[Federal Register Volume 59, Number 81 (Thursday, April 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10087]


[Federal Register: April 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33939; File No. SR-NASD-93-65]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to 
Exclusion of Class Action Claims From Arbitration

April 20, 1994.
    On November 4, 1993, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'')\1\, and rule 19b-4 thereunder.\2\ The proposal amends 
section 12 of the NASD Code of Arbitration Procedure\3\ (``Code'') by 
barring any NASD member or its associated persons from seeking to 
enforce an agreement to arbitrate against another member or associated 
person if that member or associated person has initiated in court a 
putative class action or is a member of a putative or certified class. 
The prohibition would extend to all claims encompassed by the class 
action.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\NASD Manual, Code of Arbitration Procedure, Part III, Sec. 12 
(CCH), 3712.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was provided by issuance of a Commission release 
(Securities Exchange Act Release No. 33506, February 9, 1994) and by 
publication in the Federal Register (59 FR 7282, February 15, 1994). No 
comment letters were received. This order approves the proposed rule 
change.
    Section 12(d)(3) of the Code currently bars members or associated 
persons from seeking to enforce an agreement to arbitrate against a 
customer where the customer has initiated in court a putative class 
action or is a member of a putative or certified class with respect to 
any claims encompassed by the class action. The section, however, omits 
specific reference to claims filed by associated persons against 
members and claims filed by members against other members. As a result, 
some respondents have argued that class actions encompassing such 
claimants can be submitted to arbitration under the Code. The NASD 
determined that the original intent of the section was to exclude class 
action claims by associated persons, including employment-related 
claims, and other industry class actions from arbitration, as well as 
customer-related class actions. Accordingly, the NASD proposed to amend 
section 12(d)(3) of the Code to clarify that the prohibition in the 
provision is total and encompasses class actions in which a member or 
an associated person may be the subject of a class action.
    The amendment to section 12(d)(3) of the Code adds references to 
``other member and person associated with a member'' to clarify that 
the prohibition against seeking to enforce an agreement to arbitrate 
applies not only to class actions in which a claimant is a customer, 
but to class actions in which an associated person or a member is a 
party.\4\
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    \4\The amendment limits those disputes between members or 
between a member and an associated person that are required to be 
submitted to arbitration under section 8(a) of the Code to the same 
extent as existing section 12(d)(3) limits those disputes between 
investors and members or associated persons that are required to be 
submitted to arbitration under section 12(d)(1) of the Code.
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the NASD and, in particular, the requirements 
of section 15A(b)(6) of the Act.\5\ Section 15A(b)(6) requires, inter 
alia, that the NASD's rules be designed to prevent fraudulent and 
manipulative acts, promote just and equitable principles of trade, and 
protect investors and the public interest. Over the years of the 
evolution of class action litigation, the courts have developed the 
procedures and expertise for managing class actions. Duplication of the 
often complex procedural safeguards necessary for these lawsuits is 
unnecessary. The Commission also believes that access to the courts for 
class action litigation should be preserved for associated persons and 
member firms as well as for investors and that the rule change approved 
herein provides a sound procedure for the management of class actions. 
The proposed rule change also should prevent wasteful litigation over 
the possible applicability of agreements to arbitrate between members 
or between a member and a person associated with a member 
notwithstanding the exclusion of class action claims from NASD 
arbitration. Based on the above, the Commission believes that the rule 
change herein approved should promote the efficient resolution of these 
class action disputes. For these reasons, and for the reasons stated 
above, the Commission believes that the proposed rule change satisfies 
the requirements of section 15A(b)(6) of the Act.
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    \5\15 U.S.C. 78o-3.
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    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the instant rule change be, and hereby is, approved.

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10087 Filed 4-26-94; 8:45 am]
BILLING CODE 8010-01-M