[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Notices]
[Pages 27819-27821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13229]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38635; File No. SR-NASD-97-22]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
No. 1 to Proposed Rule Change To Amend the Damage Ceilings for Claims 
Under the Standard Arbitration and Simplified Arbitration Procedures

May 14, 1997.

I. Introduction

    On March 27, 1997, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') submitted to the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the Code of Arbitration 
Procedure (``Code'') of the NASD to: (1) Raise the ceiling for disputes 
to be eligible for resolution by a single arbitrator under simplified 
arbitration procedures from $10,000 to $25,000; and (2) raise the 
ceiling for disputes eligible for resolution by a single arbitrator 
under standard arbitration procedures from $30,000 to $50,000.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 38466 (April 2, 1997), 62 FR 17273 (April 9, 1997). No 
comments were received on the proposal. The NASD

[[Page 27820]]

subsequently filed Amendment No. 1, on May 5, 1997.\3\
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    \3\ Amendment No. 1 amends Section 10308(a) of the Code, 
Designation of Number of Arbitrators, to delete the change that 
states that a majority of the arbitrators appointed shall be public 
arbitrators, and retain the original language, that at least a 
majority of the arbitrators appointed shall not be from the 
securities industry. See letter from John Ramsay, Deputy General 
Counsel, to Katherine A. England, Assistant Director, Market 
Regulation, Commission, dated May 2,1997.
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II. Description

    NASD Regulation, Inc. (``NASDR'') is proposing to amend Rules 
10202, Composition of Panels (formerly Section 9) and 10308, 
Designation of Number of Arbitrators (formerly Section 19) \4\ of the 
Code to establish the threshold for single arbitrator cases under 
standard arbitration at $50,000. NASDR is also proposing to amend Rules 
10203, Simplified Industry Arbitration (formerly Section 10) and 10302, 
Simplified Arbitration (formerly Section 13) of the Code to establish 
the threshold for simplified arbitrations at $25,000. In addition, 
NASDR is proposing to amend each of those rules to state that the 
threshold amount is ``exclusive of attendant costs and interest.''
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    \4\ NASDR will shortly be filing a proposed rule change to amend 
Rule 10308 to implement the list selection process for the selection 
of arbitrators recommended by the NASD's Arbitration Policy Task 
Force. The list selection rule filing will further substantially 
amend Rule 10308, but will not be implemented until NASDR has 
developed the technology and procedures to administer the process 
and developed a pool of arbitrators sufficient to provide lists of 
arbitrators in accordance with the requirements of the rule. 
Accordingly, NASDR is amending Rule 10308 in the interim until the 
list selection rule is filed, approved and implemented.
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    Under the proposed rule change to Rules 10302(d) and 10308(b), 
claims involving public customers and exceeding $25,000, exclusive of 
attendant costs and interest, will be heard by a three member 
arbitration panel, rather than ``a panel of no less than three and no 
more than five arbitrators.'' Under the proposed rule change to Rule 
10302 (f) and (h)(3), the Director of Arbitration will ``appoint,'' 
rather than ``select,'' the public arbitrator for simplified 
arbitration. The original proposed rule change amended Rule 10308(a) to 
state that a majority of the arbitrators on a three member arbitration 
panel (for claims involving public customers under standard 
arbitration, that are less than or equal to $50,000, but where a party 
or arbitrator requested a panel of three arbitrators) ``shall be public 
arbitrators,'' rather than stating that a majority of the three 
arbitrator panel ``shall not be from the securities industry.'' 
Amendment No. 1 deletes this change, returning to the original language 
that at least a majority of the arbitrators appointed ``shall not be 
from the securities industry.'' The proposed rule change also includes 
several technical changes designed to correct inconsistencies in the 
rule language and which also were adopted by SICA.

III. Discussion

    The Commission believes that the proposed rule change is consistent 
with the provisions of Section 15A of the Act \5\ in general and 
Section 15A(b)(6) \6\ in particular in that raising the thresholds for 
simplified arbitration and for standard arbitrations using a single 
arbitrator will permit such cases to be resolved more quickly and at 
lower cost to the parties, and is consistent with the NASD's 
longstanding goal of providing the investing public with a fair, 
efficient and cost-effective forum for the resolution of disputes. 
Accordingly, as discussed below, the rule proposal is consistent with 
the requirements of Section 15A(b)(6) that NASD rules further investor 
protection and the public interest.\7\
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    \5\ 15 U.S.C. 78o-3.
    \6\ 15 U.S.C. 78o-3(b)(6).
    \7\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes that raising the arbitration thresholds to 
$25,000 and $50,000 is reasonable under the Act in that the change 
should serve to promote a more efficient allocation of resources and 
less expensive arbitration, while still providing adequate protection 
of investors and the public. The changes to the arbitration thresholds 
should result in a larger percentage of cases being resolved under the 
simplified arbitration procedure or the one arbitrator procedure under 
standard arbitration. This should result in a more efficient allocation 
of resources because the arbitrators whose attention and time would 
have been involved in those cases will now be able to hear other cases, 
resulting in a larger number of cases being heard. The threshold 
changes should also result in less expensive arbitration because the 
customer will not have to pay the costs attendant with three 
arbitrators or a hearing \8\ (if they qualify for a decision on the 
pleadings and evidence).\9\
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    \8\ Under the simplified arbitration procedures for matters 
between a public customer and an associated person or member, cases 
are resolved without a hearing (so-called ``paper cases'') by a 
single public arbitrator. A public customer may, however, demand a 
hearing, or the arbitrator may call a hearing, in which case the 
arbitrator will hold a hearing and the parties will have the benefit 
of all of the available forms of discovery. See Rule 10302.
    \9\ The Commission notes that the NASD has stated that the 
arbitration fees will increase in some brackets, but that the 
increases would be larger in three arbitrator proceedings. Phone 
conversation between Elliot Curzon, NASD, Katherine England, 
Assistant Director, Market Regulation, Commission, and Heather 
Seidel, Attorney-Advisor, Market Regulation, Commission, on May 5, 
1997.
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    The Commission recognizes the NYSE and SICA's concerns, expressed 
by the NASD in its filing, that by setting the thresholds too high, a 
customer claimant's procedural rights under the Code could be 
disadvantaged in cases that have a significant economic value to the 
customer. However, the Commission believes that the change in the 
thresholds for simplified arbitration and single arbitrator standard 
arbitration, to $25,000 and $50,000 respectively, is adequate to 
protect against this concern and strikes an appropriate balance between 
protecting the investing public and promoting a more efficient and 
cost-effective forum to resolve disputes. The Commission notes that 
simplified industry arbitration provides for no fewer than one but no 
more than three arbitrators, and that simplified arbitration involving 
public customers provides for two additional arbitrators, upon the 
request of the arbitrator already appointed.\10\ Also, for standard 
public arbitration and standard industry arbitration under $50,000, any 
party may request three arbitrators.\11\
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    \10\ See Rules 10203(a)(1) and 10302(i) of the Code.
    \11\ See Rules 10308(a) and 10202(b)(1) of the Code.
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    The Commission believes that the proposed rule change to Rules 
10302(d) and 10308(b), stating that claims involving public customers 
and exceeding $50,000, exclusive of attendant costs and interest, will 
be herd by a three member arbitration panel, rather than a panel of no 
less than three and no more than five arbitrators, is reasonable under 
the Act. This change should also promote greater efficiency and cost-
effectiveness because these cases will now involve fewer arbitrators, 
whose time and attention will be available for other cases, and the 
customers will not have to bear the cost of up to five arbitrators. At 
the same time, this change will still provide adequate protection to 
public customers and a fair and efficient forum

[[Page 27821]]

for disputes because the claims will still be heard by three 
arbitrators.
    The Commission believes that the proposed rule change to Rule 10302 
(f) and (h)(3), where the Director of Arbitration will ``appoint,'' 
rather than ``select,'' the public arbitrator for simplified 
arbitration, is consistent with the Act in that it is not a substantive 
change; the Director of Arbitration will continue to be the individual 
who is responsible for choosing the arbitrator for these cases.\12\
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    \12\ The Commission notes that the NASD has stated that it will 
implement this rule filing at the same time as a rule filing dealing 
with amendments to the arbitration fees, yet to be filed with the 
Commission. See letter from Elliot R. Curzon, Assistant General 
Counsel, NASDR, to Katherine England, Assistant Director, Market 
Regulation, Commission, dated May 5, 1997.
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    As noted above, Amendment No. 1 amends Section 10308(a) of the 
Code, Designation of Number of Arbitrators, to delete the change in the 
original filing that states that a majority of the arbitrators 
appointed shall be public arbitrators, and retain the original 
language, that at least a majority of the arbitrators appointed shall 
not be from the securities industry. The Commission finds good cause to 
approve Amendment No. 1 to the proposed rule change prior to the 
thirtieth day after the date of publication of notice of filing thereof 
in the Federal Register. The Commission notes that this a non-
substantive change in that it restores the rule to its original 
language and conforms the language with similar wording in Section 
10308(b) of the Code. Accordingly, the Commission believes that it is 
consistent with Section 15A(b)(6) of the Act to approve Amendment No. 1 
to the proposal on an accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the rule proposal. 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 at the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-97-22 and should 
be submitted by June 11, 1997.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NASD-97-22), including 
Amendment No. 1, is approved.

    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13229 Filed 5-20-97; 8:45 am]
BILLING CODE 8010-01-M