Neutral Corner - April 2006
When in Doubt, Disclose
By Rina Spiewak, Staff Attorney
NASD Dispute Resolution West Regional Office
Duty to Disclose
One of the most important tasks arbitrators must undertake is the disclosure of any and all information that could potentially affect their objectivity. Before serving on a panel, arbitrators must disclose not only known conflicts, but also make a reasonable attempt to uncover potential ones. This must occur at every stage of the arbitration.
Rule 10312 of NASD's Code of Arbitration Procedure (Code) governs this crucial obligation, and provides guidance to arbitrators about their duty to disclose. Arbitrators must disclose any circumstances that might preclude them from rendering an objective and impartial determination. Specifically, arbitrators must disclose any direct or indirect financial or personal interests in the outcome of the arbitration. They must also disclose any existing or past financial, business, professional, social or family relationships that are likely to affect impartiality or might reasonably create an appearance of bias. Moreover, under Interpretive Material (IM) 10308, arbitrators who also serve as mediators must disclose the fact that they serve as mediators on their disclosure reports.
In light of these factors, arbitrators must closely examine their prior and current relationships with parties, parties' representatives, witnesses, and other arbitrators serving on the same panel, and disclose any possible circumstances that may affect their judgment.
Oath of Arbitrator
Once appointed to a panel, arbitrators must sign an Oath of Arbitrator and complete an Arbitrator Disclosure Checklist (Checklist). The Checklist is intended to remind arbitrators to make all possible disclosures. For example, one question asks whether the arbitrator has an immediate family member who is—or was—employed by a brokerage firm. If the arbitrator answers this question in the affirmative, the arbitrator should provide a complete explanation of the possible conflict to the parties. The arbitrator should include in the explanation what his or her relationship is to the family member that worked in the securities industry, what position that family member held, with which firm or firms, and for how long. Fully answering this question provides the parties with the necessary information to evaluate whether they believe that the conflict may prevent the arbitrator from rendering an impartial decision.
Duty to Investigate
In addition to disclosing known relationships, Rule 10312 of the Code requires arbitrators to make a reasonable effort to inform themselves of potential conflicts involving employers, partners, business associates and family members that might preclude them from rendering an objective and impartial determination. Canon II of the ABA Code of Ethics for Commercial Arbitrators (Code of Ethics) concurs with this directive and advises arbitrators to disclose any interest or relationship likely to affect impartiality or that might create an appearance of partiality or bias. In other words, NASD arbitrators have an affirmative duty to become aware of relationships that should be disclosed.
To investigate for possible conflicts, arbitrators should conduct a thorough conflicts check before serving on a case. For example, arbitrators who are attorneys should look into whether they or someone at their firm has previously done, or is currently doing, business with a party or a party's representative. Arbitrators who represent claimants in securities arbitrations should keep their disclosure reports current to reflect the fact they are actively representing clients in actions against particular member firms.
Arbitrators associated with the securities industry should determine if they or their firm conducted business with the participants in the arbitration. Even if the business relationship seems tenuous, arbitrators must disclose any and all contact with the participants in the arbitration. For example, a securities professional who attends a Rotary Club luncheon for the purpose of soliciting clients should disclose if he or she then happens to meet one of the parties, parties' representatives, or even another arbitrator on the panel. Although the contact may seem innocuous, the parties have the right to be apprised of the meeting and to judge the partiality of the arbitrator.
The appearance of bias can be as harmful in arbitration as an actual conflict of interest.
Appearance of Bias
One might ask why arbitrators should try to uncover conflicts that they might otherwise be unaware of, and thus, would not affect their impartiality. Although arbitrators may not be biased if they lack knowledge of a particular conflict, the existence of the conflict may still give rise to an appearance of bias. The appearance of bias can be as harmful in arbitration as an actual conflict of interest. It can undermine the parties' confidence in the integrity of the arbitration system—a system built on a foundation of fair and impartial arbitrators. Although lack of knowledge may preclude actual bias, it does not always prevent a reasonable appearance of partiality.
Ongoing Duty to Disclose
Disclosure is an ongoing obligation throughout the entire arbitration process. Under Rule 10312(c) of the Code, arbitrators have a continuing duty to disclose interests, relationships or circumstances that might prevent an arbitrator from making an objective and impartial determination. The continuing duty requires arbitrators to disclose—at any stage of the arbitration—any such interests, relationships or circumstances that may arise, are recalled, or discovered during this time.
Often, the most difficult disclosure situations that arbitrators face are disclosures they must make once a hearing has begun. Canon II (G) of the Code of Ethics provides some guidance to arbitrators about what they should do if one or more of the parties objects to their continued service on the case based on a disclosure. Under Canon II (G), the arbitrator must withdraw from the case if all parties request that he or she do so. Even if less than all parties request that an arbitrator withdraw from the case, the arbitrator should withdraw unless—after careful consideration—the arbitrator determines that:
- the reason for the challenge is not substantial, and
- the arbitrator can act and decide the case impartially and fairly.
To Disclose, or Not to Disclose: There Should NOT Be a Question
When deciding whether or not to make a particular disclosure, an arbitrator should keep in mind that making a disclosure does not necessarily mean that he or she will be removed from a case. However, if an arbitrator fails to make a required disclosure, the failure may be grounds for a court to vacate a panel's arbitration award. In addition, failure to make a required disclosure may be grounds for NASD to remove the arbitrator from its arbitrator roster. To ensure that neither of these possibilities happens, arbitrators should follow the rule of disclosure: when in doubt, disclose.
Dispute Resolution News
Arbitration case filings from January 1 through March 31, 2006 reflect an 11 percent decrease compared to cases filed during the same three-month period in 2005 (from 1,568 in 2005 to 1,393 cases in 2006).
The overall turnaround time to process an arbitration case (hearing and simplified) from January 1 through March 31, 2006 decreased by 4 percent compared to the same period in 2005 (from 14.5 months in 2005 to 13.9 months in 2006).
NASD Spring Securities Conference
The 15th Annual NASD Spring Securities Conference will be held May 17-19, 2006, in Hollywood, Florida. In addition to regulatory issues, the program will address hot topics in securities arbitration and mediation. Experienced attorneys, arbitrators, NASD Dispute Resolution (NASD) senior staff, and program attendees will engage in problem-solving activities to tackle issues that arise during arbitrations. The faculty will also discuss NASD's current initiatives in securities dispute resolution, including the Code of Arbitration Procedure revision project and the discovery arbitrator pilot program.
For more information, please visit the NASD Spring Securities Conference page.
NASD Dispute Resolution Officer Promotions
We are pleased to announce that Rose Schindler, Regional Director of the Southeast Region, has been promoted to Vice President. Prior to joining NASD in 1995, Ms. Schindler was the Associate Regional Director for the Securities and Exchange Commission's (SEC) Southeast Regional Office in Miami, where she was responsible for managing and directing the enforcement and regulation activities for the Southeast Region. Before she joined the SEC, Ms. Schindler worked as in-house counsel for A.G. Edwards & Sons, Inc. Ms. Schindler earned her J.D. from DePaul University in Chicago, Illinois, and holds Master's Degrees in Social Work and Counseling.
We are also pleased to announce that Barbara L. Brady, Director of Neutral Management, has been promoted to Vice President. As Director of Neutral Management, Ms. Brady is responsible for arbitrator recruitment, arbitrator training and the maintenance of arbitrator records. Prior to joining NASD in January 2000, Ms. Brady was an Associate Vice President with the American Arbitration Association (AAA). Having joined AAA in 1978, Ms. Brady has spent a career of nearly three decades devoted to the field of alternative dispute resolution. Ms. Brady holds a Bachelor of Science in Business Management from the University of Phoenix.
Latest in Arbitrator Training
We are pleased to announce that on March 27, 2006, NASD Dispute Resolution (NASD) launched its new online Basic Arbitrator Training Program. The tuition for the mandatory arbitrator training program is $125 and includes the following:
- An online basic arbitrator training course, which requires successful completion of an online examination.
- An onsite classroom training program, which requires successful completion of the staff trainer's evaluation.
- An online expungement training course.
Online Basic Arbitrator Training Course
This skills course requires a thorough review of online self-study materials and successful completion of an online test. After reviewing the materials online, the candidate must take a 25-question, multiple-choice online test designed to measure the candidate's comprehension of the program's material. NASD requires candidates to score at least twenty correct answers to pass the test.
The course and test take approximately eight hours to complete, and can be accomplished over a period of 30 days from the date of registration.
Some states have approved NASD's Basic Arbitrator Training Program for continuing legal education (CLE) credit. Please look to the Arbitrator Training page on www.finra.org for a list of states that have approved the program for CLE credit
Onsite Classroom Training Program
After successfully completing the online course and examination, the candidate is ready to attend a four-hour onsite classroom training program. NASD conducts onsite trainings across the country throughout the year. You will find a complete listing of our arbitrator training programs on the Arbitrator Training page on www.finra.org.
Online Expungement Training Course
This mandatory course provides an overview of the expungement process. Specifically, the course explains the role of the Central Registration Depository, gives an in-depth review of NASD's Rule 2130, and discusses the specific findings arbitrators must make in order for NASD to waive its right to oppose the expungement request in court. The course also concludes with a test. NASD requires a grade of 70 percent or greater to pass the course. The course and test take approximately one hour to complete, and can be done over a period of 30 days from the date of registration.
To register for our Basic Arbitrator Training Program—or to register for any of our subject-specific online mini-courses—please complete the enrollment form on the Arbitrator Training page at www.nasd.com.
Follow-up Questions from the February 14th Arbitrator Phone-in Workshop
On February 14, 2006, NASD Dispute Resolution conducted an Arbitrator Phone-in Workshop. Approximately 1,100 arbitrators participated in the Workshop. After the program, we received several follow-up questions. The answers to the most frequently asked questions appear below.
Question: Parties often argue about discovery issues up until the eve of a hearing, thereby prompting a party to file a motion to compel discovery. Frequently, the party also files a postponement request citing that insufficient time remains to prepare for the hearing. This scenario still occurs despite the fact that all parties and arbitrators agreed to the scheduled hearing dates, as well as discovery cut-off dates, many months prior. What can the arbitrators do to avoid this situation and ensure the parties comply with discovery well before a hearing?
During the initial prehearing conference, the panel should encourage the parties to make every effort to cooperate in the voluntary exchange of documents and information to expedite the arbitration. The panel should, to the fullest extent possible, encourage the parties to:
- Mutually exchange documents and information.
- Enter into stipulations.
- Agree to the joint submission of pre-marked exhibits.
- Narrow the issues in dispute.
- Identify witnesses and the subject of their testimony.
- Identify documents to be used at the hearing.
Even before a discovery issue arises, the panel should advise the parties to raise such issues with the panel well in advance of the hearing in order to avoid future postponements.
For further guidance on discovery, please register for the Discovery: Abuse & Sanctions online mini-course on our Web site.
Question: From time to time, I take arbitrator trainings with other organizations or forums, such as the American Arbitration Association. How do I update my NASD Arbitrator Disclosure Report to reflect these trainings?
Answer: NASD strongly encourages arbitrators to keep their Arbitrator Disclosure Reports current, including training sessions conducted by other organizations or forums. For this reason, NASD provides a number of convenient ways for arbitrators to update their records:
- You may update the information by going to the Arbitrator Information Update Form and enter the applicable information.
- You may send your updates directly to NASD's Department of Neutral Management via facsimile at (646) 625-6050, or by email.
- If you are currently serving on an arbitration case, you may forward your update to the NASD staff member assigned to your case, and staff will make sure your report is updated.
Please be sure to include the name of the training event, the organization that conducted the training, the length of the training (preferably in hours), the date you completed the training, and your arbitrator identification number.
Question: I previously participated in several of NASD's arbitrator training events, such as phone-in workshops, mini-courses and various Webcasts. How do arbitrators report this information on their Arbitrator Disclosure Reports?
Answer: NASD automatically updates its arbitrator records when an arbitrator successfully completes one of the forum's online arbitrator training courses. To receive credit for all other NASD training events—such as phone-in workshops or Web casts—please update your Arbitrator Disclosure Report using one of the three methods described in the answer to the prior question. Be sure to include the name of the training event, the date you completed the training, and your arbitrator identification number.
Question: During a prehearing conference, is it appropriate for the panel to reduce the number of hearing days requested by the parties when it appears unreasonable, considering the limited issues and the number of witnesses they intend to present at the hearing?
Answer: Arbitrators may limit the number of hearing days. However, before doing so, the panel should express their concerns to the parties. The panel may request that the parties provide reasons for the number of days scheduled, confirm the number of witnesses they plan to call and the scope of their testimonies, and estimate the number of documents they intend to present at the hearing.
The panel should always keep in mind that the process belongs to the parties, and the parties must be afforded a full and fair opportunity to present their cases.
Clarification of The Neutral Corner February 2006 "Question & Answer" on Joint and Several Liability
The Neutral Corner endeavors to provide impartial information, which is both informative and relevant, to aid arbitrators as they serve on arbitration cases. We used the Question and Answer (Q&A) feature in the February 2006 issue of this newsletter to provide general guidance on joint and several liability—an issue that comes up frequently. NASD Dispute Resolution (NASD) did not intend to suggest in the article that arbitrators have the authority—without regard to state law—to determine liability and to allocate damages, or that case administrators would provide advice to arbitrators on legal matters. NASD staff has been trained that under no circumstances should they provide legal advice.
We have been asked to supplement the February Q&A by addressing the role of state law in determining joint and several liability. While arbitrators generally have the authority to determine liability and allocate damages, there may be instances when more specific or contrary state law applies. In such cases, it is the parties' responsibility to bring to the arbitrators' attention any issues regarding relevant state law. The February Q&A did not intend to suggest arbitrators should disregard applicable state law.
The February Q&A also advised arbitrators to contact the assigned case administrator with questions on joint and several liability. As stated above, we did not mean to imply that case administrators would provide advice to arbitrators on legal matters. Rather, when faced with a question regarding legal matters, arbitrators should direct all inquiries for clarification on applicable law to the parties through the NASD case administrator. In addition, arbitrators may question the parties during the hearing on applicable law, or request briefs from the parties on the subject at any time prior to the award. NASD case administrators serve as intermediaries for the parties and the arbitrators for communications outside of hearings, and are available to provide procedural guidance related to the Code of Arbitration Procedure and general NASD practices. NASD case administrators do not provide legal advice to parties or to arbitrators.
NOTE: Starting in June 2006, participants must successfully complete the online portion of basic arbitrator training before attending the onsite training program. For more information about online basic arbitrator training, please review the article, "Latest in Arbitrator Training," in this issue.
Northeast Regional Update
During the next three months, the Northeast Regional Office will conduct in-person Basic Arbitrator Training programs in these locations on the following dates:
- Boston, Massachusetts May 23, 2006
- New York, New York June 21, 2006
- Newark, New Jersey July 12, 2006
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Cheree White at (212) 858-4063, or by email.
Midwest Regional Update
This summer, the Midwest Regional Office will relocate to 55 West Monroe Street, Chicago, Illinois. The office will occupy the same building as the NASD District Office.
During the next three months, the Midwest Regional Office will conduct in-person Basic Arbitrator Training programs in these locations on the following dates:
- Dallas, Texas May 17, 2006
- Milwaukee, Wisconsin June 21, 2006
- Minneapolis, Minnesota July 12, 2006
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Deborah Woods at (312) 899-4431, or by email.
Mid-Atlantic Regional Update
In an effort to diversify NASD's Roster of Arbitrators, the Mid-Atlantic Regional Office will participate in a recruitment event at the Pennsylvania Bar Association in Hershey, Pennsylvania, on June 7-9, 2006. The Mid-Atlantic Regional Office will also attend the North Carolina State Bar meeting in Atlantic Beach, North Carolina, on June 15-18, 2006.
During the next three months, the Mid-Atlantic Regional Office will conduct the following in-person Basic Arbitrator Training program:
- Washington, DC June 22, 2006
If you are interested in attending this Basic Arbitrator Training program, please contact Karen Carter at (202) 728-8327, or by email.
Southeast Regional Update
In an ongoing effort to enhance customer service, NASD is in the process of implementing a new strategy to administer arbitration cases more efficiently. On March 6th, the Southeast Regional Office introduced this new business model. The Northeast and Mid-Atlantic Regions previously implemented the new business process, and the Midwest and West Regions will follow later this year.
During the next three months, the Southeast Regional Office will conduct in-person Basic Arbitrator Training programs in these locations on the following dates:
- Boca Raton, Florida May 18, 2006
- Orlando, Florida May 18, 2006
- Jackson, Mississippi June 1, 2006
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Lanette Cajigas at (561) 447-4911, or by email.
West Regional Update
On April 21, 2006, Marya M. Santor, Case Administrator Manager for the Mid-Atlantic Region, gave a presentation to the Dispute Resolution Section of the Washington State Bar Association in Seattle, Washington. Ms. Santor discussed NASD's arbitration and mediation programs, and provided information to prospective arbitrators and mediators on how to join NASD's Roster of Neutrals.
During the next three months, the West Regional Office will conduct in-person Basic Arbitrator Training programs in these locations on the following dates:
- San Diego, California June 6, 2006
- Salt Lake City, Utah July 11, 2006
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Tiffany Hansmann at (213) 613-2684, or by email.
Arbitrator Tip: Disclosure and Acting as an Expert
Arbitrators who act as expert witnesses must remember to report this information on their disclosure reports. We recognize that some arbitrators act as experts with great frequency, so it may be difficult to keep the disclosure reports current. There may also be privacy and confidentiality concerns. Therefore, we suggest that all arbitrators who act as experts include—at a minimum—a sentence (filling in the appropriate type of party) in their background paragraph such as:
"I have been an expert witness for (customers/brokerage firms/brokers, or associated persons)."
Arbitrators may also wish to provide an estimate of the number of times they acted as an expert for customers, registered representatives or broker-dealers. Including such a statement will alert parties to potential conflicts and prompt them to inquire further, if necessary, as allowed by NASD's Code of Arbitration Procedure Rule 10308(b)(6).
When we assign arbitrators to a case, NASD staff will ask them whether they act or have acted as an expert for any of the named parties or counsel participating in the case. Arbitrators should carefully review their Oath of Arbitrator form and the Arbitrator Checklist to ensure that they have made all necessary disclosures.
Please keep in mind that arbitrators have a continuing duty to disclose any and all information relevant to the service as an arbitrator, and to keep their disclosure reports current.
Message from the Editor
In addition to comments, feedback and questions regarding the material presented in this publication, or 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 reserve the right to determine which articles to publish.
Please email your articles to Jisook Lee at Jisook.Lee@nasd.com, or send them to:
Jisook Lee, Editor
The Neutral Corner
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