The Financial Industry Regulatory Authority’s arbitration panels lack diversity and transparency about member biases, and the self-regulator’s recruiting practices have resulted in a “homogenous” arbitrator pool, according to a report released Tuesday by the Public Investors Arbitration Bar Association.
“Diverse groups of people make better decisions,” Jason Doss, president of PIABA, which represents investors in disputes with the securities industry, said on a Tuesday conference call with reporters to discuss the report findings.
PIABA’s analysis, based on 5,375 Arbitrator Disclosure Reports, found that due to recruiting practices, FINRA’s arbitrator pool “bears little resemblance in terms of race, gender, age and profession to the broad population of investors.”
For instance, the analysis says that the arbitration pool consists of approximately 80% men and 20% women. The report also states that the average arbitrator is 65 years old, with approximately 40% of the arbitrator pool being 70 years or older and approximately 12% of the arbitrator pool 80 or older. The aging arbitrator pool “raises concerns about their ability to effectively participate in deciding cases,” the report states.
Doss stated on the call that while “there’s nothing wrong with elderly arbitrators … we have had complaints that some [elderly arbitrators] fall asleep during arbitration or they can’t hear” the proceedings.
PIABA is not saying an arbitrator’s “age is the problem; it’s the homogenous nature and lack of diversity [in FINRA’s arbitration process] that’s the problem,” added PIABA President-Elect Joseph Peiffer, a New Orleans attorney.
FINRA responded in a Tuesday statement that PIABA’s “notion that individuals 70 and older are unable to and unfit to serve as effective arbitrators is insulting and borders on age discrimination. It stands to reason that a good portion of those able to make this time commitment on an ongoing basis for the pay offered are likely to be retirees.”
FINRA added in its statement that its Dispute Resolution forum is “a fair, efficient and cost-effective system to resolve disputes between and among investors, brokerage firms and individual brokers,” and that FINRA has “an aggressive recruitment campaign in place to seek individuals from diverse backgrounds to serve as arbitrators,” which involves more than 100 organizations nationwide reaching out to all types of people through on-site events, targeted recruiting advertisements and direct marketing campaigns.
FINRA added that it has also been “working closely with PIABA since 1999 in an effort to recruit the best arbitrators possible.”
But PIABA argues in its study that FINRA’s arbitrator disclosure process “fails to ensure that it provides updated and accurate background information and information related to potential conflicts of interest and bias to parties.”
In many cases, the report states, “arbitrators are unable to indicate when they last updated their disclosure documentation and do not appear to be urged by FINRA to do so on a regular basis. In addition, FINRA fails to have adequate and verifiable procedural safeguards in place to ensure that impartial and neutral arbitrators are added to the arbitrator pool.”
The PIABA study argues that “arbitrator fairness is of paramount concern for investors,” and states that since 1992, the win rate for investors has fallen as low 37% in 2007 and was approximately 42% in 2013, with claimants’ percentage recovered also “sharply” declining.