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NASD Arbitration Returns to Connecticut - Will the New Venue Respond to Arguments of Bias?

  • November 2005

    After the market boom in the late 1990s and the subsequent "tech stock" decline which followed, the National Association of Securities Dealers, Inc. (the "NASD") experienced record numbers of arbitration cases. The NASD's practice is to hold an arbitration at the venue closest to the claimant's residence. For Connecticut residents, this practice most often required a hearing in New York City or in Boston. In the mid-1980s, the NASD held hearings in Hartford and Stamford, but discontinued this practice because there were too few arbitrators to hear cases in Connecticut.

    The NASD was recently criticized for the presumed bias of the arbitration panels. In NASD arbitration, there is a requirement in most cases that there be two public arbitrators and one industry arbitrator involved in a panel. State securities regulators and consumer groups argue that the industry arbitrator requirement biases the panel. While there has been no change with respect to this requirement, the NASD recently created venues in each of the fifty states, with Hartford serving as the Connecticut venue.

    It is fair to say that at least one theory underlying the return to Hartford is that local arbitrators in local venues would make the process less biased toward the industry. In fact, the list of potential arbitrators is replete with New York, Albany, Providence and Boston arbitrators with only a limited number from Connecticut. Without a full complement of Connecticut Arbitrators to populate the panels, one might argue that the change has done little but eliminate the need to take a train to New York.

    Would the elimination of the industry arbitrator create a fair process in Hartford or any other venue? Is the Hartford venue less fair than ones with experienced arbitrators in New York or Boston?

    Advocates of the three public arbitrator system argue that the panel would then be similar to a jury. Certainly, jurors do not need any special expertise in securities law or practice to determine whether someone was injured by wrongdoing or to aware damages. While the argument has some appeal for trial lawyers and some popular appeal for litigants, it does not recognize that arbitration is a restricted process with limited discovery, little opportunity for pre-hearing motion practice, and, except in rare circumstances, no ability to lock in testimony through deposition or affidavit. The normal tools which a litigator has to test the truthfulness of testimony are not available in most arbitrations.

    Given the limitations of the process, there seems to be some worth in having the most knowledgeable arbitrator possible. Often industry arbitrators are the only panel members who have an understanding of why the wrongdoing might exist. Putting skepticism aside, it is certainly possible that an industry arbitrator is better for the claimant's case than as unknowing or inexperienced public arbitrator.

    If claimant's counsel accepts the worth of the industry arbitrator, are there enough experienced industry and public arbitrators available in Connecticut? Has the new venue given the party a fair chance to get the best decision, or, in the interest of reducing bias and unfairness, has the new venue made it even harder to get the right decision? It appears that time will tell.

NASD Arbitration Returns to Connecticut -  Will the New Venue Respond to Arguments of Bias?

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