InvestmentNews (October 2, 2006 11:01 pm) -- Securities industry observers are expressing dismay that state regulators are pushing for elimination of the requirement that NASD arbitration panels include industry representatives.

The issue came up last month in San Diego at the annual meeting of the North American Securities Administrators Association Inc., where industry lawyers were surprised to learn that the organization essentially had adopted the view of the plaintiff's bar in pushing to eliminate industry arbitrators or make their use voluntary.

For most cases, NASD arbitration forums use three-person panels that have one "non-public," or industry, arbitrator and two public panelists.

Washington-based NASAA also is questioning whether public panelists are free enough from industry connections.

State officials endured testy questioning from industry representatives at the meeting when it became known that the organization had been consulting with the Public Investors Arbitration Bar Association of Norman, Okla., which represents the plaintiff's bar.

"PIABA has been lobbying NASAA to take up the mantle of the plaintiff's bar," said Peter Anderson, a partner and industry defense lawyer at Sutherland Asbill & Brennan LLP of Atlanta and Washington, who was at the meeting.

The defense bar was upset that it did not have a "fair opportunity to be heard," Mr. Anderson said. "PIABA comes in with a one-sided perspective."

"I was very surprised to learn they didn't want an industry panelist, or they want both sides to agree," said Matt Fornshell, a partner at Schottenstein Zox & Dunn in Columbus, Ohio, an industry defense attorney who also attended the session.

"I left that session with the impression that [NASAA's] mind was made up [without having an] appreciation for the other side of the argument," said Mr. Fornshell, who once worked in the Ohio division of securities.

In a speech to fellow state regulators, new NASAA president Joseph Borg reiterated his organization's view. "As long as the current composition of arbitration panels consist of a mandatory industry representative and public arbitrators who maintain significant ties to industry, the process is fundamentally unfair to investors," he said.

Mr. Borg is director of the Alabama securities commission in Montgomery. He later said in an interview that arbitration panels "should be absolutely neutral."

NASD of Washington still supports having one industry arbitrator. "They bring important expertise to the process," NASD spokesman Herb Perone said in a statement.

"Arbitration cases are increasingly more complicated, [and having industry] knowledge about rules and procedures in this area helps hold firms and individuals accountable."

The NYSE, which also has one industry arbitrator on its panels, "currently does not contemplate getting rid [of the industry arbitrator]," said Karen Kupersmith, NYSE Regulation director of arbitration.

Industry people are "often the hardest on the industry," she said. "They want to make sure the business is [run like] a good, tight ship."

"An industry panelist can cut through silliness on either side," said Stuart Kaswell, a defense lawyer in the Washington office of Philadelphia-based law firm Dechert LLP and a former general counsel for the Securities Industry Association of Washington and New York.

NASD has a rule proposal pending at the Securities and Exchange Commission that would tighten the definition of "public arbitrator."

Similar changes at the NYSE go into effect in December.

"If the sole reason for [having an] industry arbitrator is to educate [the other panelists], that tells me we're not doing enough to train arbitrators," Mr. Borg said.

"The industry arbitrator is an outdated dinosaur," said Steven Caruso, a partner at Maddox Hargett & Caruso PC in New York and president-elect of PIABA. In the majority of cases, he said, parties use expert witnesses to instruct panelists.

'Potential ally'

Mr. Borg said NASAA welcomes input from all sides. He said he has met with SIA committees and will continue to do so. "We have an open door to all the groups," Mr. Borg said.

He said NASAA began focusing on arbitration issues several years ago when it began sending representatives to meetings of the Securities Industry Conference on Arbitration.

SICA is a 30-year-old organization with balanced representation that develops suggested model rules for industry arbitration forums.

NASD's arbitration system handles about 90% of all cases.

PIABA president Robert Banks, of the Banks Law Office PC in Portland, Ore., said he approached NASAA late last year asking the group to comment on a pending NASD rule change.

"I saw them as a potential ally," he said.

In at least one instance, NASAA's involvement this year may have gotten NASD to eliminate language that PIABA did not like from a proposed rule. (InvestmentNews, Aug. 7).

With NASAA's help, NASD "is no longer going to be able to ignore documented instances of abuse" such as violations of discovery orders, Mr. Caruso said.

Within the last year, NASAA has commented on at least three NASD rule proposals, each time supporting views similar to PIABA's.

Mr. Borg said NASAA now feels "up to speed" on arbitration issues and will be voicing more opinions.

Meanwhile, the organization for state and provincial securities regulators has collected arbitration award data from the NASD and will be conducting an analysis.

State regulators involved with that project declined to comment.

Mr. Borg said he wants to see an analysis of what typically are counted as customer "wins," even though claimants don't fully recover alleged losses.