The Public Investors Arbitration Bar Association (PIABA) slammed FINRA’s arbitration system as “unsound,” saying in a report issued Tuesday it found “serious flaws” in the regulator's abitrator recruitment practices, a lack of diversity among participants and a total lack of transparency.
PIABA called into question the reliability of FINRA’s arbitration process, citing the regulator’s failure to ensure arbitrators are neutral and free of conflicts of interests. To improve fairness to investors, the report made several recommendations, including that the Securities Exchange Commission should step in to evaluate the arbitrator recruitment practices and create an oversight board independent of FINRA’s regulatory activities.
In the report, Dr. Akshay Rao, a University of Minnesota professor PIABA solicited for expert opinion, concluded that disclosure within FINRA’s arbitration process is simply “illusory” and failed to provide meaningful and reliable information about arbitrators’ bias and conflicts of interest.
“While FINRA may say the right things about disclosure, its actual implementation of disclosure policies fail to elicit meaningful or reliable information about arbitrators’ conflicts or biases,” Rao said in the report.
Tuesday’s report, based on background information provided by FINRA for over 5,000 arbitrators, also noted the safeguards that FINRA has set up to ensure arbitrators’ impartiality were "inadequate and not verifiable,” the report said.
FINRA’s arbitrators are not a diverse group, with 80 percent being male and the average age hovering at age 69, PIABA found. About 40 percent of the arbitrator pool is 70 years or older. And only about 25 of industry arbitrators have advanced degrees, compared to the 75 percent of arbitrators in the public pool.
PIABA argued the lack of diversity meant that women investors are significantly underrepresented, while the advanced age (12 percent are over the age of 80) of the arbitrators raised serious concerns about their "ability to effectively and fairly participate in arbitration proceedings," according to the investor group.
FINRA's lack of transparency around their arbitrator pool was at the core of many of the issues at play in FINRA’s arbitration process, PIABA says, recommending that the SEC take action, including launching a study to determine how FINRA’s current arbitrator recruitment practices have impacted case outcomes.
PIABA further recommended the SEC appoint an independent group to assist in the oversight of FINRA’s entire arbitration process, an independent board of directors that does not report to FINRA’s current board. Creating an independent arbitration body separate from the regulatory body would likely improve fairness, PIABA argued.
Additionally, PIABA contended a viable alternative to FINRA’s arbitration system is needed and urged urges Congress to pass the Investor Choice Act of 2013. The legislation would make securities arbitration optional for investors.
In response to PIABA’s report, FINRA issued a statement noting it had an aggressive recruitment campaign in place to seek individuals from diverse backgrounds to serve as arbitrators. “Ongoing recruiting initiatives involve more than 100 organizations nationwide reaching out to all types of people through on-site events, targeted recruiting advertisements and direct marketing campaigns,” the regulator said.
“The reality is that win rates increase or decrease depending upon the controversy involved, market events and counsel. We have made substantial efforts to recruit and train arbitrators from diverse backgrounds and will continue to do so,” FINRA said.
