Opposing
Views As To Arbitration Of Disputes Before Forums Sponsored By The Securities
Industry
SECURITIES DISPUTE ARBITRATION
If you seek information related to the resolution of disputes before securities industry sponsored arbitration fora, related questions of fairness in resolving those disputes and/or lack of regulatory oversight, the views expressed on this website will be of substantial interest to you. "In a statement Monday, the (former) chairman of the Senate finance committee ... Charles E. Grassley, Republican of Iowa ... said: ' ... Today we're all paying the price for an S.E.C. culture of deference to Wall Street.'" (NYT, 10/6/08, "Impartiality of S.E.C. Is Questioned") "Chris Cox, chairman of the Securities and Exchange Commission, in congressional testimony Thursday ... said he and other regulators have learned many lessons, chiefly that 'voluntary regulation does not work.'" (MarketWatch, 10/23/08, "Voluntary regulation doesn't work, SEC's Cox says") As you will see, below, those comments on "deference" and unworkable "voluntary regulation" apply to the SEC's resistance to attempts to reform securities arbitration.
Opposing
Views As To Arbitration Of Disputes Before Forums Sponsored By The Securities
Industry
Advocacy Correspondence and
Court Action
Purported Regulatory "Reports"
Or "Studies"
FINRA
Retaliates Against Whistle-Blowing Arbitrator (2022)
A Legal Challenge
to FINRA's Right to Exist (2022)
"NASD reviews its arbitration program continuously to identify ways to promote transparency to investors, improve the quality of arbitration, and ensure the integrity of the arbitration process. … NASD strives continually to improve the transparency of the arbitration process for investors. … Transparency is a cardinal value of the federal securities laws. … NASD believes that transparency should be a hallmark of securities arbitration as well." (Testimony of Linda D. Fienberg, President, NASD Dispute Resolution in Hearing Before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the Committee on Financial Services, U.S. House of Representatives, March 17, 2005 --- "The Securities Arbitration System")
"The term 'arbitration' as it is used in these proceedings is a misnomer.
Most often, this process is not about two evenly matched parties to a
dispute seeking the middle ground and a resolution to their conflict from
knowledgeable, independent and unbiased fact finders, rather what we have in
America today is an industry sponsored damage containment and control program
masquerading as a juridical proceeding."
"[T]he United States Supreme Court has repeatedly stated that arbitration is an acceptable forum for litigation because plaintiffs are entitled to the same rights and protections in arbitration as they receive in court." (Letter dated January 9, 1998 from Edward J. Markey, Ranking Member, Subcommittee on Telecommunications, Trade and Consumer Protection, United States Congress to Mary Schapiro, President NASD Regulation.)
"Arbitration can be a fair and efficient way to settle disputes, but only when it is entered into knowingly and voluntarily by both parties to the dispute. We call on the Commission to consider the best mechanisms to address this problem, giving particular attention to the following alternatives: (1) a rule banning all pre-dispute mandatory arbitration clauses; or (2) if pre-dispute agreements are to be allowed, a rule requiring broker-dealers to provide their customers with a 'check-the box' choice between traditional judicial process and Self-Regulatory Organization ('SRO') arbitration." (Letter dated May 4, 2007 from Senators Russell D. Feingold and Patrick Leahy, United States Senate Committee on the Judiciary, to Christopher Cox, Chairman, Securities and Exchange Commission.)
"No powerful party should be permitted to immunize itself from accountability by forcing others into a private justice system of its own choosing. Parties are welcome to arbitrate disputes when they can agree on mutually beneficial procedures. The critical point is that arbitration should truly be voluntary for both." Representative Linda T. Sanchez, Chairperson of the House Judiciary Subcommittee on Commercial and Administrative Law. (WSJ, 7/23/08, Letters to the Editor: "Arbitration or Trial in Court Should Be a Fair Choice")
Wall
Street Journal,
6/22/09, "Securities Arbitration Is Faulted" Comment Section:
DAVID BARTH, CFA, wrote:
I am a retired Securities Arbitrator and spent fifty years as an investment professional. Very few of the attorneys I served with on arbitration panels knew anything about securities and/or investing. I find the legal professional is loaded with, basically, legal clerks who are obsessed with procedures. As most securities suits are frivolous and, in many cases, brought at the insistence of ambulance chasing lawyers, it is understandable that the lawyers wouldn't want an expert on the panel. Virtually every panel that I was assigned to where, on the merits, the broker or brokerage was liable was settle before they came to arbitration. I was a part of the majority on every panel I sat on. Having experience in the industry brought insight to the other arbitrators. In many cases lawyers on panels wanted to make sure both parties lost enough to cover legal expenses for both sides. I also mediated cases. In fact, I was the first mediator in this district and not one case I mediated went to arbitration. Furthermore, I arbitrated and mediated hundreds of insurance claims saving both parties and the economy millions of dollars. The myopic, greedy legal profession is, as usual, wrong and part of the problem not the solution.
LES GREENBERG replied:
There may be a simple solution to your complaints. FINRA could screen for attorneys who are knowledgeable in securities and/or investing. It appears that you feel that securities industry arbitrators somehow provide more expertise to the hearing panel than expert witnesses. However, testimony of expert witnesses is available to all parties and is subject to cross-examination. "Virtually every panel that I was assigned to where, on the merits, the broker or brokerage was liable was settle before they came to arbitration." That statement indicates that you pre-judged the (lack of) merits before you heard the testimony. Hmmm. "The myopic, greedy legal profession is, as usual, wrong and part of the problem not the solution." That sounds like a statement from an unbiased fair-minded even-handed arbitrator. Hopefully, Congress will pass the AFA and let the Courts, and not amateurs like, you dispense justice.
"Investor's advocate, Robert Uhl of Aidikoff, Uhl & Bakhtiari, agrees that ... arbitration allows him to take on more clients with a lower dollar amount in dispute. This helps the claimants and him, he says, because otherwise he wouldn't have the time to have as many clients. He would need to be at court more, filing motions and taking depositions and 'jumping through all the hoops' attorneys have to jump through when they litigate as opposed to arbitrate. ... Mr. Uhl says litigating a $200,000 case is not cost effective. He is able to take on the $100,000 cases, claims that he says he 'couldn't afford to take on,' if he were to litigate them. ... He concedes that the current system does make him more money so he does have a vested interest in keeping arbitration as a (sic) the means of resolving securities disputes." (Emphasis in original.) Investor Securities Arbitration (2006)
The following are links to editions of an email newsletter entitled, "Has NASD Dispute Resolution, which is NOT a sponsor of this email, informed you that....?" It was distributed to over 1,000 securities arbitrators and others interested in the securities arbitration process. Comments and stories related to personal experiences were solicited. Many responded. Their comments were published in subsequent editions. The NASD has expressly disavowed the views expressed in the newsletter.
I. In
II. Samples of Responses to My Prior Email
A. Arbitrators Learn of
B. Hot Issue of Explanations of Arbitration Awards
C. Layman Efforts to Follow the Law
D. Go with the Flow
E.
Criticisms of NASD and Suggestions for Improvement
F. Curmudgeon
(In October 2007, the State Bar of California informed NASD Dispute Resolution that attorneys maintaining
"inactive" status may not serve as arbitrators in California and that NASD Dispute Resolution should identify
to the State Bar those "inactive" attorneys serving as arbitrators or inform those arbitrators of the requirements.)
I. Hot Issue of Explanations of
Arbitration Awards
II. Hoof in Mouth?
III.
Layman Ponders the Law
IV. Discovery
V. Criticisms of NASD Dispute Resolution
VI. Comments on Many Issues
VII. Advocate of Professional Association Seeks Comment
VIII.
NASD Seminar Topic Ideas
IX. Ruder Commission Report
I. Comments on Many Issues
II. Hot
Issue of Explanations of Arbitration Awards
III. Ruder
Commission Report
IV. Prime Candidate for “Civility” Training
V. Freedom of Information Act Request
II. Writing
A Statement of Reasons
III. Communication with NASD
IV. Comments on Many Issues
V. Positive Arbitration Changes – Possible? How?
VI. Complaints and Lack of NASD Feedback
VII. Perino Report and Other Writings
II. Should An Arbitrator Just Follow Orders?
III. What’s the Plan, Coach?
IV. Congressional Testimony --- Quotable Quotes
V.
VI. Non-Arbitrator Bias and Full Disclosure in Perino Report?
I. Discovery
II. Follow
the Law? --- Three Very Divergent Views
A.
Deference
B. "Contributory Negligence"
C.
"Does one and one equal two?"
III. "NASD Needs Arbitrators"?
IV. Reading Material
II. "Does one and one equal two?"
III. NASD-DR Claims Email Statements Are "Misleading"
IV. Multiple Topics and Suggestions
II.
Last Minute Settlements
III. What Is the Law and Does It Matter?
IV. Is NASD Arbitration “Exclusionary”?
V. "Does one plus one equal two?" (Encore)
VI. Test Your Decision-Making Approach
I. Arbitrators and the Law
II.
Last Minute Settlements
III. "Does one plus one equal two?" (Encore, Encore)
IV. Discovery
V. Securities Industry Arbitrators and "Arbitrator's Judicial Notice"
I. Petition for Rulemaking - Arbitration Procedure,
Training, Evaluation and Oversight
II. Securities Industry Arbitrators and “Arbitrator’s Judicial Notice”
III. Arbitrator Familiarity
IV. Arbitrators and the Law
V. Last Minute Settlements
I. Petitions for Rulemaking
A. Arbitration Procedure, Training, Evaluation and Oversight
B. Discovery Motion Compensation
II. Last Minute Postponements
III. Canned by the NASD Due to Lack of Pigeon Hole
IV. Dealing with Parties Who “Represent” Themselves
V. Chairpersons
Who Act Unilaterally
VI. Written Statements of Decision
VII. Criticism of NASD
I. Arbitrators and the Law
II. Industry Arbitrators and Discovery Motion Compensation
III. Comments on Petition for Rulemaking (SEC File No. 4-502)
I. Arbitrators and the Law
II. NASD Notice of Website Update
III. Comments on Petition for Rulemaking (SEC File No. 4-502)
I. Petitions for Rulemaking, NASD Proposal and the News Media
A. Media Coverage
B. Petitions and NASD Proposal
C. Comments Have an Impact
II. Arbitrators and the Law
III. NASD Telephone Conference Questions
IV. NASD Retaliation?
V. Arbitrator Superstars?
I. Media Coverage
II. "Explained Decisions" – Comment and Rebuttal
III. Third-Party Subpoena NASD Proposal Comments
IV. NASD Discovery Arbitrators
V. Arbitrators and the Law
VI. Arbitrator Superstars?
III. Arbitrator Selection Process
IV. NASD Discovery Arbitrators
V. Arbitrators and the Law
VI. Arbitrator Superstars?
I. NASD Proposed Arbitration Code/Rule Changes
II. "Explained Decisions" – Comment and Rebuttal
III. Arbitrators and the Law
IV. "Random" Selection of Arbitrators
V. Comments
on the Neutral Corner (August 2005)
I. PLI
Seminar Summary
II. Award
Analysis
III. Discovery
Arbitrators
IV. NASD
Retaliation
I. SICA "Survey"
I. SICA "Survey" and Minutes of SICA Meetings Obtained Through A Freedom of Information Act Request
SICA Meeting Minutes: 1/18/96, 2/8/96, 2/27/96, 7/12/96, 10/17/96, 11/18/96,
1/17/97, 4/15/97, 7/10/97, 10/16/97,
2/6/98, 5/1/98, 8/28/98, 10/22/98,
2/25/99, 4/13/99, 7/15/99, 10/21/99,
1/18/00, 3/15/00, 8/1/00, 10/11/00,
1/19/01, 3/21/01, 6/18/01, 10/17/01,
1/16/02, 3/11/02, 6/7/02, 10/2/02,
1/13/03*, 4/9/03*, 6/13/03*, 10/22/03*,
1/16/04*, 3/22/04*, 6/8/04*, 10/20/04*,
1/12/05*, 3/15/05*, 6/23/05*, 10/11/05*,
1/12/06*, 3/21/06*, 6/13/06, 10/25/06
* --- "Independent Research to Evaluate Fairness of SRO Arbitration" The SICA Meeting Minutes were obtained from the SEC pursuant to a FOIA request and associated litigation. Subsequently, SICA ceased providing the SEC with a copy of its Meeting Minutes. SICA is not directly subject to FOIA requests..
Documents Show SEC Does Its Best to Quash Public Petitions for Rulemaking
Documents produced by the SEC in response to FOIA requests reveal that the SEC's Division of Market Regulation does its best to quash Petitions for Rulemaking that are related to securities arbitration and which seek to improve securities arbitration process. In substance, those Petitions for Rulemaking consist of complaints against SROs and recommend solutions to the problems that they describe.
SEC General Rule 192(a) states, "Any person desiring the issuance, amendment or repeal of a rule of general application may file a petition therefor with the Secretary. ... The Secretary shall ... refer it to the appropriate division ... for consideration and recommendation. Such recommendations shall be transmitted with the petition to the Commission for such action as the Commission deems appropriate." However, in practice, the SEC Staff, without authorization, has changed Rule 192 to avoid making the required recommendations. In substance, SEC Staff refers the Petitions to the SROs and waits related rulemaking proposals by the SROs.
The SEC Staff refused to consider Petition for Rulemaking (SEC File 4-403), filed on October 1, 1997 by the Public Investors Arbitration Bar Association ("PIABA"). At SICA's request, the SEC Staff asked PIABA to withdraw its petition. PIABA refused. In April 1998, the SEC Staff forwarded the petition to SICA for comment and waited for SROs to propose a related rule. The SEC Staff specified no time deadline for action by SICA or SRO. In January 2000, SICA was still asking PIABA to withdraw its petition. SICA did not respond to the SEC Staff's request for comment. No SRO has made a related rule proposal. After ten years, SEC Staff has not made a recommendation to the Commissioners.
The SEC Staff rejected Petition for Rulemaking (SEC File 4-501), filed on May 6, 2005 by Daniel R. Solin. Rather, than make the required recommendation to the Commissioners, the SEC Staff found "no basis upon which to recommend to the Commission that it commence rulemaking in this area."
The SEC Staff has not acted upon Petition for Rulemaking (SEC File 4-541), filed on June 18, 2007 by Daniel R. Solin, or its supplement. The Petition proposed that securities arbitration before SROs not be mandatory. Ironically, the SEC Staff found that securities arbitration should be voluntary when it thoroughly considered the issue in 1988. The SEC's Oversight of Self-Regulatory Organization Arbitration (Audit 289) dated August 24, 1999 states, in pertinent part:
The MR (Division of Market Regulation) officials responsible for overseeing arbitration were well aware of the arguments in favor of and against mandatory predispute arbitration agreements. In 1988, MR forwarded a legislative proposal to the Commission that would have prohibited broker-dealers from requiring customers to sign predispute arbitration agreements as a condition of opening brokerage accounts.
On June 12, 2009, PIABA filed Petition for Rulemaking (SEC File 4-568) seeking to eliminate the requirement that an arbitrator affiliated with the securities industry sit on all public investor cases arbitrated before FINRA in which the amount in controversy exceeds $100,000. I fully support the proposal, which is very similar to parts of PIABA's Petition for Rulemaking (SEC File 4-403). However, if recent history is any guide, Petition 4-586 will eventually end in a trash heap at the SEC and PIABA's efforts will be for naught. Some question whether FINRA and PIABA have joined forces to sacrifice industry arbitrators in order to preserve their vested financial interests. FINRA plans to conduct another "survey" related to its pilot project. I view FINRA "surveys" with suspicion.
In effect, the SEC Staff acts to stifle changes to the securities arbitration process that are not proposed by the securities industry.
Miscellaneous Documents
Correspondence dating back to 1987 through 1988 show that the SEC has long been aware of serious flaws in the securities arbitration process, and that Public Members of SICA were concerned that the SEC favored the securities industry on arbitration issues. Email traffic shows the participation of Robert A. Love, SEC Special Counsel, in guiding SICA's actions. One email implies that the Securities Industry Association member of SICA has veto power over who could serve as a Public Member.
One has to wonder whether the SEC protects public investors from potential acts of the securities industry, or surreptitiously protects the securities industry from public investors. You be the judge.
I. Lawsuit against SEC Based Upon Alleged Violations of Freedom of Information Act ("FOIA"), Federal Advisory
Committee Act ("FACA") and Administrative Procedures Act
I. Securities Arbitration Fairness Survey - 2006
II. SICA Non-SRO Arbitration Pilot Program "Survey"
III. Lawsuit Against SEC
IV. Chair Roster
V. California "Inactive" Attorneys Serving As Arbitrators
Commencing in 2005, a formal Petition for Rulemaking and many letters, dealing with severe problems affecting the securities arbitration process and lack of serious oversight, were directed to the Securities and Exchange Commission and other legal authorities. Links to the communications and associated responses, if any, are available as follows:
Petition for Rulemaking (SEC File No. 4-502)
and Supplement;
Reply to SEC (objecting to SEC's referral
of Petition to Securities Industry Conference on Arbitration
["SICA"]);
Response from SEC and SICA's Comments on
Petition;
First Reply to SEC (Re: SICA's Comments);
Second Reply to SEC (Re: SICA's Comments);
Third Reply to SEC (Re: SICA's comments);
Greenberg v. SEC (USDC Case No. 06-7878-GHK[CTx]);
Complaint
for Declaratory and Injunctive Relief;
Motion to Dismiss (FACA and Administrative
Relief Claims);
Opposition to Motion to Dismiss and Request for Judicial
Notice;
Reply in Support of Motion to Dismiss;
Minute Order (Federal Advisory Committee
Act Claim);
Joint Supplemental Brief on Plaintiff's
Administrative Act Claim;
Minute Order (Administrative Procedure Act
Claim);
First Amended Complaint for
Declaratory and Injunctive Relief;
Motion to Dismiss (FACA Claim);
Answer to First Amended Complaint
(FOIA and Administrative Relief Claims);
Opposition to Motion to Dismiss;
Reply
in Support of Motion to Dismiss;
Minute Order (Federal
Advisory Committee Act Claim);
Joint Discovery/Case Management Plan
[F.R.C.P. Rule 26(f)];
Minute Order (APA: "The government is strongly
urged that, if Defendant is going to act on Plaintiff's petition for rulemaking,
it do so with that time (60 days hereof)." FOIA: "[T]he parties
agreed to meet and confer in an attempt to voluntarily resolve Plaintiff's
Freedom of Information Act ('FOIA') claim. If Plaintiff's FOIA claim is
not voluntarily resolved, the government is ORDERED to file a Vaughn
index, by February 28, 2008, with respect to the documents still in
dispute.");
SEC Denies Petition for Rulemaking (On March 27,
2008, the SEC "DENIES" Petition for Rulemaking and referred it [again]
to FINRA as to ensure "the most efficient use of rulemaking resources ...
since the proposed rulemaking would consume significant resources that must be
allocated among many competing demands and priorities.");
Response to SEC Denial of Petition for Rulemaking;
FOIA Request Related to SEC Denial of Petition for
Rulemaking;
Response of SEC to FOIA Request Related to SEC Denial of Petition for
Rulemaking;
Motion for Leave to File Second Amended
Complaint;
Opposition to Motion for Leave to File
Second Amended Complaint;
Response to Motion for Leave to File
Second Amended Complaint;
FOIA Request Related to Communications Between
SEC and FINRA;
FINRA Response to SEC Re: Petition for
Rulemaking (SEC File No. 4-502) and FINRA criticism of SICA's "Perceptions of Fairness
of Securities Arbitration: An Empirical Study" (February 2008).
What have we learned? The SEC has a longstanding pattern and practice of outsourcing to the securities industry recommendations made by the public (Petitions for Rulemaking pursuant to SEC General Rule 192a) dealing with the securities arbitration process, whatever alleged inequities the recommendations address. If the securities industry does not concur with the recommendations, which are usually critical of the securities industry, the SEC will not take action to remedy the relevant problems. The SEC will exercise a pocket veto of the recommendations if a petitioner does not bring litigation that seeks injunctive relief.
Letter to SEC Re: Severe Problems with NASD Arbitration and Questionable SEC
Oversight;
Comments to the SEC (SR-NASD-2005-094)
on arbitrator classification --- "public" or
"industry" --- and to bar securities industry persons from serving on
arbitration panels;
Comments to the SEC (SR-NASD-2005-032)
on "explained decisions" in the arbitration process and reply
to comment of A.G. Edwards, Inc.;
Comments to the SEC on Petition for Rulemaking (SEC File No. 4-506) --- NASD
arbitrator selection process and need for Administrative Judge;
Comments to the SEC (SR-NASD-2004-164)
on "random" vs. "rotational" selection methods and
arbitrator knowledge and use of the law in decision making process, education
and evaluation;
Comments to the SEC (SR-NASD-2005-052)
on arbitrator compensation for hearing discovery motions on
the papers;
Comments to the SEC (SR-NYSE-2005-18)
on prevention of discovery abuse.
Comments to the SEC (SR-NASD-2007-023)
on arbitration oriented comments of SICA and NASD on proposed consolidation
of NASD and NYSE arbitration departments and Supplemental Comments to SEC.
Comments to the SEC on Petition for Rulemaking (SEC File No.
4-541) --- SEC should ban mandatory securities arbitration before forums
sponsored by SROs;
Comments to the SEC on Petition for Rulemaking (SEC File No.
4-586) --- eliminate the requirement that an arbitrator affiliated with the
securities industry sit on all public investor cases arbitrated before FINRA and
Supplemental Comments Re: PIABA vested financial
interests and Supplemental Comments Re: suspicion
of FINRA "surveys";
Letter to Congress seeking investigation of the
relationships between SEC (Division of Market Regulation) and SROs with
respect to pattern of lack of SEC action in response to Petitions for Rulemaking related to securities arbitration.
Letter to SEC's Investor Advisory Committee
The SEC, NASD and/or NYSE regularly rely on certain reports or studies to support their positions and/or proposals. We have reviewed those purported reports and studies. Links to copies those reports or studies, which contain highly critical annotated comments, are as follows:
Table of Contents and annotated excerpts of "Securities Arbitration
Reform --- Report of the Arbitration Policy Task Force" (1996)
("Ruder Report");
Annotated "Party Evaluation of Arbitrators: An
Analysis of Data Collected from NASD Regulation
Arbitrations" (1999)
("Tidwell Report");
Annotated "Report to the Securities And Exchange Commission Regarding
Arbitrator Conflict Disclosure Requirements in NASD and NYSE Securities
Arbitrations" (2002) ("Perino Report");
Annotated "Final
Report Securities Industry Conference on Arbitration
After reviewing the documents, one might wonder whether the SEC operates to protect the securities industry from public investors.
SICA informed the SEC, "At the time of implementation of the program, we were aware of the possibility that the program might not see a lot of cases."
SICA conducted a "survey" to confirm the obvious --- why the project did "not see a lot of cases." At a time when SICA had received four responses to the "survey," SEC Special Counsel Robert Love's email stated, "After tedious debate on how to characterize the replies (with the SROs wanting them to be a proxy for widespread joy with the process, and public member ... asserting that he was privy to secret information indicating great woe with the process), I suggested that someone draft a short, flat report that doesn't say too much, and give others an opportunity to edit. ... As for the pilot itself, there are rumoured (sic) citings (sic) of a couple of cases, with unclear status or case stage."
One should wonder whether there will be a "tedious debate on how to characterize the replies" to the Securities Arbitration Fairness Survey - 2006 and whether the SEC will advise another "short, flat report that doesn't say too much." On the other hand, the SROs will push for a proclamation of "widespread joy with the process," and they are footing the bill for the "survey."
There was further evidence of how the SEC asserts itself into questionable areas when the same SEC official advised exchanges to "protect themselves" against investors by stating, "NASD gave only the briefest of presentations of its rule that would allow investors access to court in cases against a defunct broker-dealer. I expanded in order to advised (sic) the exchanges of the need to protect themselves. After the meeting, I asked ... the secretary, to please make certain she looked at and understood the rule and possible implications for the exchanges so that the minutes reflect this, and help them protect themselves with similar filings if they feel exposed."
One might ask why the SEC advised SICA and stock exchanges on how to "protect themselves" from the investing public.
Annotated "Securities Arbitration Fairness Survey - 2006."
Annotated "EMPLOYMENT DISPUTES:
Recommendations to Better Ensure That Securities Arbitrators Are Qualified"
(GAO-03-790, August 2003). This report is very critical of the
NASD and NYSE with respect to their lack of training and evaluation of
securities arbitrators. It criticizes the SEC for lack of proper
oversight. The Congressional Committee on Energy and Commerce further
commented upon the Report's findings and recommendations.
"Officials at each SRO reported that if they receive no information about an arbitrator's performance on a case, they assume that the arbitrator's performance was adequate. ... Both SROs reported that it has been difficult for them to get parties to return evaluations. ... NASD could not report how often staff evaluate arbitrators. ... Although NASD supplements its evaluations by rating arbitrators on a quarterly basis, our review showed that ratings are often based on little or no information. ... In reviewing the records of NASD arbitrators, we found that staff did not always document how they responded to poor evaluations and complaints. We estimate that 10 percent of all 494 NASD arbitrators that heard cases between January 2001 and June of 2002, received some kind of complaint, either from a staff member, a party member, or another arbitrator. ... SEC found that one or both SROs did not record information on arbitrator performance in a central database or disqualify all arbitrators who were poor performers from hearing cases. ... SEC agreed that evaluating arbitrator performance is a fundamental element of the arbitration process...."
Annotated "SIFMA: White Paper
on Arbitration in the Securities Industry" (October 2007). This
paper extols the many and varied alleged benefits of securities arbitration
sponsored by SROs. The annotated comments debunk SIFMA's
propaganda.
Annotated "Perceptions of Fairness
of Securities Arbitration: An Empirical Study" (February 2008).
This procedurally flawed "study" was sponsored by SICA and paid for by
SROs. It concludes that public investors have very serious reservations as to
whether securities arbitration is fair. SRO influence on the
"study" is described in SICA
Meeting Minutes, which were obtained from the SEC through a Freedom of Information Act
request.
Annotated "US Chamber of Commerce
Institute of Legal Reform Arbitration Poll" (April 2008). This
telephonic poll of 800 registered voters claims that 75% of consumers are against the Arbitration Fairness
Act, which would outlaw pre-dispute arbitration agreements. The pollsters
needed to explain the arbitration process to the respondents, but omitted many
material negative features. ILR's press release had the appearance of
credibility by association by asserting, "Benson Strategy Group ... is
currently a strategist and pollster for Senator Obama's presidential
campaign."
Unannotated "Response to
Congress: Mandatory Arbitration Among SEC-Registered Investment Advisers As
Directed By The House Committee on Appropriations H.R. Report 117-393".
It should be obvious to the SEC Staff that Registered Investment Advisers design
arbitration agreements to escape accountability.
Various publications have commented positively upon our efforts to level the playing field as to the resolution of disputes via arbitration before securities industry forums.
5/24/05 Los
Angeles Times, "NASD Rules Preempt State Law"
9/1/05 Registered Representative Magazine, "The
Real Arbitration Nightmare"
7/31/05
San Diego Union-Tribune, "Stockbroker
losses bring no trials, lots of tribulations"
7/17/05
Pittsburgh Post-Gazette, "Systems
for resolving disputes may need an overhaul"
July/August
2005 Alternatives - ADR Briefs, "Seeking Rules: A Critic Asks the
SEC for Arbitration Reform"
11/13/06
InvestmentNews.com, "NASD's
involvement in survey is questioned"
4/22/07 Corporate Governance News, "Guest
Commentary"
5/7/07 Corporate Governance News, "How
Long Should a Recommendation Take"
11/12/07 InvestmentNews.com, "A
possible solution to arbitration dispute"
12/28/07 Corporate Governance News, "With
Your Help, Mandatory Arbitration May End Soon - But SEC Oversight of SRO's Needs
Fundamental Reform"
2/8/08 Corporate Governance News, "Self-Study
of Arbitration Suffers Same Fate as Customers"
3/17/08 InvestmentNews.com, "Viewpoint/Letters"
November 2008 Alternatives - ADR Briefs, "New
Securities ADR Pilot Launches, Allowing Industry Arbitrator Removal"
6/25/09 Bloomberg, "Obama
Fails to End Kangaroo
Courts for Investors"
6/29/09 BNA, "Continuing Debate on Arbitrating
Broker-Customer Disputes May Add Little"
During the past 30 years, I have informed FINRA, the Securities and Exchange
Commission and the public of the systemic problems affecting securities
arbitration and suggested remedial solutions. The process is supposed to achieve
the same level of justice as in a court of law, but on the cheap. Justice on the
cheap is not justice. It is only a façade of justice. It
is the equivalent of juries without instructions.
My
recent experiences of how FINRA deals with complaints by arbitrators demonstrate
the results its 30 years of neglect—ethically challenged arbitrators, less
than competent Case Managers, management that glosses over improprieties, an
Office of the Ombudsman that protects FINRA, and a stone-walling Board of
Directors' Audit Committee.
The
root causes for this are not new—failure to select arbitrators with litigation
experience, lack of subject-matter training, lack of quality control, and
FINRA's over-riding goal of protecting FINRA, as opposed to the parties who
appear before its arbitration panels.
My
recent experience has shown that FINRA believes that rules—Code of Ethics,
Code of Arbitration Procedure—are for fools. FINRA does not enforce its rules.
Further, FINRA makes up rules to suit uncomfortable (for FINRA) situations. That
misconduct is condoned at the highest levels.
When
I alerted FINRA, the parties, and my former co-panelists of the former
co-panelists' unethical conduct, FINRA surreptitiously worked with the
co-panelists to remove me from the panel. Appeals to the Director, Office of the
Ombudsman and the Audit Committee were for naught. See no evil. Hear no evil.
Speak no evil. It is very disconcerting when FINRA closes its eyes and fails to
fess-up. Unfortunately, FINRA's conduct may just be systematic of our times.
I
told you so—30 years ago.
A recent legal action seeks a declaration that FINRA's existence is unconstitutional. A related legal article describes "the [Supreme] Court's recent jurisprudence now creates real risk that federal courts will declare keystone SROs unconstitutional because they do not fit neatly into an eighteenth-century constitutional framework.
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The information presented on this website and linked websites was obtained from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. It is provided solely for general interest and educational purposes. It is not intended to be nor should it be interpreted to be the rendering of legal or other advice. The opinions, findings and/or conclusions of the author(s) do not necessarily state or reflect those of any one else, may not be politically correct and are subject to change without notice.
Last Updated: August 1, 2023
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