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 directly 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

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"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. … 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, Hearing Before the House Subcommittee on Capital Markets, March 17, 2005, "The Securities Arbitration System"

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"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." — Testimony of William Francis Galvin, Secretary of the Commonwealth of Massachusetts, before the same Subcommittee, March 17, 2005

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"[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, to Mary Schapiro, President, NASD Regulation.

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"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 SRO arbitration." — Letter dated May 4, 2007 from Senators Russell D. Feingold and Patrick Leahy to Christopher Cox, Chairman, Securities and Exchange Commission.

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"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)

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"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. … He concedes that the current system does make him more money so he does have a vested interest in keeping arbitration as the means of resolving securities disputes." — Investor Securities Arbitration (2006)

Wall Street Journal, 6/22/09, “Securities Arbitration Is Faulted” — Comment Exchange

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. … 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. … "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.

III

Advocacy Correspondence and Court Action

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:

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Petition for Rulemaking (SEC File No. 4-502) and Supplement;

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Response from SEC;

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Reply to SEC (objecting to SEC's referral of Petition to Securities Industry Conference on Arbitration ["SICA"]);

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Letter to OCIE;

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Response from SEC and SICA's Comments on Petition;

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First Reply to SEC (Re: SICA's Comments);

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Second Reply to SEC (Re: SICA's Comments);

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Third Reply to SEC (Re: SICA's Comments);

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Greenberg v. SEC (USDC Case No. 06-7878-GHK[CTx])

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Complaint for Declaratory and Injunctive Relief;

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Motion to Dismiss (FACA and Administrative Relief Claims);

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Opposition to Motion to Dismiss and Request for Judicial Notice;

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Reply in Support of Motion to Dismiss;

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Minute Order (Federal Advisory Committee Act Claim);

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Joint Supplemental Brief on Plaintiff's Administrative Act Claim;

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Minute Order (Administrative Procedure Act Claim);

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First Amended Complaint for Declaratory and Injunctive Relief;

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Motion to Dismiss (FACA Claim);

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Answer to First Amended Complaint (FOIA and Administrative Relief Claims);

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Opposition to Motion to Dismiss;

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Reply in Support of Motion to Dismiss;

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Minute Order (Federal Advisory Committee Act Claim);

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Joint Discovery/Case Management Plan [F.R.C.P. Rule 26(f)];

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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[in] 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.";

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SEC Denies Petition for Rulemaking — On March 27, 2008, the SEC "DENIES" Petition for Rulemaking and referred it (again) to FINRA 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.";

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Response to SEC Denial of Petition for Rulemaking;

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Response of SEC to FOIA Request Related to SEC Denial of Petition for Rulemaking;

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Motion for Leave to File Second Amended Complaint;

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Opposition to Motion for Leave to File Second Amended Complaint;

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Response to Motion for Leave to File Second Amended Complaint;

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Seriatim/Recusal Letter;

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Minute Order;

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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).

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Letter to SEC Re: Severe Problems with NASD Arbitration and Questionable SEC Oversight;

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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;

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Comments to the SEC (SR-NASD-2005-032) on "explained decisions" in the arbitration process and reply to comment of A.G. Edwards, Inc.;

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Comments to the SEC on Petition for Rulemaking (SEC File No. 4-506) — NASD arbitrator selection process and need for Administrative Judge;

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Comments to the SEC (SR-NASD-2004-164) on "random" vs. "rotational" selection methods and arbitrator knowledge and use of the law in the decision-making process, education and evaluation;

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Comments to the SEC (SR-NASD-2005-052) on arbitrator compensation for hearing discovery motions on the papers;

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Comments to the SEC (SR-NYSE-2005-18) on prevention of discovery abuse;

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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;

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Comments to the SEC on Petition for Rulemaking (SEC File No. 4-541) — SEC should ban mandatory securities arbitration before forums sponsored by SROs;

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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; Supplemental Comments Re: PIABA vested financial interests; and Supplemental Comments Re: suspicion of FINRA "surveys";

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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;

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Letter to SEC's Investor Advisory Committee

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. 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.

In effect, the SEC Staff acts to stifle changes to the securities arbitration process that are not proposed by the securities industry.

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Miscellaneous Documents: Correspondence dating back to 1987–1988 shows 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.

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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.

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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. The author fully supports the proposal. However, if recent history is any guide, Petition 4-586 will eventually end in a trash heap at the SEC. 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. The author views FINRA "surveys" with suspicion.

Purported Regulatory Reports or Studies

The SEC, NASD and/or NYSE regularly rely on certain reports or studies to support their positions and/or proposals. These reports have been reviewed. Links to copies of those reports or studies — which contain highly critical annotated comments — are as follows:

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Table of Contents and annotated excerpts of "Securities Arbitration Reform — Report of the Arbitration Policy Task Force" (1996) ("Ruder Report");

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Annotated "Party Evaluation of Arbitrators: An Analysis of Data Collected from NASD Regulation Arbitrations" (1999) ("Tidwell Report");

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Annotated "Report to the Securities And Exchange Commission Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSE Securities Arbitrations" (2002) ("Perino Report");

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Annotated "Final Report Securities Industry Conference on Arbitration Pilot Program for Non-SRO-Sponsored Arbitration Alternatives" (2002) and SICA Pilot Program.

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Annotated "Securities Arbitration Fairness Survey — 2006."

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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, and criticizes the SEC for lack of proper oversight. The Congressional Committee on Energy and Commerce further commented upon the Report's findings and recommendations.

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. At a time when SICA had received only 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."

One might ask why the SEC advised SICA and stock exchanges on how to "protect themselves" from the investing public.

Media Coverage

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July/August 2005 Alternatives — ADR Briefs, "Seeking Rules: A Critic Asks the SEC for Arbitration Reform"

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11/13/06 InvestmentNews.com, "NASD's involvement in survey is questioned"

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4/22/07 Corporate Governance News, "Guest Commentary"

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5/7/07 Corporate Governance News, "How Long Should a Recommendation Take"

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11/12/07 InvestmentNews.com, "A possible solution to arbitration dispute"

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12/28/07 Corporate Governance News, "With Your Help, Mandatory Arbitration May End Soon — But SEC Oversight of SRO's Needs Fundamental Reform"

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2/8/08 Corporate Governance News, "Self-Study of Arbitration Suffers Same Fate as Customers"

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3/17/08 InvestmentNews.com, "Viewpoint/Letters"

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November 2008 Alternatives — ADR Briefs, "New Securities ADR Pilot Launches, Allowing Industry Arbitrator Removal"

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6/25/09 Bloomberg, "Obama Fails to End Kangaroo Courts for Investors"

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6/29/09 BNA, "Continuing Debate on Arbitrating Broker-Customer Disputes May Add Little"

FINRA Retaliates Against Whistle-Blowing Arbitrator (2022)

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 of 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 overriding 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 symptomatic of our times.

I told you so — 30 years ago.

Disclaimer

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.