By Jessica Neer
Last fall, the Public Investors Arbitration Bar Association (PIABA) released a study titled “The Importance of Arbitrator Disclosure”. The study analyzed the backgrounds of current Financial Industry Regulatory Authority (FINRA) arbitrators and the arbitrator recruitment and disclosure process. The emphasis on the make-up of arbitrators stems from the concern that arbitration can only be as fair as the arbitrators that dictate the outcome of disputes. This is particularly important to aggrieved investors that must resolve disputes with their brokers or brokerage firms through FINRA Dispute Resolution.
The study found a fairly homogeneous pool of arbitrators that “put them out of touch with the average investor.” More specifically, 80% of the arbitrator pool are men; the average age of a FINRA arbitrator is 67, with 40% of the arbitrators over 70 years old and about 17% over 80 years old. Furthermore, 73% of arbitrators have advanced degrees.
The implications of the lack of diversity include one-sided rulings by arbitration panels, according to PIABA President Jason Doss. The overall “win rate” for investors has dropped from about 60% in the early 1990s, fell as low as 37% in 2007, and was approximately 42% in 2013. Mr. Doss asserts, “There is no question that having a pool of arbitrators with diverse backgrounds and experiences will result in improved decision making.”
The study proposed a series of recommendations, including congressional action to give investors the option to go to court. The Investor Choice Act of 2013 would prohibit mandatory pre-dispute agreements that force investors to arbitrate. Other recommendations included the Securities Exchange Commission (SEC) developing an independent group to oversee FINRA’s arbitration process and commissioning an independent study about arbitrator diversity.
In response to PIABA’s report, FINRA counters it has an aggressive recruitment campaign to reach potential arbitrators from diverse backgrounds. Specifically, FINRA provided an Appendix of over 100 organizations and websites it utilizes to recruit arbitrators, which include PIABA, Working Mother Magazine, and more.
Moreover, FINRA offers explanations for how their neutral policy may reflect a less diverse panel despite their substantial efforts of diverse candidates. It cites the “reality” of “win rates increas[ing] or decreas[ing] depending upon the controversy involved, market events and counsel.” Also, FINRA’s emphasis on educational and experience requirements for arbitrators paired with the time commitment appeals to retirees.
In July, FINRA formed a Dispute Resolution Task Force. The task force was formed “to suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum for all participants.” In Fall 2015, the task force plans to make recommendations to FINRA’s Standing Board Advisory Committee: the National Arbitration and Mediation Committee (NAMC). Currently, the task force is soliciting information and viewpoints from the general public and arbitration participants by email at DRTaskForce@finra.org.