Disputants Could Help Pick Arbitrators Under Rule Proposal

The NASDR filed a prospective rule change with the SEC in July that would change the way arbitration panels are picked.Under the plan, both sides to a dispute would assign rankings to a list of arbitrators and strike any they did not like. The NASDR would then assemble a panel based on the order of rankings. The proposed process is similar to how private arbitration firms, such as the American Arbitration

The NASDR filed a prospective rule change with the SEC in July that would change the way arbitration panels are picked.

Under the plan, both sides to a dispute would assign rankings to a list of arbitrators and strike any they did not like. The NASDR would then assemble a panel based on the order of rankings. The proposed process is similar to how private arbitration firms, such as the American Arbitration Association, pick panels. Currently, NASDR arbitrators are appointed by the SRO itself, which has led to criticism that member firms, through their SRO, have too much control.

One major change would be an unlimited right to strike proposed arbitrators. Currently, disputants get one peremptory challenge--the right to have one of the arbitrators removed without stating a reason. Any other challenges have to be for cause, such as a conflict of interest.

Now, both sides exercise great caution in exercising their one-and-only peremptory challenge, says plaintiff's attorney Scot Bernstein of Sacramento, Calif. "You hold on to it like it's gold."

The unlimited ability to strike proposed panelists is seen as an advantage. But one problem with unlimited strikes "is that either party is effectively put in the position of being able to void the new process simply by striking everyone on the list," Bernstein wrote in his comment letter to the SEC. If that happened, arbitrator selection would end up back in the hands of the NASDR. He suggested the NASDR limit the number of strikes.

In its response to comment letters, the NASDR acknowledged the potential problem but declined to change its proposal. The SRO said it would "monitor" the process and consider imposing a limit on strikes if needed. Setting up second and third rounds of list selection is one way to solve the problem, but the NASDR said it proposed only one selection round because it has a scarcity of arbitrators in some locations and feared more steps would delay a hearing.

"The problem can be solved in great part by expanding the pool of arbitrators, and expanding the list of arbitrators as the pool increases," says plaintiff's attorney James Beckley of Wheaton, Ill., and a director of the Public Investors Arbitration Bar Association. Beckley supports the list-selection idea, and calls the current practice of using NASDR-picked panels "fatally flawed."

In its filing, the NASDR said it intends to proposed the same selection process for intra-industry (broker-firm) disputes. An NASDR spokespersons says no date has been set yet for that rule filing.

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