FINRA Seeking to Create a Bigger, More Diverse Arbitrator Roster

According to the Financial Industry Regulatory Authority ‘s lead arbitrator recruiter, the self-regulatory organization is taking active steps to create a roster of arbitrators that is not only larger than its current one, but also more professionally and culturally diverse. Barbara Brady spoke at a Practicing Law Institute seminar this month.

Arbitrators are who that preside over FINRA arbitration cases on numerous matters, including financial fraud claims by investors and broker-brokerage firm disputes. Last year, arbitrators made more than 1,270 securities arbitration decisions that led to over $19 million in repayment to investors, over $63 million in fines, and 475 broker suspensions. Only a court can overturn an arbitrator’s securities ruling and this would have to be due to extenuating circumstances.

“Outcomes in arbitration vary greatly based on the quality of the arbitrators,” said William Shepherd, a Houston-based attorney, whose firm has represented investors in more than 1,000 arbitration claims over the past twenty years. “If securities arbitration is to have any integrity at all FINRA must make certain that the arbitrator decides cases fairly.”

Choosing who should be named an arbitrator can lead to disagreement over how much securities industry/brokerage firm experience or ties a candidate should have. For example, while an arbitrator who used to be a broker or a securities attorney may have certain technical expertise and experience that could prove helpful in deciding a case, he/she may also be biased.

“Having savvy arbitrators may streamline the process a bit with less reliance on expert testimony,” said Shepherd, “but it is difficult for such arbitrators to understand the lack of understanding of investments by the ordinary investor. I often point to my client’s own experiences to demonstrate this to arbitrators. For example, my client’s understanding of machinery at his workplace keeps him from getting hurt, but if you walked into that factory you might be killed the first day. It’s not that you’re stupid, just that you lack experience in that environment. The dangers of investing were foreign to my client. That is why he or she hired an expert. ”

Securities panels with three arbitrators usually handle arbitration disputes when over $100,000 is involved. Customers are allowed to opt for two of the three arbitrators or all three of them to not have a securities industry background. That said, just because someone is a non-industry arbitrator doesn’t mean he/she lacks biases.

While FINRA chooses not to reveal the demographics of its arbitrator pool, Brady claims that the SRO does try to select a diverse range of arbitrators from different backgrounds. She said FINRA is making an effort to make sure that women, minorities, and professors of economics, law, and real estate are represented.

Who makes a good arbitrator?, Reuters, August 20, 2012

Arbitrator Appointment Frequently Asked Questions, FINRA

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Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

UBS, Citigroup FINRA Arbitration with Nonprofit Over ARS Cannot Be Halted, Said District Court, Institutional Investor Securities Blog, August 6, 2012
At Shepherd Smith Edwards and Kantas, LTD, LLP, over the years our arbitration lawyers have successfully represented investors with claims before FINRA, the American Arbitration Association, the New York Stock Exchange Inc. (NYSE), and in private arbitration. In addition to representing clients domestically, we also have numerous international clients with relief claims against FINRA-registered broker-dealers that are based in the US.