NASD Panel Calls for Big Changes in Arbitration of Investor Disputes

A task force appointed by the National Assn. of Securities Dealers on Monday called for major changes in the arbitration of disputes between customers and brokerage firms, including something the firms have long desired: a limit on punitive damages.

It also recommended steps sought by investors, including a better selection of arbitrators and tougher rules requiring each side to make available evidence to the other.

Since a 1987 Supreme Court decision, the vast majority of investor disputes with brokerage firms must go to arbitration rather than court. David S. Ruder, a former Securities and Exchange Commission chairman who headed the NASD’s eight-member task force, said the panel was formed largely in response to a widespread perception by investors that the arbitration process was biased in favor of the securities industry.

In a telephone news conference, Ruder said, “We found that the system was fair.” Nevertheless, after more than a year of study, Ruder said, the task force concluded that major changes were necessary to make the process stronger and to reassure customers that the deck is not stacked against them.

The NASD’s arbitration division handles the lion’s share of arbitration cases arising from customer complaints about brokerage firms: 6,055 in 1995. By contrast, the New York Stock Exchange handled 810 such cases and the independent American Arbitration Assn. had 330.

Mary Alice Brophy, chairman of the NASD’s board of governors, said the NASD will move quickly to adopt the task force’s recommendations, some of which must then be approved by the SEC.

The unveiling of the task force’s report reflected the controversy that had accompanied the NASD’s decision to appoint the task force. Only one of the eight task force members, Atlanta lawyer J. Boyd Page, represented investors. Two others--Stephen L. Hammerman, vice chairman of Merrill Lynch, and John W. Bachmann, managing principal of Edward D. Jones & Co.--are senior executives at brokerage firms. And three other members are lawyers from firms that represent brokerage firms.

The NASD had also been criticized for bypassing the Securities Industry Conference on Arbitration, an independent panel that monitors securities arbitration. James E. Beckley, a lawyer and member of SICA, accused the NASD in an interview Monday of appointing the Ruder panel to push through pro-industry measures, including the cap on punitive damages.

Ruder, however, strongly denied that his panel was biased in favor of the industry. He defended the cap as necessary because the task force found that too many claims for punitive damages were being made, resulting in delays and additional work for arbitration panels.

He said about half the claims requested punitive damages and that only about 2% of awards granted them. The cap would limit punitive damages to $750,000, or twice the amount of actual damages, whichever was less.

Theodore J. Eppenstein, a prominent investors lawyer in New York, contended that the reduced threat of punitive damages would take away brokerage firms’ incentive to settle cases.

In another move favored by brokerage firms, Ruder’s panel called for sharply reducing public disclosure of customer complaints against brokers and settlements paid by them. Although it did not cite a specific figure, it recommended substantially increasing the size of settlements that must be disclosed publicly, from the current minimum of $5,000. The report said this is necessary to encourage brokerage firms to settle disputes.

Beckley sharply criticized that. “This means that brokers who begin with relatively small problems can graduate to bigger problems without [public] disclosure,” he said.

But investors’ lawyers, including Eppenstein, lauded the reports’ recommendations on improving selection of arbitrators and appointing them earlier in the proceedings. The report recommends expanding the pool of arbitrators, training and paying them better and giving investors a say in which arbitrators serve on their panels.

The Ruder task force also addressed a long-standing complaint by investors lawyers: that brokerage firms often refused to turn over evidence in arbitration cases. The report calls for arbitrators to enforce tougher rules and for each side to be required to swiftly produce essential documents.