SEC Approves Rules Permitting Arbitration Participants To Seek Injunctive Relief From Arbitrators
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Executive Summary
On August 23, 1995, the Securities and Exchange Commission (SEC) approved amendments to the Code of Arbitration Procedure (Code) clarifying the authority of arbitrators to issue injunctions. The amendments include a new section that permits parties in intra-industry disputes1 to seek emergency relief, called "immediate injunctions," or nonemergency relief, called "regular injunctions." The parties will remain free, however, to obtain interim injunctive relief from the courts even though the merits of the case, and any claims for permanent injunctive relief, must be submitted to arbitration.
The new section codifies the authority of arbitrators to grant interim injunctive relief; requires parties seeking injunctions, in court or from the arbitrators, to submit a claim to arbitration for permanent relief; and provides that parties failing to comply with injunctive orders issued pursuant to Section 45 may be subject to disciplinary action for violating Article III, Section 1 of the Rules of Fair Practice. The amendments also require the party requesting interim injunctive relief pay a $2,500 nonrefundable surcharge for expedited proceedings. The new section is effective on January 3, 1996, for a one-year trial period. The text of the amendments follows this Notice.
Description Of Amendments
On August 23, 1995, the SEC approved an amendment to the Code adding a new section specifying procedures for obtaining injunctive relief in arbitration in connection with intra-industry disputes. The amendments also set forth fees for such injunctive relief proceedings and provide that members may be subject to disciplinary actions for failure to abide by injunctive orders issued under the new rules.
New Section 47 of the Code expressly provides that temporary and permanent injunctive relief may be obtained from the arbitrators; however, because parties may prefer to vest jurisdiction over interim relief in the courts, the NASD® has determined not to interfere with such preferences by barring resort to the courts at this time. Therefore, parties to an arbitration proceeding will still be permitted to obtain temporary injunctive relief from a court of competent jurisdiction, but they must submit the dispute to arbitration for final resolution. The new provision limits the scope of the relief that the parties may obtain in court to temporary relief and clarifies that the arbitrators have the authority to make final resolutions of issues in arbitration, including enjoining any party.
The NASD's goal in adopting these changes to the Code is to force eligible intra-industry disputes that include injunctive actions into arbitration, even if the initial temporary relief is obtained in court. The NASD is adopting the new rules as a pilot program and they will be effective for one year from January 3, 1996. The NASD will evaluate the new injunctive relief process toward the end of the first year of operation to determine, among other things, whether the process is providing the procedural efficiency and protection for the parties that would justify mandating that the parties obtain injunctive relief exclusively in arbitration, and whether the process should be adopted as a permanent addition to the Code.
Introduction To New Section 47
The introduction to new Section 47 provides that the parties to an arbitration may seek an "interim injunction" from a single arbitrator or a "permanent injunction" from a panel of arbitrators. In addition, parties may seek temporary injunctive relief in court; however, a party seeking temporary relief from a court for a dispute that is required to be submitted to arbitration pursuant to Section 8 of the Code must also file a claim for permanent relief in arbitration for the same dispute. This provision will prevent a party who is seeking interim relief in court from failing to pursue final resolution of the claim in arbitration. Thus, temporary injunctive relief may be obtained from a court or a single arbitrator, while permanent injunctive relief may be obtained only as a final remedy or award from a full panel hearing a claim in arbitration submitted pursuant to Subsection 25(a) of the Code.
Procedure For Seeking Interim Injunctive Relief
Under new Section 47, interim injunctions are available as Immediate Injunctive Orders (essentially emergency relief) or Regular Injunctive Orders (nonemergency relief). Immediate Injunctive Orders are the approximate equivalent of temporary restraining orders, while Regular Injunctive Orders are the approximate equivalent of Preliminary Injunctions designed to preserve the positions of the parties pending arbitration of the dispute on the merits. Subsection 47(a) provides that applications for interim injunctions will be heard by a single arbitrator.
Subsection 47(b) requires the party seeking interim injunctive relief to make a clear showing that it is likely to succeed on the merits, that it will suffer irreparable injury unless the relief is granted, and that the balancing of the equities lies in its favor. Thus, the proposed standards for granting injunctive relief are similar to those traditionally employed in many courts.
Subsection 47(c) provides that the party seeking interim injunctive relief must serve a Statement of Claim, a statement of facts demonstrating the necessity for injunctive relief, and a properly executed Uniform Submission Agreement (collectively, the application) on the party or parties against whom injunctive relief is sought. The applicant must also simultaneously file the application with the NASD Arbitration and Mediation Department.
Subsection 47(d) sets forth the procedure and timetable for the administration of applications for interim injunctive relief. Paragraph (d)(1) provides that applications for Immediate Injunctive Orders will generally be scheduled for hearing one to three business days after the NASD receives the application. If the party against whom an Immediate Injunctive Order is sought chooses to file a response, two copies must be submitted to the Director and served on all other parties at or before the hearing. The Arbitration Department will provide the name and background of the arbitrator assigned to hear the application before the hearing. The hearing on the application may be held by telephone or in person in a location specified by the NASD, taking into consideration the needs and circumstances of the parties. The NASD intends to conduct such hearings as teleconferences whenever personal attendance by all parties is difficult and where the nature of the hearing and the evidence to be presented will permit. To the extent personal hearings are held, the NASD contemplates holding such hearings in New York, Chicago, and San Francisco. The arbitrator will attempt to rule on the application within one business day after the hearing and record are closed. The duration of an Interim Injunction will be determined by the arbitrator, but, in any event, it will expire no later than the date of any ruling on a Regular Injunctive Order (if any) or a decision on the merits of the entire controversy.
Under Paragraph 47(d)(2), applications for Regular Injunctive Orders generally will be scheduled for a hearing within three to five business days after the response is filed or due to be filed, whichever comes first. A response to an application is due three business days after the party against whom an injunction is sought receives a copy of the application. If a responding party does not file a response, however, the responding party may still be heard and present evidence at the hearing. As with applications for Immediate Injunctive Relief under paragraph (d)(1), the Arbitration and Mediation Department will provide the name and background information of the arbitrator assigned to hear the application for a Regular Injunction, and the hearing on the application may be held by telephone or in selected cities. The arbitrator will attempt to rule on applications for Regular Injunctions within one business day after the hearing and record are closed. If granted, the injunction will remain in effect for a term to be determined by the arbitrator, but in no event later than the date of a decision on the merits of the dispute.
The NASD does not intend that interim relief be open-ended in nature. The NASD will advise and train arbitrators hearing applications for Immediate Injunctive Orders that they should consider setting short time limits on the duration of an order and require the applicant to seek renewal of an order in the event a Regular Injunctive Order has not been obtained. The NASD will also advise and train arbitrators hearing applications for Regular Injunctive Orders that they should consider limiting the duration of an injunctive order to remove incentives for the applicant to delay proceedings on the merits. In addition, the NASD will advise parties who have been enjoined that they may seek reconsideration (including termination or limitation) of the injunctive order at any stage of the proceedings. Finally, the NASD will monitor cases where Immediate Injunctive Orders have been granted to determine if any party is being unfairly disadvantaged during the effectiveness of the order.
Peremptory Challenges
To recognize and facilitate expedited injunctive proceedings, new Subsection 47(e) provides the parties with unlimited challenges for cause to the single arbitrator appointed to hear the application for an interim injunction, but no peremptory challenges are permitted. In addition, the parties will not be permitted a peremptory challenge to the arbitrator who heard an application for an injunctive order and who subsequently is appointed to participate on the arbitration panel hearing the same arbitration on the merits.
The amendments also include a change to Section 22 of the Code that excepts proceedings for injunctive orders under new Section 47 from the provisions of Section 22 granting a party one peremptory challenge to an arbitrator. Therefore, the two changes together (new Subsection 47(e) and the amendment to Section 22) make clear that with respect to the single arbitrator appointed to hear an application for an injunction there will be no peremptory challenge available.
Expedited Hearings
Subsection 47(f) provides for the appointment of a panel of arbitrators to hear the merits of a claim immediately following the issuance of an interim injunction. The arbitration of the claim will proceed in an expedited manner according to a timetable and procedures specified by the arbitration panel. This provision ensures that, in cases where interim injunctive relief has been granted, the merits of the dispute will be resolved expeditiously.
Subsection 47(g) provides that if a court has issued an injunction against one of the parties to an arbitration agreement, any arbitration that might be requested will be handled expeditiously, according to a timetable and procedures determined by the arbitration panel. Thus, in all cases eligible for arbitration, an injunction usually will speed up the proceedings.
Subsection 47(h) permits the arbitrator to require a party to deposit security in an amount that the arbitrator deems proper for the payment of any costs or damages that might be incurred by the adverse party if it were wrongfully enjoined. If the arbitrator security deposit, Subsection (h) requires that the deposit be placed in a separate bank trust or escrow account for the benefit of the party against whom injunctive relief is sought for the payment of any costs or damages that may be incurred or suffered by the party against whom injunctive relief is sought if it is found to have been wrongfully enjoined. This provision provides a mechanism to protect the party who is enjoined from the consequences of the injunction if, in the final decision on the merits, the enjoined party prevails. The NASD will not be the depository for security deposits; rather, parties required to deposit security will be required to make their own private arrangements with a financial institution to comply with the rule and the arbitrator's order.
Subsection 47(i) contains a "sunset" clause, causing the section to expire in one year unless extended by the NASD Board of Governors. This will provide for a pilot period, during which allowing arbitrators to issue interim injunctions can be assessed.
Fees
Currently, Section 44 imposes a non-refundable $2,500 surcharge on all parties in an expedited proceeding. Expedited proceedings are provided in connection with a request for injunctive relief under new Section 47 and as a result of a court granting injunctive relief. The amended Section 44 provides that the total $2,500 surcharge is to be paid only by the party or parties requesting expedited proceedings. The NASD regards the language of Section 44(h) imposing a surcharge as applying to a party seeking temporary injunctive relief, regardless of whether that relief is sought in court or in arbitration. In addition, the rule change provides that the arbitrator may determine that a party shall reimburse another party for any such surcharge it has paid.
Failure To Comply With Injunctive Orders
The NASD has also amended the Resolution of the Board of Governors, Failure to Act Under Provisions of the Code of Arbitration Procedure currently found at paragraph 3744 of the NASD Manual to provide that failure to comply with any injunctive order issued pursuant to Section 47 may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Article III, Section 1 of the Rules of Fair Practice. The failure of a party to comply with a court-issued injunction may be remedied through contempt proceedings in that court and, therefore, are not covered by this amendment.
Questions regarding this Notice may be directed to the NASD Arbitration and Mediation Department at (212) 858–4400.
1 The new section is expressly limited to intra-industry (member to member or employee to member) claims eligible for arbitration under Section 8 of the Code.
Text Of Amendments To The Code Of Arbitration Procedure
(Note: New text is underlined; deletions are bracketed.)
CODE OF ARBITRATION PROCEDURE
PART I and PART II No change.
PART III UNIFORM CODE OF ARBITRATION
Sec. 12 through Sec. 21 No change. Peremptory Challenge
Sec. 22. In any arbitration proceeding, except as provided in Section 47, each party shall have the right to one peremptory challenge. In arbitrations where there are multiple Claimants, Respondents and/or Third-Party Respondents, the Claimants shall have one peremptory challenge, the Respondents shall have one peremptory challenge, and the Third-Party Respondents shall have one peremptory challenge, unless the Director of Arbitration determines that the interests of justice would best be served by awarding additional peremptory challenges. Unless extended by the Director of Arbitration, a party wishing to exercise a peremptory challenge must do so by notifying the Director of Arbitration in writing within five (5) business days of notification of the identity of the person(s) named under Section 21 or Section 32(d) or (e), whichever comes first. There shall be unlimited challenges for cause.
Sec. 23 through Sec. 43 No change.
Schedule of Fees for Industry and Clearing Controversies
Sec. 44.
(a) through (g) No change.
(h) In each industry or clearing controversy which is required to be submitted to arbitration before the Association as set forth in Section 8, above, [requiring] where interim injunctive relief is requested or where a court has issued a temporary injunction and a party requests expedited [hearings] proceedings, a total non-refundable surcharge of $2,500 shall be paid by [all Claimants, collectively, and a non-refundable surcharge of $2,500 shall be paid by all Respondents, collectively] the party or parties requesting the expedited proceedings as provided in Section 47. For purposes of this Section, where expedited proceedings are mandated by subsection (g) of Section 47 of this Code, the party that sought and was granted injunctive relief by a court shall be deemed a party requesting expedited proceedings. These surcharge fees shall be in addition to all other non-refundable filing fees, hearing deposits, or costs which may be required. The arbitrators may determine that a party shall reimburse another party for any non-refundable surcharge it has paid.
Sec. 45 and Sec. 46 No change.
Injunctions
Sec. 47. In industry or clearing disputes required to be submitted to arbitration pursuant to Section 8. parties to the arbitration may seek injunctive relief either within the arbitration process or from a court of competent jurisdiction. Within the arbitration process, parties may seek either an "interim injunction" from a single arbitrator or a permanent injunction from a full arbitration panel. From a court of competent jurisdiction, parties may seek a temporary injunction. A party seeking temporary injunctive relief from a court with respect to an industry or clearing dispute required to be submitted to arbitration pursuant to Section 8 shall simultaneously file a claim for permanent relief with respect to the same dispute with the Director in the manner specified under this Code. This section 47 contains procedures for obtaining an interim injunction. Paragraph (g) of this Section relates to the effect of court-imposed injunctions on arbitration proceedings. If any injunction is sought as part of the final award, such request should be made in the remedies portion of the Statement of Claim, pursuant to Section 25(a).
Single Arbitrator
(a) Applications for interim injunctive relief shall be heard by a single
Showing Required
(b) In order to obtain an interim injunction, the party seeking the injunction must make a clear showing that it is likely to succeed on the merits, that it will suffer irreparable injury unless the relief is granted, and that the balancing of the equities lies in its favor.
Application for Relief
(c) Interim injunctions include both Immediate Injunctive Orders and Regular Injunctive Orders, as described in paragraph (d) below. In either case, the applicant shall make application for relief by serving a Statement of Claim, a statement of facts demonstrating the necessity for injunctive relief, and a properly executed Submission Agreement on the party or parties against whom injunctive relief is sought. The above documents shall simultaneously and in the same manner be filed with the Director of Arbitration, together with an extra copy of each document for the arbitrator, proof of service on all parties, and all fees required under Section 44. Filings and service required under this Section 47 may be made by United States mail, overnight delivery service or messenger.
(d) The procedures and timetable for handling applications for interim injunctive relief are as follows:
(1) Immediate Injunctive Orders.
(A) Upon receipt of an application for an Immediate Injunctive Order, the Director shall endeavor to schedule a hearing no sooner than one and no later than three business days after receipt of the application by the respondent and the Director.
(B) The filing of a response to an application for an Immediate Injunctive Order is optional to the party against whom the immediate order is sought. Any response shall be served on the applicant. If a response is submitted, the responding party shall, prior to the hearing or at the hearing, file with the Director two copies of the response and proof of service on all parties.
(C) Notice of the date, time and place of the hearing: the name and employment history of the single arbitrator required by Section 21: and any information required to be disclosed by the arbitrator pursuant to Section 23 shall be provided to all parties via telephone, facsimile transmission or messenger delivery prior to the hearing.
(D) The hearing on the application for an Immediate Injunctive Order may be held, at the discretion of the arbitrator or the Director, by telephone or in person in a city designated by the Director of Arbitration.
(E) The arbitrator shall endeavor to grant or deny the application within one business day after the hearing and record are closed.
(F) If the application is granted, the arbitrator shall determine the duration of the Immediate Injunctive Order. Unless the parties agree otherwise, however, the order will expire no later than the earlier of the issuance or denial of a Regular Injunctive Order under subparagraph (2) or a decision on the merits of the entire controversy by an arbitration panel appointed under this Code.
(2) Regular Injunctive Orders.
(A) Upon receipt of an application for a Regular Injunctive Order, the Director shall endeavor to schedule a hearing no sooner than three and no later than five business days after the response is filed or due to be filed, whichever comes first.
(B) The party against which a Regular Injunctive Order is sought shall serve a response on the applicant within three business days of receipt of the application. The responding party shall simultaneously and in the same manner file with the Director two copies of the response and proof of service on all parties. Failure to file a response within the specified time period shall not be grounds for delaying the hearing, nor shall it bar the respondent from presenting evidence at the hearing.
(C) Notice of the date, time and place of the hearing: the name and employment history of the single arbitrator required by Section 21: and any information required to be disclosed by the arbitrator pursuant to Section 23 shall be provided to all parties via telephone, facsimile transmission or messenger delivery prior to the hearing.
(D) The hearing on the application for a Regular Injunctive Order may be held, at the discretion of the arbitrator or the Director, by telephone or in person in a city designated by the Director of Arbitration.
(E) The arbitrator shall endeavor to grant or deny the application within one business day after the hearing and record are closed.
(F) If the application is granted, the arbitrator shall determine the duration of the Regular Injunctive Order. Unless the parties agree otherwise, however, a Regular Injunctive Order shall expire no later than a decision on the merits of the entire controversy by an arbitration panel appointed under this Code.
Challenges to Arbitrators
(e) There shall be unlimited challenges for cause to the single arbitrator appointed to hear the application for injunctive relief, but there shall be no peremptory challenges. Parties wishing to object to the arbitrator shall do so by telephone to the Director, and shall confirm such objection immediately in writing or by facsimile transmission, with a copy to all parties. A peremptory challenge may not be made to an arbitrator who heard an application for an injunctive order and who subsequently participates or is to participate on the arbitration panel hearing the same arbitration case on the merits.
Hearing on the Merits
(f) Immediately following the issuance of an Immediate or Regular Injunctive Order, the Director shall appoint arbitrators according to the procedures specified in the Code to hear the matter on the merits. The arbitration shall proceed in an expedited manner pursuant to a schedule and procedures specified by the arbitrators. The arbitrators may specify procedures and time limitations for actions by the parties different from those specified in the Code.
(g) If a court has issued an injunction against one of the parties to an arbitration agreement, unless otherwise specified by the court, any requested arbitration concerning the matter of the injunction shall proceed in an expedited manner according to a time schedule and procedures specified by the arbitration panel appointed under this Code.
(h) The arbitrator issuing the Immediate or Regular Injunctive Order may require the applicant, as a condition to effectiveness of the order, to deposit security in an amount that the arbitrator deems proper, in a separate bank trust or escrow account for the benefit of the party against whom injunctive relief is sought, for the payment of any costs and damages that may be incurred or suffered by the party against whom injunctive relief is sought if it is found to have been wrongfully enjoined.
Effective Date
(i) This Section 47 shall apply to arbitration claims filed on or after the effective date of this section. Except as otherwise provided in this Section 47. the remaining provisions of the Code shall apply to proceedings instituted under Section 47. Section 47 shall expire one year after its effective date unless extended by the NASD Board of Governors.
Resolution of the Board of Governors
Failure to Act Under Provisions of Code of Arbitration Procedure
It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Article III, Section 1 of the Rules of Fair Practice for a member or a person associated with a member to: (1) fail to submit a dispute for arbitration under the NASD Code of Arbitration Procedure as required by that Code; (2) fail to comply with any injunctive order issued pursuant to Section 47: (3) fail to appear or to produce any document in his possession or control as directed pursuant to provisions of the NASD Code of Arbitration Procedure; [(3)] (4) fail to honor an award, or comply with a written and executed settlement agreement, obtained in connection with an arbitration submitted for disposition pursuant to the procedures specified by the National Association of Securities Dealers, Inc., the New York, American, Boston, Cincinnati, Chicago, Pacific, or Philadelphia Stock Exchanges, the Chicago Board Options Exchange, the Municipal Securities Rulemaking Board, or pursuant to the rules applicable to the arbitration of securities disputes before the American Arbitration Association where timely motion has not been made to vacate or modify such award pursuant to applicable law; or [(4)] (5) fail to comply with a written and executed settlement agreement, obtained in connection with a mediation submitted for disposition pursuant to the procedures specified by the National Association of Securities Dealers, Inc.