March 18, 2005
In 2002, St. John’s Professor Michael Perino was retained by the
U. S. Securities and Exchange Commission to review and make
recommendations on the adequacy of arbitrator conflict disclosure
requirements in securities arbitrations. Last week, at a hearing
entitled “A Review of the Securities Arbitration System,” he faced
a subcommittee of the House of Representatives’ Committee on
Financial Services to discuss his findings.
Speaking to the Subcommittee on Capital Markets, Insurance and
Government-Sponsored Enterprises, Professor Perino presented both
written and oral testimony describing his review and his conclusion
that, “available empirical evidence on outcomes in SRO [self
regulatory organizations such as NYSE and NASD] arbitrations and on
investors’ perceptions of the arbitration process suggests that the
current system addresses customers’ disputes fairly and
impartially."
He also warned about the dangers of basing significant policy
changes on isolated problems in individual cases. “A rational
regulatory policy,” he told the Subcommittee, “cannot be based on
mere anecdote.” Instead, the SROs should be encouraged to sponsor
additional independent studies on this subject and if those studies
“reveal systemic problems…those problems should and must be
addressed.”
Professor Perino currently teaches a variety of corporate and
securities law courses at St. John’s School of Law.” He has written
extensively about securities fraud and securities class action
lawsuits and is frequently quoted in the media on securities
matters.
For more information on Professor Michael Perino view his biography.
Professor Michael Perino's Oral Statement
to the Subcommittee on Capital Markets, Insurance and
Government-Sponsored Enterprises - Thursday, March 17,
2005
Mr. Chairman and members of the Subcommittee, thank you for the
invitation to appear before you today. As you are well aware, the
fairness and adequacy of securities arbitration is crucially
important because arbitration is the primary dispute resolution
mechanism for customer-broker disputes. To be successful, the
system must not only be fair and impartial, but investors, the
public, the judiciary, and Congress must believe that it is fair
and impartial.
Does securities arbitration satisfy this standard? This
Subcommittee will no doubt hear stories of problems in individual
cases and calls for substantial overhauls of the current system.
But a rational regulatory policy cannot be based on mere
anecdote. Sweeping changes can have significant unintended
consequences and additional procedural requirements can impose
significant costs. As the SEC has noted, proposed changes must
“balance the need to strengthen investor confidence in the …
arbitration system with the need to maintain arbitration as a form
of dispute resolution that provides for the equitable and efficient
administration of justice.” Those seeking to revamp the securities
arbitration system thus should have the burden of identifying
through thorough and well-documented empirical evidence that actual
problems in fact exist.
In my mind, a compelling case for substantial change has yet to
be made. In 2002, the SEC asked me to review the adequacy of
arbitrator conflict disclosure requirements in securities
arbitrations. In putting together that study, I examined the
available empirical evidence in detail, which I discuss at length
in my written statement. I will not repeat that material here,
although I am, of course, happy to answer any questions you might
have. At bottom, the available empirical evidence on outcomes
in SRO arbitrations and on investors’ perceptions of the
arbitration process suggests that the current system addresses
customer disputes fairly and impartially.
There are, I believe, good reasons why the data do not show a
pro-industry bias. The NASD and NYSE are likely subject to more
regulation and greater oversight than any other arbitration forum.
The NASD and NYSE are not mere trade organizations, as some have
characterized them, but self-regulatory organizations that have a
statutory mandate to provide a fair dispute resolution forum. The
SEC exercises substantial oversight of the SROs, approves all
arbitration rules before they become effective, and oversees SRO
arbitrations through its inspection process. Congress also plays an
important role. In addition to holding hearings such as this,
Members have frequently requested the GAO study the securities
arbitration system. Although the GAO has recommended changes
from time to time, it has never found that SRO-sponsored
arbitrations were biased in favor of securities industry
members.
The securities industry also has a rational self-interest in
providing a fair dispute resolution system. The acceptability of
arbitral awards is strongly correlated with parties’ perceptions of
whether fair and unbiased procedures were used to reach an outcome.
Systemic procedural inequities would likely increase the costs of
the arbitration system. More dissatisfied parties would attempt to
overturn arbitration awards and judges would be more likely to
grant those requests. If the securities industry wants to reap the
cost savings associated with arbitrations, they must also inhibit
any pro-industry biases from developing.
Let me be clear about one final point. Nothing I have said
either here or in my written statement should be taken to mean that
we can safely ignore securities arbitrations. In my SEC Report, I
wrote that “[g]iven the unquestioned significance of securities
arbitrations, it is crucial that the SROs resolve any lingering
concerns about pro-industry bias.” Accordingly, I recommended that
the SROs sponsor additional independent studies to further evaluate
the impartiality of the arbitration process. It is my understanding
that such a study is about to commence. If that or other studies
reveal systemic problems, then those problems should and must be
addressed. But, until persuasive evidence of such problems exists,
it would be imprudent to substantially alter a system that appears
to serve investors well.
Thank you.