PANEL OUTLINES ARBITRATION REFORM\Proposals for brokers include setting award cap, curtailing appeals.

Byline: Floyd Norris The New York Times

Here's a clever idea about how to persuade brokerage firms to compensate clients they have treated badly: Change the rules to make sure that other prospective clients do not find out about it. Then the broker will be more inclined to settle quietly.

That is one of the proposals in a report by the arbitration policy task force appointed by the National Association of Securities Dealers. The report, issued Monday, also recommends capping the punitive damages that can be awarded to clients and taking steps to keep brokerage firms from tying up customers in court when they seek arbitration.

First, a little background: Unlike most parts of society, where arbitration is used by people who have chosen to resolve disputes in preference to going to court, securities investors have no choice. The Supreme Court in 1987 said that brokerage firms could require investors to agree to arbitration as a condition of opening an account.

As a result, there has been a flood of arbitration - and of angry customers and brokerage firms. Some awards of punitive damages have outraged the brokerage firms, and there have been cases of prolonged legal haggling that seemed to be aimed at assuring that the investors would encounter long delays and heavy expenses just to get their cases heard.

The task force, headed by David S. Ruder, a Northwestern University law professor and a former chairman of the Securities and Exchange Commission, proposed capping punitive damage awards, and also proposed rules intended to make it impossible for brokerage firms to run to court to seek rulings to bar arbitration.

Instead, the proposal says all such appeals to court will have to be delayed until after the arbitrators reach a decision. Such post-arbitration appeals are difficult to win.

The findings were presented to the NASD board Monday; it directed the NASD staff to prepare rule proposals based on the recommendations for consideration in March.

One of the recommendations holds the possibility of making it harder for an investor to find out about past problems a broker might have had.

At present, any settlement of an arbitration dispute for $5,000 or more must be reported. And while the NASD has accepted brokers' pleas to keep such reports confidential, the reports also go to state securities regulators, many of whom make them public. Some investors use them in determining whether to do business with a broker.

The Ruder task force said that limit should be raised but did not set an amount. In an interview, Ruder said firms were sometimes reluctant to settle because of the possibility of disclosure and added that a settlement did not always mean that a firm admitted wrongdoing, but was simply settling to avoid the expense of pursuing an arbitration.

Ruder said the task force had found that the arbitration system was fair to investors, but that some investors thought it was not. He said he hoped to change that perception by giving brokerage firms and investors more rights to veto the choice of arbitrators, and by changing the process to require firms to provide relevant documents much more quickly. He also pushed for better training of arbitrators.

Much of the investor anger may result from investors' lack of choice. Brokerage firms routinely require investors opening securities accounts to agree to arbitration in the event of disputes.

In contrast, the Commodity Futures Trading Commission requires the firms to let commodities investors not agree to arbitration. Asked about that, Ruder said he did not know what the CFTC did, but added that it was irrelevant because commodities drew a different type of investor. The CFTC also maintains a reparations program, in which administrative law judges decide whether a customer deserves damages, but investors may choose to go to court instead.

Last year, more than 6,000 securities arbitration cases were filed, 85 percent of them with the NASD and most of the rest with the New York and American stock exchanges.