Is mandatory securities arbitration on the way out? If Congress (either this year or under a new administration come January 2009) and the state securities regulators at NASAA (the North American Securities Administrators Association) have their way, two of investors’ biggest complaints may become a thing of the past: mandatory securities arbitration AND the mandatory securities industry arbitrator now required to sit in judgment of securities fraud and other investor claims (on three-member arbitration panels as a so-called “non-public” arbitrator).

We’ve supported both reforms vigorously for over twenty years in places where it should count, making the case for prohibiting the fundamentally unfair and unconstitutional predispute imposition of these mandatory requirements on investors:

• in argument before the U.S. Supreme Court in 1987 in the Shearson v. McMahon case

• in Congressional testimony before two House subcommittees and in our assistance to Congress in the late 1980’s to restore to investors the right to go to court that had been stripped away by the McMahon decision

• in extensive and consistent recommendations to the SEC and the brokerage industry’s self-regulators over the last twenty years

• in the January 2007 letter of the Public Members of SICA, including Public Member Ted Eppenstein, to the Chairman of the SEC recommending these and other reforms to benefit investors

• and in Ted Eppenstein’s Congressional testimony on October 25, 2007 before the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Commercial and Administrative Law in support of the Arbitration Fairness Act of 2007.

The state regulators of NASAA believe that FINRA (the Financial Industry Regulatory Authority):

should require its member firms to offer their customers a meaningful choice between binding arbitration and civil litigation. If arbitration really is fair, inexpensive, and quick, as its adherents claim, then these benefits will prompt investors to choose arbitration. If, on the other hand, arbitration does not offer these advantages, then this mode of dispute resolution should not be forced upon the investing public.

NASAA “believes the ‘take-it-or-leave-it’ clause in brokerage contracts is inherently unfair to investors, and [supports] the Arbitration Fairness Act of 2007 as a positive step in the right direction.” (Testimony of NASAA, Senate Committee on the Judiciary, Subcommittee on the Constitution, Civil Rights and Property Rights, December 12, 2007).

NASAA also supports: elimination of the requirement of an industry arbitrator; a non-biased “public arbitrator” pool; and the dissemination of information to the public of arbitration outcomes that are statistically and otherwise unbiased:

As long as arbitration panels include a mandatory industry representative of the securities industry and include public arbitrators who could have ties to the industry, the arbitration process will be both perceptively and fundamentally unfair to investors.

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An investor who recovers only a small fraction of their losses in the arbitration process can hardly be described as a “winner,” especially when attorneys’ fees and costs are added to the mix. Much more accurate, for example, would be data reflecting the ratio of amounts awarded in relation to damages claimed. Fairly assessing the pros and cons of arbitration as a means of dispute resolution requires access to meaningful and accurate statistics.

(Testimony of NASAA, Senate Committee on the Judiciary, Subcommittee on the Constitution, Civil Rights and Property Rights, December 12, 2007).

On behalf of investors, we agree that both mandatory securities arbitration and the requirement of an industry arbitrator in securities arbitration should be eliminated.