After failing to win much support for its claim that numerous provisions in standard customer agreements are illegal, the Public Investors Arbitration Bar Association (PIABA) is pressing its assault on industry dispute resolution practices on another front. The group, which serves as a professional association for plaintiffs' attorneys, has petitioned the SEC to, in essence, eliminate the NASD from the arbitration process.
Citing both statistics and anecdotal information, the lawyers' group says NASD arbitrators are blatantly unfair to customers and too cozy with the industry. PIABA wants the SEC to amend the NASD Code of Arbitration to give all customers the right to have disputes settled before American Arbitration Association (AAA) panels. And PIABA wants the SEC to allow a new makeup of arbitration panels, one that would include strict rotation of arbitrators to prevent industry attorneys from playing favorites during the selection process.
"This needs to be done for so many reasons," says Diane Nygaard with Nygaard & Miller in Overland Park, Kan., and the newly elected president of PIABA. "NASD arbitrations are increasingly biased with arbitrators who are more concerned with staying on the good side of the industry than reaching fair decisions."
According to a letter sent to the SEC by PIABA in September, the number of customer complaints being arbitrated by the NASD has far outpaced dispute resolution forums run by other SROs. Those figures, as compiled by the Maplewood, N.J.-based Securities Arbitration Commentator, show that in 1988, for example, the NASD handled 65% of all industry arbitrations. By 1996, that number had risen to 86%.
The reason for the migration, the groups says, is frustration of customer attorneys with the pace and outcomes of arbitrations run by other SRO forums and the lack of non-industry run forums.
According to PIABA's in-house research, none of the 20 largest securities firms offers the option of neutral arbitration in customer agreements. One firm that did permit it, PIABA says, Charles Schwab & Co., recently amended its agreement to eliminate that option, a fact verified by a Schwab spokesperson.
Critics of PIABA say its causes are chosen less on the criteria of customer rights and more on the ability of attorneys to collect the largest possible settlements. Although the lawyers' group maintains that its primary interest is investor rights, Nygaard doesn't dispute that attorneys' fees are an issue, too. "I'm not going to tell you that lawyers aren't interested in money, but it is our job to get the best possible settlements on behalf of our clients," she says.
Under the terms of its proposal, PIABA wants customers to have the right to an AAA arbitration regardless of whether they have previously consented in writing to SRO forums. And they want the makeup of panels, which traditionally consist of industry and public arbitrators to be replaced by two types of panels-public or experienced. A public panel would be composed of three public arbitrators, while an experienced panel would consist of a public, an industry and an investor advocate arbitrator.
The SEC would not comment on the proposal beyond acknowledging its receipt. Although NASD executives would not return phone calls to discuss the charges, NASD spokesman, Michael Robinson, does say that, "The organization maintains the strictest standards of fairness when resolving disputes between customers and the industry."