When problems between brokers and investors occur, the Financial Industry Regulatory Authority (FINRA) administers the largest forum specifically designed to resolve securities-related disputes between and among investors, securities firms and individual brokers. FINRA’s arbitration forum is the largest in the country for the securities industry, handling nearly 100 percent of securities-related arbitrations from more than 70 hearing locations—including at least one in all 50 states, London and Puerto Rico.
FINRA’s arbitration panels are composed of one or three arbitrators who are selected by the parties. They read the pleadings filed by the parties, listen to the arguments set forth by the parties, study the documentary and/or testimonial evidence, and render a decision on the matter. The panel’s decision, called an “award,” is final and binding on all the parties. All parties must abide by the award, unless it is successfully challenged in court.
The Public Investors Arbitration Bar Association (PIABA), an international bar association whose members represent investors in disputes with the securities industry, claims in a new report that the lack of diversity among FINRA arbitrators hurts investors in disputes against brokerage firms and has led to a decrease in the number of cases they win. 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. According to PIABA, the advanced age of many FINRA arbitrators raises serious concerns about their ability to effectively and fairly participate in arbitration proceedings. Furthermore, PIABA asserts that FINRA fails to have adequate procedural safeguards in place to ensure that impartial and neutral arbitrators are added to the arbitrator pool. PIABA’s report can be read here.
FINRA quickly responded to PIABA’s report and hotly contested its findings, arguing that FINRA reaches out to a diversified pool of candidates when recruiting arbitrators. Specifically, 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. FINRA states that it has made substantial efforts to recruit and train arbitrators from diverse backgrounds and that it will continue to do so. FINRA stood behind the educational and experience requirements it has in place for arbitrators, stating that a primary goal of its arbitrator recruitment program is to identify and train a knowledgeable pool of potential arbitrators from which parties can choose to respond to very complex issues that often arise in securities disputes. FINRA questioned the link PIABA made between the arbitrator pool and the outcome of cases. FINRA asserts that the reality in securities arbitration is that win rates increase or decrease depending upon the controversy involved, market events and counsel. FINRA was also offended at the criticism of older arbitrators, saying that retirees are often the people who have the time to serve on arbitration panels. FINRA asserted that it was insulting and bordered on age discrimination for PIABA to claim that individuals 70 and older are unable or unfit to serve as effective arbitrators. FINRA’s response to PIABA can be found here.
The selection of arbitrators is an important decision. Although you will never be able to predict with certainty how the case will be decided based on the arbitrators you select, there are certain steps you can take and guidelines you can follow to obtain the best panel possible under the circumstances.
If you are unrepresented by counsel and need assistance selecting arbitrators for your FINRA arbitration, contact The Law Office of Michael A. Nagy, LLC for a free consultation.