Neutral Corner - August 2003

NASD Proposes Perino Report Amendments

On June 12, 2003, NASD filed with the Securities and Exchange Commission (SEC) a proposal that will amend NASD Rules 10308 and 10312 (File No. SR-NASD-2003-95).

The proposal will do three primary things. First, to help ensure that persons with significant connections to the securities industry do not serve as public arbitrators at this forum, it changes the NASD Code of Arbitration Procedure (Code) definitions of public and non-public arbitrators. Second, to help promote public confidence that all challenges for cause to arbitrators are granted or denied on the same basis, it incorporates into the Code the standard for making these determinations presently contained in the Securities Industry Conference for Arbitration (SICA) Arbitrator's Manual. Third, the proposal conforms Code language to NASD practice by making clear that arbitrator disclosure obligations are indeed mandatory.

The proposed amendments seek to implement recommendations contained in or otherwise consistent with Professor Michael A. Perino's November 2002 Report to the Securities and Exchange Commission Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSE Securities Arbitrations (Perino Report).

Professor Perino, an Associate Professor at St. John's University School of Law, was asked by the SEC to determine whether current NASD and New York Stock Exchange (NYSE) arbitrator disclosure requirements should be conformed to any of the California Judicial Council ethical and disclosure standards for arbitrators (California Standards).

The Perino Report concluded that the California Standards would not benefit arbitrating parties if NASD, the NYSE or other self-regulatory organizations (SRO) sponsoring securities arbitration adopted them. It did, however, recommend several amendments relating to arbitrator classification and disclosure rules to help enhance investor belief that NASD and other SRO arbitrations are fair. As stated earlier, these Perino Report recommendations are included in this rule proposal.


NASD Expands Pilot California Waiver Rule

On July 14, 2003, NASD extended the application of this pilot rule to provide that if any customer or any associated person with a claim against a member or another associated person, signs a waiver of the contested California Standards, all industry respondents in that matter will be deemed to have waived the application of these standards. Until this extension, the rule initially applied to customers and to associated persons with claims of statutory employment discrimination. The amended pilot rule applies to claims against all industry respondents, including terminated member firms and associated persons. The pilot rule is effective until September 30, 2003.

To read more about the California Standards in this newsletter, see the August 2002, October 2002, April 2003, and June 2003 editions of The Neutral Corner.

Global Settlement & Investor Options at NASD Dispute Resolution

As a result of regulatory investigations, on April 28, 2003, NASD, the SEC, the NYSE, the National Association of State Securities Administrators (NASAA), and the New York State Attorney General announced the final terms of a settlement involving alleged conflicts of interest at brokerage firms between securities research and investment banking (Global Settlement).

Ten of the nation's largest investment firms agreed, as part of the Global Settlement, to pay $1.4 billion—part of which would be used to compensate damaged investors through a distribution process overseen by the SEC. According to the settlement, investors who are entitled to receive payments also may pursue other remedies, including arbitration and mediation.

Consequently, NASD arbitrators should be alert to the following:

  • Investors may elect to bring claims based on the Global Settlement.
  • Some investors may already have arbitrations in progress against the firms that were part of the Global Settlement. After balancing the interests of investors in pursuing these claims against any possible disadvantage to the other parties, arbitrators may wish to consider granting investors' motions either:

a. To amend their pleadings to include allegations based on the Global Settlement; or

b. To dismiss their cases "without prejudice" in order to permit them to refile (after taking into consideration potential statute of limitations issues with a dismissal).

In a given case, the panel may decide that the arbitration has progressed too far to amend the claim or to dismiss it without causing harm to the other parties. In such a case, the investor would need to file a new claim if he or she wanted to pursue the allegations based on the Global Settlement. It may be helpful for the panel to provide a brief statement of their reasoning in denying a motion to amend or dismiss the case, so that the investor can respond to possible arguments by the respondents that such claims should have been raised in the prior proceeding.

In view of the preceding, NASD neutrals should review the June 18, 2003 Notice to Investors regarding the Global Settlement and options for seeking compensation through NASD Dispute Resolution.

Proposal to Amend NASD Rule 10304

In June 2003, NASD filed a proposal with the SEC that would clarify NASD Rule 10304—the eligibility rule. NASD Rule 10304 contains the six-year time limitation for the submission of claims to NASD arbitration (File No. SR-NASD-2003-101).

Consistent with the U.S. Supreme Court decision in Howsam v. Dean Witter Reynolds, Inc., the amendments clarify that these NASD time eligibility determinations will be made by the presiding arbitrators—not by a court of law. Conforming to this change, the amendments also propose to delete the current NASD Rule 10304 provision that provides that this eligibility rule does not apply to claims a court ordered to arbitration—because courts will no longer be authorized to make these eligibility determinations.

For more information in this newsletter on the Howsam decision, see the February 2003 edition of The Neutral Corner.

Additionally, the amendments make clear that if the presiding arbitrators dismiss a claim as ineligible for arbitration at this forum because it was not filed within the six year time limit, the claim may nevertheless be filed in a court of law. In this regard, the proposal states that any party asking for a dismissal of a claim because it was not filed within the six-year time frame also agrees, if successful, that the claimant may withdraw all related claims and file them in court.

Messages from the Editor

Fall Securities Conference

NASD will be hosting its annual Fall Securities Conference October 15-17 2003 in Scottsdale, Arizona. Among the topics, there will be a workshop on Dispute Resolution issues, and a Mediation Advocacy pre-conference program.

Editor's Note

In addition to your comments, feedback, or questions on the material presented in this publication and 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.

Please send your article to Tom Wynn, Editor, The Neutral Corner, NASD Dispute Resolution, One Liberty Plaza, 165 Broadway, 27th Floor, New York, New York 10006. Call the Editor at (212) 858-4392 for editorial guidelines.

Question & Answer On Scheduling Evidentiary Hearings

Question: I have been an active arbitrator on the NASD Roster of Arbitrators for several years. I have great respect for the process and believe that arbitrators should do everything in their power to conduct punctual, prompt, and fair proceedings. However, I've participated in several cases where we've been unable to schedule evidentiary hearings quickly because the parties or their counsel are unavailable.

What, if anything, can arbitrators do in these situations?

Answer: NASD Dispute Resolution appreciates your desire to schedule prompt hearings. While the process essentially "belongs to the parties," there are still a number of things the arbitrators can do to expedite the scheduling of evidentiary hearings:

(1) Arbitrators should ask the parties or their counsel to provide specific reasons why they are unavailable to schedule a hearing on specific days. For example, a response such as "I'm booked all of July" can be considered unacceptable. During the Initial Prehearing Conference, arbitrators can require the parties and/or their counsel to go through their calendars on a week-by-week basis (day-by-day, in some instances) and describe the prior commitments that make them unavailable to schedule additional arbitration hearings.

(2) Acknowledging that scheduled hearings are often uncontrollably postponed, arbitrators can schedule alternative back-up hearing dates. In the event the scheduled hearings are postponed, valuable time will be saved if back-up dates have been scheduled.

(3) While consecutive hearing dates are preferable because they help maintain continuity, arbitrators should not schedule hearings on consecutive days if doing so will result in excessive scheduling delays.

(4) In response to scheduling difficulties, arbitrators also can suggest that hearings be scheduled in the evenings or on weekends.

NASD Dispute Resolution encourages arbitrators to use their authority to schedule hearings as expeditiously as possible. If delays in scheduling become a problem, NASD will consider rules to ameliorate scheduling delays that are not consented to by all parties.


Linda D. Fienberg
NASD Dispute Resolution

George H. Friedman
Executive Vice President
NASD Dispute Resolution

Jean Feeney
Vice President & Chief Counsel

Dorothy Popp
Associate Vice President,
Director of Operations

Kenneth L. Andrichik
Vice President,
Mediation & Business Strategies

Barbara L. Brady
Associate Vice President &
Director, Neutral Management

Richard W. Berry
Associate Vice President &
Director, Case Administration

John C. Barlow
Associate Vice President &
Regional Director, Midwest Region

Elizabeth R. Clancy
Vice President &
Regional Director, Northeast Region

Judith Hale Norris
Associate Vice President &
Regional Director, Western Region

Rose Schindler
Associate Vice President &
Regional Director, Southeast Region

Shari Sturm
Regional Director,
Mid-Atlantic Region

Tom Wynn
Editor, The Neutral Corner

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