Industry to Offer Choice of Arbitration Forums

In 1999, the securities industry will sponsor a pilot program allowing a target of 100 customer cases in the next two years to go to arbitration at independent forums, such as the American Arbitration Association (AAA), as an alternative to the NASDR and NYSE.Seven major firms have signed up for the program: Merrill Lynch, Morgan Stanley Dean Witter, A.G. Edwards, Prudential Securities, Salomon Smith

In 1999, the securities industry will sponsor a pilot program allowing a target of 100 customer cases in the next two years to go to arbitration at independent forums, such as the American Arbitration Association (AAA), as an alternative to the NASDR and NYSE.

Seven major firms have signed up for the program: Merrill Lynch, Morgan Stanley Dean Witter, A.G. Edwards, Prudential Securities, Salomon Smith Barney, Raymond James Financial Services and PaineWebber. Raymond James, as the smallest firm of the group, has a goal of 10 cases; the other six are aiming for 15 cases apiece.

But the choice is up to the customer. And if a broker is named as a co-respondent, he or she will be able to exercise veto power and have the case heard at an SRO forum, says Steve Sneeringer, senior vice president and counsel at A.G. Edwards and chairman of the Securities Industry Association's arbitration committee.

The pilot was proposed in the fall of 1997 by the Securities Industry Conference on Arbitration (SICA), an organization established in 1977 to develop uniform procedures for SRO arbitration. The SICA is composed of representatives from the SROs, the SIA and the public. The group will monitor the pilot.

A July 1997 NASDR proposal to cap punitive damages in customer cases prompted the SICA to develop the plan, says Richard Ryder, publisher of Securities Arbitration Commentator in Maplewood, N.J. Capping damages is opposed by several SICA members. Such rules would not apply to outside forums.

The SICA's final guidelines for the pilot were due to be presented to the SIA's arbitration committee in mid-January, Sneeringer says. Alternative providers will then meet with the firms in the program.

As to when the pilot will actually get under way, Sneeringer says his "wild guess" is about six months from the time of the January meeting.

Between 1991 and 1993, the NYSE sponsored its own program that offered alternative dispute forums. But the program has since gone unused. "It never really ended," says Robert Clemente, the NYSE's director of arbitration. Though most firms think the pilot ended after two years, the NYSE never stopped sending out information about alternative forums as part of the packet it sends to investors who inquire about arbitration, he says.

At the end of its first year, in June 1992, the pilot had referred 35 cases to the American Arbitration Association (AAA), Clemente says. According to data the NYSE collected at the time, there were 22 instances in which the firms offered arbitration at the AAA to customers, and out of those, 13 accepted. On the other side, customers requested the AAA in 29 instances, and of those, the firms agreed in 22 cases.

One reason the program saw only minimal use is that customers balked at paying higher fees to go to the AAA. That situation could quickly change because a major fee increase for NASDR arbitration hearings is now pending at the SEC.

Another significant difference between then and now is that in the early 1990s, the AAA was about the only alternative provider. Now, a number of organizations offer private arbitration services.

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