FINRA proposes fresh list when arbitrator selections fail

FINRA has proposed letting parties in arbitration choose from an entirely new list of arbitrators when their first round of selections fails, AdvisorHub reports. The rule change, filed with the Securities and Exchange Commission, would replace the current extended-list appointment process, which produces substitutes through a random algorithm and limits challenges to those substitutions to for-cause objections. FINRA says that arrangement has 'proved unpopular' because it restricts the parties' role in selecting who hears their case.

The proposal addresses cases where the initial list falls short because the sides could not agree on enough arbitrators or a chosen panelist withdraws. It also codifies a practice FINRA has already applied in some instances, when both parties agree to pick from a short list of algorithm-generated replacements. The filing adds a $300 honorarium for substitute arbitrators, payable for every four hours they spend reviewing case records and recordings before joining an existing panel.

Michael Bixby, president of the Public Investors Advocate Bar Association, calls it 'a pretty subtle change' likely to be welcomed by investor representatives and industry advocates. He draws a contrast with FINRA's broader modernization agenda, opened for comment in March, which includes an industry-led proposal aimed at curbing punitive-damage awards that critics attack as 'runaway.' Bixby says he remains 'pretty deeply concerned' about that prospect.

For a firm defending an arbitration claim, the change offers a real say in panel composition when the first pick fails, instead of accepting a randomly assigned substitute. The honorarium compensates the replacement for the preparation required before ruling. The larger stakes lie in the contested punitive-damages reform still under review; this rule tweak is a modest, practical adjustment by comparison.