Securities Arbitration Pilot Program
by Stephen G. Sneeringer

The Securities Industry Conference on Arbitration (SICA) issued a challenge to the securities industry - let a significant number of cases go to arbitration forums not affiliated with the securities industry, such as JAMS (JAMS) or the American Arbitration Association (AAA), have those organizations administer the arbitrations, look at the results and evaluate the effectiveness of these forums verses industry arbitration forums such as the NASD or NYSE. Seven of the largest retail brokerage firms accepted the challenge.

Commencing on January 24, 2000, customers of Merrill Lynch, Morgan Stanley Dean Witter, PaineWebber, Prudential Securities, Salomon Smith Barney, A.G. Edwards and Raymond James may elect to have their arbitrations heard by a non-industry forum. 100 cases will go to an award by an arbitration panel administered by a non-affiliated forum over the next 24 months. Because 60% to 70% of all cases settle, it is estimated that over 400 cases will go through the program in order to obtain 100 decisions.

Participation by the securities firms is voluntary. However, once the firm agrees to participate, the firm is required to arbitrate at least a specified number of cases to award during the two years of the pilot program. The firm cannot elect which of the cases it will permit to go into the program; only a public customer can do that.

The firms participating, the number of cases that will go to decision and the arbitration forums selected are:

Merrill Lynch 15  JAMS
MS Dean Witter 15 JAMS
PaineWebber 15 JAMS
Prudential Secs. 15  JAMS
Smith Barney 15 JAMS
A.G. Edwards 15 JAMS/ AAA
Raymond James 10 JAMS/AAA

Claims Eligible for Program
Only public customer cases where the customer is represented by an attorney may be brought in the pilot program. Excluded are employment related disputes, disputes between securities industry members and claims that cannot be filed before an industry forum. Claims involving commodity futures, non-publicly traded limited partnerships or class actions will also not fall within the program. The transactions in issue must have occurred within four years before the pilot program commenced and not more than six years before the filing of the claim. Lastly, only the securities firms that have volunteered to be part of the program are required to participate in the program. Other individuals and industry members who have not volunteered to participate cannot be forced to participate.

Filing the Arbitration Claim
A public customer may file her claim with an industry forum such as the NASD or NYSE. If the firm agrees that the claims are eligible for the pilot project, the industry forum will advise the customer that her case may be arbitrated at the indicated non-affiliated forums. The customer may contact the firm or the non-affiliated forum if she wishes to have her claims heard under the program. In the alternative, the customer may simply advise the industry forum that she wishes to have her claims heard by them. The decision must be made within 15 days or the claims will stay at the NASD or the NYSE.

The customer must advise the industry forum of his decision in writing. If he elects to go to the non-affiliated forum, all pleadings, fees and deposits will be returned to the customer. In addition, any applicable statutes of limitations will be tolled for 60 days from the date the customer originally filed with the industry forum. This is to permit the customer adequate time to commence his arbitration at the non-affiliated forum.

Alternatively, customers may file directly with the specified non-affiliated forum. In her statement of claim, the customer must include the name of the industry forum where she would have filed. Whether the statement of claim is filed at an industry forum or non-affiliated forum, the firm will advise if the case is not eligible to participate in the pilot program, or the non-affiliated forum is not one designated by the firm, or one of the parties is not subject to an agreement to arbitrate or is not participating under the pilot program.

Governing Rules
Arbitrations before JAMS will be governed by the Securities Arbitration Rules of the AAA as in effect in 1993 and as amended by JAMS to fit the pilot program. Arbitrations before the AAA shall be governed by the AAA Commercial Arbitration Rules as amended by the AAA for the pilot program. Both sets of rules are substantially similar and establish the process by which the arbitration will be handled including time periods for filing of pleadings, the administration of the discovery process, the make-up of the panels, the necessity of an oral hearing, the issuance of awards, etc.

The Arbitration Panels
Under either set of rules, an arbitration panel of three people is required unless the parties consent to a single arbitrator. At least one of the arbitrators must have current or past direct involvement in the securities industry of three to five years. Involvement is either employment at a brokerage firm or as an attorney, accountant or other professional for a brokerage firm.

The arbitrators will be selected by the parties pursuant to a list selection method historically used by the AAA and more recently adopted, either for all cases or at the election of the parties, by the NASD and the NYSE. Each party will receive two lists, one containing non-affiliated arbitrators and the other the names of affiliated arbitrators. Each party will have 20 days in which to strike any names and number the remaining names in order of preference.

JAMS requires $25,000 in dispute and the AAA requires $100,000, before the case will qualify for three arbitrators. In the event the claim is for less than these amounts, both parties must agree to proceed with fewer than three arbitrators.

Given the expense of three-arbitrator panels, many in the securities industry have adopted Seth Lipner's belief that numerous disputes in arbitration should be resolved by one arbitrator. This would save time and money by making the hearing easier to schedule and by lowering the cost involved in the arbitration. Several have voiced the opinion that the parties may be willing to agree to a single arbitrator after the panel has been established and the chair chosen. At that juncture, both parties will know who the single arbitrator will be (namely the Chair) and may be comfortable in having him or her decide the case

Oral Hearings
If the parties agree, oral hearings in a case may be waived.

Any awards under the pilot program shall contain the names of the parties and their representatives, a summary of the issues, the damages or other relief requested and awarded, a statement of any other issues resolved, the names of the arbitrators, the date the case was filed, the date of the award, the number and dates of hearings, and the location of the hearings. All of the information will be public except for the names of the parties and any witnesses unless those individuals specifically agree to have their names made public.

SICA will evaluate the pilot program by various means including evaluation forms completed by the participants. Obviously, the program's purpose is to evaluate non-industry forums: therefore, the participants' active involvement in the evaluation process must occur. Records will be kept of every customer who participates in the program as well as the customers who decline to participate.

SICA has prepared special submission forms and evaluation forms for use in this program.

All the participants, industry forums, non-industry forums and firms have agreed to actively cooperate in an effort to make the program a success. The only ingredient left to come is the public customer.

* Stephen G. Sneeringer is Senior Vice President & Counsel, A.G. Edwards & Sons, Inc. and a member of SAC's Board of Editors. As the former Chair of the Securities Industry Association's Subcommittee on Securities Arbitration, Mr. Sneeringer was a participant in formulating the Program which is the subject of this article.

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Securities Arbitration Pilot Program

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