Investors Scrutinizing the Regulators

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Investor group calls for less secrecy

Disputes with broker: Investors still have no way of tracking arbitration results

Susan Heinrich

Financial Post


October 06, 2001

An investors' rights group says the arbitration system designed to resolve disputes between brokers and their clients is a step in the right direction but should be more transparent, which would serve to better protect investors from brokers who break the rules.

The Small Investors Protection Association, a Toronto-based resource group for consumers, says the so-called arbitration system is too secretive.

"Part of the agreement [between clients and brokers] when they enter the arbitration process is that the results are kept secret. I think we find fault with this because this is an area that should be part of the public information," said Ed Nelles, vice-president of registration with SIPA in Toronto. "This is an area of fiduciary responsibility and secrecy is anathema to the public's trust."

He argues that by making the outcomes of arbitration cases available to the public, investors could check the track record of advisors before they agree to hand over their money.

Connie Craddock, a spokeswoman for the Investment Dealers Association, the self-regulatory group that governs the investment industry, said the IDA does not track the results of arbitration hearings.

"We are not able to track and therefore to report arbitrations against individual [brokers] ... The nature of the independent third party arbitration program means that we do not have as part of our central records any reporting as to whether an individual had or had not been involved in an arbitration decision," she said.

But the IDA does track and disclose to the public any disciplinary actions it brings against brokers who break the rules.

The situation is very different in the United States, where arbitration has existed since the 1920s and is widely used. (Most brokerage firms now require all clients to sign an agreement that in the event of a dispute with their broker, they will use the arbitration process to settle it instead of filing a lawsuit.) A database called the central registration depository keeps data on every firm and broker registered with the country's National Association of Securities Dealers. By calling up the record of any registered advisor, a consumer can see a list of all arbitrations a broker has been involved in, including a brief description of the case, its outcome and any monetary award made in the case.

"We operate in the sunshine," said Linda Fienberg, president NASD dispute resolution, adding she can't imagine why a self-regulatory organization would not make that information available to the public. "We want investors to review that kind of information before they deal with brokers so they can ensure themselves the person is reputable."

For years, clients in Canada with serious complaints against their brokers were at a distinct disadvantage because legal action was their only recourse and lawsuits were costly and lengthy to resolve.

British Columbia was the first province to introduce arbitration in which a retired judge or securities lawyer hears the case and renders a decision. All decisions made by arbitrators are binding so there is no opportunity for appeal unless there is found to be some sort of miscarriage of justice.

But it wasn't until last year that arbitration became available across the country. Now that it is, the IDA says it is satisfied the system is doing what it was intended to do.

"It's a faster, cheaper, less contentious method than using the court system," said Joe Oliver, president of the IDA in Toronto. The IDA is encouraged by the number of people using arbitration instead of the courts.

In the first 12 months since arbitration became available nationally --July, 2000, to July, 2001 -- 47 cases were heard. Of those, about 40% of the decisions were made in favour of the investor and an average of $45,000 was awarded. Those figures don't include cases that went to court or those in which some sort of settlement was reached.