In Debt Crisis, an Abritration Alternative

by Thomas A. Dubbs

March 16, 2009

Investors have a stronger claim under rules established by a financial industry regulator.

As the collapse of the nonprime mortgage markets has broadened into the worst financial crisis to confront this country in nearly a century, there is no shortage of theories of liability.

Mortgage lenders blame profligate home-owners who bought houses far beyond their means. Companies that purchased these loans, then packaged them into collateralized debt obligations (CDOs), decry the poor underwriting practices of the mortgage lenders. Investment banks saddled with the CDOs point to the lax standards of the ratings agencies that branded enormously risky securitized debt as safe investments.

Few litigants contesting the actions arising from the securitized debt disaster are aware of an emerging approach to resolving many of these disputes: arbitration under the rules of the newly constituted Financial Industry Regulatory Authority (FINRA), a body that oversees disputes involving members of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD). With President Obama's appointment of Mary Schapiro, the former chief of FINRA, to head the U.S. Securities and Exchange Commission, this alternative method of dispute resolution under FINRA rules is likely to be the subject of increasing attention.

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