November 30, 2010
Thank you for the opportunity to comment on this proposed rule change. For over 20 years I previously served investors as a member of the securities industry. For the past 20 years I have represented parties in securities arbitration, mostly investors. The time has come to end the requirement that one pon-public arbitrator must serve on panels to resolve disputes between public investors and securities firms.
A brief study of the history of securities arbitration reveals that the U.S. Supreme Court's reversal of its position in 1987 to hold that pre-dispute arbitration agreements are enforceable was based on the Court's determination that securities arbitration had become "fair." Today, even the most ardent supporters of mandatory securities arbitration concede that the "perception of fairness" is a crucial goal of all connected with this process.
Since its inception, my firm has represented thousands of investors and been in communication with tens of thousands of members of the investing public. I can assure you that, of all the provisions of the Code of Procedure employed in securities arbitration, the most objectionable to investors is that one of the three arbitrators who decide an investor's case must be a member of the securities industry, or otherwise be connected to it.
In fact, if one were to set out to accomplish the "perception of unfairness" by investors in the securities arbitration process, near the top of the list would likely be the requirement that one of the three persons who will decide an investor's claim be an "industry" arbitrator. Investors feel they step up to the plate with "one strike" against them and, considering that only one other arbitrator need agree with the industry arbitrator, "two strikes" and they are out.
Twenty years ago I believed that some non-public (industry) arbitrators sought to clean-up their own industry and would tend to grade their piers harshly. However, with consolidations in the financial industry, my current belief is that there may be a real or perceived fear by industry arbitrators that ruling against financial firms may be hazardous to their future employment.
In any event, whatever might be gained by requiring that one of the arbitrators be an industry "insider," is far outweighed by either the perception or the reality of the bias that arbitrator may consciously or unconsciously hold toward financial firms or those in the securities industry.
While there are other reforms which would need to occur before securities arbitration could truly be considered the "fair forum" that the Supreme Court envisioned, the elimination of the mandatory non-public arbitrator is a "good start."