NASAA Calls on FINRA, SEC to Improve the Integrity of Securities Arbitration System by Removing Mandatory Industry Representative from Arbitration Panels
The North American Securities Administrators Association (NASAA) today called upon the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) to take immediate action to improve the fairness of the system of securities arbitration, beginning with the removal of the mandatory industry representative from arbitration panels used to resolve securities disputes involving customers and industry.
FOR IMMEDIATE RELEASE
February 6, 2008
State Securities Regulators Say New Study Clearly Shows Investors View Securities Arbitration as Biased and Unfair
NASAA Calls on FINRA, SEC to Improve the Integrity of Securities Arbitration System by Removing Mandatory Industry Representative from Arbitration Panels
WASHINGTON, D.C. February 6, 2008âThe North American Securities Administrators Association (NASAA) today called upon the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) to take immediate action to improve the fairness of the system of securities arbitration, beginning with the removal of the mandatory industry representative from arbitration panels used to resolve securities disputes involving customers and industry.
NASAAâs call follows todayâs release by the Securities Industry Conference on Arbitration (SICA) of its survey of the participants in the NASD and NYSE arbitrations: An Empirical Study: Perception of Fairness of Securities Arbitration.
âThe study overwhelmingly demonstrates that investors view the securities arbitration forum as biased and unfair,â said
Karen Tyler
, North Dakota Securities Commissioner and President of NASAA, the oldest international organization devoted to investor protection. NASAAâs membership consists of the securities administrators in the 50 states, the
District of Columbia
, Puerto Rico, the U.S. Virgin Islands,
Canada
, and
Mexico
.
According to the SICA study:Nearly half of the customers who expressed their views believed their arbitration panel was biased;
- 62 percent believed the arbitration process was unfair;
- 70 percent were dissatisfied with the outcome;
- 49 percent stated that the arbitration process was too expensive, and;
- A striking 75 percent of customers who compared their arbitration process to their civil litigation process indicated that arbitration was âvery unfairâ or âsomewhat unfairâ compared to court.
âThe SICA studyâs results are disturbing, and they support what state regulators have been hearing from investors in their states â investors believe that the arbitration forum they are forced to participate in is rigged against them,â said
Bryan Lantagne
, Director of the Massachusetts Securities Division and chair of NASAAâs Arbitration Project Group.
Currently, almost every broker-dealer includes in their customer agreements a predispute arbitration provision that forces public investors to submit all disputes that they may have with the firm and/or its associates to mandatory arbitration. Securities arbitration cases are heard by a three-member panel that includes one ânon-publicâ or securities industry member, and two âpublicâ members, who may have worked in the industry. Neither of the public arbitrators is required to be an investor advocate, even though the non-public arbitrator is required to be an industry representative. FINRA, the industry SRO, selects who is qualified to be in the arbitrator pool.
The SICA study was conducted to primarily assess participantsâ perceptions of the fairness of the arbitration process given that perceptions of fairness provide valuable insights about the procedural and substantive fairness of the arbitration. The study was initiated pursuant to the recommendations of the 2002 Perino Report to the SEC. It was designed by academics at
Pace
University
with the assistance of
Cornell
University
âs Survey Research Institute with participation from members of SICA to ensure that the questions were appropriate and relevant.
âThe study is sound and accurate,â Lantagne said. âThe studyâs responses were compiled in a scientific manner, which provided a factual foundation for its results.â
Tyler
said NASAA urges FINRA to act immediately on this study. âThe first step toward improving the integrity of the arbitration system must be the removal of the mandatory industry arbitrator and a prohibition on ties to the industry on the part of the public arbitrator. NASAA has long held that a choice between arbitration and the courts for resolving disputes should be a fundamental right for investors. Because the arbitration system has evolved into a mandatory condition imposed by the industry, it is imperative that the system of dispute resolution be fair, transparent and free from bias,â
Tyler
said.
NASAA believes that investors should be given a choice of forums to bring their investment disputes. âHowever, where there is no choice but arbitration through a program administered by FINRA, then investors must have confidence in the substantive fairness of the process,â
Tyler
said.
Tyler
added that NASAA supports the passage of S.1782 and H.R. 3010, the Arbitration Fairness Act of 2007, introduced by Sen. Russ Feingold (D-WI), and Rep. Hank Johnson (D-GA), and will continue to work with Congress to restore choice, fairness and balance to the existing securities arbitration system.
The report has been posted on the
Pace
Law
School
website and can be downloaded at: http://www.law.pace.edu/files/finalreporttosica.pdf.
NASAAâs news release is available at: http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/8081.cfm
For more information:
Bob Webster
, Director of Communications
202-737-0900
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