From: Cary S. Lapidus
Affiliation: Law Offices of Cary S. Lapidus
July 14, 2005
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth St., N.W.
Washington, D.C. 20549
Dear Mr. Katz:
I am writing to comment upon the proposed revisions to the NASD Code of Arbitration.
I am an attorney based in San Francisco, California who has represented investors in NASD securities arbitrations for nearly 20 years. I served on the NASD National Arbitration and Mediation Committee from 1999 to 2002. I was on the Board of Directors of the Public Investor Arbitration Bar Association (PIABA) from 1995 to 1999. I was a member of the NASD's Arbitration Recruitment Council in San Francisco and have spoken at several NASD seminars for the purpose of educating arbitrators and other attorneys regarding practice in NASD arbitration proceedings. During the 1980's I was an attorney in the Commission's Department of Market Regulation as well as an enforcement attorney in the Commission's San Francisco Branch Office.
I concur with the comprehensive comment letter submitted by PIABA this month. There are three points raised by the PIABA letter which I believe require special attention.
1. The first point is the change to the Code to create a special list of arbitrators who may serve as Chairpersons for the arbitration hearings. This revision to the Code is unnecessary and unwise. The present system of appointing Chairpersons has worked well for at least the past 20 years. There is no need to change the system at this juncture.
Indeed, the proposed revision would limit the choice of arbitrators who are eligible to serve as the Chairperson. Investors are already limited in their choice of forum because of the U.S. Supreme Court decisions upholding mandatory pre-dispute arbitration provisions in customer agreements. Their choice of the arbitrators to hear their case should not be limited by creating a Chairperson-qualified list.
There is no evidence that the persons who would comprise such a list would be any more qualified to serve as Chairpersons than the other arbitrators who make up the NASD's arbitrator pool. It is likely that by creating such a list a pool of "professional arbitrators" will be created. Many commentators have recognized that one of the problems with an arbitration system is the effect that repeat arbitrators have on the process especially when one set of parties (in this case the brokerage firms) appear before these arbitrators on a regular basis. The establishment of a Chairperson eligible list will exacerbate this problem and will not provide any meaningful improvement to the NASD arbitration selection process.
2. The second aspect of the Code revision that is critically important relates to the exchange of information the parties are required to provide each other during the course of pre-hearing discovery. In virtually all jurisdictions of which I am aware, it is required that the parties produce information about insurance policies which may cover the claim. Respondents in NASD arbitrations routinely refuse to produce such documents and information concerning insurance coverage. Arbitrators are unsure whether documents and information regarding insurance should be ordered to produce thereby resulting in an inconsistent patchwork of decisions in deciding motions to compel the production of such documents. The Code should be revised to make it clear to these arbitrators that information and documents regarding insurance coverage should be produced.
3. Finally, it is now time for the Code to be revised to eliminate the "non-public" (industry) arbitrator. This aspect of the NASD's arbitration procedure is fundamentally unfair to members of the investing public. The rationale for the existence of the industry arbitrators was that they provided expertise to the other members of the panel because of their experience in the industry. It is now routine in NASD arbitrations that both claimants and respondents retain expert witnesses who testify and educate the arbitrators about issues particular to the securities industry. There is no longer a need for an industry arbitrator to perform this function.
The actual effect of having an industry arbitrator as a member of a three person panel is to give an unfair advantage to the brokerage industry. In order to have a true level playing field the arbitration panel should be comprised of three public arbitrators, none of whom are beholden to the securities industry.
Thank you for your consideration of these comments.
Cary S. Lapidus
Law Offices of Cary S. Lapidus
425 California Street, Suite 2100
San Francisco, CA 94104