SEC Alters Rules on Arbitration System : Changes Intended to Ensure Fairness in Settling Investor Disputes

WASHINGTON —  The Securities and Exchange Commission on Wednesday approved rule changes designed to make the securities industry’s arbitration system more fair to disgruntled customers.

By a 5-0 vote, the commission authorized a series of changes, spurred by complaints from unhappy investors who discovered after the October, 1987, stock crash that they had signed away their right to sue their brokers.

Many firms, in the fine print in paper work required to open an account, require customers to agree in advance to settle any disputes through industry-administered arbitration proceedings, rather than through the courts.

The SEC, under the new rule effective in 120 days, will require firms to highlight and fully explain arbitration clauses so investors know what they’re signing.

Arbitration, because it is cheaper and faster than suing in court, is a good deal for many investors, particularly those with small claims. But there is only a limited right of appeal and some investors may be better off in court.

The commission decided against an outright ban of the clauses. Some members were reluctant to dictate the terms of contracts entered into by private parties.

Also, brokerage firm executives had argued that banning the clauses could destroy the arbitration system and push more cases onto the nation’s already crowded court dockets.

In explaining the commission’s decision not to ban the clauses, SEC Chairman David S. Ruder said enough firms offer cash accounts without arbitration clauses that investors still have access to the market even if they want to keep their right to go to court. However, he warned that the SEC will be checking to see if more firms start using arbitration clauses.

The rules governing arbitration have become increasingly critical after a Supreme Court decision in 1987 that upheld the validity of arbitration clauses. Also, the number of arbitration cases has mushroomed from 830 in 1980 to 6,101 last year.

The SEC, in adopting the changes, acted on proposals from the New York Stock Exchange, the American Stock Exchange and the National Assn. of Securities Dealers.

“I think they will make the arbitration process better . . . and clear up some of the perception problems that have nagged the system,” said commission member Charles Cox.

Another important change requires the exchanges to keep track of the amounts of arbitration awards, the amounts originally sought, the issues in dispute and the brokers and firms involved.

“We now for the first time really will be in a position to effectively monitor the arbitration process,” Commissioner Mary Schapiro said.

Other changes are aimed at ensuring that the “public” members of arbitration panels do not have ties to the securities industry, that arbitrators disclose any ties that may affect their decisions and that arbitrators get more power to compel brokers and plaintiffs to turn over relevant documents in a timely manner.