"I question whether the public truly understands that stocks go down as well as up"
By Sarah
O'Brien
Investor
complaint against brokerage houses have multiplied along with the number
of people trading stocks.
Joseph Meyer, president of Meyer & Associates, a consulting
firm in Ormond Beach, Fla., is one of ;more than 7,000 arbitrators for
NASD Dispute Resolution Inc., a subsidiary of the National Association of
Securities Dealers. It's the primary forum for settling disputes
between investors and brokers.
Between the NASD and the New York Stock Exchange, Mr. Meyer has
been involved with about 100 cases in the past five years.
In 1987, the Supreme Court ruled that disputes between brokerage firms and
clients would have to be dealt with through arbitration, where both sides
agree to a binding decision made by a neutral third party.
Complaints could also be handled, on a voluntary basis, through
mediation--which results in a non-binding decision.
Since the ruling the number of arbitration cases filed has grown
steadily. Last year, 5,608 were filed, compared with 2,886 in 1987.
Although Mr. Meyer, 54, is not a lawyer, he has spent 29 years in
the securities industry in various capacities and offers his expertise to
law firms.
"We've used him as a consultant in several securities
cases," says Jonathan Alpert, a partner at the Tampa law firm Alpert
Barker Rodems Ferrentino & Cook. "He's been in the business
for years and knows and understands it."
Q Through
August, investors filed 152 margin-related arbitration claims with the
NASD. That's up from 117 for all of 1999 and 44 in 1998. Why has the number increased?
A We
have more public investors participating in the stock market today than
ever before. The majority of them are first-time, novice investors
who basically have
The problem I foresee is the growing number of people buying and selling securities through online
broker-dealers. Now, the reason is that it's very convenient, extremely cost effective, and the public investor can pretty much control their buying and selling right from a computer terminal.
That has some good points but certainly has some bad ones. I question whether the public truly understands that stocks go down as well as up, and that if you are on margin when we have major swings in the market, you are subject to bringing addition stock and/or cash to the account to maintain your position.
Q Do you think that there should be stricter rules for margin accounts?
A I think full disclosure is a very important tenet under both state and federal securities laws. And I think the risks of margin and/or the marketplace have to fully be disclosed to the public customer.
No one can assume that public customers are sophisticated investors, nor do I think that anyone should assume that just because someone opens an account via a computer terminal with an online broker, that they really know what they're doing.
Q Am I hearing that the online brokers are falling short on knowing their customers?
A Well, we've had disputes with customers and online brokerage firms. And basically the disputes involve, "What does the customer know?: and more importantly, "What should he have known?"
I think the problem is that people don't read the margin agreement or the customer agreement, and they're basically convinced that when a correction takes place in
The psychology is, "I'll sell long before the market goes down."
Well, that may or may not happen. In a lot of instances, the opposite happens.
These people are caught up in the market; they get greedy and reckless. Ant the first down day we get, they have a margin call. They're unable to meet it.
Q Have the majority of cases you've worked on involved mostly online brokers or margin accounts?
A No, they've involved churning, buying and selling of securities for no underlying investment purpose. We see cases of misrepresentation, cases of alleged violation of NASD rules and regulations. We continue to see cases where there's a breach of fiduciary duty by the broker or the broker-dealer.
Q Considering that the NASD is the self-regulatory organization for broker-dealers, is there an inherent conflict in the forum for these disputes?
A I don't believe so. If you look at the disciplinary history of the NASD, you can see they will step in and take decisive action if they feel there's any wrongdoing on the part of the broker-dealer and the broker. I feel the NASD, from the standpoint of policing the industry, has done an extremely fine job.
I have never served on a panel where I thought the public customer wasn't treated fairly. That doesn't mean everyone who brings a
Q Do both sides generally walk away happy, or at least satisfied?
A It's been my experience that both sides are respectful of the process, and they can see that the panels were fair. These arbitrations are run very similarly to a trial in a civil court. People may be disappointed that they didn't get the type of award they were looking for, but I've never seen anyone be visibly angry.
Q Some plaintiff lawyers say the arbitration process favors the broker-dealers.
A Well, I disagree. If you were to try a securities-law case in a civil courtroom, yes, you would go before a jury of your peers. But would a jury truly understand the intricacies of the dispute? And what would be the time frame in the courts?
Arbitration, from the standpoint of how quickly a case can be put into the process and hopefully resolved, is an expedient one. Most arbitration cases are completed in nine months. And mediation is offered by the NASD for all cases, on a voluntary basis. Ninety percent of the cases that go to mediation are settled.
So how fast is it? If the parties agree to mediation, a case could be completed in three or four months.
That's a pretty speedy resolution of a difference of opinion.
A You have to understand the composition of an arbitration panel. It includes someone, such as myself, who spent the majority of their business career in the brokerage industry.
The chairman of the panel is either a retired or practicing attorney at law, and the third person is from the public sector.
That can be anyone from a retired schoolteacher, to an engineer, to an accountant. The idea is to give the panel as much diversity as we can from the business community. So we do have an attorney who chairs the panel.
Q Is there a statute of limitations on filing a complaint with the NASD or NYSE?
A It's a six-year statute. It's basically determined from the date of transaction or the date that the customer became aware that the transaction was improper.
Q How do the rules governing these complaints differ?
A In mediation, the NASD does not have a mandatory mediation process. The NYSE, in certain cases, does. Cases that involve (member firms), where the claim exceeds $500,000, are automatically mandated to go to mediation.
On public customer cases, where the losses are $500,000 or more, the parties are offered, on a consensual basis, mediation through the exchange, with the first four hours being paid for by the exchange.
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Last Modified:
July 27, 2004
