NASAA Urges Reforms to Securities Arbitration System

State Securities Regulators Support The Arbitration Fairness Act of 2007

WASHINGTON, D.C., December 12, 2007 – The North American Securities Administrators Association today testified in support of S. 1782, the Arbitration Fairness Act of 2007 introduced by Sen. Russ Feingold (D-WI), saying that it is “a positive step in the right direction” toward improving the fairness of the system of securities arbitration.

Currently, almost every broker-dealer includes in their customer agreements, a pre-dispute arbitration provision that forces public investors to submit all disputes that they may have with the firm and/or its associates to mandatory arbitration. “As long as securities arbitration remains mandatory, investors will continue to face a system that is not fair and transparent to all. For this reason, NASAA supports the passage of S.1782, the Arbitration Fairness Act of 2007,” Illinois Securities Director Tanya Solov said on behalf of NASAA in testimony before a subcommittee of the U.S. Senate Committee on the Judiciary.

“NASAA believes that securities arbitration system should be truly voluntary, that more meaningful and accurate statistics concerning arbitration outcomes should be compiled and disseminated, and the balance in the composition of arbitration panels should be restored,” Solov testified.

The recent consolidation of NASD and NYSE into the Financial Industry Regulatory Authority (FINRA) has effectively resulted in a single industry run forum for the resolution of disputes between public customers and the securities industry. “NASAA believes that absent the option of pursuing a claim in court, investors should at least be given a choice of arbitration forums; however, where there is no choice but arbitration through a program administered by FINRA, then this one forum must at least be independent and fair to investors,” Solov testified.

Solov said FINRA should require its member firms to offer their customers a meaningful choice between binding arbitration and civil litigation. “If arbitration really is fair, inexpensive, and quick, as its adherents claim, then these benefits will prompt investors to choose arbitration,” Solov testified. “If, on the other hand, arbitration does not offer these advantages, then this mode of dispute resolution should not be forced upon the investing public.”

“Until mandatory securities arbitration is a thing of the past, NASAA will continue to work to eliminate the inherent industry bias in the existing system,” Solov said. “We recognize that over the years NASD, now FINRA, adopted a number of changes in an effort to improve the arbitration system, but more is needed.”

Specifically, NASAA believes the securities arbitration system could be enhanced by:

  • Removing mandatory industry arbitrators from the arbitration process, and for public arbitrators to have no ties to the industry. This change will bring greater fairness to securities arbitration and instill greater confidence in retail investors that their complaints will be heard in a fair and unbiased forum. Securities arbitration cases currently are heard by a three-member panel that includes one “non-public” or securities industry member, and two “public” members, who may have worked in the industry.
  • Improving the statistics that FINRA collects and disseminates on arbitration, particularly with respect to outcomes. Proponents of arbitration often point out that investors receive “some amount of compensation” in over half of the arbitrations that result in a decision. To the extent this statistic is intended to suggest that investors “win” more often than not, it is misleading. An investor who recovers only a small fraction of their losses in the arbitration process can hardly be described as a “winner,” especially when attorneys’ fees and costs are added to the mix. Much more accurate, for example, would be data reflecting the ratio of amounts awarded in relation to damages claimed. Fairly assessing the pros and cons of arbitration as a means of dispute resolution requires access to meaningful and accurate statistics.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, the provinces and territories of Canada, and Mexico.

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NASAA Testimony

For more information:
Bob Webster, Director of Communications

202-737-0900

2007 Headlines, Newsroom