July 13, 2005
July 13, 2005
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File Number SR-NASD 2003-158
Dear Mr. Katz:
The purpose of this letter is to provide the Securities and Exchange Commission SEC with comments on the above referenced proposed rule change, and the amendments to the same, that was originally filed by the National Association of Securities Dealers, Inc. NASD, through its wholly owned subsidiary, NASD Dispute Resolution, Inc. NASD-DR on October 15, 2003.
As an attorney whose practice is exclusively devoted to the representation of public investors in their disputes with the securities industry, I agree with the NASD that the time has come to rewrite the Code of Arbitration Procedure Code and submit the following comments to assist you in ensuring that investors rights are preserved under the new Code.
While my comments are directed to some of the specific provisions which I believe will have the greatest impact on investor rights, my decision not to comment on other particular sections should not be read to mean that I necessarily either agree or disagree with them.
I. Definition and Continued Use of Non-Public Arbitrators
Section 12100 n
Perhaps the most important revision to the Code that should be mandated by the staff of the SEC would be a provision which would provide public investors with the unilateral choice as to whether or not an industry arbitrator should be forced on them in every arbitration case where their arbitration panel consists of three 3 arbitrators.
It is unseemly that the securities industry, which has mandated arbitration as the exclusive forum for the resolution of disputes with its public customers, should also then have the right to mandate that one of the arbitrators should then be a non-public arbitrator which is nothing more than a euphemism for industry arbitrator.
The notion that an industry arbitrator needs to be on every panel to explain the complexities of a case is outdated, at best, and an affront to established jurisprudence in this country, at worst. If a jury of ones peers can be entrusted to decide the ultimate issues of fact and law such as in life and death cases in criminal matters then why shouldnt the public investor have the same exact right in an arbitration forum?
At the same time, it is disingenuous for the term non-public arbitrator to be continue to be considered when the use of that term is directly contrary to the purported plain English initiative that was stated to have been one of the primary predicates for the proposed revision of the Code.
If the SEC decides to continue to permit industry arbitrators to serve on all NASD arbitration panels, then the revised Code should honestly and forthrightly call them exactly what they are: industry arbitrators who are arbitrators with ties to the securities industry.
II. Neutral List Selection and Chairperson Roster
Section 12400 b and c
One of the most significant new proposed rules in the Code is the section which would create a new third category of arbitrator which has been labeled as the chairperson eligible arbitrator.
In order to be eligible to be included on this roster of arbitrators, the proposed rule would mandate that an individual complete the NASD chairperson training course or have substantial equivalent training or experience which are notably undefined and also either i have a law degree, be a member of a bar of at least one jurisdiction and completed service on at least two arbitrations in which hearings were held, or ii completed service on at least three arbitrations in which hearings were held.
Aside from the fact that the NASD has not proffered any reason for the proposed chairperson eligible roster of arbitrators and has not defined the meaning of the term hearings in the proposed rule, it is clear that this proposal should be unacceptable to the SEC.
First of all, notwithstanding my legal background, it borders on arrogance to suggest that being an attorney renders an individual more qualified to decide an arbitrable controversy as a chairperson of a panel than a non-attorney. In fact, in my experience in the arbitration process over the past twenty four years, I have found non-attorneys to be as equally qualified to decide arbitration cases as attorneys. To create a class distinction based on ones chosen occupation is simply wrong and should not be condoned.
Of equal importance, however, is the fact that there is absolutely no evidence to suggest that arbitrators who have served on a greater number of cases are any better qualified to serve as a chairperson than the arbitrator who has been chosen to decide his or her first case. Accordingly, the creation of a chairperson eligible roster of arbitrators will only add to the problem of having professional chairperson arbitrators who are devoted to the arbitration system as a source of their income. Since it is human nature for arbitrators to recognize that their awards will be carefully scrutinized by both counsel for Claimants and Respondents in deciding whether a proposed arbitrator should be stricken from a potential list, the creation of a new class of arbitrators will further compound the perception that sometimes awards are drafted based on the prospect of future service instead of what is fair and right.
Finally, while the present arbitrator selection process provides an investor with at least some input into the selection of the chairperson for a panel, the proposed rule would only further remove the public investor from having any viable role in the selection of the individuals who will decide a dispute.
III. Number of Arbitrators in Simplified Arbitrations
Sections 12401 b, 12402a and 12800b
It is disappointing that, in the proposed revisions to the Code, the NASD has not increased the amount of a claim which would render a dispute eligible to be decided by a single arbitrator past the antiquated 25,000 or less limitation.
In view of the realities of the arbitration process and the increasing amounts of the claims that are being presented for resolution, the time has already passed when this limitation should have been increased to at least 150,000 if not more. Simply put, there is no empirical evidence to suggest that a single arbitrator would not be qualified to decide a larger dispute than is afforded by the present limitation.
What is most troubling about the proposed revision to the Code in simplified arbitrations, however, is the new requirement that the only arbitrators who would be qualified to decide single arbitrator cases would be those individuals who were included on the chairperson eligible arbitrator roster.
For the same reasons that were discussed above, this preferential recognition of a new class of arbitrator should not be condoned.
IV. Disclosures of Arbitrators Who Serve as Mediators
Finally, in response to one of the specific questions that the SEC has set forth in Release No. 34-51856, there can be no dispute that a mediator, who also serves as an arbitrator, should be required to make full and complete disclosures of all matters for which he or she has served as a mediator.
While disclosure of any settlement amounts that may have been achieved through the services of the mediator may present questions of confidentiality, at the very least, there should be disclosure of the identities of the parties and/or their counsel who have utilized the services of the mediator as well as the types of cases that have been mediated by him or her.
For example, it would be material in the arbitrator selection process for a party to know whether an individual, who has been proposed as an arbitrator, has mediated one case or one hundred cases involving the same brokerage firm that is a party in a pending arbitration case. It would also be material for a party to know whether opposing counsel in an arbitration case has ever appeared before a proposed arbitrator, in the mediation context, and the frequency of such appearances.
Thank you for the opportunity to comment on this matter and your careful consideration of the issues that I have addressed.
Very truly yours,
Steven B. Caruso
Maddox Hargett & Caruso, P.C.
80 Broad Street, 5th Floor
New York, N.Y. 10004