By Patricia Uceda, Fall 2014 Graduate Research Assistant
The Public Investors Bar Association (PIABA) recently analyzed FINRA dispute resolution’s arbitrator pools in an effort to assess diversity within it. As we have mentioned here often before, most contracts between an investor and his or her broker includes an arbitration clause mandating that all disputes concerning the relationship be arbitrated in the FINRA dispute resolution forum, so knowing who will be making a decision if a dispute arises should be very important to investors.
In its study, PIABA found that the FINRA arbitrator pool was approximately 80% male. The average arbitrator age was 69. Additionally, 40% of the arbitrator pool is 70 or older, and 17% is 80 or older. In particular, women were found to be significantly underrepresented in the pool.
According to PIABA, this lack of diversity is concerning because the win rate for investors has steadily declined in recent years. PIABA believes that the lack of diversity may be driving investors’ declining success rates. A 1992 federal study found that 60% of investors who participated in industry-sponsored arbitration forums received an award. In 2013, however, investors prevailed in only 42% of proceedings. Similarly, the amount investors typically recover has also declined.
PIABA’s study went further than just diversity. The study also claims that FINRA’s arbitrator disclosure process contributes to arbitrator bias. Arbitrators are under a continuous duty to disclose anything that could affect their ability to be impartial. However, PIABA believes that FINRA should strengthen the disclosure rules and oversee the process, urging arbitrators to update their disclosures on a regular basis. PIABA seeks more regular updates overseen by FINRA to ensure that accurate background information is being made available to investors as they choose their arbitrators.
The need for a diverse FINRA arbitrator pool with complete arbitrator background disclosure is especially important given that arbitration has become the mandatory form of dispute resolution. As PIABA points out in its study, the Supreme Court held in 1987 that pre-dispute arbitration agreements in the brokerage industry are enforceable, and since then, pre-dispute arbitration clauses have become the norm. Additionally, while there used to be as many as ten industry-operated arbitration forums, today FINRA is the only one.
PIABA ended its study with recommendations for more oversight of the dispute resolution process through legislative action or more SEC oversight of FINRA to ensure that investor dispute resolution is a fair process. These far ranging recommendations include the following:
- Congress should make securities arbitration optional for investors by passing the Investor Choice Act of 2013;
- SEC should commission an independent group to assist in the oversight of FINRA’s arbitration process;
- SEC should improve transparency of FINRA’s arbitration forum by making documents relating to its supervision of FINRA arbitration subject to Freedom of Information Act;
- SEC should commission an independent study about FINRA’s past and current recruiting practices and how they have impacted arbitration outcomes;
- SEC should examine FINRA’s arbitration recruitment practices and develop a transparent recruitment process to ensure diversity; and
- SEC should ensure that FINRA has adequate and verifiable procedural safeguards in place to ensure that arbitrator disclosure process results in recruitment and selection of unbiased arbitrators.