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What Must FINRA Arbitrators Disclose Before Arbitration?

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

Potential Conflicts of Interest for a FINRA Arbitration Panel 

Under FINRA Rule 12405, members of a FINRA arbitration panel are required to, both prior to and during FINRA arbitration, disclose any interests, relationships, or circumstances that may impair their ability to serve as an impartial arbitrator. However, both the investor and the brokerage firm are required to properly investigate potential arbitrators, as they risk waiving their rights to challenge an award solely on grounds that an arbitrator failed to disclose material conflicts of interest.

1. Duty to Disclose Prior to Panel Selection          

Under FINRA’s current rules, potential arbitrators are required to disclose certain facts that may preclude them from being able to render an objective and impartial determination in the potential proceeding. Potential arbitrators, after having been informed of the nature of the dispute and the identities of the parties, are required to make reasonable efforts to disclose any circumstances that may impair their impartial judgment.

Some of these circumstances may include:

  • Any direct or indirect financial or personal interest in the outcome of the arbitration
  • Any existing or past financial, business, professional, family, social, or other relationships or circumstances with any party that may impact their judgment
  • Any relationship or circumstances involving members of the arbitrator’s family or the arbitrator’s employers, partners, or business associates
  • Any existing or past service as a mediator for any of the parties in the case.

2. Continued Duty to Disclose Post-Selection

The arbitrator’s duty to disclose potential conflicts of interest does not terminate with their selection. Under FINRA Rule 12405(b), arbitrators retain a duty to disclose any interests, relationships, or circumstances that may impair their impartial judgment. It should be noted that this continued duty to disclose is a requirement that is affirmatively accepted by an arbitrator who accepts their appointment for a proceeding. At any point of the arbitration proceeding, an arbitrator is required to disclose any of these potentially adverse interests, relationships, or circumstances, whether they arose before or during the arbitration proceeding.

Potential Issues Arising from Material Conflicts of Interest

There have been several cases heard in civil court attempting to vacate the awards issued by FINRA panels on grounds that there was “evident partiality” on behalf of an arbitrator. Stone v. Bear, Stearns & Co. features a FINRA arbitrator who was legally married to someone who had close personal connections to the securities industry. The arbitrator’s husband was a professor at the Wharton School of Business and was a frequent lecturer for investment firms, insurance agencies, and institutional banks.

The claimant, having lost their arbitration case, sued to vacate the award under the Federal Arbitration Act for “evident partiality,” claiming that the arbitrator’s decision was tainted by her husband’s relationship to the industry. While the arbitrator had disclosed her circumstances to FINRA, it was never included with the arbitrator’s arbitrator disclosure report (“ADR”). However, the court found that the mere failure to disclose was not enough, at least alone, for vacating an arbitration award. The court determined that the claimant was required to show circumstances so suggestive of bias that a reasonable person would have to believe that the arbitrator was partial towards the opposing party. In addition, the court stated that the claimant had waived their rights to challenge the award given that they failed to diligently investigate the arbitrator’s background prior to the announcement of the award.

In Goldman, Sachs & Co. v. Athena Venture Partners, L.P., the court reversed a lower court’s decision to vacate an arbitration panel’s award on the grounds that an arbitrator failed to properly disclose a material fact. Within the case, the court stated that an arbitrator had failed to properly disclose that he was subject to numerous regulatory complaints, which the claimant used as the basis for its original motion to vacate the award. In reversing this decision, the court found that the claimant had failed to properly investigate the record of the arbitrator. While the disclosures were deficient in many respects, the court stated that the claimant discovered or could have discovered the extent of the arbitrator’s background had it properly performed its own due diligence. With that, the court stated that the claimant had waived its right to challenge the award on grounds that the arbitrator failed to properly disclose material conflicts of interest, and thus was partial to the opposing party.

Ultimately, the disclosures required by arbitrators are quite comprehensive. The requirement is imposed on arbitrators both pre- and post-selection process for a proceeding panel. In addition, the disclosures encompass any interest, relationship, or circumstance that may impair their ability to impartially arbitrate the proceeding before them.

How Likely is It for a Court to Vacate a FINRA Award?

Not likely at all. The courts have shown great deference to arbitration panels and their final awards.

Only in extreme circumstances, say where there is “evident partiality,” will a court consider vacating a panel’s award. A key theme throughout these cases for failing to disclose is the fact that the moving party must show that they performed due diligence on the questioned arbitrator’s background prior to the award. If the court finds sufficient evidence to show that the moving party discovered or could have discovered the arbitrator’s conflict of interest prior to the award, the moving party’s right to challenge the award may be deemed as having been waived.

What Can a FINRA Attorney Do for Me?

FINRA lawyers are familiar with the arbitrator selection process. They know how to look for arbitrators that are more likely to side with the investor and render fair awards. If you want to begin the FINRA arbitration process, contact one of our FINRA arbitration lawyers for a free case evaluation and professional advice on what steps to take next.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.