[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29355]


[[Page Unknown]]

[Federal Register: November 29, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34998; File No. SR-NASD-94-10]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Procedures for Large and Complex Arbitration Cases

November 22, 1994.
    Pursuant to section19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November 
18, 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 
February 15, 1994. Amendment No. 1, submitted on October 12, 1994, 
clarified various aspects of the proposed rule change, altered the 
manner in which arbitrators are selected to a panel and altered the 
disclosures required with respect to unsuccessful settlement 
discussions. Amendment No. 2 amended proposed Subsection (g) to 
clarify that arbitrators may, at their own initiative, issue an 
award accompanied by a statement of reasons or basis of award and 
that parties may specifically agree to require arbitrators issue a 
statement of reasons when they issue an award. See Letter from 
Suzanne E. Rothwell, Associate General Counsel, NASD, to Mark 
Barracca, Branch Chief, Over-the-Counter Regulation, SEC (available 
in Commission's Public Reference Room).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend the Code of Arbitration Procedure 
(``Code'')\2\ by amending Part III, Sections 43\3\ and 44\4\ and adding 
Section 46 to provide procedures for large and complex arbitration 
cases. Below is the text of the proposed rule change. Proposed new 
language is in italics.
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    \2\NASD Manual, Code of Arbitration Procedure, (CCH) 3701 et 
seq.
    \3\NASD Manual, Code of Arbitration Procedure, Part III, Sec. 43 
(CCH) 3743.
    \4\NASD Manual, Code of Arbitration Procedure, Part III, Sec. 44 
(CCH) 3746.
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Code of Arbitration Procedure

* * * * *
Schedule of Fees for Customer Disputes
Sec. 43.
* * * * *
    (h) If an eligible matter is submitted for arbitration as a large 
and complex case under the procedures set forth in Section 46 of the 
Code, or under procedures agreed upon by the parties, following the 
Administrative Conference specified in Subsection 46(c) of the Code, 
the fees and deposits for such matter shall be those set forth in the 
schedule of fees for claims over $5,000,000.
* * * * *
Schedule of Fees for Industry and Clearing Controversies
Sec. 44.
* * * * *
    (i) If an eligible matter is submitted for arbitration as a large 
and complex case under the procedures set forth in Section 46 of the 
Code, or under procedures agreed upon by the parties, following the 
Administrative Conference specified in Subsection 46(c) of the Code, 
the fees and deposits for such matter shall be those set forth in the 
schedule of fees for claims over $5,000,000.

Procedures for Large and Complex Cases

Sec. 46.

Applicability

    (a)(1) Any dispute, claim or controversy, otherwise eligible for 
disposition under the Code shall be deemed a matter eligible for 
disposition pursuant to the procedures set forth in this Section where: 
(A) the claim or counterclaim of any party is at least $1 million, 
including punitive or exemplary damages, but exclusive of interest, 
costs and fees; or (B) all parties agree. Unless otherwise agreed to by 
the parties, in the event of a conflict, the procedures set forth in 
this Section shall supersede the procedures set forth elsewhere in the 
Code.
    (2) Any eligible matter shall be scheduled for an Administrative 
Conference pursuant to Subsection (b), below. An eligible matter shall 
not be eligible for further proceedings under this Section following 
the Administrative Conference unless all parties agree.
    (3) Any agreement among the parties to an eligible proceeding to 
continue with further proceedings following the Administrative 
Conference, either pursuant to the provisions of this Section or 
pursuant to agreed upon procedures, may be modified or cancelled upon 
the agreement of all parties and, if cancelled, the parties shall 
proceed under the procedures set forth elsewhere in the Code. Following 
the appointment of the last arbitrator pursuant to a procedure agreed 
upon by the parties or pursuant to the procedure specified under 
subsection (d)(3) of this Section, the withdrawal or disqualification 
of an arbitrator shall not reopen consideration of the terms of such 
agreement unless such reconsideration is ordered by the remaining 
arbitrators.
    (4) Unless waived in whole or in part by the Director of 
Arbitration, the parties to an eligible matter shall pay the arbitrator 
fees, hearing session deposits and any other fees and deposits required 
pursuant to the Code prior to the commencement of the first or the next 
hearing session before the arbitrators, as applicable. Unless 
apportioned by the arbitrators, 50 percent of all other fees and 
charges assessed on the parties following the payment of the hearing 
session deposit specified in Sections 43 or 44 of the Code shall be 
paid by the Claimants (apportioned equally among all Claimants) and 50 
percent shall be paid by the Respondents (apportioned equally among all 
Respondents). The arbitrators shall, in their award, determine the 
party or parties responsible for arbitrator or forum fees and may 
direct the return of monies previously deposited by a party. The waiver 
of the deposit requirement shall not preclude the assessment of forum 
fees against a party in the award. If an agreement to proceed under 
this Section is cancelled, or the parties otherwise settle or abandon 
the proceeding after agreeing to arbitrate under this Section, the 
parties shall not be entitled to a refund of any fees or charges paid.

Administrative Conference

    (b) The Director of Arbitration shall designate a member of the 
Arbitration Department staff to conduct an Administrative Conference of 
the parties to an eligible matter. The Administrative Conference may be 
conducted in person or by telephone conference at the discretion of the 
Director of Arbitration. The purposes of the Administrative Conference 
include, but are not limited to:
    (1) obtaining additional information about the nature of and amount 
in dispute;
    (2) determining the anticipated length of hearing and other 
scheduling issues;
    (3) determining the preferences of the parties with respect to the 
qualifications of arbitrators;
    (4) considering whether mediation or another non-adjudicative 
method of dispute resolution would be of interest to the parties in 
resolving the dispute;
    (5) determining what discovery is sought by the parties and setting 
a schedule to complete discovery and to resolve other procedural 
disputes;
    (6) considering the schedule, arrangements, form and scope of any 
depositions or interrogatories sought;
    (7) determining a schedule for settlement discussions and the 
method for certifying to the NASD that settlement discussions occurred;
    (8) developing a statement of (A) the matters in dispute, (B) the 
positions of each party on the matters in dispute, and (C) the legal 
authorities related to the matters in dispute to be brought to the 
attention of the arbitrators;
    (9) developing a schedule for: (i) identifying witnesses, including 
experts (and with respect to experts, arranging for the production of 
resumes and summaries of anticipated testimony, including any testimony 
on calculating damages), and (ii) determining the availability of such 
witnesses for hearings; and
    (10) determining the form of the hearing record, and, if 
transcribed, any arrangements for payment by the parties for 
transcription and transmission of copies to the arbitrators.

Appointment of Arbitrators

    (c)(1) Eligible matters shall be heard and determined by a panel of 
three arbitrators, at least one of which shall be an attorney; 
provided, however, that the parties may agree to submit an eligible 
matter to a single mutually acceptable arbitrator selected pursuant to 
the provisions of this subsection (c).
    (2) Arbitrators shall be appointed (A) pursuant to Section 19 of 
the Code if the parties cannot agree on another method of selection, 
(B) provided the parties agree, pursuant to the procedures set forth in 
paragraph (3), below, or (C) pursuant to another procedure agreed upon 
by the parties.
    (3)(A) Each party will be provided simultaneously with two lists of 
arbitrators chosen from the pool of arbitrators: (i) the first list 
will be securities industry arbitrators; and (ii) the second list will 
be public arbitrators. Each list also will include the employment and 
background information specified under Section 21 of the Code. 
Additional biographical information about arbitrators appearing on the 
lists will be furnished to a party upon request. Copies of such 
additional information will be forwarded to all parties. As soon as 
practicable following the appointment of the last arbitrator, the 
arbitrators shall comply with and the Director shall act in accordance 
with the provisions of Section 23 of the Code.
    (B) Not more than 20 business days following transmittal of the 
lists of arbitrators, the parties shall: (i) challenge, either on a 
peremptory basis for cause, any or all arbitrators on the lists; (ii) 
number any remaining arbitrators on the lists in order of preference, 
with one (1) being the most preferred; and (iii) return the lists with 
challenges and preferences noted to the Director of Arbitration. In the 
event a party fails to return the lists to the Director of Arbitration 
within the time specified, all arbitrators on the lists will be deemed 
acceptable to that party.
    (C) Following receipt of the lists from the parties, the Director 
of Arbitration shall prepare consolidated lists of arbitrators 
acceptable to both parties ranked according to consolidated preference 
rankings. Consolidated preference rankings shall be determined by 
adding the numerical ranking of each party on each arbitrator and 
ranking the arbitrators according to sum of the rankings. The Director 
of Arbitration shall then extend invitations to the highest ranked 
attorney arbitrators on either list, and appoint an attorney from 
attorneys accepting the invitations, giving preference to acceptances 
in the order of the consolidated preference ranking of the arbitrators. 
The Director of Arbitration shall then extend invitations to all of the 
remaining ranked arbitrators, including attorney arbitrators who 
accepted but were not named to the panel in the first round, and 
appoint a panel from arbitrators accepting the invitations, giving 
preference to the acceptances in the order of the consolidated 
preference ranking of the arbitrators.
    (D) If a complete panel cannot be appointed from the consolidated 
lists, or after invitations have been extended to arbitrators on the 
consolidated lists and declined, the Director of Arbitration will 
submit lists of proposed arbitrators to each party as provided under 
Section 19 of the code. Arbitrators already named to the panel pursuant 
to Subsection (c), above, will remain on the panel. Parties may 
exercise unlimited challenges for cause and one peremptory challenge 
with respect to arbitrators appointed pursuant to Section 19 of the 
Code.
    (E) In the event of a successful challenge for cause following 
appointment of the panel, the Director of Arbitration may reopen the 
selection process at the point in the process where the last arbitrator 
was selected and continue with the process as though the challenged 
arbitrator had never been appointed.
    (4) Upon the agreement of the parties, or at the discretion of the 
Director of Arbitration according to the magnitude and complexity of an 
eligible matter, compensation shall be paid to the arbitrators by the 
parties in addition to the honorarium specified by the Board of 
Governors. The amount of any compensation to be paid to the arbitrators 
by the parties will be decided before the arbitrators are selected.
    The parties shall deposit any additional compensation agreed or 
ordered to be paid with the Association no later than 10 days prior to 
the first hearing. Such additional compensation shall be assessed and 
paid pro rata on the basis of the number of parties. The arbitrators 
may assess any additional compensation paid pursuant to this subsection 
against any or all of the parties as part of the final award.

Preliminary Hearing

    (d) As promptly as practicable after the selection of the 
arbitrators, the arbitrators shall convene a preliminary hearing of the 
parties or their representatives, either in person or by telephone 
conference. The Director of Arbitration shall appoint one member of the 
panel to preside over the preliminary hearing and, with respect to any 
matter arising before or after the preliminary hearing, to act on 
behalf of the panel. Matters that may be considered at the preliminary 
hearing include, but are not limited to:
    (1) stipulations to any uncontested facts;
    (2) exchange and pre-marking of exhibits or evidence that each 
party believes may be offered at the hearing;
    (3) the schedule, form, scope and use of any sworn statements and/
or depositions;
    (4) whether mediation or another non-adjudicative method of dispute 
resolution would be of interest to the parties in resolving the 
dispute; and
    (5) issues which are or will be ripe for prehearing resolution.

Nothing in this subsection, however, shall prevent the arbitrator 
conducting a preliminary hearing from referring any matter to the full 
panel for consideration.

Settlement of Eligible Matters

    (e) If an eligible matter is not settled prior to the first hearing 
date, the parties shall submit a joint statement or individual 
statements to the arbitrators setting forth the date(s) and duration of 
settlement discussion, and the fact that such settlement discussions 
did not result in settlement. Such statements shall not disclose the 
dollar value of any settlement offer or proposal discussed by the 
parties.

Management of Proceedings

    (f)(1) Arbitrators are authorized to take such actions and issue 
such rulings as are necessary or desirable consistent with the 
objective of a just, speedy and cost-effective resolution of an 
eligible matter.
    (2) Arbitrators are authorized to order, at the request of a party, 
the deposition of, or the propounding of interrogatories to, persons 
who may possess information relevant to the disposition of an eligible 
matter and who may not be available to testify at the hearings. Unless 
otherwise agreed to by the parties, depositions or interrogatories 
shall be limited to determining and preserving testimony and facts 
relevant to the determination of the matter, not for conducting 
discovery. Unless otherwise agreed to by the parties, interrogatories 
shall be limited to twenty (20) questions, including parts and 
subparts. Arbitrators are authorized to order audio/video depositions 
or audio/video site review.
    (3) Arbitrators are authorized to conduct special proceedings as 
necessary (either through a hearing or on the written submissions of 
the parties, at the discretion of the arbitrators) to rule on 
dispositive motions, such as motions for summary judgment as to 
liability or damages or the applicability of a statute of limitations.

Form of Award

    (g) The award of the arbitrators shall be in the form prescribed in 
Section 41 of the Code. In addition, all parties may specifically agree 
that the award be accompanied by a statement of reasons or basis of the 
award.

Temporary Effectiveness

    (h) This Section 46 shall remain in effect for one year from [the 
effective date of the proposed rule change] unless modified or extended 
prior thereto by the board of Governors.

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

    As a result of the experience gained managing the securities 
industry's largest arbitration forum, the NASD has become aware that 
certain large and complex cases may require special management. In 
response to the perceived need, the NASD is proposing to amend the Code 
to add a new section 46 setting forth procedures for handling and 
managing large and complex cases. The proposed procedures are patterned 
after rules recently adopted by the American Arbitration Association 
(``AAA'') for processing large and complex cases. The proposed 
procedures also add the hearing plan features of the arbitration rules 
of the National Futures Association. The NASD is aware that many of the 
procedures provided in the proposed rules are already available in the 
Code; however, placing them in the proposed rules serves to emphasize 
the utility of these procedures for large and complex cases.
    The procedures are intended to encourage the parties to come to an 
agreement on the rules that will govern the disposition of the matter. 
Beyond the mandatory administrative conference, any party to an 
eligible matter must agree to continue with a proceeding under the 
rules. The emphasis in the rules is on flexibility: most of the 
provisions of the proposed rules allow the parties to adopt an 
alternative procedure of their own creation if they can come to an 
agreement on such procedures.
    The proposed rules include procedures for an administrative 
conference, the appointment of arbitrators, and a preliminary hearing. 
The provisions of the proposed rule change are described in more detail 
below.
    Finally, the NASD is proposing to adopt the proposed rules as a one 
year pilot program. They will remain in effect for cases filed within 
one year from the date of effectiveness unless modified or extended by 
the Board of Governors. During the pilot program the NASD will monitor 
the implementation and usefulness of the proposed rules in order to 
determine whether to make them a permanent addition to the Code.
Fees
    The NASD is proposing to amend Sections 43 and 44 of the Code, 
which specify the schedule of fees for customer disputes and industry 
disputes, respectively, to add subsections specifying that the fees and 
deposits for matters submitted for arbitration under the large and 
complex case rules shall be the fees and deposits otherwise specified 
for claims over $5,000,000. The increased complexity of managing large 
and complex cases necessitates higher fees and deposits to defray the 
costs to the NASD associated with providing a forum for such matters.
Applicability
    Subsection (a) of the proposed rule change specifies that the 
procedures for large and complex cases will be applicable to disputes, 
claims or controversies (referred to in the proposed rules as an 
``eligible matter'') where the claim or counterclaim is at least $1 
million, including punitive or exemplary damages, but exclusive of 
interest costs or fees, or where the parties agree that the matter 
should be subject to the procedures. This provision permits parties 
with claims of less than $1 million to have their matter heard pursuant 
to these procedures if, in their judgment, it would be advantageous to 
do so.
    An eligible matter is required to be set over for an Administrative 
Conference and, unless the parties agree, the matter may not continue 
under the large and complex case procedures following the 
Administrative Conference. The procedures for an Administrative 
Conference, discussed in detail below, bring the parties to an eligible 
matter together to consider the various issues involved in managing the 
matter and to determine if any agreement can be reached on such issues. 
If the parties fail to agree on procedures, they are not forced to 
continue under the large and complex case rules; this reflects the 
intent of the NASD not to force the structure of the large and complex 
case rules on an unwilling party.
    Where, however, the parties have agreed to continue the proceedings 
under the large and complex case rules, Subsection (a) provides that 
the agreement becomes binding on the parties once the last arbitrator 
is named. The NASD believes that once the parties have come to an 
agreement on the procedures to be employed on an eligible matter, and 
the effort and commitment necessary to the naming of the arbitrators 
has been expended, the parties should be compelled to follow through on 
the arbitration of the matter under the large and complex case rules. 
In this regard, if, at any point after such an agreement becomes 
binding, a member of the NASD or an associated person refuses to go 
forward with the arbitration of the matter and, instead seeks to 
dismiss the action and refile it in court, another arbitration forum, 
or with the NASD as an ordinary arbitration action, the NASD would 
regard such a failure to go forward as a violation of the member's 
obligation to arbitrate such matters under the Code subjecting the 
member or associated person to potential disciplinary action. Further, 
any failure by any party to go forward after the agreement becomes 
binding may be addressed under various provisions of the Code which 
permit the arbitrators to issue orders, penalize parties and make 
awards without the attendance or participation of a party.\5\
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    \5\See Sections 29, 32, 33, and 35 of the Code of Arbitration 
Procedure.
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Administrative Conference
    Subsection (b) of the proposed rule change provides for the 
convening of an Administrative Conference of the parties to an eligible 
matter to discuss, among other things, the claim and amount in dispute, 
arbitrator preferences, procedures, discovery, scheduling and 
settlement. The intent of this provision is to bring the parties 
together to air and discuss all issues related to the arbitration, to 
exchange information on procedural and scheduling matters, and to agree 
on as many such procedural and scheduling issues as possible in order 
to facilitate the orderly and expeditious resolution of the matter. If 
it becomes apparent that one or more parties are not amenable to 
proceeding under the large and complex case rules, the Administrative 
Conference will have served its purpose and the matter may proceed 
under the other provisions of the Code.
Appointment of Arbitrators
    Subsection (c) of the proposed rules provides for the appointment 
of a panel of three arbitrators to hear eligible matters. At least one 
of the arbitrators must be an attorney.
    The NASD will establish and maintain a pool of arbitrators to 
preside over large and complex cases. The NASD intends to identify 
arbitrators qualified to preside over such cases on the basis of 
training, varied knowledge and expertise. The qualifications of an 
arbitrator for inclusion in the pool will be based on, among others, 
the following factors: (1) attendance and successful completion of 
course(s) relating to large and complex cases; (2) experience and 
regular service as an arbitrator; (3) knowledge or expertise in the 
subject matter or technical aspects of the dispute; (4) length of 
service as an Association arbitrator; and (5) professional and business 
expertise.
    While the NASD intends to establish pools of specially qualified 
arbitrators, the NASD will also draw from its regular pool of 
arbitrators as necessary to fill panels for eligible matters. Moreover, 
in order to attract arbitrators to serve on panels hearing eligible 
matters, the NASD is proposing to provide a mechanism to provide 
additional compensation for such arbitrators. Paragraph (c)(4) of the 
proposed rule change provides that the parties may agree to pay, or the 
Director of Arbitration has discretion to assess, additional 
compensation to be paid to the arbitrators by the parties in addition 
to the honorarium specified by the Board of Governors in the 
consideration of the magnitude and complexity of an eligible matter. 
The amount of any such additional compensation must be decided by the 
Director of Arbitration and agreed to by the parties prior to the 
selection of the arbitrators and, pursuant to Subsection (a)(4), must 
be paid prior to the first hearing or the next scheduled hearing, as 
applicable.
    The NASD intends that the staff member assigned to conduct the 
Administrative Conference will discuss the availability of arbitrators 
with the parties at the Administrative Conference and obtain the 
agreement of the parties on how to proceed if availability is a 
problem. The parties may, for instance, make further proceedings under 
the large and complex case rule contingent upon the availability of 
specially qualified arbitrators.
    Finally, while the rules contemplate that eligible matters will be 
heard by panels of three arbitrators, at least one or whom is an 
attorney, paragraph (c)(1) of the proposed rule change permits the 
parties to agree to submit an eligible matter to a single mutually 
acceptable arbitrator.
    The appointment of a panel may be accomplished in one of three 
ways: (1) pursuant to the usual procedures in Section 19 of the Code, 
if the parties cannot agree on another method; (2) pursuant to a 
procedure set forth in paragraph (c)(3) of the proposed rules; or (3) 
pursuant to a procedure agreed to by the parties.
    The procedure set forth in paragraph (c)(3) of the proposed rules 
provides that each party will be simultaneously provided with two lists 
of arbitrators: the first list will be securities industry arbitrators 
and the second list will be public arbitrators. The lists will include 
certain biographical information, with other information available on 
request. Following receipt of the list each party must challenge 
peremptorily or for cause any or all arbitrators on the lists. Then 
each party must rank the remaining arbitrators on their lists in order 
of preference with one (1) being most preferred. Any party failing to 
challenge, rank and return the lists will be deemed to have accepted 
all listed arbitrators.
    After receiving the lists from the parties the Director of 
Arbitration will prepare two consolidated lists (one of public 
arbitrators and one of industry arbitrators) of the arbitrators by 
combing the lists of acceptable arbitrators and consolidating the 
rankings. This is accomplished by preparing a combined list of only 
those arbitrators acceptable to all parties and then adding the number 
rankings assigned by each party together to achieve a consolidated 
rank.

------------------------------------------------------------------------
                                                            Consolidated
                                          Party A  Party B      rank    
------------------------------------------------------------------------
Arbitrator #1...........................        1        3           4  
Arbitrator #2...........................        3        2           5  
Arbitrator #3...........................        4        1           5  
Arbitrator #4...........................        2        5           7  
Arbitrator #5...........................        5        4           9  
------------------------------------------------------------------------

    In order to ensure that the panel has at least one attorney, the 
Director will extend the first invitations to the highest ranking 
attorneys on either list, giving preference to acceptances in the order 
of the ranking. Once an attorney has been named to the panel, the 
Director will continue to extend invitations to arbitrators in the 
order of their consolidated rank until the panel has been filled by the 
required number of public and industry arbitrators. Paragraph (c)(3) 
also provides for repeating and finalizing the process in an 
abbreviated manner if the first attempt at appointing a panel from the 
lists does not succeed in completing a panel.
    Finally, pursuant to proposed subparagraph (c)(3)(E), if a 
challenge for cause is successful after the appointment of the panel is 
complete, subparagraph (c)(3)(E) permits the Director of Arbitration to 
reopen the selection process at the point where the last arbitrator was 
appointed and continue the process as though the challenged arbitrator 
had never been appointed.
Preliminary Hearing
    Subsection (d) of the proposed rule change provides that promptly 
following the appointment of the panel the arbitrators will convene a 
preliminary hearing. The preliminary hearing will be held by one of the 
arbitrators, appointed by the panel, and the presiding arbitrator will 
have the power to act on behalf of the panel on any matter arising 
before the hearing. The presiding arbitrator will also have unlimited 
discretion to refer any such matter to the full panel for 
consideration. The matters which may be brought to the presiding 
arbitrator for resolution include: stipulations as to uncontested 
facts, exchanging and premarking exhibits to be offered at the hearing, 
and the schedule, form, scope and use of sworn statements and 
depositions. In addition, the presiding arbitrator may consider any 
other matter ripe for resolution at the prehearing stage, including 
encouraging mediation or other non-adjudicative resolution of the 
matter.
Settlement of Eligible Matters
    Subsection (e) of the proposed rule change provides that if an 
eligible matter is not settled prior to the first hearing date, the 
parties must submit either a joint statement or individual statements 
to the arbitrators summarizing any settlement discussions that 
occurred. The statement must include a record of the dates of any 
discussions and the issues discussed by the parties, but must not 
include any statement disclosing the dollar value of any settlement 
offer or proposal discussed by the parties. The intent of this proposed 
subsection is to provide the arbitrators with additional information 
concerning the issues in dispute. The prohibition against disclosing 
dollar amounts discussed is intended to avoid suggesting dollar values 
for any award ultimately made by the arbitrators.
Management of Proceedings
    Subsection (f) of the proposed rule change sets forth the general 
and specific powers granted to the arbitrators to permit them to manage 
the proceedings. The goal of the arbitrators under the general powers 
granted in paragraph (f)(1) is to act and rule on matters before them 
in a manner consistent with the just, speedy and cost-effective 
resolution of the matter. Further, the arbitrators may, without 
limitation, delegate their powers under subsection (f) to a single 
arbitrator to be exercised either in the preliminary hearing or at any 
other time prior to the hearing. Among the specific issues on which the 
arbitrators may act or rule are dispositive motions, including motions 
to dismiss on any grounds, including the applicability of a statute of 
limitations, or motions for summary judgment on specific issues such as 
liability or damages, or on the whole matter.
    Depositions and interrogatories are intended to be limited to 
determining and preserving testimony and facts relevant to the 
determination of the matter, not for conducting unlimited discovery. 
Further, interrogatories are limited to twenty questions, including 
parts and subparts. These limitations may be modified upon the 
agreement of the parties.
    Finally, the arbitrators are authorized to conduct special 
proceedings as necessary to resolve any such matters before them. Such 
special proceedings may take any form specified by the arbitrators, and 
may be conducted in person, via teleconference or on written 
submissions alone, or by any other method.
Form of Award
    Subsection (g) of the proposed rule change specifies that the award 
in an eligible proceeding shall be in the form prescribed in Section 41 
of the Code. Arbitrators may, at their own initiative, issue an award 
that is accompanied by a statement of reasons or basis of the award. 
Although not specifically addressed by Section 41, it has been the 
position of the NASD that arbitrators are permitted under that Section 
to issue a statement of reasons or basis for the award and arbitrators 
have issued such statements in many cases.
    In addition, arbitrators must issue such a statement if the parties 
specifically so require. Thus, in situations where the arbitrators 
would not otherwise issue a statement accompanying the award, the 
arbitrators would nonetheless do so where all of the parties have 
specifically agreed that a statement of the reasons or basis of the 
award accompanying the award itself.
Sunset Provision
    Subsection (b) of the proposed rule change specifies that the large 
and complex case rules will remain in effect for one year following the 
effective date, unless modified or extended by the Board of Governors.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act\6\ in that specifying 
procedures in the Code for large and complex cases will serve the 
public interest by enhancing the satisfaction and perceived fairness of 
such proceedings by the parties to such proceedings. To the extent the 
parties to such proceedings express increased satisfaction with the 
resolution of eligible matters, the goal of providing the investing 
public with a fair, efficient and cost-effective forum for the 
resolution of disputes will have been advanced.
---------------------------------------------------------------------------

    \6\15 U.S.C. Sec. 78o-3.
---------------------------------------------------------------------------

(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 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:
    Commenters are requested to focus attention on the fact that the 
proposed rule change would alter basic responsibilities of the parties 
in arbitrations administered under the proposed rule for large and 
complex cases. Commenters are requested to consider whether the 
proposed rule change is clear and whether it strikes an appropriate 
balance in responsibilities for claimants and respondents. Commenters 
should also consider that the NASD has determined to produce prior to 
the effective date of the rules an educational pamphlet that would be 
provided to all parties considering the use of these alternative 
rules.\7\ The proposed pamphlet would address the issues that parties 
should address in a written document prior to submitting a matter for 
resolution under the alternative rules, including: (1) arbitrator 
selection; (2) additional fees for arbitrator compensation; (3) whether 
the parties will use the prehearing discovery rules included in these 
alternative rules, whether they will use the prehearing discovery rules 
in the regular rules, or some other prehearing procedures; and (4) 
whether the parties are contracting for the arbitrators to provide a 
written statement of reasons. The pamphlet also will disclose that if 
the parties fail to address any of these issues, the issues may need to 
be resolved by the arbitration department or the arbitrators, as 
appropriate under the assignment of responsibilities under the large 
and complex case rules and other Code provisions. The pamphlet will 
also highlight the fact that under the alternative rules arbitrators 
may dismiss the case, or any part of it, on the written submissions of 
the parties without any oral hearing.
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    \7\See letter dated October 12, 1994 to Mark Barracca, Esq., 
Branch Chief, SEC, from Suzanne E. Rothwell, Associate General 
Counsel, NASD (``NASD Letter'').
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    Comment is solicited on whether the provisions for prehearing 
discovery contained in Subsection (f)(2), which provides for discovery 
only upon the agreement of the parties would be likely to have a 
balanced effect on claimants and respondents. Do the rules clearly 
advise the parties that unless they reach agreement on the scope of 
desired discovery before submitting to the rules for large and complex 
cases, they are restricted to depositions and interrogatories taken for 
the preservation of evidence, rather than to the use of such techniques 
for conducting discovery? Is the scope of discovery proposed in the 
proposed rule change appropriate for the large and complex matters to 
which these proposed rules apply?
    Commenters should note that under the proposed rule change, 
arbitrators are authorized to order depositions of, or interrogatories 
to:

    Persons who may possess information relevant to the disposition 
of an eligible matter and who may not be available to testify at the 
hearings. Unless otherwise agreed to by the parties, depositions or 
interrogatories shall be limited to determining and preserving 
testimony and fact relevant to the determination of the matter, not 
for conducting discovery.

Section 32 of the NASD's current arbitration rules provides that an 
arbitrator may ``issue subpoenas, direct appearances of witness and 
production of documents, set deadlines for compliance, and issue any 
other ruling which will expedite the arbitration proceedings.''
    The NASD Letter stated that ``[w]hile the standards under Section 
32 and proposed Subsection (f)(2) for the ordering of depositions and 
interrogatories by arbitrators are different, one is not necessarily 
more restrictive than the other particularly in view of the fact that 
Subsection (f)(2) allows the parties the flexibility to decide the 
scope of their own discovery.'' Comment is specifically solicited on 
whether the parties' ability to bargain for an agreed upon scope of 
discovery before consenting to arbitrate under the large and complex 
rules provides sufficient safeguards to assure that the proposed 
amendment will operate in a balanced manner? Can reliance on agreement 
by the parties, who may have different bargaining strengths and 
different needs for the discovery of documents and information provide 
for a balanced administration of these procedures?
    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 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 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 the file number in the caption above and 
should be submitted by December 22, 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. 94-29355 Filed 11-28-94; 8:45 am]
BILLING CODE 8010-01-M