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THE SECURITIES ARBITRATION SYSTEM

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE AND 

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 17, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–11

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 17, 2005 ................................................................................................. 1

Appendix: 

March 17, 2005 ................................................................................................. 27

WITNESSES 

THURSDAY, MARCH 17, 2005

Fienberg, Linda D., President, Nasd Dispute Resolution, Inc. ............................ 4

Galvin, Hon. William Francis, Secretary of the Commonwealth of Massachusetts ....................................................................................................................... 6

Katsoris, Constantine, Wilkinson Professor of Law, Fordham University 

School of Law ........................................................................................................ 13

Kupersmith, Karen, director of Arbitration, New York Stock Exchange, Inc. ... 12

Lackritz, Marc E., President, Securities Industry Association ............................ 15

Perino, Michael, Professor of Law, St. John’s University School of Law ............ 8

Shockman, Rosemary, President, Public Investors Arbitration Bar Association ........................................................................................................................ 10

Solin, Daniel R., Esquire ......................................................................................... 17

APPENDIX 

Prepared statements: 

Gillmor, Hon. Paul E. ....................................................................................... 28

Kanjorski, Hon. Paul E. ................................................................................... 29

Fienberg, Linda D. ........................................................................................... 31

Galvin, Hon. William Francis .......................................................................... 41

Katsoris, Constantine ....................................................................................... 47

Kupersmith, Karen ........................................................................................... 50

Lackritz, Marc E. .............................................................................................. 65

Perino, Michael ................................................................................................. 80

Shockman, Rosemary ....................................................................................... 103

Solin, Daniel R. ................................................................................................. 111

(1)

THE SECURITIES ARBITRATION SYSTEM 

Thursday, March 17, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, 

AND GOVERNMENT SPONSORED ENTERPRISES

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 2:00 p.m., in Room 

2128, Rayburn House Office Building, Hon. Richard Baker [chairman of the subcommittee] presiding. 

Present: Representatives Baker, Ryun, Kanjorski, Frank, Clay, 

and Scott. 

Mr. BAKER. I would like to call this meeting of the Capital Markets Subcommittee to order. 

The committee meets today for the purpose of reviewing the current securities arbitration system, which has been in place and in 

effect for some number of years, which enables those who feel 

wronged in the treatment of their investment practices may seek 

out remuneration or appropriate remedy by engaging in the services of arbitration systems. 

Three out of every four investors who have sought arbitration 

remedy before the NASD have been awarded compensation. In a 

1997-1999 survey, 93 percent of the NASD arbitrants believe their 

claims were handled appropriately and without bias. There have 

been diligent efforts to improve on the payment methodologies, 

from the amount of unpaid awards in 2001 of 31 percent, down to 

the recently achieved number of 14 percent for the first half of 

2004. Regrettably, the unpaid awards usually are attributable to 

brokers who are no longer in business. 

I do believe the system offers a timely, efficient and low-cost remedy for those who seek redress, but it certainly is consistent with 

the committee’s overview of market-sector-by-market-sector to engage in this hearing today, ask stakeholders and participants to 

give us their perspectives, and each of you brings to the committee 

a unique perspective on enhancement, remedies, criticisms, compliments, of the current methodology and we certainly will welcome 

your comments. 

By way of explanation, every individual’s comments will be made 

part of the official record. We will recognize you in regular order 

for the customary 5 minutes of comment. I am certain that as the 

committee proceeds, members will come in and out. I am advised 

that in about 45 minutes to 1 hour, we will expect a series of votes 

which will interrupt the proceedings, but it is our intent to return 

immediately thereafter to conclude the hearing. 

2

Also by way of announcement, because of prior obligations before 

this hearing was actually scheduled, Mr. Ryun will at the appropriate time assume the chair. 

With that, I would like to recognize the ranking member, Mr. 

Frank, for his statement. 

Mr. FRANK. Mr. Chairman, thank you for calling this hearing. I 

did request that the Secretary of the Commonwealth of Massachusetts, my former legislative colleague and former legislative colleague of about half the Massachusetts delegation, William Galvin, 

who has been a very diligent advocate of the rights of individual 

investors in regard to this and in many other areas. He is the one 

who called this subject to my attention and thought it was worth 

this sort of an examination. I agree with him and I am glad to do 

that. 

I also welcome Mr. Daniel Solin who has written on this, who is 

another Massachusetts person. 

I thank you for convening this balanced panel. I think there were 

some very important issues raised as to how this process goes forward. This is very much our obligation. We are not at a crisis point 

here, but we are often legitimately criticized for waiting until we 

get to crisis points. I think that some concerns have been raised; 

The Wall Street Journal today has a page one article which raises 

some genuine issues that need to be addressed. I hope some of the 

representatives of industry will address some of them as to who is 

or is not a public arbitrator and what qualifies you to be a public 

arbitrator. 

I think what we have found is to the extent that we are able to 

have hearings such as this and to legislate, we are helping the financial system. To the extent that we address concerns or grievances of individual investors or institutional investors in the large 

have, and give people some sense that we are trying to improve 

that, we enhance the attractiveness of investing. This is not an attack, even for those who are critical of the system. It is not an attack on the American financial system. It is an effort to continue 

to improve it and thereby, among other things, enhance its 

attractiveness to people. 

So this is a relatively new subject for the committee. I want to 

congratulate Secretary Galvin for the initiative he has taken in 

bringing this issue forward. Once, as it often happens, people learn 

that there is going to be this kind of a hearing, other people come 

forward with comments. I think this is the beginning of a process 

which I hope will result in some improvements. 

Thank you. 

Mr. BAKER. I thank the gentleman for his statement. 

Mr. Ryun? 

Mr. RYUN. Thank you, Mr. Chairman, for scheduling this important hearing. 

Arbitration has long been a primary dispute resolution process 

for the securities industry in the United States. By providing a 

faster and cheaper method of resolving disputes between investors 

and brokers than would the court proceedings, the arbitration process has been largely successful. The success of the arbitration process depends heavily on the ability to provide a fair and unbiased 

3

proceeding. It is especially critical to ensure the arbitrators selected are unbiased. 

To accomplish this goal, panels are made up of three arbitrators, 

two that are public and one that is industry. While the actual process for selecting arbitrator varies from forum to forum, I believe 

that this is generally done in an equitable fashion. I look forward 

to hearing the comments from our witnesses on the various techniques used to ensure the fairness. All in all, I believe that arbitration has served the industry well. 

Clearly, each member of this panel should remain interested in 

continuing to improve the system by making it even more equitable 

and efficient. The results of the disputes through means other than 

a court proceeding saves time and money for all parties involved. 

There is strong evidence that the system already operates in an equitable manner, but we are here today to hear testimony from 

those who know the industry best and who can provide us with valuable insight on where improvements could and possibly should be 

saved. 

I encourage my colleagues on this committee, as well as witnesses, to come to this dispute, if you will, with an attitude of helping to make a great system even better. I believe we have an outstanding panel of witnesses. I believe that this hearing is going to 

give us an opportunity to look at the state of the industry. I will 

be especially interested to hear comments about recent improvements in the arbitration selection process, as well as the positive 

trends that result in fewer unpaid rewards. 

Again, I thank the esteemed panel for coming, for your time, for 

agreeing to be here, and I welcome each of you. I look forward to 

your testimony. 

Mr. BAKER. I thank the gentleman. 

Mr. Kanjorski? 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

We meet today to discuss the issue of securities arbitration. I 

just left the hearing on steroids in the Reform Committee. I was 

going to suggest we could end up making this a lot sexier if we put 

a testing device in for all financial service people. It may get us the 

attention the other hearing gets. 

I greatly appreciate the courtesy that you have extended to Congressman Frank, the ranking Democrat on the Financial Services 

Committee, in agreeing to convene this hearing. Securities arbitration is an important issue and deserves careful examination. The 

securities industry has long relied on arbitration to resolve disputes. As I understand the New York Stock Exchange has used arbitration throughout most of its history. In addition, more than 125 

years ago, the big board expanded its arbitration program to include investor complaints. 

For many decades, investors had the option of pursuing claims 

against brokers through either litigation or arbitration. In 1987, a 

U.S. Supreme Court ruling determined that brokerage firms could 

compel customers to agree to arbitrate claims in an industry-sponsored forum as a condition of opening a brokerage account. In such 

agreements, customers would forfeit their right to pursue individual claims in court. 

4

Since the Supreme Court ruling, the use of mandatory arbitration agreements has grown. In my view, there is nothing inherently 

wrong with arbitration per se. It can prove to be a more efficient 

and less expensive dispute resolution mechanism than court litigation. However, for arbitration to work well and to foster investor 

trust, it must be fair. 

We have before us a panel with a demonstrated breadth and 

depth of knowledge on arbitration issues. They will be able to help 

us understand how arbitration works and whether there is a need 

for statutory, regulatory or procedural reforms. I look forward to 

learning of their insights, as I approach these matters with an 

open mind. 

As we proceed today, I nevertheless hope that we will explore a 

number of issues. For example some have questioned the mandatory nature of securities arbitration. We should therefore examine 

whether investors should once again be offered a choice. We should 

also discuss the inclusion of an industry-related arbitrator on arbitration panels, and the process of selecting arbitrators. In particular, we should focus on the disclosure of potential conflicts. 

One other issue that we are certain to review today concerns the 

transparency of arbitrators’s decisions. In the past, arbitrators 

have not had to justify their decisions with written rulings. As a 

result, a customer often had little understanding of how the arbitration panel reached its decision in a case. To address this concern, the NASD recently proposed giving the participants in arbitration proceedings the option, prior to the first hearing, to request 

written explanations of decisions for an additional fee. The adoption of this proposed reform will help to better transparency and 

may increase investor satisfaction with and confidence in the fairness of the arbitration proceedings. 

In closing, Mr. Chairman, I commend you for convening this 

proactive hearing to examine the securities arbitration process. I 

look forward to receiving the testimony of our distinguished panel. 

[The prepared statement of Hon. Paul E. Kanjorski can be found 

on page 29 in the appendix.] 

Mr. RYUN. [Presiding.] Thank you very much. 

Since it does not appear that we have any questions within the 

financial industry with regard to steroids, we are going to move 

ahead. 

I would like to begin by introducing our first panelist, Ms. Linda 

Fienberg, president of NASD Dispute Resolution. 

We look forward to your testimony and welcome you. Thank you 

for coming. 

STATEMENT OF LINDA D. FIENBERG, PRESIDENT, NASD 

DISPUTE RESOLUTION, INC. 

Ms. FIENBERG. Thank you very much, Chairman Ryun, for inviting us to participate, and thank you to the members of the committee and subcommittee. 

My name is Linda Fienberg and I am president of NASD Dispute 

Resolution. I am very grateful for the opportunity to testify about 

our arbitration system. NASD is a private sector regulator of the 

securities industry. Our foremost mission is to protect investors 

5

and to ensure market integrity. By federal law, any individual or 

firm that sells securities to the public must be regulated by NASD. 

As part of our investor protection mission, NASD operates the 

world’s largest forum to help investors, firms and individual brokers settle disputes through arbitration or mediation. In 2004, we 

administered more than 9,000 arbitrations. Roughly three of every 

four investors who brought claims received compensation either in 

settlements or awards. 

Over the last decade, we have made significant improvements to 

ensure that investors get a fair, expeditious and affordable resolution of their disputes. Important steps have included party selection of arbitrators; tightening the definition of who can serve as a 

public arbitrator; increasing the number of arbitration hearing 

sites so that there is one in every state, we will have 68 sites by 

the end of this month; and sponsoring our expanded mediation program. 

NASD believes that transparency should be the hallmark of securities arbitration. Each step of the process should be clear for investors. Transparency starts when investors open a brokerage account. In most cases, investors sign an agreement with their brokerage firm to settle any disputes through arbitration rather than 

litigation. This is a matter of contract between the investor and the 

firm, an arrangement the Supreme Court has held permissible 

under the federal securities laws. It is not an NASD requirement, 

but NASD does require firms present plain English agreements 

that explain to investors the process and the differences between 

arbitration and litigation. 

To further transparency, during the arbitration selection process, 

parties receive arbitrator disclosures and information on past 

awards to help them choose their three-member panel. NASD allows parties to strike arbitrators they do not want and to rank the 

remaining ones in order of preference. And NASD awards are publicly available on our Web site. 

An important step that NASD has taken to improve transparency is a rule proposal that we recently sent to the SEC that 

will give investors the power to require arbitrators to explain in 

writing the basis of their decisions. We believe this will increase investor confidence in the fairness of the process. 

NASD also ensures the integrity of the process by taking all 

steps in our power to ensure that investors get the money from 

their awards, mediations or settlements. Our rules require NASD 

firms and brokers to pay awards within 30 days or face removal 

from the industry. Recent NASD initiatives have resulted in a 

steady decline in the percentage of unpaid awards to about 14 percent to 15 percent, but we are not satisfied with this. Even one unpaid award is one too many. 

The essential quality of arbitration is fairness. Therefore, the 

quality of the arbitrators is critical. We maintain a roster of about 

7,000 arbitrators. They are not NASD employees. We are committed to have arbitrators who have the experience to evaluate disputes fairly. Thus, we review their performance on strictly neutral 

criteria. To assure the quality of the arbitration, all new applicants 

must undergo background checks, training and testing. And we 

continue to train existing arbitrators to make sure the roster is 

6

filled with highly qualified individuals. NASD rules require that arbitrators disclose all conflicts of interest. We remove from the roster those who do not comply. 

Mr. Chairman, let me briefly discuss an issue that has been a 

subject of some debate. Each arbitration panel consists of three individuals, two who are classified as public and one who is classified 

as non-public who has ties to the industry. Some critics have 

charged that non-public arbitrators are biased toward the industry. 

Let me be clear: the overwhelming number of awards is unanimous, and our review of them shows absolutely no abuse or pattern 

of non-public arbitrators favoring industry parties. 

In conclusion, NASD is committed to review of its arbitration 

program to promote transparency for investors, to improve quality, 

and to ensure the integrity of that process. We look forward to 

working with Congress on this and other issues. 

Mr. Chairman, again thank you for the opportunity to testify. I 

would be happy to answer any questions. 

[The prepared statement of Linda D. Fienberg can be found on 

page 31 in the appendix.] 

Mr. RYUN. Ms. Fienberg, thank you very much for your testimony. 

Next, we have the Honorable William Galvin, Secretary of the 

Commonwealth of Massachusetts. 

STATEMENT OF WILLIAM FRANCIS GALVIN, SECRETARY OF 

THE COMMONWEALTH OF MASSACHUSETTS 

Mr. GALVIN. Thank you, Chairman Ryun and Ranking Member 

Frank and all the members of the subcommittee. 

I am Bill Galvin, Secretary of the Commonwealth and chief securities regulator in Massachusetts. Thank you for the opportunity to 

be here today to testify about arbitration in the securities industry 

from the point of view of investors on Main Street. I can speak to 

the concerns of small investors because they call or visit my office 

in Massachusetts all the time. Small investors, let’s not forget, are 

the lifeblood of our securities markets. Without their faith and 

trust and their hard-earned money, our markets could not function. 

Unfortunately, in recent years their faith has been badly shaken. 

They have watched as giant companies, some with household 

names, were looted and run into the ground by corrupt management. They have seen respected Wall Street firms hype technology 

stocks using corrupt research reports, research that we now know 

were designed not to paint a true picture of the company or its 

prospects, but to curry favor with a client in order to win lucrative 

investment banking business. 

Corporate scandals and the collapse of the high-tech bubble have 

hurt countless Main Street investors. That is bad enough. What is 

worse in my opinion is the rigged system we now have to help 

harmed investors seek a measure of justice. Every year, thousands 

of investors file complaints against their brokers. If these disputes 

are not settled, they end up in mandatory arbitration, a system 

that I believe is fundamentally flawed and stacked against the individual investors. 

The sad thing is, industry-sponsored arbitration is the only game 

in town. When an investor opens a brokerage account, in almost all 

7

cases he or she must sign away their right to a day in court should 

a dispute arise. Instead, they agree to have their claim heard by 

a panel of three arbitrators, picked from a list compiled by the 

NASD or the NYSE, the so-called ‘‘industry self-regulators.’’

The term ‘‘arbitration’’ as it is used in this proceeding is really 

a misnomer. Most often, the process is not about two evenly 

matched parties to a dispute seeking the middle ground and a resolution of their conflict from knowledgeable, independent and unbiased fact-finders. Rather, what we have here in America today is 

an industry-sponsored damage containment and control program, 

masquerading as a juridical proceeding. 

Of the three arbitrators on the panel, there is one with ties to 

the securities industry and two supposedly without ties to the industry. I believe the truth about the independence of these other 

arbitrators will reveal a troubling pattern. I invite your review. Is 

it a fair process? The industry would say yes, but let’s think about 

it for a minute. The NASD, the industry umbrella group, or the 

NYSE, gets to decide who is qualified to be an arbitrator and who 

is not. They and only they select the pool of arbitrators. There is 

no state in this union that gives to one party to litigation the unilateral right to choose the finders of fact or jury that will decide 

their case. 

Would anyone seriously suggest that we apply this approach to 

any other industry? For instance, would anyone here seriously suggest that in all future disputes between automobile manufacturers 

and their customers relating to defects, that those who purchase an 

automobile can only bring their complaints and claims before a 

panel selected by GM, Ford or Chrysler? I do not think so. Are not 

the financial futures of our citizens entitled to at least as much 

protection as their cars? 

As further proof of this rigged system, I offer one example that 

I happen to be personally familiar with. John J. Mark is a former 

NASD arbitrator from Massachusetts. Mr. Mark was an arbitrator 

with the Commonwealth of Massachusetts for many years and an 

adjunct professor at Harvard University and Boston University. As 

far as I know, he is a man of impeccable credentials and yet he was 

dropped from the NASD pool of arbitrators. Why? As he told a 

meeting of state securities regulators last summer, ‘‘The word on 

the street is, if you rule against the brokerage houses, you will be 

removed from the list.’’

To be sure, lately the NASD has been working on this arbitration 

process. About 9 months ago, for example, they fined three large 

Wall Street firms, Merrill Lynch, Morgan Stanley, and Smith Barney, $250,000 each for failing to produce documents in some 20 arbitration cases between 2002 and 2004. That was an overdue step 

in the right direction. Foot-dragging by Wall Street firms involved 

in disputes with investors must be punished, but these fines are so 

small in light of the overall totality of the problem that they hardly 

operate as a deterrent to further stonewalling. Automatic default 

and treble damages on claims would be a far more effective remedy. More recently, the NASD, after deliberation, has passed another milestone. Arbitrators may be required to put their decisions 

in writing for a fee. 

8

But no fine or other regulatory tinkering will address the more 

fundamental flaw of the so-called arbitration process, namely that 

is run by the industry and for the industry. The system is unfair. 

Consider the statistics. While the NASD asserts that in more than 

half the cases, arbitration panels award money to investors, the 

number of so-called investor victories does not tell the true stories 

of how investors fare in arbitration. 

The NASD cites cases where the arbitrators make any cash 

award as a victory for the investor, but in fact many of those 

awards are for only a fraction of the amount claimed. Under this 

method of reckoning, a claimant who has $5 million in losses, but 

was awarded just $5 in restitution, has received an arbitration 

award. This is a pyrrhic victory at best. 

The arbitration system should be reformed to put the investors’s 

interest on the same level as those of Wall Street. How can we do 

that? Given that investors by law today have no choice but arbitration, we need to make the system more fair. The best way to do 

that is to take it out of the hands of the industry. Put someone besides the self-regulators in charge. That is the best solution. In the 

short term, we need to increase the oversight of the arbitration 

process. The FCC, state securities regulators and perhaps even 

Congress need to take a hard look at arbitration. 

State securities regulators have begun this process by creating a 

task force to look at the issues involving arbitration. These issues 

include how arbitrators are selected, trends in arbitration awards, 

and how cumbersome and expensive the system is for investors. 

This is not a small thing. We have almost 100 million investors in 

this country. In recent years, we have made reforms to make sure 

that Main Street investors get a better shake in the marketplace. 

We now need to focus on reforming the dispute resolution system. 

It is the right thing to do, the right thing for investors, and the 

right thing for our markets. It is time to act. 

Again, I am grateful for the chance to be here today to share 

some of my thoughts, and I look forward to your questions. Thank 

you. 

[The prepared statement of Hon. William Francis Galvin can be 

found on page 41 in the appendix.] 

Mr. RYUN. Mr. Galvin, thank you very much for your testimony. 

I want to encourage the panelists to stay with the 5-minute time 

limit. 

We are next going to hear from Mr. Michael Perino, professor of 

law from St. John’s University School of Law. Thank you. 

STATEMENT OF MICHAEL PERINO, PROFESSOR OF LAW, ST. 

JOHN’S UNIVERSITY SCHOOL OF LAW 

Mr. PERINO. Thank you. Mr. Chairman and members of the committee, thank you for the invitation to appear before you today. 

As you all are well aware, the fairness and adequacy of securities 

arbitration is crucially important because arbitration is the primary dispute resolution mechanism for customer-broker disputes. 

To be successful, the system must not only be fair and impartial, 

but investors, the public, the judiciary and Congress must believe 

that it is fair and impartial. 

9

Does securities arbitration satisfy that standard? This subcommittee will no doubt hear stories of problems in individual 

cases and calls for substantial overhauls of the current system, but 

a rational regulatory policy cannot be based on mere anecdote. 

Sweeping changes can have significant unintended consequences 

and additional procedural requirements can impose significant cost. 

As the SEC has noted, proposed changes ‘‘must balance the need 

to strengthen investor confidence in the arbitration system with 

the need to maintain arbitration as a form of dispute resolution 

that provides for the equitable and efficient administration of justice.’’

Those seeking to revamp the securities arbitration system thus 

should have the burden of identifying through thorough and welldocumented empirical evidence that actual problems in fact exist. 

In my mind, a compelling case for substantial change has yet to be 

made. In 2002, the SEC asked me to review the adequacy of arbitrator conflict disclosure requirements in securities arbitrations. In 

putting together that study, I examined the available empirical evidence in detail, which I discuss at length in my written statement. 

I am not going to repeat that material here. Of course, I am happy 

to answer any questions you might have about it. 

At bottom, the available empirical evidence on outcomes in SRO 

arbitrations and on investors’ perceptions of the arbitration process 

suggests that the current system addresses customer disputes fairly and impartially. There are, I believe, good reasons why the data 

do not show a pro-industry bias. The NASD and the New York 

Stock Exchange are likely subject to more regulation and greater 

oversight than any other arbitration forum. 

The NASD and the New York Stock Exchange are not mere trade 

organizations, as some have characterized them, but self-regulatory 

organizations that have a statutory mandate to provide a fair dispute resolution forum. The SEC exercises oversight over the SROs, 

approves all arbitration rules before they become effective, and 

oversees SRO arbitrations through its inspection process. 

Congress also plays an important role. In addition to holding 

hearings such as this, members have frequently requested the GAO 

to study the securities arbitration system. Although the GAO has 

recommended changes from time to time, it has never found that 

SRO-sponsored arbitrations were biased in favor of securities industry members. 

The securities industry also has a rational self-interest in providing a fair dispute resolution system. The acceptability of arbitral 

awards is strongly correlated with the parties’s perceptions of 

whether fair and unbiased procedures were used to reach an outcome. Systemic procedural inequities would likely increase the 

costs of the arbitration system. More dissatisfied parties would attempt to overturn arbitration awards and judges would be more 

likely to grant those requests. If the securities industry wants to 

reap the cost savings associated with arbitrations, they must also 

inhibit any pro-industry biases from developing. 

Let me be clear about one final point. Nothing I have said here 

or in my written statement should be taken to mean that we can 

safely ignore securities arbitrations. In my report to the SEC, I 

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tions, it is crucial that the SROs resolve any lingering concerns 

about pro-industry bias. Accordingly, I recommended that the SROs 

sponsor additional independent studies to further evaluate the impartiality of the arbitration process. It is my understanding that 

such a study is about to commence. If that or other studies reveal 

systemic problems, then those problems should and must be addressed. But until persuasive evidence of such a problem exists, it 

would be imprudent to substantially alter a system that appears to 

serve investors well. 

Thank you. 

[The prepared statement of Michael Perino can be found on page 

80 in the appendix.] 

Mr. RYUN. Mr. Perino, thank you very much. 

Our next panelist is Ms. Rosemary Shockman, president of Public Investors Arbitration Bar Association. 

Welcome. 

STATEMENT OF ROSEMARY SHOCKMAN, PRESIDENT, PUBLIC 

INVESTORS ARBITRATION BAR ASSOCIATION 

Ms. SHOCKMAN. Thank you, Mr. Chairman, Ranking Member 

Frank. My name is Rosemary Shockman. I have been representing 

public investors in cases against securities broker-dealers for 23 

years. I am president of the Public Investors Arbitration Bar Association. PIABA is an international bar association of more than 750 

lawyers representing investors in securities arbitrations. We are 

dedicated to creating a level playing field for public investors in securities arbitration. 

Let me begin with what we believe is the most important issue 

to help level the playing field for aggrieved investors: the elimination of the mandatory industry arbitrator on panels hearing 

cases. As was pointed out earlier, the cases are heard by threemember panels. One of the panelists is required to be a member 

of the securities industry. The remaining two are to be public, although many times they have also spent part of their careers in 

the securities industry. 

Problem number one with the industry arbitrator is my clients 

come in to me, they see the industry gets to have one member on 

the panel and they do not think it looks fair to them. They think 

it has an appearance of impropriety. Problem number two with the 

industry arbitrator, and I think to practitioners this is a greater 

problem, we have been faced, and we have seen in the last few 

years these broad securities problems such as the mutual fund 

problems that went across the industry, and the problems now that 

we are seeing with variable annuity sales. 

The NASD, the SEC, and NYSE have all come out commenting 

about the over-sale of variable annuities on suitable sale to retired 

investors, a half-trillion sold in the last 3 years. Yet our clients 

when they bring these cases are forced to have their cases heard 

with a panel member whose very firm is selling the same variable 

annuities and using the same practices. That is a reason to end the 

industry arbitrator. 

The industry tells us that an industry arbitrator is needed so 

that someone on the panel will have knowledge of the securities industry, sort of an expert witness. Long ago, that might have been 

11

true. Securities arbitration has become so much more sophisticated. 

Both parties are represented by lawyers, and typically have expert 

witnesses. We do not really need to have an expert witness on the 

panel anymore. Congress should urge the SEC to move forward to 

adopt rules eliminating the requirement of an industry arbitrator. 

Compounding the problem of the industry arbitrator is the existence of public arbitrators who are just too close to looking like an 

industry arbitrator. Instances where public arbitrators have 

worked for years in the securities industry, maybe 10, 15 years, 

where lawyers have worked for long periods of time representing 

broker-dealers, it does start to look to the public investor having 

his or her case heard that this panel is stacked against them. 

Last summer, I had a case in which not only did I have an industry arbitrator, but two of the people on the public panel presented 

to me for selection had gone from being industry arbitrators to public arbitrators the week before. So there are some problems here 

that definitely need to be worked with with respect to who is a 

public arbitrator. 

Discovery abuses, I do commend the NASD for their efforts to 

put forth fines and so on, but here is a packet of just recent discovery abuses with Morgan Stanley Dean Witter. It is still out 

there. It is a problem. They look at it as a cost of doing business. 

Unpaid arbitration awards, there has been an improvement, but 

part of what is not reflected in those numbers is clients who do not 

get lawyers because the lawyers know that they cannot collect at 

the end of the day. So while the NASD has made strides in collecting against people who can pay, we still have a problem with 

small broker-dealers who simply go out of business and there is no 

where to collect. I recently had the experience of a widowed mother-in-law of a prominent Member of this Congress, who came to me 

with a very good case. She had been defrauded, but there was nowhere to collect the money in the end. This was a broker-dealer 

heading out of business. 

Public investors are shocked to hear that they have to have car 

insurance, that the net capital requirements are so small for 

broker-dealers. Why isn’t there some sort of protection in an industry where people are handling their life savings? 

Problems at the New York Stock Exchange. Practitioners who 

brought cases there for years are no longer bringing cases because 

of delays in getting arbitrators appointed and in getting hearings 

set, just extraordinary delays. I do want to commend Karen 

Kupersmith and Dan Beta of the Exchange for meeting with us 

and working with us in efforts to try to improve that situation. It 

still exists. Work needs to be done there. 

Thank you, and if we can provide any further information, we 

would be happy to do so. 

[The prepared statement of Rosemary Shockman can be found on 

page 103 in the appendix.] 

Mr. RYUN. Thank you for your testimony. 

Our next panelist is Ms. Karen Kupersmith, director of Arbitration, New York Stock Exchange. 

Welcome. 

12

STATEMENT OF KAREN KUPERSMITH, DIRECTOR OF 

ARBITRATION, NEW YORK STOCK EXCHANGE, INC. 

Ms. KUPERSMITH. Thank you very much, Mr. Chairman, Congressman Frank and everyone else for permitting me to come here 

today to testify on behalf of the New York Stock Exchange. I am 

Karen Kupersmith. I am the director of Arbitration at the New 

York Stock Exchange. I started working there in 1983, first as a 

staff arbitration attorney and then a senior counsel, a manager and 

finally I was appointed director of Arbitration in April, 2004. 

There have been many changes at the New York Stock Exchange 

since I have been there, but one factor has remained constant, a 

factor that I have personally observed and that is the firm commitment of the New York Stock Exchange to providing the most fair 

and neutral forum possible for the public investor. 

Arbitration has always been thought of and found to be efficient, 

faster than court, and also far more economical than litigation proceedings. At the New York Stock Exchange, in fact, in 2004 all 

cases were closed in less than 15.45 months. In court, that number 

is considerably higher, often 2 1/2 years to perhaps even 5 years. 

The New York Stock Exchange is very committed to providing 

this level playing field and has taken many initiatives to show this 

commitment. The most recent of these is a recent rule filing with 

the SEC, the purpose of that filing being to make permanent a variation of a pilot program that allows for alternate ways of appointing arbitrators. This particular rule filing will now give, once approved, the public investor the right to select the method of arbitrator appointment, either computerized list selection or what we 

call the traditional staff method of appointment. 

At the base of every arbitration program are the arbitrators 

themselves. They are the individuals who hear the cases and they 

are the most important part of the system. The New York Stock 

Exchange is doing everything possible to recruit new arbitrators 

into its pool to enlarge that pool. Currently, our 12 staff attorneys 

are reaching out to all the current arbitrators that we have and 

asking them, do you know of somebody who might be interested, 

who would be a good candidate to be an arbitrator? It is very important to us to have people from diverse backgrounds to represent 

the diverse backgrounds of the public investors sitting before them. 

I always say, were my mother to be involved in a securities arbitration and have a complaint against a brokerage house, I would 

want someone on that panel with a background similar to hers. 

We train our arbitrators carefully and continually. There is an 

ongoing requirement that all NYSE arbitrators attend training at 

least once every 4 years. This training focuses on disclosures and 

how important it is that everything be disclosed. Any family, personal, professional, social or other type of relation, any type of financial or personal interest that the arbitrator might have in the 

outcome of the proceeding must be disclosed. 

To help that, we have just started an online portal system so our 

arbitrators can actually go online and input information themselves 

to maintain their profiles in the most current fashion possible. We 

also focus on the fact that arbitrators in deciding cases must decide 

the cases on the facts and the testimony before them in that parVerDate 0ct 09 2002 10:25 Nov 18, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\DOCS\24398.TXT FIN1 PsN: MICAH
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ticular matter, and should not have any preconceptions when they 

start the hearing and throughout the course of a proceeding. 

We are always reviewing the process of arbitration to make it 

better. Relationships change and so have the corporate relationships changed, many as a result of the financial modernization legislation, some of which I understand came out of this committee. 

Corporate relationships are far more complicated and complex now, 

so that entities which once had nothing to do with the securities 

industry now may find themselves owning broker-dealers. The New 

York Stock Exchange is in the process of reviewing current classifications to make sure that all classifications of arbitrators as either public or securities arbitrators is correct, and is correct as regards these new relationships that have developed. 

I thank you very much for permitting me to be here to testify 

today, and I am glad to answer any questions. Thank you. 

[The prepared statement of Karen Kupersmith can be found on 

page 50 in the appendix.] 

Mr. RYUN. Ms. Kupersmith, thank you very much for your testimony. 

Let me sort of give you an update on what is happening. The 

Chair has ruled that I am going to, out of respect for all of you and 

your time, I am going to go ahead and miss this particular vote because we have time for a lot of other discussion on the floor. I want 

to listen as much as we can to what the panel has to say and keep 

things moving along, if we may. 

Next, we have Mr. Constantine ‘‘Gus’’ Katsoris, Wilkinson Professor of Law, Fordham University School of Law. 

Welcome. We look forward to your testimony. 

STATEMENT OF CONSTANTINE KATSORIS, WILKINSON 

PROFESSOR OF LAW, FORDHAM UNIVERSITY SCHOOL OF LAW 

Mr. KATSORIS. Thank you, Mr. Chairman. 

I have participated in the resolution of securities disputes for 

over 35 years as an arbitrator, a mediator, an arbitrator trainer, 

a public member of the Securities Industry Conference on Arbitration, also known as SICA, and an adviser to the Fordham Law 

School Arbitration Clinic. 

I could not begin to share all of my experiences in the 5 minutes 

allotted me, so I will save my opinions for my responses to questions from the panel. I would, however, like to tell you how I first 

got involved in this area. Before joining the faculty at Fordham 

Law School over 40 years ago, I was a full-time litigator at a major 

Wall Street law firm. After a few years of teaching and loving 

every minute of it, I realized that I missed litigation. 

Thus, in 1967, I became an arbitrator at the NASD and shortly 

thereafter at the New York Stock Exchange, where I have served 

in many, many, many cases. In 1977 when SICA was first created, 

I was selected as one of its public members where I have served 

ever since. In addition, about 8 years ago at the suggestion of thenSEC Chairman Arthur Levitt, I helped establish the Securities Arbitration Clinic at Fordham to represent injured investors who 

could not obtain an attorney and thus would find it difficult to pursue their claims. I am proud to say it is the most popular clinic at 

Fordham and is the first such clinic in the country to obtain puniVerDate 0ct 09 2002 10:25 Nov 18, 2005 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\DOCS\24398.TXT FIN1 PsN: MICAH
14

tive damages in an SRO arbitration. There are presently about one 

dozen such law school clinics operating today, and collectively they 

constitute a growing force in this area. 

Arbitration in the 1960s when I first began was like the horse 

and buggy days. There was virtually no pre-hearing discovery or 

exchange of information. Not too many people complained, however, because basically the system was voluntary as far as the public was concerned. In the 1970s, however, the SEC was not satisfied with handling of small claims and its office of consumer affairs 

issued a report recommending the creation of a non-SRO entity for 

the handling of such claims. In response to this report, SICA was 

created with an initial mandate to establish a procedure for handling small customer claims. 

Facilitating the processing of small claims, however, did not address the broader issue, namely the basic balkanization of the various SRO arbitration programs. In other words, each SRO had its 

own set of rules. Some were written, some existed solely on the 

basis of custom and usage, all of which complicated the task of the 

practitioner in choosing a forum. 

Thus, SICA’s next assignment was to establish a uniform code of 

arbitration, which was basically applicable to all SRO cases, large 

as well as small. Nevertheless, SRO arbitrations were still basically 

voluntary because of the then-prevailing conventional wisdom that 

1934 Act federal securities claims were not subject to previous arbitration agreements and thus could still go to court. 

As confidence grew in the new code, SRO arbitrations more than 

tripled from 830 in 1980 to over 2,800 in 1986. Yet SRO arbitration 

was still in its infancy until the McMahon case in 1987, which virtually transformed the process from a voluntary procedure to a 

mandatory one by holding that 1934 Act claims were arbitral pursuant to pre-dispute arbitration agreements. 

After the McMahon case, the landscape changed overnight. Not 

only did the number of arbitrations more than double to over 6,000 

in the year after McMahon than the year before, but equally significant was the influx of the larger and more complicated cases 

that previously were being filed in court. At this point, the task of 

ensuring the fairness of SRO arbitrations largely fell upon SICA, 

which incidentally had been favorably mentioned in the McMahon 

case as evidence of the changing landscape. 

SICA’s independence was essential to the process, and that independence was ensured at the outset because its public members 

were beholden to no one. Thereafter, the public members got to 

pick their own successors. Moreover, the SEC with its oversight authority over the SROs and as gatekeeper of the 19(b) process, attends SICA meetings. Indeed, the efforts to ensure a level playing 

field are outlined in SICA’s 12 reports issued to the SEC over the 

years, which describe with great transparency the evolution in SRO 

arbitrations. I have a few of those reports here which I will gladly 

give at the end. 

It is not only the affirmative rules that SICA enacted into the 

code of arbitration that is important, but it is also the actions that 

SICA took in preventing from seeing the light of day some provisions that could have been injurious to the public. For example, a 

rigid cap on punitive damages where no such rule existed in court. 

15

Another example, an offer of a ward rule that could have limited 

the damages sought by claimants. And there were others. 

Since the adoption of the uniform code, over 100,000 arbitrations 

have been filed at the various SROs. Has justice been achieved in 

every one of those 100,000 cases? Certainly not, but I do not know 

of any dispute resolution system that has an unblemished record 

in this regard, and that includes our own court system. Admittedly, 

sometimes awards are excessive, sometimes they are inadequate, 

but that is true no matter what resolution system we use. 

Are there improvements that can still be made to the SRO process? Of course there are, and the process is ongoing and never-ending as new problems and situations arise. For example, when it became obvious that third party subpoenas were being used in an 

abusive manner, SICA just a few months ago required a 10-day notice period before such subpoenas became effective. Another example, when a problem arose as to the administrative appointment of 

arbitrators to fill vacancies, SICA just this very week, last Tuesday, granted a peremptory challenge to each side as to such appointments. 

My principal concern going forward is we do not backslide into 

a system of balkanization that existed before SICA, where practitioners had to contend with the diverse rules of procedures of the 

various states, various courts, and the various SROs throughout 

the country, each of which spoke in a different language, reminiscent of the biblical Tower of Babel. We saw an example of that 

when the State of California recently sought to impose its own 

rules as to the qualification of arbitrators in SRO proceedings. 

In conclusion, I can express to you that since the mandate of 

McMahon, the system has on balance worked well. We must be 

ever vigilant, however, that the playing field remains level and is 

not tilted one way or the other. 

Thank you, Mr. Chairman. 

[The prepared statement of Constantine Katsoris can be found on 

page 47 in the appendix.] 

Mr. RYUN. Thank you very much for your testimony. 

Our next panelist is Mr. Marc Lackritz, president of the Securities Industry Association. 

Thank you for being here. 

STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES 

INDUSTRY ASSOCIATION 

Mr. LACKRITZ. Thank you very much, Mr. Chairman and members of the committee. We commend you for holding this hearing 

today and welcome the opportunity to discuss the current arbitration system, as well as suggestions for improvement. 

Mr. Chairman, public trust is critical to the success of our capital 

markets, the securities industry, and any dispute resolution mechanism used by our customers. SRO-sponsored securities arbitration 

is a system that works well. It is a fair and efficient means of resolving disputes between customers and brokerage firms. We know 

this from the weight of both anecdotal evidence and empirical data. 

Independent organizations such as the General Accounting Office, 

the Securities Industry Conference on Arbitration, and noted acaVerDate 0ct 09 2002 10:25 Nov 18, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\DOCS\24398.TXT FIN1 PsN: MICAH
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demic experts, some of whom are here today, have all consistently 

documented the success of securities arbitration. 

Studies conducted over the past 20 years have consistently 

shown that investors receive awards in more than half of all cases 

brought in arbitration. Even this data understates investor success 

since investors collect money in more than three-quarters of the 

cases that they bring to arbitration, taking into account cases that 

are settled by the parties. 

Arbitration continues to be a far more efficient and cost-effective 

dispute resolution mechanism than traditional court-based litigation. Studies have consistently shown that on average, disputes are 

resolved much faster and at a lower cost to customers in the SROsponsored arbitration than in comparable court cases. Successful 

claimants get the relief they want more quickly. The significant reduction in time spent litigating means less disruption in the parties’ business and lives and less money spent on lawyers. 

Faster resolution also makes arbitration fair, since there is less 

difficult with witnesses’ inability to recall age-old facts and less 

trouble locating witnesses and documents. That is why an independent analysis in 2000 found that 93 percent of all parties to securities arbitration consider the system to be fair. Aggrieved customers get what they really want: their day in court. 

Unlike in court cases, claimants in arbitration are not held to 

technical pleading standards. Unlike in court cases, pre-trial discovery in arbitration is focused and limited and rarely includes expensive and time consuming taking of depositions. Unlike in court 

cases, the hearings themselves are not intimidating technical proceedings bound strictly by the rules of evidence, but are designed 

to be flexible and allow the arbitrators to reach the most equitable 

and just conclusions. 

The more streamlined process of arbitration, as compared with 

many procedural and financial obstacles that must be overcome by 

a plaintiff in a court case, means that nearly every case brought 

in arbitration other than those that are settled goes to a full merits 

hearing. 

So the system works, but it will continue to be superior to courtbased litigation only if we guard against what I would call creeping 

litigiousness that is at the gates. Some of the changes that have 

been proposed, for example requiring written explanations of 

awards by arbitration panels, expanding pretrial discovery, broadening the scope of parties’s rights to appeal from arbitrators’ decisions, would undermine what has made arbitration an attractive 

alternative: a streamlined, efficient and less-costly means of resolving disputes. I urge the committee and the Congress to be very reluctant to endorse this type of change to securities arbitration. 

Two criticisms leveled at securities arbitration are the inclusion 

of a so-called industry arbitrator on panels and the mandatory nature of arbitration. Both criticisms miss the mark. Arbitration panels in most fields, not just securities, include those with experience 

in that field. This is a positive development for everyone by providing a level of expertise that would not otherwise be available to 

the panel. 

The ever-growing complexity of financial products and services 

and the technical issues that sometimes arise, as well as the disVerDate 0ct 09 2002 10:25 Nov 18, 2005 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\DOCS\24398.TXT FIN1 PsN: MICAH
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putes among expert witnesses on both sides that often occur, make 

it desirable that one of the three arbitrators be well-versed in the 

regulatory framework under which brokers and other financial professionals operate. The painstaking and transparent selection process for arbitrators also protects against any possible pro-industry 

bias. 

Criticism of the mandatory nature of securities arbitration is also 

misplaced. Agreeing to arbitrate rather than court-based litigation, 

is a choice of forum, not of rights. In fact, arbitration can and does 

impose extraordinary sanctions with respect to securities firms 

such as referring conduct uncovered in the proceeding to regulatory 

authorities or suspending an industry member’s license for failing 

to pay an arbitration award promptly. Moreover, agreeing in advance to arbitrate all disputes is a neutral event that prevents one 

party when a dispute arises from blocking access to arbitration because it sees an advantage to dragging the dispute out in court. 

The current system of SRO-sponsored arbitration, like any system of justice devised by humans, is not perfect. The NASD, the 

New York Stock Exchange and the securities industry continue to 

work hard to take into account the concerns and issues raised by 

all participants and to adjust the process as needed. The facts show 

that disputes continue to be resolved more expeditiously, efficiently 

and fairly than they would be in our already-overburdened court 

system. 

Thank you for holding this hearing, Mr. Chairman, and for inviting me to testify. I would be pleased to answer any questions. 

[The prepared statement of Marc E. Lackritz can be found on 

page 65 in the appendix.] 

Mr. RYUN. Mr. Lackritz, thank you very much. 

Our final panelist today is Mr. Daniel Solin, investor, attorney 

and author. In fact, one of his books is very intriguing, ‘‘Does Your 

Broker Owe You Money?′′ We welcome your testimony. 

STATEMENT OF DANIEL SOLIN, ESQUIRE 

Mr. SOLIN. Thank you very much, Mr. Chairman. 

Thank you, especially, Congressman Frank, for convening these 

hearings. It is a terribly important issue for the millions of investors who have been the victims of misconduct by their brokers and 

whose only recourse is the industry-sponsored arbitration system. 

While it is of course true that these investors sign a document 

in which they agree to mandatory arbitration, make no mistake 

about the reality of what that situation really is. I have been representing investors for a number of years. I have tried many cases 

before these tribunals. I have never met a single investor who 

knew that when he signed his or her account opening statements, 

they were consenting to mandatory arbitration, much less understood the nature of the mandatory arbitration they were consenting 

to. 

The issue, Mr. Chairman, has nothing to do with the merits of 

arbitration or the merits of the court system. The issue properly 

framed is whether investors in this country are entitled to a dispute resolution system which has both the appearance and the reality of fairness. The current system does not have the appearance 

18

of fairness. As Commissioner Galvin and Rosemary Shockman so 

eloquently stated, it is run by the industry. This makes no more 

sense than if Congress mandated that all investor disputes should 

be run by PIABA as the administrative arm. No one would regard 

that as fair or reasonable and no investor would perceive that as 

fair or reasonable. 

Second, as somebody who sits and looks in the eyes of these tribunals, let me tell you that having an industry member on that tribunal is a devastating blow to the perceived, if not the actual, fairness of these proceedings. The ostensible purpose for having this 

industry arbitrator is because of his supposed expertise. If that is 

true, you can imagine the influence that that person has which is 

far beyond his one vote. 

The fact that in a number of cases, the industry arbitrator joins 

in acquiescing to a favorable verdict for the investor does not mean 

that that industry arbitrator did not do his or her best to ensure 

that that result did not occur. It does not mean that that industry 

arbitrator did not accomplish his or her goal of limiting the amount 

of damages that that tribunal would award. 

The impartiality, as Commissioner Galvin and Rosemary 

Shockman stated, of the public arbitrators is highly suspect. The 

only study I have found is a 1994 study by the General Accounting 

Office which said that 89 percent of the panelists at that time were 

white men over the age of 60. There are very, very few members 

of those panels, of the 6,000 or 7,000, who are around today. Certainly in 1994, there were very few of them who were people of 

color, who were younger people. This tends to be a very conservative industry-oriented group. 

The NASD and the NYSE have broad discretion in appointing 

these people and it is not true, in all candor, that we as advocates 

play a meaningful role in this process. Very often in my cases, a 

week or 2 weeks before the actual hearing, for some reason, the arbitrators that we ranked highly drop out and the NASD and the 

NYSE then have the right without any discretion whatsoever to appoint whoever they want. We have no role in that process. 

Finally, and this is a very significant point, psychologically let 

me tell you that it is a valuable perk for people to sit on these tribunals. They love sitting in judgment. This is part of their life. 

Many of them are retired. This is a very important part of who 

they are. And these people know that if they issue a big award 

against the brokerage industry, they are not going to be reappointed to sit on panels. It becomes a self-selecting group. 

There is no evidence that this system is fair. The evidence that 

Mr. Perino is talking about and that the industry representatives 

are talking about is very flawed statistical evidence, as I indicate 

in my report. We are in the process of doing an exhaustive analysis 

that I hope will shed some light on it, but it is very difficult to 

prove that a whole system is unfair. 

What should be done here is very clear. We should have a system 

of arbitration run by a completely impartial tribunal, like the 

American Arbitration Association or any private dispute regulation 

group. We should not have an industry judging itself. All we are 

asking for as representatives of investors is that there be a totally 

impartial administration and that the three people sitting there are 

19

completely impartial, unaffiliated with anyone, which is exactly 

what Ms. Kupersmith’s mother would want if she did have a claim 

against her broker. She would not want a panel that is one-third 

biased any more than she would want a jury that is one-third biased or a judge who says one-third of my mind is made up before 

we start. 

I thank you again, Mr. Chairman. I thank you again, Congressman Frank, for the opportunity to share my views with you. 

[The prepared statement of Daniel R. Solin can be found on page 

111 in the appendix.] 

Mr. RYUN. Thank you very much. 

I want to thank all the panelists for coming. I know you have 

tremendous insight into what this process is all about. The discussion has been good today about arbitration process and how to 

make it more transparent. Specifically, it is important that the investors are well informed and it is very clearly understood what 

this process is all about. 

With that in mind, I want to inquire a little about the process 

of ensuring that investors understand what they are doing when 

they sign a pre-dispute arbitration agreement. Specifically, what is 

done to make sure that each investor knows that the signing of the 

agreement effectively waives their right to sue? I will be interested 

in any comments anyone has to make on that. 

Mr. KATSORIS. At SICA, we had passed a rule that the arbitration clause be highlighted in the agreement that the customer signs 

at the beginning. SICA had passed an additional rule that that 

clause be separately initialed by the customer so there would be no 

doubt that the customer saw that arbitration clause. Unfortunately, no SRO has passed it. I would recommend that they rethink that and adopt the SICA rule which is still on the books that 

they separately initial that arbitration clause. That would defuse 

the argument that somebody did not see it, and perhaps solve that 

problem for the future. 

Mr. RYUN. Mr. Solin? 

Mr. SOLIN. Thank you, Mr. Chairman. Picture what happens 

when an investor in this country goes to open up his account. He 

is confronted with a slew of account opening statements. More 

often, the broker already has his trust or he would not be there. 

He is entrusting him usually with his or her life savings. These arbitration clauses are not negotiated the way any normal bilateral 

agreement between two equals would be negotiated. 

As a practical matter, if the investor does not sign whatever is 

in those papers, they have nowhere to go if they want to invest in 

this country. The issue is not, I would respectfully suggest, do investors know that there is a mandatory arbitration clause. The 

issue is whether all investors in this country should be required to 

sign a mandatory arbitration clause that consigns them to resolve 

all of their disputes by an industry organization. 

Mr. RYUN. Let me address this a little bit differently, if I may. 

I would like to go to Linda Fienberg from NASD. You testified the 

presence of an industry arbitrator on the panel does not influence 

the outcome of the arbitration in favor of the broker. I think it is 

an important point that merits further discussion and I would like 

to have any further comments you would like to make. 

20

Ms. FIENBERG. Thank you, Chairman Ryun. 

We are, first and foremost of course, a regulator of the securities 

industry. As a result, we are very concerned not only about the 

quality of the forum, but also about its fairness and the appearance 

of fairness. Therefore, we have reviewed our award data to be sure 

that there is no bias in the process because of the industry arbitrator. Here is what we found. About 98 percent of awards are 

unanimous. In 2004 for example, there were a little over 1,100 

cases in which the customer prevailed. In only 32 of those cases 

was there a dissent: 21 times by public arbitrators and only 11 

times by non-public arbitrators, reflecting the two-and-one composition of panels. 

Looking at the flip side, we reviewed the awards of the entire 

roster of arbitrators who had signed at least eight awards. We 

found the same thing. Of 1,226 arbitrators with eight or more 

awards, only 41 ruled for the industry 75 percent or more of the 

time; 28 of the 41 were public arbitrators; only 13 were industry. 

Of the 1,226, 209 decided in favor of investors 75 percent or more 

of the time. Of the 209, 67 were industry arbitrators or 32 percent, 

and 142 were public arbitrators. 

In addition, we are satisfied by the many surveys that have been 

taken by the GAO, by the SEC examinations and audits, by the 

most recent one done by Professor Perino under the auspices of the 

SEC, that there is no unfairness in the forum and our surveys reflect that the actual participants in the forum, the investors in the 

forum, do not believe that they have gotten an unfair shake at the 

end of the day. 

Mr. RYUN. I am going to give Mr. Frank an opportunity. I know 

we are about to move into final passage and I would like him to 

have an opportunity to ask some questions as well. 

Mr. FRANK. Thank you, Mr. Ryun. I just want to reassure the 

panel, and I know you have come a long way, and there are only 

a couple of us. It is a Thursday afternoon. It was not the optimal 

time, but there are 10 people sitting up here behind us, staff members, and getting information to them is the best way to get information across. So you are not testifying vainly and I think you are 

adding significantly because of the presence of the people who do 

a lot of the thinking around here, to the basic knowledge. 

Mr. Lackritz, one question, you really believe that this is really 

good for the investor, right, the system? 

Mr. LACKRITZ. Yes, I do. 

Mr. FRANK. Do you think the investors are so stupid that they 

would not know that if you did not force it on them? I mean, why 

don’t you make it voluntary? You answered the objections partially. 

There is an objection to having it case-by-case whether or not you 

go to arbitration. And I know the Chairman asked a very good 

question which is, well, shouldn’t we know about it in advance. 

But the question you have to put is, what good would it do the 

investor to know about it? It is a contract of adhesion, so you know 

about it. So what are you going to do? Go out and sign with nobody? So why shouldn’t it be that the investor is asked, and you 

can say this if you know, arbitration would be a lot better for you, 

and here is the record, than going to court? Do you want to sign 

this clause or not? Why not make it voluntary with the investor? 

21

Mr. LACKRITZ. First of all, I do believe this process is good for 

investors. 

Mr. FRANK. I know that, but we only have 5 minutes. Don’t repeat. 

Mr. LACKRITZ. I think that rather than larding up opening an account with a lot of due process requirements——

Mr. FRANK. Excuse me. Answer my question, Marc, come on. You 

know that we have a limited amount of time. Don’t do a Greenspan 

on me and filibuster. 

[Laughter.] 

The question is this: Why do you not give the investor the choice 

to go into the arbitration system or not? Why would that not be 

better? 

Mr. LACKRITZ. Because number one, it is a solution in search of 

a problem. Number two, I think that the mandatory structure in 

fact provides a regulatory oversight mechanism that provides far 

more scrutiny and makes the process far better. 

Mr. FRANK. Let me ask NASD, if in fact we had a system where 

investors could decide to go into the arbitration or not, would that 

impeded your ability to oversee the system for those that agreed 

to it? 

Ms. FIENBERG. I actually believe if given——

Mr. FRANK. That is a straightforward question. 

Ms. FIENBERG. I am going to answer. I believe that most investors would still——

Mr. FRANK. That is not what I asked you. Please, you are all 

very intelligent people, a simple question. The suggestion was it 

has to be made mandatory for everybody to provide regulatory 

oversight. Would you be capable of administering regulatory oversight if it was optional for whether or not there was arbitration in 

every case? 

Ms. FIENBERG. We could still have our regulatory oversight over 

those cases that came into arbitration. 

Mr. FRANK. Good. That was the question. Thank you for the answer. Look, you can repeat yourselves, but the point is this. You 

are giving answers that are not fully responsive. I think you make 

a very good case for arbitration. I would like to see it somewhat 

changed, but I do not understand you think the investors who you 

generally think are wise people, we are often told, you know, honor 

their choices and not infringe on them. But let me put it this way, 

if individual investors, according to you, I think, and others, are 

smart enough to take half of their Social Security accounts and decide how to run the rest of their lives with it, why aren’t they 

smart enough to decide whether they want to go into a mandatory 

arbitration system? 

Mr. LACKRITZ. You raise a philosophical question in terms of how 

much freedom do you want to give people. If in fact people have 

a choice, when you know one system is better than the other, do 

you want to bar them from in fact picking a system that is going 

to be worse for them or not. So it gets back to paternalism. I completely agree with——

Mr. FRANK. Okay, so your argument is that you know, and you 

have certainly more experience in this than the investors, because 

you know that this system is better for them, you do not want 

22

them to be able to make the bad choice. You may hear that argument in the Social Security context, by the way, made by some people on the other side. But you have not made a case to me as to 

why it has to be mandatory. Certainly, it would work sometimes. 

I understand the argument for mandatory if you need a critical 

mass of participants, but I think you would have that anyway. 

The other question now is with regard to the industry member. 

Why couldn’t there be industry members providing expertise without a vote? I mean, we have that all the time. Look, expertise 

about votes? I just started out by mentioning there are 10 people 

sitting up here who will know at any given time more about these 

subjects than any of us because they do not have to march in parades. They have a certain advantage in terms of their time allocation. So they do not vote, but they know a great deal and have a 

great deal of input. Why is it necessary, and let me ask any of the 

panelists, to give that person a vote to get the benefit of his or her 

expertise? Yes, sir. 

Mr. KATSORIS. I have heard this debate many, many times about 

the industry against the public. I was on SICA when——

Mr. FRANK. Excuse me, sir. I just asked a simple question. Why 

is it necessary? 

Mr. KATSORIS. I will try to develop a——

Mr. FRANK. No, you are not. Why is it necessary to give that person a vote to get the benefit of his or her expertise? 

Mr. KATSORIS. I do not mind if you dismantle the whole present 

process of industry participation. 

Mr. FRANK. That is not what I asked you, sir. If you do not want 

to answer the question I asked, it is voluntary. This is not arbitration. There is no contract of adhesion. I would like anyone who 

wanted to to ask the question, why is it not possible to get the expertise, because I think there is an argument for the expertise. 

Why is it not possible to get that expertise without giving that person a vote? Mr. Solin? 

Mr. SOLIN. Mr. Frank, that is exactly what happens in every arbitration I have been in. It is not necessary, is the answer to your 

question, because each side calls expert witnesses who provide all 

the expertise that the panel needs. 

Mr. FRANK. Okay, I figured that, because somebody suggested to 

me, well, and maybe it was Mr. Lackritz who said, well, you know, 

you get conflicting experts and you need one to be the arbitrator, 

but I think that argument refutes itself. The fact is, this is not 

science. This is not something that is indisputable, although in today’s political climate even science is not indisputable if you do not 

like it for religious reasons, but the notion that one expert somehow cuts through everyone else’s expertise seems to me problematic. 

Mr. Lackritz? 

Mr. LACKRITZ. Yes, with all due respect, you are proceeding from 

an assumption that the industry involvement here is problematic. 

Mr. FRANK. I am not. Excuse me, you lose me. I want to be cooperative here, but you lose me when you will not answer the question. I do not understand why you won’t. The question is: Is there 

not a way to get expertise without giving that person a vote? I 

know you have said this to me before, well, you know, if there is 

23

no crisis, you don’t change it. We are often asked to make changes 

without there being a total crisis. But in any case, that is a question that is aside from your hurt feelings because I have even 

raised the issue that you are not perfect. The question is: Why is 

it not possible to get that expertise without giving the person a 

vote? That is not disposative of whether or not the person ought 

to vote. 

Ms. FIENBERG. If I may, we believe it is necessary in order to 

promote transparency. If this person were in the panel but did not 

have a vote, then people choosing this person would not have a 

track record as they do with all the awards from the industry and 

the public. 

Also, in order to avoid impasses, in order to save money, you 

would still have to have three voting arbitrators. That means you 

would increase the delays because you would have four people’s 

schedules to consider. It would be more costly because you would 

be paying four arbitrators instead of three, and of course I am not 

sure we would be able to get that person if they did not have the 

ability to have the same rights as the other three members of the 

panel. 

Mr. FRANK. I am skeptical of that, but I appreciate your answer 

to the question. Let me close with this, Mr. Chairman, because you 

do stress again the importance of transparency. That is why you 

believe it is important to have the decisions, the reasons published. 

Mr. Lackritz suggests that this would be a degree of litigiousness 

that might significantly detract from the process. I am wondering 

if any member of the panel would like to comment on that. Let’s 

start with you, and that is my message. 

Mr. KATSORIS. I do not think that you need an industry arbitrator anymore. I think we have outlived that, which started originally 30 year ago or so. However, if you eliminate categories, you 

eliminate all categories, throw everybody into the pool, and depend 

upon peremptory challenges and challenges for cause like any other 

judicial system. 

Mr. FRANK. I appreciate that. Let me ask, how do you deal with 

the argument that reducing the reasons to writing would somehow 

detract from the flexibility and superiority of arbitration over litigation? 

Ms. SHOCKMAN. Thank you, Congressman. I think that the issue 

of reasoned awards, and PIABA believes the issue of reasoned 

awards is way down near the bottom of things that really need to 

be addressed. It is true that investors, after cases when they have 

lost those cases, and when they have won them and gotten some 

teeny-tiny fraction award, they want to know what happened. 

Mr. FRANK. I am sorry. I apologize if I am unusually inarticulate 

today. I did not ask in general your opinion of doing them in writing. I was asking specifically whether reducing them to writing 

would be so burdensome that it would reduce the advantage of arbitration over the courts. That is a separate question. 

Ms. SHOCKMAN. I do not think it would be so burdensome that 

it would reduce the advantage of arbitration. 

Mr. FRANK. The general rule that I make, which is if I ask you 

a question and you do not like the answer that you would have to 

24

give, do not answer it, but do not answer a different question, because I mean that is not the way I think so that is not helpful. 

Does anybody else have a comment on whether this would be so 

burdensome? 

Mr. KATSORIS. Congressman Frank, I wrote an article last week. 

I think I sent it to all the members of this panel: Beware of what 

you ask for, you might just get it. It has to deal with reasoned 

awards. I think most of the panel has it. I have another 10 copies 

here. I will leave them here. This is a debate between myself and 

a member of PIABA as to the pros and cons of reasoned awards. 

Mr. FRANK. All right. I appreciate that. Once the staff has read 

it, they will tell me about it. I guess again I will try one more time, 

the argument that reducing things to writing would make it too 

burdensome. Does anybody want to comment on that? 

Ms. FIENBERG. NASD does not believe it would add an extra burden. The awards, of course, are already in writing, but there is not 

an explanation in many of them as to why an investor won or lost. 

We get many complaints from investors, as Ms. Shockman indicated, if they have not prevailed, as to what happened, why did the 

panel turn down their claim. 

We have structured this proposal so that investors get to choose 

whether to have this explained decision, so when they choose in advance whether they want it or not, they can factor in that it might 

be slightly longer until they get that award. We are prepared to 

provide sufficient staff so that it will not take longer or burden the 

process. 

Mr. FRANK. Let me ask Mr. Perino, do you have any view on 

whether or not they should be written down, the reasons? 

Mr. PERINO. I am hoping this answer is going to satisfy your responsiveness requirement. There is nothing inherent with writing 

them down in and of itself, but the more procedural and other requirements that you require in arbitration, if it is that——

Mr. FRANK. I agree. It is cumulative, but I have not heard a lot 

of other proposals. This one in terms of, if we only did that, would 

it be a qualitative difference? 

Mr. PERINO. If the parties want a reasoned award, there is absolutely no reason not to give it to them. There is one potential downside with reasoned awards. Arbitrators sometimes reach decisions 

based on what they view as the equities of the situation as opposed 

to what the law actually requires. That may actually harm investors in some cases if a reasoned award is required. 

Mr. FRANK. It is one thing, though, of course to give reasoned 

awards. That does not necessarily mean that there then has to be 

a compilation or that in any way it is considered to have precedential value. You could separate that out. Does the NASD proposal 

assume precedential value? 

Ms. FIENBERG. No, absolutely not, Congressman Frank. This 

would not be precedential, just as they are not now. Even today, 

many arbitrators do in fact write explanations of their decisions 

and they are not precedential and they would not be if this new 

rule is approved by the SEC after public comment. 

Mr. FRANK. Thank you, Mr. Chairman. 

Mr. RYUN. Thank you very much to the panelists for coming. I 

appreciate your insight. Let me just make an observation. I know 

25

there is room for improvement. I tend to think, though, unless 

something is completely broken, let’s be careful in fixing it. If it is 

something that seems to move through in months as opposed to 

years, I would hate to add more expense and longevity to it. 

So let me just say this in closing, since there are no other members for questions, we need to continue to have this dialogue and 

do things that would help improve the system. I want to thank you 

very much for being here. 

This meeting stands adjourned. 

[Whereupon, at 3:18 p.m., the subcommittee was adjourned.] 

(27)

A P P E N D I X

March 17, 2005

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