I understand that the NASD has filed Amendment No 5 to the Code rewrite, Filing 2003-158. This filing includes substantial changes from the last amendment to the rewrite and will materially affect investors. Based on the scores of comment letters already received on the rewrite it is clear that this is an area of great concern to the public. I therefore ask that the SEC commence a new comment period to allow public input on this important new filing.
The import of these changes will effectively allow arbitration to morph into litigation, because the code rewrite effectively allows for motions for summary judgment and motions to dismiss to be litigated without a final evidentiary hearing. For example, the NASD has stated in relation to new rule entitled “Dispositive Motions (Proposed Rule 13504),” that
For purposes of this rule, if a party demonstrates affirmatively the legal defenses of, for example, accord and satisfaction, arbitration and award, settlement and release, or the running of an applicable statute of repose, the panel may consider these defenses to be extraordinary circumstances. In such cases, the panel may dismiss the arbitration claim before a hearing on the merits if the panel finds that there are no material facts in dispute concerning the defense raised, and there are no determinations of credibility to be made concerning the evidence presented.
This new interpretation of this rule allows for Rule 56 type motions, known as Motions for Summary Judgment. The reality is that most arbitrators lack law degrees, and are ill-educated to rule on a Motion for Summary Judgment, as it would frequently require a detailed knowledge of the law. Most cases, in my opinion, are decided on the merits based on the credibility of witnesses, and evidence, and on what is equitable and just, not what is technically legal or illegal, as is typically decided on a motion to dismiss or a motion for summary judgment.
Recall that since the 1975 amendments to the Exchange Act, the Commission has had expansive power to ensure the adequacy of the arbitration procedures employed by the SROs. No proposed rule change may take effect unless the SEC finds that the proposed rule is consistent with the requirements of the Exchange Act, 15 U.S.C. 78s(b)(2); and the Commission has the power, on its own initiative, to "abrogate, add to, and delete from" any SRO rule if it finds such changes necessary or appropriate to further the objectives of the Act, 15 U.S.C. 78s(c). The Commission would be failing in its duty to ensure that the arbitration procedures adequately protect investor’s statutory rights.
Indeed, the congressional reports confirm that while the development of rules for the governing of exchanges, as enumerated in s 19(b), was left to the exchanges themselves in the first instance, the SEC could compel adoption of those changes it felt were necessary to insure fair dealing and protection of the public. See H.R.Rep. No. 1383, 73d Cong., 2d Sess., 15 (1934); S.Rep. No. 792, 73d Cong., 2d Sess., 13 (1934).
The new rules will help complete the transformation of arbitration from an equitable proceeding to one with more a formalized motions practice, including motions to dismiss, and motions for summary judgment.
The Commission should adopt a clear rules change to the arbitration code that 1) all claimants are entitled to an evidentiary hearing and an opportunity to present witnesses and other evidence 2) no motions to dismiss or for summary judgment are allowed, until after a full evidentiary hearing is conducted 3) no form of interrogatories are allowed except to a) identify witnesses b) dates or c) entities or individuals that may be holding documentary evidence relevant to the claims or defenses and 4) no subpoenas shall be allowed except as signed by at least two arbitrators.
The Commission must do a complete review of the new proposed code and to clarify that arbitration shall be quick, inexpensive and equitable. The NASD has done a poor job of managing arbitrations and training arbitrators to the point where arbitration is nothing more than full blown litigation, which was not the intent of the Supreme Court when it authored SHEARSON/AMERICAN EXPRESS INC. v. McMAHON, 482 U.S. 220 (1987). As Justices Blackmun, Brennan and Marshall stated in Shearson vs. McMahon, “the Court thus approves the abandonment of the judiciary's role in the resolution of claims under the Exchange Act and leaves such claims to the arbitral forum of the securities industry at a time when the industry's abuses towards investors are more apparent than ever.” That duty is now left to SRO’s, whose arbitration procedures are supposed to be reviewed and changed by the commission, to ensure a level playing field. The reality is that the SEC has failed millions of individual American investors who were duped by Wall Street when Wall Street was caught publishing false “buy” ratings on companies from whom they were doing banking business with. The $1.4 billion dollar settlement did not find its way to the individual investor, who lost trillions in the market which was rigged by Wall Street. The SEC did nothing to ensure that individual investors got a fair hearing in arbitration, and as a result, the vast majority, over 75% of investors lost their analyst conflict claims in arbitration.
The code rewrite is wrong. The SEC should step forward, and present its own proposal for a fair and balanced arbitration code. The NASD did not solicit the input of the Public Arbitration Bar Association, whose members handle the vast majority of cases for customers in SRO arbitrations. The NASD has asked for an expedited review, without public comment, and without giving an adequate explanation.
This code rewrite presents an opportunity to the SEC to level the arbitration field. It is important, for example, to get rid of mandatory industry arbitrators. No forum in the United States except securities arbitration requires an industry sponsored representative to sit in judgment of one of their own. There are more than enough public arbitrators available to decide these cases.
Where was the SEC when the bubble popped? What meaningful actions did the SEC take to ensure that investors who lost trillions in the technology bubble, created by Wall Street based on conflicted analyst reports, got restitution? Even the $1.4 billion in fines paid by 10 Wall Street firms were small when compared to the roughly $80 billion in profits made by Wall Street firms over the bubble years.
It’s time for the SEC to take charge and stop rubberstamping the NASD’s rules requests.
Jeff Sonn, Esq.