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A federal court in Minnesota held that the NASD Code of Arbitration prohibits NASD members from compelling arbitration in class action cases regardless of whether the arbitration agreement contains a class action waiver.
In Good v. Ameriprise Financial, Inc., No. 06-1027, 2007 WL 628196 (D. Minn. Feb. 8, 2007), Good commenced a putative class action against Ameriprise, alleging that he and other Ameriprise financial advisers were not paid full commissions. Ameriprise filed a motion to compel arbitration pursuant to an arbitration agreement containing a class action waiver.
The only obstacle to arbitration was Rule 10301(d)(3) of the NASD Code of Arbitration, which provides that an NASD member cannot enforce an arbitration agreement against another NASD member or associate "who has initiated in court a putative class action or is a member of a putative class or certified class . . . unless and until" the class member "elects not to participate in the putative or certified class action."
As the Court noted, other courts have found that Rule 10301(d)(3) prohibits NASD members from compelling arbitration of claims that are proceeding as a putative or certified class action.
Ameriprise argued that Rule 10301(d)(3) was no obstacle because the class action waiver meant that Good and the other financial advisers had elected not to participate in the putative class action, thus bringing the case within the exception to the rule. In response, Good argued that the exception applies only if the person elects not to participate in a class action after it has been initiated.
In agreement with Good's interpretation, the Court relied on the rule's use of the phrase "has initiated" in holding held that the exception cannot come into play until the class action is initiated. In other words, under Rule 10301(d)(3), a person cannot elect not to participate in a class action until the class action is initiated. Accordingly, the Court denied Ameriprise's motion to compel arbitration.
Under the amended NASD Code of Arbitration, which takes effect in April, there is no Rule 10301. However, Rule 13204(d) of the amended code contains a virtually identical prohibition on compelling arbitration in class action cases.
The NASD Code of Arbitration ("NASD Code") is distinct from the rules of other arbitration providers (e.g., the National Arbitration Forum Code of Procedure) because it must be approved by the SEC in accordance with the Securities Exchange Act of 1934 (SEA). This oversight lends special status to the NASD Code. For example, in Jevne v. Superior Court, 111 P.3d 954 (Cal. 2005), the court held that the NASD Code, by operation of the SEA, preempted a California law that would have imposed heightened disclosure requirements on NASD arbitrators.
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