Arbitration Task Force Issues 70 Recommendations in Largest Revamping of Securities Arbitration Since Its Start More Than a Century Ago
Washington, D.C.—A high-level arbitration policy task force under former Securities and Exchange Commission (SEC) Chairman David S. Ruder today issued more than 70 recommendations representing the most comprehensive revamping of securities industry arbitration since it was established to resolve investor disputes more than a century ago.
The eight-member task force was appointed in September 1994 by the Board of Governors of the National Association of Securities Dealers, Inc. (NASD), which provides a forum for 85 percent of the arbitration claims brought in the securities industry each year.
The recommendations would suspend the six-year eligibility rule and provide for earlier resolution of federal and state statute of limitations issues. Further, they would permit investors who can sue for punitive damages in courts of their home state to seek punitive damages for the same claims in arbitration with securities firms. The damages would be subject to a cap, following a growing trend in federal and state law limiting punitive damages. The recommendations would also require early production of documents and swift resolution of discovery disputes; place selection of arbitrators in the hands of the parties under a list selection method; increase training programs for arbitrators; and overhaul procedures under which securities arbitration claims are brought, heard, and resolved.
"Fairness, speed, and low cost are the focus of our changes," said Mr. Ruder. "Our integrated package of recommendations will preserve and enhance a system that has benefited both investors and the securities industry. The recommendations will prevent unnecessary collateral litigation, increase arbitrator quality and efficiency, reduce aggressive litigation tactics, and offer mediation and early neutral evaluation as low-cost alternatives. These changes will enhance investor rights and protect the securities industry from runaway damage awards."
"These changes will revitalize, simplify, and prepare for the future a dispute resolution system that has served investors and securities firms well over the years," said Joseph R. Hardiman, NASD President. Mr. Hardiman said the NASD Board has instructed the staff to prepare an implementation plan for consideration by the Board at its March meeting.
The task force recommended that the industry continue to be allowed to enter into predispute agreements with their customers, saying it believes securities arbitration offers "a more efficient, faster, and cheaper process than court litigation." Predispute arbitration agreements require investors and member firms to resolve their disputes in an arbitration forum. The enforceability of such agreements was upheld in 1987 by the United States Supreme Court.
The task force recommended expanded "plain English" disclosures in arbitration agreements regarding the implications of arbitration, including comparisons with judicial rights and remedies. Other recommendations would limit use of choice-of-law provisions in arbitration agreements to curtail rights investors would otherwise have in a judicial forum.
The task force worked for some 15 months, interviewing representatives of investor and consumer groups, securities regulators, securities exchanges, securities firms, firm employee groups, arbitrators, and others interested in or involved with securities arbitration.
The following were among the task force's major recommendations:
Suspend the six-year eligibility rule and resolve issues of whether an arbitration claim is time barred by more vigorously applying applicable state and federal statutes of limitations. The current rule, under which claims must be brought within six years of the date of the event giving rise to the dispute, would be suspended for three years, during which time enhanced procedures for statute of limitations decisions would be implemented. The present rule has been the subject of time-consuming and expensive collateral litigation in court, frequently over the issue of what event triggered the running of time under the rule.
Bar collateral court litigation over procedural issues in arbitration until after the arbitration award. Because frequent litigation over the timely status of claims and other procedural issues brings long, expensive delays in dispute resolution, the panel recommended that parties be required to seek resolution of such issues in the arbitration forum and not in collateral court litigation.
Enable investors to seek punitive damages whenever such damages are available in the investor's judicial forum. Such damages would be limited to the lesser of twice the amount of compensatory damages awarded or $750,000. Many federal and state statutes limit punitive damages to this amount or to lesser amounts.
Simplify document production and other discovery, and require early resolution of any discovery dispute. In its report the task force observed that the conduct of discovery in arbitration proceedings threatened the relatively simple and cost-effective nature of securities arbitration. Under the task force proposals, most document discovery would be limited to specified essential documents which would be required to be produced early in the process.
Expand use of simplified arbitration procedures under a single public arbitrator, in which most disputes are resolved without a hearing, to include all claims in which total damages sought do not exceed $30,000. The task force recommended that current, simplified procedures, involving a single public arbitrator who decides claims based on the parties, written submissions, apply to claims that do not exceed $30,000.
Enlarge use of mediation and introduce early neutral evaluation (ENE) to encourage opportunities for settlement of disputes. The task force recommended that the NASD expand its mediation program introduced in 1995 and also initiate a two-year pilot early neutral evaluation program under which a percentage of cases would be required to participate. In ENE, which has been very successful in a number of court systems, the neutral provides the parties with an assessment of the strengths and weaknesses of the case early in the proceeding.
Provide for list selection of arbitrators and expand the available pool of qualified arbitrators through improved training, increased compensation, and other measures. The task force recommended that the NASD adopt a list selection process similar to the one used by the American Arbitration Association. This system would give the parties the ability to select the arbitrators who would decide their cases.
The task force said the mounting arbitration caseload in the securities industry, as elsewhere, required an expanded pool of experienced arbitrators. It recommended that arbitrator compensation be increased; that arbitrators, especially panel chairs, receive expanded training; and that arbitrators control the scheduling and postponements of hearing sessions. The group also recommended that arbitrators be impaneled early, so that the arbitrators, and especially the panel chair, can play a much greater role in pre-hearing matters such as discovery.
Mr. Ruder, SEC Chairman from 1987 to 1989, is the William W. Gurley Memorial Professor of Law at Northwestern University School of Law in Chicago. He is a former Dean of the School. Mr. Ruder is Senior Counsel to the law firm of Baker & McKenzie. He formerly served as a Member of the NASD Board of Governors.
In addition to Mr. Ruder, members of the task force included Linda D. Fienberg, Partner, Covington & Burling, Member, NASD Legal Advisory Board, NASD National Arbitration and Mediation Committee, and formerly Executive Assistant to the Chairman and Associate General Counsel of the SEC, who also served as reporter to the task force; John Bachmann, Managing Principal, Edward T. Jones & Co., and formerly Chairman of the Securities Industry Association; Stephen J. Friedman, Partner, Debevoise & Plimpton, and formerly SEC Commissioner, Executive Vice President and General Counsel of The Equitable Life Assurance Society of the United States, and Executive Vice President and General Counsel of The E. F. Hutton Group, Inc.; Stephen L. Hammerman, Vice Chairman and General Counsel, Merrill Lynch & Co., Chairman, Merrill Lynch, Pierce, Fenner & Smith, and Member, New York Stock Exchange Board of Directors, and formerly Member and Chairman, NASD Board of Governors, and SEC New York Regional Administrator; J. Boyd Page, Partner, Page & Bacek, Director, Officer, and past President of the Public Investors Arbitration Bar Association (PIABA), and formerly Public
Member of the NASD National Arbitration and Mediation Committee; Francis O. Spalding, Professional Arbitrator and Mediator, Public Member and past Chair of the NASD National Arbitration and Mediation Committee, and author and lecturer on alternative dispute resolution; and Richard E. Speidel, the Beatrice Kuhn Professor of Law of the Northwestern University School of Law and co-author of a five volume treatise on federal arbitration law.