[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17353]
[[Page Unknown]]
[Federal Register: July 18, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34355; File No. SR-NASD-93-38]
Self-Regulatory Organizations; Notice of Proposed Rule Change by
National Association of Securities Dealers, Inc. Relating to Interim
Injunctive Relief in Intra-Industry Disputes and Certain Other Changes
in the NASD Code of Arbitration Procedure
July 12, 1994.
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 February
8, 1994, the National Association of Securities Dealers, Inc. (``NASD''
or ``Association'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
NASD.\1\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\The NASD initially submitted the proposed rule change on July
13, 1993. Amendment No. 1 made technical changes to the text of the
rule. See Letter from Suzanne E. Rothwell, Associate General
Counsel, NASD, to Selwyn Notelovitz, Branch Chief, Over-the-Counter
Regulation, SEC (available in Commission's Public Reference Room).
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I. Self-Regulatory Organizations Statement of the Terms of Substance of
the Proposed Rule Change
The NASD proposes to amend its Code of Arbitration Procedure
(``Code'') to: (1) redesignate Part III, Section 44\2\ et seq. as new
Part IV; (2) amend Sections 22 and 44; and (3) add a new Section to the
Code. Below is the text of the proposed rule change. Proposed new
language is in italics, proposed deletions are in brackets.
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\2\NASD Manual, Code of Arbitration Procedure, Art. III, Sec. 44
(CCH) 3744.
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CODE OF ARBITRATION PROCEDURE
* * * * *
PART III
UNIFORM CODE OF ARBITRATION
* * * * *
Peremptory Challenge
Sec. 22. In any arbitration proceeding, except as provided in
Section (XX--Injunctions), each party shall have the right to one
peremptory challenge. In arbitration 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 identify of the person(s) named
under Section 21 or Section 32(d) or (e), whichever comes first. There
shall be unlimited challenges for cause.
* * * * *
PART IV
MISCELLANEOUS
* * * * *
Schedule of Fees for Industry and Clearing Controversies
Sec. 44.
* * * * *
(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 (XX--Injunctions). These surcharge fees shall be
in addition to all other non-refundable filing fees, hearing deposits,
or costs which may be required. The arbitrator may determine that a
party shall reimburse another party for any non-refundable surcharge it
has paid.
* * * * *
Injunctions
Sec. XX. 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. This section (XX--Injunctions) 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) Applicants for interim injunctive relief shall be heard by a
single arbitrator.
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 applicator 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 (XX--Injunctions) 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) If an Immediate or Regular Injunctive Order is issued by an
arbitrator, the 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.
Effect of Court Injunction
(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.
Security
(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 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 (XX--Injunctions) shall apply to arbitration
claims filed on or after the effective date of this section. Except as
otherwise provided in this Section (XX--Injunctions), the remaining
provisions of the Code shall apply to proceedings instituted under
Section (XX--Injunctions). Section (XX--Injunctions) 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 fail to submit a dispute for arbitration under the Code of
Arbitration Procedure as required by that Code, to fail to comply with
any injunctive order issued pursuant to Section (XX--Injunctions), to
fail to appear or to produce any documents in his possession or control
as directed pursuant to provisions of the Code of Arbitration
Procedure, or to fail to honor an award of arbitrators properly
rendered pursuant to the Uniform Code of Arbitration under the auspices
of 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 a timely motion has not been made to vacate or
modify such award pursuant to applicable law.
* * * * *
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 places 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
(a) The NASD is proposing to amend the Code to codify the authority
of arbitrators to grant interim injunctive relief in intra-industry
disputes under Section 8 of the Code that are subject to NASD
arbitration, to provide that peremptory challenges may not later be
made to arbitrators who handled requests for interim injunctive relief
in the same case, to provide that the $2,500 nonrefundable surcharge
for expedited proceedings shall be paid by the party requesting such
proceedings, and to provide that failure to comply with any injunctive
order issued pursuant to the new injunction section may be deemed to be
a violation of Article III, Section 1 of the Rules of Fair Practice.
(1) Peremptory Challenge to Arbitrator Who Handled Request for
Injunction: The proposed rule change to Section 22 excepts proceedings
for injunctive orders under the proposed new section from the provision
granting a party one peremptory challenge to an arbitrator. This
provision is compatible with the expedited nature of injunctive
proceedings. See discussion below of subsection (e) of the proposed new
section.
(2) Non-refundable Surcharge for Expedited Proceedings: Currently,
Section 44 imposes a non-refundable surcharge of $2,500 on all parties
in an expedited proceeding. Expedited proceedings are provided in
connection with a request for injunctive relief under the proposed new
section and as a result of a court granting injunctive relief. The
proposed rule change would amend Section 44 to provide that the total
surcharge of $2,500 is to be paid only by the party or parties
requesting expedited proceedings. 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.
(3) Procedure for Granting Interim Injunctive Relief: The
introduction to the proposed new section gives arbitrators authority to
grant interim injunctive relief in intra-industry disputes and
clarifies the ability of parties to seek injunctive relief in court if
they wish. The introduction sets out that under the proposed new
section, the parties may seek either an ``interim injunction'' or a
``permanent injunction'' and that subsection (g) of the proposed new
section describes the effect of court-imposed injunctions on an
arbitration proceeding. Finally, the introduction clarifies that if any
injunction is sought as part of the final award, the request must by
made pursuant to Section 25(a).
Paragraph (a) provides that applications for interim injunctions
are to be heard by a single arbitrator. Paragraph (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. Paragraph (c) lists the documents that must be filed to apply
for interim injunctive relief. Paragraph (d) sets forth the procedure
and timetable for handling applications for interim injunctive relief.
Under subparagraph (d)(1), an expedited timetable is provided for
handling applications for Immediate Injunctive Orders, which are
similar to temporary restraining orders (``TROs'') that might be issued
by a court, in that a response to such an application is optional. In
such cases, that Director is to endeavor to schedule a hearing within
one to three business days after receipt of the application.
Information required to be given to parties may be sent by facsimile
transmission, and the hearing may be held by telephone or in a limited
number of cities, at the discretion of the arbitrator or the Director
of Arbitration. At present, the NASD contemplates holding such hearings
in New York, Chicago and San Francisco. The arbitrator will endeavor to
grant or deny 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 the issuance or denial or a Regular Injunctive Order
(if any) or a decision on the merits of the entire controversy.
Subsection (d)(2) of the proposed new section deals with Regular
Injunctive Orders, which are similar to preliminary injunctions issued
by the courts. Under these provisions, the Director will endeavor to
schedule a hearing within three to five business days after the
response is filed or due to be filed, whichever comes first. Failure to
file a response will not, however, delay the hearing, and the
responding party may choose to present evidence at the hearing whether
or not it has previously filed a response. As in paragraph (d)(1),
hearings may be held by telephone or in selected cities. Regular
injunctions expire as determined by the arbitrator, but in no event
later than the date of a decision on the merits of the underlying
controversy.
Subsection (e) of the proposed new section provides that there can
be unlimited challenges for cause to the single arbitrator appointed to
hear the application for an interim injunction, but no peremptory
challenges are permitted. Moreover, peremptory challenges may not later
be made to an 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. As stated
above with regard to Section 22, the elimination of peremptory
challenges promotes the expedited nature of injunctive proceedings,
while still preserving the parties' rights to challenge an arbitrator
for cause.
Subsection (f) of the proposed new section provides that the
arbitration of the underlying controversy is to proceed in an expedited
manner according to a timetable and procedures specified by the
arbitration panel. This continues the expedited treatment of cases in
which interim injunctive relief has been granted, to provide a faster
resolution of the merits of the dispute. Paragraph (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. Paragraph (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.
Subsection (i) of the proposed new section contains a ``sunset''
clause, causing the section to expire in one year unless the NASD files
a rule change under Rule 19b-4 to amend the proposed rule change to
extend its period of effectiveness or eliminate the expiration date.
This will provide for a pilot period during which the feasibility of
allowing arbitrators to issue interim injunctions can be assessed.
(4) Resolution of the Board of Governors: The proposed rule change
would amend the Resolution of the Board of Governors currently found at
paragraph 3744 of the Manual to provide that failure to comply with any
interim injunctive order issued pursuant to the proposed new section
will be added to the types of conduct that may be considered to be
violative of Article III, Section 1 of the Rules of Fair Practice.
(b) The NASD believes that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act,\3\ in that the
proposed rule change will facilitate the arbitration process in the
public interest by codifying authority of arbitrators to grant interim
injunctive relief in intra-industry disputes under Section 8 of the
Code that are subject to NASD arbitration, providing that peremptory
challenges may not later be made to arbitrators who handled requests
for interim injunctive relief in the same case, providing that the
$2,500 non-refundable surcharge for expedited proceedings shall be paid
by the party or parties requesting such proceedings, and providing that
failure to comply with any injunctive order issued pursuant to the new
injunction section may be deemed to be a violation of Article III,
Section 1 of the Rules of Fair Practice.
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\3\15 U.S.C. Sec 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Association 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 purpose 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 may
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. The Commission requests that, in
addition to any general comments concerning whether the proposed rule
change is consistent with Section 15A(b)(6) of the Act, commentators
address the following:
1. The proposed new section would permit parties to seek injunctive
relief from a court of competent jurisdiction. Section 6 of the Code of
Arbitration Procedure provides that ``no party shall commence any suit,
action or proceeding against any other party touching upon any of the
matters referred to arbitration pursuant to this Code''. Should the
relationship between the two sections be clarified?
It is not clear under the proposed amendment whether the new
section clarifies the parties' access to existing procedures under
certain state statutes allowing for injunctive actions even where
parties have entered into arbitration agreements, or whether it
establishes a new contractual agreement by the parties excepting
injunctive actions in court from the parties' agreements to arbitrate
under NASD rules. Should the proposal be amended to clarify that it is
limited to existing rights under statute, or to clarify that it is
intended to extend to all agreements to arbitrate under NASD rules?
2. The proposed rule change would amend an existing Resolution of
the Board of Governors to provide that failure to comply with any
injunctive order issued pursuant to the proposed new section may be
considered to be violative of Article III, Section 1 of the Rules of
Fair Practice. Since the proposed new section authorizes both court-
issued injunctions (discussed in question 1 of this solicitation of
comments) and interim injunctions issued by an arbitrator, should the
proposed change to the resolution be clarified to indicate whether the
amendment would extend to both types of injunctions or only to the
interim injunctions issued by arbitrators pursuant to the section?
Should the resolution be limited to arbitrator-issued interim
injunctions?
3. The proposed rule change provides for two different types of
interim injunctions, ``immediate injunctive orders'' and ``regular
injunctive orders''. Should the proposed rule change make it clear
whether different standards apply for the granting of the two types of
orders, or whether the only difference in the two types of injunctive
proceedings consists of the number of days in which decisions under the
section are to be made?
Subsection (d)(1) of the proposed new section provides that an
immediate injunctive order expires no later than the earlier of the
issuance or denial of a regular injunctive order or a decision on the
merits of the entire controversy. Should the proposed rule change make
it clear how and when proceedings for a regular injunctive proceeding
would follow an immediate injunctive proceeding?
4. Subsections (f) and (g) of the proposed new section provide that
the arbitration concerning a matter in which either an interim
injunction under the section or a court injunction has been issued will
be expedited, under a schedule specified by the arbitration panel
appointed under the Code. Since it appears under the proposal that the
arbitration panel would be appointed after a decision on the
application for injunctive relief is made, should there be a time frame
in the proposed new section for the Director of Arbitration to appoint
the panel? Should it be made clear under the expedited procedures in
the proposed new section how the prehearing procedures under section 32
of the Code would operate to assure that parties can obtain access to
necessary information prior to the hearing on the merits?
5. Although the introduction to the section provides that if any
injunction is sought as part of the final award, the request should be
made in the remedies portion of the statement of claim under Section
25(a) of the Code, and although subsection (c) provides that
applications for interim injunctions must be accompanied by a statement
of claim, it is not clear under the proposal whether applications for
interim injunctive relief must be submitted together with the statement
of claim for the full case on the merits or merely a statement of claim
to support the application for injunctive relief. If the full statement
of claim is not required at the time of the application for injunctive
relief, should the proposed new section impose a fixed time period for
the submission of the statement of claim in order to avoid prejudice to
the party against which interim injunctive relief has been awarded? If
the full statement of claim for the case on the merits is required at
the time of the application for an interim injunction, should the
proposed new section be amended to clarify that point?
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 and copying in the Commission's Public
Reference Section. 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 Number SR-NASD-93-38 and should be
submitted by August 8,1994.
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. 94-17353 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-M