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From Securities Regulation Daily, October 7, 2014

FINRA arbitration pools lack diversity and transparency, PIABA report charges

By John M. Jascob, J.D.

A report released today by the Public Investors Arbitration Bar Association (PIABA) claims that FINRA’s arbitration pools lack the gender and age diversity that would help ensure that investors receive a fair resolution of their disputes. In addition, the PIABA asserts, FINRA’s disclosure process fails to ensure that parties receive accurate information concerning arbitrators’ backgrounds and their potential conflicts of interest and biases.

The PIABA’s report was based on an analysis of the information provided by FINRA to parties in proceedings involving 5,375 arbitrators. PIABA collected the information from Arbitrator Disclosure Reports obtained from PIABA members who were or are representing parties in FINRA arbitration cases.

“Sad state” of FINRA arbitration. “There is no question that having a pool of arbitrators with diverse backgrounds and experiences will result in improved decision making,” said PIABA President Jason R. Doss in a news release. Ross said that the “sad state of FINRA arbitration” provides the best argument for federal legislation that would require giving investors the option to litigate their disputes in court. “PIABA has showed that FINRA’s arbitrator disclosure process fails at every step,” Ross said. “Therefore, investors have no other choice but to conclude that arbitration is unfair.”

“Out of touch” with investors. According to the PIABA, the data reveals that FINRA has a problem with a lack of diversity on its arbitrator roster that needs to be fixed immediately. The report states that FINRA’s arbitrator pool consists primarily of elderly men who have a socioeconomic status that puts them out of touch with the average investor. The report found that female arbitrators are significantly underrepresented in the pool, which is approximately 80 percent male. Moreover, approximately 70 percent of the arbitrators possess an advanced degree, which the report defines as a university degree higher than a bachelor’s degree.

Advanced age. In addition, the report suggests that the “advanced age” of FINRA’s arbitrators raises concerns about their ability to effectively participate in deciding cases. The report found that the average age of FINRA’s public arbitrator pool is 69 years of age. Approximately 40 percent of the arbitrator pool is 70 years or older, with about 12 percent of the pool being 80 years or older.

Although PIABA members have complained that some FINRA arbitrators were having a difficult time effectively participating in hearings due to their age, the report notes that FINRA’s response in the past has been merely to encourage parties and their attorneys to complete party evaluation forms. The report also references a lawsuit filed against FINRA by Jill Wile, a former FINRA employee. According to the report, Wile’s complaint alleged that a FINRA regional director “frequently joked about FINRA’s older arbitrators, saying that he hoped that they would die before he had to go through the trouble of having to track them in a process for problem arbitrators.”

Targeted recruiting. The report also concludes that FINRA’s targeted recruiting for public arbitrators has had a significant impact on the demographics of its arbitrator roster. According to the PIABA, the data suggests that FINRA has targeted public arbitrator recruiting efforts at attorneys, resulting in a homogenous pool of arbitrators primarily consisting of individuals with advanced degrees, something which the SEC had warned about in a 1992 arbitration study conducted by the GAO. As FINRA does not disclose its recruitment practices about specific arbitrators, however, it is not known where FINRA found these attorneys or what the attorneys’ motivations were for becoming FINRA arbitrators, the report observes.

“Illusory” disclosure process. The report also concludes that FINRA's arbitrator disclosure process is illusory because it fails to gather objective and accurate information about arbitrators’ conflicts of interest and biases. According to Dr. Akshay R. Rao, a professor at the University of Minnesota’s Carlson School of Management who was retained by the PIABA for the study, FINRA’s arbitrator application is not designed to elicit meaningful and reliable answers because the questions require respondents to self-define important words in the application, which leads to subjective variance, and hence inaccuracies, in the answers. Absent full and complete background disclosures, the report argues, parties are unable to ensure that they are ranking and striking arbitrator candidates who are most likely to be fair and unbiased.

PIABA recommendations. The PIABA offered several recommendations to remedy the problems identified by the study and ensure that investor dispute resolution is a fair process. Among its proposed solutions, the PIABA urged Congress to pass the Investor Choice Act of 2013 making securities arbitration optional for investors. The PIABA also recommends that the SEC address the lack of transparency by commissioning an independent group to assist in the oversight of FINRA’s entire arbitration process. If possible, the PIABA urges the SEC require FINRA Dispute Resolution to be governed by a new independent board of directors that it is separate and distinct and that does not report to FINRA’s current board of directors.

FINRA’s response. In a statement responding to the report, FINRA countered the PIABA’s claims that targeted recruiting practices have led to homogeneity in the composition of FINRA’s arbitration panels. FINRA stated that it has an aggressive recruitment campaign in place to seek individuals from diverse backgrounds to serve as arbitrators, and found any suggestion that FINRA has not been partnering with PIABA in the recruitment of potential arbitrators to be “absurd.” FINRA also took sharp issue with the PIABA’s criticisms of the age of FINRA’s arbitrators, stating that the “notion that individuals 70 and older are unable to and unfit to serve as effective arbitrators is insulting and borders on age discrimination.”

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