The NASD took steps this week to make sure securities arbitration panels truly represent the public. The regulator proposed banning from serving as public arbitrators individuals who work for any firm with ownership ties to a broker/dealer, as well as their spouses and immediate family members.
Securities arbitration panels, which resolve the vast majority of investment disputes between clients and brokers, are typically made up of two public arbitrators and one industry arbitrator, a system that is intended to tip the scales in favor of the public.
“One of the complaints from the customer side is that public arbitrators aren’t truly public, so that you’re not getting the real non-industry person you’re entitled too,” says William Jacobson, a securities lawyer in Providence, R.I. “So the NASD in addressing those concerns is trying to tighten up the definition of public.”
The proposed rule change would improve the perception that arbitration panels are created fairly, but would probably have little impact on actual cases, says Jacobson and other securities lawyers. Neither the outcomes of arbitration rulings, nor the number of arbitration cases brought should change as a result, says Wayne Josel, counsel to Kaufmann Feiner Yamin Gildin & Robbins and a member of the Public Investors Arbitration Bar Association (PIABA).
The concern that a lot of people have is that deregulation has resulted in so much cross-ownership and cross-affiliation in the securities industry that there are individuals working in other industries who could carry a securities industry bias, says Josel.
The NASD, which submitted the proposed rule to the SEC on Monday, has already taken measures to restrict who can and can’t be a public arbitrator. All professionals working for a member firm are, obviously, banned. But effective July 2004, professionals whose firms derive 10 percent or more of their annual revenue from clients involved in the securities business were also prohibited from serving as public arbitrators, while anyone associated with the securities industry for 20 years or more was banned for life.
The NASD also announced Monday that it is launching a pilot program “designed to increase the efficiency of the discovery process and to curb abuses in that process.” The program starts Aug. 1 in a handful of regional hearing locations. If it works, it will be expanded to all of them.
In July of last year, NASD fined Citigroup, Merrill Lynch and Morgan Stanley $250,000 each for failure to comply with their discovery obligations in a number of arbitration cases.