Ernst & Young Reports No NLSS Bias

   

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Study Finds PIABA Charges Inaccurate

Last year around this time, a controversy was smoldering over charges of bias in the NASD-DR Neutral List Selection System — so we did a follow-up.

We can best recall for readers the dialogue between NASD and the Public Investors Arbitration Bar Association (PIABA) by excerpting passages from 11 SAC 7(8).

There, we reported that then-NASD President Richard Ketchum had written a letter, dated August 1, 2000, to then-PIABA President Mark Maddox, in which he stated that accounting firm Ernst & Young was being retained, at NASD-DR’s expense, to examine the Association’s NLSS processes. This undertaking came in response to Mr. Maddox’s demand for third-party verification (SAA 00-31) of NASD denials after PIABA publicly charged foul play. According to our report, “PIABA had accused NASD of ‘rigging securities arbitration panels,’ on the basis of information that the expertise factor, built into NLSS under NASD Rule 10308(b)(4)(B), was constructed with a bias toward seniority. NASD quickly issued a denial and Mr. Ketchum wrote to the PIABA Board, demanding a retraction (SAA Spec. Del., 7/21/00). He c

ategorically stated that ‘our system … does not choose arbitrators based on seniority when specific expertise is requested.'” Subsequently, Seth Lipner, the incoming President of PIABA, wrote an article (“The NLSS ‘Expertise’ Function Should Go,” 11 SAC 8(1)), enlarging upon the issue.

Ernst & Young has now issued its report and findings, we understand from NASD-DR Senior Vice President George H. Friedman. E&Y’s independent verification study, he observed, found, “that NLSS operated as NASD said and as provided for in the rule filing and approved order.”


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