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NASD Regulation Board OKs Reforms

Securities: Regulator agrees to cap punitive damages and ease 'eligibility rule.' Recommendations await 2nd panel's approval before going to SEC.

November 16, 1996|From Associated Press

WASHINGTON — Reform of the securities arbitration process advanced Friday, with a Wall Street regulator agreeing to limit punitive damages against brokers and their firms while revising other rules so older complaints against brokers wouldn't get rejected automatically.

The NASD Regulation Inc. board of directors adopted a ceiling on punitive damages--a fine above out-of-pocket expenses aimed at punishing egregious conduct--proposed by a panel led by David Ruder, a former Securities and Exchange Commission chairman.

And the board also agreed to revise rules so investor complaints wouldn't be automatically barred from arbitration if they arise from disputes that happened more than six years ago. This revision, backed by consumer groups, would simplify the so-called eligibility rule for arbitration claims.

NASD Regulation is the enforcement arm of the National Assn. of Securities Dealers Inc., Wall Street's self-policing body.

The reforms now will be forwarded to the NASD Inc. board for consideration next month. If approved, the rules then go to the SEC for final passage, which could be sometime next summer.

"We have improved the arbitration system in our attempt to maintain it as a swift and less costly means to resolve disputes," said Mary Alice Brophy, head of NASD Regulation's board. "We've added some specificity here that will help investors and will also clarify the boundaries for the firms as well."

Arbitration refers to a court-like process where investors' complaints against brokers and their firms are hashed out before a panel of certified hearing officers. Almost every investor agrees to deal with their complaints through arbitration--instead of bringing them to court--when they open their brokerage accounts.

The reforms come amid complaints that arbitration has strayed far from being the efficient and less expensive alternative to private lawsuits. The NASD handled more than 6,000 cases a year, about 85% of all of the industry's arbitration caseload.

Consumer groups have complained that the cap on punitive damages would weaken the financial penalties aimed at deterring wrongdoing on Wall Street. The NASD Regulation board agreed to limit punitive damages to the lesser of $750,000 or twice compensatory damages, which pay for lost interest income or principal.

In other matters, the NASD Regulation board approved a new budget in which it will spend an extra $43 million over the current spending level of $178 million, said Mary Schapiro, president of the NASD regulatory arm. Staff will increase nearly 10%, with 130 more people to be hired in market regulation, surveillance and other oversight areas.

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