MARKET COMMENT
February 5, 2007
On a quiet day for most market sectors let’s talk about one
of my least favorite subjects--arbitration.
I’ve been an NASD and NFA arbitrator for over a decade. Despite all the pressure from both
organizations to remain active, I’ve yet to be asked to work a case. For all I know I’m on inactive status and I
don’t care. Undaunted, the crack staff for
both groups sends me material from time to time and I’ll give it a glance, sigh
and then toss it.
The system is broken.
Today Investment News [you
may need to register] also reported some grumblings by arbitrators for an
overhaul of the system. You’ll hear no
such refrain from the securities industry since the system is rigged in their
favor particularly against small investors.
If a small investor with assets of less than say $100K were
desirous of pursuing an action against their broker, they’d be hard pressed to
find legal representation. Most of these
cases would find the rewards in legal fees insufficient to justify the costs associated
with pursuing the complaint. What if the
losses for which you’re complaining are modest, by industry standards but very
meaningful to you, perhaps $30K of the $100K?
What if the losses were accomplished without your permission or were
flagrantly inappropriate and unsuitable?
What attorney will represent you?
No one frankly. You’re on your
own.
As the linked article states from one source that in some
arbitration cases: “where the awards given in favor of the investor, but the
cost of the forum and the arbitration exceeded the award which doesn’t make any
sense,” said the source.
Firms will routinely take letters of complaint from
customers and route them to their legal department. They in turn will send out a letter of
acknowledgement articulating some concern saying they’ll investigate the issue
and follow-up. Many months might pass
before a dismissive letter would surely follow.
Dissatisfied after perhaps a year without resolution you
decide to proceed on your own, well you’re in for the shock of your life. First you’ll have to front the cost of the
arbitration through fees to the NASD.
Then you’ll run into a blizzard of discovery requests. If you’ve never seen a complaint form you
might faint upon its presentation. It
contains many pages of rather dull and seemingly unrelated requests for
information in questionnaire form. These
may include such nonsense as your phone and cellular records, tax returns,
brokerage statements from any other firm, any relatives accounts and so on--little
relating to the actual complaint. The
intent is to drive you mad. Then you’ll
quit the complaint because “that” my friends is the defendant’s objective,
because this is not a search for the truth.
Before mandatory arbitration existed many complaints were
handled locally first by the defendant’s local manager, if a broker, and then
perhaps even a regional manager. I can
recall occasions when another broker’s client would write a letter to a branch
manager which would be followed quickly by a manager’s query of the broker. Then the injured party would be invited to
meet with the manager and discuss the situation. Many times complaints were resolved quickly
and at other times not. The supervising
manager was “informed and responsible” for what was occurring within their charge. No longer.
If a complaint arrives the manager takes no action and makes no
acknowledgement merely sending it to their legal department like a hot potato. They’re no longer involved in the affairs of
the brokers within their charge. That in
itself is irresponsible.
So, as far as I’m concerned, it’s a rigged system in favor
of the firms. As House Financial Service
Committee Chairman Barney Frank stated in the aforementioned article, “Financial
services is a big world.” Welcome to the
big time Barney!