLSS with the Mediation and Arbitration Tracking and Retrieval Interactive Case System (MATRICS).

As a result, “all of the information contained in the NLSS was transferred to MATRICS such that MATRICS now contains the list selection algorithm DRS uses to generate lists of arbitrators from its rosters of arbitrators,” FINRA states. “However, the Codes refer to the NLSS as a computer system that governs arbitrator list selection in the DRS arbitration forum.”

FINRA is proposing to update the Codes “by making technical, non-substantive changes to remove references to the NLSS from those rules describing arbitrator list selection and instead refer to the ‘list selection algorithm.’”

The proposed rule change “would provide greater transparency and consistency regarding arbitrator list selection, as the Codes would reflect and align with DRS’s existing practices, processes and systems relating to arbitrator list selection,” the broker-dealer self-regulator states.

Edmiston noted that “this specific rule change is little more than just changing terminology. I do expect there will be meaningful substantive changes coming down the pike.”

From PIABA’s’ standpoint, he continued, “one of the things we’ve been pushing [FINRA] for is more information about the algorithm itself; how does it work?”

In the proposed rule change, FINRA states that it “is not proposing any changes to the list selection algorithm, or any of DRS’s existing practices, processes and systems related to arbitrator list selection.”

FINRA has filed the proposed rule change for immediate effectiveness and has requested that the SEC waive the requirement that the proposed rule change not become operative for 30 days after the date of the filing.

Wells Fargo Case

Judge Belinda Edwards of the 5th Superior Court District Atlanta Circuit in Georgia ruled earlier this year that Wells Fargo and its counsel “manipulated” FINRA’s arbitrator selection process and violated the FINRA Code of Arbitration Procedure, denying investors their contractual right to a neutral, computer-generated list of potential arbitrators.

On Aug. 2, a Georgia appeals court reversed Edwards’ decision, ruling in favor of Wells Fargo.


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