NASD Proposes to Let Investors Go to Court

Score one for investors.

The National Assn. of Securities Dealers on Monday proposed letting customers of defunct brokerage firms pursue claims in court rather than through arbitration.

The NASD proposal would prevent firms that have gone out of business or have been expelled or suspended from the securities industry from requiring customers to arbitrate financial disputes in an NASD forum instead of going to court.

The proposed change to the NASD Code of Arbitration Procedure, which must be approved by the Securities and Exchange Commission, comes in response to findings by congressional investigators that investors who win arbitration disputes with brokerages typically collect little of their award because the firm is out of business or bankrupt.

“This proposed amendment will give investors increased flexibility to seek remedies against defunct firms,” said Linda Fienberg, president of NASD’s dispute resolution forum. “By going to court, investors can obtain a preliminary judgment, such as an immediate asset freeze, that is not available in arbitration.”

The proposal would apply only to customers of firms that no longer have NASD membership status and only to disputes slated for arbitration in the NASD’s forum, which says it handles more than 90% of all securities-related disputes.

“It is limited to our forum, so we’re not telling the New York Stock Exchange or any other forum what to do,” Fienberg said.

Brokerages generally require investors to agree ahead of time to arbitration, often a more efficient way to resolve disputes than going to court. Arbitration is used to resolve about 6,400 disputes a year between investors and their brokerages, allegations ranging from unauthorized trading to misleading sales tactics.