The North American Securities Administrators Association Inc. and the Public Investors Arbitration Bar Association want to remove industry arbitrators from securities arbitration panels, arguing that the presence of industry representatives makes the panels inherently unfair. They say that using only public arbitrators would make the panels truly neutral.
But wouldn't that create a bias against the securities industry?
Certainly, it is only natural for public arbitrators to sympathize with an investor alleging wrongdoing by a wealthy financial firm.
But what about cases where contentious investors inflate or fabricate a claim because a deep-pocketed firm makes an inviting target?
At present, the system seems balanced. In cases using three arbitrators (usually those involving claims of more than $10,000), the panel comprises two public and one industry arbitrator.
Because decisions are made by majority vote, this would seem to give the plaintiffs the edge. Moreover, plaintiffs and respondents can challenge any arbitrator. And each side has one peremptory challenge and unlimited challenges for cause.
To be sure, the presumed expertise of the industry arbitrator could sway public arbitrators. This is the major complaint of those who want to get rid of industry arbitrators.
A greater concern may be that industry lawyers may be more familiar with arbitration procedures than lawyers representing plaintiffs.
But there is a simple solution for both perceived problems: Encourage public arbitrators and the plaintiff's bar to become more familiar with the securities industry, and its practices and rules.
There is little evidence the current system is treating plaintiffs unfairly. The Securities Arbitration Commentator, a Maplewood, N.J., publication that has studied arbitration awards, found that 80% of claims settle in favor of the plaintiffs before a panel renders a judgment. Until recently, customers won awards in the majority of other cases.
Last year's decline in the percentage of cases decided in favor of customers may well be because cases brought in the wake of the tech bubble collapse were weak.
In the absence of significant evidence that the current system is shortchanging investors, let's not rush to make major repairs.
Rather, the
Financial Industry Regulatory Authority Inc. of New York and Washington should work with NASAA of Washington and PIABA of Norman, Okla., on an in-depth, unbiased study of how well the current system is working.
Some possible changes: require arbitrators to publish findings of fact, summarize how they reach their conclusions, and itemize components of any award they make.
This would provide evidence of bias on either side and might eliminate that bias. The ultimate goal of the arbitration system must be that it is fair to both sides and that it is perceived as fair by both sides.
