NASD DR Seeks to Tighten Definition of "Public Arbitrator"
Washington, D.C. — NASD Dispute Resolution announced today it has filed a new rule proposal with the Securities and Exchange Commission to further tighten the definition of who can serve as a public arbitrator in its Dispute Resolution forum. The proposal is designed to ensure that individuals with even indirect ties to the securities industry are not able to serve as public arbitrators.
The new rule would exclude from serving as public arbitrators officers, directors and employees of any entity that is in a "control relationship" with a broker-dealer, as well as their spouses and immediate family members. Such an entity is one that directly or indirectly controls, is controlled by, or is under common control with a broker-dealer.
The new rule proposal follows several important changes to arbitrator classification rules made in July 2004 to tighten the definition of public arbitrator. Those modifications included increasing from three years to five years the period for transitioning from a non-public to a public arbitrator; prohibiting anyone who has been associated with the industry for 20 years or more from ever becoming a public arbitrator; prohibiting attorneys, accountants, and other professionals whose firms derive 10 percent or more of their annual revenue from clients involved in the securities business from serving as public arbitrators; and excluding investment advisers from serving as public arbitrators.
NASD DR also announced today that it is launching a pilot program designed to increase the efficiency of the discovery process and to curb abuses in that process. The program starts August 1 in all the hearing locations served by NASD DR's Southeast Regional Office in Boca Raton and West Regional Office in Los Angeles. If the pilot program proves successful, it will be expanded to NASD DR's other hearing locations.
Parties to arbitrations will be able, on a voluntary basis, to avail themselves of a "discovery arbitrator" who will resolve all discovery disputes prior to the actual hearing, but who will not be part of the three-member panel selected to hear the merits of the case. NASD DR has created a roster of discovery arbitrators for each region, made up of public arbitrators who are lawyers with experience in resolving discovery-related disputes. A discovery arbitrator will be appointed only when all parties to the arbitration have signed an agreement to use a discovery arbitrator. Only those parties represented by counsel are eligible to participate in the pilot.
The discovery arbitrator has the authority to issue monetary and evidentiary sanctions against any party for failing to comply with discovery rulings, submitting frivolous discovery motions or responses, or otherwise abusing the discovery process.
NASD DR has taken numerous steps to emphasize to all parties their obligations to cooperate in the exchange of documents and information during arbitration. In a Notice to Members issued in November 2003, NASD DR indicated it would continue to monitor for compliance and would refer any perceived abuses to the enforcement side of NASD for investigation and disciplinary review. In January 2004, NASD DR issued a Notice to Parties with a similar message.
In July 2004, NASD brought an enforcement action against three firms - Citigroup, Merrill Lynch and Morgan Stanley - fining them each $250,000 for failing to comply with their discovery obligations in 20 arbitration cases between 2002 and 2004. NASD also ordered the firms to implement written procedures designed to ensure that future discovery violations that lead to sanctions are elevated to senior officers for review and appropriate corrective action.
NASD Dispute Resolution is the largest securities dispute resolution forum in the world. NASD facilitates the efficient resolution of monetary, business, and employment disputes between investors, securities firms, and employees of securities firms by offering both arbitration and mediation services through a network of hearing locations across the United States.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity 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 member firms. For more information, please visit our Web Site at www.nasd.com.