[Federal Register Volume 63, Number 34 (Friday, February 20, 1998)]
[Notices]
[Pages 8727-8729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4342]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39664; File No. SR-NASD-98-07]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Extension of Time to Answer 
Arbitration Complaints

February 13, 1998.
    Pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 
1934 (``Act''),\1\ notice is hereby given that on February 2, 1998,\2\ 
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. 
The Association has designated the proposed rule change as constituting 
a ``non-controversial'' rule change under paragraph (e)(6) of Rule 19b-
4 under the Act \3\ which renders the proposal effective upon receipt 
of this filing by the Commission.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(3)(A).
    \2\ The NASD filed a technical amendment on February 11, 1998 to 
change the operative date of the proposed rule filing from March 1, 
1998 to March 16, 1998. See letter from Jean I. Feeney, Assistant 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Market Regulation, Commission, dated February 6, 1998.
    \3\ 17 CFR 240.19b-4(e)(6).
    \4\ The Association has represented that this proposed rule 
change: (1) Will not significantly affect the protection of 
investors or the public interest; (ii) will not impose any 
significant burden on competition, and (iii) will not become 
operative for 30 days after the date of this filing, unless 
otherwise accelerated by the Commission. The Association also has 
provided at least five business days notice to the Commission of its 
intent to file this proposed rule change, as required by Rule 19b-
4(e)(6) under the Act. Id.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Regulation is proposing to amend Rule 10314 of the NASD's Code 
of Arbitration Procedure (``Code'') to recognize and conform to current 
practice and to reduce the administrative burden on NASD Regulation 
staff. Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

10314. Initiation of Proceedings

    Except as otherwise provided herein, an arbitration proceeding 
under this Code shall be instituted as follows:
    (a) Unchanged.
    (b) Answer-Defenses, Counterclaims, and/or Cross-Claims
    (1) Within twenty (20) business 45 calendar days from receipt of 
the Statement of Claim, Respondent(s) shall serve each party with an 
executed Submission Agreement and a copy of the Respondent's Answer. 
Respondent's executed Submission Agreement and Answer shall also be 
filed with the Director of Arbitration with sufficient additional 
copies for the arbitrator(s) along with any deposit required under the 
schedule of fees. The Answer shall specify all available defenses and 
relevant facts thereto that will be relied upon at the hearing and may 
set forth any related Counterclaim the Respondent(s) may have against 
the Claimant, any Cross-Claim the Respondents(s) may have against any 
other named Respondents(s) and any Third-Party Claim against any other 
party or person based upon any existing dispute, claim, or controversy 
subject to arbitration under this Code.
    (2)(A)--(B) Unchanged.
    (c) A Respondent, Responding Claimant, Cross-Claimant, Cross-
Respondent, or Third-Party Respondent who fails to file an [a] Answer 
within [twenty (20) business] 45 calendar days from receipt of service 
of a Claim, unless the time to answer has been

[[Page 8728]]

extended pursuant to subparagraph (5) below, may, in the discretion of 
the arbitrators, be barred from presenting any matter, arguments, or 
defenses at the hearing.
    (3)--(4) Unchanged.
    (5) The time period to file any pleading, whether such be 
denominated as a Claim, Answer, Counterclaim, Cross-Claim, Reply, or 
Third-Party Pleading, may be extended for such further period as may be 
granted by the Director of Arbitration or with the consent of the 
initial claimant. Extensions of the time period to file an Answer are 
disfavored and will not be granted by the Director except in 
extraordinary circumstances.
    (c)--(d) Unchanged.
* * * * *

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 Association 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 test of these statements may be examined at the places 
specified in Item IV below. The Association 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 of Rule Change
    NASD Regulation is proposing to amend Rule 10314 of the Code to 
recognize and conform to current practice and to reduce the 
administrative burden on NASD Regulation staff. Currently, Rule 10314 
requires respondents to answer an arbitration claim within twenty 
business days of receiving it. NASD Regulation's Office of Dispute 
Resolution (``Office'') routinely grants requests for extension of the 
time to answer for two weeks. Requests for extension generally arise 
because respondents need additional time to develop a complete answer 
to the claim. Complete answers are encouraged. In fact, under Rule 
10314(b)(2)(A), to party who pleads only a general denial as an answer 
may, upon objection by a party, be barred by the arbitrators from 
presenting any facts of defenses at the hearing. In addition, under 
Rule 10314(b)(2)(B), a party who fails to specify all available 
defenses and relevant facts in the answer may, upon objection by a 
party, be barred by arbitrators from presenting such facts or defenses 
at the hearing.
    The practice of granting extensions of time to answer, burdens the 
staff with processing requests and responses, and it undermines the 
certainty of the deadlines specified in the Rule. The NASD believes the 
Code should reflect the current reality that most claims are not 
answered within the 20 business day period that currently is specified.
    Accordingly, the NASD has determined that Rule 10314 of the Code 
should be amended to extend the time to answer a claim to 45 calendar 
days and to eliminate routine extensions.\5\ Under the proposed 
amendment, extensions are disfavored and will be granted only in 
extraordinary circumstances or with the consent of the initial 
claimant. The term ``extraordinary circumstances'' is not defined; 
however, the NASD intends that the circumstances that would qualify for 
an extension would be limited to unusual and unforeseeable personal or 
professional conflicts that would make filing on time extremely 
difficult or burdensome. Extending the time period to 45 calendar days 
provides approximately the same amount of time to answer as is 
currently the case, since 20 business days equal 28 calendar days, and 
a two-week routine extension (14 calendar days) would bring the total 
to 42 calendar days.
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    \5\ The proposed rule change will not apply to simplified 
arbitration claims filed under Rule 10302 of the Code. Answers to 
claims involving less than $10,000 will continue to be due within 20 
days of receipt of the Statement of Claim.
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    The Securities Industry Conference on Arbitration (``SICA'') \6\ 
considered the proposed rule change at its October 16, 1997 meeting, 
but declined to adopt it as part of the Uniform Code of Arbitration. 
The other self-regulatory organization (``SRO'') members of SICA noted 
that, because of the small number of claims they process, they do not 
experience significant burdens related to administering extensions of 
time to answer. SICA members also believe that the proposed change 
would not reduce the number of extension requests and that it may 
result in additional delays. Notwithstanding their reluctance to adopt 
the proposed change, the members of SICA understood NASD Regulation's 
position that the proposed amendment will eliminate the administrative 
costs associated with granting extension in the time to answer claims. 
Accordingly, SICA recommended that NASD Regulation adopt the change on 
a pilot basis. The NASD has determined to adopt the rule without a 
sunset provision, but the NASD will monitor the impact of the proposed 
rule change.
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    \6\ SICA is a group composed of representatives of the self-
regulatory organizations that provide dispute resolution forums, 
public investors, and the securities industry. Staff of the SEC 
attend as non-voting invitees. SICA was established with the 
encouragement of the SEC to develop uniform rules for securities 
arbitration (the ``Uniform Code of Arbitration'') and to provide a 
forum for the various dispute resolution forums and users of those 
forums to communicate about issues relating to securities industry 
dispute resolution SICA member forums are encouraged to adopt the 
provisions of the SICA Uniform Code of Arbitration, but are not 
required to do so.
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2. Statutory Basis of Rule Change
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\7\ 
which requires, among other things, that the Association's rules must 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and, in general , to 
protect investors and the public interest. The NASD believes that the 
proposed rule change protects the public interest by making the time 
period within which to answer uniform for all parties, whether or not 
they are knowledgeable enough to seek an extension of time, and by 
eliminating further extensions of time, absent extraordinary 
circumstances, in order to make the arbitration process move more 
expeditiously.
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    \7\15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Association does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the 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

    The proposed rule change has been filed by the Association as a 
``non-controversial'' rule change under Rule 19b-4(e)(6) under the 
Act.\8\ Consequently, because the foregoing proposed rule change: (1) 
Does not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become

[[Page 8729]]

operative until March 16, 1998, more than 30 days from February 2, 
1998, the date on which it was filed, and the NASD provided the 
Commission with written notice of its intent to file the proposed rule 
change at least five days prior to the filing date, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(e)(6) thereunder.
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    \8\ 17 CFR 240.19b-4(e)(6).
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal if it appears to the Commission that 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 (SR-NASD-98-07) and should be submitted by March 13, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4342 Filed 2-19-98; 8:45 am]
BILLING CODE 8010-01-M