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BOSTON – Massachusetts Secretary of the Commonwealth William Galvin has joined the attack on the securities’ industry arbitration system, echoing a recent survey that lambasted the system as unfair and biased. The study commissioned by the Securities Industry Conference on Arbitration, Perception of Fairness of Securities Arbitration: An Empirical Study, surveyed various types of participants in National Association of Securities Dealers Inc. (NASD) and New York Stock Exchange (NYSE) arbitrations that began after Jan. 1, 2002 and ended between Jan. 1, 2005 and Dec. 31, 2006. In July 2007, NASD and NYSE’s arbitration functions merged to form the Financial Industry Regulatory Authority (FINRA). According to the study released on Feb. 6, nearly 48% of all survey participants and 62% of securities brokerage firm customers disagreed with the statement that the arbitration process was fair. About 35% of survey participants disagreed that the arbitration panel was impartial, compared with about 41% of customers. “The study results are alarming, and clear and indisputable evidence that there are major problems with FINRA’s arbitration program and FINRA can no longer ignore these issues,” said Galvin, in a Feb. 13 statement. Galvin also supported the North American Securities Administrators Association’s recent demand that regulatory authorities stop requiring a mandatory industry representative on arbitration panels. The administrators association made that demand to FINRA and the U.S. Securities and Exchange Commission when the study was released. Through a spokesman, FINRA said the survey’s findings were mixed and inconsistent. FINRA said many of the same people noted the “thoroughness and openness of the process” and gave high marks for the arbitrators’ competence, then questioned the arbitrators’ impartiality. FINRA also said it’s “troubled” that survey participants rated the system as unfair while giving high marks to several objective standards, including: arbitrator competence; arbitrator understanding of the issues; process efficiency; and the “arbitrators’ willingness to listen.” “As the authors note, these findings ‘shed light on subjective perceptions by arbitration participants and do not address objective standards of substantive or procedural fairness,’” FINRA said. SEC spokesman John Nester said the agency has made changes to the arbitration process that post-date the arbitrations surveyed in the study. On Jan. 24, the agency announced several rule changes, including: giving arbitrators greater authority to impose sanctions for violations, such as failure to comply with discovery requirements; boosting the qualifications for arbitrator panel chairpersons; and expanding the number of arbitrators available for parties’ choice. “We certainly agree that the arbitration process must be fair and efficient, and just last year approved new arbitration codes to promote investor interests by making the process as simple, uniform, and transparent as possible,” Nester said. FINRA said it has taken several steps to upgrade its arbitration process in the past few years, including: enhancing arbitrator requirements and streamlining the process for investors.

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