Neutral Corner - April 2003
SEC Publishes NASD Expungement Rule
In November 2002, NASD filed with the Securities Exchange Commission (SEC) a proposal to adopt NASD Rule 2130 (File No. SR-NASD-2002-168). In January 2003, NASD filed an amended rule proposal that the SEC has now published for public comment. If approved by the SEC, the rule will govern requests from NASD member firms and associated persons to expunge customer dispute information from the Central Registration Depository (CRD)1. For purposes of this rule, customer dispute information includes arbitration claims, customer complaints, court filings made by customers, and arbitration awards or court judgments that may result from these claims or filings.
In January 1999, NASD imposed a moratorium on arbitration awards that directed the expungement of customer dispute information from the CRD system. Under the moratorium, NASD does not honor these arbitrator directives unless the awards are confirmed by a court of law. The proposed rule will make the existing moratorium permanent—with a limited exception for certain intra-industry awards involving defamatory statements on the Form U-5 termination notice. For more on the moratorium and the limited intra-industry exception, read the article titled "Expungements" in the December 2001 edition of The Neutral Corner.
In addition, the proposal, which is the result of lengthy consultations between the North American Securities Administrators Association (NASAA)2 and NASD, contains procedures for handling these expungement requests. The rule requires that NASD members or associated persons name NASD as an additional party in any court proceeding in which they are seeking an order to expunge customer dispute information or requesting confirmation of an arbitration award that directs such relief. Upon request, however, the rule permits NASD to waive this requirement, if it determines that the expungement meets one of the standards set forth below. In other words, NASD will waive the requirement that it be made a party in these judicial proceedings—provided the court order or arbitration award directing expungement contains, at least, one of the following findings:
- The claim, allegation or information is without factual basis (i.e., factually impossible or clearly erroneous);
- The complaint fails to state a claim upon which relief can be granted or is frivolous; or
- The information contained in the CRD system is defamatory in nature.
Under the proposed rule, NASD also retains authority to waive, upon request, the member's or associated person's obligation to name NASD as a party in these court proceedings where the expungement of customer dispute information is not based on one of the preceding standards. However, NASD will make this exception and waive the requirement only if it determines that the basis of the expungement is justified and the removal of the customer dispute information from CRD will not have any material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.
If the expungement order—being sought from a court or directed by arbitrators in the award—does not meet one of the standards of NASD Rule 2130, as discussed above, NASD will participate in the judicial proceedings and oppose the expungement of the customer dispute information.
1 The CRD system is the registration and licensing system for the United States securities industry and its federal and state regulators and self-regulatory organizations and is jointly administered by NASD and NASAA. Federal and state laws require comprehensive reporting of each broker's administrative information, including personal, employment, and registration data as well as disclosure information (e.g., criminal, regulatory, customer complaint/dispute and financial) prior to and throughout the broker's securities career. Individual broker and firm information collected through the CRD system is used by federal and state securities regulators and the securities industry for regulatory and compliance purposes. Selected information from the CRD system is made available to investors by NASD upon request through NASD BrokerCheck and by state regulators under state law.
2 NASAA is the oldest international organization devoted to investor protection. It is a voluntary association whose membership consists of 66 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, Canada, and Mexico. In the United States, NASAA is the voice of the 50 state securities agencies responsible for efficient capital formation and grassroots investor protection.
Messages from the Editor
NASD Pilot Rule Extended
On March 31, 2003, NASD filed with the SEC (SR-NASD-2003-64) an extension of the pilot rule in IM-10100(f) and (g) of the Code of Arbitration Procedure. NASD requested an extension of the pilot rule for an additional six months or until pending litigation resolves the question of whether the California arbitrator disclosure standards apply to NASD arbitration. The proposal was effective upon filing.
The pilot rule, which became effective on September 30, 2002, requires industry parties in California arbitrations to waive the application of the contested California standards if (1) all investor/customers waive these standards or (2) persons associated with NASD member firms with claims of statutory employment discrimination waive these standards.
NASD Spring Securities Conference
The 2003 NASD Spring Securities Conference will be held April 30-May 2 in Florida. Congressman Mike Oxley, Chairman of the House Financial Services Committee and co-author of the 2002 Sarbanes Oxley Act, will be the keynote speaker. NASD is also hosting a pre-conference program focusing on small firm compliance issues taking place April 30.
View the conference agenda and information about how to enroll.
Arbitration Statistics Through the End of March 2003
Filings through March
Close-outs through March
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.
Questions & Answers on Keeping a Record of Arbitration Proceedings
Question: Are presiding arbitrators required to keep a record of the arbitration hearings?
Answer: Yes. NASD Rule 10326 provides, in pertinent part, the following: A verbatim record by stenographic reporter or a tape recording of all arbitration hearings shall be kept.
Although all of the parties in a particular case may request—at their own expense—that the official record of the proceeding be a stenographic record, this is an occasional occurrence. Ordinarily, a tape recording is the official record at NASD arbitration hearings.
Question: Why is the requirement that presiding arbitrators tape record the proceeding so critically important?
Answer: When arbitrators do not tape record a proceeding as required under NASD Rule 10326, this failure interferes with the rights of the parties to review or copy hearing presentations or other related events. This failure undermines arbitrator and forum integrity. In addition, this failure precludes NASD Dispute Resolution from maintaining a required record of the proceeding under NASD Rule 10326.
Question: How can the presiding Chairperson and the other panel members help ensure that a required tape recording of the proceeding is kept?
Answer: To perform this essential function, the Chairperson and his/her co-panelists must be aware of its importance to the hearing participants and to this forum, as set forth previously. In addition, arbitrators should follow the guidance of assigned staff—guidance contained in the "Hearing Procedure Script" used by arbitrators when conducting evidentiary hearings. These important guidelines include the following:
- Use the tape recorder to record the entire proceeding with the exception of executive sessions or breaks.
- Make sure the tape recorder is turned off during executive sessions or breaks.
- Make sure all tapes are left in a secure location during executive sessions, lunch, or other breaks.
- Label each used tape with the case name and number; the hearing date; and a tape number.
To facilitate tape identification and the specific tape location of hearing events (e.g. motions, opening remarks, witness testimony, etc.), arbitrators should use the "Tape Log" form contained in the arbitrator case packet booklet titled "NASD Dispute Resolution Information and Forms for Arbitrators."
- Be sure the tape recorder is operating correctly.
If the recorder is not operating correctly or if the tape needs to be turned over or changed, advise the Chairperson to stop the hearing to permit an explanation or other appropriate action.
- When you finish using a tape, punch out the plastic tabs on the top of the tape to prevent any alterations or erasures.
- Always return all tapes to assigned staff at the end of the hearing.
Please be advised that failure to follow these procedures may be grounds for removal of an arbitrator from the NASD roster.
View the tape recording guidance contained in the "Hearing Procedure Script" found in the Arbitrator's Reference Guide.
Questions & Answers on NASD Arbitration Confidentiality
Question: I served as a panel member in a controversial arbitration where the award was significant. During a Bar Association function a few months later, a party representative approached me and tried to discuss the case, including the arbitrator deliberations. I declined to discuss the case and politely stepped away. Did I do the right thing?
Answer: Absolutely. Canon VI of the Code of Ethics for Arbitrators in Commercial Disputes provides: An Arbitrator should be faithful to the relationship of trust and confidentiality inherent in that office. Subparagraph B of Canon VI states: Unless otherwise agreed to by the parties, or required by applicable rules or law, an arbitrator should keep confidential all matters relating to the arbitration proceedings and decision.
Since NASD arbitrators agree to serve in accordance with the applicable provisions of the Code of Ethics when they apply to become arbitrators, Canon VI B continues to obligate all of the presiding arbitrators to maintain the confidentiality of the process—even after the award is rendered—unless some other applicable rule or law requires otherwise.
View the NASD Arbitrator Application.
Question: What is the scope of the arbitrator's duty to maintain the confidentiality of NASD arbitration?
Answer: The arbitrator's duty to maintain the confidentiality or privacy of the process extends to all aspects of the arbitration—to panel deliberations or other panel discussions in executive session; to evidentiary and other procedural decisions; to the contents of filed or amended claims and other pleadings; and to the motions, testimony, documents, oral or written statements/arguments made during the prehearing or evidentiary stages of the proceeding.
View Canon VI B of the Code of Ethics. Also, read "Confidentiality of Arbitration Proceedings" in the Arbitrator's Manual.
Question: Can you provide exceptions to the confidentiality of NASD arbitration?
Answer: Although presiding arbitrators cannot discuss the award or their deliberations, NASD Dispute Resolution is required to make awards publicly available under NASD Rule 10330(f). Another exception to process confidentiality is the authority of presiding arbitrators to make referrals for regulatory review at the conclusion of a case. While arbitrators cannot discuss the filed pleadings, testimony, or documents they considered in disposing of all properly submitted claims, defenses, or other important issues in the award, they may request, under NASD Rule 10105 that an appropriate NASD District office review the evidence, case-related materials or communications to ascertain whether the conduct of NASD members or persons associated with members may have violated NASD Rules or securities laws.
For more information on arbitrator authority to make regulatory referrals, read the article titled "Questions & Answers on Referrals for Regulatory Review" in the February 2003 edition of The Neutral Corner (TNC).
Linda D. Fienberg
NASD Dispute Resolution
George H. Friedman
Executive Vice President
NASD Dispute Resolution
Vice President & Chief Counsel
Associate Vice President,
Director of Operations
Kenneth L. Andrichik
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
Associate Vice President &
Regional Director, Southeast Region
Editor, The Neutral Corner
NASD Dispute Resolution Offices
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