NASAA Calls on FINRA, SEC to Improve the Integrity of Securities Arbitration System by Removing Mandatory Industry Representative from Arbitration Panels

WASHINGTON, D.C. February 6, 2008—The North American Securities Administrators Association (NASAA) today called upon the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) to take immediate action to improve the fairness of the system of securities arbitration, beginning with the removal of the mandatory industry representative from arbitration panels used to resolve securities disputes involving customers and industry.

NASAA’s call follows today’s release by the Securities Industry Conference on Arbitration (SICA) of its survey of the participants in the NASD and NYSE arbitrations: An Empirical Study: Perception of Fairness of Securities Arbitration. Click here to download the full report.

“The study overwhelmingly demonstrates that investors view the securities arbitration forum as biased and unfair,” said Karen Tyler, North Dakota Securities Commissioner and President of NASAA, the oldest international organization devoted to investor protection. NASAA’s membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

According to the SICA study:

• Nearly half of the customers who expressed their views believed their arbitration panel was biased;
• 62 percent believed the arbitration process was unfair;
• 70 percent were dissatisfied with the outcome;
• 49 percent stated that the arbitration process was too expensive, and;
• A striking 75 percent of customers who compared their arbitration process to their civil litigation process indicated that arbitration was “very unfair” or “somewhat unfair” compared to court.

“The SICA study’s results are disturbing, and they support what state regulators have been hearing from investors in their states – investors believe that the arbitration forum they are forced to participate in is rigged against them,” said Bryan Lantagne, Director of the Massachusetts Securities Division and chair of NASAA’s Arbitration Project Group.

Currently, almost every broker-dealer includes in their customer agreements a predispute arbitration provision that forces public investors to submit all disputes that they may have with the firm and/or its associates to mandatory arbitration. Securities arbitration cases are heard by a three-member panel that includes one “non-public” or securities industry member, and two “public” members, who may have worked in the industry. Neither of the public arbitrators is required to be an investor advocate, even though the non-public arbitrator is required to be an industry representative. FINRA, the industry SRO, selects who is qualified to be in the arbitrator pool.

The SICA study was conducted to primarily assess participants’ perceptions of the fairness of the arbitration process given that perceptions of fairness provide valuable insights about the procedural and substantive fairness of the arbitration. The study was initiated pursuant to the recommendations of the 2002 Perino Report to the SEC. It was designed by academics at Pace University with the assistance of Cornell University’s Survey Research Institute with participation from members of SICA to ensure that the questions were appropriate and relevant.

“The study is sound and accurate,” Lantagne said. “The study’s responses were compiled in a scientific manner, which provided a factual foundation for its results.”

Tyler said NASAA urges FINRA to act immediately on this study. “The first step toward improving the integrity of the arbitration system must be the removal of the mandatory industry arbitrator and a prohibition on ties to the industry on the part of the public arbitrator. NASAA has long held that a choice between arbitration and the courts for resolving disputes should be a fundamental right for investors. Because the arbitration system has evolved into a mandatory condition imposed by the industry, it is imperative that the system of dispute resolution be fair, transparent and free from bias,” Tyler said.

NASAA believes that investors should be given a choice of forums to bring their investment disputes. “However, where there is no choice but arbitration through a program administered by FINRA, then investors must have confidence in the substantive fairness of the process,” Tyler said.

Tyler added that NASAA supports the passage of S.1782 and H.R. 3010, the Arbitration Fairness Act of 2007, introduced by Sen. Russ Feingold (D-WI), and Rep. Hank Johnson (D-GA), and will continue to work with Congress to restore choice, fairness and balance to the existing securities arbitration system.

For more information:

Bob Webster, Director of Communications
202-737-0900