In FINRA Arbitration, Does the Arbitrator Really Matter?
Who is a FINRA Arbitrator and What Difference Does the Arbitrator Selection Process Make?
Absolutely. Everyone – based on his or her profession, experiences, and politics – has some built in bias about court cases and financial disputes. Which is why, as reported by Reuters, the Financial Industry Regulatory Authority is actively recruiting new arbitrators. According to Barbara Brady, FINRA's lead recruiter of arbitrators, the self-regulatory organization hopes that new arbitrators will add “more cultural and professional diversity to its pool [of arbitrators].” Based on recent FINRA actions and statements (such as the launch of the organization’s newest pilot program), FINRA’s train of thought seems to be that the fairness of the arbitration process is directly correlated to how much choice investors have over who their arbitrators are. But, is that assumption correct?
Arbitrators for a FINRA panel are picked similarly to how a traditional jury is selected during a trial. Before the hearing begins, a list of potential arbitrators, picked randomly from FINRA’s arbitrator pool, is handed to each party.
The list contains the potential arbitrators’ names and any associated disclosure reports, which include information about the arbitrators’ industry experience. Parties involved in the dispute can then strike any name from the list and rank the remaining choices according to their preference.
Prior to Feb. 2011, investors involved in a dispute that involved sums of more than $100,000 were required to have at least one industry-affiliated arbitrator on their three-person panel. This requirement was often – rightly – perceived as having the potential to introduce a significant conflict of interest into the process. After all, could someone who may be a colleague of the broker or brokerage firm involved in the dispute treat the investor’s claim with the unbiased regard it deserves?
Many investors and investor advocates didn’t think so.
In fact, 61% of investors surveyed in 2008 said the FINRA arbitration process was inherently unfair to investors.
So, when FINRA introduced a pilot program in 2010 that allowed investors to choose all-public arbitration panels instead, a significant number jumped at the chance.
That same year, investors were awarded damages in a higher percentage of
cases than any other year over the past six years. (In 2007, for example,
investors were awarded damages in only 37% of cases. By 2010, investors
were receiving awards in 47% of cases heard before a FINRA arbitration
panel.) The number of
multi-million dollar awards also increased that year. Investors quickly associated the all-public
panel option with the increase in investor awards, and the
pilot program was adopted permanently by early 2011.
If the number and size of investor awards are any indication, then it does seem – based on recent years’ data – that as investors are given more choices and control over the arbitration process, they are treated more fairly. With that in mind, it seems highly likely that a larger and more diverse arbitrator pool, which would further expand investor choice, would also lead to a fairer and more balanced process.
To learn more about FINRA arbitration, watch our video.