Firms will still be able to sue defecting brokers in court under provisions of a proposed NASDR rule filed with the SEC in July.
The proposal deals with how firms may obtain temporary restraining orders (TROs) and injunctions against brokers when they leave. In some cases, brokerage firms seek a TRO and/or a longer-term injunction that prohibits a rep from contacting clients based on an alleged non-compete agreement. Firms claim theft of trade secrets, i.e., client account information by the departing rep. A firm must also claim it will suffer irreparable harm if a broker takes his or her accounts.
The rule would make final a two-and-a-half year pilot program whereby the NASDR offered injunctive relief via the NASDR arbitration system. If a firm (or in rare cases a broker) sought a TRO or injunction from a court, the pilot program mandated that the plaintiff simultaneously file for expedited arbitration.
The expedited procedure would be preserved in the final rule. Its designed to avoid having reps tied up for months, unable to call clients, while waiting for a hearing.
The proposed final rule would require an expedited hearing within 28 days after a TRO is granted by either a court or an arbitrator. The pilot program had no time requirements, which led to continued delays in some disputes.
The industry has been criticized for obtaining TROs in court, where firms are usually successful arguing their cases before judges unfamiliar with industry practice, versus in arbitration, where they obtain a TRO or injunction about a third of the time.
Although the court option would remain, firms would be prohibited from requesting extension of a court-ordered TRO beyond an initial 10-day period.
The prohibition is a good result, says Tom Campbell, a partner in the New York law firm of Smith Campbell & Paduano, whos active in defending reps in TRO cases. The pursuit of a longer-term injunction in court can be the excuse for taking all kinds of discovery, and tying it up in court as long as possible, Campbell says.
Parties would no longer be able to pursue discovery in court under the proposal. Only NASDR arbitrators would be able to extend TROs.
Brokers would, however, lose one of their key arguments in preventing court TROs: that the availability of a TRO in arbitration is grounds for denial by a judge. The rule would specifically prohibit that argument.
The result, Campbell believes, is that judges will more readily grant TROs without giving a case much consideration. He believes more TROs may be issued.
Despite the rules details regarding expedited hearings, few TRO cases ever go that far. The TRO strategy typically is used to obtain settlements from defecting reps; some 96% of TRO cases filed with the NASD from January 1996 to October 1997 settled, according to NASDR statistics.
This past October, the NASDR held a comment period that produced 17 comment letters. Salomon Smith Barney, Charles Schwab and BancOne came down in favor of retaining court-ordered TROs, but all other letters strongly urged the NASDR to eliminate that option.
Those voting no on court-ordered TROs included Morgan Stanley Dean Witter, four regional firms, three NASD arbitrators and a former staff attorney at Merrill Lynch.
At press time in August, the final rule proposal had not been published in the Federal Register. The normal SEC comment period is 21 days from publication.
As part of its filing, the NASDR proposed extending the current pilot program through January 1, 1999, at which time the final rule would go into effect.
