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Tuesday, October 24, 2006

Securities Industry Behemoths Are Once Again Trying to Change the Rules of Arbitration

As usual, securities industry behemoths are once again trying to change the rules of arbitration to further stack the chips in their favor. This time it comes in the form of proposed changes to the NASD Code of Arbitration Procedure known as Rule 12504 and 13504. These changes will allow brokerage houses to introduce motions to dismiss in “extraordinary circumstances” prior to an arbitration panel hearing a case. The full rule change proposal can be found on the SEC’s website here.

The securities arbitration process was designed be simple, cost effective and expedient. Allowing brokerages, who of course have unlimited legal resources, to move for dismissal before an arbitration hearing opens up the opportunity for potential abuse. Attorneys will introduce motions without merit simply to increase a small investor’s legal costs and to poison an arbitration panel before they know the facts of a case. The reality is arbitration panels rarely issue sanctions.

This is another example of the systematic effort by the securities industry to stack the deck against the ordinary investor. Worse yet, it’s done under the false pretenses of reform. If the industry wanted true reform, then the NASD should be very specific about what constitutes “extraordinary circumstances.” Suitable circumstances should be limited to situations such as when the wrong defendant, or in this case broker, is named in a lawsuit. The NASD actually went back to the industry with this suggestion, but not surprisingly they wouldn’t agree to any clarification. Instead the rule gives the brokerages a carte blanch opportunity to introduce complex, time consuming motions to dismiss, which is another blow to an already damaged system.

My colleagues on the plaintiffs bar have done a good job in submitting comments opposing the rule so the SEC should reject this change out of hand. And while they are at it, the SEC should do away with the industry panelist requirement. It should be up to the ordinary investor whether he or she wants a potential industry “shill” deciding the fate of their claim.


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