American Bar Association
04.01.2021

Although brokerage firm contractual provisions and the rules of the Financial Industry Regulatory Authority (FINRA) make arbitration the default forum for resolving customer disputes in the securities industry, the arbitrator pools remain largely made up of Caucasian males over the age of 60. For that reason, and as with any dispute resolution forum, there is an unequivocal need to increase diversity in arbitration panels. Diversity helps to ensure parties will not feel disadvantaged and disenfranchised in litigating their disputes before FINRA. The Securities Industry and Financial Markets Association has stated that diversity “expands your firm’s knowledge and helps advance your offerings to clients.” Similarly, organizations such as the Public Investors Arbitration Bar Association have posited that having a diverse arbitration forum can result in improved decision-making compared with forums that have more homogeneous decision-making bodies.

Arbitration forums like FINRA and the American Arbitration Association (AAA) have already instituted initiatives to diversify. In recognizing its strides in increasing diversity in its arbitration rosters, FINRA has stated that “[w]hile we are encouraged by these short-term results and incremental progress made, we recognize this is a long-term effort. There is more progress to make and we remain fully committed toward achieving our diversity goals.” The AAA is “committed to the recruitment, retention and advancement of a diverse and inclusive Panel, Council and workforce, and seek[s] to advance diversity and inclusion in all aspects of the AAA’s work.” Through these efforts, steps have already been taken to ensure diversity of background in the arbitration forum.

Ensuring a diverse arbitration panel is crucial to improved decision-making through diversity of thought and approach. Different backgrounds bring different perspectives, which will ultimately lead to a more inclusive process. Corporate America has long since embraced the call for diversity in its ranks, and there are concrete steps the arbitration forums can take to follow suit and close the diversity gap in securities arbitration.

There are three primary ways the industry can ensure an injection of diversity. First, arbitrator pools themselves should be diversified to ensure the implementation of diverse arbitrator panels. To achieve this, potential arbitrators must be drawn from a broader range of sources, e.g., from various diversity-based organizations, events, and forums. Organizations like FINRA and the AAA have pledged to increase their diversity efforts by conducting outreach to minority organizations and networking groups and by hosting and attending events with these organizations. But statistics prove that a lot of work remains. FINRA has championed such efforts in recent years, which has led to a steady increase in the diversity of its arbitrator pool. Between 2016 and 2020, the percentage of female arbitrators in FINRA’s overall pool increased from 24 percent to 40 percent, and the percentage of Black or African American arbitrators has nearly doubled from 5 percent to 9 percent. Despite these concerted efforts by FINRA, however, the racial composition of the FINRA arbitrator pool remains 81 percent Caucasian, and the percentage of races other than Black or African American has essentially remained flat over the past five years. In addition, the AAA has stated that its roster of arbitrators and mediators comprises only 26 percent women and minorities.

Another glaring lack of diversity that FINRA’s efforts have been unable to remediate is the age of its pool, with the percentage of arbitrators age 60 or younger decreasing by 5 percent over the past five years. Further recruitment efforts that are targeted at organizations of young professionals would serve to bridge both the age gap and the diversity gap of arbitrator pools. Arbitration forums need to draw applicants from diverse organizations and conduct extensive outreach to diverse groups with the intention of not only recruiting but also educating the public about opportunities to become arbitrators.

Second, arbitration forums should evaluate their requirements for becoming an arbitrator to determine whether such requirements are reinforcing racial disparities. For instance, to become an arbitrator for the AAA, the organization requires as “Threshold Criteria” a minimum of 15 years of senior-level legal, business, or professional experience; an educational degree or professional license; honors or awards in the applicant’s field; training or experience in arbitration or other forms of dispute resolution; and membership in professional associations. It is no surprise that candidates from less privileged backgrounds face greater difficulties in achieving the steep educational and professional requirements of organizations like the AAA. Requiring 15 years of senior-level professional experience in addition to excelling in professional fields is a requirement that hinders diversity by barring the applications of otherwise qualified diverse candidates and may fail to recognize the struggles people of color experience in advancing their careers. FINRA should also evaluate whether its arbitrator requirements disproportionately exclude arbitrators of color. A dispute resolution forum may establish its arbitrator qualification requirements as it sees fit but should also remain ever-cognizant of how these requirements may adversely affect the diversity of its arbitrator pool.

Once diverse applicants do become arbitrators, greater measures must also be made with respect to transparency toward arbitrating parties. This means ensuring up-to-date and accurate background information that may reveal potential conflicts of interest and biases. For example, arbitrators are not currently required to disclose their political contributions even though such disclosures are currently required for other participants in the securities industry. In addition, while most lawyers in arbitrator pools disclose their primary practice areas and the percentage of their time devoted to representing plaintiffs and defendants in their narrative descriptions, forum rules should require the disclosure of such information. Without such required disclosures, parties are often left to Google searches and pulling case filings to make an educated guess as to a potential arbitrator’s legal experience. By requiring this information, arbitration forums can ensure more diverse panels and attempt to avoid the influence of unconscious bias.

Third, arbitration forums must address language barriers in their proceedings. While arbitrations are generally conducted in English, it is striking that practically no information is provided to non-English-speaking parties or the general public regarding how forums handle translation services or how translators are provided to parties that need them in hearings. The need for translation services was perhaps most evident throughout the wave of FINRA arbitrations conducted in Puerto Rico following the collapse of the municipal bond market in 2013. At FINRA’s request, many firms with a large number of Puerto Rico cases agreed to bear the costs of translation services in cases in which the claimant or the claimant’s witnesses were not fluent in English. However, without the firms’ arranging for translation services, it would have been nearly impossible to conduct arbitration hearings for primarily Spanish-speaking claimants and financial advisors. In addition, it was often difficult to account for items “lost in translation,” as witnesses were required to either testify in their second language or to rely on interpreters to properly convey the full meaning of their testimony to the arbitration panel. To begin to bridge this language gap, arbitration rules, guidance, and notices should at least be translated at least into Spanish, with consideration given to translating into other commonly spoken languages. These measures will ensure that parties for whom English is not their primary language can fairly represent their interests in arbitration. Also, the arbitration forums should provide increased access to interpretation tools within the hearings to ensure a level and neutral playing field.

The diversity gap in securities arbitration is a complex problem and is certainly the result of many systemic issues beyond the control of the arbitration forums themselves. However, through implementation of the simple measures outlined herein, we believe the arbitration forums can do their part to help to bridge the diversity gap.

This article originally appeared in American Bar Association’s Securities Litigation section on April 1, 2021.

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