Tuesday, June 16, 2009

PIABA Petitions SEC To Remove Industry Arbitrator Requirement

PIABA, the bar association dedicated to suing brokers and brokerage firms, has filed a petition with the SEC to remove the requirement of having an arbitrator that is affiliated with the securities industry from panels involving customer disputes.

The requirement of an industry arbitrator has been part of FINRA arbitrations since the forum has existed, and has its genesis in worthwhile goals. In the past, having an arbitration panel that was familiar with the retail securities business was a benefit to all sides, as it lessened the need for expert witnesses and lengthy testimony from witnesses as to practices and procedures in the industry.

But as arbitration expanded and became more popular, the process began to look more and more like a court proceeding. While we can debate the benefits, if any, of that transformation, the industry arbitrator has become an issue. Expert witnesses are common place today. Further, having a panel decide a case based on facts not in evidence (an individual arbitrator's personal experience, knowledge and opinions) cuts against our sense of due process and trial procedure.

Plus, it just doesn't "look" right. It is difficult to argue that the process is fair when one of the arbitrators has an affiliation with the securities industry.

Of course, there is no evidence that even suggests that the industry arbitrator sides with the industry. In my experience it just isn't the case. In fact, I obtained a multimillion dollar award for a customer, which included punitive damages, from a panel that included the General Counsel of a major wirehouse.

But individual stories prove nothing, and perceptions are important. Perhaps it is time to insure that all arbitrators are not only impartial, but have the appearance of being impartial.

PIABA has actually taken a reasonable position here. It is not asking to ban industry arbitrators, it is asking that the rules be changed so that the customer can opt out of having an industry arbitrator.

In my view, a reasonable compromise, but one that does not go far enough. If an arbitrator who was a back office clerk at a brokerage firm 3 years ago has an appearance of bias, doesn't a securities attorney who spends his days representing customers against brokers have at least the same level of an appearance of bias against the industry?

While I have no doubt that my brethren who represent customers decide their cases fairly and without bias, it is a bit odd to have an arbitrator who spends his time suing brokers as the arbitrator in a customer dispute.

Appearances mean a lot in arbitration. Let's allow all parties to opt out of having an industry arbitrator, and also allow them to opt out of having a customer attorney on the Panel. And lets do the same for employee arbitrations. Remove the industry arbitrators from those panels as well.

More information, and a copy of the petition, is at the Securities Law Professor Blog - PIABA Submits Petition to SEC to Eliminate Requirement of Industry Arbitrator in Customer Disputes
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