Part 2: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time: Arbitrators.

By: Alexandra Hughes, Spring 2016 Graduate Research Assistant

alexhughesAs noted by the task force, the “quality of dispute resolution at the FINRA forum depends greatly on the abilities and commitments of the individuals who serve as arbitrators.” Due to the task force’s extreme focus on arbitrator issues, and in an effort to be comprehensive, arbitrator issues will be discussed in Part 2 and Part 3 of this blog series. The following are summaries of those issues the task force considered, along with any proposed recommendations.

  1. Arbitrator Compensation

The task force received complaints about the low level of compensation for FINRA arbitrators. FINRA arbitrator honoraria have never been as high as the “market rate.” However, FINRA has taken steps to raise compensation. In November 2014, FINRA increased the arbitrator’s honorarium from $200 to $300 per hearing session and increased the additional honorarium from $75 to $125 per day for the chairperson. Despite these efforts, arbitrators still desired increased compensation, especially in light of increased case complexity, disclosure requirements, and responsibility and time commitments.

The task force discussed how increased compensation would attract greater and more experienced arbitrators. However, the task force also discussed the feasibility of raising compensation to the “market rate.” Keeping in mind these countervailing considerations, the task force recommended session fees for all hearings be increased from $300 per session to $500 per session and recommended automatic biennial increases in the honorarium pegged to the consumer price index (CPI).

  1. Expanding the Depth and Diversity of the Arbitrator Pool

The task force also considered complaints that the FINRA arbitrator pool lacks diversity, as approximately 80 percent of arbitrators are male and have an average age of 69. FINRA is already actively involved in recruitment efforts of more than 100 women and minority organizations. The task force recommended that FINRA continue to use aggressive recruitment efforts and exhibit inclusiveness. The task force also recommended that FINRA oversee the arbitrator application process to ensure timely processing of applications since a lengthy application process discourages applicants.

Additionally, some members expressed concerned about the expertise of the current pool of arbitrators—the Public Investors Arbitration Bar Association (PIABA) criticized the requirement that arbitrators have two years of college credit or five years of business or professional experience as excluding. Other commentators believe the requirement is not high enough. These views ultimately reflect a policy decision: whether the arbitrator should more reflect a juror or a judge. The task force did not reach consensus on this issue.

  1. Arbitrator Selection

With regard to the arbitrator selection process, the task force recommended:

  • In a case where all non-public arbitrators are struck (the all public panel), a new list of 10 public arbitrators should be generated for that seat, allowing parties a total of 30 arbitrators to choose from
  • Allowing challenges for cause on the ground that an arbitrator has been appointed to serve on multiple related cases, recognizing such circumstances can create conflicts
  • Providing training materials to arbitrators sitting on multiple related cases to address conflicts

Arbitrator Disclosure; Voir Dire

The task force discussed whether arbitrator disclosure sufficiently preserves an unbiased forum for parties. In finding the current system deficient in some respects, the task force recommended:

  • Requiring arbitrators to update their arbitrator disclosure report when they have material new information or experience a material change
  • Requiring arbitrators to review their disclosure report annually
  • Requiring the arbitrator disclosure report to list the name of counsel and location of counsel’s office for cases currently assigned to the arbitrator to allow parties to contact counsel about the arbitrator
  • Require subject matter disclosures (disclosure specific to the parties) to be disclosed to the parties at the time the arbitrator lists are generated, not after an arbitrator has already been appointed, so that biases can be seen sooner rather than later
  • Changing the language of the disclosure checklist from “investment advisor” to “registered representative” for clarity

The task force determined voir dire questioning was inappropriate to elicit information from arbitrators.

The full task force report is available online.