January 10, 1995
Mr. John Pinto
NASD Executive Offices
1735 K Street NW
Washington, DC 20006-1500
RE: Arbitrator Knowledge and Education
Dear Mr. Pinto,
Let me preface my comments with some of my background so you can put my
subsequent commentary into perspective. I have taught most security licensing
preparation courses (6, 7, 22, 24, 26, 27, 63, etc.) for the past 14 years.
I have taught the Certificate Program in Financial Planning for the University
of California, employee investment and financial planning seminars for top
500 companies and have written extensively in the field. I also acted as
a NASD arbitrator for several years and as a fee only financial planner for
over 8 years. That said, my comments are as noted below. These issues were
discussed personally with Mr. Paul Frohan, Senior Compliance Examiner at
District 1 and I indicated that they needed to be explored more fully.
Agents in the business are rarely taught anything of real world use through
the licensing training (and I indicate so to them). For example, beta and
unsystematic risk- two mainstays in a review of suitability- are so lightly
touched upon as to be useless in subsequent discussions with a client.
Correlation and asset allocation- also necessary to understand suitability-
are essentially missed in the entirety. And since there has been no continuing
education in the field (I 'm aware of the new law, but am very cynical about
the end result providing ethical and knowledgeable facts to
agents),agents are woefully unprepared to provide even the most
rudimentary analysis of a client's needs. As further verification
of that statement, I simply need to ask "what is the risk of investing in
individual stocks and what is the obligation (by law) of the agent to the
client in addressing that risk?".
Additionally, we have the further area of volatility/standard deviation and
the absolute basic criteria of suitability and basic planning, the pyramid
of investing. This must be taught someplace since one can
"easily" recognize unsuitability if one violates this basic tenet of investing.
Within that context I find that the knowledge of arbitrators- my main focus
of this letter since any changes in licensing training will take eons- know
even less than agents about the risks and rewards of securities or investing.
While some "officials" say that that is the duty of the attorneys prosecuting
or defending a suit to provide the insight, I have not even yet found
one attorney that properly understood diversification. And if you
don't know this, you don't know anything about securities.
In fact, of the attorneys I have met both publicly and privately, I have
never yet met one that had any advanced training in securities training,
or most importantly, application, the real crux to suitability.
(I know I never got any special training with my law degree- any knowledge
I have since received/retained has come from totally other sources.) I have
never met an attorney who even had a recognized book on investments in their
library. I therefore submit that the attorneys are not offering much in the
way of objective and knowledgeable presentations to arbitrators on which
to objectively base or contest a case.
My point is that no one is providing any objective insight at all regarding
the basic teachings in investments to arbitrators or attorneys. One hopeful
sign was the NASD's attempt to provide additional arbitrator education.
Admittedly these classes do address some pertinent issues, they are almost
all on the periphery of the problem- lack of knowledge and suitable application
of the investment. For example, having a session to discuss whether
or not punitive damages may be awarded misses the entire point of what the
problems were to begin with. It's putting the cart before the horse
has even evolved. NONE of the offerings include basic discussions on investments.
And I know it's needed. (However, I have been told privately that expanded
knowledge of arbitrators might increase potential awards and that the SRO's
don't want that to happen since they are funded by the security industry.)
I believe there is an ethical and legal requirement, as identified by
congressional statements, to provide basic security knowledge so that the
cases may be weighed on the real world issues- not obfuscated in leagalese
or on issues that clearly miss the point. Arbitrators need to understand
(or at least recognize) the pyramid of investments, unsystematic and systematic
risk, correlation, statistical asset allocation and numerous other presentations
that are made at the basic university level. I'm not talking about CFA
presentations but the absolute minimum standards necessary to determine
I offered my assistance to Ms. Mascussi several years ago but did not receive
a reply. I am offering it once again since, having spent the last 15 years
intensely involved at all levels of planning and investments with clients
specifically addressing suitability and ethical responsibility, I believe
these issues can be definitively and objectively presented in a factual,
non judgmental and clearly understandable format that would provide an insight
to arbitrators far beyond current, and significantly lacking, standards.
I would appreciate a reply.
Errold F. Moody Jr.