In a test, brokerage industry will revamp arbitration program

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From Times staff writer Walter Hamilton:

The brokerage industry’s oft-criticized arbitration system may be in for a makeover.

In a two-year pilot program announced Thursday, a handful of arbitration panels will consist of three members of the public, rather than two from the public and one from the industry, as things work currently.

Though the present system would seem to favor investors in complaints they file against their brokerages, attorneys have long contended that panel members who are listed as public representatives often have ties to the securities industry and vote with industry representatives to deny investors’ claims.

Six brokerages -- Charles Schwab Corp., Citigroup Inc., Merrill Lynch & Co., Morgan Stanley, UBS and Wachovia Corp. -- will take part in the pilot program, and more than 400 cases over the next two years will go to the all-public forums. The program begins Oct. 6. (More details for investors here.)

Once the pilot run is over, the industry watchdog that oversees arbitration -- the Financial Industry Regulatory Authority -- then will compare the results of the two systems.

‘This pilot will give investors greater choice when selecting an arbitration panel,’ said Mary Schapiro, FINRA’s chief executive. ‘Additionally, this program will allow us to see if a change in the way arbitration panels are selected is a better way to serve and protect the interests of investors.’

But that’s not acceptable to some critics, including a group of state securities regulators.

All investors should have access to the public panels and steps should be taken to ensure that public members are unbiased, the North American Securities Administrators Assn. said in a statement.

‘The first step toward improving the integrity of the arbitration system must be the removal of the mandatory industry arbitrator coupled with a prohibition on ties to the industry on the part of the public arbitrator,’ the group said. The pilot program, ‘while a positive step, does not go far enough toward resolving immediate investor harm.’