NASD FILES PERINO REPORT AMENDMENTS:
Responding to the Perino Report, NASD seeks revisions on arbitrator disclosure and removal standards, plus it is narrowing its public and non-public arbitrator classifications. The amendments NASD proposes to Rules 10308 and 10312 parallel those we described in last weeks report on NYSEs rule changes (SAA 03-22), but include as well changes to the standards that define public and nonpublic arbitrators. ]]>
As we indicated in SAA 03-22, Prof. Michael Perinos November 2002 Report recommended that the SROs:
- (1) amend their arbitration rules to emphasize that all conflict disclosures are mandatory;
- (2) re-examine the current definitions of public and non-public arbitrators;
- (3) provide greater transparency with respect to challenges for cause by including the cause standard in their rules; and
- (4) sponsor independent research to evaluate the fairness of SRO arbitrations.
The NYSE rule proposal deals with the first and third of those recommendations, as those recommendations had been addressed by SICA, while the other two Perino recommendations, as of the NYSE filing (May 12) are currently under consideration by SICA. We saw no mention of SICA in the NASD submission, but it may be that SICA has met and acted in the interim.
In any case, NASD will now change Rules 10308 and 10312 to reflect identical standards for cause challenges and to clarify that arbitrator disclosures and due diligence requirements in Rule 10312 (a) and (b) are mandatory. The classification changes NASD plans to adopt will broaden the definition of a non-public arbitrator in Rule 10308 to include associated persons who have been out of the securities or commodities industry for up to five years (from 3) and those who, not only retired from the industry, but spent a substantial part of a career so engaged (substantial is not defined and, logically, it would seem to change over time, as ones career lengthens).
The public arbitrator definition will be narrower, excluding, as before, those defined as non-public, their spouses and immediate family, while adding some important new exclusions. Investment advisers, the buy side are out (since they are not within the non-public definition, they fall between the two circles of inclusion). Investment adviser is not defined, so it will probably be broadly construed to include financial planners and others (trustees? tax and estate planners?) who recommend securities, whether or not state- or federally-registered.
Public arbitrators who work for companies that are outside the securities business, but service it will want to review this proposal carefully. If your company derives 10% or more of its annual revenue in the past 2 years from industry sources, you may be out, too. The exclusion relates to attorneys, accountants, or other professional employees, but professional is not defined. Picture a reporter from Bloomberg (assume Bloomberg earns 10% of its revenues from the industry). That reporter would appear to be ineligible to sit as either a public or non-public arbitrator, under the proposal, assuming one views a member of the media as a professional (ed: Query whether the Mayor is ineligible.) The same might be true of an analyst for ValueLine (although her research would be deemed independent). If one is an employee, but not a professional within such a firm, service as a public arbitrator appears permissible (i.e., to serve, one must not be a professional).
Finally, the rule change eliminates from the public ranks more arbitrators who are in families of non-public arbitrators. The immediate family members exclusion be broadened to encompass a parent, stepparent, child, or stepchild, regardless of residence, or a member of the household.
The rule change was submitted to the SEC on June 12 under File No. SR-NASD-2003-95. Comments may be submitted under that file number, until the SEC sets a comment deadline through publication in the Federal Register. (SAC Ed: NASD does not estimate in the rule filing how many arbitrators will be eliminated from its rolls by this change, but we recall hearing officials say it will not be many. Thats good, because 8,500 arbitrators may need to deal with 12,000 cases over the next year.) (SAC Ref. No. 2003-23-02)
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.