By Paul D. Boynton

Investors or employees involved in disputes with brokerage firms could ask for a written explanation of arbitration decisions under a proposed new rule, which, if approved, could dramatically change how arbitrations are decided in the securities industry.

The National Association of Securities Dealers last month filed the proposed rule change with the Securities and Exchange Commission, which has the final say on whether it becomes final. The SEC is expected to act on the proposal within the next few months following a public comment period.

Almost with exception, complaints against brokerages are handled by three-member arbitration panels, and currently it’s completely up to the panels whether they will explain their decisions in writing.

Under the proposed change to the NASD’s arbitration code, prior to the first hearing either a customer or a broker pursuing a claim against a securities firm could request that the panel issue a written decision. Arbitrators would get $200 each for a written ruling, with the NASD paying half to lessen the costs for parties. Panels would not have to cite cases or statutes in their written decisions.

The NASD is seeking to create greater transparency in securities arbitration.

“Investors want to know more about how a panel reaches its decision,” said NASD chairman Robert R. Glauber. “By giving investors the option of requiring a written explanation of an arbitration panel’s decision, we will increase investor confidence in the fairness of the NASD arbitration process.”

While NASD members can request a written decision, panels are not required to issue them absent a request by the customer.

The proposed rule can be found on the “important documents” page of New England In-House’s website, www. newenglandbizlawupdate.com.

The rule would have “a large impact on what happens in securities arbitration,” according to Michael Unger, who specializes in defending brokerages as a partner at Boston-based Rubin & Rudman.

The number of settlements could increase, suggested Unger, by “putting pressure on the plaintiffs’ bar to settle more quickly since written decisions are another weapon for the securities industry, which have deeper pockets, to pursue an appeal of the arbitration award in court. The client’s award may be at risk and the [plaintiff’s] attorney’s contingency fee may be at risk.”

These cases are usually handled on a contingency fee basis.

Divided Bar

The plaintiffs’ bar is divided on the merits of the proposed rule. Some are concerned cases will last longer and be more expensive, while others see written decisions leveling the playing field for their clients.

Rosemary Shockman, president of the Public Investors Arbitration Bar Association, said the group’s membership supports generally the right of investors to request written rulings so they can better understand rulings, especially unfavorable ones.

However, Shockman, who practices in Scottsdale, Ariz., acknowledged the risks and expenses associated with more appeals and motions to vacate arbitration awards. She said the right to ask for a written decision alone will not make the system fairer.

PIABA advocates broad reform of securities arbitration, she said, including abandoning the NASD and New York Stock Exchange practice of having a securities industry representative on each arbitration panel.

Panels typically have an industry representative and two “neutrals” that have no specific ties to the securities industry.

“Many plaintiffs’ lawyers like the system as it currently exists,” said William A. Jacobson, a Providence, R.I. securities arbitration specialist. “Win or lose, the case is over for the most part. There’s a concern that the main benefit of arbitration – a relatively speedy result – will be lost. Written decisions will likely create a greater number of challenges in court.”

However, Jacobson recently secured a rare reversal of an arbitration award against his client – a former broker for Citigroup Global Markets, Inc. – who claimed Citigroup violated New Hampshire wage laws by denying him commissions under a compensation plan that allows employees to defer compensation by purchasing stock at a discount. These types of payment plans are common in the investment industry.

The broker sued, claiming Citigroup’s program (known as a Capital Accumulation Plan) deprived him of about $257,000. A three-member arbitration panel rejected his claim, saying the New Hampshire wage laws were “irrelevant” and that he had agreed in writing to the compensation plan and had benefited from it.

But a U.S. District Court Judge in New Hampshire, Joseph A. DiClerico Jr., reversed the panel, saying it inappropriately disregarded the statute and substituted what it believed to be a fair decision.

Jacobson said he was able to demonstrate through the language of the written award that the arbitrators intended to disregard the law – which is the difficult standard for overturning an arbitration award.

“There’s no question that having a written decision made it a lot easier to show the court what the arbitration panel did, and to meet the legal standard for overturning the award. It was very helpful to us,” he observed. “Justice can be served if the arbitrators have to explain what they are doing.”

Matthew Farley, who defends brokerages, predicted that the securities industry “will not actively oppose” the proposal.

Nonetheless, Farley criticized the rule proposal as “just adding another layer to the process” that’s become more and more complex over the years, even though securities arbitrations are intended to be an efficient, speedy way to resolve disputes.

“It will just create more work at the end of the process and create a drag on the system,” he said.

Impact On Awards

Farley, a partner in the New York City office of Drinker Biddle, questioned whether arbitration panels would issue detailed, “scholarly” decisions if the NASD proposal is approved.

“I don’t know if we’re going to get clear awards under this rule,” said Farley. “We’ll get generalities, statements like ‘the claimant didn’t satisfy his or her burden of proof.’ I’ve been in cases where written awards have been requested and you don’t get much more than that in the decision.”

More appeals will likely result as parties try to “pull apart brick by brick the written awards,” Farley said. “I don’t think that the number of awards actually overturned will go up as a result of them being in writing. The narrow standard of review hasn’t changed. But more people will take a shot [on appeal].”

David E. Robbins of New York City, who regularly sits as an arbitrator in securities disputes, hopes the rule proposal will elevate the quality of awards.

“Arbitrators should have the courage of conviction to explain their rationale for a decision,” Robbins said. “They should lay out in writing the reasons for their decisions.”

Michael J. McAllister of New York City, a 35-year veteran of securities arbitration cases, sees the rule change as “enhancing” the arbitration process: “Panels will have to think long and hard about what they will write down. It will compel them to think unanimously about what’s a reasonable outcome.”

The time and effort involved in submitting written awards may cause attorneys with active practices to shy away from sitting on panels, Unger noted, especially considering that the fee for a written decision is $200 per case.

When To Request A Written Decision?

Experts predict that requests for written decisions will more likely come in cases where lawyers perceive they have a strong legal argument, as opposed to cases with a strong emotional appeal.

Requesting a written decision could “backfire” in a case involving strong equitable factors in favor of the plaintiff, according to Robbins.

“Sometimes arbitrators want to unscrew the screwed [investor or employee] just because it’s the right thing to do, even if it has no basis in the law,” Robbins said. “If they are compelled to write a decision, they may go in the other direction.”

McAllister, a partner at Satterlee, Stephens, Burke & Burke, said he would be “reluctant to see a written award if I was going on a strong emotional case with a weak legal basis.”

Unger predicted that brokerages would more likely appeal adverse written awards to avoid “bad” rulings that could be used in other cases. While arbitration awards are not binding, arbitration panels do use them as guideposts.

“In large damages cases where there are findings against brokerage firms, they might find they like having a written decision as the basis for an appeal,” said Unger.

Robbins agreed.

“Brokerage firms want to avoid adverse arbitration rulings in writing because even if they are not binding, they could be persuasive to other panels. The rule proposal will likely lead to more motions to vacate filed by brokerage firms,” Robbins said.

Farley said brokerages would not regularly pursue appeals solely as a delay tactic to pressure plaintiffs into settlements.

“I’ve never come across a brokerage firm that has done that,” he said. “The large, reputable ones just don’t do it. It may happen, but it’s the exception, not the rule.”

Questions or comments can be directed to the writer at [email protected].