Yes, my school has a similar system. They told us grades and the write-on are weighted "equally" in determining membership. The top 5% (9 people) can grade on--but the remaining 25 spots are so are a combination of the two.
Nevertheless, an advisor at my school told me that when push comes to shove, grades are weighted more heavily than the paper--the paper isn't a formality, per se, but if you're not in the top 15-20% i guess you have a huge uphill climb getting on.