On March 1, 2007, NASD Dispute Resolution President Linda Fienberg, along with NASD Vice President and Director Richard Berry, presented an arbitrator workshop on the recently approved revisions to the NASD Code of Arbitration Procedure. The changes will affect selection of arbitrators, motions practice, imposition of sanctions, postponement of hearings, 20 day exchange, and many other critical aspects of a case. The most significant changes are summarized below in a Q & A format.
Q1: When will the changes become effective?
A: The changes to the NASD Code of Arbitration Procedure (the “Code”) will become effective on April 16, 2007 and will apply to all cases filed on or after the effective date. The only exception to the effective date is that the new rules governing the arbitrator selection process will apply to all cases in which a list of arbitrators has not yet been generated or in which an entirely new list of arbitrators must be generated. In addition, in pending cases filed before April 16, 2007, the parties may agree, through written stipulation, to have the new rules in their entirety govern their case.
Q2: How do the new rules change the arbitrator selection process for customer claims?
A: If a panel consists of three arbitrators, the Neutral List Selection System will generate three lists, each containing the names of eight potential arbitrators. As under the current system, public and non-public arbitrators will be identified on separate lists. The third list will be comprised of public arbitrators who are qualified to serve as the chairperson of a panel. In addition, the parties can stipulate that the chairperson list contain only arbitrators who are attorneys. Where the panel consists of only one arbitrator, the Neutral List Selection System will continue to generate a single list of eight public arbitrators. Each separately represented party may strike up to four arbitrators from each list for any reason. See Rule 12404.
Q3: How do the rule changes affect the selection of the chairperson of the panel?
A: New Rule 12400 provides that the chairperson of each panel must be selected from the list of chairperson-qualified arbitrators. To be chairperson-qualified, arbitrators must be either: (1) an attorney who has sat through two arbitration cases through the award date; or (2) a non attorney who has sat through at least three such cases. They also must complete an NASD training program or have “substantially equivalent” training or experience.
Q4: When will a case be heard by a single arbitrator?
A: Claims for $25,000 or less will be decided by a single arbitrator. Claims for more than $25,000 but less than $50,000 will be decided by a single arbitrator unless any party requests three arbitrators in its initial pleading. The single arbitrator appointed in these situations no longer has the option of requesting that a panel of three arbitrators be appointed. See Rule 12401.
Q5: In simplified arbitrations, must the sole arbitrator be from the chairperson-qualified list?
A: The only arbitrators eligible to hear simplified cases will be chairperson-qualified arbitrators; however, the parties have the option to select an arbitrator from a different roster if they mutually agree.
Q6: Do the new rules incorporate NASD NTM 99-90 (the “Discovery Guide”)?
A: Yes. The new rules codify the Discovery Guide, and Rule 12506 clarifies that it is mandatory for parties either to produce all Discovery Guide List Items on the relevant document production lists, explain why production is not possible, or object. This rule also provides that parties must act in “good faith” when complying with its provisions, and defines this requirement by stating that a party “must use its best efforts to produce all documents required or agreed to be produced.” In addition, if a document cannot be produced in the required time frame, a party must establish a reasonable time frame for production.
Rule 12507 incorporates the Discovery Guide’s language regarding additional document requests and information requests.Like Rule 12506, Rule 12507 provides that if a document cannot be produced in the required time frame, a party must establish a reasonable time frame for production.
Q7: Do the new rules have any impact on motions practice in customer arbitrations?
A: Yes. Rule 12503 governs motions practice, and provides that before filing any motion, the moving 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 filing the motion. Under Rule 12504,1 motions to decide claims on the merits before the final hearing are discouraged and may be granted only in extraordinary circumstances. Moreover, under this rule, dispositive motions must be in writing unless the parties agree or the panel determines otherwise. Dispositive motions will be decided by the full panel, and the panel must hold a pre-hearing conference on the motion unless that is waived by the parties. In addition, if the panel determines a dispositive motion was filed in bad faith, it may issue sanctions under Rule 12212.
Q8: Are there any changes to an arbitration panel’s ability to impose sanctions against a party?
A: Yes. Rule 12212 incorporates and codifies the sanctions provisions in the Discovery Guide, and is intended to give more guidance to parties and arbitrators regarding the scope of arbitrator authority to address noncompliance with the Code and noncompliance with panel orders. The rule lists specific sanctions that may be imposed, such as requiring payment of monetary penalties; precluding a party from presenting evidence; drawing adverse inferences; assessing fees (including attorney’s fees); initiating a disciplinary referral; and dismissing a claim, defense or arbitration with prejudice as a sanction for material and intentional failure to comply with an order of the panel or if prior warnings or sanctions have proven ineffective.
Rule 12511 provides that failure to cooperate in the exchange of documents and information may result in sanctions, as may a failure to comply with the discovery provisions of the Code, unless the panel finds there is a substantial justification for the failure to comply. Moreover, this rule provides that sanctions may be imposed for frivolously objecting to the production of requested documents and information. In addition, the new rule provides that a panel may dismiss a claim, defense or proceeding with prejudice for intentional and material failure to comply with a discovery order if prior warnings or sanctions have proven ineffective.
Q9: Under the new rules, which documents and information must be turned over at the 20-day exchange?
A: The new 20-day exchange rule, Rule 12514, provides that at least 20 days prior to the first scheduled hearing date, parties must provide all other parties with the names and business affiliations of all witnesses they intend to present at the hearing. This rule also says that at the hearing, parties may not present any documents or other materials not produced, and may not call any witnesses not identified, unless the panel determines good cause exists for the failure to produce the document or identify the witness. This rule defines good cause to include the need to use documents or call witnesses for rebuttal or impeachment purposes; however, the comments to the rule note that the rule’s definition of good cause specifically does not include cross examination. Thus, under the new rules, withholding documents from production at the 20-day exchange on the grounds that they will be used only for cross examination may result in exclusion.
Q10: Do the new rules limit a claimant’s ability to dismiss a case without prejudice?
A: Yes. Rule 12702 provides that once a claim has been answered, the claimant may withdraw the claim only with prejudice unless the panel decides otherwise, or if the claimant and the answering party agree otherwise. This rule specifically was designed to prevent claimants from forum shopping by dismissing claims without prejudice and then refiling those same claims with the hope of obtaining a more favorable panel.
Q11: Do the new rules address postponements of hearings?
A: Yes. Under Rule 12601, the parties have the discretion to postpone a hearing if they mutually agree to do so. If the parties do not agree to postpone, and one party makes a motion for postponement within ten days of the date the hearing is scheduled to begin, the panel should not postpone unless it determines that good cause exists. With regard to postponement fees, the panel has the authority to allocate such fees among non-requesting parties if those parties contributed to the need for postponement.
Q12: Are expert witnesses now permitted to attend all hearing sessions?
A: Under the new Rule 12602, expert witnesses should be permitted to attend all hearings unless there are persuasive reasons to the contrary.
Q13: Are there any changes to the various deadlines imposed by the current Code?
A: Yes. All parties now have 20 calendar days to respond to an amended Statement of Claim under Rule 12309. In simplified arbitrations, parties now have 45 days to file an answer pursuant to Rule 12800.
Written motions (except as provided for dispositive motions in Rule 12504) must be served at least 20 days prior to a scheduled hearing, unless the panel decides otherwise. Dispositive motions must be served at least 60 days prior to the hearing date. Responses to written motions are due within ten calendar days of receipt, pursuant to Rule 12504.
Under Rule 12596, parties now have 60 days from the date the Answer is due to respond to the Discovery Guide’s document production lists. Likewise, Rule 12507 provides that parties now have 60 days to respond to discovery requests.
Q14: Will the new rules continue to apply after the merger between NASD and NYSE becomes effective?
A: Yes. However, the NASD and NYSE likely will adopt new rules after the merger in an effort to take the “best practices” from each forum and incorporate them into a new, amended Code of Arbitration.