Report to the SEC Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSE Securities Arbitrations


Washington, D.C., November 12, 2002 -- The Securities and Exchange Commission is releasing a report prepared at the Commission's request by Professor Michael Perino, an associate professor of St. John's University School of Law and currently a visiting professor at Columbia Law School.

The Commission had asked Perino to assess whether the current disclosure requirements in NASD and NYSE arbitration procedures should be modified to reflect any of the disclosure concepts in California's recently adopted arbitration rules.

SEC Chairman Harvey L. Pitt said, "Professor Perino's report makes a significant contribution to our understanding of disclosure requirements in arbitration procedures and to the interests of investors. I commend and thank him for his substantial service to the public in this matter."

Perino's report concludes that there is little if any indication that undisclosed conflicts represent a significant problem in NASD or NYSE (collectively, SROs) arbitrations. As a result, his report concludes that having the SROs adopt the California arbitration rules would likely yield very few benefits for investors. At the same time, his report concludes that adopting the California arbitration rules may impose significant costs and may have significant unintended consequences that may reduce investors' perceptions of the fairness of SRO arbitrations.

Perino's report also finds that while the current SRO conflict disclosure requirements generally appear adequate, some minor enhancements to disclosure and other related rules may provide additional assurance to investors that arbitrators are in fact neutral and impartial. For this reason, his report recommends that the SROs: (1) amend their arbitration rules to emphasize that all conflict disclosures are mandatory; (2) re-examine the current definitions of public and non-public arbitrators; (3) provide greater transparency with respect to challenges for cause by including the cause standard in their rules; and (4) sponsor independent research to evaluate the fairness of SRO arbitrations. The SROs have represented to Perino that they would follow these recommendations.

A copy of the report can be found on the Market Regulation Web page of the Commission's Web site.

Last modified: 11/12/2002