Fee-Based Accounts Must Be Appropriate (NASD) It generally is inconsistent with just and equitable principles of trade—and therefore a violation of Rule 2110—to place a customer in an account with a fee structure that reasonably can be expected to result in a greater cost than an alternative account offered by the member that provides the same services and benefits to the customer.5 Accordingly, before opening a fee-based account for a customer, members must have reasonable grounds to believe that such an account is appropriate for that particular customer. To that end, members should make reasonable efforts to obtain information about the customer's financial status, investment objectives, trading history, size of portfolio, nature of securities held, and account diversification. With that and any other relevant information in hand, members should then consider whether the type of account is appropriate in light of the services provided, the projected cost to the customer, alternative fee structures that are available, and the customer's fee structure preferences. In addition, members should disclose to the customer all material components of the fee-based program, including the fee schedule, services provided, and the fact that the program may cost more than paying for the services separately.

The Increased Difficulty of Successfully Challenging the Arbitration Award: Read it if you have to use arbitration

"Simply believing that the arbitration panel made an incorrect decision with respect to application of the law is not enough to overturn a decision. The Court ruled that if there is barely a colorable justification for the outcome of the panel, a court should enforce the panel's decision.

Also of particular interest to practitioners involved in arbitration, the court stated that arbitrators were not expected to understand legal concepts with the sophistication of a highly skilled attorney. In addition, the Second Circuit stated that it did not expect arbitrators to review case law other than what was presented to them, i.e. no independent research.

rbitration awards can be clearly challenged based on a manifest disregard of the law standard. The reasoning of this decision further bolsters the judiciary's continued preference for more disputes to be addressed in non-traditional forums. Arbitrators will continue to be given great deference and as much as attorneys may prefer otherwise, arbitration awards will be rarely disturbed."

Summary Arbitration Statistics June 2005

Appellate Court Unable to Vacate Arbitration Award With an Insufficient Record: (2006) Once again a court has confirmed that if an arbitration proceeding is not transcribed, a reviewing court may not be able to determine from the record whether the arbitral award should be vacated.

Want to know why arbitrations don't work?  (2006) Read this first- NASD Proposal for Arbitrator Education and Training. Frankly I didn't think I would get a responsible reply- and I didn't.

Here are the comments from the NASD- "we must decline to use your services to provide additional training to the arbitrators on its roster. As a matter of policy, the NASD provides procedural rather than substantive training to its roster members. In arbitration, the parties present their arguments and evidence to the arbitration panels and the arbitrators are not expected to do their own research. While most arbitrations claims present questions of fact, some parties relay on a specific law, statute or industry standard. Generally, the party who has raised such an issue will offer the panel a brief setting forth how the law, stated or industry standard applies to the case.

Signed Linda Fienberg, President Dispute Resolution."

The point is this- there is NO training in the industry for attorneys, arbitrators OR expert witnesses in regards to suitability. Fienberg notes that the parties will offer the panel material on "industry standard" but the problem has always been that there aren't any standards. Brokers have never been taught the fundamentals of investing. Nothing on correlation, alpha and so on. They are not required to know how to use a financial calculator. Even look at the supposed experts. They generally come from the industry. They may have supervised others for years. They have a series 4, 8 24 and so on. Yet none of the licenses have the fundamentals developed either.

The procedures she is addressing cover pre hearing conferences, etc. but nothing about the procedures of suitability. I bet, absolutely bet, she does not know the definition for diversification. Nor does effectively anyone else at the NASD.

Controversies Involved in Arbitration Cases 2006

Type of Controversy*             2002          2003           2004           2005             June - 2006

Margin Calls                           366               244          168             78                  27

Churning                                  824              665          449             315               130

Unauthorized Trading              930              789           520             395                147

Failure to Supervise                  2,633          3,230        2,743         1,828              756

Negligence                               2,522           3,500         3,398        2,225            1,003

Omission of Facts                    1,178           1,949         2,195         1,123              397

Breach of Contract                  1,958            2,328        2,723         1,987              890

Breach of Fiduciary Duty         4,236           5,565         5,426         3,514            1,505

Unsuitability                             2,644            3,198        2,697        1,926              793

Misrepresentation                    2,623             3,280         3,230       1,826              671

Online Trading                        95                  74               4               7                      6

*Each case can be coded to contain up to four controversy types. Therefore the columns in this table cannot be totaled to determine the number of cases served in a year.

Enforcement?: The Securities and Exchange Commission has lost several hundred staff positions as a result of budget constraints this year.

SEC enforcement actions by year 2006

So far in fiscal 2006, the SEC has filed 492 enforcement actions. Previous fiscal years:

                                         2000      2001     2002        2003       2004       2005

Financial disclosure            103        112       163          199         179        185

Securities offering              125         95        119           109        99              60

Broker-dealer                    72          65           82           137        140           94

Inside trading                     40          57            59             50         42           50

Investment adviser/company 44        40           52             72          90           95

Civil contempt                     36         31           47             42         21            23

Market manipulation           48          40          42              32         39            46

Other                                 35          44           34             38         29            44

Delinquent filings                 NA NA NA NA NA                                          33

Total                                   503        484        598             679      639       630

Arbitration and awards (Solin  2007) investors have won less frequently as this decade has progressed. Over the period studied, the high point of wins for investors was in 1999, when 59% of arbitration cases resulted in some kind of award to investors. That percentage declined to 44% in 2004.

Solin and O'Neal also found that investors who take on the largest brokerages for big claims--$250,000 or more--recover just 10% to 12% of the amounts for which they ask. For claims of less than $10,000, however, they recovered 30% on average. Against the industry as a whole, the recovery percentage was 34%. For all firms receiving claims greater than $250,000, investors' recovery percentage was 20%.

The third most significant finding was that advisors at the three largest broker-dealers had a better chance of winning in arbitration than brokers at nearly 5,000 other licensed firms in the industry. When investors went up against the three biggest wirehouses (Merrill Lynch, Smith Barney and Morgan Stanley, based on number of registered reps), they won 38% of the time. Those results were not too different for investors opposing the 17 next largest firms. Customers won 43% of the time against investment houses such as UBS, Edward Jones, A.G. Edwards, Ameriprise, Goldman Sachs and Raymond James & Associates.

Against the remainder of NASD member firms, however, clients won 57% of the time. That means that firms from No. 21 on down were looking at a 19-point disparity in arbitration success versus the top three wirehouses and a 14-point gap against the next 17 largest.

NASD statistics show that more than 80% of claims are settled, withdrawn or dismissed prior to adjudication

Fair arbitrations?: (WSJ) In 2006, investors in NASD arbitration won 42% of cases decided by arbitrators, down from a recent high of 54% in 2001. (A win is when a claimant receives monetary damages or nonmonetary relief.). What's more, if their claim is against a large firm, any winnings they receive are likely to be only a small fraction of what they claimed.

Most claims don't get to an arbitration panel. In 2006, 81% of customer claims were resolved by other means, mostly via settlement or mediation. Over time, the share of claims resolved before a hearing has grown substantially.

The remaining 19% of claims that made it to a panel last year may represent the cases brokerage firms think they have the best shot of winning.