August 8, 2007
As an experienced NASD Arbitrator and an attorney who has practiced in the NASD Forum for 20 years I feel compelled to comment on the proposed changes to Rule 12100(u)
I agree with the NASD that Rule 12100(u) must be amended to address its treatment of public arbitrator industry conflicts. But the NASD proposal, while an improvement, does not address the Rule's fundamental flaw, which is to impose conflicted public arbitrators on investors who must already face a mandatory industry arbitrator on their panel.
The NASD proposal to amend Rule 12100(u) would continue the rule in its current form except it would disqualify professionals who receive in excess of $50,000 in fees annually in the last two years, from disputes involving investor accounts or transactions. The NASD proposal must be revised as follows in the interest of investor protection.
1. Expand the NASD Proposal to Apply to All Industry Fees. The NASD proposal contains an obvious flaw in that it fails to recognize that receiving fees from the securities industry presents a basic conflict for an arbitrator regardless of the nature of the industry work performed. The fee disqualification proposal must be expanded to apply to all industry work. Not making this change means the 10% rule is the only limitation on public arbitrators performing non-customer dispute work for the securities industry. This would allow an arbitrator's firm to accept millions in fees from industry clients and still be classified as a public arbitrator. The appearance of a pro-industry bias is clear. No investor would willingly accept such a standard because it is unfair on its face. The $50,000 limitation proposed by the NASD must be applied to all industry work and the 10% rule, which allows material conflicts and is unworkable on its face, must be eliminated.
2. Arbitrator Fee Reporting Must Be Mandatory/Investor Questions Must Be Answered. Without a mandatory annual arbitrator fee reporting requirement and a provision requiring arbitrators to respond to party inquiries concerning conflicts of interest, any rule limiting securities industry fees is unenforceable. Failure of an arbitrator to file annual fee reports should result in disqualification. Conflict rules which are not coupled with reporting and disclosure requirements are mere window dressing and are an affront to any organization charged with protecting investor interests.
It is imperative that the SEC address the fundamental flaws of Rule 12100(u) in its consideration of the NASD proposal. Conflicted public arbitrators corrupt the NASD arbitration process, and the NASD should not be allowed to impose them on investors already subject to mandatory arbitration with an industry arbitrator.
Thomas C. Wagner
Van Deusen & Wagner L.L.C.