[Federal Register Volume 62, Number 108 (Thursday, June 5, 1997)]
[Notices]
[Pages 30920-30922]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14618]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38692; File No. SR-NASD-97-34]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Miscellaneous Amendments to Arbitration Procedures and 
Clarifications of the Code of Arbitration Procedure

May 29, 1997.
    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 May 5, 
1997,\1\ the National Association of Securities Dealers, Inc. (``NASD'' 
or ``Association'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ The NASD filed Amendment Nos. 1 and 2 with the Commission on 
May 13, 1997, and May 22, 1997, respectively, the substance of which 
are incorporated into the notice. See letters from Elliot R. Curzon, 
Assistant General Counsel, NASDR, to Katherine A. England, Assistant 
Director, Market Regulation, Commission, dated May 8, 1997 
(``Amendment No. 1'') and May 20, 1997 (``Amendment No. 2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Regulation, Inc. (``NASDR'') is proposing to amend the Code of 
Arbitration Procedure (``Code'') to make certain minor procedural 
changes designed to enhance the arbitration process. Specifically, 
NASDR is proposing to amend: (1) Rule 10305 (formerly Section 16), to 
permit arbitrators to dismiss claims with and without prejudice; (2) 
10310 (formerly Section 21), to extend the time periods for notice of 
selection of arbitrators and further inquiries concerning an 
arbitrator; (3) Rule 10311 (formerly Section 22), to permit the 
Director of Arbitration to grant additional peremptory challenges of 
arbitrators; (4) Rule 10313 (formerly Section 24), to extend the time 
in which a party can exercise its right to challenge a replacement 
arbitrator; and (5) rule 10330 (formerly Section 41), to permit awards 
to be served by facsimile.

[[Page 30921]]

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 self-regulatory organization 
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 self-regulatory organization 
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

1. Purpose
    As part of its continuing efforts to enhance the arbitration 
process, NASDR has been engaged in a comprehensive review of proposals 
to improve the procedures for arbitration specified in the Code. The 
amendments to the Code proposed herein are a result of that effort, and 
are intended to clarify existing provisions, eliminate ambiguities, and 
adjust certain procedures to accommodate changing practices in 
arbitration. The amendments were considered and approved by the 
Securities Industry Conference on Arbitration (``SICA''). In addition, 
while NASDR does not believe that the rule changes proposed herein will 
conflict with amendments to the Code to be proposed in response to the 
recommendations of the NASD's Arbitration Policy Task Force, some of 
the rule changes proposed herein will ultimately be replaced or 
superseded by those amendments and are, therefore, temporary in nature. 
For example, the proposed changes to the peremptory challenge provision 
discussed below will be superseded when the Association's list 
selection rule is filed with and approved by the Commission. 
Nevertheless, NASDR believes that the rule changes proposed herein are 
important enough to be made now even if some of them will eventually be 
superseded.
    NASDR is proposing to amend Rule 10305 of the Code (formerly 
Section 16), which relates to dismissal of arbitration proceedings, to 
clarify that the arbitrators may dismiss a proceeding without prejudice 
to the claims or defenses of the parties and refer the parties to their 
judicial remedies and, in addition, to any other dispute resolution 
forum agreed to by the parties. The Code does not specify the grounds 
for dismissals without prejudice; however, such dismissals would 
generally occur only where appropriate and in the interest of justice, 
such as where the parties have agreed to the dismissal (especially if 
they have agreed to proceed in another forum), or where an 
indispensable party cannot be joined in the arbitration.
    NASDR is also proposing to amend Rule 10305 by adding a new 
subsection (b) granting arbitrators the express authority to dismiss a 
claim, defense, or proceeding with prejudice as a sanction for willful 
and intentional material failure to comply with an order of the 
arbitrator(s), but only if lesser sanctions have proven ineffective.\2\ 
This provision is intended to establish clearly that arbitrators have 
the power to issue orders in aid of the arbitration process and to 
enforce those orders by use of the ultimate sanction of dismissal with 
prejudice. Such a sanction would be used, for example, where a party 
refused to produce documents necessary for another party's claim or 
defense. In such instances, after the arbitrators have imposed lesser 
sanctions that have not induced compliance with the order, the 
arbitrators may dismiss a claim, defense, or the entire arbitration 
proceeding, with prejudice.
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    \2\ While it is believed that arbitrators currently have plenary 
power to issue such dismissal orders, this power is rarely exercised 
because it is not expressly provided for in the Code and arbitrators 
appear to be reluctant to wield such sanctioning power without 
express authority.
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    NASDR is proposing to amend Rules 10310, 10311, and 10313 of the 
Code (formerly Sections 21, 22, and 23), which relate to arbitrator 
selection, peremptory challenges and arbitrator disclosures, to extend 
the time limitations on a party to (1) seek additional information 
under Rules 10310 and 10313 about replacement arbitrators, and (2) 
exercise a peremptory challenge under Rule 10311, from 5 days to 10 
days prior to the hearing. In addition, Rule 10310 is proposed to be 
amended to extend the Arbitration Department's obligation to provide 
the parties with the names and histories of the arbitrators from 8 to 
15 days prior to the date of the first hearing. The proposed rule 
change further amends Rule 10310 to replace ``the Director of 
Arbitration'' with ``the Director'' whenever it occurs.
    NASDR is also proposing to amend Rule 10311 to permit the Director 
to grant additional peremptory challenges under certain circumstances. 
Currently, the rule permits the Director to grant additional peremptory 
challenges in multi-party cases when the Director, ``in the interests 
of justice,'' determines that additional peremptory challenges are 
warranted by the circumstances of the case. For example, on occasion a 
party will discover grounds for a cause challenge to one arbitrator 
after the party has used its peremptory challenge against that 
arbitrator. In such an instance, the party may argue that it would have 
used its peremptory challenge differently had it known of the 
information. Under the current rule if that circumstance arose in a 
multi-party case, the Director may, ``in the interests of justice,'' 
grant additional challenges. NASDR believes that similar circumstances 
may arise in single-party cases and, therefore, is seeking to amend the 
rule to permit the Director to grant such additional challenges.
    NASDR is also proposing to amend Rule 10330 of the Code (formerly 
Section 41) to permit the Office of Dispute Resolution to serve 
arbitration awards by facsimile or other electronic means if the 
recipient agrees. The Office frequently is asked to provide arbitration 
awards to parties by facsimile. Because the Code does not provide for 
this method of service, the Office serves the award by facsimile and 
also duplicate service by one of the other methods specified in the 
Code. By amending the Code to permit facsimile service, the Office will 
not be required to serve duplicates by another approved method. 
Nevertheless, the Office will not use the facsimile method of service 
unless both parties have agreed to this form of service in order to 
prevent disagreements over when an award was served for purposes of 
time limitations on appeals.
    The proposed rule change also amends references to numbers, such as 
``eight (8)'' or ``fifteen (15)'', throughout the proposed rule change 
to delete the word from and retain the Arabic numeral.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act \3\ in that clarifying 
procedures, eliminating ambiguities, and adjusting procedures to 
accommodate changing practices are 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.
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    \3\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

[[Page 30922]]

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

    No written comments were either solicited or received.

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

    Within 35 days of the 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 the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-97-34 and should 
be submitted by June 26, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14618 Filed 6-4-97; 8:45 am]
BILLING CODE 8010-01-M