SEC Approves NASD Arbitrator Classification Rule Changes
Amendments Designed to Enhance Confidence in Fairness, Neutrality of the Process
Washington, D.C. —NASD today announced that the Securities and Exchange Commission (SEC) has approved rule amendments that further define several key arbitration rules, in an effort to provide additional assurance that individuals with ties to the securities industry may not serve as public arbitrators.
The NASD Code of Arbitration Procedure classifies arbitrators as "public" or "non-public." NASD currently defines public arbitrators as individuals who are qualified to serve as arbitrators and who are not either personally engaged in certain activities that would make them non-public, or the immediate family member of a person engaged in such activities.
Non-public arbitrators have a connection to the securities industry, as defined in NASD rules. When investors with a dispute against their brokers file claims in NASD arbitration, their cases are heard by either a single public arbitrator or a panel consisting of two public arbitrators and one non-public arbitrator, depending on the amount of the claim.
For non-public arbitrators who have worked in the securities industry, the proposal would amend these definitions to:
- Increase from three years to five years the period for transitioning from a non-public to public arbitrator after leaving the securities industry;
- Clarify that the term "retired" from the industry includes anyone who spent a substantial part of his or her career in the industry; and
- Prohibit anyone who has been associated with the industry for at least 20 years from ever becoming a public arbitrator, regardless of how long ago the association ended.
In addition, the proposed rule change would:
- Exclude from the public arbitrator roster attorneys, accountants, and other professionals whose firms have derived 10 percent or more of their annual revenue in the previous two years from clients involved in the securities-related activities, and
- Provide that investment advisers may not serve as public arbitrators.
The proposed rule change would also expand the definition of "immediate family member" to include parents, stepparents, children and stepchildren, or anyone who is the member of the household of a non-public arbitrator, whether related or not. The proposal also clarifies related areas of the code by strengthening the standards for disqualifying arbitrators and clarifying the arbitrator's duty to disclose and update potential conflict-of-interest information.
The amendments will take effect on July 19, 2004. Details of the arbitration code changes have been published in a Notice to Members.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business — from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms.
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