From: Seth E. Lipner
To the SEC
Re: SR-NASD-2003-1589 (proposed NASD Code of Arbitration Procedure revision)
Please accept this submission as my comment on the NASD's proposed Code Revision.
I am a member of Deutsch & Lipner, attorneys who have for many years represented investors in SRO arbitration. I am also Prof. of Law at the Zicklin School of Business at Baruch College, CUNY. I have served on the NASD's NAMC, and am a past-President and current Board Member of PIABA.
I support the position of PIABA expressed in its comment letter. In addition, I offer the following additional (brief) thoughts/concerns/comments:
1. The move to a chair-qualified panel is a dramatic step backward in arbitration - back to the day of the jaded, oooold arbitrator. The NASD developed this concept because of a perception that, in a small percentage of cases, there is, after arbitrator selection, no arbitrator who is competent to serve as Chair. The NASD has stated how often that occurs, or why, with proper training, they can't solve the problem.
Instead, the NASD proposes a radical change which will have many unforeseen consequences, especially in thin-pool locations. But the rule has an across-the-board effect - it re-establishes the role of the "professional arbitrator", who is beholden to the system for a significant portion of his/her income. These folks have too many pre-conceived (and often hidden) ideas about investor cases; they often have (sometimes in past) ties to the industry; and and they are often motivated in their decision-making by a pro-industry attitude toward awarding investors all they deserve. In a few words, to remain arbitrators, they have to make compromise awards. that is just not good "justice" for investors.
While arbitral experience is useful in some ways, it is not a guarantee of competence. The NASD's attempt to equate automatically its weak on-line training and "arbitrator experience" stands on a poor footing.
If this rule is adopted, however, its effects can ameliorated by limiting arbitrators to serving on more than three (3) panels at any time. Then there will be true rotation through the pool of 7,000 arbitrators, and it would become impossible for an arbitrator to become beholden to the system.
That said, "random" appointment is an improvement over "rotation" - the current system. But the so-called non-public arbitrator should be eliminated entirely. The presence of an industry person on every panel is - as the public sees it - the biggest perceived problem with arbitration today - even more than the adhesory contracts used by the securities industry to compel arbitration before anm organization that they influence, fund and belong to.
2. Motions to Dismiss - the rule is an advancement, because currently the NASD ignores its own rules prohibiting such motions by guaranteeing an in-person hearing, not a document case. See current NASD Rule 10303. The rule is an improvement because it expressly discourages such motions except in extraordinary cases.
The rule, unfortunately, lacks teeth. To improve the rule, the rule should state that the costs of such a losing motion be awarded against the firm immediately and automatically upon denial of the motion by the arbitrators. Of course, such costs can be assessed later, but by then it is too late. It is akin to hitting the dog on the nose right after it urinates on the rug; such a smack, even if hard, has no effect a year later.
3. Pre-arbitration disclosure. The current rule permits Respondents to hold back documents they intend to use at the hearing under the guise of "rebuttal" or "cros-examination". Such sandbagging is not permitted in court or any other modern forum. it should be outlawed in arbitration as well. Too often some surprise document hits the table, and the attorney on the other side is unable to rebut it in time. There should be no hearings-by-ambush.
4. Insurance disclosure. In every other forum, including court, the presence and amount of insurance, if applicable, must be disclosed. In arbitration there is no such provision. The result is that small broker-dealers who have insurance can coerce a cheap settlement by pointing (falsely) to payment ability. In addition, Claimants, who are selecting arbitrators (some of whom have insurance affilations) need to know whether an insurance company lawyer is defending.
Thank you for this opportunity to comment. I again refer to the PIABA proposal for additional comments.
Seth E. Lipner