Who makes a good arbitrator?

Wed Aug 22, 2012 11:24am EDT

Morning commuters walk past the New York Stock Exchange August 20, 2012. REUTERS/Brendan McDermid

Morning commuters walk past the New York Stock Exchange August 20, 2012.

Credit: Reuters/Brendan McDermid

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(Reuters) - Wall Street's self-regulator is actively recruiting to expand its roster of arbitrators. The move comes as industry experts say the pool of people chosen to rule on brokerage-related disputes could use some freshening.

The Financial Industry Regulatory Authority hopes to add more cultural and professional diversity to its pool, Barbara Brady, FINRA's lead recruiter of arbitrators, said at a Practicing Law Institute seminar earlier this month.

Arbitrators hold significant power in the securities industry; their decisions are binding and can usually only be overturned by a court and then only in extenuating circumstances. The stakes are high. Arbitrator rulings in 2011 resulted in more than $63 million in fines and more than $19 million in repayment to harmed investors, as well as the suspension of 475 brokers. More than 1,270 cases were decided by arbitrators last year.

And many pockets of the country are still in need of larger arbitrator pools, Brady said. That makes selecting new people for the pool of about 6,400 people qualified to hear securities-related disputes all the more important. FINRA oversees about 4,380 brokerage firms and nearly 630,000 registered securities representatives.

Arbitration panels hear cases on everything from broker disputes with their employers to investor cases alleging fraudulent sale of securities.

"The arbitration process is only as good as the pool of arbitrators," said Andrew Stoltmann, a Chicago-based lawyer who has handled more than 1,000 arbitration claims for investors over the past decade. "FINRA's number one challenge is making certain that the arbitration is fair."

INDUSTRY TIES: THE DEBATE

The selection of arbitrators is fraught with disagreement over the extent to which a person should have ties to or a background in the securities or brokerage industry.

An arbitrator who has been, say, a securities lawyer or a broker has certain knowledge and technical expertise that could help him or her understand issues more clearly.

"If we have more potential panelists with a greater understanding of the industry, it may streamline the process a bit and make us less reliant on expert testimony," said Luigi Spadafora, a Connecticut-based lawyer who often represents broker-dealers in arbitration cases.

But critics say familiarity could lead to bias in rulings, based on which side of the issue they previously worked.

Stoltmann, for example, believes someone who has a clear frame of mind and would be able to approach issues without any predispositions is an ideal arbitrator.

"If we have blue-collar bus drivers and truck drivers dissecting capital murder cases, then certainly those same people can decide a case involving money between a broker and a brokerage firm," he said.

In cases involving a panel of three arbitrators - those involving more than $100,000 in dispute - customers can choose a panel composed of two arbitrators who do not have a background in the industry and one who does, or a panel with three arbitrators who have no securities industry background.

NO ONE SIZE FITS ALL

Of course, many securities industry observers and investor advocates say qualifications and fairness come down to the individual, given that biases aren't bound by profession.

"There are (non-industry) arbitrators that I've sat with, that basically said, 'big companies screw the little guys'," said Marc Dobin, a Florida-based securities lawyer who usually represents brokers or brokerages and has served as an industry arbitrator. "How do they lose their bias?"

Before each arbitration hearing, FINRA sends randomly generated names and associated disclosure reports for arbitrators to both parties. Parties can strike any name from the list and rank the remaining choices by preference.

Dobin said he doesn't consider industry experience when he decides whether to strike any arbitrators from the list of names received.

"I look at their work history to see if there may be some bias that they acquired as a result of their work history, and then I look at their arbitration awards to see if there is some detectable bias in the arbitration awards," he said.

FINRA does not disclose the demographics of its arbitrator pool, but Brady said at the PLI seminar that FINRA "strives to have a broad selection of people" diverse in culture, professions and background. She also said the regulator is "very strongly" focusing on building the roster of minorities and women arbitrators, as well as real estate professionals and professors of law and economics.

"Ideally, you'd like somebody that understands the broker-customer relationship," said Jill Fisch, a law professor at the University of Pennsylvania who co-authored a study about the influence of arbitrator background and representation on arbitration.

Fisch said that of the sample of arbitrators they looked at, a high percentage were lawyers. But it was difficult to draw conclusions about FINRA's arbitrator pool at large, or whether certain arbitrators do a better job or are less biased than others, since there are many unknowns about the pool.

"It strikes me that a first step would be the need to have more information available," Fisch said.

(Reporting By Ashley Lau in New York; Editing by Jennifer Merritt and Leslie Adler)

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