Subject: File No. 4-502
From: David Plimpton
Affiliation: Plimpton & Esposito
June 2, 2005
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington DC 20549-0609
Dear Mr. Katz:
I am writing to comment on the above-captioned Rulemaking Petition (SEC File No. 4-502) (the "Petition") and other matters relating to the NASD Dispute Resolution ("NASD") arbitration program which are touched upon or implicated by the contents of the Petition. I have practiced law for 39 years. I have been on numerous charitable boards, and helped operate profit and non-profit organizations. For the last 16 years, my professional practice has been restricted to serving as a neutral (principally as a mediator and arbitrator) in all types of civil disputes. I have acted as a neutral in about 1,300 cases, divided about equally between arbitrations and mediations. I administer most of my arbitrations and mediations myself, but have served on panels for provider organizations, where in some cases the neutral proceedings are partially or fully administered, such as NASD, CPR Institute for Dispute Resolution, AAA, National Arbitration Forum, and Maine Labor Relations Board I have also worked as a facilitator, hearing officer, fact finder, court-appointed special master and court-appointed referee. I have been a public NASD arbitrator (arbitrator #10704) since about 1990. I have served in about 70 NASD arbitrations (mostly as the chair of a three-person panel). I am qualified, I believe, for NASD employment and injunctive relief arbitrations and have served for the NASD in both those types of cases, but mostly in broker-customer disputes. The panels on which I have participated have issued about 28 publicly available awards. I have participated in a number of NASD arbitration training programs, and, around 1993, served as a trainer for a NASD training in Boston (cited below). In 1998 I organized and helped present a Maine State Bar Association CLE program on NASD arbitration and mediation, aimed mostly at lawyers representing clients in securities disputes before NASD. I consulted with NASD on the content and materials for this program. I have been on the NASD roster of mediators for at least 10 years, but have not yet been called upon to do a NASD mediation. I have mediated privately some customer-broker disputes. I have never been involved in customer-broker disputes as legal counsel for either side.
I mention this background mainly to point out that my experience with the NASD arbitration program, while extensive and occurring over about 15 years, is anecdotal in nature. Although I try to stay up-to-date on NASD bulletins, newsletters and web site, I have not done a lot of independent research for these comments. Therefore, I stand ready to be corrected if I am not totally up-to-date on recent developments or initiatives designed to address some of the matters I discuss. Where I am aware of such initiatives, I try to take them into account in my comments Also, my perspective is one of a professional neutral concerned about the professionalism (including training, selection, appointment and compensation of neutrals), quality, neutrality, ethical standards, fairness, efficiency, accessibility, and speed of resolution of dispute resolution programs. My experience is that programs which have high standards in these respects and realize them in practice end up being fair to the parties in individual disputes conducted pursuant to these programs. I have read much about the fairness or bias of NASD's arbitration programs, with contrary views expressed by groups which represent investors, on the one hand, or the securities industry, on the other hand. Of course, perception is important and that must be addressed in designing and administering a dispute resolution program. The NASD Dispute Resolution staff has, over the years, made considerable and laudable efforts in its arbitration program, and these have resulted in a program which I believe is currently usually fair to both investors and the securities industry. But it is the recent and current drift in the nature of NASD arbitrations and the way they are conducted which concerns me. I also want to acknowledge that I believe NASD has worked hard, generally, to promote ethical standards for its neutrals, and at least fact-specific disclosures to the parties in individual cases.
Things have changed dramatically for NASD arbitrations in recent years, as discussed in more detail below, and these changes threaten, if they have not already started, to engulf NASD Dispute Resolution and its arbitrators. Such a development could well further compromise arbitration fairness and efficiency, unless the SEC, NASD and its members are willing to commit significantly more resources to the program, including more attention to the above factors (professionalism (including selection, training, appointment and compensation of neutrals), quality, neutrality, ethical standards, fairness, efficiency, accessibility, and speed of resolution). If those systemic matters are addressed thoughtfully and thoroughly, fairness and the perception of fairness in NASD arbitration will, in my view, take care of themselves over a reasonable period of time.
- NASD arbitrators should be receiving more training, not only in applicable substantive securities law, as the Petition suggests, but also in the area of arbitration law. NASD used to provide more training on the substantive legal issues which frequently arise in NASD arbitrations including the factual issues which often come up in different types of claims, and the legal theories which come into play (with investor and industry perspectives on the law). From an arbitration law perspective, training might include the matters which arbitrators may also take into account as arbitrators (in the context of, but not contrary to, applicable case law and statutes), such as SEC and exchange rules, equity, justice and fairness. Arbitrators should learn that their authority comes from the agreement of the parties with incorporates arbitration rules, federal and state statutes governing arbitration, and applicable ethical and professional guidelines. For some reason, this type of training has ended or been severely limited since the mid-1990s. Examples of past worthwhile training provided by NASD include: (a) Training for Securities Arbitrators, Boston, September 10, 1993 (in which I participated as a presenter), (b) Arbitrator Training (Chairperson Participant's Guide and Module 1), November 1996 (this may be a precursor of the current Advanced Arbitrator (Chairperson) On-Line Training listed on the NASD's web site), and (c) Arbitrator Skills Training Program, Washington, DC, May 21, 1997. Now, almost ten years later, arbitration, and the law and custom surrounding arbitration (e.g., the way in which arbitrations are conducted, the powers of arbitrators, arbitrability and eligibility issues, choice of law issues, standards on court appeal of arbitration awards, attorneys fees, costs, interest, punitive damages, and sanctions) have become complex and rapidly evolving legal and practical areas. NASD arbitrators, especially in the complex factual and legal disputes which are often before them, need much more training in these areas. The NASD has done some training, and passed new rules, on discovery abuses, problems, and the powers of arbitrators to deal with discovery issues, which have been helpful. However, other recent training initiatives have frankly seemed bizarre, given the rapidly changing nature of NASD arbitrations and the importance of NASD arbitrators keeping up with these changes. For example, recently there was mandatory training in the arcane and rarely relevant subject of broker record expungement requests. A broker expungement issue is likely to come up much, much less than the issues I mention above which come up in virtually every arbitration. In summary, more needs to be done in training on how arbitrators should run a hearing, control of the proceedings, standards for and manner of deciding postponement requests, applicable legal theories, remedies, and damages, how and when arbitrators should use the law, equity and fairness, dealing with the arbitration record, whether and how reasoned awards should be prepared, and other matters which frequently come up for arbitrators.
The NASD should make clear to arbitrators that they are authorized to consider applicable law, whether or not it comes from the parties. NASD arbitrators should not be required to do legal research, but should not be prohibited from doing additional research beyond what the parties present by way of legal authority. Certainly arbitrators should not do factual research or consider factual matters beyond what the parties present. If there are factual matters which an arbitrator believes are crucial to deciding the dispute before the arbitrator, the arbitrator should ask the parties, in a neutral and open-ended fashion, for more information, or why the requested information is not relevant. Sometimes there may be perceived gaps in or questions about the law, including law which the arbitrator from his or her own experience believes should be considered, or conflicts between the law as presented and an arbitrator's sense of justice and fairness. Here, it has been suggested that the better practice is for arbitrators (who are not court judges, but ultimately creatures of a contract between the parties) to raise the legal questions and issues with the parties before the hearing (or arbitration record) is closed, and ask them to present further law, comment or argument. American Arbitration Association, Manual for Commercial Arbitrators, p.13 (1999). This would also be in aid of fulfilling the arguable professional and ethical duty of arbitrators not to decide cases based upon material not presented to them in the hearing. This currently is sometimes difficult to achieve in a NASD arbitration because of the increasing frequency of voluminous material presented by counsel, including written legal argument and case law, which arbitrators may not receive until near the end of the hearing, and which many arbitrators do not review in any event. Some of the reasons for that tendency, including inadequate compensation for the job of serving as a NASD arbitrator, are discussed below. Also, if arbitrators were better versed and more expert in the ways discussed above, there would be more chance that these types of questions would be asked before the hearing ended. Ironically, if arbitrators were better trained in the above ways, and were so perceived by parties and their counsel, legal and factual presentations in NASD arbitrations would be more streamlined, efficient and relevant. Counsel would not feel that they had to "educate" the arbitrators with a mountain of cases, citations and argument, much of which turns out not to be helpful and/or is 'canned' for the type of case involved. I have found that one way to get counsel to focus on the applicable law is to request that if there are rules, statutes and cases which they believe are directly on point and should be considered, that counsel provide copies to the panel to read. This makes counsel think carefully about what they are going to ask the panel to read.
NASD arbitrator recruitment and training policies should take into account ethical standards which I believe are or should be applicable to provider organizations, such as NASD. Particularly is this so in the context of the current NASD arbitration program. NASD arbitrators are not adequately compensated and are not in any way assured of any cases, as a result of becoming a NASD arbitrator and receiving training. As a result, NASD should not charge for training without full disclosure of these and other aspects of NASD arbitration which bear on the benefits and burdens of serving as a NASD arbitrator, some of which are discussed in more detail below. See David Plimpton, “Ethical Duties Needed for Trainers Promoting ADR Courses”, Alternatives - CPR Institute for Dispute Resolution, Vol. 19, No. 7, July/August 2001.
- Clearly, industry arbitrators, for the ethical and professional reasons discussed above, should not present information or matters to fellow panelists, whether factual or custom, which are not disclosed to the parties as something the panel wishes to consider. In such event, fairness dictates that the parties have an opportunity to hear the information or matters being raised within the panel and to present information, argument and/or reasons why those matters are not relevant. I realize there is a fine line between raising additional information in the arbitration and deliberation of the arbitrators after the record is complete. Nevertheless, this is an important issue which should be addressed and covered in NASD policies and rules for the arbitration program. This is particularly true with regard to the role of industry arbitrators, because of the perception, which is significant if not widespread, that the involvement of industry arbitrators creates a bias in NASD arbitration in favor of the securities industry. I personally believe that industry arbitrators are generally fair. Also, their experience and perspective in the industry, and insights with respect to custom and practice, are helpful in reaching fair decisions. In fact, in my experience, industry arbitrators are often the toughest members of the panel, when it comes to holding NASD members accountable for their dealings with customers. Nevertheless as is well-known and highlighted in NASD guidelines on ethical standards and disclosures, perception is reality.
- The quality of NASD arbitration currently suffers, in my view, because there is no comprehensive arbitrator evaluation system, or if there is one, it is not being implemented. Arbitrators and parties are requested to complete evaluations of arbitration panel members, but in my experience such evaluations are rarely done and there is little or no follow-up in order to obtain the evaluations. An evaluation system is not easy to operate under the best of circumstances, because of the natural reluctance of people to say anything negative about fellow arbitrators. In addition, arbitrators are poorly compensated and, in my view, therefore even more reluctant to spend time completing and sending in evaluations. I have sent them in for some on my cases in the past, but it seems as if they go into a deep hole as there has been no feedback or requests for more detail or confirmation when I raised a question about the performance or conduct of another arbitrator in a case. Also, it is human nature that once the cases completed, all participants want to move on to other matters. It would obviously take more staff and resources in order to carry out even the evaluation system which NASD has on its books. However, an increased effort to compensate and train NASD arbitrators, and monitor/evaluate their performance, would pay important dividends for the quality of the NASD arbitration program. That effort would have to include emphasis on the confidentiality of the evaluations, include more detail in the evaluation and staff debriefing, and perhaps be mandatory for arbitrators before being appointed to additional cases, for claimants before the award is issued, and for securities industry participants and members, as a condition of licenses remaining in good standing. Finally, NASD would have to commit to take appropriate action to follow up on the valuations, including second and last chance corrective action, and then ultimately dismissal from the panel of arbitrators, in appropriate cases.
In summary, on these important issues, a real question exists about whether the SEC and NASD as currently staffed and funded has the resources to monitor/run the arbitration program. an independent third party organization, with no ties to the SEC or NASD, although perhaps staffed with current members of NASD, might be in a better position to run the program in accordance with some of the principles in unseeded above and in accordance with generally recognized professional and ethical standards. Also, the idea of a largely pro-bono volunteer basis arbitration program is no longer workable, in view of the complexity of the disputes, multiple parties, necessary time-commitment per case, and required expertise and dedication to be an effective and fair arbitrator. If the securities industry still believes it is in the best interest of its members and customers to have an alternative dispute resolution system (and thereby avoid the need to be in court on theses disputes), it needs to dedicate the financial and human resources to have a quality program that passes muster on the criteria and standards discussed above. Finally, the current economic circumstances of most NASD arbitration participants is such that they should pay something much closer to market cost for the dispute resolution services involved in NASD arbitration. As with other dispute resolution programs, including the courts, there could be exceptions made for truly indigent participants.
If changes are made in the NASD arbitration program, they should be reflected in rules, guidelines, training materials, the web site, announcements to the industry and the public, articles for publication in appropriate media, and where appropriate, in the required provisions of broker-customer contract arbitration provisions.
Resources which the SEC and NASD might consider in such an endeavor, if they have not recently been considered include: (a) Securities Arbitration Reform, Ruder Task Force Report to NASD Board of Governors (January 1996), (b) CPR-Georgetown Commission on Ethics and Standards of Practice in ADR, Principles for ADR Provider Organizations, (Draft June 2000 - there may be a final or later version), (c) American Arbitration Association and other signatories, Consumer Arbitration Due Process Protocol (April 1998), and (d) CPR Institute for Dispute Resolution and American Bar Association, Commercial Arbitration at Its Best; Successful Strategies for Business Users; A Report of the CPR Commission on the Future of Arbitration (2001).
Finally, as support for my observations, I will pass along some of my personal experiences as a NASD arbitrator and which at least show where I am coming from. I apologize for some repetitiveness.
NASD disputes have become much more litigious and complex, including challenges to arbitrators for cause, motion practice, extensive discovery practice and disputes, voluminous submissions, pre- and post-hearing briefs, and in the few cases which don't settle at the last minute, multi-day hearings. These tendencies were noted as early as 1996 in the Ruder Report to the NASD. Counsel for the parties now bring extensive legal argument, case law, and regulations into their presentations. This is as it should be, but NASD arbitrators now get little legal training from NASD on the issues, but yet must consider and evaluate the factual and legal presentations. Judges at least have law clerks. Private arbitrators don't, but as least they get paid for reading the cases and writing well thought out arbitration decisions. Not to consider the law, as well as the facts, equity and fairness as an NASD arbitrator, would be not to live up to the professional and ethical obligations of an arbitrator. But yet NASD arbitrators are not paid to do it, nor are they often trained in law applicable to securities disputes. The small stipend now to be offered by NASD for a reasoned award is at least a start, but not anywhere near adequate. Assuming my fellow panelists agree I always prepare a reasoned award with an explanation of the basis for the decision, as I feel the parties deserve it and may benefit from it. That is usually a day or two of work, at least, for which there is no pay. In one NASD arbitration where I chaired the panel, I believed firmly that the losing party would appeal if we awarded punitive damages, which we did. The panel issued a many page award, with extensive reasoning and case citation. It was appealed and it took a United States District Court Judge many more pages to uphold the decision (thankfully in every respect). There I spent at least a week on the award with no compensation.
- The compensation for all the time involved is woefully inadequate, even taking into account the pro bono factor, probably about 5% of what I would make as an arbitrator or lawyer for a comparable private case. The cases are interesting, good experience, good for the resume, and challenging. 50% of normal compensation would probably be about right, assuming one agrees, given the economic circumstances of most of the participants, that this is the type of arbitration program which should be partly pro bono.
As a matter of disclosure, NASD should suggest that prospective arbitrators consider all relevant issues which will face them in evaluating compensation as a neutral, including serving as a NASD arbitrator. See David Plimpton, “Getting Paid: What You Need to Know About Neutrals’ Compensation”, Alternatives - CPR Institute for Dispute Resolution, Vol. 22, No. 10, November, 2004.
- I get very few cases from NASD, which may be unique to me, but I suspect not. The number of arbitrators as against the number of NASD arbitrations is such that, on average, the number of cases assigned to any arbitrator on an annual basis will only be one or two, and most of those never get to hearing. If one is not a professional arbitrator, which most NASD arbitrators are not, how is one supposed to avoid being rusty on these cases which have now become more and more demanding for the conscientious arbitrator. Frankly, the amount of effort in meeting the obligations of being a NASD arbitrator is far beyond what it is worth in terms of number of cases and compensation. This problem for NASD arbitrators was also noted in the Ruder Report.
- Even on the cases which do settle, you can spend a lot of time for which you don't get paid - reading pleadings, submissions, briefs, cases and regulations, writing prehearing orders, not to mention keeping up with the NASD Dispute Resolution web site, rules, mandatory trainings, and so forth. The new initiative to have direct communication between the parties and the arbitrators is a good idea, but as I have found from the one case I have had with that feature, it involves significantly more time for the chair, again with no compensation. Except perhaps for mediated cases, arbitrations almost always settle late (just before hearing). The recent additional small stipend for cases which settle within 3 days of the scheduled hearing is at least a gesture, but woefully inadequate. I have complained to the NASD for years about this, pointing out the inconvenience and cost of making travel arrangements, booking hotels, blocking out hearing days which I cannot reschedule for something else at a late date. In my private dispute resolution practice, I have cancellation fee equal to at least a half day at my full rate if cancellation is within so many days of the hearing or mediation. I know some neutral colleagues who have a month or 6 weeks policy for every day cancelled (10 hours time), not just the first half or full day.
- There are many things which should be done to restore and/or put in place a quality arbitration program:
- An independent administrator to administer the program in a professional and commercially reasonable manner - procedures, arbitrator neutrality, commitment and compensation. This would also tend to correct the current perception, with which I don't agree but which exists or is at least claimed, that securities arbitration is unfair or slanted against investors/customers. I say this with nothing but the greatest respect for most of the NASD staff attorneys and administrators with whom I have worked. They are mostly fair-minded, conscientious and hard-working with what I imagine are large caseloads.
- More arbitrator control over the manner in which the proceedings are conducted, according to applicable NASD Rules, and after input from the parties. This would enable the cases to move along and be handled fairly, more expeditiously and in a more efficient and streamlined manner than currently.
- Fewer, better trained, more neutral, more independent, and more committed arbitrators who could count on a reasonable amount of work, become more familiar with the issues, and do a better job as arbitrators.
- Panelists should be chosen by random computer method with no right to strike or challenge except for cause. The current method of striking or ordering priority leads to irrational forum-shopping and wasted time in getting the case moving toward resolution.
- Lawyers or others who currently represent parties (either customers, reps or broker-dealers) in securities arbitrations and court cases should not, in my view, be able to serve as public arbitrators. It continually amazes me that this is (or at least in the past has been) allowed by NASD. No way would those people be chosen, no matter how competent they are, as arbitrators in comparable private arbitration. In my experience, they have a very difficult time, whether consciously or unconsciously, being truly neutral. Certainly they cannot rationally be perceived as neutral.
- Awards should not be publicly available unless all parties agree in each case. Cases are so fact-specific and also lack precedential value, such that they are of little real guidance to anyone. Yet even lawyers, who should know better, try to read them and decide whether certain arbitrators favor investors or brokerage houses, which, again, leads to extensive and irrational forum-shopping. Yes, the arbitrations involve the securities industry which is publicly regulated, but if a disciplinary referral comes out of the arbitration and leads to regulatory action or sanction, then it will appropriately become public. Other arbitration decisions are not made public and with good reason. Again, they stem from private disputes, and are specific to the particular facts of each case, just as are NASD cases.
- In summary, securities disputes are specialized, complex, fact-intensive, and often involve (1) significant relevant periods of time, (2) multiple (more than two) parties, and (3) intricate legal issues. It is not an easy job to conduct an arbitration program under the best of circumstances, and NASD disputes present a tremendous challenge. Unfortunately, however, the current NASD arbitration program, despite what I believe are good intentions, simply is not geared to deal adequately with these kind of disputes in a fair, effective, stream-lined, and efficient manner.
Thank you for the opportunity to comment on the Petition and the NASD arbitration program. I look forward to the results of the SEC's consideration of the Petition and the SEC and NASD's future efforts to strengthen the NASD arbitration program.
Plimpton & Esposito
1000 Sawyer Road
Cape Elizabeth ME 04107