From: Stephen Krosschell
Affiliation: Goodman & Nekvasil, P.A.
July 14, 2005
Goodman & Nekvasil, P.A.
14020 Roosevelt Blvd, Suite 808
Clearwater, Florida 33762
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street
Washington DC 20549-0609
Re: File No. SR-NASD 2003-158
SEC Release No. 34-51856
Dear Mr. Katz:
Thank you for the opportunity to comment on the proposed amendments to the NASD Code of Arbitration Procedure for customer-industry disputes. I would like to comment on proposed rules 12312, 12313, 12503, and 12504.
Proposed Rule 12504 would explicitly authorize dispositive motions, which are not expressly authorized now. The rationale for permitting dispositive motions is that the arbitrators and the parties should not have to go through the time and expense of a full hearing, if the matter can be decided by motion before the hearing. In my experience, however, the overall time and expense required to prepare, respond to, and decide dispositive motions vastly exceeds the time and expense that is saved in the few cases in which the motions are granted.
During the ten years or so that I have represented investors in securities arbitrations, I have personally expended thousands of hours responding to hundreds of dispositive motions. Only one of those motions was granted in full, and that was an unusual case in which the brokerage firm had improperly obtained favorable rulings on the motion from the courts, which rulings the United States Supreme Court then reversed. See Harvey v. Salomon Smith Barney, 537 U.S. 1085 (2002). I do not believe the arbitrators would have granted the motion if their consideration of the motion had not been tainted by the prior court rulings. In approximately four or five other cases, dispositive motions were granted in part, but hearings were still required on the remaining claims, and no time was saved. In all other cases, the motions were denied. Plainly, from a system-wide point of view, permitting dispositive motions fails to fulfill the purpose of arbitration to provide a speedy and less expensive alternative to litigation, because the effort expended in cases in which the motions are denied is much greater than the effort saved in cases in which the motions are granted.
Proposed Rule 12504 does provide that dispositive motions are “discouraged and may only be granted in extraordinary circumstances,” but I regard this provision as completely useless. In all cases, the industry parties will regard their motion as one of the rare motions that should be granted, and the industry parties will also consider that some arbitrators might grant the motion even if it should be denied. Accordingly, merely “discouraging” dispositive motions will not reduce the filing of dispositive motions in any meaningful way.
Many states have adopted Section 5(b) of the Uniform Arbitration Act, which provides that, “[u]nless otherwise provided by the agreement, . . . [t]he parties are entitled to be heard, to present evidence material to the controversy and to cross-examine witnesses appearing at the hearing.” Construing this provision, state courts have frequently vacated arbitration awards that are rendered without an evidentiary hearing. Bates v. McQueen, 613 S.E.2d 566, 569-570 (Va. 2005) (“In short, the failure to conduct ‘the hearing’ clearly intended by the terms of Code § 8.01-581.04, unless otherwise provided by an agreement, and by the provisions of Code § 8.01-581.010(4) was tantamount to no arbitration. Unless parties agree otherwise, a hearing is a fundamental part of the arbitration process because ‘[t]he arbitrators are the final judges of both law and fact, their award not being subject to reversal for a mistake of either.’”); Volkmann v. Volkmann, 688 N.W.2d 347, 348-349 (Minn. Ct. App. 2004) (“Arbitrators must conduct a hearing unless otherwise provided by agreement. Minn. Stat. § 572.12(a) (2002). At the hearing, ‘[t]he parties are entitled to be heard , to present evidence material to the controversy and to cross-examine witnesses.’”); Graham v. Wall, 938 S.W.2d 892, 893 (Ky. Ct. App. 1997) (“Where the arbitration agreement does not contain an express waiver of a hearing, the parties are entitled to an opportunity to be heard, present evidence , and cross-examine witnesses.”); Mikel v. Scharf, 85 A.D.2d 604, 604, 444 N.Y.S.2d 690, 691 (1981) (“[P]arties at an arbitration hearing are ‘entitled to be heard, to present evidence and to cross-examine witnesses.’").
Proposed Rule 12504 would generally preempt this state law based on the Uniform Arbitration Act, which provides a measure of protection to claimants in arbitration by allowing them to insist on a hearing before the arbitration panel with presentation of evidence. Adopting this proposed rule would therefore violate 15 U.S.C. § 78o-3(b)(6), which does not permit the Securities and Exchange Commission to approve NASD rules unless they are designed to “protect investors and the public interest.” Here, Rule 12504 does not protect investors and actually takes away protection that they have under many states’ laws.
Proposed Rule 12503(a)(1) provides that, “[b]efore making a motion, a party must make an effort to resolve the matter that is the subject of the motion with the other parties. Every motion, whether written or oral, must include a description of the efforts made by the moving party to resolve the matter before making the motion.” The purpose of this seemingly laudable provision is to encourage parties to attempt to resolve matters among themselves before bringing the motion to the arbitrators.
Federal courts, however, commonly have similar provisions, and I have personally conferred hundreds of times with opposing counsel in federal cases to comply with these provisions. Except for routine motions such as motions for extensions of time (for which I would have conferred in any event with opposing counsel), in no case was any motion resolved or even altered as a result of these conferences. These motion conferences were uniformly a waste of time in which we engaged solely to comply with the court’s procedural requirements. Although I have always complied with this requirement, my opponents usually do not, and the courts seldom enforce it. I also do not see why, for example, a party making an oral motion for mistrial in an arbitration immediately after a witness unexpectedly accuses an arbitrator of sexual misconduct should be required to describe “the efforts made by the moving party to resolve the matter before making the motion.” This proposal is a prime example of the courtroom-style procedural rules which arbitration is supposed to avoid.
Proposed Rules 12503(a)(2) and (b) require all filings with the Director and the other parties to be done at the same time and in the same manner. These provisions would unreasonably, for example, preclude sending the original and three copies of the document to the Director by FedEx and simultaneously sending it by facsimile to opposing counsel. The rule should allow for some reasonable variation in the method of service.
Proposed Rule 12503(b) requires responses to motions within 10 calendar days of receipt of the motion. This provision should be deleted. If the motion is received on Friday, the response would be due two Mondays later, which is not much time, given most lawyers’ busy schedules. On weeks with holidays, such as Thanksgiving, this amount of time is even less. In addition, running the time from the date of receipt is inherently susceptible to abuse, because neither the arbitrators nor the party filing the motion necessarily knows when the motion was received. The NASD has recently said that no responses to motions are due until after the first prehearing conference. See Valerie Bailey Johnson, “Handling Motions Filed before the IPHC,” The Neutral Corner (NASD April 2005). This procedure is a good one and should be continued. Thereafter, the deadlines, if any, to respond to motions should be set, not by rule, but by the arbitrators, at the prehearing conference or otherwise.
Rules 12312 and 12313
Proposed Rule 12312 provides that claimants may be joined in one proceeding if (1) a common question of law or facts exists and (2) either (a) the claims assert any right to relief jointly and severally or (b) the claims arise from the same transactions or occurrences or series of transactions or occurrences. Read literally, this rule would permit joinder of Claimants A and B if Claimant A in State A sued Brokerage Firm A and Broker A jointly and severally under the federal securities laws regarding Mutual Fund A and Claimant B in State B sued Brokerage Firm B and Broker B jointly and severally under the federal securities laws regarding Mutual Fund B. A common question of law or fact would exist – whether the federal securities laws apply to sales of mutual funds – and the claims would assert rights to relief jointly and severally. Joinder in this example would be appropriate under proposed Rule 12312, even though the claimants, brokerage firms, brokers, states, and investments were different
I recognize that the rule is likely intended to refer to joint and several entitlement to relief, rather than joint and several liability. Although joint and several liability is a well-established concept, however, I am not persuaded that joint and several entitlement to relief even exists. If arbitrators award $100,000 jointly to a husband and wife, the husband and wife would never also be severally entitled to $100,000, for a total of $200,000. In all cases, the brokerage firm will issue the check jointly to the husband and wife and let them decide how to divide it.
Although this language in proposed Rule 12312 does not make sense to me, it is an improvement over current Rule 10314(d)(1), which makes even less sense. Under current Rule 10314(d)(1), “[a]ll persons may join in one action as claimants if they assert any right to relief jointly, severally, or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any questions of law or fact common to all these claimants will arise in the action.” Read literally, this rule permits joinder of claimants if a common question of law or fact exists and if they assert a claim for relief either jointly or severally. Because all claims for relief are either joint or several, the only substantive requirement in current Rule 10314(d)(1) is that a common question of law or fact exists, such as whether the federal securities laws apply to sales of mutual funds. The provision that the claims arise from the same transaction or occurrence or series of transactions or occurrences is superfluous.
Current Rule 10314(d)(1) was based on a misreading of Federal Rule of Civil Procedure 20(a), which provides as follows: “All persons may join in one action as plaintiffs if they assert any right to relief jointly, severally, or in the alternative in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action.” The reference in Rule 20(a) to relief “jointly, severally, or in the alternative” was intended to change the common law principle that joinder was permitted only if the parties sought joint relief. “Plaintiffs who were asserting joint rights were compelled by the principles of common law to join their respective claims in a single action; permissive joinder of plaintiffs, in the sense that plaintiffs whose rights were several had an option to join their claims, did not exist.” Charles Alan Wright, et al., Federal Practice and Procedure, § 1651. Rule 20(a) changed the common law by permitting joinder for persons who were seeking relief severally. “Rule 20(a) has substantially expanded party joinder beyond that allowed under the common-law rules and the state codes. Plaintiff joinder, which was limited to those asserting a joint right, now includes parties who are asserting a claim ‘jointly, severally, or in the alternative.’” Id. at § 1654. Thus the reference in Rule 20(a) to “jointly, severally, or in the alternative,” was intended to emphasize that joinder was permitted regardless of whether the relief sought was joint or several and that the form of relief was irrelevant to this issue. Rule 20(a) is thus starkly different from current Rule 10314(d)(1) and proposed Rule 12312, which make the joint or several nature of the relief an important element of the joinder question.
I agree with Federal Rule 20 and do not agree with the NASD that whether the relief sought is joint or several is pertinent. The appropriate joinder test is whether (1) a common law question of law or fact exists, and (2) the claims arise from the same transactions or occurrences or series of transactions or occurrences. The references in proposed Rules 12312 and 12313 to joint and several relief should be deleted.
Thank you for allowing me to file these comments.
Goodman & Nekvasil, P.A.
14020 Roosevelt Blvd, Suite 808
Clearwater, Florida 33762
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