To further weed out potential conflicts of interest and provide greater transparency into why certain arbitrators are removed from arbitrators selection lists, the Financial Industry Regulatory Authority has filed a rule change with the Securities and Exchange Commission codifying its automatic and manual processes for selecting arbitrators.

Filed on Dec. 23, the proposed rule change is designed to provide both parties in an arbitration with a written explanation detailing why an arbitrator is removed for conflicts of interest during Finra's Dispute Resolution Services (DRS) manual review of arbitrator names.

The proposal follows a judge’s ruling last year that reversed an arbitration decision that was made in favor of Wells Fargo, based in part on her finding that the wirehouse had manipulated Finra’s arbitration selection process to keep certain arbitrators who had a history of unfavorable awards against Wells Fargo off of its cases.

After the decision, which attracted wide media attention, Finra hired the law firm of Lowenstein Sandler LLP to do an independent review. The law firm found “no evidence of an improper agreement to remove certain arbitrators from arbitration cases.”

The firm did, however, make a number of recommendations last June for tightening up Finra’s arbitrator list selection process, which produces arbitrator lists based on a computer algorithm and a manual review by the DRS director. Both processes are designed to weed out names based on conflicts of interest.

Under the proposed rule change, if an arbitrator is removed based on this conflicts review, the list selection algorithm would randomly select an arbitrator to complete the lists.

To provide transparency and consistency, the proposal would also amend the arbitration codes to codify current practice by requiring Finra DRS’s director to provide a written explanation to the parties detailing the decision, including in cases where DRW grants or denies a party’s request to remove an arbitrator. Finra moved to begin providing such reports last September.

“This is the transparency that has been sorely needed for years,” said Michael Edmiston, a former Finra staff attorney who is now an attorney with Jonathan W. Evans & Associates in Studio City, Calif.

“For people to understand how and why certain events occur in the arbitration process, like an arbitrator’s name not appearing on a list, it’s important to know why it was removed. All too often parties and their attorneys have no idea. They get a list of 30 names and have no idea why three arbitrators no longer appear there,” said Edmiston, past president of the Public Investors Advocate Bar Association, the trade group for investor attorneys.

Arbitrators’ potential conflicts can include the arbitrator being employed at the same law firm as counsel to a party to the case; the arbitrator being employed by the same financial services firm as a claimant or respondent; the arbitrator being employed by a party to the case or the arbitrator being an immediate family member or relative of a party to the case or his or her counsel.

The proposed rule change also makes clarifying and technical changes to requirements in the arbitration codes for holding prehearing conferences and hearing sessions, initiating and responding to claims, motion practice, claim and case dismissals and providing a hearing record, Finra said.