FINRA Beefs Up Investigation of Arbitrators with Annual Background Checks

The Financial Industry Regulatory Authority, Inc., recently revealed it is updating its process for vetting arbitrators already approved on its roster. FINRA will conduct annual background checks on its arbitrators, and review them before they are appointed to hearing panels on arbitrators. The enhanced scrutiny comes following United States District Judge J. Curtis Joyner’s decision to vacate a securities arbitration ruling against an investor who sought to recoup $1.4 million from Goldman Sachs Group, Inc., where one of the arbitrators failed to fully disclose his involvement in an unrelated criminal proceeding.

“The procedures we are putting in place will help ensure not only that parties receive the information that they should but also that Finra’s active arbitrators are eligible to serve,” said FINRA spokeswoman Michelle Ong, according to Investment News.

Securities firms almost universally require arbitration of disputes as part of their customer agreements with investors. FINRA has a pool of approximately 6,500 arbitrators, who traditionally were reviewed only when they applied to be added to FINRA’s roster of arbitrators. FINRA assigns one or three arbitrators to each case depending upon the amount of damages at issue, and the arbitrators are selected based upon the parties’ ranking of a selection of arbitrators on lists generated from FINRA’s pool of potential arbitrators. In ranking arbitrators, parties rely upon disclosures provided by FINRA regarding the potential arbitrators.

There are very limited grounds upon which a court may vacate an arbitration award, and courts rarely vacate arbitration awards. Arbitrator bias or misconduct, however, can be grounds for vacating an arbitration award. In the Goldman Sachs case, Judge Joyner vacated the arbitration award upon finding that the investor’s legal rights in the proceeding were compromised, because one of the three arbitrators misled the parties about his indictment for the unauthorized practice of law.

In particular, Demetrio S. Timban, Jr., was indicted in New Jersey for practicing law without a license. Although Timban made a disclosure about the indictment, he falsely stated that it was one isolated incident involving the representation a family friend in a local municipal court matter. In fact, Timban opened a law office in Cherry Hill, New Jersey, and actively practiced law in New Jersey for at least one year, despite not being licensed in New Jersey. The Court found that Timban’s disclosure was so inaccurate that the arbitration award would be vacated, and the matter remanded to FINRA for a new arbitration hearing. The Court also criticized the failure of FINRA, the self-proclaimed “largest independent securities regulator in the United States,” to investigate the circumstances of Timban’s disclosure at the time it was made.

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