WealthManagement Magazine

Expedited Arbitration Rule for TRO Cases Extended

The NASDR has asked for and received Dec. 17, 1997, from the SEC a six-month extension for its pilot program that expedites arbitration hearings for brokers who have been enjoined by former employers.In some cases, when reps leave a firm, they are hit with temporary restraining orders (TROs) and injunctions that prohibit them from contacting customers. The NASDR last year asked for comment on its

The NASDR has asked for and received Dec. 17, 1997, from the SEC a six-month extension for its pilot program that expedites arbitration hearings for brokers who have been enjoined by former employers.

In some cases, when reps leave a firm, they are hit with temporary restraining orders (TROs) and injunctions that prohibit them from contacting customers. The NASDR last year asked for comment on its pilot program of expedited arbitration, and asked whether firms should be able to continue obtaining TROs in court, and whether the NASDR should continue its own injunctive arbitration hearings.

Although the NASDR was due to file its conclusions and recommendations with the SEC by Dec. 31, NASDR spokesperson Nancy Condon says the SRO "really wanted to be able to do a complete review of the comments" that it received during the comment period which ended Oct. 31. The NASDR got a total of 17 comment letters.

Condon says the NASDR again will be seeking comment on proposed changes to the rule at the end of first quarter 1998.

Smith Barney, Charles Schwab, and Banc One came down squarely in favor of retaining the right to go to court to obtain a TRO. "In no event should the option of going to court be eliminated," wrote Eugene Clark, Smith Barney's senior vice president and associate general counsel. Smith Barney also recommended that TROs be eliminated in arbitration because "as a practical matter, the NASD has been unable to provide a quick and cost-efficient alternative to the court system."

Linda Drucker, vice president and senior corporate counsel at Schwab, recommended that TROs be retained in both the courts and in arbitration, suggesting that the expedited arbitration rule be amended to "expressly state that the availability of relief through arbitration is not grounds for preventing a party from applying, or denying that party's application, for a TRO [from a court]." If such an amendment were to be added, "the reluctance of certain courts to entertain requests for TROs would be dispelled," she said.

But other than these firms, the letters were overwhelmingly negative about retaining the right to obtain court-ordered TROs. The NASDR got "no" votes from four regional firms; three of the NASD's own arbitrators; a former staff attorney at Merrill; and A.G. Edwards rep Tim Nicholson who left Merrill Lynch in 1996, and, at least technically, was prevented from contacting clients for one year (see "Marked Man," RR, February '97, Page 64)

Dean Witter's senior deputy general counsel, Paul Dubow, flatly stated: "The option for a court-ordered TRO should be eliminated." But Dean Witter also said the option to obtain TROs from arbitrators should not be eliminated. That's the route the firm used to enjoin broker Robert Zielke and his new firm, Bear Stearns, from processing account transfers last year (see Page 90, November '97 RR).

The firm also called for strict time limits on TROs and preliminary injunctions. "Under the present system, a party who obtains an Immediate Injunctive Order can engage in gamesmanship by delaying the next hearing long enough so that the party enjoined is forced to resolve the case," Dubow wrote. "We are aware also of at least one instance where an arbitrator who issued an Immediate Injunction Order set a hearing date for months later and then postponed it, thereby forcing the respondent to settle on onerous terms," Dubow said in recommending a limit of 10 days for TROs and 60 days for preliminary injunctions.

Ironically, Zielke left Dean Witter in December 1996 and waited four months before the TRO was lifted on his full book.

Attorneys for four regional firms also voted to eliminate court-ordered TROs, including Deborah Fabritz, associate general counsel at Robert W. Baird of Milwaukee, who answered the question with an enthusiastic "YES!"

Stephen Sneeringer, senior vice president and counsel, director of law, at A.G. Edwards in St. Louis, offered his opinion that eliminating court-ordered TROs "would be a cost-saving measure for all parties."

Claude O. Ramer II, assistant general counsel at Nashville-based J.C. Bradford, wrote that following an injunction, "The ensuing litigation/arbitration bears many attributes of child-custody cases, and like the kids in the custody cases, the biggest losers are generally the clients. The situation is not a healthy one for the industry."

Likewise, Pamela Warnement, senior vice president and deputy general counsel at Interstate/Johnson Lane in Charlotte, N.C., noted that when a TRO is obtained in court, it leaves "the clients without the benefit of advice from the person with whom they are most accustomed to dealing. This 'hostage' situation often puts the hiring firm in the position of having to 'ransom' the broker in order to avoid the possible ruination of his or her business." NASD arbitrator Peter Pointer, president of Peter L. Pointer Investment Co. of Columbus, Ohio, was perhaps the bluntest.

"Most of the employment dispute arbitrations with which I have been involved do little but put the client at risk and inconvenience," he wrote. "The losing firm gains the TRO, hassles the representative for a period of time, settles prior to the arbitration and the majority of the clients remain with the representative. The TRO has done nothing but exacerbate a bad situation with the representative and cause harm and confusion to the client," he wrote, adding that a TRO should not be permitted in cases involving fewer than five reps leaving an office during a 30-day period.

Neither Merrill Lynch, which launched the practice of obtaining TROs back in the 1970s, or its external counsel, Greg Rubin, of Paoli, Pa., filed comment letters. Neither did Tom Campbell, who often works the defense side against Merrill and other firms.

But the NASDR did get a comment letter from James Dolan, an attorney in private practice, who was "with the Merrill Lynch legal department in the 1970s when raiding of account executives was prevalent." Dolan said he "arbitrated some 30-plus cases" and found that the "practice was expensive, time-consuming and produced uneven results." In his private practice, he has handled cases on both sides "with results that have not been uniform because of the uneven application of judicial discretion." Dolan supported injunctive relief via the NASDR.

TAGS: Archive
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish