(Reuters) – Lawyers for investors charged on Tuesday that securities arbitrators are chosen from a limited pool of mostly elderly men, one of several flaws in Wall Street’s mandatory arbitration system that could be the cause for a steep decline in rulings favoring investors.
The finding, in a study by the Public Investors Arbitration Bar Association (PIABA), raises questions about how Wall Street’s industry-funded watchdog recruits arbitrators, PIABA said, calling it a process largely shrouded in secrecy.
The Financial Industry Regulatory Authority (FINRA), the brokerage industry’s self-regulator, runs the arbitration forum in which investors must resolve legal disputes with brokerages. PIABA wants the U.S. Securities and Exchange Commission, which oversees FINRA, to look into arbitrator recruitment practices.
FINRA’s practice of targeting groups of professionals such as lawyers and accountants could prevent a broader range of “quality arbitrators” from serving, PIABA said.
“FINRA has a problem with a lack of diversity on its arbitrator roster that needs to be fixed immediately,” it added.
In response, FINRA included a list of more than 100 organizations it has approached for recruiting.
“We have an aggressive recruitment campaign in place to seek individuals from diverse backgrounds to serve as arbitrators,” FINRA said in a statement.
PIABA blames recruiting practices for what it says is a steep decline in success rates for investors who arbitrate.
In 1992, about 60 percent of investors were successful in arbitration and received about 60 percent of the amount they claimed. The current win-rate is now 42 percent, with some receiving as little as a penny to 10 cents on the dollar, PIABA said, citing U.S. government and FINRA statistics.
Still, the actual link between arbitrator diversity and those rates is not clear, a point that some reporters made in a call with PIABA officials on Tuesday. Nonetheless, diversity can be a check on bias against investors, Susan Macpherson, a Minneapolis-based jury consultant who worked on the PIABA project, said during the call.
In its statement, FINRA pointed to other factors that can affect whether investors win, including the issue involved, market events and the skill of an investor’s lawyer.
PIABA also faced questions from reporters about whether its focus on older arbitrators was ageist. Its report mentioned instances of arbitrators falling asleep or being unable to hear.
“We’re not saying that the age is the problem,” said Joseph Peiffer, PIABA’s president-elect. “It’s homogeneousness that’s the problem.”
FINRA’s arbitration system, which has long been steeped in controversy, is already under internal review. A task force FINRA assembled in July will hold its first meeting on Friday to identify potential issues that might require change.
FINRA has made some changes to its program. In 2011, for example, it allowed investors to select a three-person arbitration panel that did not include a mandatory industry-affiliated arbitrator.
There are 6,383 arbitrators, according to FINRA. PIABA’s analysis of disclosure reports for 5,375 past and current securities arbitrators from as far back as 1991 found that 80 percent of arbitrators were male. PIABA also analyzed 2,118 disclosure reports it had complied from 2013-14. Of those, the average age was 66 and more than 78 percent were men.
Questionnaires that arbitrators must complete to provide information about their backgrounds to parties in a dispute, including potential conflicts of interest, are also poorly designed and not current, PIABA added.
(Reporting by Suzanne Barlyn. Editing by Andre Grenon)
0 comments
Share
