The National Association of Securities Dealers announced yesterday that it has filed a proposed new rule with the Securities and Exchange Commission that would restrict who can serve as a public arbitrator in an arbitration process held to resolve a dispute over a municipal bond or securities transaction.
The new rule would exclude from serving as public arbitrators any officers, directors, or employees of any entity that controls, is controlled by, or is under common control with, a broker-dealer. In addition, spouses and other immediate family members of these individuals also would be prohibited from serving as public arbitrators.
The SEC must approve the rule before it takes effect.
Under the NASDs arbitration program, securities disputes are heard by three-member panels of arbitrators chosen from a pool put together by the NASD. At least one of the three must be a member of the securities industry, ostensibly to provide expertise. The other two panel members are public arbitrators.
The NASD action comes after William F. Galvin, secretary of the Commonwealth of Massachusetts and others complained to the House Financial Services Committees capital markets panel at a public hearing in March that the NASD arbitration process was unfair and stacked against investors.
Rosemary Shockman, president of the Public Investors Arbitration Bar Association, a nonprofit group whose attorney members represent investors in disputes with securities firms, told panel members that too often public arbitrators have ties to the industry, creating conflicts of interest.
