State securities regulators are skeptical of the brokerage industry's criticism of a recent study that uncovered significant unhappiness with the securities arbitration process.
The report, "An Empirical Study: Perception of Fairness of Securities Arbitration," found that 55.1% of respondents were dissatisfied with the outcomes of their arbitration cases. It also found that many of those surveyed viewed the arbitration system as unfair and their arbitration panels as biased.
The report, which was released Feb. 6, was based on responses from more than 3,000 participants, including customers, lawyers and representative of brokerage firms.
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The Securities Industry and Financial Markets Association and the Financial Industry Regulatory Authority Inc., both based in New York and Washington, participated in the survey. But after its conclusions were made public, both said the survey's response rate of 13% was too low and, as a result, conclusions were "mixed."
"It seems nobody had trouble with the survey itself until the results came back," said Tanya Solov, director of the Illinois Securities Department.
It's unfair to highlight only investor dissatisfaction with the arbitration system, said Kevin Carroll, managing director and associate general counsel of SIFMA.
"You have industry-side people who also perceive the system is unfair" because they believe it's too tilted in favor of investors, he said.
In a statement, SIFMA noted that many survey respondents (58%) characterized arbitrators as competent and said they listened to them (73%).
"The results don't show a system that's broken," Mr. Carroll added.
State regulators, on the other hand, contend that the survey highlights the need for removing industry members from arbitration panels.
CALL FOR INDEPENDENCE?
"We're trying to see whether the investors believe [that the arbitration system is] fair, said Bryan Lantagne, director of the Massachusetts Securities Division and chairman of the arbitration working group sponsored by the North American Securities Administrators Association Inc. of Washington.
"Now we have a report that shows that they don't, and everyone's trying desperately to put a spin on this," Mr. Lantagne said. "These numbers really speak volumes to what the investors believe. That's crucial to the forum. If they feel they're forced to go into a forum that's biased, it perverts the program."
In a statement issued Feb. 13, Massachusetts Secretary of the Commonwealth William Galvin called on Finra to prohibit arbitrators from having ties to the securities industry. Such a move would be "a reasonable first step which will send an immediate message to investors that Finra has heard them and will take action to address their legitimate concerns," according to the statement.
That is not true, SIFMA's Mr. Carroll said.
"They want to dismantle the entire system," he said of the state regulators. "Part of that plan is to get rid of the industry arbitrator."
Indeed, state regulators have called for reform of the arbitration system, and Ms. Solov has testified on behalf of NASAA in support of legislation that would eliminate mandatory-arbitration clauses in contracts.
Last fall, SIFMA released a white paper that it said showed the benefits of arbitration.
Among other things, SIFMA's white paper concluded that having industry arbitrators on arbitration panels does not change the outcome of cases.
"If you have a panelist that's not skewing outcomes and they provide expertise, I can't think of a good reason to remove that person," Mr. Carroll argued.
State regulators also are pushing Finra to provide more access to the arbitration process.
Alabama regulators, for example, requested that they be allowed to monitor arbitration proceedings at Finra's arbitration center in Birmingham, state securities director Joseph Borg said.
"We wanted to know what types of cases were being brought" and whether particular firms or agents were repeatedly going through arbitration, he said. "We think that would be helpful for both the industry and investors."
Finra, however, is less than receptive to the idea.
"Finra arbitration proceedings are confidential, and attendance is limited to parties," Finra spokeswoman Sarah Bohn wrote in an e-mail. "Under no circumstances has Finra allowed federal, state or self-regulatory-organization investigative staff to attend."
Uninterested parties may attend a hearing only if they have the consent of all those involved, including the arbitrators, Ms. Bohn said.
"The bottom line is, we've never been able to resolve that issue," Mr. Borg said. "Since we can't, we've taken the position you cannot have an arbitration process that is mandatory."
Sara Hansard can be reached at shansard@crain.com.
