Neutral Corner - December 2003

Note that this issue of The Neutral Corner is being published only via the Web.

NASD Launches Initiative to Curb Discovery Abuse

NASD has launched an initiative to curb discovery abuse by any party in arbitration because such abuse interferes with efficient, cost-effective, and fair arbitrations.

As part of this initiative, in November 2003, NASD issued Notice to Members 03-70. The Notice reminded NASD members of their duty to cooperate in the exchange of documents and information requested by parties in arbitration under NASD Rule 10321 and the NASD Discovery Guide. The Notice announced that NASD Dispute Resolution will be monitoring the discovery process and referring, when appropriate, discovery abuses by members or associated persons to NASD Regulatory Policy and Oversight for disciplinary review. In a related NASD press release, Mary L. Schapiro, NASD Vice Chairperson and President of Regulatory Policy and Oversight, stated: "NASD will investigate all referrals of instances in which member firms are prolonging arbitration by engaging in a protracted discovery process. Any firm found abusing the arbitration process, including discovery, will face disciplinary action."

Although the Notice is aimed primarily at NASD members and their associated persons, endnote 1 of the Notice makes clear that NASD realizes claimants, as well as respondents, may cause discovery abuse. To emphasize that discovery cooperation is a shared responsibility, NASD is preparing a Notice to Parties for its Web site that will remind claimants and respondents that failure to comply with NASD discovery rules and procedures may result in appropriate sanctions, including the assessment of fees; adverse inferences; preclusion of evidence; and the dismissal of a claim or defense.

NASD believes that these steps—and enhanced arbitrator training efforts regarding the wide range of tools presiding arbitrators may use to address discovery abuses—will help to curb such abuses and the need for future rule changes or other actions.

NASD Dispute Resolution is in the process of developing an online arbitrator training mini-course titled "Discovery, Abuses & Sanctions." The course is expected to go "live" via our Web site during the first quarter of 2004. Details will be published in future issues of this newsletter.

Public Customer Arbitration Code

In October 2003, NASD Dispute Resolution, Inc. filed with the Securities and Exchange Commission (SEC) a proposed rule change to the Code of Arbitration Procedure (Code) (SR-NASD-2003-158).

NASD plans to reorganize its current dispute resolution rules into three procedural codes—for public customer disputes; for industry disputes; and for mediation. SR-NASD-2003-158 contains the proposed separate Code of Arbitration Procedure for Customer Disputes that will reorganize the current arbitration rules, simplify rule language, incorporate current practices, and implement various substantive changes. It also includes conforming changes to NASD Discovery Guide contents because much of the Guide has been included in the proposed Customer Code.

The three new Codes will replace the current Code in its entirety. Although many rules in the Customer and Industry Codes will be identical, NASD believes that separate arbitration codes will eliminate confusion regarding the applicability of the rules to specific disputes. NASD also believes that a separate Mediation Code will be especially helpful to parties that submit matters directly to mediation.

The Industry and Mediation Codes will be filed with the SEC within the next month. NASD is hopeful that the SEC will publish the three new codes for public comment in 2004.

Arbitrator Compensation for Last Minute Adjournments

In November 2003, NASD filed with the SEC proposed amendments to IM-10104, and NASD Rules 10319 and 10306 (SR-NASD-2003-164). The amendments will impose an additional adjournment fee of $100 per arbitrator, payable by the party whose request for an adjournment is made and granted within three business days of scheduled hearing(s). This new adjournment fee will be paid to the presiding arbitrators as compensation for lost time resulting from last-minute adjournments. The fee also will apply to situations where assigned staff is notified of final settlements within three business days of scheduled hearing(s). However, it will not apply to adjournments of any prehearing conferences.

Arbitrators who participated last year at NASD Dispute Resolution's regional focus groups expressed concern over last minute hearing adjournments. Since appointed arbitrators must reserve hearing dates—which are often scheduled months in advance—they lose the time they spent preparing for the hearing(s), and they also lose the honoraria from the cancelled hearing(s) and any other income they might have earned on the reserved dates.

NASD believes that the proposal will have two effects: it will provide some compensation to presiding arbitrators when hearing(s) are adjourned at the last minute; and it should encourage parties to resolve their disputes sooner.

Messages from the Editor

Dispute Resolution on the Move

To accommodate the hiring of additional staff to administer the continuing growth of the forum's caseload nationwide, NASD Dispute Resolution is acquiring more space in each of its five regional offices. Office additions have been completed in the forum's regional offices located in Chicago; Washington, D.C; New York City; and Boca Raton, Florida. The Los Angeles office will expand early in 2004.

New Hearing Locations

On December 3, 2003, NASD Dispute Resolution announced its partnership with the Chartered Institute of the United Kingdom to offer its first European hearing location in London, England. As a result, parties that agree to the London hearing location will no longer have to travel to New York to arbitrate or mediate their claims. The Institute, which is based in London, will provide the presiding arbitrators or mediators to resolve cases. NASD rules or procedures will apply to all matters submitted for arbitration or mediation.

Effective October 13, 2003, NASD Dispute Resolution also established a new hearing location in Newark, New Jersey. This brings to 50 the number of hearing locations in the United States and Puerto Rico. The Northeast Regional Office of NASD Dispute Resolution located in New York City will administer all claims assigned to the Newark hearing location.

Chairperson Training Reminder

NASD Dispute Resolution offers an exciting and innovative option in the area of arbitrator training: Online Arbitrator Training for Chairpersons. The online program replaced previous Chairperson Training that consisted of precourse reading and in-person classroom instruction.

This informative training is available via our Web site 24 hours a day, seven days a week. The cost of the online training is $100. Participants have one month to complete the course from the time of their enrollment and must receive a passing grade of 80 percent.

If you have not yet been trained as a Chairperson, we strongly encourage you to register for this course. If you have already participated in Chairperson training, you are not required to be re-trained. However, the course includes new and useful information so we encourage even previously trained arbitrators to refresh their skills by signing-up.

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.

Asserting Jurisdiction Over Non-Parties

By Tom Wynn, Editor-In-Chief

There have been instances where a party to a proceeding has requested that the presiding arbitrators assert jurisdiction over a non-party. This article provides procedural guidance on this issue in the form of case law and applicable NASD Rules.


Duty to Arbitrate

In May 1995, the U.S Supreme Court decided a matter titled First Options of Chicago, Inc. v. Kaplan and M K Investments, 514 U.S. 938 (1995). View this case on

By way of background, the Kaplans were the owners of M K Investments (MKI), an investment company. First Options of Chicago Inc. (First Options) cleared stock trades on the Philadelphia Stock Exchange (PHLX). First Options filed an arbitration claim at the PHLX against the Kaplans and MKI for monies owed. The Kaplans contended that they had no duty to arbitrate this dispute at the PHLX because they never signed the agreement to arbitrate. Only First Options and MKI had signed this agreement. However, the PHLX arbitrators asserted jurisdiction over the Kaplans and rendered a $6,000,000 award in favor of First Options against the Kaplans and MKI.

The U.S. District Court confirmed the award. However, the Third Circuit Court of Appeals partially set aside or vacated the award, holding that the Kaplans were not obligated to arbitrate this dispute because they had not signed the agreement requiring arbitration.

The U.S. Supreme Court agreed with the Court of Appeals and held that whether any party has agreed to arbitrate a dispute is a threshold contract issue; that a court will not presume that a party is obligated to arbitrate unless there is a clear, unmistakable agreement to do so; and that even if arbitrators assert jurisdiction over a non-party they will not preclude a court from independently reviewing and deciding this issue.

Questions & Answers

Question: When a party requests that the presiding arbitrators assert jurisdiction over a non-party, what are the arbitrators being asked to determine? How should the arbitrators approach this important issue?

Answer: The arbitrators are being asked to determine that the non-party respondent is obligated to arbitrate this particular dispute at NASD. Since arbitration is a matter of contract, the question for the arbitrators is whether the non-party respondent agreed to arbitrate the dispute at NASD—before or after the dispute arose.

NASD Rules

Non-Party Firm

As a condition of NASD membership, member firms agree to abide by all NASD Rules, including the provisions of the NASD Code of Arbitration Procedure.

Under NASD Rule 10201 (a) and NASD Rule 10301 (a), an NASD member firm or a person associated with a member firm is required to arbitrate all disputes—involving subject matter eligible for submission under NASD Rule 10101—upon request of customers, other member firms, or associated persons.

However, if the non-party firm is not an NASD member and has not signed any agreement to arbitrate the dispute at this forum, this firm and its employees are not obligated to arbitrate here, and the presiding arbitrators should not assert jurisdiction over them—unless the firm or employees voluntarily sign and file Uniform Submission Agreements (USA).

Non-Party Customer

NASD Rule 10301(a) allows claimant customers to require an NASD member firm or a person associated with the member to arbitrate disputes at this forum even if the member firm or associated person has not signed any agreement to arbitrate here.

On the other hand, NASD Rule 10301(a) allows a claimant member firm to require non-party respondent customers to arbitrate at this forum, but only if the customers signed an agreement to arbitrate the dispute at this forum.

If the customer has not signed any agreement to arbitrate the dispute at this forum, the customer is not obligated to arbitrate here, and the presiding arbitrators should not assert jurisdiction over the customer—unless the customer voluntarily signs and files a USA.

Question: Assume that a claimant persuades the presiding arbitrators that a non-party non-member firm or a non-party customer is essential to a full, fair and final determination of the dispute, but this firm or customer has not signed any agreement to arbitrate the dispute at this forum, and declines to voluntarily sign a USA. Under these circumstances, should the presiding arbitrators assert jurisdiction over this non-party firm or non-party customer?

Answer: No. Although a panel may conclude that the non-party firm or non-party customer is essential to a full, fair and final determination of the dispute, it should not assert jurisdiction over them because they have not agreed to arbitrate the dispute at this forum and are not obligated to do so.

Question: What may the presiding arbitrators do where an essential non-party non-member firm or non-party customer has not agreed to arbitrate at this forum and declines to voluntarily sign a USA?

Answer: The panel should consider exercising its authority under NASD Rule 10305 (a). This provision authorizes the presiding arbitrators on their own initiative—as well as at the request of a party—to dismiss the claim "without prejudice" and refer the party to any existing judicial remedies or to any agreed on dispute resolution forum. The panel also may decide to continue the arbitration as to any other respondents that are clearly obligated to arbitrate the dispute at this forum.

Direct Communications Between Parties & Arbitrators

In October 2003, NASD filed with the SEC a proposed new NASD Rule 10334 that provides procedures under which all of the parties and the presiding arbitrators may agree to direct, written communications during a case. Oral communications among parties and arbitrators are permissible only when all parties and arbitrators are present (SR-NASD-2003-163).

The proposed new rule is based primarily on procedures designed and piloted successfully by NASD Dispute Resolution's Midwest Regional Office in Chicago. See the article titled "Direct Communications Pilot Program Survey" in the December 2002 edition of The Neutral Corner.

To use the proposed procedures, all parties must be represented by counsel. All arbitrators and parties must agree to the scope of the direct, written communications and the agreement must be included in an arbitrator order—prior to any such communications. The parties may transmit directly to the arbitrators only those materials listed in the order. Parties may make direct facsimile or electronic transmissions to the arbitrators provided all parties and arbitrators have those capabilities. In addition, any arbitrator or party may rescind the agreement at any time. Should any represented party decide to proceed without counsel, the direct communications' rule ceases to apply.

The proposal to permit parties in an arbitration to communicate directly with the arbitrators if all parties and arbitrators agree, and to establish guidelines for such direct communication is expected to expedite the arbitration process and permit parties to exercise more control over their cases. SR-NASD-2003-163 was filed with the SEC on October 31, 2003, and NASD expects the SEC to publish the rule for public comment shortly.

NASD Pilot California Waiver Rule

In September 2003, NASD requested that the SEC extend the temporary effectiveness of the Pilot Rule in IM-10100 (f) for six additional months through March 31, 2004 or until the pending litigation among NASD Dispute Resolution, Inc., the New York Stock Exchange, Inc., and the Judicial Council of California resolves the question whether the California Arbitrator Disclosure Standards (California Standards) apply to NASD arbitrations (SR-NASD-2003-144). The pilot was originally approved for six months on September 26, 2002; was extended for six months in March 2003; and was to expire on September 30, 2003. The proposed extension was effective on filing.

In October 2003, NASD filed an amendment with the SEC that would extend the Pilot Rule's application to claims filed by members against other members, and to claims filed by members against associated persons that relate exclusively to promissory notes (SR-NASD-2003-153). If the claimant members waive the application of the California Standards to the case, then the respondent members and the respondent associated persons also will be deemed to have waived their application. Until this filing, the Pilot Rule provided that only customers or claimant associated persons had the option of waiving the application of the California Standards and proceeding with the arbitration under NASD Rules. This proposal also was effective on filing.

For more information on the California Standards in this newsletter, see the August 2002, October 2002, April 2003, June 2003, and August 2003 editions of The Neutral Corner.


Linda D. Fienberg
NASD Dispute Resolution

George H. Friedman
Executive Vice President
NASD Dispute Resolution

Jean I. 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

NASD Dispute Resolution Offices

Northeast Region
One Liberty Plaza
165 Broadway
27th Floor
New York, NY 10006
(212) 858-4400
Fax: (212) 858-4429

Mid-Atlantic Region
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Washington, DC 20006
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Fax: (202) 728-6952

Southeast Region
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Western Region
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Fax: (213) 613-2677

Midwest Region
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(312) 899-4440
Fax: (312) 236-9239