InvestmentNews (July 7, 2006 11:01 pm) -- A major rewrite of NASD's arbitration code has erupted into controversy, with some plaintiff's attorneys accusing the self-regulatory organization of trying to sneak in industry-friendly changes at the 11th hour.

The rule package is pending approval at the Securities and Exchange Commission. As a result of critics' concerns, Washington-based NASD and the SEC may reopen the more controversial parts for further comment.

The controversy involves proposed rules covering how arbitrators handle motions to dismiss a case before it is heard. Arbitration is supposed to offer investors a chance to make their case without the legal hurdles found in court.

Arbitrators generally don't dismiss cases, but the plaintiff's bar is worried that the proposed change will, if approved, increase the frequency of dismissals.

NASD's proposed rewrite, originally published for comment a year ago, said: "Motions to decide a claim before a hearing are discouraged and may only be granted in extraordinary circumstances."

But in May, NASD amended the proposal, adding legalistic explanatory language defining "extraordinary circumstances."

It said in its May filing that the language was necessary because arbitrators need more guidance. The Public Investors Arbitration Bar Association, a Norman, Okla.-based group that represents plaintiff's attorneys, said that this latest change opens the door to dismissing cases based on various legal defenses instead of obvious mistakes, such as when the wrong person or firm is named in a case.

"We were surprised by [NASD's amendment], because we had spent a lot of time on the motions rule," said PIABA president Robert S. Banks Jr., an attorney with the Banks Law Office PC in Portland, Ore.

He and other critics say that the amendment changes the intent of the original rule, which was to discourage dismissals.

"The [new] language suggests arbitrators can routinely [dismiss cases]," said Jill Gross, director of advocacy at the Pace Investor Rights Project and associate professor at the Pace University School of Law in White Plains, N.Y.

Her group represents small investors. NASD was well intentioned in offering guidance, Ms. Gross said, but the explanatory language is "overly broad" and will encourage dismissals "more frequently than even the NASD wants."

She said arbitrators already seem to be dismissing cases more often.