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For the past two decades, investors have relied almost exclusively on arbitration to resolve disputes with their stock brokers and investment advisors. Brokerage firms routinely include an “arbitration clause” in each customer agreement. Since the early 1980s, federal courts – led by the Supreme Court – have upheld the validity of those arbitration provisions, forcing investors to turn toward self-regulatory organizations and away from the courthouse. As the arbitration process evolved, NASD emerged as the preeminent forum for dispute resolution. While the NYSE also has hosted arbitration proceedings, far more customers utilize the NASD process The emergence of arbitration has proved to be both a blessing and a boon for securities customers. On the one hand, the process is recently fast and less costly than a lawsuit. On the other, some observers believe that NASD arbitrators tend to have a pro-industry bias. Some arbitrators have granted significant awards – occasionally far in excess of actual losses. Others deny claims in their entirety – and there is virtually no basis for appeal. Arbitration procedures and proceedings have undergone numerous changes over the years; some mere tweaking and occasionally sea change – generally reflecting an effort to level the playing field. Recently, the SEC approved a number of changes in NASD’s dispute resolution process, including efforts to make NASD’s Code of Arbitration Procedure more “user friendly". Investors should be please to learn that the newly-revised Code is calculated to provide a clearer roadmap for aggrieved customers. The newly approved Code has been separated into three parts: the Customer Code, the Industry Code, and the Mediation Code. Hopefully, this will enable all parties to determine which rules apply to each dispute. To make it easier to find specific rules, the Code is now organized to follow the sequential order of a typical arbitration. The new Code addresses the discovery process- the period before a hearing where parties exchange documents and information. Discovery has often been informal; parties have ignored discovery demands or evaded production. Under the new Code, parties must produce (or formally object to producing) documents requested in the discovery process. Arbitrators now will be able to sanction parties who fail to comply with discovery rules or orders from the panel. The new rules also establish uniform procedures for filing, responding to and ruling on motions in NASD arbitrations. Concerns over the arbitrator selection process also have been addressed. The Code now creates a new roster of public arbitrators who are qualified to serve as chairpersons in investor disputes. Arbitrators must have a specific amount of training and experience to qualify to serve as a chairperson. Specifically, in investor cases that require three arbitrators, parties will receive three lists of potential arbitrators: a public arbitrator list, a public chair-qualified arbitrator list and a non-public arbitrator list. Each list will contain eight names. Parties can strike up to four names from each list and rank the remaining candidates. In single-arbitrator cases (those involving claims of $50,000 or less), parties will choose from a list of eight public chair-qualified arbitrators. For certain industry cases which do not include claims by or against an investor (such as disputes between firms), NASD has also established a non-public chairperson list. The new Code is expected to become effective this spring (except for the Mediation section, which already is in use). To implement the transition, NASD has adopted a new technological platform which, among other things, generates lists of arbitrators on a random, rather than rotational, basis. All three Codes are available to customers – as well as brokers – on NASD’s website, www.nasd.com. IF YOU HAVE QUESTIONS OR COMMENTS FOR STOCKPATROL.COM, CONTACT US AT editor@stockpatrol.com
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