Getting a fair shake in arbitration

The Public Investors Arbitration Bar Association has made one valid point in its criticism of the pool of arbitrators used by Finra to settle suits by investors against brokers, but it also makes a number of unjustified assumptions about members of the pool.

In a study it released last week, PIABA implied that investors cannot get a fair shake from the Financial Industry Regulatory Authority Inc.’s arbitrators because 80% of the roster is male, the average age is 67 and 73% have advanced degrees. It noted that “PIABA’s research shows Finra’s arbitrator pool consists primarily of elderly men who have socioeconomic status that puts them out of touch with the average investor.”

It also reported that the “win rate” for claimants dropped from about 60% in the early 1990s to 42% in 2013.

That so much of the pool is male is a valid complaint, and Finra must increase its efforts to recruit female arbitrators to add diversity to the pool. But why is it a negative that the pool’s average age is 67, with 40% of the arbitrators over 70? Surely with age comes wisdom based on experience.

And why is it a negative that 73% of the arbitrators have advanced degrees? A well-educated arbitrator certainly will be better able to see phony arguments from both sides in a dispute.

OUT OF TOUCH?

The assumption that arbitrators with high socioeconomic status are out of touch with the concerns of the average investor is simply a bias for which no evidence is cited.

In fact, there is no reason to say those who have worked their way up to a comfortable financial situation will be unable to identify with investors still struggling to climb the ladder. They also might be less liable to be swayed by the industry-related arbitrators.

Concerning the win rate, to draw any conclusions, one would have to know the makeup of the arbitration pool 20 years ago. And, as Finra pointed out in its rebuttal, the number of cases relying on an arbitrator’s decision has fallen to 23% from 33%, as more complaints are settled before reaching arbitration.

In the report, PIABA recommends the Securities and Exchange Commission appoint an independent board of directors to oversee the Finra arbitration process.

That is premature, however. Finra has established a task force to recommend improvements. The SEC should wait to see which improvements eventuate before even considering PIABA’s suggestion.