What You Don’t Know Can Hurt You

From the October, 1999 issue of Registered Representative magazine

    Whether or not you are embroiled in an arbitration, you shouldn’t ignore the almost universal practice of securities arbitrators withholding reasons for their decisions to award—or not to award—dam- ages to your customers or you as an employee. How- ever, you have some ability to influence whether the rationale underlying a ruling will become public.

    Since the Supreme Court’s 1987 decision in Shearson/American Express v. McMahon, arbitrators have been the exclusive judges of sales practices disputes and are becoming more involved in the resolution of employment claims. In addition, they have long followed the practice of juries in not explaining the grounds for their decisions, even though NASD and NYSE rules neither encourage nor forbid them to do so.

    Thus, the effective withdrawal of industry disputes from public courtrooms is the strongest argument against keeping decisions private. Individual jury decisions are not public as such. However, published appellate, pretrial and post-verdict rulings often explain how general laws are to be applied to common fact patterns and can guide future conduct:

    There are few arbitration decisions available to explain how previous rulings on issues such as churning or suitability can be applied to contemporary conditions. Does this state of affairs provide you with a bright-line test to guide your conduct or protect the public interest? You be the judge.

    Arbitrators’ silence can hurt you by leaving the rules that govern your future business unexplained. It can have a much worse effect if you’re a party to a case decided without explanation. The result of a case in which damages were awarded to the customer is reflected on your CRD record. The regulatory and practical difficulties that arise from an award of damages without explanation can be enormous. Vague arbitration decisions can trigger open-ended investigations or the need to defend yourself to customers. As long as decisions without explanations are released, however, that’s exactly what’s going to happen.

    The tide may be turning against the continuing silence of arbitrators. The Second Circuit’s (New York) recent reversal of the original arbitration decision in Halligan v. Piper Jaffray rested on the arbitrators’ failure to explain why they disregarded what appeared to be overwhelming testimony supporting the underlying age discrimination claim.

    Robert Clemente, NYSE director of arbitration, acknowledged in remarks following the Halligan decision that “a brief explanation of the reasons for [a] decision may, in many instances, help the parties understand and accept the decision.” Moreover, such an explanation might clarify a producer’s limited (or nonexistent) role in conduct underlying an alleged sales practices claim, reducing individual regulatory exposure and unfavorable publicity.

    It is unlikely that the NYSE and the NASD will propose changes to their arbitration rules to force arbitrators to explain their decisions. However, parties to arbitration need not be silent. A claimant or respondent always has the ability to request prior to the end of hearings that the formal award contain a brief summary of the grounds underlying the result. This may be particularly appropriate in cases that involve both an individual broker’s conduct and sales materials generated by the house or supervisory approval of the trades at issue

    If you believe that a decision minimizing your role in a bad outcome might be helpful, this strategy is worth considering. On the other hand, remember that an award identifying you (justly or unjustly) as the chief culprit may have far greater impact than off-the-record disciplinary referrals.

    If you find yourself before an arbitration panel, the written and unwritten rules of the game may not be your principal concern. Nonetheless, it’s worth paying attention not only to what arbitrators say, but also to their potential silence about the reasons for their decision. If you and counsel believe that an on-the-record explanation of the grounds for an eventual award might be helpful, ask for it—or forever hold your peace.

Reprinted with permission of Registered Representative magazine

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