August 8, 2007
Nancy M. Morris,
Secretary, U.S. Securities and Exchange Commission
100 F Street NE
Washington, D.C. 20549-9303
Re: SR-NASD-2007-021; Proposed Amendment to NASD Code of Arbitration Procedure, Rule 12100(u)
Dear Ms. Morris:
I am an attorney in Seattle, and have represented both investors and stockbrokers/broker-dealers in NASD arbitrations for more than 15 years. Im also an arbitrator with the NASD.
Context of the issue. Currently investors are forced to arbitrate virtually all claims against stockbrokers/broker-dealers in the arbitration system run by the NASD--the National Association of Securities Dealers. In my experience the results of that process are on average worse (and certainly less predictable) for the customers--most of whom in my case have been retired individuals, or individuals with little investment experience. Win rates for customers in NASD arbitrations are inexplicably low, and when customers do win arbitration panels commonly award less than all of the actual damages suffered; the customer usually is required to pay his or her own attorneys' fees; and, incredibly, arbitration panels often split 50/50 the NASD's cost of the proceeding, which can easily run $10,000-$25,000, between the "winning" customer and the securities industry Respondents.
I do not know what to attribute the industry's success in NASD arbitration cases to. Maybe some arbitrators just believe that anyone who invests is rolling the dice and shouldn't be complaining when they lose; maybe the arbitrators, not being judges, are not experienced or comfortable with judging anyone harshly and making large damage awards; maybe some don't want to risk alienating a brokerages firm with a large adverse award, knowing that if they do they will be stricken from future panels by industry cousel. Maybe it's that latter fact--the industry's ability to cull out arbitrators who have shown the nerve and willingness to award full compensation to investors from panels, after "one bit of the apple". (Investors' counsel can't do the same because one can't deduce much from the failure to give an award in any particular case.)
Appearance of fairness. Particularly in light of historical results, it is hard for ordinary people whose retirement money, or life savings, are at issue, to have any faith in the fairness of the NASD's arbitration system. I explain to clients who are considering whether to pursue a claim how the appointment of the arbitrators works. Currently professionals qualify as public arbitrators even though their firms may do millions of dollars of business with securities industry clients--as long as the firm is big enough that the millions of dollars do not exceed 10% of the firm's total income. So in addition to the manadatory industry arbitrator, under present Rule 12100(u)there is no certainlty that the other arbitrators will be free of financial ties to the industry. Fully informed of this, how many Americans would be confident they would get a fair hearing before an NASD arbitration panel?
Amendment to Rule 12100(u). The pending NASD proposal to reform Rule 121000(u) is an improvement, but it does go far enough:
The current NASD arbitration system, with its pro-industry conflicts and biases, must be reformed if the American public is to belive they will get a fair hearing on their claims. Amending Rule 12100(u) is one step in that process.
Thank you for considering this.
Carl J. Carlson
Carlson & Dennett, P.S.