One on One: "Most people allege … breach of fiduciary duty, misrepresentation or fraud"

Investors want retribution. And they’re going after their brokers to find it.

A record number of losses by investors in the market since January has led many to take legal action.

Claims against brokers through the National Association of Securities Dealers’ arbitration unit are being filed at a rate 10% to 15% higher than that of last year.This is where Linda D. Fienberg steps in. As president of NASD Dispute Resolution Inc. and chief hearing officer for NASD Regulation Inc., Ms. Fienberg, 58, is responsible for the NASD’s alternative dispute resolution program and a new disciplinary hearing program.

She played a key role in last year’s shake-up of the NASD’s arbitration system – one that will likely affect the outcomes of the latest complaints.

Under the new system, parties involved with cases going to arbitration have a say in who will hear their cases. Parties can indicate which arbitrators they want or don’t want to hear their case. They then obtain a computerized list of 15 names from which to choose.

The change was made in response to criticism of the securities industry’s arbitration procedures. Critics complained that the self-regulating body’s process often resulted in the selection of arbitrators who favored the industry. In fact, an NASD survey found that 90% of industry lawyers and parties involved in arbitration said they had been treated favorably.

As part of the shake-up, the NASD also eliminated 800 arbitrators for unsatisfactory behavior or performance.

Stephen G. Sneeringer, a senior vice president at A.G. Edwards Inc.’s home office in St. Louis, says that there is “a greater level of satisfaction among the parties because of their participation in the process of selecting the arbitrators.

“One result is that parties are seeing a lot of arbitrators they have never seen or who have little arbitration experience. Depending on how you look at [the] matter, it’s either a positive or a negative.

“The process of obtaining arbitrators is something we need to look at. We want people who have knowledge of the industry, but having that knowledge will affect their bias.”

Q What are the most common disputes that come through NASD Dispute Resolution Inc.?

A We see a whole range of things. Most people allege as a general matter breach of fiduciary duty, misrepresentation or fraud. We have a range of cases alleging churning. We also have a range of cases that have dealt with limited partnerships, although that’s receding.

We also handle industry cases versus members and associated persons with respect to rating and employment matters, and discrimination matters. We have more cases in the last few months dealing with margin and execution issues, and failure to supervise. They are still a relatively small percentage, but it is certainly higher than it was two years ago.

Q Have you seen a change in the nature of complaints since the stock market’s slump?

A The bulk of our claims now do relate to equities as opposed to limited partnerships. The largest number of cases we are seeing are breaching of fiduciary duties. Last year, about 2,500 cases alleged breaching of fiduciary duty. Our cases are up this year by 15% over last year. In the first quarter, we had 1,556 cases compared to 1,355 last year.

Q Will the volatility of the market mean more disputes?

A There is a time gap between market events and people filing claims, so we expect to see more claims this year than last year.

Q What are the most serious areas of concern in dispute resolution?

A We think we are addressing, and have been for the last five years, the major concerns about the forum. We are now perceived as running a very fair forum. We now have a list selection process for parties, which we are continuing to improve.

We are in the process of creating a much better case-tracking system, which will enable parties to participate more in the process by web when we roll it out in 2002. Those are some of our major initiatives.

Q How do you deal with issues concerning clearing a broker’s record?

A NASD Regulation and NASD Dispute Resolution are jointly looking at ways to resolve fairly to all parties issues concerning expungement. We are looking at ways to be fair to investors so that they can get enough information, but also be fair to registered persons who have been defamed unjustly and improperly.

Q What are the new goals for NASD Dispute Resolution Inc.?

A We continue to strive, and we have this as both long-term and short-term goals, making our forum more efficient and delivering really high-quality service without having to raise our fees more than the cost-of-living inflation factor. Those continue to be important goals.

Another important goal is to continue improving our roster of arbitrators. We are working on that issue. We are also in the process of becoming very web oriented. You can now get all kinds of things on our site, and we are in the process of a massive project to redo our entire computer operation for dispute resolution.

We hope to roll that out in the next year and a half. It will enable parties to communicate with us online in a whole range of ways that they can’t do now.

Q How long is the dispute resolution process?

A It depends on whether the case settles or goes to mediation or whether it goes to a full hearing to award. We believe that arbitration dispute is really the parties’ dispute, so we have placed a lot of the timing issues in the hands of the parties.

The parties and arbitrators now choose the hearing date whereas the staff used to choose them. The parties tend to choose dates further out than the staff used to, so that it is now taking us a bit longer.

In addition, where the parties select their own arbitrators, there are a lot of time periods built into that, so that process can take as much as two months whereas the staff used to pick the arbitrators, and that process just took a few days.

We are seeing slightly longer time periods from when the claim comes in and is served until it goes to award. It’s about 15 months, but most cases settle, about 70% or so. When you average it out, you get much shorter time periods in court.

Cases that go to mediation usually settle in about 60 days from the time the parties first agreed to mediate. There is no real hard figure; it really depends on the circumstances.

Q How does the Dispute Resolution board handle discrimination cases?

A We have done a whole range of things to make our forum really sensitive to discrimination cases. We have gone from a relatively small number to a much larger percentage of women on our arbitration roster. Now 17% of the roster is female.

We have changed our employment discrimination rules in a number of ways. The NASD itself no longer requires registered people to arbitrate discrimination cases with their employers. That is a question of a contact between the registered rep and their employer.

We have different rules for employment discrimination cases than we have for other kinds of cases, and a specialized roster for those cases. We are offering people who have been approved as having expertise in that area as being truly neutral. We believe all of our arbitrators are truly neutral, but there is a special category of arbitrators who are trained and have expertise in this area.

We changed our rules. We have very specific rules that are in the code of arbitration procedure that deal just with discrimination cases. It’s not just women; it’s race and age. You’d be surprised at the number of cases that in fact are older white men.

Our total number of discrimination cases is down because more people now have the option through contracts with their firms to go to court with another provider. It’s still a goal to add more women to [our] staff of arbitrators.

Q Will you be adding any new training methods?

A We will be rolling out this year improved training for chairpersons. Our goal for 2002 is to develop web-based training for arbitrators.

Q How do you think investors will react to the web-based environment?

A If you take a look at generational gaps, there isn’t a person under 35 who doesn’t spend half of his or her life on the computer. As those people get into their 40s and start investing, as many of them are now, they are going to do it all online. It’s very much a generational thing. People over 60 don’t do it, but everyone under 40 does.

SNAP SHOT

Linda D. Fienberg, 58, president, NASD Dispute Resolution Inc. and chief hearing officer of NASD Regulation Inc. in Washington

Affiliations: member of the executive council of the Federal Bar Association, the D.C. Bar Association and the board of directors of the National Partnership for Women and Families

Career: 1996, joined the NASD; 1990-96, partner at Covington & Burling in Washington; 1979-90, staff attorney with the Securities and Exchange Commission

Education: bachelor of arts, Cornell University, 1964; master of arts in teaching, Wesleyan University, 1966; law degree, Georgetown University, 1973