September 14, 2005
September 14, 2005
This Message is directed to:
Jonathan G. Katz, Secretary
Securities and Exchange Commission
Washington DC
From:
Jorge A. Lopez, Esquire
The Law Offices of Jorge A. Lopez, P.A.
1500 San Remo Avenue, Suite 290
Coral Gables, Florida 33146
Re: File No. SR-NASD 2005-094
Dear Secretary Katz:
I appreciate this opportunity to briefly share with you my thoughts and provide comments on the above referenced proposed revisions to the NASD Code of Arbitration Procedure concerning the composition of SRO arbitration panels and the definition of public arbitrator. I enjoy the privilege of representing investors that have been the victims of negligence, breaches of fiduciary duty and outright fraud by members of the securities industry. When the securities industry began to include pre dispute arbitration clauses in its agreements with its customers, it did so because, supposedly, arbitration would be an efficient and fair manner in which to decide disputes between members of the securities industry and its customers. It was not intended to sacrifice fairness. Most customers have no idea that they give up the right to have their day in court before a judge and jury of their peers when they establish accounts with securities firms.
The NASD and NYSE have now proposed revisions to the definition of Public Arbitrator in their codes of arbitration procedures. The proposed changes are necessary but, unfortunately, they fall far short of ensuring procedural and substantive fairness in the dispute resolution fora imposed upon public customers. I would begin by saying that mandating that a securities industry arbitrator sit on an arbitration panel in a customer case should be abolished since it serves no purpose other than to tilt the process further in favor of the securities industry, a process that is already administered by an SRO. There is simply no need for an industry arbitrator to sit on every customer arbitration panel. Any required industry expertise may be provided by expert
testimony.
It has been my practice that arbitrators with industry ties, no matter how seemingly remote, possess an inherent bias in favor of the securities industry and its practices. This bias is clearly manifested in the questions asked and comments made during discovery conferences and during the evidentiary hearings themselves. The appearance of bias is also manifested in awards that do not properly compensate customers even when the evidence overwhelmingly supports the customers claim. An objective analysis of customer awards demonstrates that it is truly a rarity to see decisions where a customer has prevailed and in turn was properly awarded statutorily mandated remedies plus costs and attorney fees which would make said customer whole for the abuse suffered. Of course there are exceptions to this, but these results have become the norm rather than the exception and one of the most obvious and logical explanations for such results is that industry arbitrators, with the assistance of arbitrators who have been mis-classified as public when they are truly industry based upon their backgrounds and affiliations, effectively minimize damages to a customer because of inherent bias.
The definition of the public arbitrator in SRO arbitration proceedings is extremely important and serves to establish one of the foundations of fairness that should be inherent in the dispute resolution process. From the perspective of the customer/claimant, securities industry
influence already pervades the SRO arbitration fora by requiring that a non-public or industry arbitrator sit on all three-person arbitration panels. The current system of allowing an industry arbitrator to sit in a mandatory industry-sponsored forum makes it essential that the
two remaining public arbitrators be free from industry influence in the interest of basic fairness. Investors must be assured that they will have no more than one of three panel members with the appearance of a pro-industry bias. I believe that the current definition of public arbitrator fails to provide this assurance and must be changed.
The current definition of Public Arbitrator allows persons with industry bias to serve on panels under the guise of being public. For example, permitting any attorney with industry ties to serve as a public arbitrator is inherently unfair. If an attorney or his or her firm has a conflict of interest that would preclude representing the customer, that attorney should not be allowed to decide the customers case. That includes issue conflicts where the attorney or his firm has taken positions adverse to similarly situated customers. The net effect of such attorneys serving on panels is to place two industry members on the panel. The current system of establishing a percentage cutoff for the amount of industry business a professional may have before concluding that an appearance of bias or prejudice exists is an arbitrary and fictional standard. Any industry business on the part of the professional establishes the same conflict and a public arbitrator with any appearance of industry bias or prejudice is unacceptable.
Given the large number of well qualified independent and truly objective arbitrators there is no practical reason to continue to require that an industry arbitrator be on every panel and there are numerous reasons to exclude them. Similarly, there is no need to qualify attorneys with industry ties as Public Arbitrators and numerous reasons to exclude them. Customers should be entitled to the same fair and unbiased decision maker they could get in court. Anything less denies customers a fair hearing.
In conclusion, I would also like to express my full support of the position expressed by the Public Investors Arbitration Bar Association PIABA in its comment letter to the referenced rules proposal.
Very truly yours,
Jorge A. Lopez