Neutral Corner - August 2002
*Note that this issue of The Neutral Corner is being published only via the Web.
NASD Seeks Exemption from California Arbitration Rules
On July 22, 2002, NASD and the New York Stock Exchange (NYSE) filed suit against the California Judicial Council and its members in the United States District Court for the Northern District of California. Both self-regulatory organizations (SROs) are seeking a declaration that they are exempt from the California arbitrator disclosure standards that were implemented in that state on July 1, 2002.
NASD and NYSE contend that the new California rules cannot be applied to SRO arbitration programs or their arbitrators because the programs already operate under extensive federal oversight. In addition, there are conflicts between the new California standards and the NASD and NYSE arbitration disclosure rules. The Securities and Exchange Commission (SEC), which approves SRO arbitration rules, including those relating to arbitrator disclosure, and provides regular oversight inspections of NASD and NYSE arbitration programs, wrote a letter in support of the exemption.
NASD Dispute Resolution President Linda D. Fienberg commented on the effect of the new California arbitration rules as follows: "If self-regulatory organizations...were required to implement the California rules, investors and other parties would be saddled with higher costs, a less efficient and streamlined process, and a much smaller arbitrator roster from which to select the panelists who will decide their cases." See the July 22, 2002 NASD Press Release.
On July 1, 2002, NASD postponed the appointment of arbitrators to new arbitration cases in California because of the state's new arbitration rules. However, the new rules do not affect arbitrators appointed to California cases before July 1, 2002, and NASD continues to accept and process California case filings. In addition, the rules do not apply to arbitration cases outside California.
Since new arbitrator appointments have been postponed, NASD announced practice tips to help California parties deal with the delay in their cases, while the exemption issue is pending in court. For example, NASD urges investors who believe they have disputes with their brokers not to delay the filing of their cases with an SRO forum because there are substantive statutes of limitations that specify the amount of time investors have between the time a dispute arises and the time a claim is required to be filed.
For pending California arbitrations, NASD advises that parties can agree to have their cases heard in non-California locations such as Las Vegas or Reno, Nevada; Phoenix, Arizona: Portland, Oregon; or Seattle, Washington. Parties also can agree to have California arbitrators or arbitrators from these states hear and decide the controversy. The parties will not be charged for any arbitrator travel or related expenses. NASD also encourages parties to mediate their California cases and has waived its administrative mediation fees and requested its mediators to offer their services at a reduced rate during this time frame.
For additional information, including whom you should contact to discuss the above, read the July 29, 2002 "Notice to Parties in California Arbitration Matters".
Messages from the Editor
Mediation Advocacy Seminar
On October 21, 2002, NASD Dispute Resolution will conduct this program at the Sheraton San Diego Hotel and Marina prior to the NASD Fall Securities Conference on October 22 and 23, 2002.
The pre-conference program is designed to improve the mediation advocacy skills and knowledge of those who practice or expect to participate in securities mediations.
San Juan, Puerto Rico
NASD Dispute Resolution is in the process of recruiting arbitrators and mediators to resolve cases in this recently established hearing location.
NASD Adds Spanish Language Material to Its Dispute Resolution Web Site
On July 10, 2002, NASD announced that its Dispute Resolution division had enhanced its Web site by providing information in Spanish. The Web site now provides links to important investor information in Spanish, as well as links to translated documents providing overviews of the dispute resolution process for parties and arbitrators.
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, 125 Broad Street, 36th Floor, NY, NY 10004. Call the Editor at (212) 858-4392 for editorial guidelines.
Arbitration Statistics Through the End of July 2002
Filings through July
Close-outs through July
By Tom Wynn, Editor-In-Chief
This article describes the arbitrator's duty and authority to maintain decorum during hearings. It also suggests available measures to help control the hearing and ensure the finality of arbitrator decisions.
Canon I of the Code of Ethics for Arbitrators in Commercial Disputes (Code of Ethics) provides that arbitrators should uphold the integrity and fairness of the arbitration process. To help ensure process fairness, Canon I explains that arbitrators should make reasonable efforts to prevent harassment of any hearing participant, or any other abuse or disruption of the hearings; and they should make this effort throughout a proceeding.
Canon IV of the Code of Ethics provides that arbitrators should conduct fair and diligent hearings. Canon IV makes it clear that fairness starts with exemplary arbitrator conduct when it states that arbitrators should treat all parties in a fair, even-handed manner, and act with courtesy and patience in dealing with parties, lawyers, and witnesses.
In most cases the parties and their representatives conduct themselves properly during the evidentiary hearings. However, there are times when tempers flare, and statements or other conduct become disorderly. Misconduct can take many forms, including witness or party harassment, uncalled for interruptions, vulgar language, name-calling, or rude gestures.
Although arbitrators are ethically obligated to treat everyone fairly, they should not permit improper demeanor, whether it is aimed at a party, representative, or a witness. All hearing participants, including the presiding arbitrators, have a right to expect everyone to act in a reasonable fashion during the entire proceeding. At the outset of the first evidentiary hearing, the Chairperson reads the Hearing Procedure Script (Hearing Script). The Hearing Script includes a statement titled "Expected Conduct" that reminds all participants to conduct themselves properly during the hearings. You can review the Hearing Script in the Arbitrator's Reference Guide.
When misconduct occurs, the Chairperson and the other arbitrators should act quickly to diffuse the situation and maintain decorum. Ordinarily, this can be accomplished by means of neutrally-delivered statements that convey the importance of process fairness, and zero tolerance for abusive conduct. The comments may be accompanied by a 'time-out'--where everyone can absorb this important message and calm down--off the hearing record.
However, if the statements and breaks do not succeed in eliminating the abuse or disruptions, arbitrators are authorized to take a number of actions to help ensure fair proceedings. NASD Rule 10324 provides arbitrators with full discretion to act appropriately to enforce their orders, whether the orders relate to the misconduct of a hearing participant, or the production of documents or witnesses.
For example, arbitrators may assess a variety of costs and expenses under NASD Rules 10332 or 10205. In addition, if an NASD member firm or a person associated with a member firm does not comply with an arbitrator order, the panel may refer the non-compliance to NASD's Enforcement Department for appropriate action after the case concludes. To view appropriate regulatory action, read the article titled "National Adjudicatory Council Affirms Sanctions" in the June 2002 edition of The Neutral Corner.
NASD Rule 10305 authorizes arbitrators to dismiss the proceeding "without prejudice" to any party's existing right to resubmit the claim or defense at this or another forum. If the arbitrators believe that a party's non-compliance is material and intentional, and lesser sanctions have not been effective, NASD Rule 10305 also authorizes them to dismiss claims, defenses, or the proceeding "with prejudice"--meaning with no right to resubmit the claim or defense at any time and at any forum. Review "Arbitrators' Power to Issue Orders" in The Arbitrator's Manual.
If counsel is the cause of serious disruptions or abuse, the panel cannot sanction counsel because an agreement to represent a party is not an agreement to submit to these arbitrator powers. However, the panel is not powerless to act under these circumstances. The panel can take any of the preceding actions against the party represented by the offending counsel. In other words, if the panel orders counsel to refrain from disruptive conduct, and the conduct continues, it may hold the client responsible for counsel's demeanor and take appropriate actions against the client.
As stated earlier, these actions/sanctions may include an assessment of postponement fees if counsel's actions cause postponements or an assessment of appropriate forum fees, attorneys' fees, or other expenses and costs in the award. If the arbitrators determine that the attorney's conduct is extraordinarily disruptive, they can dismiss a claim or a defense "with prejudice" provided his/her non-compliance is significant, intentional, and lesser actions have not achieved compliance.
Lastly, if the represented party is an NASD member firm or an associated person, arbitrators also can refer these industry clients to NASD Enforcement for appropriate discipline because of their counsel's non-compliance with the order to refrain from disruptive conduct.
For more on proper advocacy, read the article titled "Advocacy With Civility: A Prescription For Success" by Constantine N. Katsoris, in the January 2001 edition of The Neutral Corner. Also, see The "Top Ten" Standards Of Good Practice At Arbitration Hearings.
Arbitrators should always use executive sessions to discuss and decide what may be needed to secure proper demeanor. In addition, before they determine to take action against any hearing participant for non-compliance with their order to refrain from abusive or disruptive conduct, they should make a record.
The record at the hearing should include: a description of the misconduct; prior panel warnings to curb the misconduct; and the possible consequences of the misconduct if it persists. If the arbitrators ultimately determine that particular actions or sanctions are appropriate and should be taken to obtain participant compliance with their order, the hearing record also should include these panel decisions and the underlying reasoning.
In addition, arbitrators should include the above decisions and reasons in the "Other Issues Considered and Decided" part of award. You can review this portion of the award in the Award Template contained in the Arbitrator's Reference Guide.
When arbitrators make a record--both at the hearing and in the award--they are providing information that helps a reviewing court uphold their actions. At the same time, they are helping to protect the award from being set aside or vacated on grounds that these actions constituted serious arbitrator misconduct that prejudiced a party's right to a fundamentally fair hearing. See the grounds upon which awards may be vacated under the United States Arbitration Act.
Arbitrators who describe disruptive conduct and the actions taken to maintain decorum in the award also provide a service to all forum participants and enhance this forum's reputation for fairness.
Question & Answer on Arbitrator Travel Reimbursement
According to NASD Dispute Resolution's Guidelines for Arbitrator Expense Reimbursement, if I live closer than 120 miles from my primary hearing location, the policy is to reimburse me for local transportation expenses incurred in traveling to and from the hearing location. Your nearest hearing location is 85 miles away from my home, and I find it difficult to make the round trip in one day. Why can't people like me be reimbursed for overnight expenses?
While we recognize that some neutrals are unhappy with our travel reimbursement policy, we assure you that we carefully considered the issue prior to formulating the guidelines contained in the Arbitrator's Reference Guide. NASD Dispute Resolution is committed to controlling costs in order to insure that the process remains of the highest quality, and yet is affordable to all parties. Arbitrator payments constitute one of our highest costs. It was for this reason that we designed the travel reimbursement policy.
SR-NASD-2001-41-proposed amendments to NASD Rules 10308 And 10313 relating to arbitrator selection were withdrawn. SR-NASD-2001-55--proposed rule change that would permit optional direct service of claims also was withdrawn.
The above proposals were filed in anticipation of a new computer system. Although the implementation of this new system is scheduled for 2003, the exact date is not yet set. Since the effective dates of the rule changes could not be definitely scheduled, the SEC asked NASD Dispute Resolution to withdraw them at this time.
On July 17, 2002, the SEC approved SR-NASD-2002-15--default procedures for cases in which a suspended, terminated, or otherwise defunct NASD member firm or associated person fails to answer or participate in an arbitration proceeding, and all claimants elect to pursue the claim against such respondents. View SEC Order approving this amendment to NASD Rule 10314.
On July 25, 2002, the SEC approved SR-NASD-2002-62--the proposal to conform minimum answer requirements to the minimum claim requirements of NASD Rule 10314. View SEC Order approving this amendment to NASD Rule 10314.
The effective date of both new rules will be announced in the September 2002 Notices to Members.
Director's Expanded Power to Remove Sitting Arbitrators
By Rachel D. Glasgow
In December 2000, the SEC approved amendments to NASD Rules 10308 and 10312 providing the Director of Arbitration (Director) with authority to remove arbitrators for cause even after the first prehearing conference or hearing session begins. The amendments became effective March 8, 2001 and apply to all cases regardless of the date the arbitration claim was filed. This article describes the amendments and examines their impact on the parties, the arbitrators and the arbitration process.
Prior to the enactment of the amendments, the Director had no authority to remove a challenged arbitrator after the first prehearing conference or hearing session started. At that time, the parties could make a motion for arbitrator recusal or seek relief in a court. Generally, these options did not appeal to the parties because of the perceived negative implications of asking an arbitrator to remove himself/herself and the costs associated with obtaining judicial intervention. As a result of these drawbacks, parties rarely availed themselves of these alternatives. It was, therefore, possible for an arbitrator with an actual or perceived conflict of interest to remain on a case, and jeopardize the integrity of the arbitration process.
Under the amended rules, the Director has authority to remove an arbitrator at any stage of the proceeding. However, this expanded authority has important restrictions. First, after the commencement of the first prehearing or hearing session, the Director may only remove an arbitrator based upon information not known to the parties when the arbitrator was selected. Second, this authority is non-delegable—only the Director or the President of NASD Dispute Resolution may remove a presiding arbitrator.
With respect to the first limitation, since the amended rules state that the Director may only remove an arbitrator based upon information not known to the parties when the arbitrator was selected, the parties cannot remove an arbitrator because of dissatisfaction with his/her rulings. Similarly, an arbitrator cannot be removed based upon information known and subsequently considered objectionable by a party. Also, it is not sufficient that the arbitrator did not disclose the information; it also must have been unavailable to or not previously known by the challenging party. These limitations help to ensure that selected arbitrators are not removed from panels at the whim of the parties.
In fact, since these amendments became effective almost 18 months ago, the Director has approved 11 out of 39 requests to remove a sitting arbitrator. In this regard Director George H. Friedman stated that the "data show that there has not been a wholesale removal of arbitrators." According to Friedman, "in an overwhelmingly large percentage of cases, the arbitrators and parties get it right; the rules are intended to allow the Director to act in the small percentage of cases when they don't."
The second limitation relates to those authorized to remove a presiding arbitrator. As mentioned earlier, the authority to disqualify an arbitrator is limited to the Director of Arbitration or the President of NASD Dispute Resolution; and the authority cannot be delegated. This limitation addressed user concerns about the staff's expanded power to remove selected arbitrators and to do so in a consistent manner nationwide.
The amendments also expand the scope of arbitrator disclosures and broaden the basis for the Director's removal of arbitrators. The amended rules make it clear that arbitrators must disclose all circumstances that are likely to affect impartiality or might reasonably create an appearance of partiality or bias. These changes help to increase confidence in the neutrality of the arbitration process by assisting the parties in their effort to make informed arbitrator selections.
Based upon the preceding statistics, it is clear that the intended narrow scope of these amendments--to provide a remedy in a limited number of cases involving actual conflicts of interest--has been accomplished. These situations arise when information is not disclosed to the parties. There is a lesson to be learned here. Whenever you are in doubt about disclosing information, please disclose it because more disclosure lessens the likelihood that the Director will be called upon to remove you from service.
Rachel D. Glasgow started working with NASD Dispute Resolution in the fall of 1995. Her work at NASD includes being an intern, a legal assistant and a staff attorney. In 1998, she assumed the additional responsibilities of supervising a team of staff attorneys and legal assistants. In May 2001, she was promoted to Senior Attorney. In addition to administering a caseload and supervising a team, Rachel is a Code Specialist and a liaison to the NAMC Rules and Procedures Subcommittee.
Rachel is a member of the New York and New Jersey State Bars. Rachel received her JD from the Benjamin N. Cardozo School of Law and has a BA in Math and Spanish from the State University of New York at Binghamton. In May 2003, she will receive her MBA from Fordham University. Rachel also co-authored an article for Marketing News titled "U.S., Europe Look to Ease Market Stress" August 13, 2001.
Linda D. Fienberg
NASD Dispute Resolution
George H. Friedman
Executive Vice President
NASD Dispute Resolution
Associate Vice President & Chief Counsel
Associate Vice President, Operations
Kenneth L. Andrichik
Mediation and Business Strategies
Barbara L. Brady
John C. Barlow
Elizabeth R. Clancy
Associate Vice President,
Judith Hale Norris
Associate Vice President,
Washington, D.C. Office
Editor, The Neutral Corner
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