Finra increases arbitrator recruiting, diversity, but other reforms lag

Agency said it recruited 945 arbitrators in 2016, and that 33% were women and 14% African American. But reform advocates seek broader changes, such as with the expungement process and notice of unpaid awards.

Feb 8, 2017 @ 1:41 pm

By Mark Schoeff Jr.

Finra has increased arbitrator recruiting, diversified its pool of arbitrators and strengthened arbitrator disclosures in response to a task force's recommendations, the broker-dealer regulator announced Wednesday.

In its status report, the Financial Industry Regulatory Authority Inc. said it has addressed 35 of the panel's 51 recommendations, including many that do not require rulemaking.

For instance, the arbitration task force, which released its report in 2015, said Finra should “increase the depth and diversity” of its pool of 7,097 arbitrators.

Finra said that last year it recruited 945 new arbitrators, exceeding its goal of 750, and that 33% were women and 14% African American. Those numbers are up from 2015 recruiting numbers in which 26% were women and 4% were African American.

The industry self-regulator also said it has provided a greater choice of public arbitrators for all-public panels, and required greater arbitrator disclosures and training.

Finra manages the arbitration system that adjudicates disputes between brokerage clients and firms as well as between brokers and firms. Most brokerage contracts contain a mandatory arbitration clause.

“Many of the recommendations we are putting in place are meaningful changes that will position the forum to better serve all parties involved,” Finra president and chief executive Robert Cook said in a statement.

Arbitration reform advocates said Finra is taking the task force report seriously but not going far enough to overhaul the system.

“They are taking some incremental, piecemeal steps, but there are still very important issues that aren't being addressed,” said Andrew Stoltmann, a Chicago securities attorney and member of the Public Investors Arbitration Bar Association.

Hugh Berkson, former PIABA president, said the Finra status report falls short on the topic of reforming the expungement process, which allows brokers to remove disciplinary events from their record in BrokerCheck.

He said the task force recommended substantial expungement reforms, such as establishing a special panel of arbitrators to consider expungement requests.

In the status report, Finra said it would contact state securities regulators about expungement requests.

“Just notifying the state is the lowest hanging fruit,” said Mr. Berkson, a principal at McCarthy, Lebit, Crystal & Liffman.

He also said Finra has not addressed a task force recommendation to release statistics on unpaid arbitration awards.

“It's a field that could be added to BrokerCheck or it could be published on Finra's arbitration statistics [web] page,” Mr. Berkson said.

Finra has not yet embraced a task force recommendation that the three-member arbitration panels articulate the reasoning behind their decisions.

In the status report, Finra said investors and industry lawyers expressed reservations about award explanations. But it will waive the $400 fee for an explained decision.

Some of the task force's recommendations require Finra to propose new rules. Finra said it has begun rulemaking on six of them.


The Securities and Exchange Commission has approved new rules on the number of public arbitrators and motions to dismiss. The agency is considering a proposal on alternative forums for small claims, among other proposals.

Finra, through its National Arbitration and Mediation Committee, is continuing to review the task force's recommendations, the organization said.

Two status reports have been released since Mr. Cook took over as Finra chief, including one last October. But it's too early to discern his agenda for arbitration reform.

“It's still a tabula rasa,” Mr. Stoltmann said. “We're still waiting for his philosophy to be determined.”


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