Securities: A House subcommittee hears calls against & of support for arbitration (Web)
March 20, 2005
Securities: A House subcommittee hears calls for abolition of, and voices of support for, arbitration.
Securities arbitration either needs to be reformed--or it serves the public and the markets well.
That’s the gist of Washington testimony on Thursday at hearings in front of the House Committee on Financial Service’s subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.
The subcommittee has posted the testimony of eight securities arbitration experts, as well as a statement by the subcommittee’s ranking Democrat, here:
At the hearing, titled "A Review of the Securities Arbitration System," industry experts said the system works, while critics called for an overhaul.
Securities arbitration, explained Rep. Paul E. Kanjorski, of Pennsylvania, the subcommittee’s senior Democrat, has grown since the U.S. Supreme Court ruled in 1987 that brokerage firms could compel customers to arbitrate claims “in an industry-sponsored forum as a condition of opening a brokerage account,” referring to Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 242 (1987).
The system has come under attack because of arbitrators’ industry ties. Most securities arbitrations take place before a three-member panel, only one of whom may be a Wall Street employee. Critics charge the so-called public arbitrators aren’t far enough removed from their old securities jobs.
Kanjorski said he hoped the subcommittee also would examine conflicts disclosures, and the proceedings’ mandatory nature.
In his opening remarks, Kanjorski said, “there is nothing inherently wrong with arbitration per se. It can prove to be a more efficient and less expensive dispute-resolution mechanism than courtroom litigation. However, for arbitration to work well and to foster investor trust, it must be fair.
The hearing panel was brought in to help the subcommittee “understand how arbitration works and whether there is a need for statutory, regulatory, or procedural reforms,” he said, adding that he was approaching “these matters with an open mind.”
That might not be the case for most of the rest of the 49-member subcommittee. Fewer than five members attended the hearings, reports the March 19 Wall Street Journal; the article notes that chairman Richard Baker, R., La., “left just a few minutes after the hearing started.” The article says that Barney Frank, D., Mass., told the hearing participants that the subcommittee members had sent aides to take notes on the proceedings.
Testimony highlights include:
- William Galvin, Massachusetts’ chief securities regulator, said that small investors’ confidence in the securities markets has been shaken, and the dispute resolution process is “fundamentally flawed.” The Journal reported that Galvin had encouraged Frank, who is a member of the House Financial Services Committee but not the subcommittee, to h old the hearings.
- Linda D. Feinberg, president of NASD Dispute Resolution, told the subcommittee that mediation and arbitration were more cost effective than litigation, and that the NASD reviews its arbitration program processes “continuously” to “promote transparency to investors, improve the quality of arbitration, and ensure the integrity of the arbitration process.” She added that NASD Dispute Resolution expects to present to its board soon amendments to the definition of public arbitrator that would ban from its roster neutrals who work for a nonsecurities-related entity that is affiliated with a broker-dealer.
- St. John’s University School of Law Prof. Michael A. Perino, who wrote an extensive report three years ago on the securities industry’s self regulatory system for the SEC, said that the “available evidence does not suggest that the heavily regulated securities arbitration system has any apparent pro-industry bias.” But he added that the industry needs to continue to monitor the processes’ impartiality.
- Karen Kupersmith of the New York Stock Exchange described how the market administers arbitration, and noted that regardless of outcome, arbitrators with three or more customer complaints within a five-year period are removed from the neutrals’ pool.
- Since the adoption of the Securities Industry Conference on Arbitration’s Uniform Code of Arbitration, said veteran securities arbitrator and mediator Constantine N. Katsoris, a law professor at Fordham University School of Law in New York, more than 100,000 arbitrations have been filed at the self-regulatory organizations. “Has justice been achieved in every one of those 100,000 cases?” he asked. “Certainly not; but, I don’t know of any dispute resolution system that has an unblemished record in this regard – and that includes our own court system.”