Eugene Scalia

Direct: +1 202.955.8206 

Fax: +1 202.530.9606 

EScalia@gibsondunn.com 

September 24, 2015 

VIA ELECTRONIC MAIL 

Office of Regulation and Interpretations 

Office of Exemption Determinations 

Employee Benefits Security Administration 

U.S. Department of Labor 

200 Constitution Ave., NW 

Washington, DC 20210 

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement 

Investment Advice (RIN 1210-AB32); Proposed Best Interest Contract Exemption 

(ZRIN 1210-ZA25) 

To the Office of Regulation and Interpretations: 

I am submitting this comment letter on behalf of interested clients to address several 

issues that were raised in the recent hearings and comment period for the rules proposed by 

the Employee Benefits Security Administration to broaden the definition of “fiduciary” 

under ERISA and the Internal Revenue Code, and to create new prohibited transaction 

exemptions. Specifically, this letter addresses (1) four new research reports that were added 

to the rulemaking record by the Department; (2) the claim by some rulemaking participants 

that if the Department’s proposals are adopted, advisory firms operating on a fee-based 

model can be trusted to adequately serve investors with small accounts; and (3) commenters’ 

request that the Department’s prohibited transaction exemptions bar binding pre-dispute 

arbitration agreements. 

DISCUSSION 

I. The Department’s Four New Studies Highlight Flaws In The Proposed Rules 

And In The Department’s Economic Analysis. 

The Department recently provided public notice of four studies that had been added 

to the rulemaking record. U.S. Dep’t of Labor, Announcement of Transcript Availability and 

Comment Period Closing Date (Sept. 8, 2015), http://www.dol.gov/ebsa/regs/1210-AB32-2-

HearingTranscriptAnnouncement.html. One of the studies—by Advanced Analytical 

Consulting Group—is explicitly identified as having been prepared under contract with the 

Department. See Advanced Analytical Consulting Group, Inc., Comments on a Review of a 

White House Report on Conflicted Investment Advice at 10 (“Advanced Analytical Report”). 

The other three reports were “[p]repared for [the] Department of Labor” by the RAND 
September 24, 2015

Page 2 

Corporation, which has been under contract to provide other studies and research to the 

Department in connection with the “fiduciary” proposal. See RAND Labor and Population, 

Financial Advice Markets: A Cross Country Comparison (“Cross Country Report”); RAND 

Labor and Population, Effective Disclosures in Financial Decisionmaking (“Disclosures 

Report”); RAND Labor and Population, Do Financial Advisers Influence Savings Behavior? 

(“Savings Behavior Report”). 

Rather than bolster the case for the Department’s proposals, these four reports 

highlight some of the flaws in the premise of the Department’s fiduciary proposal, and 

confirm commenters’ concerns with the proposals’ likely adverse effects, particularly for less 

affluent investors. This is the case in at least three important respects.

First, these new reports confirm the failure of the Department’s Regulatory Impact 

Analysis—and the rule proposals themselves—to give appropriate weight to the benefits 

consumers receive from the assistance and advice of financial professionals. Advanced 

Analytical Report at 2, 4-5; Savings Behavior Report at 1-2; see also Comment Letter of 

Securities Industry and Financial Markets Association, Appendix 1 at 17-22 (July 21, 2015) 

(report of NERA Economic Consulting). The very title of one of the RAND reports reflects 

the Department’s skeptical, and at-times contradictory, treatment of the role of financial 

advisers. The title asks: “Do Financial Advisors Influence Savings Behavior?” One would 

think that it is beyond dispute that financial advisers “influence” investors’ behavior. After 

all, the Department’s skeptical (and mistaken) view of the impact of advisers’ purportedly 

conflicted advice is the entire motivation for these far-reaching regulatory proposals. And 

yet, the Report’s authors opine, for instance, that “there is very limited evidence about a 

causal link between financial advice and savings.” Savings Behavior Report at 9. 

It is unclear what value the Department sees in questioning whether financial advice 

is helpful. Plainly, it would be a grave mistake to premise these rule proposals on the 

speculation that financial advice is not valuable and can be dispensed with. The Savings 

Behavior Report itself concedes that financial professionals have “great potential” to help 

Americans save for retirement; among the benefits these professionals provide include 

“improvements in financial behavior, resulting in increased savings.” Savings Behavior 

Report at 1, 3. This advice “could be particularly valuable for those struggling to meet their 

financial goals,” since individuals receiving investment assistance may “be more likely to 

have a plan for retirement, more likely to feel confident about their retirement preparations, 

and more likely to have retirement goals.” Id. at 3, 18. Assistant Secretary Borzi stated at 

the hearing, “We strongly believe that individuals need this assistance in making these 

decisions because there is no GPS that an individual can rely on to help them reach their 

retirement goals.” Hr’g Tr. 13. The fiduciary proposal itself repeatedly characterizes 

financial products as complex, making education in the products valuable. E.g., 80 Fed. Reg. 
September 24, 2015

Page 3 

21,928, 21,929 (Apr. 20, 2015) (to be codified at 29 C.F.R. pts. 2509, 2510) (explaining that 

DOL is revisiting the 1975 regulation in light of “the need for plans and IRA owners to seek 

out and rely on sophisticated financial advisers to make critical investment decisions in an 

increasingly complex financial marketplace”), 21,932 (“the variety and complexity of 

financial products” lead investors to “rely on experts for advice”). Likewise, many of the 

proposals’ supporters consider the measures necessary precisely because of the enhanced 

advice consumers purportedly will receive as a result. E.g., Comment Letter of Committee 

for the Fiduciary Standard at 1 (July 20, 2015) (proposals would provide “[m]illions of 

American retirement investors . . . the benefit of advice” in their best interest); Comment

Letter of Consumer Federation of America at 5 (July 21, 2015) (“very few retirement savers 

have the financial expertise necessary” to make investment decisions without assistance from 

professionals). See also Hr’g Tr. at 813 (“[I]t’s important that families can turn to financial 

professionals to help them chart a course for retirement.”). 

The Savings Behavior Report also strongly suggests that the benefits of financial 

advice are likely to be greatest for “low-income populations.” Savings Behavior Report at 6. 

Numerous commenters, also, spoke of the importance to middle- and lower-income investors 

particularly of receiving informed assistance with investment decisionmaking. E.g., 

Comment Letter of National Association of Social Workers at 3-4 (July 21, 2015) (lowerincome minority groups “have an even greater lack of investment knowledge on the average 

than the general population,” which makes them “more dependent on professional financial 

advisers”); Comment Letter of National Council of La Raza at 2 (July 20, 2015) 

(“Consumers [r]ely on [f]inancial [a]dvice to [n]avigate [c]omplex [o]ptions”); Hr’g Tr. 

492:22-493:8 (statement of Martin Neil Baily) (“[I]t’s the lower middle and the upper middle 

we are most concerned about, making sure that they save enough and get the right kind of 

advice”). 

None of these benefits of advice are captured in the DOL’s economic analysis of its 

proposed rules, however. See, e.g., Jeremy Berkowitz, Renzo Comolli & Patrick Conroy, 

Review of the White House Report Titled “The Effects of Conflicted Investment Advice on 

Retirement Savings” at 4 (Mar. 15, 2015). Indeed, Advanced Analytical—in a report 

commissioned by the Department—states that the analysis by the Council of Economic 

Advisers (“CEA”) “‘gives short-shrift’ to the benefits that consumers receive from brokers,” 

and excessively discounts the benefits of the current marketplace as a result.1

 Advanced 

Analytical Report at 2, 4-5. Advanced Analytical attempts to excuse this failing by asserting 

 

1

 The DOL’s Regulatory Impact Analysis reaches conclusions similar to the CEA study, 

based on “the same literature” as the CEA report. Regulatory Impact Analysis at 97 

n.189. 
September 24, 2015

Page 4 

that specific quantitative data on the benefits of brokers is lacking. Advanced Analytical 

Report at 4. Similarly, the Savings Behavior Report states that existing research generally 

does “not account for . . . benefits that investors might receive from financial advisers.” 

Savings Behavior Report at 1. The fact that the Department claims not to have specific data 

on these benefits is hardly justification, however, for proceeding with the rulemaking as if 

those benefits do not exist. To the extent that—as the Advanced Analytical Report asserts—

“exploring the importance of these benefits is an important topic for future work,” id. at 5 

(internal quotation marks and alteration omitted)—that “future” work should be performed 

now, before the Department institutes a regulatory framework that up-ends the means by 

which millions of Americans currently receive assistance and advice on financial planning. 

Second and related, these additional research reports demonstrate that the Department 

has failed to properly reckon with the adverse consequences threatened by the proposed rule 

and exemptions. Chief among these is the likelihood that investors, especially the less 

affluent, will lose access to advice as a result of the Department’s regulatory changes.2 

The description of the UK experience in the RAND Cross Country Report is 

particularly stark. In 2012, the UK’s “Retail Distribution Review,” or “RDR,” barred 

financial representatives from receiving commission payments on financial products. The 

toll this has taken in less than three years is startling: Fewer advisers exist, the cost of advice 

has risen, and lower-income clients in particular are losing access to advice. See Cross 

Country Report at 29-31. Between 2011 and January 2014, the number of advisers in the UK 

dropped by approximately 25 percent—from 40,000 to approximately 31,000—and “the 

estimated number of advisers working at banks dropped from about 8,600 to 3,600 over the 

period.” Id. at 29. More recent figures from Towers Watson show that the number of 

advisers has dropped even farther, to approximately 28,000. Towers Watson, Advice Gap 

Analysis: Report to FCA (Dec. 5, 2014), at 32 (“Towers Watson Report”). 

With such a steep and sudden drop in the number of advisers, an increase in the cost 

of advice should be expected. And indeed, “the cost of receiving advice has increased” in 

the UK. Cross Country Report at 33. See also Advanced Analytical Report at 4. Moreover, 

the advisers who remain have shifted the services they provide to more costly offerings. The 

Cross Country Report cites a survey finding that 47 percent of advisers interviewed “had 

recently turned away clients because the cost of their service had become disproportionately 

 

2

 Other harms discussed in the new reports include that broker-dealers may be unable to 

provide the same quality of advice under a fee-based compensation structure, and that 

consumers will be harmed as a result. Advanced Analytical Report at 3 n.3. The CEA’s

analysis did not consider this possibility. Id. 
September 24, 2015

Page 5 

high for some clients’ needs.” Cross Country Report at 29-30. Another survey found that 

approximately 20 percent of advisers—that is, fully a fifth—“would not advise on accounts 

below a certain threshold,” while 50 percent believed they would decide whether to advise 

those accounts on a case-by-case basis. Id. at 30. Yet another survey reported that 

approximately 15 percent of advisers had “stopped providing service” to low-net worth 

consumers. Id. at 31. In short, the Cross Country Report concludes, “it appears that in some 

cases lower-wealth clients may now find it more difficult to receive advice.” Id. at 38; see 

also Towers Watson Report at 8 (“[A]necdotal evidence of developments in the market post 

RDR suggests that advice capacity serving less affluent segments is likely to have reduced 

and there may therefore be reduced provision.”). 

The Towers Watson Report, as the Cross Country Report recognizes, purports to 

show that the supply of advice in the aggregate still exceeds demand, but concedes that 

“supply and demand may not be perfectly aligned across the market,” and that “capacity 

mismatch” could result, “particularly at the lower end of the market.” Cross Country Report 

at 30 (citing Towers Watson Report). Similarly, the Advanced Analytical Report cites a 

report by Europe Economics which suggests that clients who lost their advisers were able to 

find other advisers. Advanced Analytical Report at 4. But that report states merely that the 

authors “assume[d]” many of the clients who lost advisers “sought out another adviser” and 

were “largely successful” in doing so. Id. (emphasis added; internal quotation marks 

omitted). An “assumption” on such a critical issue is not an adequate basis for the 

Department’s rulemaking. 

The sudden and disturbing changes in the UK financial services industry since the 

RDR was implemented are already prompting a re-appraisal by UK authorities. Last month, 

the Financial Conduct Authority (“FCA”) announced what it called a “major new review” of 

the steps needed to “radically improve” access to financial advice and assistance. See Major 

new review to radically improve access to financial advice launched (Aug. 3, 2015), 

https://www.gov.uk/government/news/major-new-review-to-radically-improve-access-tofinancial-advice-launched. The review has been prompted by what FCA calls an “advice 

gap” for people seeking assistance with financial planning, particularly people who “do not 

have significant wealth.” HM Treasury, Financial Advice Market Review: Terms of 

Reference (Aug. 3, 2015), https://www.gov.uk/government/publications/financial-advicemarket-review-terms-of-reference/financial-advice-market-review-terms-of-reference. 

Among the top “[o]bjectives” the FCA has for its review are identifying “the regulatory or 

other barriers firms may face in giving advice,” and, second, determining “how to give firms 

the regulatory clarity and create the right environment for them to innovate and grow.” Id.

As the Labor Department contemplates its own sweeping changes to the provision of 

financial services in the U.S., it must carefully study the UK experience, including the effects 
September 24, 2015

Page 6 

of the “regulatory barriers” to advice that DOL is constructing, and the “regulatory clarity” 

that U.S. financial institutions need to “innovate and grow.” The UK experience confirms 

beyond a doubt that a loss of advice resulting from the DOL’s changes is a very real concern 

that must be carefully examined; it is not a red herring concocted by industry. 

To be sure, there are differences between the RDR—which banned commissions 

entirely—and the DOL proposal, which purportedly would enable financial representatives 

to receive commissions through the Best Interest Contract Exemption. But there is broad 

consensus within industry and even among some supporters of the rule that the proposed 

Exemption is unworkable. E.g., Hr’g Tr. 365:6-8; Comment Letter of Consumer Federation 

of America at 46; Comment Letter of Financial Planning Coalition at 25-26 (July 21, 2015). 

As a practical matter, therefore, the differences between the current DOL proposal and the 

RDR cannot be expected to be significant. 

Moreover, the UK experience drives home that DOL cannot have it both ways when 

projecting the impact of its regulatory changes: DOL cannot claim, on the one hand, that it 

will reduce the compensation that broker-dealers and financial advisers receive in connection 

with their clients’ investment activity, while supposing—on the other hand—that reducing 

that compensation will not affect who enters the field, who remains in it, and the services 

they offer.3

 Rather, as a matter of simple economics and as the UK experience demonstrates, 

there will be an effect—DOL must study and estimate that effect with no less zeal than it has 

addressed the purported effects of “conflicted advice.” Likewise, to the extent the 

Department believes that its exemptions to its new fiduciary definition will enable financial 

representatives to continue to receive commission-based compensation, DOL bears an even 

greater burden to justify its claim that its rule will produce billions in dollars of benefits by 

eliminating the supposedly distorting effect that commissions have on the financial services 

industry. The Department cannot claim radical benefits, while insisting that it is not 

instituting radical changes. 

Indeed, during the hearing, even vocal supporters of the rule testified that it will not 

deliver anything approaching the benefits claimed by the Department. Professor Mercer 

Bullard testified at length on the ways that he believes the rule will have little positive effect, 

including that “[t]he rulemaking will generally have no effect on financial advisors’ 

incentives to recommend a product in one compensation group over a product in another.” 

 

3

 The Advanced Analytical Report also observes that the CEA’s report fails to accurately 

measure the costs of the DOL’s proposed regulation because it ignores the fact that 

“additional obligations will likely translate into higher compliance costs” for brokerdealers. Advanced Analytical Report at 3 n.3. 
September 24, 2015

Page 7 

Hr’g Tr. 174-77; see also id. at 241 (similar argument by Professor Ron Rhoades regarding 

the Best Interest Contract Exemption). 

In sum, the Department has not adequately assessed the benefits of the current 

marketplace for financial products and services, and the costs and purported benefits of the 

regime its proposals would establish instead. The four new studies confirm these 

shortcomings.4 

A third notable aspect of the reports recently added to the rulemaking record 

concerns disclosure. DOL’s proposal would impose complex and burdensome disclosure 

requirements on the premise that these disclosures will provide substantial benefits, yet the 

Department’s new research does not support that claim. Indeed, it shows the opposite. The 

Disclosures Report concludes that to be effective, disclosures must be simple—excessive 

disclosures are counterproductive. The Report observes, for example, “Research has shown 

that the longer, more detailed disclosure documents have not been effective at helping 

consumers make informed choices in selecting mortgages, credit cards, and mutual funds, 

due to either limited attention or limited understanding of the material itself.” Id. at 18. 

While “simplicity” is “[o]ne common factor in . . . effective disclosures,” id. at 22, even 

more “simplified disclosures may still be too lengthy and complex for the average 

consumer[],” id. at 24. “Additional research” would be “needed to more fully evaluate the 

effectiveness of disclosure as a policy intervention to protect customers,” the Report 

concludes. Id. at 10.5

 

4 The comment letter of the Consumer Federation of America cited a study by Edwin 

Weinstein in purported support of the Department’s economic analysis. Comment Letter 

of Consumer Federation of America at 15 (citing Edwin Weinstein, Mutual Fund Fee 

Research (Spring 2015)). But many of Weinstein’s observations actually demonstrate 

that regulation like the Department’s is not appropriate at this time. Weinstein observed 

that “there is no such thing as a ‘behaviorally neutral compensation scheme,’” and that 

“[i]dentifying a problem with one form of compensation does not automatically imply 

that one specific alternative form of compensation is better.” Mutual Fund Fee 

Research, at 9-10. Weinstein concluded that important gaps remain in the research

regarding whether a fee-based compensation model is superior to a commission model, 

and that accordingly “questions about the impact of new compensation schemes and their 

impacts . . . need to be addressed to ensure that undesirable and unintended outcomes are 

minimized.” Id. at 8. 

5

 The authors of the Disclosures Report assume clients would make different decisions if 

they understood the disclosures, but another way of viewing this research is that the 

(Cont'd on next page)
September 24, 2015

Page 8 

Given the Department’s professed uncertainty about the value of disclosure—and its 

endorsement of research indicating that effective disclosures must be simple—the 

requirements of the Department’s proposed regulatory framework are indefensible. 

Consider, for example, the three required disclosures in the Best Interest Contract 

Exemption. The point-of-sale disclosure requires a representative to give an investor a 

detailed chart describing the “total cost” of the proposed investments over different periods 

of years, and the total cost for each investment must include granular detail such as loads, 

commissions, mark-ups, and account opening fees. 80 Fed. Reg. 21,960, 21,985 (Apr. 20, 

2015). Investors must also be given an annual disclosure, containing the following: (1) 

identification of each asset purchased or sold during the year and the accompanying price; 

(2) a statement of the total dollar amount of all fees and expenses paid by the client, directly 

or indirectly, with respect to each asset; and (3) a statement of the total dollar amount of all 

compensation received by the representative and the firm, directly or indirectly, from any 

party as a result of each asset. Id. at 21,985. The web page disclosure must provide the 

public with information showing all direct and indirect compensation payable to the 

representative, firm, or other affiliate, with respect to each asset that an investor is able to 

purchase, hold, or sell through the representative and that has been purchased, held, or sold 

in the last year, along with the source of the compensation and how it varies within and 

among assets. Id. 

These complex and technical disclosures are exactly the type of disclosure that the 

Disclosures Report concludes will likely provide no benefit, and may simply sow confusion 

among investors. See Disclosures Report at 22 (effective disclosures keep “technical jargon 

to a minimum”), 12 & 24 (reviewing research showing other disclosures in financial industry 

are too “complex for average consumers” and “confuse[]” them). The Report is further 

evidence that the Department must radically reduce the burdensome disclosure requirements 

in its regulatory proposals. The Department will also need to account for the Report’s 

skeptical assessment of the value and effectiveness of disclosure as it proceeds toward 

finalizing a rule that, evidently, is substantially premised on the expectation that sweeping 

disclosures will prevent the losses that purportedly result from conflicted advice. 

 

(Cont'd from previous page) 

client did in fact understand and was satisfied with the advice given. It may well be the 

case that a consumer weighs the costs and benefits of the purportedly conflicted advice, 

and determines that more is to be gained by continuing with that financial representative 

than abandoning the interaction. 
September 24, 2015

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II. Firms Using A Fee-Based Model Cannot Be Expected to Fill The Advice Gap 

Resulting From DOL’s Proposals. 

As the UK experience shows, there is substantial evidence that small accounts will 

suffer a loss of advice under the DOL’s proposed rule. While the Best Interest Contract 

Exemption purports to permit the commission model to continue, there is broad agreement 

that the Exemption’s requirements are too onerous to be workable. See supra p. 6. 

Consequently, it must be expected that large numbers of financial professionals will stop 

serving existing customers, especially the less wealthy, if the proposal is adopted. See 

Comment Letter of Oliver Wyman, Inc. at 38 (July 13, 2015) (“Individuals with small 

balance accounts are likely to lose access to retirement help and support with selecting 

appropriate products.”); Comment Letter of Martin Neil Baily & Sarah E. Holmes at 17 (July 

21, 2015) (“proposed rule will bring with it increased compliance costs” and additional 

litigation risks, which may lead to “households with modest savings” being “abandoned” by 

advisers). There is thus significant reason to be concerned that the people most in need of 

advice and assistance—low- to modest-income households—will be worse off under DOL’s 

rule. 

Some supporters of the rule have said that these concerns are misplaced because there 

already are firms and advisers that successfully serve small accounts on a fee-based model. 

E.g., Comment Letter of Wealthfront, Inc. at 1-2 (April 21, 2015); Comment Letter of 

Financial Planning Coalition at 15 & n.48. The UK experience casts serious doubt on those 

claims, and an examination of those firms and their business models confirms that a feebased model will not adequately serve small savers.

Most of the firms touted by supporters of the DOL’s initiative have account 

minimums that would price out smaller accounts. Personal Capital and Rebalance IRA, for 

example, both require a $100,000 minimum. Personal Capital, 

https://www.personalcapital.com/ (last visited Sept. 23, 2015); Rebalance IRA, Frequently 

Asked Questions, http://www.rebalance-ira.com/faq/ (last visited Sept. 23, 2015). ProVise 

Management Group, LLC normally requires an account minimum of $250,000. ProVise 

Management Group, LLC, Brochure at 8 (July 22, 2015), available at 

http://www.provise.com/wp-content/uploads/2012/10/FormADV_Part2A_Brochure 

_0722151.pdf. Seabridge Wealth Management, LLC requires a million dollar account 

minimum, with a minimum annual account fee of $5,000. Seabridge Wealth Management, 

LLC, Firm Brochure at 3 (Oct. 7, 2013), available at http://www.adviserinfo.sec.gov/Iapd/ 

Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=210608. This bolsters the 

observation in Oliver Wyman’s Comment Letter that “7 MM current IRAs would not qualify 

for an advisory account due to low balances” (pp. 6, 38). 
September 24, 2015

Page 10 

Even when fee-based firms have low account minimums or no minimums, there are 

other barriers to holders of small accounts obtaining meaningful advice. Financial Engines 

only provides advice to employees of participating companies, for example. Comment Letter 

of Financial Engines at 1-2 (July 21, 2015); Financial Engines, Getting Started,

http://corp.financialengines.com/individuals/getting-started.html (last visited Sept. 24, 2015). 

The Garrett Planning Network does not provide compliance oversight, and some of the 

network’s members are no longer accepting additional clients, see Garrett Planning Network, 

Member Search, http://www.garrettplanningnetwork.com/find-an-advisor-map (last visited

Sept. 23, 2015). As for the “robo-adviser” Wealthfront Inc., it only has three Investment 

Advice Representatives and seven Registered Representatives, Wealthfront Inc. Form ADV 

(last amended Aug. 14, 2015), and its general online services provide advice using an 

approximately 10-question tool that “only takes 60 seconds,” Wealthfront Inc., 

www.wealthfront.com (last visited Sept. 23, 2015). Advice provided under these 

circumstances is hardly comparable to the assistance obtained in a one-on-one interaction 

with a financial professional. 

Indeed, the SEC and FINRA recently issued a joint investor alert cautioning against

robo-advisers. Securities and Exchange Commission Office of Investor Education and 

Advocacy and Financial Industry Regulatory Authority, Joint Investor Alert, Automated 

Investment Tools (May 8, 2015), attached hereto as Exhibit A. The problems with roboadvisers identified in the alert are plentiful, but all point to the likelihood that an investor will 

receive and follow poor or incorrect investment advice. For example, the alert instructs 

investors to “[b]e aware that an automated tool may rely on assumptions that could be 

incorrect or do not apply to your individual situation,” and therefore it could “suggest 

investments . . . that may not be right for you.” Id. The automated tool “may ask questions 

that are over-generalized, ambiguous, misleading, or designed to fit you into the tool’s 

predetermined options.” Id. And, if the automated tool “does not allow you to interact with 

an actual person,” the alert warns, “you may lose the value that human judgment and 

oversight, or more personalized service, may add to the process.” Id. 

For all of these reasons, the DOL cannot base its final rules on a conclusion that firms 

operating on a fee-based model will bridge the “advice gap” created by the rules. That

determination would rest on the unsubstantiated assertions of a small number of firms whose 

market position and viability are unknown to the Department, and would depend in part on 

increased use of an investment tool that the agency with expertise in the area has cautioned 

sternly against. A handful of unverified testimonials—from firms and an industry with 

which the Department has limited familiarity—are insufficient ground to reject the broad 
September 24, 2015

Page 11 

consensus of leading firms in the industry, with support from the industry’s principal 

regulators.

6

 

III. Commenters’ Criticisms Of FINRA Arbitration Are Misplaced. 

A number of rulemaking commenters have urged the Department to revise the Best 

Interest Contract Exemption to preclude arbitration. Some of these commenters have been 

particularly critical of FINRA as an arbitral forum. See, e.g., Comment Letter of Consumer 

Action at 2 (July 9, 2015) (alleging, without support, that arbitration is “an opaque, unfair 

process that benefits the brokerage industry”); Comment Letter of American Association for 

Justice at 4 (July 21, 2015) (stating, without analysis, that “the mandatory nature” of FINRA 

arbitration “undermines a fair and robust forum”). These comments reflect a mistaken 

understanding of the Department’s statutory role and authority, and of the merits of 

arbitration as a means of resolving disputes. 

 

6 A witness for the Consumer Federation of America suggested at the hearing that 

industry’s concerns with a fee-based model are unfounded, and are similar to concerns 

that were voiced—but not borne out—during efforts to vacate SEC Rule 202(a)(11)-1. 

Hr’g Tr. 116. That rule would have allowed broker-dealers to offer fee-based brokerage 

accounts without registering as investment advisers. 70 Fed. Reg. 20,424 (Apr. 19, 

2005). Some of that rule’s supporters argued that broker-dealers would find it too 

expensive to offer the accounts as registered investment adviser (“RIA”) accounts, but 

this witness contended that after the rule was vacated by the D.C. Circuit, many brokerdealers did indeed convert the accounts to RIA accounts. 

 The comparison is inapt. Brokers offered fee-based brokerage accounts to clients that 

wanted that higher level of service and advice; the fees paid for that higher level of 

service, and therefore broker-dealers continued to offer the service after the rule was 

vacated. DOL, by contrast, would force customers onto a more expensive business 

platform that they do not want and that in many cases their accounts cannot sustain 

financially. Moreover, DOL’s proposals would inaugurate a much more radical reordering of the industry than was at issue with the SEC’s Rule. The same can be said of 

the argument that the DOL’s proposals are akin to the Certified Financial Planner 

Board’s recent establishment of Standards of Professional Conduct. See Hr’g Tr. 

28. Professional standards set by a credentialing organization are different in kind and 

far less intrusive than the DOL’s complex fiduciary rules, which—among other things—

would be enforceable through private rights of action and class action litigation. 
September 24, 2015

Page 12 

As an initial matter, the Department has no authority to preclude parties from 

agreeing in advance that they will resolve any disputes by binding arbitration. See Comment 

Letter of Gibson, Dunn & Crutcher LLP at 16-17 (July 20, 2015). As the Supreme Court has 

repeatedly emphasized, the Federal Arbitration Act (“FAA”) embodies a “liberal federal 

policy favoring arbitration agreements,” Moses H. Cones Mem’l Hosp. v. Mercury Constr. 

Corp., 460 U.S. 1, 24 (1983), and only a “contrary congressional command” can override the 

FAA’s mandate that arbitration agreements be enforced according to their terms, 

CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012) (internal quotation marks 

omitted). ERISA contains no such command. See Kramer v. Smith Barney, 80 F.3d 1080, 

1084 (5th Cir. 1996); Bird v. Shearson Lehman/Am. Express, Inc., 926 F.2d 116, 120 (2d Cir. 

1991). It should go without saying, moreover, that the Department cannot use an authority to 

exempt entities from regulation as a means of precluding arbitration and compelling parties

to litigate in court. If the Department were to attempt to do so, despite the clear command of 

the FAA and the vigilance with which that command has been enforced by the courts, it 

would only increase the appearance that the Department has improperly used its exemptive 

authority to augment its power and erect a new regulatory and enforcement framework. See 

Comment Letter of U.S. Chamber of Commerce & U.S. Chamber Institute for Legal Reform 

at 4-11 (July 20, 2015). And of course, such a major increase in the regulatory burdens of 

the original proposal would require re-proposal and the opportunity for notice and comment. 

In any event, the criticisms of arbitration, and the FINRA forum in particular, are 

mistaken. Arbitration offers greater “simplicity, informality, and expedition” than litigating 

in court. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 

(1985). By agreeing to arbitrate, parties do not “forgo [their] substantive rights . . . [but] only 

submit[] to their resolution in an arbitral, rather than a judicial, forum.” Rodriguez de Quijas 

v. Shearson/Am. Express, Inc., 490 U.S. 477, 481 (1989) (quoting Mitsubishi, 473 U.S. at 

628). 

There is ample evidence that FINRA offers a fair arbitral forum that provides these 

benefits and guarantees investors all of the “[s]ubstantive [r]ights [a]vailable to [t]hem in 

[l]itigation,” including the ability to recover punitive damages and attorney’s fees. See 

SIFMA, White Paper on Arbitration in the Securities Industry at 33 (Oct. 2007) (citing 

Rodriguez de Quijas, 490 U.S. at 481), attached hereto as Exhibit B (“SIFMA White 

Paper”). FINRA arbitration is more efficient and less expensive than litigating in court, 

which is particularly beneficial to investors with small claims. FINRA arbitrations reach 

resolution quickly, in 14 to 15 months on average. FINRA, Dispute Resolution Statistics

(Aug. 2015), available at https://www.finra.org/arbitration-and-mediation/dispute-resolutionstatistics (last visited Sept. 23, 2015). In comparison, in the 12-month period ending in 

March 2014, the average case going to trial in federal court had taken 24.4 months to reach 

resolution. See U.S. Courts, Table C-5 – U.S. District Courts – Civil Federal Judicial 
September 24, 2015

Page 13 

Caseload Statistics (Mar. 31, 2014), available at http://www.uscourts.gov/statistics/table/c5/federal-judicial-caseload-statistics/2014/03/31. Further, investors benefit from the speedy 

payment of FINRA awards—once a case is decided against a firm or individual broker, 

FINRA requires payment of the award within 30 days, upon penalty of suspension from the 

industry. Securities and Exchange Commission, FINRA Statement on Key Issues, SEC 

Investor Advisory Committee Panel on Securities Arbitration at 6 (May 17, 2010). 

As for costs, the average legal costs of FINRA arbitration in 2007 were $22,000 less 

than the costs for litigating in court, according to one estimate. SIFMA White Paper at 3. 

This is due in part to FINRA’s Customer Code of Arbitration, which “permits extensive 

document discovery while discouraging time-consuming and costly depositions,” and 

“explicitly empowers arbitrators to impose sanctions on any party for discovery 

intransigence.” Jill I. Gross, The End of Mandatory Securities Arbitration?, 30 Pace L. Rev. 

1174, 1187 (2010). Unlike in court, moreover, the costs of arbitration are significantly 

subsidized by the industry; FINRA waives the hearing fees for investors who can show 

financial hardship and pays for the hearing facilities and arbitrator compensation at no cost to 

the parties. FINRA Statement on Key Issues at 3. While one commenter asserts that 

investors need experienced counsel to arbitrate before FINRA, see Comment Letter of Better 

Markets at 25-26 (July 21, 2015), litigating in court is no different. Moreover, parties who 

cannot afford counsel can represent themselves in FINRA or engage a non-attorney 

advocate. See SIFMA White Paper at 21 (citing FINRA, Code of Arbitration Procedure 

§ 12202). 

The lower costs and more efficient, expedited process associated with arbitration 

result in a far greater number of investors having their claims heard on the merits than occurs 

in court. About 20 percent of all arbitration claims before FINRA, for example, are heard on 

the merits and decided by arbitrators, compared with approximately 1.5 percent of all civil

claims in court. SIFMA White Paper at 3. 

Some rulemaking commenters find fault here too, objecting that arbitral awards are 

not “publicly available” and are not necessarily accompanied by an opinion explaining the 

basis for the decision. See, e.g., Comment Letter of Better Markets at 27. In fact, FINRA 

discloses all awards on a publicly-available, free database that has been searched more than 

five million times. FINRA Statement on Key Issues at 9. And FINRA Customer Rule 

12904(g) expressly permits parties to jointly request an “explained decision,” which is “a 

fact-based award stating the general reason(s) for the arbitrators’ decision.” A written 

opinion is hardly necessary for parties to receive due process and a fair opportunity to be 

heard, however—juries, also, provide no written opinion—and it is entirely reasonable for 

parties to contract instead for the relatively swift, lower-cost forum provided by arbitration. 
September 24, 2015

Page 14 

Another criticism voiced by commenters is that some arbitrators apply equitable 

principles rather than hewing to black letter law. E.g., Comment Letter of James D. Keeney 

at 2 (July 14, 2015) (“arbitrators are not required to follow federal or state statutes or 

regulations, including this one”). But numerous investor advocates have concluded that this 

reported tendency may make arbitration a more favorable forum for investors than being in 

court. See, e.g., Jill I. Gross, McMahon Turns Twenty: The Regulation of Fairness in 

Securities Arbitration, 76 U. Cin. L. Rev. 493, 509-10 (2008) (concluding that requiring 

arbitrators to strictly apply law without regard to equitable principles “would only worsen the 

available recoveries for investors”). These scholars contend that many “investors’ claims 

would face a far more hostile environment in court,” Gross, The End of Mandatory Securities 

Arbitration?, 30 Pace L. Rev. at 1189-90, and that the “equitable model of arbitration” may 

be its “great[est] advantage” because “[f]ederal securities law, in particular, is not investorfriendly,” Barbara Black, Is Securities Arbitration Fair to Investors?, 25 Pace L. Rev. 1, 12 

(2004). 

There also is no merit to the suggestion that the FINRA forum in particular is biased 

against investors. See, e.g., Comment Letter of the Secretary of the Commonwealth of 

Massachusetts at 7 (July 21, 2015); Comment Letter of Better Markets at 26. FINRA 

provides numerous procedural safeguards to protect investors, including extensive disclosure 

of arbitrators’ biographies and previous awards, investor involvement in the selection of 

arbitrators, and sanctions against firms that do not comply with arbitration procedures. See 

SIFMA White Paper at 5. Participants in FINRA arbitrations largely perceive the system as 

operating fairly, see id. at 47 (citing Gary Tidwell et al., Party Evaluation of Arbitrations: An 

Analysis of Data Collected from NASD Regulation Arbitrations 3-4 (Aug. 5, 1999)), and a 

1992 study by the Government Accountability Office found no evidence of an industry bias 

in the system, id. at 4. FINRA arbitration is subject to extensive SEC oversight, which is 

“designed to ensure FINRA’s rules . . . are fair and protect investors.” Gross, The End of 

Mandatory Securities Arbitration?, 30 Pace L. Rev. at 1185-86. FINRA statistics show that 

consumers win their cases approximately 40 to 50 percent of the time. FINRA, Dispute 

Resolution Statistics, supra. 

For these reasons, while improvements could be made in the FINRA forum—as in 

any dispute resolution system—commenters’ assertions that arbitration “nullifies the 

benefits” of the DOL rulemaking, see Comment Letter of Better Markets at 24, and 

undermines investors’ access to a “fair and robust forum,” see Comment Letter of American 

Association for Justice at 4, are baseless. Certainly the record before the Department would 

not justify revising the proposed rules to bar parties from agreeing to resolve their disputes in 

a manner endorsed by Congress and the Supreme Court, in a forum overseen by the nation’s 

principal securities regulator.
GIBBON DUNN

September 24, 2015

Page 15

***

I hope that the Department finds this submission helpful, and please do not hesitate to

contact me with any questions.

Respectfully submitted, ~_ 

~G,,,e ~,_~o~ `~'~lt==

Eugene Scalia

ES/bmr

cc: Office of Exemption Determinations
Exhibit A 
SEC.gov | Investor Alert: Automated Investment Tools

http://www.sec.gov/oiea/investor-alerts-bulletins/autolistingtoolshtm.html[9/24/2015 9:27:28 AM]

Investor Alert: Automated Investment Tools

May 8, 2015

The SEC’s Offce of Investor Education and Advocacy (OIEA) and the Financial Industry

 Regulatory Authority, Inc. (FINRA) are issuing this alert to provide investors with a general

 overview of automated investment tools.

At the swipe of a fngertip on a mobile device or the click of a mouse on a desktop computer ,

 investors can access a broad range of automated investment tools. These tools range from

 personal fnancial planning tools (such as online calculators) to portfolio selection or asset

 optimization services (such as services that provide recommendations on how to allocate

 your 401(k) or brokerage account) to online investment management programs (such as

 robo-advisors that select and manage investment portfolios).

Many fnancial professionals ha ve used automated investment tools for decades to help

 customers build and manage their investment portfolios, and a growing number of these

 tools are now available directly to investors from a variety of sources. While automated

 investment tools may offer clear benefts—including low cost, ease of use, and broad access

—it is important to understand their risks and limitations before using them. Investors should

 be wary of tools that promise better portfolio performance.

Automated Investment Tool Tips

Consider the following fv e tips before using any automated investment tool:

1. Understand any terms and conditions.

Review all relevant disclosures for an automated investment tool. Understand any terms and

 conditions, such as the fees and expenses associated with using the tool or with selling or

 purchasing investments. Find out how you can terminate any agreement or relationship, and

 how long it may take to cash out any investments if you decide to stop using the tool. If

 anything is unclear or you need additional information, directly contact the automated tool

 sponsor.

Ask an automated investment tool sponsor whether it receives any form of compensation for

 offering, recommending, or selling certain services or investments.

2. Consider the tool’s limitations, including any key assumptions.

One type of automated tool called an investment analysis tool provided by registered

 securities frms and individuals must describe the criteria and methodology used, including

 the tool's limitations and key assumptions. Be aware that an automated tool may rely on

 assumptions that could be incorrect or do not apply to your individual situation. For

 example, an automated investment tool may be programmed to use economic assumptions

 that will not react to shifts in the market. If the automated tool assumes that interest rates

 will remain low but, instead, interest rates rise, the tool’s output will be fa wed. 

In addition, an automated investment tool, like other investment programs, may be

Investor Alerts and Bulletins

Company Filings | More Search Options

Search SEC Documents
SEC.gov | Investor Alert: Automated Investment Tools

http://www.sec.gov/oiea/investor-alerts-bulletins/autolistingtoolshtm.html[9/24/2015 9:27:28 AM]

 programmed to consider limited options. For example, an automated investment tool may

 only consider investments offered by an affliated frm.

3. Recognize that the automated tool’s output directly depends on what information

 it seeks from you and what information you provide.

Which questions the tool asks and how they are framed may limit or infuence the information

 you provide, which in turn directly impacts the output that an automated investment tool

 generates. If any of the questions are unclear or you do not understand why the information

 is being sought, ask the tool sponsor. Be aware that a tool may ask questions that are overgeneralized, ambiguous, misleading, or designed to ft y ou into the tool’s predetermined

 options.

In addition, be very careful when inputting your answers or information. If you make a

 mistake, the resulting output may not be right for you.

4. Be aware that an automated tool’s output may not be right for your fnancial

 needs or goals.

An automated investment tool may not assess all of your particular circumstances, such as

 your age, fnancial situation and needs, in vestment experience, other holdings, tax situation,

 willingness to risk losing your investment money for potentially higher investment returns,

 time horizon for investing, need for cash, and investment goals. Consequently, some tools

 may suggest investments (including asset-allocation models) that may not be right for you.

For example, an automated investment tool may estimate a time horizon for your

 investments based only on your age, but not take into account that you need some of your

 investment money back in a few years to buy a new home. In addition, automated tools

 typically do not take into account that your fnancial goals ma y change.

If the automated investment tool does not allow you to interact with an actual person,

 consider that you may lose the value that human judgment and oversight, or more

 personalized service, may add to the process.

5. Safeguard your personal information.

Be aware that an automated tool sponsor may be collecting your personal information for

 purposes unrelated to the tool. Understand when and with whom your personal information

 may be shared. If you have questions that are not answered in the tool’s privacy policy,

 contact the tool’s sponsor for more information.

Also, look out for phishing and other scams designed to trick you into revealing personal

 fnancial information. Unless you are accessing an account that you established, do not

 provide bank or brokerage account numbers, passwords, PINs, credit card information,

 Social Security numbers, or other personally identifable information.

When using investment tools online, take these steps to protect your personal fnancial

 information:

Do not provide payment information if the address bar of the website indicates that the

 web address begins with “http” (instead of “https”).

Pick a “strong” password, keep it secure, and change it regularly.

Password-protect mobile devices that are linked to investment tools or accounts.

Avoid accessing investment tools or accounts on a shared computer or through an

 unsecure wireless connection.

For more online security tips, read Investor Bulletin: Protecting Your Online Brokerage

 Accounts from Fraud and “Phishing” and Other Online Identity Theft Scams: Don’t Take the
SEC.gov | Investor Alert: Automated Investment Tools

http://www.sec.gov/oiea/investor-alerts-bulletins/autolistingtoolshtm.html[9/24/2015 9:27:28 AM]

Modified: May 8, 2015

Site Map Accessibility Contracts Privacy Inspector General Agency Financial Report Budget & Performance Careers

Contact FOIA No FEAR Act & EEO Data Whistleblower Protection Open Government Plain Writing Links Investor.gov

USA.gov

 Bait.

While automated investment tools are programmed to generate outputs based on preset

 options, it is up to you to decide whether and when to rely on these tools in making your

 investment decisions.

For More Information

Check the SEC’s Investment Adviser Public Disclosure (IAPD) database or FINRA’s

BrokerCheck to research the background, including registration or license status and

 disciplinary history, of any individual or frm offering, recommending, or selling an

 investment.

Receive the latest Investor Alerts and Bulletins from OIEA by email or RSS feed. Visit

Investor.gov , the SEC’s website for individual investors. Like OIEA on Facebook at

 www.facebook.com/secinvestoreducation. Follow OIEA on Twitter @SEC_Investor_Ed.

Ask a question or call the SEC at (800) 732-0330 (or 1-202-551-6551 from outside of the

 U.S.).
Exhibit B 
1

1

WHITE PAPER ON ARBITRATION IN THE 

SECURITIES INDUSTRY:

2

The success story of an investor protection focused 

institution that has delivered timely, cost-effective, and 

fair results for over 30 years. 

OCTOBER 2007 

 

1

 SIFMA brings together the shared interests of more than 650 securities firms, banks and 

asset managers. SIFMA’s mission is to promote policies and practices that work to expand 

and perfect markets, foster the development of new products and services and create 

efficiencies for member firms, while preserving and enhancing the public’s trust and 

confidence in the markets and the industry. SIFMA works to represent its members’ interests 

locally and globally. It has offices in New York, Washington D.C., and London and its 

associated firm, the Asia Securities Industry and Financial Markets Association, is based in 

Hong Kong. 

2

 This paper is the collective effort of SIFMA staff, SIFMA’s Arbitration and Litigation Advisory 

Committees, and the Compliance and Legal Division of SIFMA, which consists of over 2,500 

professionals either employed by the industry, outside counsel or other entities serving the 

securities industry, in collaboration with outside counsel, Paul, Weiss, Rifkind, Wharton & 

Garrison LLP. 
Table of Contents 

FOREWORD..................................................................................................................... 1

I. Executive Summary............................................................................................ 2

II. History of Arbitration in the Securities Industry .............................................. 6

III. For Over Thirty Years, the Public Has Had a Role in the Oversight of 

Securities Arbitration for the Benefit of Investors........................................... 7

A. All Proposed SRO Arbitration Rules are Subject to Public 

Comment and SEC Approval .................................................................... 8 

B. Regulatory Oversight Extends Beyond the Rulemaking Process ........... 10 

C. Legislative and SRO Oversight ............................................................... 13 

IV. Securities Arbitration Offers Strong Procedural Protections to 

Ensure Investors a Fair Process and an Impartial Forum............................. 15

A. Procedural Safeguards Ensure Fairness in the Selection of an 

Arbitrator or Panel ................................................................................... 16 

1. Potential arbitrators are required to provide detailed 

biographical information and to disclose potential conflicts 

of interest..................................................................................... 16 

2. Either a sole public arbitrator or a panel composed of a 

majority of public, non-industry arbitrators will hear a 

dispute ......................................................................................... 17 

3. Investors are able to choose the arbitrators to hear a 

dispute ......................................................................................... 19 

B. Procedural Safeguards in Favor of the Investor Exist Throughout 

the Entire Arbitration Process.................................................................. 20 

V. Securities Arbitration Is Faster and Less Costly Than Litigation ................ 25

A. Motion Practice Is Limited in Arbitration .................................................. 26 

B. Discovery Is Narrowly Tailored and Less Costly in Arbitration................ 28 

C. Faster Resolution of Disputes Benefits Both Parties............................... 29 

VI. The Overwhelming Weight of the Evidence Illustrates that Securities 

Arbitration is Fair to Investors......................................................................... 31

A. Parties in Arbitration Are Far More Likely To Have Their Claims 

Decided Based on a Full Factual Record................................................ 31 
B. SRO Arbitration Provides Parties with All of the Substantive Rights 

Available to Them in Litigation ................................................................ 33 

C. SRO Arbitration Is Unbiased ................................................................... 34 

1. Statistical evidence shows that SRO arbitrations are not 

biased in favor of the industry...................................................... 34 

2. The Solin Study criticizing SRO arbitrations is 

fundamentally flawed................................................................... 37 

D. Parties Believe SRO Arbitrations are Fair............................................... 47 

VII. The Use of Predispute Securities Arbitration Agreements Is Fair to 

Investors and Serves the Public Interest........................................................ 48

VIII. Conclusion......................................................................................................... 53

Appendix A (Chronology of Improvements to Securities Arbitration Procedures) ........ 55 

Appendix B (Arbitration Is Faster Than Litigation)......................................................... 62 

Appendix C (More Cases Are Heard Before a Decision-Maker in Arbitration 

Than in Court) ..................................................................................................... 63 

Appendix D (The Total Percentage of Claimants Who Recover Damages or 

Other Relief in Arbitration or by Settlement Is Favorable)................................... 64 

Appendix E (Investors’ Inflation-Adjusted Recoveries in Arbitration Have 

Increased) ........................................................................................................... 65 

Appendix F (Many Cases are Small Claims, Which are Better-Suited for 

Arbitration Than Litigation).................................................................................. 66 

Appendix G (The Presence of an “Industry” Arbitrator Has No Material Impact on 

Customer Wins) .................................................................................................. 67 

ii 
FOREWORD 

In recent months, the use of predispute arbitration agreements in 

consumer contracts has come under attack from various critics, including members of 

the claimants’ bar and the press. As part of this trend, legislators introduced the 

“Arbitration Fairness Act of 2007,” H.R. 3010, in the United States House of 

Representatives on July 12, 2007. Along with its companion bill in the Senate, S. 1782, 

the legislation would ban predispute arbitration agreements in consumer contracts. The 

concerns that gave rise to these bills focus on unsupervised arbitration programs that 

use untrained arbitrators, conduct hearings far from the consumer’s home, and involve 

hidden costs the consumer must bear.3

 Securities industry arbitration suffers none of 

these defects. Rather, securities arbitration affords investors the opportunity to have 

their claims heard close to home, before highly trained and experienced arbitrators, in a 

forum that has proven to resolve disputes at least as fairly as the judicial system, and 

much faster and less expensively. 

This recent attack on predispute arbitration agreements is not the first. 

Congress considered and rejected similar legislation in 1988. That year, the “Securities 

Arbitration Reform Act” was introduced to amend the Securities Exchange Act of 1934 

 

3

 Sen. Feingold, Rep. Johnson Introduce Measure to Preserve Consumer Justice (July 12, 

2007) available at http://feingold.senate.gov/~feingold/releases/07/07/20070712.html. On 

September 27, 2007 Senator Feingold released a statement regarding Public Citizen’s recent 

report on arbitrations conducted by the National Arbitration Forum (“NAF”) in California. The 

report asserts that private arbitration companies which receive millions of dollars in repeat 

business have a powerful incentive to rule in companies’ favor and finds that NAF has, in 

fact, “ruled in favor of credit companies in 94 percent of the disputes it resolved.” Statement 

of U.S. Senator Russ Feingold: At a Press Conference with Public Citizens on Protecting 

Consumers from Unfair Credit Card Contracts (September 27, 2007) available at 

http://feingold.senate.gov/~feingold/statements/07/09/20070927mb.htm. Securities 

arbitrators do not face a similar enticement: they are not employees of the self-regulatory 

organizations (“SROs”) that conduct the arbitration and, no matter their decisions, will 

continue to be placed on neutral lists of potential arbitrators for a panel. Furthermore, as 

discussed infra, statistics cited by Public Citizen and Senator Feingold are simply not 

applicable to securities arbitration where two-thirds of all claimants recover damages or other 

non-monetary relief. 

1
(“1934 Act”) to prohibit any broker or securities firm from entering into a predispute 

agreement to arbitrate so long as that agreement is a condition for establishing a 

customer account.4

 The House of Representatives held three hearings on the proposed 

legislation and heard testimony from, among others, the chairman of the Securities and 

Exchange Commission (“SEC”), legal scholars, investors, claimants’ attorneys and 

members of the securities industry, and it chose not to pass the legislation. As 

Congress recognized approximately twenty years ago, securities industry arbitration 

serves the interests of both investors and the industry; it should not now disrupt a 

system that not only continues to work well, but also continues to provide an everexpanding array of safeguards for investors.5

 

I. Executive Summary 

For over three decades, applicable regulations have provided investors 

with an absolute right to have their disputes arbitrated.6

 Investment firms have gained 

the same right in return by entering into predispute arbitration agreements with their new 

customers. Such contracts ensure that both sides are treated fairly and effectuate the 

 

4

 See Securities Arbitration Reform Act of 1988, H.R. 4960, 100th Cong. (1988). 

5

 Importantly, H.R. 4960 contained directives to the SEC that it shall, among other things, 

require that any “agreement to arbitrate future disputes... [be] clearly and prominently 

disclose[d] to the customer...” and to SROs that they “...specify the procedures for obtaining 

and enforcing, timely production of documents and witnesses...” as well as “provide the 

customer with reasonable biographical information and the right to challenge the selection of 

such arbitrators.” As discussed infra, these measures have been adopted—and often 

expanded upon—by the SROs. 

6

 See § 12200 of the National Association of Securities Dealers (“NASD”) Code of Arbitration 

Procedure (“Code of Arbitration Procedure”) and Rule 600A(a)(ii) New York Stock Exchange 

Arbitration Rules (“NYSE Rule”) (directing that members of the securities industry must 

arbitrate upon demand of the customer). NASD’s rules have required member firms to 

arbitrate at the investor’s demand since March 1972. See NASD Manual (July 1, 1974) 

(noting that former Code of Arbitration Procedure ¶ 3702, § 2(a)(2) took effect on March 9, 

1972).

2 
public policy in favor of predispute arbitration agreements that has been recognized by 

both Congress and the United States Supreme Court.7

 

Opponents of predispute arbitration agreements, however, seek neither 

fairness nor equality; rather, they seek an unfair strategic advantage. They want 

investors to retain their right to arbitrate as they see fit, but to deprive investment firms of 

the same right. Equally importantly, they ignore the many unique and attractive features 

of securities arbitration, some of which include: 

• Securities arbitration is faster and less expensive 

than court-based litigation. 

o A 1988 study found that average legal costs were $12,000 less in arbitration than 

in litigation. Adjusting solely for inflation, average legal costs today are at least 

$22,000 less in arbitration than in litigation. Given the significant increase in 

litigation costs since 1988, that gap is most likely substantially wider. More 

recent studies support this conclusion. 

o Cases filed in securities arbitration are resolved, on average, approximately 40 

percent faster than cases filed in court.8

 

o Arbitration saves time and money because motion practice and discovery—both 

of which may be used as expensive delaying tactics—are disfavored and more 

limited in arbitration versus litigation. 

• Securities arbitration is more accessible

than court-based litigation. 

o Relaxed pleading standards in securities arbitration encourage disputes to be 

filed. Recent Supreme Court decisions make certain that investors are far more 

likely to have their claims dismissed in court than in arbitration, where dismissals 

are rare. Thus, arbitration provides investors a much greater chance to have 

their “day in court.”

o The statistics bear out this fact. Whereas 20 percent of all arbitration claims are 

ultimately heard on the merits and decided by arbitrators, only about 1.5 percent 

of all civil claims in court are decided by a judge or jury.9

 

7

 Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 225-226 (1987). 

8 See Appendix B (Arbitration is Faster Than Litigation). 

9

 See Appendix C (More Cases Are Heard Before a Decision-Maker in Arbitration Than in 

Court). 

3 
o Approximately 25 percent of all arbitrations involve claims of less than $10,000, a 

sum for which it is often not cost effective to litigate, whether in federal or state 

court.10 

• Investors continue to fare well in securities arbitration. 

o The percentage of securities arbitration claimants who recover—either by award 

or settlement—has held steady in recent years, and in 2006 was 66 percent.11

o Between 1995 and 2004, investors’ average inflation-adjusted recoveries in 

securities arbitration have followed a generally increasing trend.12

• Securities arbitration is perceived to be fair, and is in fact fair. 

o The most recent survey of securities arbitration participants found that 

approximately 93 percent of those surveyed—more than 50 percent of whom 

were investors—believed their case had been handled fairly and without bias.13

o A 1992 GAO evaluation of the securities arbitration system found “no indication 

of a pro-industry bias in decisions at industry-sponsored forums.” 

o A review of all 2005 and 2006 arbitration decisions found that the presence of an 

“industry” arbitrator has no material impact on customer wins.14

o Securities arbitration is in fact fair because arbitrators understand the law and 

ensure it is properly followed and applied in each case. 

• Multiple regulators oversee the securities arbitration system and have ensured 

its development as an investor protection focused institution. 

o For over 30 years, securities arbitration has been closely regulated by the SEC 

and by SEC-supervised SROs, such as the Financial Industry Regulatory 

Authority (“FINRA”).15

 

10 See Appendix F (Many Cases are Small Claims, Which are Better-Suited for Arbitration Than 

Litigation). 

11 See Appendix D (The Total Percentage of Claimants Who Recover Damages or Other Relief 

in Arbitration or by Settlement is Favorable). 

12 See Appendix E (Investors’ Inflation-Adjusted Recoveries in Arbitration Have Increased). 

13 See Gary Tidwell, Kevin Foster and Michael Hummel, Party Evaluation of Arbitrations: An 

Analysis of Data Collected from NASD Regulation Arbitrations 3 (Aug. 5, 1999), available at 

http://www.nasd.com/web/groups/med_arb/documents/mediation_arbitration/nasdw_009528.

pdf. 

14 See Appendix G (The Presence of an “Industry” Arbitrator has No Material Impact on 

Customer Wins). 

15 FINRA was established on July 30, 2007 through the consolidation of NASD and the member 

regulation, enforcement and arbitration functions of NYSE. See FINRA News Release, 

4 
o Numerous procedural safeguards have evolved to protect investors and ensure 

fairness in securities arbitration, including:16 

o The requirement that arbitrators must provide and regularly update extensive 

biographical disclosures, including employment history, training, conflicts and 

associations with industry members; 

o Disclosure of prior awards of each proposed arbitrator; 

o Investor involvement in the selection process for arbitrators and arbitration 

panels; 

o Availability of sanctions against securities firms for failure to comply with the 

Code of Arbitration Procedure, including discovery obligations, and 

disciplinary referrals to SRO regulators for potential violations of federal 

securities laws or SRO rules; 

o Assurance that a hearing will take place at a location close to the customer’s 

residence; and 

o Smaller fees for investors than for member firms. 

• Predispute arbitration agreements are fair to investors and serve the public 

interest. 

o Predispute arbitration agreements contribute a valuable degree of predictability 

to the relationship between the parties. 

o Predispute arbitration agreements put the parties on equal footing once a dispute 

emerges and deter forum selection tactics. 

o In the absence of a predispute arbitration agreement, decisions whether to 

arbitrate an existing dispute will be governed by tactical advantage. The 

evidence shows that the odds of an agreement to arbitrate being entered into 

after a dispute has arisen are very low. 

• In summary, the existing system serves the best interests of investors. Predispute 

arbitration agreements make it possible for investors to pursue small claims, provide 

a friendly forum for pro se investor claimants, lower overall costs borne by investors 

and securities firms, and secure the oversight of expert regulators, all within a 

framework that was specifically designed for investor claims and has demonstrated 

fairness for decades. 

 

 

“NASD and NYSE Member Regulation Combine to Form the Financial Industry Regulatory 

Authority—FINRA”(July 30, 2007), available at

http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P036329. 

16 See Appendix A (Chronology of Improvements to Securities Arbitration Procedures). 

5 
II. History of Arbitration in the Securities Industry 

For over 130 years, arbitration has been used to resolve disputes 

between individual investors and members of the securities industry.17 Since 1872, the 

securities exchanges and regulators have developed rules for the fair and effective 

administration of disputes so that today, FINRA, the securities industry’s largest SRO, 

manages the resolution of over 4,000 disputes a year.18 

19 Since the Federal Arbitration Act (“FAA”) became law in 1925, the legal 

system has had a “healthy regard for the federal policy favoring arbitration.”20 Based 

upon Congress’ clear direction to place arbitration agreements “upon the same footing 

as other contracts,”21 courts have consistently enforced agreements to arbitrate statutory 

claims.22

 

17 In 1817, NYSE allowed its members to arbitrate disputes that arose between them. In 1872, 

NYSE expanded the jurisdiction of its arbitral forum to hear disputes between individual 

investors and member firms. See Jill I. Gross, Securities Mediation: Dispute Resolution for 

the Individual Investor, 21 Ohio St. J. on Disp. Resol. 329, 336 (2006). NASD established its 

arbitral forum in 1968. See Testimony of Linda D. Fienberg, President NASD Dispute 

Resolution, Before the Subcommittee on Capital Markets, Insurance and Government 

Sponsored Enterprises Committee on Financial Services United States House of 

Representatives (March 17, 2005), available at

http://www.finra.org/PressRoom/SpeechesTestimony/LindaFienberg/p013652 ("NASD has 

operated the forum since 1968, providing a fair process through arbitration and mediation for 

investors to settle disputes with their brokers."). 

18 Prior to the consolidation of NASD and NYSE, the NASD administered "over 94 percent of 

the investor-broker disputes filed every year." Letter from Linda D. Fienberg, NASD, dated 

January 26, 2007 (referencing the SICA 13th Report (2005)). 

19 9 U.S.C. § 1 et seq. (2000). 

20 Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983). 

21 H.R. Rep. 68-96, 1, 2 (1924). 

22 See e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 30 (1991) (“...generalized 

attacks on arbitration ‘res[t] on suspicion of arbitration as a method of weakening the 

protections afforded in the substantive law to would-be complainants,’ and as such they are 

‘far out of step with our current strong endorsement of the federal statutes favoring this 

method of resolving disputes.’” (citing Rodriquez de Quijas v. Shearson/American Express, 

Inc., 490 U.S. 477, 481 (1989)); McMahon, 482 U.S. 220; Southland Corp. v. Keating, 465 

U.S. 1 (1984). 

6 
The validity of a predispute arbitration agreement in the setting of 

securities claims was considered and confirmed in the Supreme Court’s 1987 decision in 

Shearson/American Express, Inc. v. McMahon. In McMahon, Justice O’Connor noted 

that securities arbitrators are “readily capable” of handling complex claims, that 

streamlined procedures are not inconsistent with the underlying substantive rights, and 

that judicial scrutiny of arbitration awards—while limited—is sufficient to ensure that 

arbitrators meet their statutory obligations.23 The Court also found that any mistrust of 

arbitration as an efficient and fair means to resolve disputes is particularly unfounded in 

the context of securities arbitration, which is regulated by the SEC, which has “expansive 

power to ensure the adequacy of the arbitration procedures employed by the SROs.”24

Two years later, the Court reinforced the importance of this unique aspect 

of securities arbitration when it held that claims brought pursuant to the Securities Act of 

1933 (“1933 Act”) may also be arbitrated pursuant to a predispute agreement made 

between the brokerage firm and the investor.25 Since these rulings, members of the 

securities industry have generally included arbitration agreements in their contracts with 

investors to secure the benefits of arbitration first recognized by Congress more than 80 

years ago. 

III. For Over Thirty Years, the Public Has Had a Role in the Oversight of 

Securities Arbitration for the Benefit of Investors 

Beginning in 1971, Congress undertook a “searching reexamination of the 

competitive, statutory, and economic issues facing the securities markets, the securities 

industry, and of course, public investors” in order to ensure that the regulatory structure 

 

23 McMahon, 482 U.S. at 232 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 

473 U.S. 614, 633-34 (1985). 

24 Id. at 233. 

25 Rodriquez de Quijas, 490 U.S. at 481-483. The claim in McMahon was brought pursuant to 

the 1934 Act. 

7 
had kept pace with the economic growth and shift in public investment patterns since the 

early 1930s.26 The result was that the SEC was granted “expansive power” to ensure 

the adequacy of the various exchanges and NASD’s arbitration rules and procedures.27 

Since 1975, the SEC has used this authority to enhance the accessibility, neutrality, and 

fairness of the forum, all to the benefit of investors. 

As recently as July 26, 2007, the SEC exercised its expansive oversight 

power when it approved NASD’s proposal to consolidate the NASD and NYSE 

arbitration forums.28 In so doing, the Commission addressed the argument that public 

investors be permitted to resolve their disputes either in court or in arbitration. The SEC 

concluded that in “light of the policy supporting arbitration evinced by the Federal 

Arbitration Act and the Supreme Court precedent upholding securities arbitration 

agreements, and the requirements of Section 19(b)(2) of the Exchange Act” that dictate 

the SEC act consistently with the requirements of the 1934 Act, consolidation of the two 

arbitral forums need not be “conditioned on providing customers with a choice of another 

dispute resolution forum.”29

A. All Proposed SRO Arbitration Rules are Subject to Public Comment 

and SEC Approval 

Each SRO, including FINRA, is required to file with the SEC any 

proposed rule or proposed change to its rules—including rules concerning the arbitration 

process—which the SEC, in turn, publishes for public comment.30 Only after the public 

has had a meaningful opportunity to review and comment upon the proposed rule or rule 

 

26 H.R. Conf. Rep. No. 94-229, 91 (1975). 

27 See McMahon, 482 U.S. at 233-234; see also 15 U.S.C. § 78s (2000). 

28 Securities and Exchange Commission, Release No. 34-56145, 77-78 (July 26, 2007), 

available at http://www.sec.gov/rules/sro/nasd/2007/34-56145.pdf. 

29 Id. at 78. 

30 15 U.S.C. § 78s(b)(1) (2000). 

8 
31 change will the SEC either disapprove or approve a rule change. The SEC will 

approve a rule change only if it finds the change to be “consistent with the requirements 

of [the 1934 Act] and the rules and regulations thereunder.”32 The rule must also be 

designed to “protect investors and the public interest” and cannot “permit unfair 

discrimination between customers, issuers, brokers, or dealers.”33

The SEC and, in turn, the SROs, have been responsive to public 

comments concerning the effect of certain proposed rules upon investors: observations 

from interested parties have often resulted in an SRO amending or abandoning 

proposed rules. One example of this responsiveness is NASD’s decision to abandon its 

proposed rule on the use of choice-of-law provisions in predispute arbitration 

agreements.34 On November 29, 1999, the SEC published for comment a proposed rule 

change to amend NASD Rule 3110(f) to provide, among other things, that choice of law 

provisions are unenforceable “unless there is a significant contact or relationship 

between the law selected and either the transaction at issue or one or more of the 

parties.”35 The purpose of the rule was to protect investors from the use of arbitrary 

choice of law provisions in predispute arbitration agreements.36 

After several amendments to the proposed rule change, notice of the 

proposal was again published in the Federal Register on September 12, 2003. The SEC 

 

31 15 U.S.C. § 78s(b)(2) (2000); see also 5 U.S.C. § 553 (2000). 

32 15 U.S.C. § 78s(b)(2)(B) (2000).

33 15 U.S.C. § 78f (b)(5) (2000). 

34 See Self-Regulatory Organizations; Order Granting Approval to Proposed Rule Change as 

Amended and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 5 

by the National Association of Securities Dealers, Inc., regarding NASD Rule 3110(f) 

Governing Predispute Arbitration Agreements with Customers, 69 Fed. Reg. 70,293 (Dec. 3, 

2004).

35 Id. at 70,294. 

36 Id.

9 
received 24 comments on the proposal, the majority of which opposed the proposed 

provision relating to the use of choice-of-law provisions.37 Commentators, including 

claimants’ counsel, were concerned that “because relevant case law regarding choiceof-law provisions in predispute arbitration agreements has evolved considerably over the 

past five years....proposed paragraph (f)(4)(B) could be interpreted to endorse choiceof-law clauses that may not be enforceable under state law.”38 In response to these 

comments, NASD withdrew this proposed provision on January 9, 2004.39

Finally, two additional protections exist to ensure that substantive and 

procedural arbitral rules are consistent with the overarching goal of the 1933 Act and the 

1934 Act to protect investors. First, SEC rulemaking is subject to judicial review under 

the Administrative Procedure Act (“APA”).40 Courts will review any alleged failure of the 

SEC to follow the “notice and comment” procedures provided for in § 553 of the APA. 

Second, 15 U.S.C. § 78s(c) grants the SEC the power, on its own initiative, to “abrogate, 

add to, and delete from” any SRO rule, including arbitration rules, to ensure that 

securities arbitration adequately protects the statutory rights guaranteed under the 1933 

and 1934 Acts.41 

B. Regulatory Oversight Extends Beyond the Rulemaking Process 

The SEC oversight of securities arbitration extends beyond the 

rulemaking arena. For instance, the SEC engages in frequent review of SRO arbitration 

facilities to “identify areas where procedures should be strengthened, and to encourage 

 

37 Id. at 70,293. 

38 Id. at 70,295. 

39 Id. at 70,293, 70,295. 

40 5 U.S.C. § 702 (2000).

41 15 U.S.C. § 78s(c) (2000). 

10 
remedial steps either through changes in administration or through the development of 

rule changes.”42 Such proactive efforts have ensured that the rules governing securities 

arbitration provide the investor a fair, efficient and impartial forum. 

In the late 1970’s, for example, the SEC played a pivotal role in the 

establishment of the Securities Industry Conference on Arbitration (“SICA”). SICA’s 

members consist of a majority of representatives of the investing public (including 

claimants’ lawyers), a securities industry representative, and representatives of various 

securities regulators, among others. SICA was originally charged with developing, and 

did develop, a Uniform Code of Arbitration (“Uniform Code”) which harmonized the 

various rules and procedures that SROs had been employing at the time and codified 

procedures that had been informally utilized. 43 Following the formation of FINRA, 

however, SICA no longer maintains or continues to amend the Uniform Code. 

Notwithstanding the obsolescence of its original charter, SICA’s diverse 

constituencies continue to meet on a regular basis to discuss specific rule proposals, 

and to discuss and debate current issues relating to arbitration, including, among others, 

arbitrator qualification and classification issues, electronic discovery issues, arbitrator 

disclosure and removal issues, and explained awards. Such meetings are another 

unique aspect related to securities arbitration: no other forum is the subject of 

conferences at which both investor and industry representatives, arbitrators, arbitration 

service providers and state and federal regulators convene to discuss pressing issues 

relating to the efficacy of the forum. 

 

42 Self-Regulatory Organizations; National Association of Securities Dealers, Inc; Order 

Granting Approval to Proposed Rule Change Relating to the Arbitration of Employment 

Discrimination Claims, 63 Fed. Reg. 35,299, 35,303 n.53 (June 29, 1998). 

43 J. Kirkland Grant, SECURITIES ARBITRATION FOR BROKERS, ATTORNEYS, AND INVESTORS 94-95 

(Quorum Books 1994).

11 
Another example of SEC action includes the 1998 initiative to encourage 

SROs to use “plain English” in disclosure documents and other materials used by 

investors, including the Code of Arbitration Procedure.44 NASD implemented the SEC’s 

“plain English” guidelines, simplifying language, eliminating legalistic verbiage, and 

providing definitions to eliminate the potential for consumer confusion. But NASD then 

went several steps further: it reorganized the Code of Arbitration Procedure into a more 

user-friendly format, creating a separate arbitration code specific to customer disputes 

and reorganizing the sections of the Code of Arbitration Procedure to follow the 

chronology of a typical arbitration.45 The SEC found that NASD’s revisions “make the 

process of arbitration more transparent and more accessible to users of the forum, 

including those who may file arbitration claims pro se.”

46

Finally, the SEC has commissioned studies to investigate the adequacy 

of certain aspects of SRO arbitration. Such studies have led to enhancements of SRO 

arbitration procedures. For instance, in July 2002, the SEC retained Professor Michael 

Perino from St. John’s University School of Law to assess the adequacy of arbitrator 

disclosure requirements at NASD and NYSE. Professor Perino concluded that, in his 

review of data from more than 30,000 SRO arbitrations, there was no evidence of 

 

44 Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order 

Approving Proposed Rule Change and Amendments 1, 2, 3 and 4 to Amend NASD 

Arbitration Rules for Customer Disputes and Notice of Filing and Order Granting Accelerated 

Approval of Amendments 5, 6, and 7 thereto; Order Approving Proposed Rule Change and 

Amendments 1, 2, 3 and 4 to Amend NASD Arbitration Rules for Industry Disputes and 

Notice of Filing and Order Granting Accelerated Approval of Amendments 5, 6, and 7 thereto, 

72 Fed. Reg. 4,574, 4,575 (Jan. 31, 2007); see also Code of Arbitration Procedure, available 

at http://www.finra.org/ArbitrationMediation/Arbitration/CodeofArbitrationProcedure/p009566. 

With the creation of FINRA, all securities arbitration claims filed after August 6, 2007 are 

administered under the Code of Arbitration Procedure. See NYSE Rule 600A(a)(i). A FINRA 

Code does not yet exist, but will “be melded from a harmonization of the NASD and NYSE 

Codes.” See 2006 Annual Award Survey: A SAC Award Survey Comparing Results in 2006 

to 2000-20005, Securities Arbitration Commentator, Inc. 12 (Vol. 2007, No. 2).

45 72 Fed. Reg. at 4,576. 

46 Id. at 4,601. 

12 
favoritism toward either industry members or customers, or undisclosed conflicts of 

interest, but he made a series of recommendations for strengthening the arbitrator 

disclosure requirements nonetheless.47

Professor Perino’s recommendations led NASD to modify Sections 10308 

and 10312 of the Code of Arbitration Procedure48 to expand the types of relationships 

with the securities industry that would require an arbitrator to be classified as an industry 

arbitrator, delineate the standards for removing an arbitrator from hearing a dispute, and 

clarify that arbitrators have a mandatory duty to disclose and update conflict information, 

all to “provide additional assurance to investors that arbitrations are in fact neutral and 

fair.”49

C. Legislative and SRO Oversight 

Unlike other arbitral forums, securities industry SROs are subject to 

extensive Congressional oversight, principally through Congress’ investigative arm, the 

Government Accountability Office, formerly known as the General Accounting Office 

(“GAO”). For example, in 1992, the GAO evaluated a “number of issues relating to the 

arbitration process sponsored by the securities industry self-regulatory organizations.”50 

The review found that there was “no indication of a pro-industry bias in decisions at 

industry-sponsored forums.”51 The GAO nonetheless suggested that SROs implement 

 

47 Michael A. Perino, Report to the Securities and Exchange Commission Regarding Arbitrator 

Conflict Disclosure Requirements in NASD and NYSE Arbitrations 3-5, 48 (Nov. 4, 2002). 

48 The changes are now reflected in Code of Arbitration Procedure §§ 12100(p), 12408(a), and 

12410. 

49 See NASD Notice to Members 04-49, Arbitrator Classification (effective July 19, 2004), 

available at

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p002727.pdf. 

50 U.S. General Accounting Office, Securities Arbitration: How Investors Fare 1 (1992). 

51 Id. at 6. 

13 
“internal controls” related to arbitrator qualification and selection in order to further 

ensure the fairness of arbitral proceedings.52 

In 2000, the GAO updated its 1992 study and found that the SROs had 

appropriately implemented the GAO’s 1992 recommendations by “giving arbitration 

participants a larger role in selecting arbitrators, periodically surveying arbitrators to 

verify background information, and improving arbitrator training.”53 

Public oversight of securities arbitration is not limited to the executive and 

legislative branches of government. The SROs actively oversee the arbitration process, 

and obtain extensive public participation in so doing. For instance, FINRA’s Board of 

Governors is composed of both public representatives, who hold a majority of seats, and 

industry members.54 

The securities arbitration process is also overseen by the National 

Arbitration and Mediation Committee (“NAMC”). The Code of Arbitration Procedure 

provides that the NAMC has “the authority to recommend rules, regulations, procedures 

and amendments relating to arbitration, mediation and other dispute resolution matters 

to the Board” and “has such other power and authority as is necessary to carry out the 

purposes of the Code.”55 NAMC is also charged with the “recruitment, qualification, 

 

52 Id. at 55-61. 

53 U.S. General Accounting Office, Securities Arbitration: Actions Needed to Address Problem 

of Unpaid Awards 4 (2000). 

54 An Interim Board of Governors will serve until FINRA’s three-year Transition Board of 

Governors is elected in October 2007. “Both Boards will include 11 public governors 

appointed from outside the securities industry and 10 governors from inside the securities 

industry.” See FINRA Announces Interim Board of Governors to Serve Until Annual Meeting 

for Board Elections (August 2, 2007), available at 

http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P036351.

55 Code of Arbitration Procedure § 12102(b). See also NASD Manual, Corporate Organization, 

Plan of Allocation and Delegation of Functions by NASD to Subsidiaries, NASD Dispute 

Resolution, Inc., National Arbitration and Mediation Committee, available at

http://finra.complinet.com/finra/display/display.html?rbid=1189&element_id=1159000411. 

14 
training, and evaluation of arbitrators and mediators,” and the “evaluation of existing 

rules, regulations, and procedures.”56 Like FINRA’s Board of Governors, the NAMC is 

also composed of a majority of non-industry members.57 Thus, non-industry participants 

have a significant role in shaping the procedures relating to securities arbitration. 

FINRA also provides investors with many other tools to help understand 

and easily navigate the arbitration process. For instance, FINRA provides investors with 

numerous resources on its website, including “Frequently Used Forms,” a “Questions 

and Feedback” forum, “Dispute Resolution Statistics,” the “Neutral Corner” publication, 58

and “Resources for Parties,” which provide, at one source, case-related guidance, the 

Code of Arbitration Procedure, and other helpful information for parties considering filing 

a claim or already in arbitration.59 

In sum, having been subject to stringent oversight for over 30 years, and 

with the meaningful input and contributions of SICA and NAMC, among other groups, 

SRO arbitration has evolved into a forum that offers significant and ever-improving 

safeguards to its customers. 

IV. Securities Arbitration Offers Strong Procedural Protections to Ensure 

Investors a Fair Process and an Impartial Forum 

The rules and procedures employed by FINRA are designed to 

encourage and facilitate the filing of claims and the resolution of investor disputes by 

ensuring and improving the quality and fairness of the process. In short, claimants in 

 

56 See National Arbitration and Mediation Committee, available at 

http://www.finra.org/ArbitrationMediation/FINRADisputeResolution/WhatisDisputeResolution/

NationalArbitrationMediationCommittee/index.htm. 

57 See Code of Arbitration Procedure § 12102(a)(1). 

58 See Arbitration and Mediation, available at 

http://www.finra.org/ArbitrationMediation/index.htm.

59 See Resources for Parties, available at 

http://www.finra.org/ArbitrationMediation/ResourcesforParties/index.htm. 

15 
SRO arbitration enjoy significant control over the process and stronger procedural 

protections than they would have in other arbitral forums. 

A. Procedural Safeguards Ensure Fairness in the Selection of an 

Arbitrator or Panel 

The Code of Arbitration Procedure provides three major procedural 

safeguards to ensure investor participation in the selection of a fair and unbiased 

arbitrator or arbitral panel. 

1. Potential arbitrators are required to provide detailed 

biographical information and to disclose potential conflicts of 

interest 

FINRA Dispute Resolution, which oversees all securities industry 

arbitrations between member firms and their customers, carefully selects arbitrators from 

a broad cross-section of applicants, diverse in culture, profession and background. To 

qualify, applicants must have at least “five years of full-time, paid business or 

professional experience.”60 Applicants must also be recommended in writing by two 

persons who can personally attest to their integrity and skills. These letters are reviewed 

by FINRA staff and a subcommittee of the NAMC.61 Once selected, arbitrators must 

provide and regularly update extensive biographical disclosures, including employment 

history, education, training, conflicts, and associations with industry members.62 In 

addition, before being appointed to hear a dispute, arbitrators are required to make a 

 

60 See Frequently Asked Questions About Becoming a FINRA Arbitrator, available at 

http://www.finra.org/ArbitrationMediation/ResourcesforArbitratorsandMediators/ArbitratorRecr

uitment/FrequentlyAskedQuestionsAboutBecomingaFINRAArbitrator/index.htm. 

61 Dispute Resolutions Forms, available at 

http://www.finra.org/ArbitrationMediation/ResourcesforArbitratorsandMediators/CaseRelatedI

nformationandForms/index.htm. See also NASD Dispute Resolution Arbitrator Application 

Booklet, May 2007, available at, 

http://www.finra.org/web/groups/med_arb/documents/mediation_arbitration/p017271.pdf.

62 See Self-Regulatory Organizations; Order Approving Proposed Rule Change by the National 

Association of Securities Dealers, Inc. Relating to Proposal to Conduct Background 

Verification and Charge Application Fee for NASD Neutral Roster Applicants, 68 Fed. Reg. 

5,6661-5,6662 (Oct. 1, 2003). 

16 
reasonable effort to learn of, and must disclose, any conflicts of interest related to 

hearing a particular case.63 Finally, if during the course of a hearing a conflict arises, an 

arbitrator must disclose it so that a decision can be made as to whether he or she should 

be voluntarily removed from the case or whether the matter should be referred to the 

Director or President of FINRA Dispute Resolution.64

2. Either a sole public arbitrator or a panel composed of a 

majority of public, non-industry arbitrators will hear a dispute 

Arbitration panels are composed of either a sole “public” arbitrator or a 

panel of three arbitrators, two of whom must be public, and one of whom is “non-public.” 

As defined in Code of Arbitration Procedure § 12100(p), a non-public arbitrator is a 

person who was, within the past five years, associated with a broker or dealer, 

registered under the Commodity Exchange Act, a member of an exchange or a futures 

association or associated with a person or firm registered under the Commodity 

Exchange Act. Additionally, arbitrators are often defined as non-public or “industry” 

arbitrators if they spent a substantial part of their careers, including legal careers, 

engaging in, or working on behalf of, the above listed businesses. Finally, any person 

who is employed by a financial institution that effects transactions in securities or 

monitors compliance with securities laws also is classified as a non-public or “industry” 

arbitrator. 

Under Code of Arbitration Procedure § 12100(u), the term “public 

arbitrator” refers to a person who is not engaged in any of the activities described in 

§ 12100(p) and has not been engaged in those activities for over 20 years. Additionally, 

a public arbitrator cannot be an investment advisor, an attorney or accountant whose 

firm derives over 10 percent of its revenue from any persons or entities listed in 

 

63 Code of Arbitration Procedure § 12408(a). 

64 See Code of Arbitration Procedure §§ 12408(b-c), 12410(b). 

17 
65 § 12100(p); an employee, a spouse or an immediate family member of any entity that 

controls or is controlled by a member of the securities industry; or a director or officer, or 

a spouse or an immediate family member of a person who is a director or officer of an 

entity that controls or is controlled by a member of the securities industry. 

When a claim is $25,000 or less, it is heard by a single public arbitrator.66 

If the claim ranges between $25,000 and $50,000, the FINRA panel will consist of one 

public arbitrator, unless any party requests a panel of three arbitrators, which must 

include two public arbitrators.67 If the investor’s claim is more than $50,000, or if the 

claim does not specify damages, the panel will consist of three arbitrators, unless both 

parties agree in writing to one arbitrator.68 A three-member arbitration panel must 

include two public arbitrators, one of whom serves as the chairperson.69 To qualify as a 

chair, an arbitrator must either 1) have a law degree, be a member of the bar of at least 

one jurisdiction, and have served as an arbitrator on at least two prior SRO arbitrations 

in which hearings were held, or 2) have served as an arbitrator through award on at least 

three arbitrations administered by an SRO in which hearings were held 70

.

Before serving on an arbitral panel, a candidate must complete FINRA’s 

comprehensive arbitrator training program which consists of an eight-hour online training 

 

65 In order to further enhance investor confidence in the fairness and neutrality of its arbitration 

forum, on March 12, 2007, NASD filed a proposed rule change to amend the definition of 

public arbitrator so that a professional could not be classified as a “public” arbitrator if his or 

her firm derived over $50,000 or more in annual revenue in the past two years from any 

persons listed in § 12100(p). Self-Regulatory Organizations; National Association of 

Securities Dealers, Inc., Notice of Filing of Proposed Rule Change to Amend the Definition of 

Public Arbitrator, 72 Fed. Reg. 3,9110, 3,9111 (July 17, 2007). 

66 Code of Arbitration Procedure § 12401(a). 

67 Code of Arbitration Procedure §§ 12401(b), 12402(b). 

68 Code of Arbitration Procedure § 12401(c). 

69 Code of Arbitration Procedure § 12402(b). 

70 Code of Arbitration Procedure § 12400(c). 

18 
course and a four-hour onsite classroom session, which provides “practical guidance for 

resolving common issues that arise during arbitration.”71 FINRA also offers subjectspecific online training modules on arbitrators’ duty to disclose and parties’ duties during 

the discovery process, among others. Arbitrators wishing to serve as chairperson must 

complete an additional nine-hour course to ensure that they are capable of assuming 

such significant responsibilities.72

3. Investors are able to choose the arbitrators to hear a dispute 

Claimants in SRO arbitration, unlike plaintiffs in court, have significant 

input in the composition of an SRO arbitration panel. Once a claim has been filed, 

FINRA sends both parties a randomly generated list of eight public arbitrators, eight nonpublic arbitrators, and eight public chairperson-eligible arbitrators to hear the dispute.73

The parties receive extensive disclosures regarding each potential 

arbitrator, including employment history for the past 10 years and other background 

information. The parties also have access to potential arbitrators’ prior awards on the 

FINRA website or by contacting FINRA directly. Each party may perform web-based 

searches for FINRA arbitration awards, free of charge, by simply entering the name of 

the potential arbitrator into the online database.74

After considering the relevant background information and prior awards of 

the list of potential arbitrators, each party may strike up to four arbitrators from each list 

 

71 Arbitrator Training, available at 

http://www.finra.org/ArbitrationMediation/ResourcesforArbitratorsandMediators/ArbitratorTrain

ing/ArbitratorTrainingPrograms/index.htm.

72 Id.

73 Code of Arbitration Procedure § 12403(a). If a panel consists of only one arbitrator, FINRA 

will send the parties a list of eight potential arbitrators from the chairperson roster. Code of 

Arbitration Procedure § 12403(a)(1). 

74 FINRA Dispute Resolution Homepage, available at

http://www.finra.org/ArbitrationMediation/index.htm. 

19 
75 of eight arbitrators, and rank their preferences from the remaining arbitrators. The 

ranked lists of both parties are then combined and the highest-ranked potential 

arbitrators are appointed by the Director of FINRA Dispute Resolution.76 

The Supreme Court has recognized that these extensive requirements 

and procedures promote the fairness of the process in securities arbitrations. In Gilmer

v. Interstate/Johnson Lane Corp., the Court considered NYSE rules requiring arbitrators 

to disclose extensive background information (NYSE Rule 608) and conflicts of interest 

(NYSE Rule 610), the rule permitting parties to inquire further into arbitrators’ 

backgrounds (NYSE Rule 608), and the rule permitting parties to challenge arbitrators 

(NYSE Rule 609).77 The Court noted that these rules “provide protections against 

biased panels” and concluded that “[t]here has been no showing in this case that those 

provisions are inadequate to guard against potential bias.”78

B. Procedural Safeguards in Favor of the Investor Exist Throughout the 

Entire Arbitration Process 

Federal oversight and public input have ensured that procedural 

protections exist for the investor throughout dispute resolution proceedings. Examples 

of such protections are codified in several of FINRA’s rules, including: 

• Code of Arbitration Procedure § 3110(f) requires that “in any agreement 

containing a predispute arbitration agreement, there shall be a highlighted 

statement...that the agreement contains a predispute arbitration clause.”79 

 

75 Code of Arbitration Procedure § 12404. 

76 Code of Arbitration Procedure § 12406. 

77 Gilmer, 500 U.S. at 30. The Code of Arbitration Procedure provides investors the same 

procedural protections as the NYSE rules the Supreme Court considered in Gilmer. See e.g., 

Code of Arbitration Procedure §§ 12403(b)(1), 12408(a), 12403(b)(2), 12404. 

78 Id. at 30-31. 

79 Code of Arbitration Procedure § 3110(f)(2)(A). 

20 
• FINRA also ensures that the substantive provisions of an agreement to 

arbitrate protect the investor: the arbitration clause cannot limit the ability of a 

party to file a claim or the ability of an arbitrator to make an award.80 Thus, 

all of the remedies available to an investor in court are also available to an 

investor in arbitration. Should an arbitration clause be challenged, this rule 

facilitates judicial review of the agreement to determine its enforceability 

under the FAA.81 

• Investors are not required to arbitrate disputes with members of FINRA 

whose memberships have been terminated, suspended, cancelled or revoked 

or against members who have been expelled.82 

• Investors may represent themselves or may be represented by a person who 

is not an attorney in arbitration. This rule is particularly beneficial for 

investors with small claims who “may be unable to retain an attorney because 

the attorney may believe that the attorney’s share of any award would be too 

small to justify the effort.”83

• Sections 12204 and 12205 of the Code of Arbitration Procedure provide that 

class action claims and shareholder derivative actions may not be 

 

80 Code of Arbitration Procedure §§ 3110(f)(4)(B-D). In some jurisdictions, claimants may have 

greater remedies available in arbitration than they would in court. For example, in New York, 

in the absence of a statute, punitive damages are available in a limited number of 

circumstances. Garrity v. Lyle Stuart, Inc., 353 N.E.2d 793, 795 (N.Y. 1976). Similarly, in 

Massachusetts, the general rule is that punitive damages are not available absent specific 

statutory authority. Santana v. Registrars of Voters of Worcester, 398 Mass. 862, 867 

(1986). Yet, in securities arbitration proceedings held in that state, claimants frequently seek 

punitive damages under the provision of the Code of Arbitration Procedure that allows 

arbitrators to award any damages they deem appropriate. 

81 9 U.S.C. §§ 3, 4 (2000). 

82 Code of Arbitration Procedure § 12202. 

83 Securities and Exchange Commission, Release No. 34-56540, 3 (September 26, 2007), 

available at http://www.sec.gov/rules/sro/nasd/2007/34-56540.pdf.

21 
84 arbitrated. Under these provisions, members of the securities industry may 

not enforce arbitration agreements against any member of a certified or 

putative class unless the claimant has opted out of the class.85 However, 

individual investors may, at their election, proceed to arbitrate disputes based 

upon the same facts and law underlying the class action if they opt out of the 

class action proceeding or otherwise provide notice that they will not 

participate in the class action or in any class recovery.86 These rules 

regarding class actions must be disclosed in the text of an agreement to 

arbitrate.87

• Arbitration hearings are held at the location closest to the customer’s 

residence at the time of the events giving rise to the dispute, or elsewhere as 

fairness to the customer may dictate.88 FINRA has 73 hearing locations— 

including at least one in every state—and locations in Puerto Rico and 

London, England.89 Therefore, the brokerage firm must be prepared to travel 

and arbitrate in any of the fifty states or abroad. 

• Investors are subject to modest fees for filing a claim, and filing fees for 

investors are smaller than those for member firms.90 For example, an 

 

84 Code of Arbitration Procedure §§ 12204, 12205. 

85 Code of Arbitration Procedure § 12204(d). 

86 Code of Arbitration Procedure § 12204(b). 

87 Code of Arbitration Procedure § 3110(f)(6). 

88 Code of Arbitration Procedure § 12213(a). 

89 See FINRA Mediation Regional Offices and Hearing Locations, available at 

http://www.finra.org/ArbitrationMediation/Mediation/FINRAMediationRegionalOfficesandHeari

ngLocations/index.htm. 

90 Code of Arbitration Procedure § 12900. It is important to note that broker-dealers bear 75 

percent of the cost of administering SRO arbitrations. The Arbitration Policy Task Force 

22 
investor submitting a claim with damages in the amount of $2,501.00 to 

$5,000 must pay a $175.00 filing fee. 91 Furthermore, the SRO may defer an 

investor’s payment of all or part of the filing fee on a showing of financial 

hardship,92 and an investor’s filing fee is partly refundable if the case is 

settled or withdrawn more than 10 days before a hearing, a frequent 

occurrence.93 

• An arbitrator or arbitration panel may sanction a securities firm for failure to 

comply with the Code of Arbitration Procedure, including discovery 

violations.94 An arbitrator or arbitration panel may also initiate a disciplinary 

referral to SRO regulators for perceived violations of federal securities laws or 

SRO rules.95 

• Code of Arbitration Procedure §12904(i) requires payment of an award within 

30 days unless a motion to vacate is filed. Penalties for non-compliance 

include monetary fines and suspension of a firm’s membership license.96

• FINRA has implemented various measures to expedite arbitration 

proceedings in matters involving elderly or seriously ill investors. In such 

 

Report—A Report Card at 25 (July 27, 2007), available at 

http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p036466.pdf. 

91 Id. In comparison, a FINRA member firm with a claim of the same amount must pay $525.00 

to file its claim. Plaintiffs filing a civil suit in U.S. district court must currently pay a filing fee of 

$350.00. See Frequently Asked Questions, available at 

http://www.uscourts.gov/faq.html#filing. 

92 Code of Arbitration Procedure § 12900(a)(1). 

93 Code of Arbitration Procedure § 12900(c). 

94 Code of Arbitration Procedure § 12212(a). At the conclusion of the case, the arbitration panel 

may also refer firms and individuals to regulatory authorities for potential violations of federal 

securities laws or SRO rules. Code of Arbitration Procedure § 12212(b). 

95 See Code of Arbitration Procedure § 12212(b). 

96 See FINRA Sanction Guidelines at 20. 

23 
cases, FINRA staff begins the arbitrator selection process, schedules the 

initial pre-hearing conference and serves the final award as quickly as 

possible.97

Supplementing the Code of Arbitration Procedure are manuals, available 

to the parties and the arbitrators, that explain the arbitration rules. For example, FINRA 

has published a Discovery Guide that explains the discovery rules contained in the Code 

of Arbitration Procedure.98 The Discovery Guide specifically identifies categories of 

documents that are discoverable in all customer cases and sets forth additional 

categories of documents that should be exchanged in cases with particular types of 

claims.99 The lists serve as a guide to ensure that all relevant material is exchanged, but 

the parties and arbitrators retain the flexibility to make adjustments to the types of 

materials exchanged based upon the particular claims at issue.100 The Discovery Guide 

thus facilitates the exchange of documents and information early on in the proceedings 

and ensures that customers are seeking and obtaining discovery that is relevant to their 

claims. 

 

97 NASD Announcement, “Notice to Parties - Expedited Proceedings for Elderly or Seriously Ill 

Parties,” (June 7, 2004), available at 

http://www.finra.org/ArbitrationMediation/ResourcesforParties/p009636. The expedition of 

proceedings for infirm or elderly parties is the result of just one of several pilot programs 

FINRA has undertaken in order to determine how to better serve investors. For instance, 

FINRA has also established the Discovery Arbitrator pilot program, which involves appointing 

one arbitrator to resolve all discovery disputes prior to the hearing. NASD Announcement, 

“Discovery Arbitrator Pilot” (July 27, 2005), available at 

http://www.finra.org/ArbitrationMediation/ResourcesforParties/p014765. In addition, the 

Mediation Settlement Month program, which offers reduced mediation rates, encourages 

more “parties to experience the benefits of mediation for the first time and to reinforce its 

value and effectiveness to those who have benefited from mediation before.” FINRA 

Announcement, “October 2007 is FINRA Mediation Settlement Month,” available at 

http://www.finra.org/ArbitrationMediation/Mediation/MediationSettlementEvents/p011328.

98 The Discovery Guide, available at

http://www.finra.org/web/groups/med_arb/documents/mediation_arbitration/p018922.pdf. 

99 Id. 

100 Id. 

24 
To further assist arbitrators and to ensure that customers are receiving 

the protections of the Code of Arbitration Procedure, SICA compiled The Arbitrator’s 

Manual (the “Manual”) to supplement and explain the Uniform Code of Arbitration.101 

Among other things, the Manual attaches the Code of Ethics for Arbitrators in 

Commercial Disputes and explains the arbitrators’ ethical responsibilities and duty to 

disclose conflicts.102 The Manual also encourages arbitrators to “be sensitive to a party 

who is not represented by counsel,” and to provide guidance to such a party by, among 

other things, explaining the purpose of the opening statement and ensuring “that the 

party has had an opportunity to present all evidence.”103 The Manual also explains the 

type of relief the panel may award, including compensatory damages, punitive damages, 

injunctive relief, interest and attorneys’ fees.104

Thus, the procedural rules of the Code of Arbitration Procedure, which 

are supplemented by guides that discuss and explain them, are designed to assist 

investors seeking to pursue a claim and ensure that their substantive and procedural 

rights are adequately protected. 

V. Securities Arbitration Is Faster and Less Costly Than Litigation 

SRO arbitration is more efficient and cost effective than litigation. During 

the twelve-month period between March 2005 and March 2006, the median time interval 

for federal courts to reach a decision on the merits at a trial was 22.2 months.105 By 

 

101 The Arbitrator’s Manual, January 2007, available at 

http://www.finra.org/web/groups/med_arb/documents/mediation_arbitration/p009668.pdf. 

102 Id. at 40-51. 

103 Id. at 6-7. 

104 Id. at 30-31. 

105 Federal Judicial Caseload Statistic[sic], March 31, 2006, Table C-5, available at 

www.uscourts.gov/caseload2006/tables/C05Mar06.pdf. 

25 
contrast, in NASD arbitration, the average turnaround time for cases in 2006 was 13.7 

months.106 As these figures demonstrate, disputes submitted to SRO arbitrations are 

resolved approximately 40 percent faster than cases filed in federal court.107

The faster resolution of disputes in arbitration is largely due to a number 

of procedural practices that distinguish SRO arbitration from litigation. For example, 

while motion practice is almost a given in court, it is disfavored in arbitration.108 

Likewise, whereas expansive discovery is typical in court, focused discovery is 

mandated in arbitration.109 As a result of these measures, parties’ claims are resolved 

more expeditiously and at a lower cost in SRO arbitration than in litigation. 

A. Motion Practice Is Limited in Arbitration 

Whereas motion practice is standard in court, SRO arbitration generally 

discourages dispositive motions. Under the Federal Rules of Civil Procedure, a 

defendant may file a motion to dismiss and any party may file a motion for judgment on 

the pleadings or motion for summary judgment before trial.110 While motions are 

permitted under the Code of Arbitration Procedure and have become more common in 

 

106 Dispute Resolution Statistics August 2007, available at 

http://www.finra.org/ArbitrationMediation/FINRADisputeResolution/Statistics/index.htm. 

107 Appendix B (Arbitration is Faster Than Litigation). Similarly, state courts’ crowded dockets 

make it highly unlikely that claimants will have their dispute resolved more quickly in that 

forum than in arbitration. 

108 FINRA Announcement, "FINRA Board Approves Rule to Limit Motions to Dismiss in 

Arbitration” (September 26, 2007), available at 

http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P037048. 

109 See The Discovery Guide, supra note 98; see also Code of Arbitration Procedure § 

12507(a)(1) (“Parties may also request additional documents or information from any party by 

serving a written request directly on the party. Requests for information are generally limited 

to identification of individuals, entities, and time periods related to the dispute; such requests 

should be reasonable in number and not require narrative answers or fact finding. Standard 

interrogatories are generally not permitted in arbitration.”).

110 Fed. R. Civ. P. 12, Fed R. Civ. P. 56. 

26 
111 SRO arbitrations in recent years, their numbers are likely to decrease in the near 

future: FINRA announced on September 26, 2007 that its Board of Governors had 

approved rule amendments to significantly limit the number of dispositive motions filed in 

arbitration.112

In contrast, recent Supreme Court case law addressing pleading 

standards in federal court has lead to an increase in the frequency of motions to dismiss 

in that forum. Earlier this year, the Court found that a plaintiff in a securities fraud action 

must allege “with particularity facts giving rise to a strong inference that the defendant 

acted with the required state of mind.” The Court held that an inference of fraudulent 

intent alleged in the complaint “must be cogent and at least as compelling as any 

opposing inference of nonfraudulent intent.”113 Similarly, in 2005, the Supreme Court 

held that a plaintiff asserting a securities fraud claim must not only allege that he 

purchased a security at a price that was inflated because of the fraud but he must also 

plead loss causation—a causal connection between the economic loss suffered and the 

misrepresentation alleged.114 The result of these decisions is that, for securities class 

action cases filed between 2005 and 2007, dismissals have accounted for 39.1 percent 

of dispositions.115 While a claimant asserting a fraud claim in arbitration must ultimately 

prove loss causation, the issue is much less likely to be determinative at the pleading 

stage in arbitration than it is in court. The foregoing demonstrates an additional reason 

 

111 See Code of Arbitration Procedure § 12503. 

112 See supra note 108. 

113 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499, 2504-05 (2007). 

114 Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 347 (2005). 

115 Todd Foster, Ronald I. Miller, Ph.D., Stephanie Planchich, Ph.D., Brian Saxton, and Svetlana 

Starykh, NERA Economic Consulting, Recent Trends in Shareholder Class Action Litigation: 

Filings Stay Low and Average Settlements Stay High—But Are These Trends Reversing?, 7 

(September 2007), available at http://www.nera.com/image/PUB_RecentTrends_Sep2007-

FINAL.pdf.

27 
why arbitration is attractive to investors: it is highly unlikely that a claim will be dismissed 

solely on pleading grounds in arbitration, whereas in court the risk is much higher. 

B. Discovery Is Narrowly Tailored and Less Costly in Arbitration 

The time-consuming and costly discovery procedures available in court 

are generally not present in arbitration. Rule 26 of the Federal Rules of Civil Procedure 

permits a party to obtain, with certain enumerated exceptions, discovery “regarding any 

matter, not privileged, that is relevant to the claim or defense of any party.”116 Such 

discovery is guided by the parties, who are free to make broad requests for disclosure 

within the scope of Rule 26.117 Under the Federal Rules, parties are also able to depose 

as many as ten witnesses without leave of the court (and more with leave of the court) in 

advance of trial.118 

In contrast, the Code of Arbitration Procedure tailors the exchange of 

documents and information to presumptively discoverable material enumerated on 

specific discovery lists.119 Parties may request additional documents or information, but 

requests for information are generally limited to “identification of individuals, entities, and 

time periods related to the dispute.”120 Interrogatories are generally not permitted in 

SRO arbitrations.121 Similarly, depositions are strongly discouraged in SRO arbitrations, 

and are only permitted under very limited circumstances, such as where a witness is ill 

or dying.122 Thus, the discovery process is more streamlined in arbitration and does not 

 

116 Fed. R. Civ. P. 26(b). 

117 Fed. R. Civ. P. 26. 

118 Fed. R. Civ. P. 30. 

119 Code of Arbitration Procedure § 12506. 

120 Code of Arbitration Procedure § 12507(a)(1). 

121 Id.

122 Code of Arbitration Procedure § 12510. 

28 
entail the significant costs associated with numerous depositions and expansive 

document production that are typical in court proceedings. 

The discovery procedures in place in SRO arbitration enable the parties 

to obtain information relevant to their claims in a process that is streamlined, efficient, 

economical and specifically tailored to investor claims. 

C. Faster Resolution of Disputes Benefits Both Parties 

Shortened resolution times such as these come with a myriad of benefits 

to parties. First, faster resolution of the dispute reduces the costs incurred by both 

parties. Indeed, a study conducted by Deloitte Haskins found that for the period 

between October 1, 1987 and June 30, 1988, “the average legal costs are $12,000 less 

in arbitration than for litigation.”123 Thus, after adjusting solely for inflation, this disparity 

would have grown to at least $22,000 in 2007, but given that litigation costs have 

significantly out-paced inflation since 1988, that gap is most likely substantially wider. 

More recent studies support this conclusion. A former president of the American Bar 

Association found that a “ratio of 3 or 4 to one, litigation versus arbitration, is a fairly 

realistic estimate [of the cost savings from arbitration] and a reasonable expectation is 

that the cost of an arbitration will not be in excess of half the cost of litigating.”124 The 

cost effectiveness of the process serves as a “relative economic benefit favoring 

arbitration for the customer.”125 Thus, as the Supreme Court has noted, “it is typically a 

 

123 Grant, supra note 43 at 96. 

124 William G. Paul, Arbitration v. Litigation in Energy Cases, First Annual Energy Litigation 

Program (Co-sponsored by the Center for American and International Law and by the ABA 

Section of Environment, Energy and Resources) (Nov. 2002), available at http://www.arbforum.com/rcontrol/documents/ResearchStudiesAndStatistics/2002PaulArbitrationVLitigationI

nEnergyCases.pdf. 

125 Securities Industry Ass’n v. Connolly, 703 F. Supp. 146, 159 (D. Mass. 1988); see also 

Appendix F (Many Cases are Small Claims, Which are Better-Suited for Arbitration Than 

Litigation). Between 1995 and 2004, approximately 25 percent of arbitrations filed with NASD 

or NYSE involved claims of less than $10,000, a sum for which it is often not cost effective to 

litigate, whether in federal or state court. 

29 
desire to keep the effort and expense required to resolve a dispute within manageable 

bounds that prompts [parties] mutually to forgo access to judicial remedies.”126

As discussed further below, the greater speed and lower cost of SRO 

arbitration also leads to the desirable result that more cases are resolved by 

decisionmakers on a full factual record in arbitration than in court.127 Further, prompt 

resolution of the dispute improves the reliability of witness accounts and averts 

difficulties that may arise in locating witnesses, documents, and other evidence many 

years later.128

FINRA’s mediation program is another aspect of its dispute resolution 

system that facilitates the efficient resolution of investor claims. FINRA Dispute 

Resolution developed the mediation program to provide additional dispute resolution 

options for parties.129 Mediators are selected by NAMC and are required to have formal 

mediator training and prior experience serving as a mediator in order to be 

considered.130 Mediation is a flexible, informal and voluntary process in which an 

impartial person, trained in negotiations, assists the parties in reaching a mutually 

acceptable resolution.131 Mediation allows the parties to resolve disputes even more 

 

126 Mitsubishi Motors Corp., 473 U.S. at 633. 

127 See Appendix C (More Cases Are Heard Before a Decision-Maker in Arbitration Than in 

Court). 

128 Testimony of Marc E. Lackritz before the Committee on Financial Services, Subcommittee on 

Capital Markets, Insurance and Government Sponsored Enterprises, U.S. House of 

Representatives, “A Review of the Securities Arbitration System,” (March 17, 2005), available 

at http://www.sifma.org/legislative/testimony/archives/Lackritz3-17-05.html.

129 See FINRA Mediation: An Alternative Path, available at 

http://www.finra.org/ArbitrationMediation/Mediation/ MediationAnAlternatePath/index.htm. 

130 See Mediator Recruitment Information, available at 

http://www.finra.org/ArbitrationMediation/ResourcesforArbitratorsandMediators/ArbitratorRecr

uitment/p011392.

131 Id. 

30 
quickly than arbitration, saving them substantial time and expense. In 2005 and 2006, 

10 percent of cases closed were resolved via mediation.132

VI. The Overwhelming Weight of the Evidence Illustrates that Securities 

Arbitration is Fair to Investors 

The demonstrated efficiencies of SRO arbitration, as discussed above in 

Section V, do not come at the cost of fairness in the process or in the results. Parties in 

arbitration are far more likely than parties in court to have their disputes resolved by a 

decisionmaker on a full factual record. Also, SRO arbitration provides parties with all of 

the substantive rights (and then some) to which they would be entitled in litigation. 

Moreover, as discussed above in Section IV, SRO arbitration procedures include 

numerous safeguards against arbitrator bias, which, as the data show, lead to equitable 

outcomes. Finally, and not insignificantly, studies show that both sides have found SRO 

arbitrations to be fair. 

A. Parties in Arbitration Are Far More Likely To Have Their Claims 

Decided Based on a Full Factual Record 

Claims brought in court are subject to higher pleading standards than 

those brought in arbitration. The Federal Rules of Civil Procedure require a plaintiff 

claiming fraud to allege “with particularity” the specific facts upon which his claim is 

based,133 and the Private Securities Litigation Reform Act of 1995 (“PSLRA”) further 

heightens a securities plaintiff’s burden under the already strict pleading standard. The 

PSLRA requires that any private plaintiff bringing an action under the 1934 Act (which 

provides remedies for fraud in connection with the purchase or sale of securities) must 

include in his complaint, “each statement alleged to have been misleading, the reason or 

 

132 Supra note 106. 

133 Fed. R. Civ. P. 9(b). 

31 
reasons why the statement is misleading, and if an allegation regarding the statement or 

omission is made on information and belief, the complaint shall state with particularity all 

facts on which that belief is formed.”134

Under the PSLRA, a plaintiff is also required to “state with particularity 

facts giving rise to a strong inference that the defendant acted with the required state of 

mind [scienter].”135 As discussed previously, the significance of this heightened 

pleading requirement was recently clarified by the United States Supreme Court, which 

held that in the context of the PSLRA, “an inference of scienter must be more than 

merely plausible or reasonable—it must be cogent and at least as compelling as any 

opposing inference of nonfraudulent intent.” 136

In contrast, though arbitrators follow the substantive law, pleading 

standards in SRO arbitrations are relaxed in order to encourage claimants to file their 

disputes. Indeed, under Code of Arbitration Procedure § 12302(a)(1), a claimant is 

simply required to file a Statement of Claim, “specifying the relevant facts and remedies 

requested.”137 Consequently, the leeway given to SRO arbitrators “may result in 

arbitrators seeking to be ‘fair’ [by reaching the merits of an action] whereas such claims 

may have been dismissed by a court.”138 In other words, the lesser pleading 

 

134 15 U.S.C. § 78u-4(b)(1) (2000). A number of claims brought in arbitration are based upon 

state or common law claims and are not subject to the strict pleading requirements of the 

PSLRA. 

135 15 U.S.C. § 78u-4(b)(2) (2000). 

136 Tellabs Inc., 127 S. Ct. at 2505. 

137 Code of Arbitration Procedure § 12302(a)(1). 

138 Marc Steinberg, Securities Arbitration: Better for Investors than the Courts?, 62 Brook. L. 

Rev. 1503, 1506 (1996). The effect of the PSLRA on the number of securities cases 

dismissed at the pleading stage has been significant. While dismissals accounted for only 

19.4 percent of dispositions for securities class actions filed between 1991and 1995, 

dismissals accounted for 39.1 percent of all dispositions for cases filed between 2001 and 

2005. Supra note 115. 

32 
requirements available in arbitration are more likely to prevent dismissal of a claim in the 

early stages of the dispute resolution process and allow a party to have his claim heard 

by a decisionmaker after development of a full factual record. 

The effect of these rules is evidenced by the number of claimants whose 

disputes are resolved by a decisionmaker in an SRO arbitration versus court.139 In 

2005, 20 percent of all NASD arbitrations closed were decided after a hearing. In 2006, 

18 percent of NASD arbitrations were decided after a hearing.140 In contrast, from 

March 31, 2005 through March 31, 2006, only 1.3 percent of all civil cases resolved in 

federal district courts were heard by a judge or jury.141

B. SRO Arbitration Provides Parties with All of the Substantive Rights 

Available to Them in Litigation 

Parties participating in SRO arbitration are guaranteed all of the 

substantive rights to which they would have been entitled if the action had been brought 

in court. The Supreme Court, in upholding predispute arbitration agreements, has so 

noted, stating that “by agreeing to arbitrate a statutory claim, a party does not forgo the 

substantive rights afforded by the statute; it only submits to their resolution in an arbitral 

rather than a judicial forum.”142 

Accordingly, an arbitrator may award punitive damages, attorneys’ fees 

and any other award that a court of competent jurisdiction could make. Even though a 

court would likely uphold an agreement to limit punitive damages, member firms are 

prohibited by rule from including restrictions on punitive damages in their customer 

 

139 See Appendix C (More Cases Are Heard Before a Decision-Maker in Arbitration Than in 

Court). 

140 Supra note 106. 

141 Federal Judicial Caseload Statistic[sic], March 31, 2006, Table C-4, available at 

http://www.uscourts.gov/caseload2006/tables/C04Mar06.pdf. 

142 Rodriguez de Quijas, 490 U.S. at 481 (citing Mitsubishi Motor Corp., 473 U.S. at 628). 

33 
143 agreements. This prohibition is enforced by disciplinary referrals. In this regard, 

investors in arbitration proceedings claimed punitive damages in “about 20 percent of 

the 1,552 total cases decided in 1998.”144 Investors also sought “reimbursement for 

attorney fees in about 10 percent of the 1,552 total cases decided in 1998.”145 Finally, in 

SRO arbitration, investors have an additional mechanism by which to ensure payment of 

an award that is not available to them in court: FINRA has the ability to suspend a 

member’s license if it does not promptly pay an arbitration award.146

C. SRO Arbitration Is Unbiased 

Opponents of arbitration sometimes assert that SRO arbitration is biased 

in favor of the financial services industry.147 The evidence is to the contrary. The 

evidence confirms that SRO arbitration does not favor industry members over investors. 

1. Statistical evidence shows that SRO arbitrations are not 

biased in favor of the industry 

Studies show that customers fare better in SRO arbitration than in 

litigation. A 1992 GAO study, updated in 2000, concluded that there was “no indication 

of a pro-industry bias in decisions at industry-sponsored forums.”148 That study found no 

statistically significant difference between the results in SRO arbitrations and non-SRO 

arbitrations.149 Likewise, data collected between 1980 and 2001 shows that 52.26 

 

143 See NASD Conduct Rule 3110(f)(4). 

144 Supra note 53 at 29. 

145 Id. 

146 Supra notes 96 and 128. 

147 See, e.g., Testimony of Joseph Borg before the United States Senate Committee on Banking, 

Housing and Urban Affairs, “Consolidation of NASD and the Regulatory Functions of the 

NYSE: Working Towards Improved Regulation,” at 8 (May 17, 2007), available at 

http://banking.senate.gov/_files/ACF1D.pdf.

148 Supra note 50 at 6.

149 Id.

34 
percent of securities arbitrations conducted by SROs resulted in awards for 

customers.150

Nor is there evidence that the presence of a non-public or “industry” 

arbitrator on a three-member panel in SRO arbitrations somehow infuses pro-industry 

bias into the process. A May 2005 study conducted by Securities Arbitration 

Commentator, Inc. (“SACI”) on industry bias in SRO panels found that the presence of 

non-public arbitrators yielded “no material impact on customer wins” when compared to 

“win” rates on awards which public arbitrators adjudicated alone.151 In that study, SACI 

also considered 162 arbitrations where a dissent was filed by an arbitrator.152 Of those 

cases, claimants won 63 percent of the time, and more than 70 percent of the dissents 

were filed by public arbitrators.153 SIFMA’s own review of available decisions from 2005 

and 2006 further supports the SACI study’s findings: in 2005, arbitration panels, which 

include an “industry” arbitrator, found for claimants in 60 percent of cases whereas 

cases decided by a single arbitrator, which by rule must be a “public” arbitrator, found for 

claimants in 50 percent of cases. Similarly, in 2006 panels found for claimants in 

55 percent of cases they heard.154

Nor have “industry” arbitrators objected disproportionately to large 

compensatory damage awards against securities firms or those involving punitive 

damages. In the five cases studied in which punitive damages were awarded against 

 

150 Perino, supra note 47 at 32. 

151 Industry Arbitrator Award Survey: Does the Securities Industry Arbitrator’s Presence Create 

a Discernible Shift in Award Outcomes?, Securities Arbitration Commentator, Inc. 8 (Vol. 

2005, No. 4), available at http://sec.gov/rules/sro/nasd/nasd2005094/rpryder091905.pdf.

152 Id. at 5-6. The SACI study noted that of the 7,127 arbitration awards made from 2000-2004, 

only 186 awards (2.6 percent) included a dissent. Id. at 5. 

153 Id. at 6-7. 

154 See Appendix G (The Presence of an “Industry” Arbitrator Has No Material Impact on 

Customer Wins). 

35 
155 securities firms, “industry” arbitrators filed not a single dissent. Moreover, in cases 

granting large compensatory awards to investors, public arbitrators dissented from 

decisions granting large compensatory awards eighteen times compared to just five 

such dissents from “industry” arbitrators.156 These figures led SACI to conclude that the 

data did not suggest that a non-public or “industry” arbitrator serves in a “less neutral 

role than his or her Public Counterparts.”157

By virtue of his or her extensive experience and expertise, the inclusion of 

a non-public “industry” arbitrator benefits both parties to a dispute. As has been noted 

[o]ne of the benefits associated with the arbitration 

model...is decision making by those knowledgeable in the 

field, and the industry arbitrator provides that expertise. 

The SEC has not questioned the presence of an industry 

arbitrator, and at least one independent arbitration forum 

saw value in industry expertise.158

“Industry” arbitrators also benefit the public panelists as they can serve to educate them 

about financial products and services, industry customs and practices and other legal 

industry-related issues.159 For this very reason, the presence of an industry arbitrator 

may also reduce costs: parties need not call expert witnesses in order to educate a 

 

155 Supra note 151 at 6. 

156 Id. 

157 Id. at 8. 

158 Barbara Black, Is Securities Arbitration Fair to Investors? (The Eighth Annual James D. 

Hopkins Lecture), 25 Pace L. Rev. 1, 7 (2004). The author notes that before the AAA 

effectively ceased operating as a securities arbitration forum, it also classified arbitrators as 

neutral or industry parties. See Am. Arbitration Ass'n, Supplementary Procedures for 

Securities Arbitration, available at http://www.adr.org.

159 “Industry” arbitrators are standard in other arbitration forums as well. For example, 

arbitration panels in the construction industry are typically composed of persons with 

experience in the construction field. See Am. Arbitration Ass'n, Construction Industry 

Arbitration Rules and Procedures, available at http://www.adr.org/sp.asp?id=22004. 

Similarly, arbitrators in reinsurance and insurance disputes are generally former officers or 

executives of insurance companies. See, e.g., Reinsurance Arbitration—A Primer, available 

at http://www.irmi.com/Expert/Articles/2006/Schiffer06.aspx. 

36 
panel about certain products or industry practices. As a result of their expertise and 

career in the industry, non-public arbitrators are more likely to be offended by, than 

protective of, misbehavior by other brokers or securities firms. His or her primary 

concern in deciding cases is to ensure the facts are weighed fairly, the law is applied 

correctly, and that justice is done, all of which serves to protect the reputation of the 

securities industry and the integrity of the arbitral forum.160

2. The Solin Study criticizing SRO arbitrations is fundamentally 

flawed 

These well-documented facts notwithstanding, a recent study by Daniel 

Solin, a securities arbitration claimants’ counsel, and Edward O’Neal, a professional 

expert witness who regularly testifies against brokers and their firms,161 contends that 

investors do not fare well in securities arbitration. In particular, Solin and O’Neal 

conclude that: 

1) between 1999 and 2004 investor-claimant win rates declined 15 

percent; 

2) claimants were less successful when they brought claims against 

large brokerage houses;

3) claimants who won at arbitration recovered a decreasing 

percentage of the amount claimed; and 

 

160 Non-public arbitrators do not have any vested interest in the outcome of an arbitration. 

Although arbitrators receive an honorarium from FINRA, they are not employees of FINRA. 

See Code of Arbitration Procedure § 12214. As a result, FINRA arbitrators need not be 

concerned that a decision against the financial industry may result in termination of their 

employment. Likewise, a decision against a member firm will not preclude an arbitrator from 

being placed on a FINRA generated list of potential arbitrators for any particular panel. This 

independence—unlike elected judges or other arbitration forums where arbitrators are 

employed by the arbitration organization itself—ensures that FINRA arbitrators have no 

incentive to rule in favor of one party or another. The data demonstrates that this is the case: 

as shown above, the presence of an industry arbitrator does not adversely affect claimants.

161 See Securities Litigation and Consulting Group, Testifying Experts, available at 

http://www.slcg.com/resumes.php?c=1b. 

37 
4) the average amount of expected recovery has decreased since 

1998.162

The Solin Study, however, ignores the increasingly important role of settlements, the 

means by which the vast majority of securities arbitrations are resolved, in determining 

whether claimants achieved a favorable outcome. It also fails to account for or address 

a number of historically significant events that occurred during the time period covered 

by the study. Specifically, the Solin Study ignores the bursting of the stock “bubble” and 

the ensuing bear market of the early 2000s. The study also fails to address the 

particularly aggressive claimants’ bar at that time, which filed an enormous number of 

arbitration cases, many with overstated losses and meritless claims—based on allegedly 

inaccurate stock research reports—which failed for many reasons, including the lack of a 

connection between their allegations and the losses they sought to recover. As a result, 

arbitrators decided against the claimant in more than two-thirds of analyst claims.163

These historical factors, as well as the circumstances discussed below—

the evidentiary hurdles faced by investors in proving fraudulent research claims, the 

increase in the number of settlements and the 300 percent increase in the amount of 

damages requested during this time period—easily explain the study’s findings of 

decreased win rates and diminished awards relative to the amount claimed. As a result, 

the Solin Study presents a fundamentally distorted picture of the fairness of SRO 

arbitration. 

 

162 Edward S. O’Neal, Ph.D. and Daniel R. Solin, Mandatory Arbitration of Securities Disputes-A 

Statistical Analysis of How Investors Fare 17 (2007) (“Solin Study”). 

163 Supra note 18 (regarding the proposed consolidation of the NASD and NYSE Regulation 

arbitration programs). 

38 
(a) The Solin Study’s focus on “win rates” ignores that 

the period analyzed in the study was one in which 

many dubious securities claims were filed. 

The rate at which claimants prevail over a specific period of time is not an 

empirically valid basis on which to judge the fairness of a dispute resolution forum. 

Perhaps this explains why not even the court system is evaluated in this manner. 

Although the Solin Study itself admits that win rates are “an inaccurate and misleading 

basis for determining the fairness of the mandatory arbitration system,” it then proceeds 

to rely heavily on this concededly flawed metric to attack SRO arbitration.164

The effort to draw broad conclusions from claimant win rates during the 

period that the Solin Study focuses on is particularly suspect. Although the Solin Study 

reviews arbitration statistics for the period from 1995 through 2004, it predicates its 

condemnatory conclusions about the fairness of SRO arbitration almost entirely on 

reported results during 2002-2004. In particular, the Solin Study contends that during 

this period arbitration claimants prevailed less frequently than in years past and 

recovered a smaller percentage of their claimed damages.165 Although the authors 

acknowledge that “[t]here may well be innocent explanations” for the decline in win and 

 

164 Solin Study at 5. For the same reason, the Securities Arbitration Commentator Inc.’s survey 

of 2006 arbitrations, which highlights the gap in claimants’ win rates when bringing “small 

claims” (i.e., those under $25,000) versus larger-dollar claims, does not impugn the fairness 

or efficacy of SRO arbitration. Furthermore, the rate at which investors win “small claims” 

has remained relatively constant when compared to the rate at which investors win largerdollar claims: in 2000, there was a 9 percent difference in win rates between “small claims” 

and all other claims; in 2002, there was a 15 percent difference in win rates, and in 2005, 

there was, again, a 9 percent difference in win rates between larger-dollar claims and claims 

under $25,000. See 2006 Annual Award Survey: A SAC Award Survey Comparing Results 

in 2006 to 2000-20005, Securities Arbitration Commentator, Inc. 2-4, Chart 1 (Vol. 2007, No. 

2). 

165 Solin Study at 11 (“The award percentages reached a high in 1998 of 68% and have steadily 

declined in the later years of the sample to stabilize at approximately 50% in the 2002-2004 

time period. Note that this decline in the award percentage roughly corresponds to the 

decline in win rates over the same period. Toward the end of the sample period, investors 

were winning less frequently and, when they did win, they were being awarded a smaller 

percentage of their claim.”). 

39 
recovery rates for arbitration claimants during that period, they quickly dismiss this 

possibility with the unsupported assertion that “the misconduct of [brokerage] firms 

reached its apex with the analyst fraud scandal” during this same period.166 The Solin 

Study evidently considers this a sufficient evidentiary basis to indict SRO arbitration as a 

“‘damage containment and control program masquerading as a juridical proceeding,’ 

intended to protect the major brokerage firms from significant damages.”167

The Solin Study, however, fails to give serious consideration to the fact 

that arbitration claims resolved during the 2002-2004 time period were qualitatively 

different from those decided in earlier periods—during which time investors secured 

unprecedented gains in the markets—and that those differences reduced their chances 

of prevailing at arbitration. As the Solin Study notes, the number of arbitration claims 

resolved markedly increased toward the end of their sample period. In fact, the number 

of arbitrations decided rose from 747 in 1999 to 2,021 in 2004.168 And during the 2002-

2004 time period, SROs resolved 47 percent more cases than during the prior three-year 

period.169 

The Solin Study recognizes that the explosion in arbitration claims was 

likely driven by the collapse of the stock market and, more particularly, the implosion of 

the technology sector.170 While it doubtless is true that investors are more likely to file 

claims when a bear market causes their investments to decline in value or to give back 

paper profits, it does not follow that investors have viable causes of action against their 

 

166 Id. at 17. 

167 Id.

168 Id. at Fig. 1. 

169 See id. at 6-7. 

170 See id. (attributing increase in number of arbitrations during period to “the bear market and 

resulting investor losses in the 2000 to 2002 period”). 

40 
171 brokerage firms for such market losses. The Solin Study offers no basis for its 

evident assumption that the incidence of broker misconduct would have increased 

proportionately with the number of claims during this period such that the claimant win 

rate should have been expected to remain constant. 

Another distinctive feature of the arbitration claims resolved during the 

2002-2004 time frame is the high percentage of claims premised on allegedly inaccurate 

analyst reports published by major brokerage firms.172 As noted in the Solin Study, 

regulatory investigations and settlements concerning the integrity of analyst research 

reports further fueled the claimants’ bar and prompted the filing of record numbers of 

arbitration claims.173 In the months after the global research settlement with regulators, 

three claimants’ firms alone “signed up” 10,000 potential arbitration claimants among 

them.174 Several claimants’ law firms advertised on television and the internet, posting 

estimates of potential recovery amounts and draft complaints containing boilerplate 

allegations. These advertisements encouraged the filing of claims by assuring investors 

there was no cost to filing a claim and therefore they had nothing to lose. Absent this 

extensive publicity from claimants’ firms, promising recovery without costs, it is doubtful 

whether many of these claims would have been filed. The claimants’ bar’s aggressive 

solicitation of claimants thus undoubtedly resulted in a higher number of dubious claims. 

 

171 See, e.g., Dura Pharmacueticals, Inc., 544 U.S. at 345 (noting that securities laws make 

private securities fraud actions available not to “provide investors with broad insurance 

against market losses, but to protect them against those economic losses that 

misrepresentations actually cause”). 

172 Brooke A. Masters & Ben White, Wall St. Facing Legal Blitz; ‘Global’ Settlement Prompts 

Investor [sic] to File Claims, THE WASHINGTON POST, Jul. 3, 2003, at E01. 

173 Solin Study at 13 (“The rise in award requests was likely driven by a combination of the 

technology bear market which began in 2000 and lasted through 2002 and the analyst fraud 

scandal...”). In some cases, analyst claims were brought by investors who did not even hold 

accounts at the firms against whom they filed their disputes. 

174 Masters & White, supra note 172. 

41 
Analyst claims, in particular, are difficult to win. To prevail on such 

claims, investors have to establish, among other things, that (1) specific research reports 

did not reflect the subjective views of the research analyst about a stock, (2) the investor 

reasonably relied on those reports for his decision to buy or sell the stock, and (3) the 

purportedly false research opinion itself, as opposed to an overall market collapse or 

some other reason, actually caused the investment to decline in value.175 As Solin 

himself acknowledges in his book, Does Your Broker Owe You Money?, “[t]he primary 

hurdle that investors may find difficult to overcome is proving that they relied on the 

conflicted analyst reports in making their decision to invest.”176 In view of the substantial 

hurdles relating to analyst claims, it is hardly surprising that arbitrators awarded 

damages in fewer than one-third of analyst cases.177 Indeed, when investors sued on 

these claims in court, they fared no better.178

(b) The Solin Study ignores the many claims resolved in 

mutually agreeable settlements

By narrowly focusing on claimant win rates at arbitration, the Solin Study 

also dramatically understates the percentage of arbitration claimants who receive some 

form of recovery in the arbitral process. The Solin Study ignores that the percentage of 

claims settled has increased markedly in recent years, including the very period during 

which the investor win rate has declined. For instance, in 2003, only 52 percent of cases 

 

175 See In re Merrill Lynch & Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351 (S.D.N.Y. 

2003), aff’d in part and rev’d in part sub nom., Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d 

Cir. 2005); cert. denied, 126 S. Ct. 421 (Oct. 11, 2005). 

176 Daniel R. Solin, DOES YOUR BROKER OWE YOU MONEY? 203 (Penguin Books 2004). 

177 Supra note 18 (regarding the proposed consolidation of the NASD and NYSE Regulation 

arbitration programs). 

178 See, e.g., In re Merrill Lynch & Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351; 

Lentell, 396 F.3d 161 (holding that plaintiffs failed to plead loss causation); In re Initial Public 

Offering Secs. Litig., 2005 WL 1529659, at *4 (S.D.N.Y. June 28, 2005); Joffee v. Lehman 

Bros., Inc., 2005 WL 1492101, at *14 (S.D.N.Y. June 23, 2005). 

42 
were settled directly by the parties or via mediation; by 2006, that number had grown to 

60 percent of all arbitrations filed.179 Currently, settlements are responsible for the 

resolution of “about 70% of closed cases.”180 Solin himself acknowledges in his book 

that he settles “somewhere over two-thirds of the claims” he brings and that he usually 

settles for damages of between 50-60 percent of the claim.181

Firms are more likely to settle meritorious claims since these are the 

claims that pose the greatest risk at arbitration. If a higher number of the claims with 

merit are being settled, then the claims that proceed to hearing are more likely to be 

weak or at least more difficult to prove, which would account for the declining win rate for 

those claims resolved at a hearing. In fact, over the past several years, because the 

percentage of cases that settle has increased at a greater rate than the decline in the 

win rate, the net effect is that an increasing percentage of claimants are receiving relief 

through the arbitral process. For example, whether through settlement or a decision on 

the merits, claimants recovered damages in two-thirds of the cases resolved in 2006, a 

fact that the Solin Study disregards.182

(c) The Solin Study’s conclusions about the percentages 

of claimed damages recovered are misleading and, in 

all events, not meaningful. 

The Solin Study also decries that in the period from 2002-2004 prevailing 

arbitration claimants recovered a smaller percentage of their claimed damages. Like 

“win” rates, however, the percentage of claimed damages recovered has never been 

 

179 Supra note 106. 

180 2006 Annual Award Survey: A SAC Award Survey Comparing Results in 2006 to 2000-

20005, Securities Arbitration Commentator, Inc. 2, (Vol. 2007, No. 2). 

181 Supra note 176 at 219. Solin’s settlement range (50-60 percent of the claim amount) is on 

par with the historical percentage of requested damages awarded claimants in arbitration. 

Solin Study at 11, Fig. 7. 

182 Supra note 106; see also Appendix D (The Total Percentage of Claimants Who Recover 

Damages or Other Relief in Arbitration or by Settlement is Favorable). 

43 
accepted as a valid measure of the fairness of arbitration. Again, the court system 

certainly is not evaluated by this metric. Nor should it be, for it is widely known and well 

accepted that claimants tend to overstate the amount of damages requested in their 

statements of claim.183

Significantly, as even the Solin Study recognizes, arbitration claimants 

dramatically increased the amount of their claimed damages following the bear market 

and the bursting of the “internet bubble.”184 Indeed, it is likely that many claimants 

calculated their claimed damages as the difference between the value of their stock 

portfolios at the market’s height during the late 1990s and their values following the 

market’s decline. For example, in one securities arbitration that received media 

attention, Joseph Kenith, a Morgan Stanley client from 1996 to 2001, brought a $3.3 

million dollar arbitration claim against Morgan Stanley alleging, among other things, 

negligence, breach of contract, breach of fiduciary duty, and failure to supervise.185 

According to his attorney, the $3.3 million that Kenith claimed as damages “represented 

the value of his account at the market’s peak,” 186 but that is a measure of damages for 

which the law provides no support.187 Significantly, Kenith had no out-of-pocket losses 

 

183 The Neutral Corner—June 2006, Seth E. Lipner, Study of Arbitration Recovery Statistics, 

available at 

http://www.finra.org/ArbitrationMediation/ResourcesforArbitratorsandMediators/GeneralInform

ationandReference/TheNeutralCorner/p016939 (“In many cases, the amount a claimant 

demands in the arbitration statement of claim bears only a tenuous relationship to the 

damage incurred.”); id. (“[C]laimants will generally overstate the amount of damages they 

request in the statement of claim.”). 

184 See Solin Study at 13; see also Appendix E (Investors’ Inflation-Adjusted Recoveries in 

Arbitration Have Increased). 

185 Gretchen Morgensen, Market Place: Morgan Stanley Seeks to Change Basis for Award in 

Stock Case, N.Y. TIMES, Aug. 21, 2003, at C1; Arbitration Award Against Morgan Stanley Not 

Within Arbitrators' Jurisdiction to Alter, BNA Corp. Law and Business Center, Aug. 25, 2003, 

available at http://corplawcenter.bna.com/pic2/clb.nsf/id/BNAP-5QMU3E?OpenDocument. 

186 Morgensen, supra note 185.

187 See Dura Pharmaceuticals, Inc., 544 U.S. at 343-344. 

44 
188 at all and even made $500,000 while a Morgan Stanley client. The NASD arbitration 

panel nonetheless awarded Kenith $100,000.189 As this case illustrates, because 

claimants and their counsel may claim almost any amount as damages, need not justify 

the amount claimed, and have an incentive to inflate their purported damages, the 

difference between a party’s claimed damages and the amount a claimant recovers is 

meaningless. 

As the Solin Study suggests, the significant change between 2002-2004 

and earlier periods was not the amounts arbitration panels awarded to prevailing 

plaintiffs, but only the amounts that claimants and their counsel were requesting. 

Between 1998 and 2004, even after adjusting for inflation, SRO arbitration awards to 

prevailing claimants increased 6 percent.190 Over the same period, however, the 

amounts claimants and their counsel claimed in damages increased 300 percent.191 

These figures suggest that it is not the arbitration panels that have changed in recent 

years, but only the assertiveness of the claimants’ bar. 

 Notwithstanding the marked increase in claimed damages in recent 

years, recent and historical statistics show that arbitration claimants still recover a 

substantial percentage of claimed damages when they prevail in arbitration. Statistics 

included in the Solin Study show that even in recent years, investors receive about half 

 

188 Morgensen, supra note 185. Damages are to be calculated to compensate a claimant only 

for what he lost because of the fraud, not to compensate him for what he might have gained. 

Restatement (Second) of Torts, § 549 cmt. b. (“[T]he recipient of a fraudulent 

misrepresentation is entitled to recover from its maker in all cases the actual out-of-pocket 

loss which, because of its falsity, he sustains through his action or inaction in reliance on it.”). 

189 Id.

190 See Solin Study at 13. 

191 See id.; see also Appendix E (Investors’ Inflation-Adjusted Recoveries in Arbitration Have 

Increased). 

45 
192 of the amount they claim. By contrast, investors who pursue similar claims in litigation 

do not fare nearly so well. For example, among all securities class action settlements in 

2005, investors received 3.1 percent of their estimated damages. In 2006, that figure 

dropped to 2.4 percent.193

(d) The Solin Study’s conclusions about win and recovery 

rates for large brokerage firms are misleading 

The Solin Study further concludes that recovery rates in arbitration 

decline as the size of the claim increases and when claims are asserted against larger 

brokerage firms. The Solin Study suggests that this says something troubling about the 

fairness of the arbitration process. What this result actually suggests, however, is quite 

different. 

First, large firms are generally subject to heightened regulatory scrutiny, 

and due to their greater resources and relatively greater reputational risk, they tend to 

invest more heavily in the training and procedures likely to detect and prevent securitiesrelated employee misconduct. It therefore is not surprising that large firms might be 

expected to fare better in arbitration proceedings where claimants seek to recover for the 

alleged misdeeds of their employees. 

Second, it is the larger brokerage firms that employ research analysts and 

that would be largely, if not exclusively, subject to claims of fraudulent research. As 

discussed above, due to the significant hurdles involved in such claims, panels have 

 

192 See Solin Study at 11 & Fig. 7. Similarly, the Securities Arbitration Commentator Inc.’s 

recent survey found that investors recovered, on average, 54 percent of their claimed 

damages in 2006. Supra note 180 at 7. 

193 Laura E. Simmons and Ellen M. Ryan, Cornerstone Research, Securities Class Action 

Settlements: 2006 Review and Analysis, 6 & Figure 5, available at 

http://securities.stanford.edu/Settlements/REVIEW_1995-

2006/Settlements_Through_12_2006.pdf.

46 
awarded damages in fewer than one-third of analyst claims, which is significantly lower 

than average.194

Third, again, due to their greater resources, including very experienced 

legal staffs, larger brokerage firms are particularly likely to settle meritorious claims 

asserted against them prior to hearing.195 Solin himself has acknowledged that “[o]nce 

the brokerage firm decides to take a case to hearing, it has determined that it has a 

reasonable prospect of winning. Otherwise, it would have settled the case.”196 For all 

these reasons, none of which provide any basis to question the fairness of the arbitral 

process, it is not surprising that recovery rates against larger firms will be lower than 

those against smaller firms. 

D. Parties Believe SRO Arbitrations are Fair 

Significantly, participants in SRO arbitrations—including claimants 

themselves—perceive the process as fair. In fact, a 1999 study analyzing the perception 

of fairness of NASD proceedings concluded that 93.49 percent of the individuals 

surveyed—54 percent of whom were claimants— found that their case was “handled 

fairly and without bias.”197 Similarly, in a 2001 study, 85 percent of those surveyed 

agreed that their cases were handled fairly and without bias.198 No participants in that 

study strongly disagreed with the statement that their cases were handled fairly and 

 

194 Supra note 18 (regarding the proposed consolidation of the NASD and NYSE Regulation 

arbitration programs). 

195 Tony Chapelle, Advisors Score Big in Arbitration Study, On Wall Street (June 1, 2007), 

available at http://www.onwallstreet.com/article.cfm?articleid=3635 (“[B]ig firms can afford to 

settle cases that have merit, and most times, they do. That leaves the relatively weaker 

cases. Smaller firms can ill afford to settle cases involving a couple of hundred thousand 

dollars.”). 

196 Supra note 176 at 227.

197 Tidwell, supra note 13 at 3-4. 

198 Perino, supra note 47, n119 (citing NASD-DR, Customer Satisfaction Survey Results 1 (May 

2001)). 

47 
199 without bias. Relying on this data, one commentator concluded that “[a]vailable 

empirical evidence suggests that SRO arbitrations are fair and that investors perceive 

them to be fair.”200 

That participants believe SRO arbitration to be fair and efficient is 

underscored by their continued use of SRO arbitration, even when alternative forums are 

available. In 2000, SICA commissioned a pilot program that permitted select customers 

to choose a non-SRO arbitration forum instead of standard SRO arbitration. Only 8 of 

the 277 participants chose to arbitrate their claim with a non-SRO entity.201

In short, there is no empirical data showing that SRO arbitrations are, or 

are thought by the parties to be, unfair. Rather, the data show that no industry bias 

exists in SRO arbitration and participants believe the SRO arbitration process is just. 

VII. The Use of Predispute Securities Arbitration Agreements Is Fair to 

Investors and Serves the Public Interest 

Given the fairness, speed and cost-effectiveness of arbitration, there is no 

sound public policy reason to preclude securities firms from providing for arbitration in 

customer agreements. Predispute arbitration agreements put the parties to a dispute on 

equal footing once a dispute emerges, and deter forum-selection tactics that serve no 

public purpose. 

In addition, predispute arbitration agreements contribute a degree of 

predictability to the relationship between investors and members of the securities 

 

199 Id. 

200 Id. at 48. 

201 Final Report, Securities Industry Conference on Arbitration: Pilot Program for Non-SRO 

Sponsored Arbitration Alternatives, available at 

http://www.lgesquire.com/SICA%20Pilot%20Report.pdf. The eight claimants selected either 

AAA or JAMS arbitration. 

48 
202 industry. Such agreements provide both parties with the knowledge that they must 

resolve any dispute in SRO arbitration, mitigating the complex and often time-consuming 

and expensive process of examining other venues.203 Investors are assured that firms 

must comply with the law or risk losing their licenses. Investment firms—both small 

introducing firms and larger clearing firms—are assured that they can avoid expensive 

litigation which encourages the settlement of frivolous claims. In effect, firms “accept the 

fact that a case with ‘bad facts’ will be adjudicated quickly so they will be forced to settle 

and they will accept having a very limited right of appeal in exchange for not having to 

extend the costs of a court defense or unpredictable jury damage awards.”204 This 

arrangement ensures the survival of small introducing firms, part of the fabric of 

American small business, who can serve their customers knowing that they will not be 

engulfed by defense costs in spurious court cases which could threaten their existence. 

Those who would preclude the use of predispute arbitration agreements 

are not arguing for equal treatment. They are not arguing that arbitration should occur 

only when both parties agree to it after a dispute has arisen. Rather, they are arguing 

for an advantage not found elsewhere in dispute resolution: they want investors to have 

a unilateral right to choose whichever forum—arbitration or litigation—they think will 

benefit them in a particular case, giving securities firms no voice at all. It is not the norm 

in our judicial system that a plaintiff can unilaterally choose between litigation and 

arbitration; rather, the norm (absent agreement) is that a plaintiff is free to litigate, and 

can arbitrate only with the consent of the defendant. 

 

202 See David Sherwyn, Because It Takes Two: Why Post Dispute Voluntary Arbitration 

Programs Will Fail to Fix the Problems Associated with Employment Discrimination Law 

Adjudication, 1 Berkeley J. Emp & Labor L. 21-22, 67-68 (2003). 

203 Id. at 21-22. 

204 Id. at 67. 

49 
That norm, which would lead to litigation unless the parties agree 

otherwise, would be harmful to investors, and no one is seeking it here. Many investor 

claims—even ones involving substantial amounts—are not large enough to support the 

high cost of commencing and pursuing a lawsuit in court.205 In cases involving amounts 

large enough to justify the costs of litigation, it is not uncommon for claimants 

(particularly elderly ones) to desire the expedition of arbitration, especially in an era of 

congested court dockets that give priority to criminal cases over civil cases and in 

consideration of the lengthy appellate process involved in civil litigation. It is for these 

reasons that FINRA requires securities firms to submit to arbitration at a customer’s 

request.206

The use by securities firms of a predispute arbitration agreement thus 

does not give them an advantage—it provides them the same right as customers to 

choose arbitration. It places the parties on equal footing. 

There is good reason to favor arbitration as the norm and therefore 

provide for it in customer agreements. While there is no evidence—and it is not the 

general experience of the industry—that arbitration leads to more favorable verdicts 

overall, the arbitration system provides significant benefits that have been enjoyed for 

more than three decades by both investors and the securities industry: 

• It provides faster resolution of disputes. 

• It reduces legal costs. 

• It operates under rules tailored to investor claims. 

 

205 See Appendix F (Many Cases are Small Claims, Which are Better-Suited for Arbitration Than 

Litigation). 

206 Code of Arbitration Procedure § 12200 (providing for arbitration when (1) it is required by 

written agreement or (2) it is requested by a customer). 

50 
• It provides predictability as to process, under rules that are 

uniform regardless of the state or county in which the case is 

brought. 

• It is administered by a staff that is familiar with these types of 

disputes and often can provide greater attention to the cases than 

clerks in congested courts. 

• It uses arbitrators who, by virtue of training and experience, often 

come to cases with an understanding of the rules and norms of 

the securities industry. 

These are legitimate and sound reasons, all consistent with public policy, for the 

securities industry to secure for itself the same right as investors to seek arbitration in 

most cases. 

In the absence of a predispute arbitration agreement, decisions whether 

to arbitrate an existing dispute will be governed by tactical advantage. As one 

commentator has noted, 

“the one overriding problem with post-dispute voluntary 

arbitration is that, according to the evidence... and a 

logical analysis of the economic, political, and legal 

incentives of the parties and their lawyers, it is extremely 

rare for both the plaintiff’s and defense’s attorneys in a 

case to select arbitration after the dispute has arisen.”207

This dilemma has also been described by William Paul, former President of the 

American Bar Association, 

“The odds of an agreement for binding arbitration being 

entered into after a dispute has arisen are not great. At 

that stage one party or the other will have a view that 

traditional litigation offers some advantage which the party 

does not choose to relinquish... So if you prefer binding 

arbitration, put a provision for it in the contract, up front, 

when the deal is made, and before the dispute arises and 

then, and only then, will you have assured arbitration as 

the preferred dispute resolution mechanism.”208

 

207 Sherwyn, supra note 202 at 7. 

208 Supra note 124. 

51 
Studies regarding the frequency of post-dispute voluntary arbitration bear this out. In a 

survey of AAA employment arbitrations conducted in 2001 and 2002, only 6 percent in 

2001 and 2.6 percent in 2002 were the result of post-dispute arbitration agreements.209 

Likewise, a review of AAA business-to-business arbitrations revealed that only 

1.8 percent of claims were brought pursuant to a post-dispute agreement to arbitrate.210

Parties wanting a prompt, fair, economical resolution will likely prefer 

arbitration, for the reasons described in the preceding pages. But litigation may, in a 

particular case, appeal to claimants’ counsel seeking to drive up costs to induce a 

nuisance settlement; use a judicial forum to seek prejudicial publicity or solicit other 

clients; or hope for “jackpot justice;” or benefit from an anti-business jury pool in a 

carefully selected jurisdiction. Litigation may, by the same token, appeal to securities 

firms seeking to use their greater financial resources to the detriment of the small 

investor by engaging in extensive discovery or filing numerous motions. Precluding the 

use of binding predispute arbitration agreements will leave the choice between litigation 

and arbitration to be made on the basis of tactical considerations such as these. While a 

particular party in a particular case may benefit from these tactics, the public interest and 

the overall interests of market participants are poorly served by such gamesmanship. 

Predispute arbitration agreements strike the “right balance between investor protection 

and market competitiveness” by providing investors with a fair and impartial forum in 

 

209 Lewis L. Maltby, Out of the Frying Pan, into the Fire: The Feasibility of Post-Dispute 

Employment Arbitration Agreements, at 4 (May 2003), available at 

http://www.workrights.org/current/cd_adr.pdf. 

210 Id. at 6-7. 

52 
which to resolve disputes and protecting companies from meritless lawsuits which 

threaten their effectiveness in the market and even their very existence.211 

In summary, the use of predispute arbitration agreements is fair—it 

provides no advantage to either side—and it brings about a result that serves the overall 

interests of both investors and the securities industry. 

VIII. Conclusion 

The current effort to make predispute securities arbitration agreements 

unenforceable is a solution in search of a problem. There is no credible evidence that 

SRO-regulated arbitration is unfair to investors or otherwise fails to protect their 

interests. Rather, objective and empirical evidence has proven that investors’ claims are 

more likely to be heard on the merits, more quickly and with less cost, in arbitration than 

they are in federal or state court. Arbitration permits investors with claims too small to 

litigate a cost-effective opportunity to be heard, and provides those with larger claims a 

forum capable of bringing experience and knowledge to bear in resolving their disputes. 

Furthermore, securities arbitration has received high ratings for investor satisfaction, and 

it is unique among arbitration regimes in that it is closely supervised and regulated by 

independent regulators, including the SEC. 

Prohibiting predispute arbitration agreements would simply produce more 

protracted, costly litigation. This result would not serve the best interests of investors or 

the U.S. capital markets. Congress should not disturb a system that is working. 

* * * 

 

211 Opening Remarks by Treasury Secretary Henry M. Paulson, Jr. at Treasury’s Capital Markets 

Competitiveness Conference (March 13, 2007), available at 

http://www.ustreas.gov/press/releases/hp306.htm. 

53 
Kevin M. Carroll Brad S. Karp 

Managing Director and Daniel J. Toal 

Associate General Counsel Anne S. Raish 

SECURITIES INDUSTRY AND FINANCIAL PAUL, WEISS, RIFKIND, 

MARKETS ASSOCIATION WHARTON & GARRISON LLP 

1399 New York Avenue, NW 1285 Avenue of the Americas 

Washington, DC 20005 New York, NY 10019 

Edward G. Turan Charles E. Davidow 

Executive Vice President, Compliance and Katherine L. Halpin 

Legal Division and Chair, Arbitration Committee 

SECURITIES INDUSTRY AND FINANCIAL 

PAUL, WEISS, RIFKIND,

WHARTON & GARRISON LLP 

MARKETS ASSOCIATION 1615 L Street, NW, Suite 1300 

th 388 Greenwich Street, 17 Floor Washington, DC 20036 

New York, NY 10013 

Hannah Berkowitz 

Vice President, Compliance and Legal Division 

and Chair, Litigation Advisory Committee 

SECURITIES INDUSTRY AND FINANCIAL 

MARKETS ASSOCIATION 

51 West 52nd Street 

New York, NY 10019 

54 
55

Appendix A

Chronology of Improvements to Securities Arbitra

Date

Initiative Benefit to 

1994 NASD establishes a Blue Ribbon Task Force of experts, 

led by former SEC Chairman David Ruder, to conduct a comprehensive study of securities dispute resolution and recommend needed changes.1

Subjects tare heard improveme

January 1996 The Arbitration Policy Task Force releases its report, 

the most “wide-ranging examination of securities 

arbitration since the 1987 Supreme Court decision that holds predispute arbitration agreements enforceable...”containing more than 70 recommendations for change.2

Subjects tare heard improveme

October 1998 Neutral List Selection System is implemented whereby 

arbitrator lists are generated in a neutral fashion and 

available arbitrators are “rotated” through the system.3

Grants paselection p

1. See NASD Dispute Resolution, The Arbitration Policy Task Force Report—A Report Card 5 (July 27, 2

http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p036466.pdf.

2. Id.3. NASD NTM 98-90 (effective November 17, 1998), available at http://finra.complinet.com/file_store/pdf/
56

1998 Initiative is begun to encourage the use of “plain 

English” in disclosure documents and other material 

used by investors, including the Code of Arbitration Procedure.4

Ensures thtransparenforum

September 1999

NASD announces the implementation of the Discovery Guide, which requires parties to produce specific 

categories of documents at the outset of arbitration, provides that certain categories of documents are presumptively discoverable, and directs arbitrators to sanction parties for violating written discovery orders.5

Aids partiestreamlinin

1999 Annual focus groups are launched to gather feedback 

from constituents on targeted areas of the process.6

Helps ensinto the ar

4. Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Prop

2, 3, and 4 to Amend NASD Arbitration Rules for Customer Disputes and Notice of Filing and Order GAmendments 5, 6, and 7 thereto; Order Approving Proposed Rule Change and Amendments 1, 2, 3, afor Industry Disputes and Notice of Filing and Order Granting Accelerated Approval of Amendments 54,575 (Jan. 31, 2007).

5. NASD NTM 99-90, available at http://www.finra.org/web/groups/rules_regs/documents/notice_to_mem

6. See FINRA Dispute Resolution Fact Sheet, August 23, 2007, available at 

http://www.finra.org/ArbitrationMediation/FINRADisputeResolution/FINRADisputeResolutionFactShee
57

August 2000 NASD requires firms to certify in writing that they have 

paid arbitration awards within 30 days of a decision.7

Helps ensinvestors

February 2001 Code of Arbitration Procedure is amended to allow the 

Director of Arbitration to remove arbitrators for cause 

once a hearing has begun.8

Helps ens

May 2001 Code of Arbitration Procedure is amended to prohibit a 

firm that has been terminated, suspended, or expelled from NASD, or that is otherwise defunct, from enforcing 

a predispute arbitration agreement against a customer in the SRO arbitration forum.9

Provides cseek relief to SRO ju

September 2002

Arbitration process is streamlined for claimants filing against defaulting, suspended, or terminated industry 

respondents.10

Makes it faget defaulmembers securities 

7. NASD NTM 00-55 (effective September 18, 2000), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p003993.pdf.

8. NASD NTM 01-13 (effective March 8, 2001), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p003916.pdf.

9. NASD NTM 01-29 (effective June 11, 2001), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p003875.pdf.

10. NASD NTM 02-58 (effective October 14, 2002), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p003483.pdf.
58

2002 SEC commissions study to assess the adequacy of 

arbitrator disclosure requirements.11

Helps ensmakers in 

October 2003 Systematic arbitrator background check system is 

enhanced to include criminal checks, employment verification, and professional license verification.12

Helps to eof informaarbitrators

2003-2004 A series of steps to control discovery abuse is

announced and implemented. NASD reminds member firms of their obligations under the rules to cooperate in the voluntary exchange of documents and information at the outset of arbitration.13

Requires iresponsive 

2003-2004 Customer, Industry, and Mediation Codes of Procedure 

are simplified and filed with SEC.14

Allows invarbitration 

11. Michael A. Perino, Report to the Securities and Exchange Commission Regarding Arbitrator Conflict D

NYSE Arbitrations 2 (Nov. 4, 2002).

12. NASD NTM 03-64 (effective October 1, 2003), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p003097.pdf.

13. NASD NTM 03-70 (effective November 6, 2003), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p003073.pdf.

14. See FINRA Dispute Resolution Fact Sheet, August 23, 2007, available at 

http://www.finra.org/ArbitrationMediation/FINRADisputeResolution/FINRADisputeResolutionFactSheet
59

June 2004 Procedures to reduce case processing time for matters 

involving elderly or infirm parties are implemented.15

Allows fasclaims

June 2004 Code of Arbitration Procedure is amended to expand 

the definition of “industry arbitrator” to exclude 

individuals with minor or even indirect ties to the securities industry from serving as public arbitrators in NASD arbitrations.16

Reduces tbias in the public arb

June 2004 Code of Arbitration Procedure is amended to grant 

parties’ requests to challenge arbitrators for cause “where it is reasonable to infer an absence of impartiality, the presence of bias, or the existence of some interest on the part of the arbitrator in the outcome of arbitration.” Close questions involving challenges brought by investors are resolved in favor of the customer.17

Helps ensresolve cloand bias i

August 2004 NASD implements on-line filing of claims.18 Improves 

arbitration claims fasfrom the S

15. NASD Announcement, “Notice to Parties - Expedited Proceedings for Elderly or Seriously Ill Parties,” 

http://www.finra.org/ArbitrationMediation/ResourcesforParties/p009636.

16. See NASD Notice to Members 04-49, Arbitrator Classification (effective July 19, 2004), available at

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p002727.pdf.

17. Id.

18. NASD NTM 04-56 (effective August 5, 2004), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p009899.pdf.
60

August 2004 NASD amends its by-laws to allow it to institute 

suspension proceedings against a formerly associated person for failing to pay an award or settlement for a period of two years after the award was entered or the settlement was entered into; the amendments also grant NASD the authority to suspend a broker’s ability to associate with a member in any capacity until an award or settlement is paid.19

Prevents ffail to pay entering th

August 2004 NASD amends Code of Arbitration Procedure to allow 

parties and arbitrators, at the first pre-hearing conference, to establish guidelines for direct contact with arbitrators.20

Allows parfiling pleadarbitrators

January 2005 NASD amends rule governing predispute arbitration 

agreements with customers to require delivery and 

customer acknowledgment of the agreement at the place and time of signing.21

Ensures thand acknoarbitrate th

19. NASD 04-57 (effective September 9, 2004), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p009798.pdf.

20. NAST NTM 04-62 (effective September 30, 2004), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p009904.pdf.

21. NASD NTM 05-09 (effective June 1, 2005), available at 

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p013203.pdf.
61

2005-2006 NASD conducts extensive business process reviews to 

streamline case processing.22

Improves 

July 2007 NASD Dispute Resolution issues “The Arbitration Policy 

Task Force Report—A Report Card.” The Report card 

states in pertinent part that “NASD has implemented nearly every key recommendation” made in the 1996 report and concluded that ten years after the Blue Ribbon Task Force was established NASD arbitration is more “fair to participants, and offers investors procedures for dispute resolution with broker-dealers that are equal to and frequently superior to actions in courts.”23

Reviews ataken by thensure thaforum that 

22. See FINRA Dispute Resolution Fact Sheet, August 23, 2007, available at 

http://www.finra.org/ArbitrationMediation/FINRADisputeResolution/FINRADisputeResolutionFactShee

23. See NASD Dispute Resolution, The Arbitration Policy Task Force Report—A Report Card 1, 5 (July 27

http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p036466.pdf.
62

05

10152025

Months

Duration of Cases in Arbitration vs. Litigat

Arbitration1

Litigation

Arbitration Is Faster Than L

1. Arbitration statistics are based on data for a 12-month period ending August 2007 and reflect t

arbitration proceeding from the filing of the complaint to completion of the case. See Dispute 

http://www.finra.org/ArbitrationMediation/FINRADisputeResolution/Statistics/index.htm.

2. Litigation statistics reflect median time intervals from filing to disposition of civil cases filed in U

month period ending March 31, 2006. See Federal Judicial Caseload Statistic[sic], March 31, www.uscourts.gov/caseload2006/tables/C05Mar06.pdf.

Appendix B
63

0%5%

10%15%20%25%

Percentages

More Cases Are Heard Be

Decision-Maker in Arbitration T

Arbitration1

Litigatio

1. Source: Dispute Resolution statistics, available at

http://www.finra.org/ArbitrationMediation/FINRADisputeResolution/Statistics/Index.htm. Data rcases heard on the merits in 2005.

2. Source: Federal Judicial Caseload Statistic [sic], March 31, 2006, Table C-4, available at 

http://www.uscourts.gov/caseload2006/tables/C04Mar06.pdf. Data reflect percentage of cases 

courts for the 12-month period ending March 31, 2006.

Appendix C
64

30%40%50%60%70%80%90%

P e rc e n tag e s

2003 2004 2005 

The Total Percentage of Claimants Who Recov

or Other Relief in Arbitration or By Settlement i

1. Source: Dispute Resolution Statistics available at

http://www.finra.org/AbitrationMediation/FINRADisputeResolution/Statistics/Index.htm. Data 

which claimants, including claimants other than customers, recovered damages or other reliesettlement.

Appendix D
65

Investors' Inflation-Adjusted Recoveries in A

Increased1

1. Source: Edward S. O'Neal, Ph.D. and Daniel R. Solin, Mandatory Arbitration of Securities Disputes: A S

Fare (2007) at 14, Figs. 10 & 11. 

Appendix E
66

Many Cases are Small Claims, Whic

Better-Suited for Arbitration Than Liti

1. Source: Edward S. O'Neal, Ph.D. and Daniel R. Solin, Mandatory Arbitration of Securities Disp

Claimants Fare (2007) at p. 8, Fig. 3. The statistics reflected are based on data regarding NA

occurring between January 1995 and December 2004. Solin Study at 5.

3,193 3,158

1,803

2,081

Less than $10K Between $10K and

$50K

Between $50K and

$100K

Between $100K 

$250K

Compensatory Damages Requested

Appendix F
67

0

10203040506070

Panel Sole

Arbitrator

Panel Sole

Arbitrator

2005 2006

Type of Arbitration2

Percentage Won 

1. Source: September 2007 review of all 2005 and 2006 arbitration decisions available on the FIN

http://www.finra.org/ArbitrationMediation/ResourcesforParties/FINRAArbitrationAwardsOnline/inwhich the Claimant received some form of requested relief is included among the "Percentage W

2. Arbitrations are decided by panel or sole arbitrator. A panel consists of three arbitrators, two of 

is non-public or "industry." A sole arbitrator is always a public arbitrator.

Appendix G

The Presence of an "Industry" Arbitrato

Material Impact on Customer Win