[Federal Register Volume 59, Number 109 (Wednesday, June 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13876]


[[Page Unknown]]

[Federal Register: June 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34146; File No. SR-NASD-93-75]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
the Referral of Matters by Arbitrators for Disciplinary Investigation

    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
16, 1993, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), and amended on May 25, 1994,\1\ 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the NASD. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\Amendment No. 1 amended to NASD's Statement of the Purpose 
of, and Statutory Basis for, the Proposed Rule Change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NSAD is proposing to amend section 5 of the Code of Arbitration 
Procedure (``Code'')\2\ to specify that arbitrators, at the conclusion 
of a proceeding, may refer matters arising or discovered during the 
course of an arbitration proceeding for disciplinary investigation. 
Below is the text of the proposed rule change. Proposed new language is 
italicized.
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    \2\NASD Manual, Code of Arbitration Procedure, part I, section 
5, (CCH) 3705.
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Code of Arbitration Procedure
Non-Waiver of Association Objects and Purposes
    Sec. 5. The submission of any matter to arbitration under this Code 
shall in no way limit or preclude any right, action or determination by 
the Association which it would otherwise be authorized to adopt, 
administer or enforce. If any matter comes to the attention of an 
arbitrator during and in connection with the arbitrator's participation 
in a proceeding, either from the record of the proceeding or from 
material or communications related to the proceeding, that the 
arbitrator has reason to believe may constitute a violation of the 
Association's rules or the federal securities laws, the arbitrator may 
initiate a referral of the matter to the Association for disciplinary 
investigation; provided, however, that any such referral should only be 
initiated by an arbitrator after the matter before him has been settled 
or otherwise disposed of, or after an award finally disposing of the 
matter has been rendered pursuant to section 41 of the Code.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the place specified in Item 
IV below. The NASD has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for the Proposed Rule Change

    The NASD is proposing to amend section 5 of the Code of Arbitration 
Procedure to specify that arbitrators, at the conclusion of a 
proceeding, may refer to disciplinary investigation matters which come 
to their attention during the course of an arbitration proceeding.
    The NASD believes that potential violations uncovered during 
arbitration hearings should be investigated by the NASD as part of its 
comprehensive regulatory program. The NASD is aware, however, that 
while customers who suffer a financial loss as a result of misconduct 
by their registered representative may bring arbitration actions, they 
often do not pursue formal complaints with a self-regulatory 
organization (``SRO'') necessary to trigger an investigation of the 
potential violation. Further, while the filing of an arbitration 
complaint will alert an SRO to the existence of a potential 
violation,\3\ because customer complaints in arbitration often do not 
allege or disclose sufficient information to indicate obvious 
misconduct on the part of a respondent, they may not trigger a 
disciplinary investigation. Indeed, in such cases, violations of the 
securities laws or the NASD's rules are not apparent until an 
arbitration hearing occurs and the parties testify and introduce 
evidence about the relevant events. Thus, in some cases, the NASD never 
is made aware of securities law violations or violations of the NASD's 
rules, notwithstanding the fact that the financial injury to the 
customer resulting from the violations is the subject of an arbitration 
proceeding.
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    \3\The filing of a customer-initiated arbitration complaint 
against an associated person alleging damages of $10,000 or more 
triggers a requirement of the member or associated person to amend 
the associated person's Form U-4 or U-5, as appropriate. Information 
supplied pursuant to such an amendment will be entered into the 
Central Registration Depository and will also be forwarded to the 
appropriate NASD District office for preliminary investigation.
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    The NASD also has observed that arbitrators seldom refer for 
disciplinary investigation matters which come to their attention during 
the course of an arbitration proceeding. Because the NASD believes that 
arbitration matters, and the evidentiary material related to or 
produced in such matters, constitute a valuable source of information 
concerning potential violations of the NASD's rules and the federal 
securities laws, bringing such information to the attention of the 
Association's regulatory staff should improve the efficacy of the 
NASD's regulatory function. Accordingly, the NASD believes that 
specifying a mechanism in the Code for arbitrators to bring such 
information to the attention of the NASD's regulatory staff for 
investigation will serve the public interest by ensuring that potential 
violations of the NASD's rules and the federal securities laws are not 
overlooked.
    In addition, the NASD believes that it is important for arbitrators 
to understand that the arbitration process is for the resolution of 
disputes between the securities industry and others, and that there is 
also a regulatory apparatus separate from the arbitration process which 
is designed to address misconduct which affects the public interest and 
the integrity of the financial markets. Thus, to the extent arbitrators 
are aware that they may refer matters, in addition to or in lieu of 
awarding punitive damages as part of awards,\4\ the fairness of the 
arbitration process will be enhanced.
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    \4\The NASD, in connection with this rule filing, is not 
expressing any official position with respect to the ability of 
arbitrators to award punitive damages.
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    The proposed amendment to section 5 specifies that if any matter 
comes to the attention of an arbitrator during the course of a 
proceeding the arbitrator may initiate a referral of the matter to the 
Association for disciplinary investigation. The proposed amendment also 
specifies, however, that any such referral should be initiated by an 
arbitrator only after final disposition of the matter through 
settlement or award. Although the NASD is not setting forth a specific 
procedure for such referrals, the NASD contemplates that arbitrators 
will direct referrals to the Association through the Arbitration 
Department staff and the Director of Arbitration.
    The NASD believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(6)\5\ of the Act is that specifying a 
mechanism in the Code for arbitrators to bring information concerning 
potential violations of the Association's rules and the federal 
securities laws to the attention of the NASD's regulatory staff for 
investigation will serve the public interest by ensuring that such 
potential violations are not overlooked.
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    \5\15 U.S.C. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection any copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-94-75 and should 
be submitted by June 29, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. 94-13876 Filed 6-7-94; 8:45 am]
BILLING CODE 8010-01-M