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Regulation and Compliance > Federal Regulation > FINRA

FINRA Arb Panels Lack Diversity, Transparency: PIABA Study

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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.

FINRA retorted in its statement, however, that “the reality is that win rates increase or decrease depending upon the controversy involved, market events and counsel.”

Rep. Keith Ellison, D-Minn., stated on the call that he was “committed” to ensuring passage of the bill he sponsored, the Investor Choice Act of 2013, which would ban predispute mandatory arbitration in investment contracts.

The PIABA report also states that 75% of arbitrators in the public pool have advanced degrees compared with 25% of industry arbitrators, which “supports that FINRA’s targeted recruiting practices have contributed to a homogenous arbitrator pool, especially in the public pool.”

But FINRA stated in its Tuesday response to the PIABA report that “having educational and experience requirements for arbitrators is necessary; a primary goal of our arbitrator recruitment program is to identify and train a knowledgeable pool of potential arbitrators from which parties can choose (during the list selection process) to respond to what are often very complex issues.”

The PIABA not only urges Congress to pass the Investor Choice Act, “making securities arbitration optional for investors,” but recommends that the Securities Exchange Commission require FINRA Dispute Resolution to be governed by a new independent board of directors that does not report to FINRA’s current board of directors.

The SEC should also act to restore the status of the Securities Industry Conference on Arbitration (SICA) as a meaningful participant in the oversight of the securities arbitration process, PIABA recommends. In the alternative, PIABA recommends that a new independent group with a similar mission as SICA be created. 

The SEC, PIABA says, should also improve the transparency of FINRA’s arbitration forum by making documents relating to its supervision of FINRA arbitration be subject to the Freedom of Information Act (FOIA).

FINRA appointed in mid-July an arbitration task force to take what FINRA CEO Richard Ketchum said will be a “fresh look” at the self-regulator’s arbitration process. The task force was scheduled to have its first meeting in late September or early October, but FINRA spokeswoman Michelle Ong told ThinkAdvisor on Tuesday that the task force has yet to meet.

Linda Fienberg, head of FINRA’s arbitration unit, announced in early September that she planned to leave the self-regulator at the end of November.

Ong said Tuesday that FINRA was now considering “internal candidates” to replace Feinberg.

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