InvestmentNews (August 7, 2006 11:01 pm) -- In an unusual move, NASD has withdrawn a proposed amendment to its arbitration code.

The proposal, filed in May with the Securities and Exchange Commission, dealt with how arbitrators handle motions to dismiss a case prior to a full arbitration hearing.

The main criticism of the proposed changes was over legalistic language Washington-based NASD wanted to add that defined the type of "extraordinary circumstances" under which claims could be dismissed.

The amendment immediately drew the ire of the investor plaintiff's bar, which said that the change would increase dismissals.

NASD added the industry-friendly language without the knowledge of investor representatives, industry critics said (InvestmentNews, July 10).

Adding fuel to the fire was the fact that NASD wanted accelerated approval of the changes - with no further public comment.

The proposed motions rule was part of a larger package of pending arbitration code changes.

In the wake of the storm, NASD withdrew the amendment July 21 and refiled its rule package without the offending provisions.

Separately, NASD filed for comment its proposed rules covering dismissal motions.

Pending approval of a final motions rule, "arbitrators may wish to be judicious in reviewing motions to dismiss," NASD said in a message to its arbitrators last month.

"It's pretty remarkable [for NASD] to withdraw an amendment after only two months," said Robert S. Banks Jr., president of the Public Investors Arbitration Bar Association of Norman, Okla. "I give the NASD credit."

In addition, NASD has filed with the SEC a similar set of rule changes that cover intraindustry disputes such as fights between brokers and firms.

Sarah Bohn, a spokeswoman, declined to comment, instead referring the reporter to NASD's most recent rule filing.

Touchy issues

The issue of how and when arbitration claims can be dismissed is a touchy one.

The industry complains about having to defend against frivolous cases, while the plaintiff's bar believes that investors, who for the most part are required to go to arbitration, have a right to have their cases heard.

The North American Securities Administrators Association Inc., which represents state and provincial regulators, last month offered PIABA its support in contacting the SEC about NASD's motions proposal.

Investors are "put in an extremely unfavorable position if they had their actions dismissed before a hearing, due to what is a legal maneuver," said Patricia Struck, president of Washington-based NASAA.

Arbitration was set up so investors could represent themselves, she added. "It's really just a fairness thing" not to dismiss a case before evidence is heard, said Ms. Struck, who is administrator for the Wisconsin Department of Securities.

Mr. Banks, an attorney with the Banks Law Office PC in Portland, Ore., also complained to the SEC last month about a form letter NASD had been sending to arbitrators. The letter indicated that motions could be granted without a pre-hearing conference, he said, but it was being improperly sent in cases where a motion to dismiss was pending.

An informal NASD policy requires at least a pre-hearing teleconference before a case is dismissed.

Mr. Banks said that NASD arbitration officials last month promised to stop sending the form letter.

Dismissal motions common

Attorneys say that motions to dismiss have become commonplace in arbitration disputes.

While the New York Stock Exchange and NASD have made it clear that they discourage dismissals, "courts have consistently said arbitrators have the authority to entertain [motions to dismiss] and grant them," said David Robbins, a partner at Kaufmann Feiner Yamin Gildin & Robbins LLP of New York, who represents both investors and brokers.

He is the author of the "Securities Arbitration Procedure Manual" and a public member of NASD's arbitration committee.

Two court cases decided earlier this year provided additional support to the industry's efforts to get cases thrown out.

A U.S. District Court in the state of Washington last May upheld an NASD arbitration panel's dismissal of a claim. The panel declined to hear the case, apparently on statute of limitations grounds.

In that case, investors Burrell and Helen Allen of Gig Harbor, Wash., claimed that their broker from Minneapolis-based RBC Dain Rauscher Inc. had recommended an unsuitable investment mix of mutual fund B shares. The case met NASD's six-year eligibility requirement, but the court declined to vacate the dismissal, because the written award was "ambiguous" about exactly why the case was thrown out.

In another case, decided in March, an Ohio appellate court ruled that an arbitration panel's decision to dismiss a case without explanation could stand, because the investor, James Reinglass, failed to make specific fraud claims in his lawsuit against New York-based Morgan Stanley.

Mr. Reinglass, who now resides in Jupiter, Fla., claimed that his Morgan Stanley broker had transferred money into accounts controlled by the rep, made unauthorized trades and changed account addresses to cover up the fraud. The three-judge Ohio panel said that Mr. Reinglass failed to name times, places or details of the transactions in his claim.

But no such pleading procedures are required in arbitration, said Hugh D. Berkson, a partner at Hermann Cahn & Schneider LLP in Cleveland, who is representing Mr. Reinglass in an appeal to the Ohio Supreme Court.

In a filing with that court, Mr. Berkson argued that the industry and self-regulatory organization arbitration officials have insisted that the informality of arbitration benefits investors.

He quoted, among others, Marc Lackritz, president of the Securities Industry Association in New York and Washington, who told a House committee last year that aggrieved customers can get their "day in court," because "unlike in court cases, claimants in arbitration are not held to technical pleading standards."