The Wall Street Journal-20080213-Study Finds Wide Distrust On Securities Arbitration

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Study Finds Wide Distrust On Securities Arbitration

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Some regulators and industry representatives are trying to find the positives in a study -- which they helped craft -- that shows considerable dissatisfaction with the securities arbitration system.

The study was commissioned by the Securities Industry Conference on Arbitration, a group formed in the 1970s to write rules for self- regulatory arbitration forums.

According to the study, released this month, large numbers of those surveyed had poor impressions of the arbitration system, viewing the system as unfair and arbitration panels as biased.

The survey's results are likely to provide more ammunition in an ongoing fight over mandatory securities arbitration. Last year, a bill was introduced in Congress that would ban predispute arbitration agreements in various industries, including the securities industry. Most brokerage firms require new customers to sign statements agreeing to take future disputes to arbitration. If passed, the bill would effectively give investors the option of taking their disputes to court.

While some investor advocates view the results as bolstering their case for giving an investor his or her choice of forums, the industry's major lobbying group is already working to discredit the report's findings. Ira Hammerman, senior managing director and general counsel of the Securities Industry and Financial Markets Association, referred to the survey as one "whose results are middling, questionable and, thus, unlikely to lead us to greater truths."

The study's purpose was to gauge people's perceptions of the securities arbitration system's fairness, specifically people who had participated in arbitration cases from 2002 to 2006. Responses came from customers, lawyers for both sides, corporate representatives and brokerage-firm employees.

The study shows that almost half of the 3,087 people who responded didn't have a favorable view of securities arbitration for customer disputes. Almost half also felt the arbitration process was unfair, and more than a third said the arbitration panel wasn't impartial.

Responses on whether people would recommend arbitration to others were split in nearly equal numbers.

More than half the people surveyed -- 55.1% -- said they weren't satisfied with the outcomes of their cases.

The results were even more pronounced when looking at only the perceptions of customers.

Bryan Lantagne, director of the Massachusetts Securities Division and a member of the arbitration conference that commissioned the study, called the results disturbing.

Investors "believe that it is an unfair forum," said Mr. Lantagne, who is also chairman of the arbitration committee for the North American Securities Administrators Association. "That taints, that perverts, the entire process."

In a statement, the Financial Industry Regulatory Authority described the survey's results as "mixed -- and in some cases inconsistent," saying that survey participants gave positive ratings to "several objective standards . . . while at the same time evaluating the process negatively from the subjective standpoint of fairness."

The most positive feedback in the study came in response to a question about whether arbitrators listened to the parties, their representatives and their witnesses: Nearly three-quarters of respondents said they did. Arbitrator competence got relatively high reviews, too, with 58% of people saying the panel appeared competent enough to resolve the dispute.

But the other positive ratings the Financial Industry Regulatory Authority cited -- marks for arbitrators' understanding of the issues and legal arguments, and for the efficiency of the process -- weren't landslides. While about 48% of survey participants said the panel understood the issues involved in the cases, almost 29% said the panel didn't. As for the legal arguments, about 47% thought the panel understood them, but about 27% disagreed. Almost 38% didn't think the hearings took too long -- but about 31% did.

According to numbers provided in the study, about 60% of the people surveyed were customers or their lawyers or other representatives. The rest were industry members or their lawyers or other representatives.

Supporters of the current arbitration system are aiming to minimize aspects of the findings.

For example, the Financial Industry Regulatory Authority cited a statistic that showed 40% of people who responded were concerned before starting the arbitration process that the system would be unfair. The regulatory authority said this statistic indicated "that, because of other factors, such as having lost money and then needing to initiate an arbitration to recover their losses, investors might be predisposed to have negative perceptions of our forum."

Another major concern for the regulatory authority is that investors are confused about how the process works. For example, more than 64% of survey participants said they weren't familiar with forum rule changes made in recent years. The regulatory authority said it has made several improvements to the process.

The regulatory authority and the Securities Industry and Financial Markets Association both say the survey response rate of 13% was low.

The study's authors -- two law professors -- wrote that the response rate exceeded the typical response rate for a one-time mailed survey.

Both regulators and the securities industry had input into the questions that were asked in the survey. A Securities Industry and Financial Markets Association representative who has seen the survey said, "There's balance in the survey itself, but not in the results."

Jill Gross, one of the study's authors and a professor at Pace University's law school, said those questioning the study's methodology are "missing the point."

Customers' "lack of knowledge, understanding [and] awareness can translate into negative perceptions," she said. "It's really a lost opportunity to improve a system that I don't believe should be thrown in the garbage."

The funding for the study came from the National Association of Securities Dealers and from New York Stock Exchange Regulation, which had each run its own arbitration forum until the forums merged under the Financial Industry Regulatory Authority last year. The merger helped make arbitration a hot topic -- now investors have only one forum to which they can bring complaints.