The Neutral Corner - Volume 2—2008
Regular Arbitrator Disclosure Instills Confidence in the Arbitration Process
By David Carey, Associate Director, FINRA Case Administration
Accurate and current arbitrator disclosure is essential to the integrity of the arbitration process. FINRA educates its arbitrators about this important obligation through arbitrator trainings and articles on the disclosure process.¹
As a reminder, arbitrators have a continuing duty to disclose any interests, relationships or circumstances that might preclude them from rendering an objective or impartial determination²—or that might give the appearance of impartiality or bias-at every stage of the proceeding.³ This is of primary importance to the parties as they rely on the accuracy of the disclosures in the Arbitrator Disclosure Report (Disclosure Report) when selecting arbitrators.
FINRA's Arbitrator Application and Oath
FINRA's initial Arbitrator Application requires detailed information relating to an applicant's employment, education, prior legal proceedings (involving broker-dealers) and other important career information. Before submitting the application, the arbitrator candidate must affirm the following:
I assume the responsibility of promptly informing FINRA of any changes to the answers to the questions contained on this form, and I understand that failure to do so may result in my immediate removal from the roster of approved arbitrators.
Using the information provided on the Arbitrator Application, FINRA prepares a Disclosure Report for all approved arbitrators added to the roster. Then, for each new arbitration case, FINRA sends a randomly generated list of potential arbitrators to the parties involved, along with each arbitrator's current Disclosure Report.4 After the parties select arbitrators, but before the arbitrators make any decision or attend a hearing, arbitrators must sign the Oath of Arbitrator.5
The Oath requires arbitrators to review their Disclosure Report and certify that:
An arbitrator's misstatement or failure to disclose material information in the Report may be the basis for permanent removal from FINRA's roster of arbitrators.6 In addition to the Oath, arbitrators must complete the Arbitrator Disclosure Checklist and make any disclosures or certify that they have nothing further to disclose.
The Disclosure Report is a snapshot of an arbitrator's career, disclosures and conflicts. Because this information changes frequently, arbitrators should immediately disclose changes in employment, new conflicts and career activities. When an arbitrator completes a FINRA-sponsored training program or renders a FINRA award, FINRA will update those sections of the Disclosure Report; all other updates must come directly from the arbitrator.7
Arbitrators should carefully review their Disclosure Reports to ensure that all information is accurate. The narrative summary in the background section of the Disclosure Report should conform to the employment section. Military service and part-time teaching positions should also be included within the employment section.
Even arbitrators who may not be serving on a current case—but remain available on the roster-must continue to maintain their Disclosure Reports.
Consequences of Outdated Information
Outdated information on the Disclosure Report can have consequences at any stage of the proceeding—prehearing, evidentiary hearing, post-hearing and post-award.
An arbitrator's failure to update the Disclosure Report with additional information, such as a new employer or brokerage account may:
FINRA relies on arbitrators' timely updates to properly classify them as public or non-public. Individuals who enter or leave the securities-related fields should be particularly mindful of updating their Disclosure Reports. For example, a public arbitrator who worked as a high school teacher for 20 years may decide to join a brokerage firm and become a licensed registered representative. The arbitrator should immediately notify FINRA of the change in employment and identify the new employer. This update would not only change the arbitrator's classification from public to non-public,12 but it would also preclude the arbitrator from appearing on arbitrator lists for cases involving the particular brokerage firm. In short, immediate disclosure ensures that FINRA provides accurate information to the parties when they select a panel.
How Can I Update My Arbitrator Disclosure Report?
Arbitrators may update their Disclosure Reports by:
Parties expect arbitrators' Disclosure Reports to be accurate and current, and arbitrators have a duty to regularly update their Disclosure Reports. This ensures the integrity of the arbitration process and builds the parties' trust in arbitration.
1 Arbitrator Training, "Your Duty to Disclose." Rina Spiewak, "When in Doubt, Disclose," The Neutral Corner (April 2006). "Arbitrator Tip," The Neutral Corner (June 2005). Ruth Glick, "Practice Tips for Arbitrator Disclosure," The Neutral Corner (February 2005).
2 NASD Codes of Arbitration Procedure 12408(a) and 13408(a).
3 NASD Codes of Arbitration Procedure 12408(b) and 13408(b).
4 The list is randomly generated by FINRA's computer system, the Mediation and Arbitration Tracking Retrieval Interactive Case System. See NASD Codes of Arbitration Procedure 12403 and 13403.
5 NASD Codes of Arbitration Procedure 12406(d) and 13406(d).
6 "Permanent Removal of Arbitrators from the Roster," The Neutral Corner (October 2007).
7 If an arbitrator issued an award, which does not appear on his/her Arbitrator Disclosure Report in the Publicly Available Awards section, please contact the Department of Neutral Management at (212) 858-4339 with the docket number and name of the case.
8 NASD Codes of Arbitration Procedure 12403(b)(2) and 13403(c)(2).
9 NASD Codes of Arbitration Procedure 12410(a)(1) and 13410(a)(1).
10 NASD Codes of Arbitration Procedure 12410(b) and 13410(b).
11 Federal Arbitration Act, 9 U.S Code Sec. 10(a) and (b).
12 NASD Codes of Arbitration Procedure 12100(p)(1)(A) and 13100 (p)(1)(A).
Dispute Resolution News
Arbitration case filings in January 2008 reflect a 5 percent decrease compared to cases filed during January 2007 (from 269 cases in 2007 to 256 cases in 2008).
In January 2008, the average processing time from service of claim to issuance of award in hearing cases declined to 16.6 months (from 16.8 months in 2007).
Reminder to Send Notice to Reactivate Your Record
For personal or professional reasons, arbitrators may elect to become temporarily inactive on FINRA's roster; they usually notify us of that change by sending a deactivation request. Even though these requests may include a prospective reinstatement date, arbitrators must still follow up and advise FINRA—in writing—at the time they wish to be reactivated. FINRA does not track arbitrators' individual requests because of the large number of arbitrators on the roster and the personal nature of such requests. Therefore, arbitrators are reminded to send written notice to FINRA at the time they wish to be reinstated to active service.
Recent Rule Filings with the Securities and Exchange Commission (SEC)
Removal of the Page Limit on Statements of Claim Filed through the Online Arbitration Claim Filing System
On December 27, 2007, FINRA filed a proposal with the SEC, SR-FINRA-2007-042, to amend Rule 12302 of the Customer Code and Rule 13302 of the Industry Code to remove the page limit on Statements of Claim filed through the Online Arbitration Claim Filing System. FINRA filed this proposal for immediate effectiveness and, therefore, it became effective on the date of filing.
Submissions to Arbitrators after a Case Has Closed under Limited Circumstances
On February 7, 2008, FINRA filed a proposal with the SEC, SR-FINRA-2008-005, to adopt Rule 12905 of the Customer Code and Rule 13905 of the Industry Code to permit submissions to arbitrators after a case has closed under the following circumstances:
Pending SEC approval, we will notify you of the effective date in a future issue of The Neutral Corner. For more information about this rule filing, please visit our Web site.
Proposed Rules Amendments to Address Motions to Dismiss and the Provision of the Eligibility Rule Related to Dismissals
On February 13, 2008, FINRA filed with the SEC Amendment No. 1 to SR-FINRA-2007-021. Amendment No. 1 replaces in its entirety the initial proposal that was filed on November 2, 2007. This proposal will amend Rules 12206 and 12504 of the Customer Code and Rules 13206 and 13504 of the Industry Code by providing specific procedures that will govern motions to dismiss, and amending the provision of the eligibility rule related to dismissals.
Pending SEC approval, we will notify you of the effective date in a future The Neutral Corner.
2008 FINRA Spring Securities Conference
FINRA will hold its 2008 Spring Securities Conference on May 21-23 in Hollywood, FL. This conference provides comprehensive updates on securities industry rules, regulations and compliance issues. FINRA staff and other regulators and industry representatives will address regulatory updates and facilitate a wide range of workshops.
Dispute Resolution's workshop will present the basics of arbitration, using a hypothetical arbitration claim. Presenting this highly interactive program will be: Linda Fienberg, President of FINRA Dispute Resolution; George Friedman, Executive Vice President and Director of FINRA Dispute Resolution; Garry O'Donnell, FINRA Arbitrator; Melanie S. Cherdack of the law firm Genovese Joblove & Battista, P.A.; and Richard L. Martens of the law firm Casey Ciklin Lubitz Martens & O'Connell.
Read more for additional information about the 2008 Spring Securities Conference.
Role of Arbitrators in Discovery
The timely exchange of relevant documents and information between parties in FINRA arbitrations is vital to the efficient, cost-effective resolution of disputes. Recently, complaints from parties regarding possible abuses of the discovery process in FINRA arbitrations have been on the rise. This trend suggests that some parties believe that noncompliance with the discovery process is a routine and acceptable part of arbitration strategy. It is not.
It is imperative that arbitrators manage the discovery process effectively from the outset of the proceeding. Proper management includes reminding parties to comply with the forum's discovery rules and procedures and being aware of sanctions that are available when parties violate the forum's rules or arbitrator orders. Below is a summary of the parties' obligations to exchange discovery pursuant to the NASD Codes of Arbitration Procedure and the remedies available to arbitrators when parties do not comply with the rules of discovery.
Exchange of Documents in Customer Dispute Cases
Rule 12505 of the NASD Code of Arbitration Procedure for Customer Disputes (Customer Code) requires that parties to FINRA arbitrations cooperate to the fullest extent practicable in the exchange of documents and information to expedite the arbitration. Furthermore, Rule 12506(b)(2) of the Customer Code establishes a good faith standard for the exchange of documents and information, requiring that a party must use its best efforts to produce all documents required or agreed to be produced.
The Discovery Guide and Document Production Lists supplement the discovery rules contained in the Customer Code (see Rules 12505-12511) and serve as a guide for parties and arbitrators. They are designed to facilitate the exchange of documents in customer disputes with firms and associated person(s). The Document Production Lists specifically identify which documents parties in customer disputes should exchange before the hearing. Document Production Lists 1 and 2 apply to all customer disputes, while Lists 3 through 14 apply to specific types of customer dispute claims. For example, Lists 4 and 5 apply to cases involving churning allegations.
Unless the parties agree otherwise, they must exchange copies of all documents in their possession or control that are on Document Production Lists 1 or 2, and any other lists applicable to the dispute, within 60 days of the date that the answer to the claim is due. This exchange should happen automatically, without arbitrator or staff intervention. See Rules 12506 and 12507 of the Customer Code for more information on time frames for exchanging documents.
If any party objects to the production of any document listed in the relevant Document Production Lists, the party must file a written objection on or before the date that the exchange of documents is due to occur. Parties should explain why they object to producing the documents. An objection to the production of a document or a category of documents is not an acceptable reason to delay the production of any document not covered by the objection. Arbitrators will decide whether disputed documents must be exchanged, and resolve any other issues, including requests for confidential treatment of documents. See Rule 12508 of the Customer Code for more information on objections.
Parties may also request documents or information not on the Document Production Lists. Parties must either produce requested documents or information within 60 days of the time the request was received or file a written objection in the manner described above. See Rule 12507 of the Customer Code for more information on additional discovery.
Exchange of Documents in Industry Dispute Cases
Like the Customer Code, the Code of Arbitration Procedure for Industry Disputes (Industry Code) requires that parties cooperate to the fullest extent practicable in the exchange of documents and information to expedite the arbitration. The Industry Code also establishes a good faith standard for the exchange of documents and information, requiring that a party must use its best efforts to produce all documents required or agreed to be produced.
The Discovery Guide and Document Production Lists are not applicable for non-customer cases; however, parties may request documents or information from any party by serving a written request directly on the party. Requests for information are generally limited to identification of individuals, entities and time periods related to the dispute; such requests should be reasonable in number and not require narrative answers or fact finding. Standard interrogatories are generally not permitted in arbitration. See Rule 13506 of the Industry Code for more information on requesting documents and information.
Rule 13507 provides that-unless the parties agree otherwise-within 60 days from the date a discovery request is received, the party receiving the request must either:
Sanctions for Noncompliance
Arbitrators should be firm when managing the exchange of discovery between the parties, and remind the parties that failure to comply with the forum's discovery rules and procedures may result in sanctions, including dismissal of a claim, defense or proceeding.
Under Rules 12212 and 13212 of the Customer and Industry Codes, respectively, possible sanctions include:
Arbitrators can also refer member firms and associated persons who fail to comply with a discovery order of the panel to FINRA for possible disciplinary action. Disciplinary action may include suspension or termination of FINRA membership or registration.
Examples of Sanctions for Noncompliance
Failure to comply with the forum's discovery rules and procedures, or orders of the arbitrators, can—and does—result in sanctions. For example:
Arbitrators in several other cases referred member firms or associated persons for disciplinary review for discovery abuse.
Other Arbitrator and Staff Actions to Address Discovery Abuse
As part of a comprehensive arbitrator training program, FINRA offers an online mini-course "Discovery: Abuse & Sanctions." The course focuses on the respective duties of arbitrators and parties in the discovery process. The course explains the Discovery Guide, discusses the need for orders of confidentiality, helps arbitrators to recognize and address discovery abuses, and reviews possible sanctions should they become necessary.
All alleged discovery abuses are now brought to the attention of the Director of Arbitration and the President of FINRA Dispute Resolution. These cases will be carefully reviewed and, when appropriate, referred for disciplinary review.
Discovery Arbitrator Pilot Program
FINRA launched a voluntary Discovery Arbitrator Pilot Program in which a single Discovery Arbitrator is appointed to resolve all discovery disputes prior to the hearing. These Discovery Arbitrators are not a part of the panel assigned to hear the merits of the case; they are appointed solely to resolve the parties' discovery disputes. Parties may contact their FINRA case administrator for more information on the Discovery Arbitrator Pilot Program.
FINRA hopes that these measures, together with the guidance of well-informed arbitrators, will lead to a significant reduction in the instances of discovery abuse in the forum, and alleviate the need for future rule changes to deter such abuse.
Question and Answer: FINRA's Authority to Enforce Non-Party Subpoenas
What authority does FINRA have to enforce a panel-issued subpoena to a non-party that fails to comply with the subpoena?
If the subpoena is issued to a non-party that is also a member firm or an associated person of a member firm, and that non-party fails to comply with the subpoena, arbitrators have the authority to make a disciplinary referral. The referral may be addressed at the conclusion of a case, after any award is issued, with respect to the non-compliant member firm or associated person. Staff then forwards the disciplinary referral for investigation and any action it deems necessary. Alternatively, a party may notify FINRA directly, through the Investor Complaint Center.
Arbitrators may issue a subpoena to non-parties that are not affiliated with FINRA. However, FINRA does not have jurisdiction over these parties and, therefore, could not compel the production of documents within their possession or control or their appearance at a hearing.
Question and Answer: Sanctions against Counsel
Is it ever appropriate to sanction an attorney representative for egregious acts during an arbitration proceeding?
No. FINRA does not have jurisdiction over an attorney representative, and there is no provision under the Codes that explicitly allows arbitrators to sanction an attorney representing a party in FINRA's forum. Therefore, it is never appropriate to sanction an attorney representative for his or her behavior during an arbitration proceeding.
During the course of an arbitration, arbitrators may warn an attorney-orally or in writing-concerning acts and/or behavior that undermine the arbitration process. If further action is required, at the conclusion of the case, an arbitrator, individually or as a panel, may report alleged unethical behavior to the state bar in which the particular attorney is licensed.
Mediation and Business Strategies Update
On December 13, 2007, Director Kenneth Andrichik, Assistant Director Julie Crotty, Senior Mediation Administrator Edward Sihaga and Northeast Regional Director Elizabeth Clancy conducted a focus group in New York with mediation clients, including several investor and brokerage firm representatives. The Mediation Department also hosted an online survey of frequent users of the forum. The department will analyze the survey responses and make adjustments to the program to offer the best mediation services to FINRA's constituents. FINRA appreciates the input of everyone who participated in these research efforts.
FINRA converted 22 percent of arbitration cases into mediation in 2007, up from 19 percent in 2006. This increase is consistent with feedback from parties that they are more comfortable with the mediation process and are willing to try mediation to resolve their disputes. Our mediators maintained an average settlement rate of 82 percent.
NOTE: Participants must successfully complete the online portion of the Basic Arbitrator Training Program before attending an onsite training program. Please visit the Arbitrator Training page at http://www.finra.org for more information. FINRA generally requires a minimum of nine attendees to conduct an onsite session.
Northeast Regional Update
Karen Kupersmith Retires
After 24 years, Karen Kupersmith announced her retirement, effective December 31, 2007. Ms. Kupersmith served as the Director of the New York Stock Exchange Arbitration Department prior to the recent consolidation of NASD and NYSE. We wish her the best of luck in her future endeavors.
On February 4, 2008, Elizabeth Clancy, Vice President and Regional Director of the Northeast Regional Office, spoke at the New York County Lawyers' Association Public Forum entitled, "The Ninth Annual FINRA Listens . . . and Speaks." Topics included the NASD-NYSE consolidation, the new arbitration codes and the new subpoena rule.
Digital Recording of Hearings
As a result of the West Regional Office's success with the digital recording pilot (see below), the Northeast Region wired its hearing rooms for digital recording at the end of 2007.
During the next three months, the Northeast Regional Office will conduct the following in-person Basic Arbitrator Training programs:
|Newark, NJ||March 12, 2008|
|Boston, MA||April 15, 2008|
|Hartford, CT||May 13, 2008|
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Cicely Moise at (212) 858-3963.
Midwest Regional Update
During the next three months, the Midwest Regional Office will conduct the following in-person Basic Arbitrator Training programs:
|St. Louis, MO||March 26, 2008|
|Pittsburgh, PA||April 9, 2008|
|Indianapolis, IN||April 23, 2008|
|Chicago, IL||May 14, 2008|
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Deborah Woods at (312) 899-4431.
West Regional Update
Digital Recording Pilot
In November 2007, the West Regional Office piloted a program using digital recorders in lieu of cassette recorders to record arbitration hearings. Parties and arbitrators were pleased with the ease and sound quality of the digital recorders, prompting the West Regional Office to install digital recording devices in the rest of its hearing rooms this year. The Northeast Regional Office followed the success of the pilot and installed digital recording devices in its hearing rooms at the end of 2007. The two other regional offices will adopt this technology during the next two years.
California Counsel Requirement: California Code of Procedure § 1282.4
In accordance with California Code of Procedure (CCP) § 1282.4, counsel representing a party in a California arbitration proceeding must be licensed in California or associated with a California-licensed attorney. To ensure initial compliance with this regulation, FINRA will confirm that California counsel has entered an appearance when a party files a Statement of Claim or Answer. When necessary, FINRA will send attorneys a letter advising them of their obligation to comply with CCP § 1282.4.
Under CCP § 1282.4, the panel has authority to request verification of the compliance with the statute at any time. Therefore, if a party changes counsel during the proceeding, the panel should confirm with the parties that all counsel are in compliance with CCP § 1282.4. If arbitrators have questions about this regulation, they may contact the case administrator.
During the next three months, the West Regional Office will conduct the following in-person Basic Arbitrator Training programs:
|Boise, ID||March 27, 2008|
|Houston, TX||April 17, 2008|
|Portland, OR||May 13, 2008|
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact David Newson at (213) 613-2693.
Southeast Regional Update
During the next three months, the Southeast Regional Office will conduct the following in-person Basic Arbitrator Training programs:
|Columbia, SC||March 12, 2008|
|Boca Raton, FL||March 25, 2008|
|Memphis, TN||April 10, 2008|
|Atlanta, GA||April 15, 2008|
|Birmingham, AL||May 13, 2008|
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Lanette Cajigas at (561) 447-4911.
Arbitrator Tip: Subpoenas, Discovery Motions and Orders of Appearance or Production
This arbitrator tip explains FINRA's procedures for processing subpoenas, discovery motions and orders of production or appearance. The standard for discoverability in arbitration is whether the requested information is relevant or may lead to relevant evidence. When deciding whether to order the production of a disputed document, you should "weigh a party's ability to fully develop his/her case against the reasonableness of the burden to produce the document. The arbitrator may limit, as appropriate, the time periods of the documents covered by the order to the relevant time periods in the case."1
Rule 12512 of the NASD Code of Arbitration Procedure for Customer Disputes (Code)2 describes the procedure to issue a subpoena. First, a party must file a motion requesting that an arbitrator issue a subpoena to a party or non-party. The motion must include a draft subpoena and must be served on the Director of Arbitration (Director) and all other parties to the case at the same time and in the same manner.
If a party objects to the issuance of the subpoena, the party must file an objection within 10 calendar days of service of the motion. The party must serve the objection on the Director and all parties at the same time and in the same manner. The moving party (the party who initiated the subpoena) may, within 10 days of receipt of the objection, file a response to the objection, serving the response on the Director and all other parties at the same time and in the same manner. FINRA will then forward to the arbitrator the motion for issuance of a subpoena, proposed subpoena, objection and response to the objection. After review, the arbitrator will determine its scope and decide whether to issue the subpoena.
An arbitrator's honorarium for deciding one or more contested motions requesting the issuance of a subpoena without a hearing session will be $200 per case. Even if an arbitrator issues decisions on more than one contested subpoena, he or she will receive only one payment of $200. The parties, in turn, will not be assessed more than $600 in fees in any arbitration proceeding for decisions rendered on contested subpoenas. The panel will allocate the cost of the honorarium to the parties at the conclusion of the case. For cases involving contested subpoena issues in which more than three separate arbitrators work on the requests, FINRA will pay any honorarium that exceeds the $600 cap assessed against the parties.
Rule 12503 provides the procedural framework for filing and responding to motions. Parties filing a written motion must serve it on the Director and all other parties to the case at the same time and in the same manner. Parties must serve motions at least 20 days before a scheduled hearing, unless an arbitration panel decides otherwise. A non-moving party has 10 days from the date of receipt of a motion to respond to the motion, unless the moving party agrees to an extension of time or the Director or the panel decides otherwise. FINRA will then forward the motion and response to the arbitrator or arbitration panel for decision.
FINRA will pay each arbitrator an honorarium of $200 to decide a discovery-related motion without a hearing session. The panel will allocate the cost of the honoraria to the parties at the conclusion of the case.
Orders of Appearance or Production
Rule 12513 states that upon motion of a party, an arbitration panel may order the appearance of any employee or associated person of a FINRA firm or the production of documents in the possession or control of such persons or firms. A request for an order of production is treated as a discovery motion in accordance with Rule 12503, which requires a response to a request for the issuance of an order of production within 10 days from the date of receipt of the request.
A request for an order of appearance is treated as a motion for issuance of a subpoena to compel the appearance of witnesses, in accordance with Rule 12512. This allows for an objection to a proposed order of appearance within 10 days from the date of service.
1 The Arbitrator's Manual (August 2007), p. 12.
2 Because many of the rules in the Customer Code and Industry Code are identical, for simplicity this article references only the Customer Code.
Message from the Editor
In addition to comments, feedback and questions regarding the material in this publication, we invite you to submit suggestions for articles and topics you would like addressed. We reserve the right to determine which articles to publish.
Please send your comments to:
Jisook Lee, Editor
The Neutral Corner
FINRA Dispute Resolution
One Liberty Plaza
165 Broadway, 27th Floor
New York, New York 10006
You may also email Jisook at Jisook.Lee@finra.org.
Linda D. Fienberg
George H. Friedman
Kenneth L. Andrichik
Jean I. Feeney
Richard W. Berry
Barbara L. Brady
Elizabeth R. Clancy
Judith Hale Norris
Associate Vice President
MATRICS DR Business
Associate Director of Neutral Management
Editor of The Neutral Corner
Julie Crotty - Mediation
Mignon McLemore - Office of Chief Counsel
Nene Ndem - Southeast Region
lanthe Philips - West Region
Shari Sturm - Case Administration
FINRA Dispute Resolution Offices
5200 Town Center Circle
Boca Raton, FL 33486
Tele: (561) 416-0277
Chicago, IL 60603
Tele: (312) 899-4440