Securities Industry Arbitration Needs Reform

The Securities Industry arbitration system needs major reform to insure that investors are getting a "fair shake" in arbitration. Investors have waived their right to a trial by jury in disputes against their brokers and must submit to securities industry arbitration.
On March 17, 2005, I attended the Congressional hearings on Securities Arbitration Fairness. A convincing case was made by investor advocates that the deck is stacked against investors in claims against their brokers. Arbitration is held before a three member arbitration panel with one "Industry" and 2 "Public" members.
I believe that the time has come to abolish the industry arbitrator requirement. First, members of the public are fully capable of understanding issues involving dealings between customers and brokers and are as capable as industry arbitrators of assessing "credibility" of witnesses. Second, in order to level the playing field, the industry should not start a hearing with one likely vote in its favor by the industry arbitrator who often persuades the public arbitrators to issue a decision in favor of the brokerage firm.
The NASD has recently proposed a rule that will exclude employees who work at companies that control or are controlled by securities firms from serving as "public" arbitrators. This change should have been made long ago but does little to level the playing field. The NASD has said that this is the "last change" the NASD plans to make in terms of how it defines arbitrators and it doesn't plan to abolish the industry arbitrator.
NASD's position is unfortunate and does not constitute any meaningful reform but simply is an effort to placate investor advocates.
More needs to and should be done. I will continue to speak out on arbitration fairness issues.

The NASD's New Broker "Expungement" Rule: A Disaster for Investors and Regulators

On April 7, 2005, the Wall Street Journal ran an article entitled "Brokers' Past Can Still Be Covered Up" which discussed the practical application of the NASD's new broker "expungement" rule. I am quoted in the article as saying "this is a classic example of an investor-friendly rule having the opposite effect of what was intended."

Unfortunately, the practical effect of the Rule in the year since it was enacted has been to prevent investors and regulators from obtaining accurate information about brokers because brokerage firms "strong arm" customers seeking to settle disputes by requiring expungement as a condition of settlement. Given that 80-90 % of the customer arbitration cases are settled, unless a customer agrees to an expungement (or a process that would lead to an expungement), a case will not settle. The practical effect is that customers have either agreed to a "phony" expungement process or, even worse, will not even name a broker as a respondent in a case for fear of impeding a potential settlement.

The NASD and the SEC must immediately look at how the rule is being used to suppress naming of brokers as respondents in cases and the "phony" settlement process.

A copy of the Wall Street Journal article can be viewed on my website www.zamansky.com.

Your comments would be appreciated.