The Neutral Corner - February 2005
Practice Tips for Arbitrator Disclosure
By Ruth V. Glick*
(As an arbitrator herself, Ms. Glick shares some of her advice and suggestions with her fellow arbitrators.)
NASD requires arbitrators to disclose any known direct or indirect financial or personal interest in the outcome of the arbitration case to which the arbitrator has been appointed, in addition to any known business, professional, family, or social relationship likely to affect impartiality or to create an appearance of partiality or bias. NASD provides arbitrators with a disclosure checklist to assist them in determining whether to participate in a hearing. The Arbitrator Disclosure Checklist includes questions about the arbitrator's relationships with parties, attorneys, and fellow arbitrators, as well as inquiries about the arbitrator's involvement in disputes with similar subject matter. [Refer to the Arbitrator Disclosure Checklist within the National Arbitrator's Reference Guide located on our site.]
When completing the disclosure checklist, it is wise to provide an attachment stating that you have made a reasonable and good faith effort to determine whether you have any relationships to the attorneys and/or parties in the dispute. Obviously, you should also disclose whether you have any connections to anyone in the case, including potential witnesses.
Additionally, arbitrators might consider providing waiver language such as "I have been an active member of named bar associations or other named professional organizations and do not maintain a database of these professional contacts and connections,…" or "I have been associated with several named securities industry firms or law firms over the course of 30 years and have no ability to conduct a conflicts check with them." This will alert the parties that you may have a connection of which you are unaware or unable to access.1
Within the last two years, there have been some major developments concerning an arbitrator's duty to disclose under California state law. The implementation of the Ethics Standards for Neutral Arbitrators in Contractual Arbitration ("California Ethics Standards")2, as well as associated legislation, substantially expands arbitrator disclosure requirements and the ability of parties to disqualify potential arbitrators. Some case law has also emerged, which can be applied to NASD arbitrators, on how to avoid challenges to arbitration awards based on non-disclosure principles.
When making disclosures in NASD cases, be sure to repeat your disclosures to the parties and their counsel at the first conference call or meeting to reconfirm their acceptance of you as an arbitrator. In Azteca v. ADR Consulting, 121 Cal. App. 4th 1156 (2004), the arbitrator made his disclosures to the American Arbitration Association (AAA), which was administering the arbitration under its Construction Rules. The Claimant objected to the arbitrator's appointment, but without the arbitrator's knowledge, the AAA rejected the objection to the arbitrator's service and reaffirmed his appointment. The appellate court ruled that under California law, the right of a party to disqualify an arbitrator is absolute and trumps any Alternate Dispute Resolution organization's rules to the contrary. Azteca is the first case to specifically interpret the provisions of the California Ethics Standards.3
The reasoning of Azteca is instructive to NASD arbitrators. When repeating your disclosures to the parties and their attorneys at the prehearing conference, ask them if they are aware of any facts that might affect your impartiality. Under the California Ethics Standards, the disclosure standard is "…all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial…"
If the parties accept you as an arbitrator after you repeat any disclosures, and if there are no issues that they are aware of that would affect your impartiality, memorialize it in the prehearing order and be sure to put it on the record. If there is a time lag between hearings, repeat this process in the next order.
Remember that the obligation to disclose conflicts and relationships is a continuing one. Require parties to provide you with lists of witnesses or experts as soon as possible, and then review these lists to determine whether you have any connections to any witness or expert. As soon as you become aware of a potential conflict, disclose this information to the parties and to the assigned NASD staff member. In California, it would seem that certain life experiences may also be subject to disclosure, as one recent case illustrates. In O'Flaherty v. Belgum, 115 Cal. App. 4th 1044 (2004), a bitter law firm partnership breakup resulted in a vacated arbitration award. Although vacated for other reasons, the parties who obtained the vacatur sued the arbitrator personally for failing to disclose that he had once been voted out of a law firm partnership. NASD's Arbitrator Disclosure Checklist asks potential arbitrators whether they, their immediate family, or their close associates have ever been involved in disputes involving the same subject matter as the case being assigned. Therefore, it would be wise to disclose any life experience that might raise doubt about your ability to be impartial.
Finally, it might be prudent for arbitrators to document each arbitration or mediation case in which they have served. Even though NASD keeps records for arbitrators serving in its forum, another California case, International Alliance of Theatrical Employees v. Laughon, 118 Cal. App. 4th 1380 (2004), demonstrates what can happen when an arbitrator inadvertently fails to disclose (as he was required to do under California law) serving as a neutral arbitrator in a prior commercial arbitration in which a law firm involved in the current case represented a client. Even though the prior undisclosed commercial case was put on the record during the Laughon hearing, the appellate court ruled that the arbitrator failed to make the proper disclosure under California law and, therefore, deprived Charlotte Laughon of the ability to object to the arbitrator's continued service.
The lesson from California for NASD arbitrators is no different from what has been drummed into the minds of participants during arbitrator training sessions and that is: disclose, disclose, disclose. What is instructive is that some of the justification for this comprehensive disclosure is now finding its way into case law.
* Ruth V. Glick is a full-time neutral arbitrator and mediator from Burlingame, California. She is also an adjunct professor of Arbitration Law at the University of California, Hastings College of the Law in San Francisco. Ms. Glick serves on the commercial panel of the American Arbitration Association (AAA) and as a mediator for NASD. She is a past president of the California Dispute Resolution Council, Director of the Mediation Society of San Francisco, and a fellow and Director of the College of Commercial Arbitrators. Ms. Glick is the chapter author of "Arbitrator Ethics and Disclosure," California ADR Practice Guide, Matthew Bender Lexis/Nexis and "Ethics in Arbitration," Negotiating Settlements, Mediating Disputes and Arbitrating Cases in California, CEB. She can be reached at firstname.lastname@example.org.
1 If an arbitrator is no longer an active member of his/her profession, the arbitrator should disclose this information as well.
2 NASD and the New York Stock Exchange continue to challenge the California Ethics Standards based on preemption principles. Several cases regarding this issue are now pending in state and federal courts. The self-regulatory organizations (SROs) now ask parties in securities arbitrations pending in California to either waive the California Ethics Standards or hold the arbitration in another state. While NASD disclosure requirements are as stringent as the California Ethics Standards, the SROs' position is that if every state creates legislation with new and different requirements for arbitrator disclosure and disqualification, it would conflict with securities arbitration as it is now conducted under the oversight of the Securities and Exchange Commission (SEC).
3 A federal court has ruled that the California Ethics Standards are preempted by the Securities Exchange Act of 1934 and by the Federal Arbitration Act, and do not apply to NASD arbitration proceedings, even within California. Mayo v. Dean Witter Reynolds, Inc., 258 F. Supp. 2d 1097 (N.D. Cal. 2003).
Under NASD rules, the Director of Arbitration determines if an arbitrator should be disqualified. Azteca underscores the precedence of the California Ethics Standards and Cal. Code Civ. Proc. § 1281.91 over the rules of any ADR organization. Since this conflicts with SEC approved securities arbitration procedure, it is another reason why the SROs are opposing California's legislative mandates.
Mediation and Arbitration: A Neutral's Perspective
By Robert D. Herschman**
As case filings continue to increase, parties are often faced with the decision of which dispute resolution process to utilize. This article will examine, strictly from a neutral's viewpoint, the benefits of mediation and arbitration. These methods are currently the most popular in assisting parties to resolve their securities-related disputes in an expeditious and cost efficient manner. In addition, these methods are not mutually exclusive and, in fact, are most often used in conjunction with each other.
Mediation: Interest-based Negotiation
NASD's mediation program began in 1996, and I was fortunate to be among its first neutral participants. I was skeptical at first as to its viability, as I wondered whether counsel would be receptive to this process. As most attorneys experienced during law school, there were few courses, if any, which taught collaborative problem-solving techniques for resolving disputes. Rather, the method often taught incorporated the use of adversarial techniques. The adversarial method is necessary whenever parties relinquish the responsibility for resolving their disputes to a third-party neutral, be it a judge, jury, or arbitration panel. In this type of setting, the parties must prove their respective cases to each other's detriment. The litigation skills of counsel usually play a crucial role in the likelihood of success in the adversarial process.
The skills needed in a mediation setting are quite different. Due to the collaborative nature of mediation, practitioners in this arena need excellent negotiation skills. Since parties in mediation are empowered to decide the outcome of their dispute, they will need to negotiate on the basis of their interest rather than position. The skills of the mediator will then ultimately help the parties advance from a positional posture to a collaborative interest-based stance.
As a neutral who has served as chairperson on numerous NASD arbitration cases since 1988, the progression to become a mediator was quite natural. Over my years of involvement with NASD arbitration cases, my role has always been that of a neutral and never in the capacity of an advocate. This experience and knowledge of arbitration has enabled me to help parties involved in mediation view and analyze their dispute through the eyes of an arbitrator, without any predisposed position. Providing this type of evaluation also allows me to be the "agent of reality" and identify both the strengths and weaknesses in the parties' respective cases. I can realistically inform the parties of what they may expect at a hearing, recognizing that in the final analysis only the panel's view will determine the outcome of the case.
Arbitration: Positional-based Negotiation
As an NASD arbitrator co-trainer, I have had the privilege of meeting many of my co-panelists before serving together on a panel. I recognize common traits and skills among arbitrators, such as the ability to actively listen, to conduct themselves professionally and with sensitivity, and to speak in a clear and neutral manner. These skills are magnified for the chairperson, who must also set the tone for teamwork among the panelists. When panelists feel as though they are important team members, they are more inclined to contribute to all aspects of the proceeding. This in turn translates to the parties' recognition that the arbitrators are committed to providing a fair and impartial hearing.
Parties empower arbitrators with the responsibility of deciding an outcome based on the positions presented. This can be extremely difficult when each party has presented a compelling case. The parties are generally bound (subject to limited grounds for appeal) by the panel's decision, which makes one wonder why parties do not exhaust all their collaborative problem-solving methods before leaving the decision of determining the outcome to a third-party neutral. No one knows the intricacies and facts of a dispute more so than the parties. Therefore, it is my view that the parties should take the opportunity to determine an outcome they can live with, and thereby provide a satisfactory closure for their dispute.
The Neutral's Role
Can one serve as both an NASD arbitrator and mediator? The short answer is yes, but it is not that simple. The duty to disclose is imperative for arbitrators serving on arbitration panels. If there exists any relationship that might reasonably create an appearance of partiality or bias, such relationship must be disclosed. The key word is appearance. Any relationship, regardless of how benign it may appear, is a disclosable event. This requirement applies to an arbitrator who elects to serve as a mediator on a separate case involving the same parties or counsel. For example, if an arbitrator was currently serving on an arbitration panel involving Respondent XYZ, and she accepted a mediator position on a case involving the same respondent, she has a duty to immediately disclose in the arbitration case her participation as a mediator in the subsequent case. Based on the disclosure, the parties may then decide (jointly or individually) whether to challenge the arbitrator's appointment to the panel.
Arbitrators must always be cognizant of the appearance of impropriety. Thus, the parties in an arbitration may misconstrue an arbitrator's participation in a less formal mediation setting. My experience has taught me that anyone who maintains an active mediation practice may encounter conflicts if he or she chooses to remain active as an arbitrator. In time, one must decide how to best use his or her skills in the dispute resolution arena.
My journey as a neutral has always been interesting, educational, and intellectually stimulating. As an arbitrator, I have had the opportunity to serve with hundreds of well-qualified panelists from diverse backgrounds who have worked together to decide the outcome of many difficult cases. As an NASD arbitrator co-trainer, I have instructed arbitrators on how to handle certain issues that arise in almost all arbitrations. As a mediator, I have worked with many of the same attorneys who have appeared before me in arbitrations. It is this role that I find most challenging, yet most rewarding. I am able to use my expertise in order to help the parties resolve their disputes through a negotiated settlement. It is my view that the satisfaction the parties derive from taking control of their own fate is immeasurable.
**Robert D. Herschman is an attorney in private practice and specializes in all forms of Alternative Dispute Resolution. He has served as chairperson on more than 250 arbitration cases at NASD, NYSE, and AAA. He has been a mediator with NASD since the inception of its program, and currently his practice is entirely dedicated to securities-related mediations. Since 1993, Mr. Herschman has been an arbitrator co-trainer for NASD's Basic Panel Member training program. He authored this article using his insights from conducting these training programs and from his extensive mediator and arbitrator experience.
Message from the Editor
We are delighted to announce that Richard W. Berry has been promoted to Vice President based on his outstanding dedication and contributions to NASD and Dispute Resolution during his career with NASD. Rick joined NASD Dispute Resolution in 1995 as a Staff Attorney in the San Francisco Office. That same year, he established and administered NASD Dispute Resolution's satellite office in Los Angeles. In October 2001, Rick was promoted to the national position of Director of Case Administration for Dispute Resolution. Prior to joining NASD Dispute Resolution, Rick specialized in business litigation at a law firm, and then spent a year teaching American law in Budapest. He is presently an adjunct professor at New York Law School teaching a course on arbitration and mediation. His NASD Dispute Resolution responsibilities include: overseeing and directing case administration; working in conjunction with senior management to develop and implement policies, procedures, and strategies; maintaining and improving constituent relationships; and establishing caseload and docket distribution standards. Please join us in extending best wishes to Rick.
Dispute Resolution News
Arbitration case filings from January 1, 2004 through December 31, 2004 reflect an 8% decrease compared to cases filed throughout 2003. NASD Dispute Resolution experienced a decrease in case filings from 8,945 in 2003 to 8,201 in 2004. In a major effort to reduce the existing caseload, NASD Dispute Resolution increased by 27% the number of cases closed between January 1, 2004 and December 31, 2004 compared to the same period in 2003.
Did You Know…?
Northeast Regional Update
The Northeast Regional Office is pleased to announce the opening in March 2005 of its newest hearing locations in Augusta, Maine; Manchester, New Hampshire; and Montpelier, Vermont. If someone you know may be interested in serving as an arbitrator or mediator in Augusta, Manchester, or Montpelier, please contact our Recruitment Supervisor, Neil McCoy, at (212) 858-4283.
During the next two months, the Northeast Regional Office will be conducting in-person Basic Panel Member training programs in these cities on the following dates:
New York, New York
March 16, 2005
April 19, 2005
Newark, New Jersey
April 7, 2005
If you are interested in attending a Basic Panel Member training program, please contact Carmen Sanchez at (212) 858-4365.
Mid-Atlantic Regional Update
In addition to your primary hearing location(s), if you are interested in serving as an arbitrator in Charlotte or Raleigh, North Carolina, or Pittsburgh, Pennsylvania, please contact the Mid-Atlantic Regional staff at (202) 728-8327. Keep in mind that pursuant to NASD Dispute Resolution's national policy, arbitrators who volunteer to serve in hearing locations beyond their primary location are not entitled to reimbursement of their travel and hotel expenses. Detailed information regarding reimbursement may be found under "Guidelines for Arbitrator Reimbursement" on our site. When in doubt, we encourage you to contact the Mid-Atlantic Regional staff to determine whether you would be entitled to reimbursement of travel expenses upon appointment to any matter outside your primary hearing location.
During the next two months, the Mid-Atlantic Regional Office will be conducting in-person Basic Panel Member training programs in these cities on the following dates:
April 14, 2005
May 5, 2005
If you are interested in attending a Basic Panel Member training program, please contact Karen Carter at (202) 728-8327.
Western Regional Update
Arbitrators hearing cases in California should make every effort to stay informed about new developments involving the California Ethics Standards for Neutral Arbitrators in Contractual Arbitration ("California Standards"). Up-to-date information can be found on NASD's Web site. We encourage California arbitrators to refer to our Web site often.
During the next two months, the Western Regional Office will be conducting in-person Basic Panel Member training programs in these cities on the following dates:
March 15, 2005
San Francisco, California
April 12, 2005
If you are interested in attending a Basic Panel Member training program, please contact Tiffany Hansmann at (213) 613-2684.
Southeast Regional Update
The Southeast Regional Office is pleased to announce the opening of a new hearing location in Jackson, Mississippi in March 2005. If someone you know is interested in serving as an arbitrator or mediator in Jackson, please contact our Recruitment Supervisor, Neil McCoy, at (212) 858-4283.
During the next two months, the Southeast Regional Office will be conducting in-person Basic Panel Member training programs in these cities on the following dates:
March 15, 2005
April 13, 2005
New Orleans, Louisiana
April 27, 2005
If you are interested in attending a Basic Panel Member training program, please contact Lanette Cajigas at (561) 447-4911.
Midwest Regional Update
During the next two months, the Midwest Regional Office will be conducting in-person Basic Panel Member training programs in these cities on the following dates:
St. Louis, Missouri
March 23, 2005
Des Moines, Iowa
April 13, 2005
If you are interested in attending a Basic Panel Member training program, please contact Deborah Woods at (312) 899-4431.
SEC Approval of Amendments to Eligibility Rule
On November 22, 2004, the Securities and Exchange Commission approved proposed rule change, NASD-2003-101, which amends Rule 10304 of NASD's Code of Arbitration Procedure.
The proposal amends Rule 10304 to provide specifically that arbitrators, not courts, should make eligibility decisions; to clarify that if a claim is dismissed under the Rule, the claim still may be filed in court; and to add a provision that, by making a motion to dismiss a claim on eligibility grounds, the moving party agrees that the non-moving party may withdraw all claims without prejudice and pursue them in court.
Latest in Arbitrator Training
On January 11, 2005, Kenneth Andrichik, NASD Senior Vice President and Director of Mediation and Business Strategies, hosted a successful call-in program titled, "NASD Mediation: 11,000 Cases and Counting." Designed for members of the roster of arbitrators and mediators, topics included: qualifications to become a mediator; an update on the revised Model Standards of Conduct for Mediators; disclosure requirements for mediators; tips on updating mediators' background disclosure statements; and the intersections of arbitration and mediation. Linda Fienberg, President of NASD Dispute Resolution, also participated by presenting "NASD Dispute Resolution 2004: A Year in Review." A total of 1,200 neutrals participated in the workshop. NASD Dispute Resolution then offered a recording of the workshop through MCI from January 11 through February 11, 2005 for those neutrals who could not participate live on January 11. The recording is now available on our site.
NASD Dispute Resolution will continue to offer these informative workshops to its roster members free of charge. Refer to this newsletter for announcements of future workshops.
NASD Dispute Resolution's Arbitrator Training Programs and Schedules
You can view the arbitrator training programs and schedules for 2005 on our site.
Question and Answer about the Introduction into Evidence of a "No-Action Letter"
Question: During my recent service as an NASD arbitrator, a customer introduced evidence that an investigation of the respondent firm had been undertaken by NASD, but said nothing about the disposition. In response, respondent's attorney sought to introduce evidence that the regulatory arm of NASD had investigated the brokerage firm and had issued a so-called "no-action letter." Should I permit respondent to introduce such information?
Answer: Under these narrow circumstances, the panel may choose to allow the respondent to introduce the "no-action letter" so that the record is not misleading. However, were the respondent to introduce or attempt to introduce the "no-action letter" without the customer "opening the door" by first introducing evidence of NASD's investigation, such action by the respondent would be inconsistent with NASD Rule 2110, and the panel should reject the evidence.
The fact that NASD regulatory authorities investigated a brokerage firm, but subsequently issued a "no-action letter" to the brokerage firm regarding that investigation, should have no evidentiary weight in an NASD arbitration matter. A determination by NASD not to take action against an NASD member or a member's associated person has no evidentiary weight in any mediation, arbitration or judicial proceeding that a customer has filed. More information can be found in NASD Notice to Members 02-53 (August 2002).
NASD considers it inconsistent with just and equitable principles of trade (NASD Rule 2110) for a member or associated person to attempt without provocation to introduce the letter, or the fact that NASD declined further action, as evidence in a subsequent legal proceeding. NASD's decision to close an investigation without further action can result from many factors unrelated to the merits of a complaint. As such, NASD considers it unethical and potentially misleading to suggest to an adjudicator or mediator that NASD's determination is probative evidence in a dispute on the merits of a related claim.
Nevertheless, as noted above, if a customer or the customer's attorney introduces specific evidence that an NASD investigation of a respondent was conducted, but fails to include information that the investigation resulted in a "no-action letter," the respondent may alert the panel that a "no-action letter" was issued. The arbitration panel may determine that the "no-action letter" should be introduced to complete the record on the issue of the investigation.
Comments and Feedback
In addition to your comments, feedback, or questions on the material presented in this publication or about other arbitration and mediation issues, The Neutral Corner invites readers to submit articles on important issues of law and procedure relating to mediation, arbitration, or other alternative dispute resolution processes. We, of course, reserve the right to determine which articles to publish.
Please send your article to Lisa Angelson, Editor, The Neutral Corner at NASD Dispute Resolution, One Liberty Plaza, 165 Broadway, 27th Floor, New York, New York 10006. You may also call the Editor at (212) 858-4392 for editorial guidelines.
Linda D. Fienberg
George H. Friedman
Kenneth L. Andrichik
Jean I. Feeney
Richard W. Berry
Barbara L. Brady
Elizabeth R. Clancy
Judith Hale Norris
Nicole Haynes - Northeast Region
NASD Dispute Resolution Offices
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