Neutral Corner - October 2007

Permanent Removal of Arbitrators from the Roster

Introduction

The relative finality of an arbitration decision dictates that FINRA Dispute Resolution arbitrators be of the highest caliber. In order to maintain an effective arbitration process, FINRA attempts to ensure the quality of the arbitrator pool by requiring the following:

Rigorous application process. Since 2003, all arbitrator applications have been vetted and either approved or rejected by members of the National Arbitration and Mediation Committee (NAMC) Neutral Roster Subcommittee, the majority of whom are public members (unaffiliated with the securities industry). Additionally, FINRA is continually re-examining the application itself in an effort to ensure that it elicits all appropriate information.

Background verification search. Since 2003, arbitrator candidates have been required to consent to a background search conducted by an outside vendor. The verification report may include, among other items, confirmation of education and employment history, criminal background information and confirmation of any references the applicant provides.

Extensive arbitrator training. All arbitrator candidates who have satisfactorily met the above steps must complete the Basic Arbitrator Training Program, which includes an online basic arbitrator training course, onsite classroom training session, online expungement course, and online revised Code of Arbitration Procedure (Code) training.¹

FINRA also offers other subject-specific online training modules. Chairperson Training is a mandatory course for all arbitrators who wish to qualify to serve as chairpersons under the terms of the revised Code. Other voluntary courses include: Your Duty to Disclose; Discovery: Abuse and Sanctions; Direct Communication Rule; and Understanding the Prehearing Stage. As an additional training medium, FINRA offers phone-in workshops for arbitrators on a variety of topics.

Participation in the evaluation process. At the conclusion of an arbitration case, parties and co-panelists are strongly encouraged to complete evaluation and peer review forms—designed to gauge the quality of the arbitrators in actual arbitration settings. Likewise, FINRA staff evaluates the arbitrators. FINRA reviews all of these evaluations on an ongoing basis.

Periodic surveys. As new policy and rule changes are introduced, FINRA sends surveys to arbitrators to confirm or acquire new or additional profile information.

Notwithstanding the efforts of FINRA to ensure the quality and integrity of the arbitrator roster, situations do arise that necessitate the permanent removal of an arbitrator from the roster. Therefore, specific procedures exist for that purpose. In an effort to provide clarity, this article focuses on the actual removal process and the efforts to ensure the quality and integrity of the arbitrator pool.

Reasons for Permanent Arbitrator Removal

"Permanent Disqualification" means an arbitrator will be removed from the roster without possibility of reconsideration. The following disqualification criteria outline possible reasons for permanent removal from the roster.

Disqualification Criteria

As part of the arbitrator application and the Oath of Arbitrator, an arbitrator must review the following Permanent Arbitrator Disqualification Criteria. If any of the criteria are met, an arbitrator may be removed from the roster.

• Misstatement/Omission: Misstatement or failure to disclose material information.
• Disciplinary Actions: Final, adverse disciplinary action by any domestic or foreign regulatory or governing professional body on a finding of, including but not limited to, false statement or omissions, material violation of investment-related regulation, or the violation of a non-technical rule of such organizations or statute.
• Misdemeanors/Felonies: Misdemeanor involving investments, investment-related activities.
• Felonies: Felony conviction, or plea of guilty or nolo contendere (no contest), to a felony charge.
• Fraud: Final adverse court decisions where there has been a finding of fraud.
• Statutory Disqualifications: Statutory disqualifications not included above.
• Decisions or Awards Involving Discrimination/Sexual Harassment: Arbitrator is the subject of, or is a party to, a final, adverse regulatory decision or court decision or arbitration award involving any discrimination claims, including sexual harassment, in which the arbitrator was found to have engaged directly in sexual harassment or discrimination.
• Director of Arbitration's Judgment: The Director of Arbitration, upon the approval of the NAMC, may remove an arbitrator if in his or her judgment the arbitrator is not otherwise properly included in the list of eligible neutrals.²

Inappropriate Behavior Warranting Removal

As noted in previous issues of The Neutral Corner, an arbitrator's removal can be the result of his/her display of a demeanor or temperament unsuitable for FINRA's roster. Examples of inappropriate behavior that may result in an arbitrator's removal from the roster include, but are not limited to:

• failing to be impartial, both in appearance and in fact;
• being rude to parties, counsel and/or staff;
• demonstrating perceived inability to follow or grasp the issues in dispute;
• being inflexible, especially with regard to mutual requests from parties;
• causing repeated and routine scheduling problems;
• being unprepared for conferences and hearings;
• being unwilling to abide by the Code; and
• violating the Code of Ethics for Arbitrators in Commercial Disputes.

Evaluating an arbitrator's fitness to serve on the roster is a continuing process, which does not cease upon initial approval.

Removal Process

Since January 2005, FINRA has employed the following procedures for the removal of arbitrators from the roster:

Staff Investigation

FINRA staff discreetly investigates the concerns raised in an initial complaint from a party or arbitrator in an attempt to verify their validity. For example, if an arbitrator reports that a fellow arbitrator did not conduct him/herself in a professional manner, staff attempts to corroborate this allegation with a co-panelist by asking general questions such as, "How was your experience as an arbitrator on this panel?" By handling the situation in this manner, the staff does not divulge a negative comment by one arbitrator about another, which may have been shared in confidence. If FINRA staff verifies the information, the appropriate Regional Director then reviews the facts of the situation.

Throughout the year, the regional offices hold quarterly meetings to discuss arbitrators' performances on cases during that past quarter. At these meetings, staff reviews any troubling or questionable peer and party evaluations that are submitted about an arbitrator. Staff also discusses their experiences with the arbitrators to determine whether any patterns of problematic behavior are emerging that FINRA needs to address.

Regional Director Files Formal Request for Removal

If an arbitrator appears to have repeated incidents of poor performance, or the complaint at issue involves egregious behavior, the Regional Director will formally request the removal of the arbitrator from the roster by completing an arbitrator removal form and attaching any supporting documentation. The Regional Director then submits this paperwork to the Director of Neutral Management, the Executive Vice President of FINRA Dispute Resolution and the President of FINRA Dispute Resolution, each of whom must render a determination (to approve or deny the request).³

Recommendation Forwarded to NAMC

If FINRA's senior management approves the removal recommendation, it is forwarded to two public members of the NAMC—the NAMC Chairperson and the Chairperson of the Neutral Roster Subcommittee⁴—who must unanimously approve the removal.⁵

Upon approval by the NAMC members, the arbitrator is removed from the roster and is no longer available to serve on future cases. Depending on the circumstances, the arbitrator may continue to serve on current assignments to avoid any disruption to pending cases.

Conclusion

FINRA understands the importance of the arbitrator's role in dispute resolution and consequently has adopted numerous steps to ensure the quality and integrity of arbitrators. However, situations do arise that require FINRA to remove an arbitrator from the roster. This article should demystify the arbitrator removal process.

1 FINRA recently revised its basic arbitrator training to address the updates in the newly revised Code. Expungement Training is part of the basic arbitrator training for new arbitrators, but also serves as a required stand-alone course for arbitrators who were accepted to the roster before this training became mandatory. As for the revised Code of Arbitration Procedure training course, FINRA expects all existing arbitrators to complete this required training during the next 12 months. Thereafter, this training will continue to be available as a voluntary mini-course.

2 Under the "Director of Arbitration's Judgment," the permanent removal of an arbitrator typically has its genesis in complaints from parties, counsel, peers and/or FINRA staff.

3 FINRA does not examine or otherwise consider an arbitrator's awards when deciding whether to permanently remove him/her from the roster.

4 In the event that one of the two-member NAMC review team has a conflict or is otherwise unavailable, FINRA will appoint another public member of the Neutral Roster Subcommittee.

5 FINRA also redacts the name of the arbitrator at issue from the recommendation material before submitting it in order to protect the arbitrator's privacy and to potentially prevent any biased decisions.

Dispute Resolution News

Arbitration case filings from January 1 through September 30, 2007 reflect a 36 percent decrease compared to cases filed during the same nine-month period in 2006 (from 3,703 cases in 2006 to 2,382 cases in 2007).

The overall turnaround time to process an arbitration case (hearing and simplified) from January 1 through September 30, 2007 decreased from 13.9 months in 2006 to 13.8 months in 2007.

FINRA Small Firm Conference Series

FINRA hosted a Small Firm Conference in Chicago on September 24, 2007. This conference provided representatives from small firms and FINRA regulators with an opportunity to discuss regulatory requirements and compliance practices from a small firm perspective. The conference began with a presentation on arbitration and mediation by Stuart M. Widman, FINRA arbitrator and mediator and a partner in the law firm of Miller Shakman & Beem LLP; Miriam G. Bahcall, a partner in the Securities Litigation Practice of Morgan Lewis & Bockius LLP; and Shari L. Sturm, Director of Constituent Relations of FINRA Dispute Resolution. During a moderated discussion, the speakers discussed how to evaluate new claims, whether to hire an attorney, how to select an arbitration panel and the key stages in the arbitration and mediation process.

FINRA Fall Securities Conference

FINRA held its Fall Securities Conference in Scottsdale, AZ, from October 10-12, 2007. FINRA senior management, industry leaders and fellow attendees engaged in a variety of discussions, knowledge-sharing exercises and networking opportunities. On October 11,  Dispute Resolution reviewed current events in dispute resolution and provided a lively, moderated discussion on the basics of arbitration and mediation. Participating on the panel were George Friedman, Executive Vice President and Director of Dispute Resolution; John Ohashi, FINRA Arbitrator; Rosemary Shockman of the law firm Shockman Law Office, P.C.; and Sandra Grannum of the law firm Davidson & Grannum, LLP.

Help Us Stay in Touch

Please help us stay in touch with you by providing FINRA with your current email address. This helps us convey important messages to you quickly and keep you updated on the forum's latest developments. Send us any updates to your contact information by emailing us. Simply include your name and arbitrator identification number in the body of the email, and we will update your disclosure profile promptly.

Upcoming! Neutral Roster Call-In Workshop

FINRA will conduct a call-in workshop for its neutrals on November 6, 2007 from 12 p.m. - 1:15 p.m. ET. During the workshop, Linda Fienberg, President of FINRA Dispute Resolution, and George Friedman, Executive Vice President and Director of FINRA Dispute Resolution, will discuss the consolidation of NASD and NYSE dispute resolution programs and how it affects neutrals; dispositive motions—both the current practice and FINRA's new rule proposals; and the new party representation rule and its impact on out-of-state counsel and non-attorney representatives. We will post a recording of the conference on our Web site, following the workshop.

Employment Arbitration Task Force

FINRA Dispute Resolution has established an Employment Arbitration Task Force to consider whether the NASD Code of Arbitration Procedure for Industry Disputes should be tailored to better resolve employee and brokerage firm disputes. We initiated this effort in recognition of the fact that intra-industry disputes represent one-third of our case load.

Pearl Zuchlewski of the New York law firm Kraus & Zuchlewski chairs the task force. Also participating in the task force are Allan Dinkoff of Merrill Lynch Fenner Pierce & Smith; Kenneth Meister of Prudential Equity Group; Larry Moy from Outten & Golden; David Plimpton from Plimpton & Esposito; and Pat Sadler from Sadler & Hovdesven.

FINRA Dispute Resolution President Linda D. Fienberg oversees the task force, with the support of Rachel Glasgow, Case Administrator Manager and Senior Attorney for the Northeast Region, and Mignon McLemore, Assistant Chief Counsel.

The task force has held two working sessions and will hold a final meeting in early 2008. The task force will make recommendations to the NAMC for further discussion.

The Role of Arbitrators in the Expungement Process

FINRA has developed a standard for expunging customer dispute information from the Central Registration Depository (CRD) system; arbitrators play an important role in this expungement process.

Under Rule 2130, a party may seek an expungement order either directly from a court or may request that the arbitrators order expungement as part of the award. If the arbitrators grant the request, the party must ask a court of competent jurisdiction to confirm the arbitration award. If the arbitrators have ordered expungement based on one of the specific findings described below—and the findings are explicitly laid out in the award—FINRA may waive its right to be named as a party to the judicial expungement proceeding, thereby waiving its right to oppose the request.

Parties are more likely to obtain a court order directing expungement if they first obtain a panel's expungement order that is based on one of the specified criteria. Therefore, arbitrators must be familiar with those criteria, and understand when it is and is not appropriate to make such findings.

Grounds for Expungement

An effective expungement order must be based on the arbitrators' affirmative determination—which must be articulated in the award—that:

1. The claim, allegation or information is factually impossible or clearly erroneous; or
2. The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
3. The claim, allegation or information is false.

Arbitrators must remember that an order to expunge information from a CRD record is an extraordinary remedy. The mere fact that a party prevailed in an arbitration case is not, in and of itself, an appropriate ground for expunging information about the proceeding from the CRD system. Customer dispute information will be expunged from the CRD system only if arbitrators order expungement based on one of the three specific findings and the findings are explicitly set forth in the arbitration award. Thereafter, a court of competent jurisdiction must confirm the arbitrators' directive.

Notice to Parties on Motions to Dismiss Claims Prior to Award (Dispositive Motions)

FINRA is filing with the Securities and Exchange Commission (SEC) a proposed rule change to adopt Rules 12504 and 13504 of the Customer and Industry Codes to address motions to decide claims before a hearing on the merits. The SEC will solicit public comment on this rule filing. In the interim and pending approval, arbitrators may wish to be judicious in reviewing motions to dismiss.

FINRA is aware that parties are increasingly filing motions to decide claims before a hearing (commonly referred to as dispositive motions or motions to dismiss) in arbitration cases. This notice informs parties of the policy concerning dispositive motions and reminds them that filing dispositive motions in bad faith may result in sanctions imposed by the arbitration panel. View Notice for more information.

Questions and Answers

Question and Answer: Recording Prehearing Conferences

Question: As an arbitrator, is it possible to request that a telephonic prehearing conference be recorded?

Answer: Yes. Under Rule 12502, the panel may decide to tape-record a prehearing conference on its own initiative or upon motion of a party. While prehearing conferences are not generally recorded—with the exception of prehearing conferences to decide dispositive motions—arbitrators are encouraged to request that FINRA record a conference in which substantive issues are discussed with the parties. Recording the telephonic prehearing conferences with the parties benefits the arbitrators by allowing them to review the tapes when deliberating and ruling on important issues.

Question and Answer: Mediator Profile Update Form Online

Question: Can I update my FINRA Mediator Profile online?

Answer: Yes. We recently added a form to our Web site that mediators can use to update their FINRA Mediator Profiles. Some mediators had trouble locating the form on our Web site, so we have added two links to the Dispute Resolution Mediator Information Update Form to make it easier to find. You can find a link to the form at the bottom of the menu in the Mediation section of our Web site. You can also find a link to the form on our Resources for Arbitrators and Mediators page. [Update: this is now linked from the Forms & Tools section of the web site].

The Mediator Profile is an important marketing tool for our mediators, and we strongly recommend that you update it regularly. Every time we include a mediator on a list of potential mediators for parties, we send a copy of each mediator's profile. At the bottom of the form on our Web site, you can request that we send you a copy of your current Mediator Profile. Thereafter, you can keep your profile current by regularly updating your information online.

SEC Rule Approval

Representation of Parties

On September 26, 2007, the SEC approved, which permits a party to an arbitration or mediation to be represented pro se or by an attorney admitted to practice and in good standing in any jurisdiction. A party may be represented by a non-attorney, unless state law prohibits such representation, the person is currently suspended or barred from the securities industry in any capacity, or the person is currently suspended from the practice of law or disbarred. Please view the Federal Register notice for more information about this new rule.

This rule will become effective on December 24, 2007. A Regulatory Notice will be filed on November 23, 2007.

Regional Updates

NOTE: Participants must successfully complete the online portion of Basic Arbitrator Training before attending an onsite training program. Please visit the Arbitrator Training page on our Web site at www.finra.org for more information about the online training. FINRA generally requires a minimum of nine attendees to conduct an onsite session.

Northeast Regional Update

The Northeast Region welcomes our new colleagues, the staff of the former Arbitration Department of the New York Stock Exchange.

During the next three months, the Northeast Regional Office will conduct in-person Basic Arbitrator Training programs in these cities on the following dates:

• New York, NY — November 21, 2007
• Philadelphia, PA — December 12, 2007
• New York, NY — December 18, 2007

If you are interested in attending a Basic Arbitrator Training program in any of these cities, please contact Cicely Moise at (212) 858-3963.

Midwest Regional Update

In a continuing effort to attract neutrals in the Midwest Region, Case Administrator Erroll Angara attended the State Bar of Michigan Annual Meeting from September 26-28, 2007 in Grand Rapids, MI. The event successfully garnered interest in our arbitration program in the Detroit area.

In a separate recruitment effort, Shari Sturm, Director of Constituent Relations, attended the 107th Annual Meeting of the Nebraska State Bar Association to meet potential arbitrators and discuss FINRA's dispute resolution program. The event was held in Lincoln, NE, from October 17-19, 2007.

During the next three months, the Midwest Regional Office will conduct in-person Basic Arbitrator Training programs in these cities on the following dates:

• Kansas City, KS — November 7, 2007
• Columbus, OH — November 14, 2007
• Chicago, IL — December 5, 2007

If you are interested in attending a Basic Arbitrator Training program in any of these cities, please contact Deborah Woods at (312) 889-4431.

West Regional Update

On September 18, 2007, the West Region conducted a focus group to discuss its transition to a new business model, which occurred during 2006 and 2007. Staff provided party representatives and arbitrators with an overview of the new business process and an update on its implementation in all of Dispute Resolution's regional offices. Staff also solicited participants' feedback about their experiences with the new business process and asked for suggestions on how to improve the process.

During the next three months, the West Regional Office will conduct in-person Basic Arbitrator Training programs in these cities on the following dates:

• Dallas, TX November 13, 2007
• Las Vegas, NV December 11, 2007

If you are interested in attending a Basic Arbitrator Training program in any these cities, please contact David Newson at (213) 613-2693.

Southeast Regional Update

On September 18-19, 2007, Rose Schindler, Vice President and Regional Director, and Kevin D. Rosen, Case Administration Manager, attended a meeting sponsored by the North Carolina Securities Division. Ms. Schindler and Mr. Rosen made a comprehensive presentation regarding the current state of FINRA's Arbitration and Mediation Programs and, among other topics, described the expungement procedures, the mandatory nature of arbitration and the classification of public arbitrators in our forum.

Mr. Rosen will participate in the Florida Bar's Justice Teaching program aimed at teaching elementary, middle and high school students in Florida. The program is designed to send volunteer judges and lawyers into classrooms to talk with students about civics, the court system and the Constitution. The program benefits students by promoting an understanding of the justice system, aiding in the development of critical thinking abilities and problem-solving skills, and demonstrating the effective interaction of the courts within the constitutional structure. Prior to the Justice Teaching program, Mr. Rosen participated in Nova Southeastern University's Street Law program and taught civics, trial advocacy and constitutional law to high school students in Florida.

During the next three months, the Southeast Regional Office will conduct the following in-person Basic Arbitrator Training program:

• Boca Raton, FL November 6, 2007

If you are interested in attending the onsite classroom training program, please contact Lanette Cajigas at (561) 447-4911.

Mediation Update

Director of Mediation Kenneth Andrichik and National Mediation Administrator Leon de Leon conducted a focus group meeting in Boca Raton on September 19, 2007. They surveyed a small group of regular mediation clients, including several investor and brokerage firm representatives. The mediation staff held a similar information-gathering session in Chicago and is planning a third in New York City. Based on the information gathered in the focus groups, staff designed a short Internet survey for frequent users of the forum to better understand constituents' needs.

On September 21 and 27, 2007, Assistant Director of Mediation Julie Crotty served as a coach for a mediator training provided by New York University and the NYC Office of Administrative Trials and Hearings. Both New York City employees and law students attended the training.

Mediation Settlement Month

FINRA held its annual Mediation Settlement Month event during October, offering incentives designed to promote mediation and to educate potential parties about the benefits of the program. Hundreds of mediators agreed to reduce their normal fees for Settlement Month, allowing FINRA to present substantial savings to parties. The event generated press coverage in Dow Jones and InvestmentNews.

Mediation Settlement Day

FINRA's Mediation Department served as the major force in organizing the seventh annual Mediation Settlement Day. The kick-off event was on October 2 at the Association of the Bar of the City of New York, where over 100 non-profit, government, court and academic organizations participated in an open house. Organizations sponsored tables at the open house and spoke with attendees about the benefits of mediation and the programs they offer. Judith S. Kaye, Chief Judge of the State of New York, addressed the audience and Judge Milton Mollen served as the honorary chair and keynote speaker. Mediation Settlement Day was on October 18, and sponsors hosted special events designed to introduce more people to the benefits of mediation.

Arbitrator Tip: Peer Evaluation Forms

In order to maintain a pool of qualified and committed arbitrators, and serve the parties who use our forum, we ask that you complete a Peer Evaluation form at the conclusion of every case in which you serve. In addition to staff and party evaluations, we rely on peer evaluations to gauge the quality of arbitrators within arbitration settings. These include interactions—positive and negative—during the prehearing, hearing, and posthearing stages. We take these evaluations very seriously and refer to them when making decisions concerning possible removal from our roster. We also include the comments in the arbitrator's file.

If you encounter an issue with any of your co-arbitrators during the hearing that may affect the fairness of the proceedings or jeopardize the outcome of the case, please notify staff immediately. Do not wait until the conclusion of the hearing to voice your concerns. Be assured that your comments are confidential and will not be shared without your permission.

Please do your part in this critical initiative by completing and submitting the Peer Evaluation after you serve on a case. You may find the

Message from the Editor

I am honored to be back as Editor of The Neutral Corner and look forward to contributing to the continued success of this publication. I would like to thank Shari Sturm for her excellent work as editor and welcome her to the Editorial Board.

In addition to comments, feedback and questions regarding the material in this publication, we invite you to submit suggestions for articles and topics you would like addressed. We reserve the right to determine which articles to publish.

Please send your comments to:
Jisook Lee, Editor
The Neutral Corner
FINRA Dispute Resolution
One Liberty Plaza
165 Broadway, 27th Floor
New York, New York 10006

You may also email Jisook at [email protected].

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