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Arbitrator Selection and Disclosure Analyzed; California Standards Rejected

PERINO REPORT REVIEWED: While the Report that Prof. Perino prepared for the SEC on arbitrator disclosures has been much summarized in the press and in releases by the SEC and the SROs (see SAA 02-45), it deserves a full read by those involved regularly in the securities arbitration process.

As we reported last week, Prof. Michael Perino, a Visiting Professor of Columbia Law School and Associate Professor of St. John’s University School of Law, authored a report on the sufficiency of arbitrator disclosures in NASD and NYSE arbitration. The Report was requested by the Securities and Exchange Commission and formally announced on September 17, 2002 (SAA 02-37), was completed November 4, 2002 and was released by the Commission on November 12, 2002.

The summaries, of course, focus on the main recommendations and conclusions reached by Prof. Perino; however, the details of the Report explain in full how those conclusions were reached. Given the very short time frame in which the 48-page Report was researched, prepared and published, it represents a highly comprehensive review of the authority that exists on arbitrator disclosure in the securities arena and it imparts a sophisticated understanding of the nuances of the disclosure, selection and challenge process.

For instance, it compares the default processes for arbitrator selection at the NASD and the NYSE and observes that use of the Neutral List Selection System at the NASD has earned its Dispute Resolution facility extra points for a perception of fairness. It acknowledges as well the advantages of the staff appointment process at NYSE and comments on the possible reasons that only 15% of the cases opt for the alternative selection processes.

Then, too, tactical insights arise in the detailed explanation of procedures. Some attorneys, for instance, voir dire their arbitrators with requests for additional information as part of the selection procedure and NYSE will honor a challenge for cause where arbitrators do not respond. NASD and NYSE use the same challenge for cause standards, but NYSE expressly favors the investor when honoring challenges. If a challenge is rejected, both SROs will allow the party to “appeal” directly to the challenged neutral with a motion for recusal.

The details supply valuable knowledge for practitioners, but the Report also represents the best explanation we have seen of just what dangers lie within the California Standards and how they could jeopardize the securities arbitration process if overlaid on the existing SRO disclosure rules. (SAC Ed: Read it for the tactical tips or read it for a better understanding of a current and highly visible conflict, but our advice is, read it! The Report is available on the SEC’s WebSite, www.sec.gov, in the Market Regulation section.) (SAC Ref. No. 02-46-01)


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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. 


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