FINRA Arbitrator Guide: Is the Pool of Arbitrators Diverse Enough?

According to critics of the FINRA arbitration process, the lack of diversity in arbitration panels contributes to arbitration’s overall lack of fairness to investors. The Public Investor Advocate Bar Association (PIABA) published a report in 2014 that questioned the fairness of the arbitrator selection process and suggested a lack of diversity among arbitrators may contribute to a notable decline in investor awards. Recent data suggests that not much has changed.

The PIABA report pointed out that the pool of arbitrators represents a narrow selection of professions, including lawyers and financial professionals. Arbitrators do not officially need to have any specific professional designations; they are only required to have a college degree. Professionals with a refined grasp of the securities industry and/or the arbitration process do not reflect ordinary investors who may not have any background in the securities industry.

Following the release of the report, PIABA president Jason Doss stated, “There is no question that having a pool of arbitrators with diverse backgrounds and experiences will result in improved decision-making. FINRA states that the cornerstone of the integrity of its entire arbitration forum depends on FINRA having an effective and reliable process to detect and disclose arbitrators’ biases and conflicts of interest to the parties. Therefore, investors have no other choice but to conclude that arbitration is unfair.”

Do Investors Need to Worry About FINRA Arbitration?

There is reason to believe that FINRA arbitration is an unfair process for investors. Studies have pointed out that the percentage of FINRA arbitration cases that receive an award has gone down over time. PIABA also points out that the average dollar amount of FINRA awards has also decreased.

FINRA responded that PIABA’s conclusions regarding the decrease in win rates for investors, stating, “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.”

Critics also point out that brokerage firms are more likely to have familiarity with potential arbitrators. Without a securities lawyer, investors are at a disadvantage when it comes to knowing which arbitrators to strike from the list.