Merrill Lynch and American Express Financial Advisors are fighting to preserve their ability to sue departing brokers.
Largely at Merrill's urging, with support from American Express, the NASDR has delayed the effective date of a final rule regulating the use of temporary restraining orders (TROs).
A final rule was supposed to take effect on Jan. 4, but in mid-December, the NASDR asked the SEC to extend a three-year-old TRO pilot program for another six months, until July 3, 1999. The SEC signed off on that request on either the Monday or Tuesday before New Year's, an SEC spokesperson says.
An NASDR spokesperson says the organization asked the SEC to extend the pilot to give the NASDR additional time to respond to last minute comment letters sent by Merrill and American Express.
But prior to seeing the letters, NASDR staff had already written the SEC in December saying that although "one commentator" (Merrill) had earlier urged that the pilot be extended, the NASDR was opposed to that idea. A pilot TRO program had been in effect since 1996 and had undergone "extensive review," the NASDR said. The NASDR has, therefore, "had ample opportunity to consider the effectiveness of the pilot rule."
The TRO rulemaking is a controversial effort by the NASD to regulate the use of this legal strategy. Restraining orders are used by firms to prevent departing reps from contacting clients. Brokers, as well as many firms, oppose the practice generally, and many participants also criticize the widespread practice of seeking such an order from a court rather than from an NASDR injunctive arbitrator.
The proposed final rule would put time limits on many of the procedures now used in the pilot. The final rule would prohibit firms from seeking anything more than an initial, 10-day TRO in court. Other issues such as injunctive relief for a longer period, or seeking discovery, could only be done in arbitration. Arbitration itself would be on a fast track in any TRO case. If a TRO had been issued, then a full hearing on the merits would be scheduled within a target range of 28 days. The NASDR has also proposed to make restraining orders public once the case is settled. Injunctive orders issued by the NASDR are not now publicly available.
In the fight over TRO rulemaking, some interesting statistics have come to light.
Merrill Lynch's law firm, Rubin & Associates in Paoli, Pa., in a December comment letter to the SEC boasted of handling "over 90 representative cases during the pilot period," which started on Jan. 3, 1996. An appendix noted that additional cases had been brought during that time period as well. That means Merrill is bringing actions against two to three brokers every month, on average.
Meanwhile, American Express Financial Advisors has been working to replace Merrill as the king of suing defecting brokers. Tom Campbell, a partner in the New York law firm of Smith Campbell & Paduano, which has defended brokers against Merrill for more than a decade, notes that "in the last two years, we've seen more activity from Amex than from Merrill, and it's nationwide ... from Boston to Florida to Southern California."
