PIABA claims arbitrator bias – Finra lashes back

Plaintiff's attorneys say lack of diversity among panelists means disadvantage for investors

Oct 7, 2014 @ 11:34 am

By Mark Schoeff Jr.

The lack of diversity among Finra arbitrators hurts investors in disputes against brokerages and has led to a decrease in the number of cases they win, a group of plaintiff's attorneys asserted in a report released Tuesday.

Even before the Public Investors Arbitration Bar Association held a conference call with the media Tuesday morning, the Financial Industry Regulatory Authority Inc. hotly contested the report's findings, arguing it reaches out to “all types of people” when recruiting arbitrators.

The PIABA study of 5,375 arbitrator disclosure reports of past and current arbitrators shows that 80% of the roster is male. The average arbitrator's age is 67, with about 40% of arbitrators being older than 70 and about 12% being older than 80. In addition, a PIABA review of disclosure reports from 2013-14 shows that 73% of arbitrators have advanced degrees.

“PIABA's research shows 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 PIABA study states.

The increasingly homogenous arbitrator pool has led to a reduction in the number of cases in which investors prevail, PIABA president Jason Doss said. The “win rate” for claimants has dropped from about 60% in the early 1990s to 42% in 2013.

The PIABA study also claims that Finra's arbitrator recruiting is flawed and that its arbitrator disclosure process fails to give investors a clear understanding of potential arbitrator conflicts and biases.

“There is no question that having a pool of arbitrators with diverse backgrounds and experiences will result in improved decision making,” Mr. Doss said. “Finra's arbitration disclosure process fails at every step. Investors have no other choice but to conclude that arbitration is unfair.”

Finra countered that it contacts more than 100 organizations around the country to recruit arbitrators and has worked with PIABA since 1999 to develop the arbitrator pool.

“The suggestion that Finra has not been partnering with PIABA in recruitment of potential arbitrators is absurd,” the organization said in a statement.

The regulator questioned the link PIABA made between the arbitrator pool and the outcome of cases.

“The reality is that win rates increase or decrease depending upon the controversy involved, market events and counsel,” Finra said. “We have made substantial efforts to recruit and train arbitrators from diverse backgrounds and will continue to do so.”

Mr. Doss dismissed Finra's reasoning.

“Arbitrators make the decisions,” he said. “They're the ones that impact the win rates.”

Finra also took umbrage at the criticism of older arbitrators. It said retirees are often the people who have the time to serve on arbitration panels.

“The notion that individuals 70 and older are unable to and unfit to serve as effective arbitrators is insulting and borders on age discrimination,” Finra said.

Among PIABA's recommendations is that that the Securities and Exchange Commission, which oversees Finra, institute an independent board of directors to oversee the Finra arbitration process. Finra recently established a task force to recommend arbitration improvements.

A former Finra arbitration official said PIABA was misguided in looking at the number of cases in which arbitrators decide the outcome, because they are a shrinking piece of the pie. Arbitrator decisions have fallen from about 33% of all cases to 23% over the last 20 years. Most cases are settled before arbitrators weigh in.

“Focusing on awards is really unfair,” said George Friedman, a former director of Finra arbitration from 1998-2013. “In a settlement, the investor gets something.”

Finra oversees the arbitration system that settles customer disputes with brokers. Nearly every brokerage contract contains a clause that requires claims be settled in arbitration rather than taken to court.

The Finra arbitrator pool consists of 6,383 arbitrators of which 3,550 are defined as public, meaning they have no background in the securities industry, and 2,833 are industry arbitrators. Arbitration panels consist of three adjudicators who are chosen by the parties in the case.

The PIABA study asserts that the selection of arbitrators is undermined by a lack of information about the arbitrators.

“Finra's flawed arbitrator disclosure process provides respondent broker-dealers with an unfair advantage over public investors in securities arbitration disputes in part because broker-dealers are repeat participants in securities arbitration proceedings and therefore have more information about arbitrators in the pool, due to experience,” Akshay Rao, a professor in the University of Minnesota School of Management, wrote in the report.

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