Originally published June 29, 2005

The President of NASD Dispute Resolution, Inc., Linda Feinberg, issued guidance to NASD arbitrators on a variety of subjects of potential importance to the industry during a conference call on June 28, 2005:

  • Replying to an arbitrator’s question regarding arbitrators’ duty to follow the substantive law that applies to parties’ claims, Feinberg responded:

"As you all know, in arbitration, arbitrators are not strictly bound by legal precedent. However, they should be guided in their analysis by the underlying policies of the law. They are given wide latitude in their interpretation of legal concepts. If the parties provide the panel with the law and the law is clear and applicable to the facts of the case, in those situations you should follow the law as presented by the parties. In certain jurisdictions, manifest disregard of the law is a basis for courts to vacate or set aside a panel’s award."

  • NASD has asked the SEC to approve an amendment to Rule 10330, providing that customers and associated individuals may require that arbitrators provide a written explanation addressing their disposition of each claim, by filing a demand for an explained decision no later than 20 days prior to hearing. A member firm that is party to an arbitration may request an explained decision, but under the proposal the panel can refuse the request. As is the case under the current Code of Arbitration Procedure, where the vast majority of awards are issued without explanation, explained decisions will still not be considered to carry any precedential weight. Feinberg characterized the proposal as part of NASD’s continuing efforts "to enhance investor confidence." That characterization is perhaps noteworthy, in light of recent NASD efforts to fashion the organization as a protector of the consumer and to fend off charges of pro-industry bias. NASD submitted its proposed rule 10330(b) for SEC review on March 15, 2005. The proposal has not yet been circulated by the SEC for the formal comment process, but NASD acknowledges it has already received negative feedback from a number of quarters.

  • NASD intends to file a proposed rule with the SEC in mid-to-late July under which the definition of a "public" arbitrator will be tightened to exclude arbitrators who are affiliated with (or have immediate family affiliated with) companies that control, or are controlled by, a securities firm. Again, Feinberg suggested this rule was another effort to make the arbitration process appear more "fair" to public customers.

  • NASD is launching a pilot program in its Southeast and West regions under which, with unanimous consent of the parties, a "discovery arbitrator" with special expertise in discovery issues will be appointed to decide pre-hearing, non-dispositive discovery motions. The discovery arbitrator, who will come from the roster of certified NASD arbitrators, will not be eligible to sit on the arbitration panel of the case. The discovery arbitrator’s rulings could be overruled or modified by the panel, but only upon a showing of new information or changed circumstances. NASD hopes to solicit 100 cases to participate and, if the pilot is deemed successful, NASD will seek SEC permission to make the procedure mandatory nationwide.

  • Feinberg reiterated that arbitrators have the authority to award sanctions against Claimants as well as Respondents for failure to cooperate in discovery. Initial sanctions may include: adoption of an adverse evidentiary inference; exclusion of evidence from use at the hearing; and award of forum fees and/or attorney fees. Sanctions for "intentional and consistent failure" to comply with discovery orders can include dismissal of some or all claims. This is a valuable clarification of a principle that all arbitrators should already understand.

  • Feinberg indicated that arbitrators should encourage parties to schedule arbitration hearings within nine (9) months of the Initial Pre-Hearing Conference. Where the parties indicate that their schedules will not accommodate a hearing within that time, arbitrators should consider alternatives including: splitting four-day hearings into two non-consecutive two-day sessions, working weekends or longer workdays, and even encouraging parties to consider reassigning the case to other attorneys in the firm with greater availability.

Ms. Feinberg’s call may be replayed in its entirety by calling +1-866-461-2739.

© 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice. 1