NASAA: Reform arbitration or add court option

WASHINGTON — The securities arbitration system should be reformed or else investors should be given the option of taking their disputes to court, according to a group that represents state securities regulators.
“We think it needs to be reformed,” said Joseph Borg, director of the Alabama Securities Commission in Montgomery and president of the North American Securities Administrators Association Inc. “Absent that we may have to consider making it optional.”
As part of its 2007 legislative agenda, Washington-based NASAA is calling for the new Democratic Congress to review the arbitration system.
But it isn’t clear whether the congressional committees that oversee financial services will take up arbitration soon.
“Financial services is a big world,” and House Financial Services Committee Chairman Barney Frank, D-Mass., hasn’t added the subject to his agenda so far, said committee spokesman Steve Adamske.
Among issues that need to be reviewed, Mr. Borg said:
• How arbitration panels are selected.
• Whether arbitrators are properly trained.
• Whether explanations of awards are sufficient.
• Whether the system is cost
efficient.
Arbitration panels now include a member of the securities industry, who is supposed to provide expertise on securities law.
“If the industry arbitrator is the one that has all the knowledge, he’s sort of like the foreman of the jury, and he’s probably going to lead the others,” Mr. Borg said. “That’s not fair if he’s already part of the industry.”
Plaintiff’s lawyers have argued that having someone with a vested interest in a case sit in judgment should be prohibited, as it would be in a court case.
Mr. Borg also questions whether the arbitration system is as economical as the industry long has claimed.
“We’ve seen some [arbitration cases] now where the awards were given in favor of the investor, but the cost of the forum and the arbitration exceeded the award, which doesn’t make any sense,” he said.
Some financial advisers agree that changes should be made to NASD’s dispute resolution system.
“The problem is, you go to arbitration, and the standard of care is so low,” said Bedda D’Angelo, a certified financial planner who is president of Fiduciary Solutions in Durham, N.C.
She has sat on arbitration panels and been an expert witness for both defense and claimants in arbitration cases.
“It’s been apparent that if you are a broker, all you have to do is not perpetrate a fraud” in order to prevail in arbitration proceedings, Ms. D’Angelo said.
Predictably, attorneys who represent investors in disputes welcome the NASAA call to make arbitration optional. Indeed, many plaintiff’s attorneys contend that the system essentially deprives investors of access to the court system and is unfair.
Win rates for investors in arbitration cases have dropped to 43% from about 60% in the late 1980s, said Theodore Eppenstein, a senior partner with Eppenstein & Eppenstein, a New York law firm that represents investors in fraud cases.
The Financial Planning Association favors making more alternatives available to investors in disputes, including the possibility of going to court, said Jim Reardon, a CFP who is president of People Wealth Management LLC in Topeka, Kan. Mr. Reardon, who also provides witness testimony in arbitration cases, is president of the Greater Kansas City chapter of the FPA.
He said his experience has been that the arbitration process is fair. But, Mr. Reardon said, “There’s a perception that there’s an industry bias.”
That said, not everyone is in favor of making changes to the arbitration system.
The system in place “is among the most regulated arbitration system for any industry,” Travis Larson, spokesman for the New York- and Washington-based Securities Industry and Financial Markets Association, wrote in an e-mail. “It provides a fair and efficient means of resolving disputes with the help of experts who are best qualified to ensure customers’ claims are addressed.”
Securities disputes are resolved through arbitration “more expeditiously, efficiently and fairly than they would be in our already overburdened court systems,” Mr. Larson said.
Arbitration keeps legal costs down, said David Bellaire, general counsel and director of government relations for the Financial Services Institute Inc. in Atlanta.
“The reduction of those costs is enjoyed by all the clients who have accounts with our firms,” he said. “If dispute resolution costs increase, firms would pass costs on to all clients.”
The merger of the regulatory functions of NASD of Washington and the New York Stock Exchange will hurt investors involved in disputes, because they will have still fewer forums in which to have their cases heard, argued Mr. Eppenstein, who is a public member of the Securities Industry Conference on Arbitration, an advisory board to the self-regulatory organizations.
“The public got one less forum to go to,” he said. “It’s the only forum.”