Subject: File No. SR-NASD-2005-094
From: Jay H. Salamon
Affiliation: Hermann, Cahn & Schneider LLP

September 14, 2005

September 14, 2005

Jonathan G. Katz, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-9303
Re: File No. SR-NASD-2005-0094
Public Arbitrator Definition

Dear Mr. Katz,

I am an attorney with a 19-lawyer firm in Cleveland, Ohio, and on behalf of myself and the four colleagues with whom I practice securities law, I wish to comment on the changes proposed by the NASD and NYSE with respect to the definition of public arbitrator. The proposal from these organizations, while helpful, does not address the real problem facing aggrieved investors who are forced to arbitrate in these SRO forums -- namely, the mandatory presence of the industry arbitrator and the continued use of public arbitrators who have strong ties to the brokerage industry.

By way of background, I devote nearly 100 percent of my professional practice to the handling of private investor disputes. Within my firm, I belong to a specialized practice group whose five members have nearly 100 years of collective experience in the area of securities litigation. Prior to 2001 when we began to exclusively represent investors, the primary focus of our securities practice was the defense of national and regional broker-dealers. In fact, the most recent addition to our practice group is the former general counsel of a major brokerage firm. Consequently, I think we can offer a valuable perspective on the influence of the industry arbitrator in investment disputes.

During the years when we defended brokers, we often took a hard line on cases based both on our experience and the belief of fellow members of the defense bar that we generally had to persuade only one arbitrator to accept our position while the claimant had to persuade at least two arbitrators. Obviously, this attitude reflected a well-founded assumption concerning the predisposition of most industry arbitrators. I am not saying that we believed these arbitrators were corrupt or would decide in advance of the evidence to rule against the investor. Rather, we knew that the industry panelists were bringing to the hearings an inherent bias in favor of the way they had seen things done and the way they believed the system should work, as opposed to the way the law and rules of self-regulatory organizations say the system should work. We further believed that the industry arbitrator would be a strong influence on the other panelists, asserting his purported expertise as a reason they should either defer to his view on liability or at least minimize the amount of the award. If you think I am exaggerating for effect, you need only consider the nearly frantic way in which the industry fights to preserve the industry arbitrator, even though the near universal use of expert witnesses renders the original function of the industry arbitrator obsolete.

Now that my colleagues and I represent investors, we know that we start out in the hole on every case and that even the most meritorious of claims will be heavily discounted by the respondents based on the same assumptions we used to make as defense lawyers. The presence of the industry arbitrator indisputably skews the proceeding in favor of the broker-dealer and its registered representatives.

This system is nearly impossible to justify to injured investors, who encounter it with a mixture of disbelief, trepidation, and skepticism. And what are we as their counsel to say to them when we know their concerns are justified? I scarcely need to point out that a jury sitting in a medical malpractice case need not include several doctors, nor must a jury hearing a negligent construction case include contractors and engineers. Our system of civil justice has long relied on the wisdom and fairness of unbiased fact-finders, individuals who may well be unknowledgeable about the subject matter of the case but can be aided when necessary by the testimony of outside experts. It is, in our view, a perversion of justice to force securities claimants to plead their cases to three individuals, one of whom is present on the panel solely because of his or her ties to the industry of which the respondents are members. The alleged expertise brought to the panel by such an industry arbitrator is unnecessary, and it is insidious for a purported industry expert to be advising his or her fellow panelists in secret, beyond the scrutiny of the parties and immune from cross-examination.

In sum, we consider the continued presence of a mandatory industry arbitrator to be the most severe flaw in the SRO arbitration system. Eliminating industry insiders from arbitration panels would be the single most important thing the SEC could do to foster both actual and perceived fairness, short of making the entire arbitration process voluntary.

Before closing, I would be remiss if I also failed to comment on the actual NASD proposal to exclude from the definition of public arbitrator persons with relationships to entities controlling or controlled by securities or commodities firms. My colleagues and I agree that the suggested rule change is an improvement over current practice, but we feel it does not go far enough. There also should be a revision to the provision in NASD Arbitration Rule 10308 that an attorney, accountant, or other professional whose firm has derived 10 percent or more of its annual revenue in the past two years from brokerage or commodity firms or their associated persons is barred from being a public arbitrator. This 10 percent cutoff is arbitrary and does not provide investors with adequate protection from arbitrators who may qualify under the rule despite having serious conflicts of interest.

I believe the comment letter from Rosemary Shockman on behalf of the Public Investors Arbitration Bar Association clearly sets forth the many concerns created by the classification at issue and thus I will not belabor the matter. It suffices to say that my colleagues and I strongly urge the SEC to adopt a rule that would exclude from the definition of public arbitrator any professional who has represented, or whose firm has represented, any persons or entities listed in Rule 10308 during the previous five years, regardless of revenues earned.

Thank you for the opportunity to comment on these vitally important matters. I hope our concerns will be carefully considered as the SEC evaluates the proposed rule changes.

Very Truly Yours,

Jay H. Salamon