From: J. Pat Sadler
July 13, 2005
Jonathan G. Katz, Secretary
Re: File No. SR-NASD 2003-158
Dear Mr. Katz:
Thank you for the opportunity to comment on the Reorganization and Revision of NASD Rules Relating to Customer Disputes, also known as the NASD Code Re-Write.
Mandatory arbitration of customer/broker disputes is one which has been forced upon the investing public by the securities industry. Factors such as SRO control of the arbitration fora and forced inclusion of an industry arbitrator on all cases with more than $50,000 in dispute, undercut the public’s confidence in the system. The time has come for an independent arbitration forum and for the elimination of the mandatory industry arbitrator.
If the public is to have any confidence in the SRO arbitration system, fairness in arbitrator classification and in the arbitrator selection process are of paramount importance. The NASD’s proposed Code Re-Write has significant failings in each of these areas.
Under the present system of arbitrator classification, it is not uncommon for a three-person SRO arbitration panel to look something like the following:
Thus, many public customers are disappointed to find that their arbitration panel contains not just one arbitrator with connections to the securities industry, but often contains two or even three persons with industry connection. For the public to have confidence in the fairness of the arbitration system, all persons with ties to the securities industry must be disqualified from classification as public arbitrators. The NASD Code Re-Write does not address this problem.
NASD’s proposed “three list” system of selecting arbitrators is a regressive step which will undermine fairness in the system. Brokerage firms are repeat users of the arbitration system. In virtually all cases, public customers are not. Arbitrators quickly learn that reality, and also learn that if they wish to continue to serve on panels, they cannot consistently rule against the industry. NASD’s proposed chair-qualified list encourages the development of professional arbitrators who will understand that their continued service requires that they not risk offending the repeat users of the system. The NASD proposal will also have the effect of reducing the opportunities for new arbitrators to serve.
The NASD proposal does nothing to address the problem of administrative appointments of arbitrators when list selection fails to yield a full panel. The so-called “jam down” arbitrator is a major source of dissatisfaction for litigants and counsel on both sides of the SRO arbitration aisle.
Recognizing this problem, the SICA Uniform Code has for years provided for a second list to be utilized to avoid administrative appointments. Earlier this year the Uniform Code was amended to allow each party one peremptory challenge per case in the event of administrative appointment of arbitrators, further guaranteeing the parties’ opportunity to participate in arbitrator selection. The NASD’s failure to incorporate these provisions from the Uniform Code in the Code Re-Write is a major disappointment to users of the system.
J. Pat Sadler