[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Notices]
[Pages 7241-7245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2972]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35314; File No. SR-NASD-94-10]


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

February 1, 1995.
    On January 31, 1995, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'')\1\ a proposed rule 
change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'')\2\, and Rule 19b-4 thereunder.\3\ The rule change amends 
the Code of Arbitration Procedure (``Code'')\4\ by amending Part III, 
Sections 43\5\ and 44\6\ and adding new Section 46 to provide 
procedures for large and complex arbitration cases as a one year pilot 
program.

    \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, submitted on November 18, 1994, 
amended proposed Section 46(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 to issue a statement of reasons when they issue 
an award. Amendment No. 3, submitted on December 12, 1994, and 
Amendment No. 4 were minor technical amendments. See Letter from 
Suzanne E. Rothwell, Associate General Counsel, NASD, to Mark 
Barracca, Branch Chief, Over-the-Counter Regulation, SEC (December 
9, 1994) (available in Commission's Public Reference Room); Letter 
from Suzanne E. Rothwell, Associate General Counsel, NASD, to Mark 
Barracca, Branch Chief, Over-the-Counter Regulation, SEC (January 
31, 1994) (available in Commission's Public Reference Room).
    \2\15 U.S.C. 78s(b)(1) (1988).
    \3\17 CFR 240.19b-4.
    \4\NASD Manual, Code of Arbitration Procedure, (CCH)  3701 et. 
seq.
    \5\NASD Manual, Code of Arbitration Procedure, Part III, Sec. 43 
(CCH)  3743.
    \6\NASD Manual, Code of Arbitration Procedure, Part III, Sec. 44 
(CCH)  3744.
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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. 34998, Nov. 22, 1994) and by 
publication in the Federal Register (59 FR 61010, Nov. 29, 1994). Two 
comment letters were received.\7\ This order approves the proposed rule 
change.

    \7\See letter from Cliff Palefsky, Esq., Chairman, Securities 
Industry Arbitration Committee, National Employment Lawyers 
Association (``NELA''), to Jonathan G. Katz, Secretary, SEC, dated 
December 12, 1994 (``NELA Letter''); letter from Seth E. Lipner, 
Esq., Deutsch & Lipner, to Jonathan G. Katz, Secretary, SEC, dated 
December 22, 1994 (``Lipner Letter'').
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I. Background

    The Code governs arbitration of any dispute arising out of or in 
connection with the business of any NASD member, or arising out of the 
employment or termination of employment of associated persons with a 
member, other than disputes involving the insurance business of any 
member which is also an insurance company, if the dispute is: (1) 
Between or among members; (2) between or among members and associated 
persons; (3) between or among members of associated persons and public 
customers, or others; or (4) between or among members, registered 
clearing agencies with which the NASD has entered into an agreement to 
use the NASD's arbitration facilities and procedures, and participants, 
pledges or other persons using the facilities of a registered clearing 
agency.\8\

    \8\NASD Manual, Code of Arbitration Procedure, Part I, Sec. 1 
(CCH)  3701.
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    The Code contains specialized procedures for certain categories of 
cases. Part II of the Code\9\ contains procedures applicable solely to 
industry and clearing controversies. Section 13 of the Code\10\ 
contains certain specialized procedures applicable to controversies 
involving public customers and associated persons or members if these 
controversies involve a dollar amount not exceeding $10,000.

    \9\NASD Manual, Code of Arbitration Procedure, Part II, Secs. 8-
11 (CCH)  3708-3711.
    \10\NASD Manual, Code of Arbitration Procedure, Part III, Sec. 
13 (CCH)  3713.
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    The NASD submitted this rule change because it believes that 
certain large and complex cases may require special management beyond 
that currently afforded by the Code. Therefore, the NASD is adding new 
Section 46 to the Code setting forth procedures for handling and 
managing large and complex cases. In part, some of the procedures 
contain certain features of rules adopted by the American Arbitration 
Association (``AAA'') for processing large and complex cases. Section 
46 also contains certain features of the arbitration rules of the 
National Futures Association. Many of the procedures in Section 46 also 
are provided elsewhere in the Code; however, the NASD believes that 
grouping these procedures together in a [[Page 7242]] single section 
serves to emphasize the utility of these procedures for large and 
complex cases.
    The NASD stated that the procedures are intended to encourage the 
parties to come to an agreement on the rules that will govern the 
disposition of the matter. Under new Section 46, all cases that are 
eligible for the procedures contained in that Section will be scheduled 
for an administrative conference in order to determine whether the 
parties can agree on ways in which the case should be administered. 
Beyond the mandatory administrative conference, however, all parties to 
an eligible matter must agree to continue with a proceeding under the 
provisions of Section 46; otherwise, the Code provisions generally 
applicable to arbitration matters will govern the proceeding. The NASD 
stated that most of the provisions of the proposed rules will allow the 
parties to adopt an alternative procedure of their own creation if they 
can agree on such procedures.
    Section 46 includes procedures for an administrative conference, 
the appointment of arbitrators, and a preliminary hearing. The 
provisions of the rule change are described in more detail below.
    Finally, the rule change is a one year pilot program. It will 
remain in effect for cases filed within one year from the date of 
effectiveness (ninety days after the date of this order) unless the 
NASD Board of Governors authorizes and the Commission approves its 
modification or extension. During the pilot program the NASD will 
monitor the implementation and utility of the rule change in order to 
determine whether to add it permanently to the Code.

II. Substantive Provisions

A. Fees

    Sections 43 and 44 of the Code, which specify the schedule of fees 
for customer disputes and industry disputes, respectively, have been 
amended 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. As discussed further below in Section D., parties may 
be assessed additional fees to compensate arbitrators. Parties may 
condition their acceptance of the large and complex case rules on an 
agreement with the NASD governing these fees.

B. Applicability

    Section 46(a) specifies that the procedures for large and complex 
cases will be applicable to disputes, claims or controversies 
(``eligible matters'') in which the claim or counterclaim is at least 
$1 million, including punitive or exemplary damages, but exclusive of 
interest costs or fees, or in other cases in which 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.
    Section 46(a) requires an eligible matter to be scheduled for an 
administrative conference. As noted above, unless all parties agree, 
the large and complex case rules will not govern arbitration of the 
matter following the administrative conference. The procedures for an 
administrative conference, discussed in detail below, bring the parties 
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 required to continue 
under the large and complex case rules; the rules are not intended to 
apply to cases if a party does not wish for them to apply. In order to 
assist parties in deciding whether to proceed under the large and 
complex case rules, the NASD will provide all parties with an 
educational pamphlet.\11\ The pamphlet will discuss issues that parties 
should address in a written document prior to submitting a matter for 
resolution under the large and complex case rules, including, among 
other issues, arbitrator selection and compensation, discovery and 
whether an award will include a statement of reasons. Thus, the rule 
change does not permit a selection of the large and complex case rules 
in a predispute arbitration agreement. Rather, it specifically provides 
that any agreement to proceed under such rules will be made at or after 
an administrative conference.

    \11\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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    If all parties agree 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 appointed. 
This requirement reflects the NASD's view that parties devote 
substantial resources to formulate procedures to govern a particular 
matter. In addition, substantial effort and commitment is required to 
appoint arbitrators. A party could be severely disadvantaged if it 
devoted time and resources to arbitrating a matter under the large and 
complex case rules, only to confront unilateral rejection of the 
agreed-upon procedures later in the process.
    In this regard, the NASD has stated that if, at any point after 
such an agreement under Section 46 (a)(2) and (a)(3) becomes binding, a 
member of the NASD or an associated person refuses to proceed 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 this action as a 
violation of the member's obligation to arbitrate such matters under 
the Code subjecting the member of associated person to potential 
disciplinary action. Further, the NASD has stated that any failure by 
any party to proceed 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.\12\

    \12\See e.g., NASD Manual, Code of Arbitration Procedure, Part 
III, Secs. 29, 32, 33 and 35 (CCH) 3729, 3732, 3733 and 3735.
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C. Administrative Conference

    Section 46(b) provides for 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. In its filing with the Commission, the NASD 
indicated that this provision is intended 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 reach 
agreement on as many procedural and scheduling issues as possible in 
order to facilitate the orderly and expeditious resolution of the 
matter. The filing notes that 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.
    The NASD expects that parties will have reviewed the NASD's 
pamphlet before the administrative conference. Among the topics to be 
addressed in the pamphlet are the issues that parties should address in 
a written agreement under Section 46 (a)(2) and (a)(3) prior to 
submitting a matter for resolution under the large and complex case 
rules, [[Page 7243]] including: (1) Arbitrator selection; (2) 
additional fees for arbitrator compensation; (3) whether the parties 
will use the prehearing discovery rules included in these large and 
complex case rules, whether they will use the prehearing discovery 
rules elsewhere in the Code, 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 also 
will highlight the fact that a significant feature of the large and 
complex rules is that arbitrators are authorized to dismiss the case, 
or any part of it, on the written submissions of the parties without 
any oral hearing.

D. Appointment of Arbitrators

    Section 46(c) provides for the appointment of a panel of three 
arbitrators to hear eligible matters. At least one arbitrator must be 
an attorney.
    The NASD intends to establish a pool of separately qualified 
arbitrators to hear many of the cases under the large and complex case 
rules.\13\ The NASD also indicated that it 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, Section 46 contains a mechanism to provide 
additional compensation for those arbitrators. Section 46(c)(4) 
provides that prior to the selection of the arbitrators, the parties 
may agree to pay, and that the Director of Arbitration has discretion 
to assess, compensation to be paid to the arbitrators by the parties in 
addition to the honorarium specified by the Board of Governors. The 
additional compensation would reflect the magnitude and complexity of 
the matter arbitrated under the alternate large and complex case rules. 
Under the provision, the amount of any such additional compensation 
also must be decided before the selection of the arbitrators. Section 
46(a)(4) requires parties to pay arbitrator fees prior to the first 
hearing or the next scheduled hearing, as applicable.

    \13\The NASD has indicated that it intends to identify 
arbitrators qualified to preside over such cases on the basis of 
training, experience, varied knowledge and expertise. Qualifications 
for inclusion in the pool may 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.
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    Under the procedures established by the NASD, the staff member 
assigned to conduct the administrative conference must 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 rules contingent upon the 
availability of specially qualified arbitrators or upon specific 
compensation arrangements.
    Finally, while the rules contemplate that eligible matters will be 
heard by panels of three arbitrators, at least one of whom is an 
attorney, Section 46(c)(1) permits the parties to agree to submit a 
matter to a single mutually acceptable arbitrator.
    A panel may be appointed 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 Section 
46(c)(3); or (3) pursuant to a procedure agreed to by the parties.
    The procedure set forth in Section 46(c)(3) provides that each 
party simultaneously will be provided with two lists of arbitrators: 
the first list will be composed of securities industry arbitrators and 
the second list will be composed of public arbitrators. The lists will 
include certain biographical information, with other information 
available on request. Within 20 days of the transmittal of these lists, 
each party may challenge peremptorily or for cause any or all 
arbitrators on the lists and must rank the remaining arbitrators on its 
lists in order of preference with ``one'' (1) indicating the most 
preferred arbitrator. Any party failing to challenge, rank and return 
the lists will be considered 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 
combining the parties' lists of acceptable arbitrators and 
consolidating the rankings. Under the provision, this is accomplished 
by preparing a combined list composed solely of 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  
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In order to ensure that a panel has at least one attorney, the Director 
will extend the first invitations to the highest ranking attorneys on 
either list. If each attorney accepts, the NASD will select the 
attorney who received a higher ranking from a party. 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 filed by the required number of public and 
industry arbitrators. Under the provision, if a panel cannot be 
appointed from the consolidated lists, the remainder of the panel will 
be appointed under the regular arbitration provision in Section 19 of 
the Code.
    Finally, pursuant to Section 46(c)(3)(E), if a challenge for cause 
is successful after the appointment of the panel is complete, Section 
46(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 through the challenged arbitrator had never 
been appointed.

E. Preliminary Hearing

    Section 46(d) provides that the arbitrators will convene a 
preliminary hearing promptly following the appointment of the panel. 
Once the arbitrators convene the preliminary hearing, the Director of 
Arbitration will appoint a single arbitrator to preside over the 
preliminary hearing and the presiding arbitrator will have the power to 
act on behalf of the panel on any appropriate matter arising before or 
after the preliminary hearing. The presiding arbitrator will also have 
unlimited discretion to refer any such matter to the full panel for 
consideration. 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 
medication or other non-adjudicative resolution of the matter.
[[Page 7244]]

F. Settlement of Eligible Matters

    Section 46(e) also provides for the parties to give arbitrators 
information about their settlement efforts. The provision states 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, setting out a record of the dates and 
duration of any discussions and the fact that the discussions did not 
result in settlement, but must not include any statement disclosing the 
dollar value of any settlement offer or proposal discussed by the 
parties. The NASD indicated that this subsection is included because it 
might provide 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.

G. Management of Proceedings

    Section 46(f) sets out general and specific powers granted to the 
arbitrators to enable them to manage the proceedings. 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. The large and complex case 
rules specifically permit arbitrators to rule on dispositive motions, 
such as 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. 
As noted above, the pamphlet will highlight this provision so that 
parties may determine whether they wish to utilize the large and 
complex case rules or whether they wish to agree specifically to amend 
the panel's ability to rule on dispositive motions.
    A significant difference between the large and complex case rules 
and the rules for other cases administered under current Code 
provisions concerns the prehearing procedures, or ``discovery'' 
process. The large and complex case rules rely to a significant extent 
on the parties to bargain for setting the scope of discovery. Absent a 
specific agreement by the parties in the agreement under Section 46 
(a)(2) and (a)(3) to proceed under these rules, parties are to use the 
procedures in Section 46(f). These procedures differ from the present 
Code in that 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 discovery.\14\ Further, 
interrogatories are limited to twenty questions, including parts and 
subparts. The pamphlet will highlight these and other differences 
between discovery under the large and complex case rules and discovery 
under current provisions of the Code and will advise parties that they 
may agree to modify the discovery rules contained in Section 46(f).

    \14\By contrast, Section 32 of the Code provides that an 
arbitrator may ``issue subpoenas, direct appearances of witnesses 
and production of documents, set deadlines for compliance, and issue 
any other ruling which will expedite the arbitration proceedings.'' 
NASD Manual, Code of Arbitration Procedure, Part III, Sec. 32 (CCH) 
 3732.
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    Finally, Section 46(f) authorizes arbitrators to conduct special 
proceedings as necessary to resolve any such matters before them. 
Special proceedings may take any form specified by the arbitrators, and 
may be conducted in person, via teleconference, on written submissions 
alone, or by any other method.

H. Form Award

    Section 46(g) 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, the Section provides for arbitrators to issue a 
statement of reasons or basis of the award if the parties specifically 
so agree. Accordingly, even 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 should 
accompany the award.

I. Sunset Provision

    Section 46(h) of the proposed rule change specifies that the large 
and complex cases rules will remain in effect for one year following 
the effective date, unless the Board of Governors authorizes their 
modification or extension.\15\

    \15\Any such modification or extension must be filed as a 
proposed rule change with the Commission pursuant to section 
19(b)(1) of the Act and Rule 19b-4 thereunder.
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III. Comment Letters

    The Lipner Letter states that there were both positive and negative 
aspects to the large and complex case rules, and recommended certain 
changes to the rule change to enhance the equitable nature of the 
arbitration process. NELA's comments were limited to the arbitration of 
employment disputes. NELA opposes the rule change in the context of 
employment disputes. As a general matter, NELA objects not only to the 
proposed rule change but to mandatory arbitration of complex 
employment.\16\ The NELA Letter states that employment disputes 
typically turn on legal issues rather than factual issues. NELA 
believes that it is inappropriate for a panel composed of a majority of 
non-lawyers to decide these issues. Furthermore, the NELA Letter states 
that arbitration does not provide the opportunity for the development 
of employment law. The Commission believes that, whatever the merit of 
these arguments, they are not germane to the instant rule change.

    \16\The Commission approved a proposed rule change to Sections 
1, 8 and 9 of the Code in 1993 that provides that disputes, claims, 
or controversies arising out of the employment or termination of 
employment of an associated person are eligible for submission to 
arbitration. See Securities Exchange Act Release No. 32802 (Aug. 25, 
1993), 58 FR 45932 (Aug. 31, 1993). That proposed rule change was 
prompted by two court decisions interpreting the Code so as not to 
cover employment disputes. The California Court of Appeals held that 
Section 8 of the Code did not cover employment disputes, but only 
covered disputes arising out of or in connection with business 
transactions. Higgins v. Superior Court of Los Angeles County, 1 
Cal. Rptr. 2d 57 (1992). The Seventh Circuit concluded that the NASD 
Code of Arbitration as then drafted, did not require the arbitration 
of employment disputes between an NASD member and its associated 
person. Farrand v. Lutheran Brotherhood, 993 F.2d 1253 (7th Cir. 
1993). NELA did not comment on that proposed rule change.
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    The NELA Letter also states that the large and complex case rules 
``are clearly designed to give the defendants all of the advantages of 
litigation in defending the cases while fatally disadvantaging the 
party with the burden of proof.'' As noted above, parties will be able 
to modify all provisions of Section 46 with an agreement under Section 
46 (a))(2) and (a)(3) (other than the mandatory administrative 
hearing), and if parties do not agree upon procedures to govern the 
matter, than Section 46 will not govern the arbitration of the matter.
    The NELA Letter also objects to the level of fees imposed upon 
large and complex cases. The NELA Letter states that the level of fees 
is exorbitant given that the employee does not have the option of going 
to court. The Commission notes that Section 46(a)(4) grants the 
Director of Arbitration the [[Page 7245]] authority to waive forum fees 
and grants the arbitrators the discretion to apportion all fees and 
charges assessed on the parties other than hearing session deposits.
    The Lipner Letter objects to Section 46(b)(8)(C), which provides 
that one purpose of the administrative conference is to develop a 
statement of the legal authorities related to the matters in dispute to 
be brought to the attention of the arbitrators. The Lipner Letter views 
this provision as transforming the arbitration process into one that is 
more akin to litigation. The Commission believes that this provision 
recognizes that legal issues are argued routinely in arbitration and 
that this provision may assist parties in formulating and assessing the 
strength of their claims. It is a reasonable approach for the NASD to 
adopt.
    Both the NELA Letter and the Lipner Letter object to Section 
46(f)(3), which permits arbitrators to rule on dispositive motions, 
such as motions to dismiss on any grounds, including the applicability 
of a statute of limitations, or motions for summary judgment. Both 
commenters argue that permitting such motions and the attendant legal 
briefing is inconsistent with the nature of the arbitration process. 
The Commission believes that parties should be cognizant of this 
feature of the large and complex case rules before they agree to 
arbitrate pursuant to the large and complex case rules. The Commission 
believes that the pamphlet will alert parties to this provision. As 
noted above, parties will be able to modify this provision under an 
agreement under Section 46 (a)(2) and (a)(3), and, if no agreement is 
reached, then the large and complex arbitration rules will not govern 
the arbitration of the matter.
    The NELA Letter objects to Section 46(f)(2), which limits 
depositions and interrogatories to determining and preserving testimony 
and facts relevant to the determination of the matter, rather than for 
conducting discovery. NELA believes that not permitting depositions for 
discovery is a significant disadvantage to employees and causes the 
arbitration process to be skewed in favor of employers. The Commission 
is not unmindful of the concerns expressed by NELA. However, the 
Commission believes that parties may either modify these procedures 
through the agreement reached under Section 46 (a)(2) and (a)(3) to 
permit depositions for purposes of discovery, or failing agreement, may 
arbitrate in accordance with the rules governing arbitration elsewhere 
in the Code. Moreover, experience with this provision of the pilot 
rules can be evaluated in the event that the NASD determines to propose 
these rules for permanent inclusion in the Code. The Commission also 
intends to monitor cases arbitrated under the large and complex case 
rules to determine whether parties are being disadvantaged by the 
limited scope of discovery.

IV. Discussion and Findings

    The Commission finds that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act\17\ because it may 
encourage the arbitration of large and complex cases in a manner 
consistent with the objective of a just, efficient and cost-effective 
resolution of those cases, and will provide parties with the 
flexibility to formulate their own procedures. The flexibility will 
serve the public interest by permitting parties to tailor arbitration 
proceedings in a manner which enhances their ability to pursue their 
claims.

    \17\U.S.C. 78o-3.
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    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
the File No. SR-NASD-94-10 be, and hereby is approved for a one year 
period beginning May 2, 1995.

    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. 95-2972 Filed 2-6-95; 8:45 am]
BILLING CODE 8010-01-M