August 21, 2007
By Edward Hayes
CCH WALL STREET
The NASD is working on changing the way subpoenas are issued during arbitration hearing process. The regulator filed its proposal with the SEC, stating that only the arbitrator in an NASD hearing can issue a subpoena.
This is the latest in a series of changes that the regulator is making to its arbitration codes. It has been working for about a year on the process and filed the most recent amendments last month.
Under the rule proposal a party in the arbitration hearing will have to send the arbitrator and the other party a notice of their request to issue a subpoena. The other party, usually the one subject to the subpoena, then has 10 days to object to it, explained Rick Berry, vice president and director of case administration at the NASD.
The main issue the regulator hopes to address with the rule proposal is the current inconsistency of the rule throughout the country. In some states, attorneys have the power to subpoena who they want. This causes confusion for those in states not accustomed to receiving a subpoena directly from an attorney.
“Sometimes one side would have no knowledge that a subpoena had been issued and there was confusion over if the subpoena was valid or not [because it came from an attorney],” said George Friedman, the executive director of arbitration at the NASD.
There was also some gamesmanship in the way subpoenas were disclosed, Friedman added. Some attorneys would FedEx the subpoena to the recipient and send notice of it to the other party via regular mail.
In addition, many attorney-initiated subpoenas were too broad in scope and requested data that was not particularly relevant, such as the entire phone records for a client. This abuse raised privacy concerns and added more work to the investigation, Friedman said.
By implementing this new rule, officials at the NASD hope to minimize the abuses and ensure that any subpoena that goes out as part of an arbitration hearing is justified. It will also bring more consistency on a state-to-state basis with the subpoena process.
“We believe that providing arbitrators with greater control over the issuance of subpoenas will reduce the confusion for parties and their counsel regarding whether they have the ability to issue subpoenas, minimize gamesmanship in the subpoena process, and foster greater efficiency and consistency in administering the rule. This proposal is one more step in ensuring that the process is transparent to all parties, especially investors,” said Linda Fienberg, president of dispute resolution at the NASD.
However, one attorney who has been involved in several arbitration cases said the new rule will actually slow down the process.
“There will be more posturing with this by both sides and it will make attorneys—who charge by the hour—richer,” said Lawrence L. Klayman, an attorney at the Boca Raton law firm of Klayman & Toskes, P.A.
Klayman agrees the new rule could curb some abuses. But he believes that abuse can be reduced now by giving attorneys the ability to quash a subpoena. The new system can also hurt an attorney’s chances of winning a case. For instance, an arbitration panel may deem a document an injured party wants to subpoena as irrelevant and this hamper his case.
The NASD originally filed the rule proposal on June 17. After the regulator received feedback from the industry, it added the amendments to address clarity and disclosure.
“After the arbitrators issue a subpoena, the party that requested it must serve a copy of the subpoena on all parties and the entity receiving the subpoena in the exact same manner and on the same day. Additionally, the new rule would require parties that receive documents in response to non-party subpoenas to make the documents available to all other parties upon request,” the NASD said in a statement.
The rules still need to be approved by the SEC, but Friedman is hoping that it will go into effect later this year.