Thursday, July 1, 2021

FINRA Diversity Initiative

FINRA recently posted a regulatory notice seeking information on whether it should consider changes to "rules, operations and administrative processes that may create unintended barriers to greater diversity and inclusion in the broker-dealer industry or that might have unintended disparate impacts on those within the industry."  Drexel's Nicole Iannarone, who is currently chair of FINRA's National Arbitration and Mediation Committee submitted a thoughtful letter.  As her letter explains, she's particularly well-situated consider these issues:

My interest in this issue and its application to the FINRA arbitration forum is both professional and personal. I am a law professor who teaches business and securities law courses. My recent scholarship focuses specifically on consumer investors’ experiences in FINRA arbitration.3 I previously directed a law school securities arbitration clinic and supervised law students representing investors with smaller claims against their brokers in the FINRA arbitration forum. I am the chair of FINRA’s National Arbitration and Mediation Committee (NAMC). I am also a Mexican-American woman with her own non-retirement investment accounts. These experiences provide me a unique lens through which to view FINRA’s diversity and inclusion efforts as they relate to the FINRA Dispute Resolution forum. 

She rightly highlights that arbitrator diversity has been a challenge for FINRA for some time.  I also wrote about this issue in a 2014 op-ed and highlighted the need for FINRA to do more to recruit diverse arbitrators.  Since that time, FINRA has been quite active and has conducted outreach all across the country.  The numbers have been improving as a result of these efforts.  

Professor Iannarone also explains that new arbitrators are struggling to actually get selected for hearings and highlights some research from one of her forthcoming law review articles:

Last summer, I took steps to determine if arbitrators added to FINRA’s neutral roster in the past five years, who on the whole are more diverse than the prior pool, had been able to obtain the necessary qualification to preside as chairs over smaller claims.  My study, forthcoming in the Washington Law Review, was based on the hypothesis that two structural barriers made it likely that investors with smaller claims were unlikely to obtain the benefit of FINRA’s diversity recruitment efforts: (1) FINRA’s public chair qualification rule; and (2) the list selection procedures for three arbitrator cases whereby arbitrators already qualified as chairs have two opportunities to appear on lists compared to non-chair public arbitrators only having one opportunity to appear on a list. From the publicly available awards, I was able to determine that in smaller claims that concluded via hearing from 2014-2019, only 0.98% were decided by public chair qualified arbitrators who first appeared in FINRA’s awards database as an arbitrator in a case filed after December 31, 2014.22 The data indicate that virtually no customers in small cases whose proceeding concluded with an award after a hearing benefitted from the increased diversity FINRA achieved in the overall pool from 2015-2019, suggesting that the hypothesis was correct and two FINRA rules serve as barriers to inclusion. The study also showed that longer serving arbitrators far outnumbered new entrants. Over half of the arbitrators who presided over small claims in the study period first appeared in the FINRA awards database more than 20 years ago.  Over 80% first appeared in the awards database before chair qualification was a prerequisite to presiding over smaller claims. In addition, more than one-third of the arbitrators studied first appeared in cases filed before 1998, the date before which parties had no ability to select arbitrators in FINRA proceedings.

I agree with this analysis.  Legacy arbitrators have had many more opportunities to accumulate qualifications.  Once they obtain a chair qualification, they get twice as many chances to be selected as arbitrators.  Functionally, this makes it much harder for new arbitrators to gain the experience needed to qualify as chairs.  As smaller claims are only decided by chair-qualified arbitrators, the rules will need to change to increase the odds that investors with smaller claims will have access to a reasonably diverse pool.

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Is the underlying assumption that, if the overall panel of arbitrators is more diverse, the quality of justice dispensed will improve?

Posted by: Les Greenberg | Jul 5, 2021 9:07:15 AM

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