[Federal Register Volume 63, Number 146 (Thursday, July 30, 1998)]
[Notices]
[Pages 40761-40774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20364]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40261; File No. SR-NASD-98-48]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to the Selection of Arbitrators in Arbitrations Involving Public
Customers
July 24, 1998.
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 July 10,
1998,\1\ the National Association of Securities Dealers, Inc. (``NASD''
or ``Association''), through its wholly-owned subsidiary NASDA
Regulation, 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 to the proposed rule
change on July 14, 1998 and July 23, 1998, respectively, the
substance of which is incorporated into this notice. See letters
from Alden S. Adkins, Senior Vice-President and General Counsel,
NASD Regulation, to Katherine A. England, Assistant Director, Market
Regulation, Commission, dated July 14, 1998 (``Amendment No. 1'')
and July 23, 1998 (``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 is proposing to amend Rule 10308 to set forth new
procedures to be used to select arbitrators for arbitrations involving
public customers.\2\ Under the new procedures, NASD Regulation will
allow the parties to an arbitration to rank arbitrators from lists
generated primarily using an automated process, providing parties with
a substantial role in determining the composition of their arbitration
panels. NASD Regulation is proposing conforming changes to Rules 10104,
10309, 10310, 10311, 10312, and 10313. In addition, NASD Regulation
proposes to amend Rule 10315 concerning the scheduling of the first
meeting of the parties and the arbitration panel to reflect that such
meetings usually occur prior to the first hearing of an arbitration
proceeding. Finally, NASD Regulation proposes to correctly state in the
Rule 10000 Series and any other Rules the name of the NASD Regulation
committee that addresses arbitration and related matters, the National
Arbitration and Mediation Committee.
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\2\ NASD Regulation also intends to file a proposed rule change
to use a similar list selection process for intra-industry
arbitrations.
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Below is the text of the proposed rule change. Proposed new
language is in italics proposed deletions are in brackets.
* * * * *
10104. Composition and Appointment of Panels
Except as otherwise specifically provided in Rule 10308, t[T]he
Director [of Arbitration] shall compose and appoint panels of
arbitrators from the existing pool of arbitrators of the Association to
conduct the arbitration of any matter which shall be eligible for
submission under this Code. [The Director of Arbitration may request
that the Executive Committee of the National Arbitration Committee
undertake the composition and appointment of a panel or undertake
consultation with the Executive Committee regarding the composition and
appointment of a panel in any circumstance where he determines such
action to be appropriate.]
* * * * *
10308. [Designation of Number of Arbitrators] Selection of Arbitrators
in Customer Disputes
[(a) Except as otherwise provided in Rule 10302, in all arbitration
matters involving public customers and where the amount in controversy
does not exceed $30,000, the Director of Arbitration shall appoint a
single public arbitrator knowledgeable in but who is not from the
securities industry to decide the dispute, claim or controversy. Upon
the request of a party in its initial filing or the arbitrator, the
Director of Arbitration shall appoint a panel of three (3) arbitrators
which shall decide the matter in controversy. At least a majority of
the arbitrators appointed shall not be from the securities industry,
unless the public customer requests a panel consisting of at least a
majority from the securities industry.
(b) In arbitration matters involving public customers and where the
amount in controversy exceeds $50,000, exclusive of attendant costs and
interest, or where the matter in controversy does not involve or
disclose a money claim, the Director of Arbitration shall appoint a
panel of three (3) arbitrators, at least a majority of whom shall not
be from the securities industry, unless the public customer requests a
panel consisting of at least a majority from the securities industry.
(c) An arbitrator will be deemed as being from the securities
industry if he or she:
(1) Is a person associated with a member or other broker/dealer,
municipal securities dealer, government securities broker, or
government securities dealer, or
(2) Has been associated with any of the above within the past three
(3) years, or
(3) Is retired from any of the above, or
(4) Is an attorney, accountant, or other professional who has
devoted twenty (20) percent or more of his or her professional work
effort to securities industry clients within the last two years, or
(5) Is an individual who is registered under the Commodity Exchange
Act or is a member of a registered futures association or any
commodities
[[Page 40762]]
exchange or is associated with any such person(s).
(d) An arbitrator who is not from the securities industry shall be
deemed a public arbitrator. A person will not be classified as a public
arbitrator if he or she has a spouse or other member of the household
who is a person who is associated with a member of other broker/dealer,
municipal securities dealer, government securities broker, or
government securities dealer.]
This rule specifies how parties may select or reject arbitrators,
and who can be a public arbitrator in arbitration proceedings involving
a customer.
(a) Definitions
(1) ``Day''
For purposes of this rule, the term ``day'' means calendar day.
(2) ``Claimant''
For purposes of this rule, the term ``claimant'' means one or more
persons who file a single claim.
(3) ``Neutral List Selection System''
The term ``Neutral List Selection System'' means the software that
maintains the roster of arbitrators and performs various functions
relating to the selection of arbitrators.
(4) ``Non-Public Arbitrator''
The term ``non-public arbitrator'' means a person who is otherwise
qualified to serve as an arbitrator and:
(A) Is, or within the past three years, was:
(i) Associated with a broker or a dealer (including a government or
a municipal securities broker or dealer);
(ii) Registered under the Commodity Exchange Act;
(iii) A member of a commodities exchange or a registered futures
association; or
(iv) Associated with a person or firm registered under the
Commodity Exchange Act;
(B) Is retired from engaging in any of the business activities
listed in subparagraph (4)(A);
(C) Is an attorney, accountant, or other professional who has
devoted 20 percent or more of his or her professional work, in the last
two years, to clients who are engaged in any of the business activities
listed in subparagraph (4)(A); or
(D) Is an employee of a bank or other financial institution and
effects transactions in securities and commodities futures or options
or supervises or monitors the compliance with the securities and
commodities laws of employees who engage in such activities.
(5) ``Public Arbitrator''
(A) The term ``public arbitrator'' means a person who is otherwise
qualified to serve as an arbitrator and is not:
(i) Engaged in the conduct or activities described in paragraphs
(a)(4)(A) through (D); or
(ii) The spouse or an immediate family member of a person who is
engaged in the conduct or activities described in paragraphs (a)(4)(A)
through (D).
(B) For the purpose of this rule, the term ``immediate family
member'' means:
(i) A family member who shares a home with a person engaged in the
conduct or activities described in paragraphs (a)(4)(A) through (D);
(ii) A person who receives financial support of more than 50
percent of his or her annual income from a person engaged in the
conduct or activities described in paragraphs (a)(4)(A) through (D); or
(iii) A person who is claimed as a dependent for federal income tax
purposes by a person engaged in the conduct or activities described in
paragraphs (a)(4)(A) through (D).
(6) ``Respondent''
For purposes of this rule, the term ``respondent'' means one or
more persons who individually or jointly file an answer to a complaint.
(7) ``Send''
For purposes of this rule, the term ``send'' means to send by first
class mail, facsimile, or any other method available and convenient to
the parties and the Director.
(b) Composition of Arbitration Panel; Preparation of Lists for Mailing
to Parties
(1) Composition of Arbitration Panel
(A) General Rule Regarding Panel Composition
(i) If the amount of a claim is $50,000 or less, the Director shall
appoint an arbitration panel composed of one public arbitrator, unless
the parties agree otherwise.
(ii) If the amount of a claim is more than $50,000, the Director
shall appoint an arbitration panel composed of one non-public
arbitrator and two public arbitrators, unless the parties agree
otherwise.
(B) Special Request
If the amount of a claim is greater than $25,000 and not more than
$50,000 and the claimant requests that a panel of three arbitrators be
appointed, the Director shall appoint an arbitration panel composed of
one non-public arbitrator and two public arbitrators, unless the
parties agree otherwise.
(2) One List for Panel of One Arbitrator
If one arbitrator will serve as the arbitration panel, the Director
shall send to the parties one list of public arbitrators, unless the
parties agree otherwise.
(3) Two List for Panel of Three Arbitrators
If three arbitrators will serve as the arbitration panel, the
Director shall send two lists to the parties, one with the names of
public arbitrators and one with the names of non-public arbitrators.
The lists shall contain numbers of public and non-public arbitrators,
in a ratio of approximately two to one, respectively, to the extent
possible, based on the roster of available arbitrators.
(4) Preparation of Lists
(A) Except as provided in subparagraph (B) below, the Neutral List
Selection System shall generate the list of public and non-public
arbitrators on a rotating basis within a designated geographic hearing
site and shall exclude arbitrators based upon conflicts of interest.
(B) If a party requests that the lists include arbitrators with
expertise classified in the Neutral List Selection System, the list may
include some arbitrators having the designated expertise.
(5) Sending of Lists to Parties
The Director shall send the list of arbitrators to all parties at
the same time approximately 30 days after the last answer is due.
(6) Information About Arbitrators
The Director shall send to the parties employment history for each
listed arbitrator for the past 10 years and any information disclosed
by the arbitrator under Rule 10312 relating to personal financial
interests or the existence of a relationship that gives rise to an
appearance of a conflict of interest or bias. If a party requests
additional information about an arbitrator, the Director shall send
such request to the arbitrator, and shall send the arbitrator's
response to all parties at the same time. When a party requests
additional information, the Director may, but is not required to, toll
the time for the parties to return the ranked lists under paragraph
(c)(2).
[[Page 40763]]
(c) Striking, Ranking, and Appointing Arbitrators on Lists
(1) Striking and Ranking Arbitrators
(A) Striking An Arbitrator
A party may strike one or more of the arbitrators from each list
for any reason.
(B) Ranking--Panel of One Arbitrator
Each party shall rank all of the arbitrators remaining on the list
by assigning each arbitrator a different, sequential, numerical
ranking.
(C) Ranking--Panel of Three Arbitrators
Each party shall rank all of the public arbitrators remaining on
the list by assigning each arbitrator a different, sequential,
numerical ranking, and separately shall rank all of the non-public
arbitrators remaining on the list, using the same procedure.
(D) Joint Action Permitted
All claimants may act jointly and all respondents, including
thirdparty respondents, may act jointly to file a single list that
reflects their unanimous agreement as to the striking and ranking of
arbitrators. If multiple claimants or respondents do not act jointly,
the rankings of multiple claimants or respondents will be consolidated
as described in subparagraph (b)(3)(A).
(2) Period for Ranking Arbitrators; Failure To Timely Strike and Rank
A party must return to the Director the list or lists with the
ranking not later than 20 days after the Director sent the lists to the
parties, unless the Director has extended the period. If a party does
not timely return the list or lists, the Director shall treat the party
as having retained all the arbitrators on the list or lists and as
having no preferences.
(3) Process of Consolidating Parties' Rankings
(A) General Rule
The Director shall prepare one or two consolidated lists of
arbitrators, as appropriate under subparagraph (b)(2) or (b)(3), based
upon the parties' numerical rankings. The arbitrators shall be ranked
by adding the rankings of all claimants together and all respondents
together, including third-party respondents, to produce separate
consolidated rankings of the claimants and the respondents. The
Director shall then rank the arbitrators by adding the consolidated
rankings of the claimants, the respondents, including third party
respondents, and any other party together, to produce a single
consolidated ranking number, excluding arbitrators who were stricken by
any party.
(B) Exception
If the Director determines that the interests of a party are
sufficiently different from the interests of other claimants or
respondents, the Director may determine not to consolidate the rankings
of that party with the rankings of the other claimants or respondents.
(4) Appointment of Arbitrators
(A) Appointment of Listed Arbitrators
The Director shall appoint arbitrators to serve on the arbitration
panel based on the order of rankings on the consolidated list of lists,
subject to availability and disqualification.
(B) Discretion To Appoint Arbitrators Not on List
If the number of arbitrators available to serve from the
consolidated list is not sufficient to fill a panel, the Director shall
appoint one or more arbitrators to complete the arbitration panel;
provided, however, unless the parties agree otherwise, the Director may
not appoint a non-public arbitrator under paragraphs (a)(4)(B) or
(a)(4)(C).
(5) Selecting a Chairperson for the Panel
The parties shall have 15 days from the date the Director sends
notice of the names of the arbitrators to select a chairperson. If the
parties cannot agree, the Director shall appoint one of the public
arbitrators as the chairperson. Unless all parties agree otherwise, the
Director shall not appoint as the chairperson a public arbitrator who:
(A) Is an attorney, accountant, or other professional, and
(B) Has devoted 50% or more of his or her professional or business
activities, within the last two years, to representing or advising
public customers in matters relating to disputed securities or
commodities transactions or similar matters.
(6) Additional Parties
If a party is added to an arbitration proceeding before the
Director has consolidated the other parties' rankings, the Director
shall send to that party the list or lists or arbitrators and permit
the party to strike and rank the arbitrators. The party must return to
the Director the list or lists with numerical rankings not later than
20 days after the Director sent the lists to the party. The Director
shall then consolidate the ranking as specified in this paragraph (c).
(d) Disqualification and Removal of Arbitrator Due to Conflict of
Interest or Bias
(1) Disqualification by Director
After the appointment of an arbitrator and prior to the
commencement of the earlier of (i) the first prehearing conference or
(ii) the first hearing, if the Director or a party objects to the
continued service of the arbitrator, the Director shall determine if
the arbitrator should be disqualified. If the Director sends a notice
to the parties that the arbitrator shall be disqualified, the
arbitrator will be disqualified unless the parties unanimously agree
otherwise in writing and notify the Director not later than 15 days
after the Director sent the notice.
(2) Authority of Director of Disqualify Ceases
After the commencement of the earlier of (i) the first prehearing
conference or (ii) the first hearing, the Director's authority to
remove an arbitrator from an arbitration panel ceases.
(3) Vacancies Created by Disqualification or Resignation
If an arbitrator appointed to an arbitration panel is disqualified
or resigns from an arbitration panel, the Director shall appoint from
the consolidated list of arbitrators the arbitrator who is the most
highly ranked available arbitrator of the proper classification
remaining on the list. If there are no available arbitrators of the
proper classification in the consolidated list, the Director shall
appoint an arbitrator of the proper classification subject to the
limitation set forth in paragraph (s)(4)(B).
(e) Discretionary Authority
The Director may exercise discretionary authority and make any
decision that is consistent with the purposes of this rule and the Rule
10000 Series to facilitate the appointment of arbitration panels and
the resolution of arbitration disputes.
Rule 10309. Composition of Panels
Except as otherwise specifically provided in Rule 10308, t[T]he
individuals who shall serve on a particular arbitration panel shall be
determined by the Director [of Arbitration]. Except as otherwise
specifically provided in Rule 10308, t[T]he Director [of Arbitration]
may name the chairman of the panel.
[[Page 40764]]
Rule 10310. Notice of Selection of Arbitrators
(a) The Director shall inform the parties of the arbitrators' names
and employment histories for the past 10 years, as well as information
disclosed pursuant to Rule 10312, at least 15 business days prior to
the date fixed for the first hearing session. A party may make further
inquiry of the Director [of Arbitration] concerning an arbitrator's
background. In the event that, prior to the first hearing session, any
arbitrator should become disqualified, resign, die, refuse or otherwise
be unable to perform as an arbitrator, the Director shall appoint a
replacement arbitrator to fill the vacancy on the panel. The Director
shall inform the parties as soon as possible of the name and employment
history of the replacement arbitrator for the past 10 years, as well as
information disclosed pursuant to Rule 10312. A party may make further
inquiry of the Director [of Arbitration] concerning the replacement
arbitrator's background and within the time remaining prior to the
first hearing session or the 10 day period provided under Rule 10311,
whichever is shorter, may exercise its right to challenge the
replacement arbitrator as provided in Rule 10311.
(b) This rule shall not apply to arbitration proceedings that are
subject to Rule 10308.
Rule 10311. Peremptory Challenge
(a) In an[y] arbitration proceeding, each party shall have the
right to one [(1)] peremptory challenge. In arbitrations where there
are multiple Claimants, Respondents, and/or Third-Party Respondents,
the Claimants shall have one [(1)] peremptory challenge, the
Respondents shall have one [(1)] peremptory challenge, and the Third-
Party Respondents shall have one [(1)] peremptory challenge. The
Director [of Arbitration] may in the interests of justice award
additional peremptory challenges to any party to an arbitration
proceeding. Unless extended by the Director [of Arbitration], a party
wishing to exercise a peremptory challenge must do so by notifying the
Director [of Arbitration] in writing within 10 business days of
notification of the identity of the person(s) named under Rule 10310 or
Rule 10321(d) or (e), whichever comes first. There shall be unlimited
challenges for cause.
(b) This rule shall not apply to arbitration proceedings that are
subject to Rule 10308.
Rule 10312. Disclosures Required of Arbitrators and Director's
Authority To Disqualify
(a) through (c) No change.
* * * * *
(d) The Director shall inform the parties to an arbitration
proceeding of any information disclosed to the Director under this Rule
unless the arbitrator who disclosed the information withdraws from
being considered for appointment voluntarily and immediately after the
arbitrator learns of any interest or relationship described in
paragraph (a) that might preclude the arbitrator from rendering an
objective and impartial determination in the proceeding.
([d]e) [Prior to the commencement of the first hearing session]
Prior to the commencement of the earlier of (i) the first prehearing
conference or (ii) the first hearing, the Director [of Arbitration] may
remove an arbitrator based on information disclosed pursuant to this
Rule. [The Director of Arbitration shall also inform the parties of any
information disclosed pursuant to this Rule if the arbitrator who
disclosed the information is not removed.]
(f) After the commencement of the earlier of (i) the first
prehearing conference or (ii) the first hearing, the Director's
authority to remove an arbitrator from an arbitration panel ceases.
Rule 10313. Disqualification or Other Disability of Arbitrators
In the event that any arbitrator, after the commencement of the
first hearing session but prior to the rendition of the award, should
become disqualified, resign, die, refuse or otherwise be unable to
perform as an arbitrator, the remaining arbitrator(s) shall continue
with the hearing and determination of the controversy, unless such
continuation is objected to by any party within 5 days of notification
of the vacancy on the panel. Upon objection, the Director [of
Arbitration] shall appoint a replacement arbitrator to fill the vacancy
and the hearing shall continue. The Director [of Arbitration] shall
inform the parties as soon as possible of the name and employment
history of the replacement arbitrator for the past 10 years, as well as
information disclosed pursuant to Rule 10312. A party may make further
inquiry of the Director [of Arbitration] concerning the replacement
arbitrator's background. If the arbitration proceeding is subject to
Rule 10308, the party may exercise his or her right to challenge the
replacement arbitrator within the time remaining prior to the next
scheduled hearing session by notifying the Director in writing of the
name of the arbitrator challenged and the basis for such challenge. If
the arbitration proceeding is not subject to Rule 10308, [and] within
the time remaining prior to the next scheduled hearing session or the 5
day period provided under Rule 10311, whichever is shorter, a party may
exercise the party's [its] right to challenge the replacement
arbitrator as provided in Rule 10311.
* * * * *
Rule 10315. Designation of Time and Place of First Meeting [Hearing]
The Director shall determine [T]the time and place of the first
meeting of the arbitration panel and the parties, whether the first
meeting is a pre-hearing conference or a hearing, [initial hearing
shall be determined by the Director of Arbitration and each hearing
thereafter by the arbitrators.] and shall give [N]notice of the time
and place [for the initial hearing shall be given] at least [eight
(8)]15 business days prior to the date fixed for the first meeting
[hearing] by personal service, registered or certified mail to each of
the parties unless the parties shall, by their mutual consent, waive
the notice provisions under this Rule. The arbitrators shall determine
the time and place for all subsequent meetings, whether the meetings
are pre-hearing conferences, hearings, or any other type of meetings,
and shall give [N]notice [for each hearing thereafter shall be given]
as the arbitrators may determine. Attendance at a meeting [hearing]
waives notice thereof.
* * * * *
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.
[[Page 40765]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
Recommendations of the Task Force
The Arbitration Policy Task Force (``Task Force'') in Securities
Arbitration Reform: Report of the Arbitration Policy Task Force To the
Board of Governors of NASD (``Task Force Report''), published in
January 1996, made fourteen broad recommendations to the NASD Board to
improve the securities arbitration process administered by the NASD.
Recommendation No. 8 provided: ``Arbitrator selection, quality,
training, and performance should be improved by various means,
including adoption of a list selection method, earlier appointment of
arbitrators, enhancement of arbitrator training, and increased
[arbitrator] compensation.'' \3\
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\3\ Task Force Report at 2.
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The Task Force recommended that the NASD adopt ``a variant of the
AAA's method of selecting arbitrators'' (``Recommendation One'').\4\
Under the system proposed by the Task Force:
\4\ Task Force Report at 94.
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The parties would be provided with three lists of candidates:
(1) A list of public arbitrators qualified to be panel chairs to
contain no fewer than three names, (ii) a list of other public
arbitrators, to contain no fewer than five names; and (iii) a list
of industry arbitrators, to contain no fewer than five names. Each
party could strike names from any of the lists and would then rank
the remaining names on each list in order of preference. If mutually
agreeable arbitrators are not selected, new lists would be provided
for each category in which agreement was not reached. This process
would continue for no more than three rounds. If, at the end of
three rounds, an industry and two public arbitrators, one qualified
as a panel chair, had not been chosen, the NASD Arbitration
Department would appoint the remaining arbitrator or arbitrators.
Arbitrators selected by the staff could be challenged only for
cause. (Footnotes omitted) \5\
\5\ Task Force Report at 94-95.
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The Task Force also made two other recommendations to implement
improvements in the selection of arbitrators. The Task Force
recommended that the appropriate NASD staff (now NASD Regulation's
Office of Dispute Resolution (``ODR'') should be able to exercise
flexibility in designating arbitrators as either ``public'' or
``industry'' (``Recommendation Two'').\6\ In addition, the Task Force
recommended that arbitrators be placed on the selection lists on a
rotating basis to promote more frequent selection of arbitrators who
complete an arbitrator training program (``Recommendation Three'').\7\
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\6\ Task Force Report at 96.
\7\ Task Force Report at 97.
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Parties Consulted in Development of Rule
NASD Regulation considered the Task Force's recommendations at
length. NASD Regulation also consulted with its National Arbitration
and Mediation Committee (``NAMC''),\8\ the Securities Industry
Conference on Arbitration (``SICA''),\9\ PIABA, the staff of the SEC,
and others about the efficacy of the proposals. All persons consulted
favored the selection of arbitrators by the parties using some form of
list selection. In addition, most were in favor of developing a system
featuring the capability, when appropriate and as technologically
feasible, to generate the arbitrator lists from a computer programmed
to incorporate relevant selecting factors, such as geographic proximity
of an arbitrator to the proposed site of the hearing, subject matter
expertise, and classification of an arbitrator as a public arbitrator
\10\ or a non-public arbitrator,\11\ rather than developing a system in
which the lists of arbitrators to be forwarded to parties for ranking
would be generated solely on the basis of ODR's judgment.
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\8\ The NAMC is a balanced committee of NASD Regulation.
Committee members are individuals with broad and diverse experience
in securities arbitration and mediation as representatives of
investors, firms, firm employees, and neutrals (arbitrators and
mediators).
\9\ The membership of SICA is diverse and includes persons
representing the interests of public customers (including members of
the Public Investors Arbitration Bar Association (``PIABA'')),
representatives from the self-regulatory organizations, and the
Securities Industry Association (``SIA'').
\10\ The term ``public arbitrator'' is defined in proposed Rule
10308(a)(5).
\11\ The term ``non-public arbitrator'' is defined in proposed
Rule 10308(a)(4).
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General Principles Underlying Proposed Rule Change
NASD Regulation recommends as a general principle that parties in
arbitration be given more input into the selection of arbitrators. In
furtherance of this principle, NASD Regulation has developed a rule
providing that, in a one-arbitrator panel case, the parties to the
arbitration will be provided a list of public arbitrators, and, in a
three-arbitrator panel case, the parties will be provided a list of
public and a list of non-public arbitrators.\12\ The parties will use
the lists to express numerical preferences for the arbitrators listed
and those rankings will determine the outcome of the arbitrator
selection process, unless all ranked arbitrators decline to serve
because they are unavailable, recuse themselves, or are disqualified
because of conflicts of interests.
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\12\ In this rule filing, for ease of reference the discussion
of the process of selecting an arbitration panel focuses more on the
selection of a three-person arbitration panel than a one-person
panel because the process of selecting one arbitrator is simpler and
much less frequently employed.
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The list or lists of arbitrators will be generated from an
arbitrator database by a computer to further fairness and neutrality.
This automated system is the Neutral List Selection System
(``NLSS'').\13\ However, to preserve the exercise of discretion and
judgment when appropriate and to act on behalf of a party's request,
when a party or parties express a request for a process that may
legitimately be considered in the selection of an arbitration panel but
that NLSS is not capable of performing, or request an arbitration panel
that may not be ``selected'' or ``sorted'' using NLSS, the Director of
Arbitration (``Director'') may supplement the NLSS process.
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\13\ The term ``Neutral List Selection System'' is defined in
proposed Rule 10308(a)(3).
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In developing an arbitrator list selection rule to implement the
Task Force's Recommendation One, NASD Regulation concluded that there
were not enough arbitrators on the arbitrator roster of the ODR to
provide sufficient names for three selection rounds. In addition,
although NASD Regulation also initially considered a two-round, two-
list selection method, NASD Regulation concluded that the operational
burdens of administering such a process, especially given the limited
number of arbitrators relative to the large caseload, would be too
great. Also, NASD Regulation was concerned that a two-round, two-list
selection method would make the process of appointing arbitrators too
lengthy and would be too costly. Accordingly, NASD Regulation is
proposing that the list selection contain a single-round, two-list
selection process as set forth in greater detail below.
Notwithstanding, NASD Regulation's proposed rule change implements
the fundamental aspect of Recommendation One in that it sets forth a
list selection process that allows the parties to play the dominant
role in selecting their arbitrators. In this proposed rule filing, NASD
Regulation is also implementing Recommendation Three by placing
arbitrators on a rotating list. By implementing Recommendations One and
Three, the list selection process will function primarily through the
[[Page 40766]]
operation of the NLSS, supplemented by the actions and judgments of the
Director, but only when required to effect the appointment of a panel.
NASD Regulation is not implementing the Task Force's Recommendation
Two that NASD staff should have discretionary authority regarding the
classification of an arbitrator. Applying the explicit standards set
forth in proposed paragraph (a) of Rule 10308, ODR will designate an
arbitrator as either ``public'' or ``non-public'' (i.e., ``industry'')
based upon the information provided about the person. At this time,
NASD Regulation believes that it is impracticable to grant to the
Director or the ODR the discretion or flexibility to modify the
classification of an arbitrator based on information or criteria other
than that which is set forth in the defined terms of ``public
arbitrator'' or ``non-public'' arbitrators. Perceptions and
expectations of participants about the backgrounds of potential
arbitrators indicate that the participants do not believe that this
flexibility would enhance the arbitrator selection process.\14\
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\14\ However, the ODR will have authority to change the
classification of an arbitrator already classified in the NLSS based
upon new information (e.g., an arbitrator changes his or her
employment and, after such change, the arbitrator fits the criteria
for non-public arbitrator, rather than the criteria for a public
arbitrator).
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NASD Regulation believes that the proposed methodology for
selecting arbitrators will benefit investors, firms, associated
persons, and other users of the arbitration forum. First, proposed Rule
10308 and NLSS, the technology developed to implement key parts of the
proposed Rule, provide a system for selecting arbitrators that allows
parties to have the greatest impact in the composition of their
arbitration panel. Second, Proposed Rule 10308 is a more streamlined
process than the process envisioned in the Task Force's Recommendation
One. Third, proposed Rule 10308, a single-round process, will be less
costly. Fourth, the proposed process borrows from the process used
successfully for some time by the American Association of Arbitration
(``AAA''), the largest domestic arbitration forum sponsor
Description of Proposed Rule Change
The proposed rule change, which only governs the selection of
arbitrators in cases involving public customers, is divided into five
parts. Paragraph (a) contains definitions. In paragraph (b), NASD
Regulation specifies how the lists of public and non-public arbitrators
will be compiled and forwarded to the parties. Paragraph (c) specifies
how the parties indicate their preferences by numerical rankings and
how the Director reconciles the preferences of the parties, selects the
arbitrators, selects the chairperson if the parties do not make the
selection, and, if necessary, disqualifies an arbitrator before the
arbitrator is appointed. Paragraph (d) describes generally how parties
and the Director may remove a person from serving as an arbitrator if
the person has a conflict of interest or a bias. Paragraph (e)
specifies that the Director has discretionary authority to resolve
issues arising in the administration of the list selection process.
There are several other rules in the Rule 10000 Series that NASD
Regulation must amend in order to make the Rule Series 10000
consistent. The proposed amendments to those rules are discussed at the
end of the discussion of the proposed changes to Rule 10308.\15\
Finally, NASD Regulation requests comments on the proposed rule change,
including one important specific topic set forth separately below.\16\
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\15\ See Miscellaneous Related Proposed Rule Changes, infra.
\16\ See Request for Comments on Specific Issue, Infra.
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Definitions--Paragraph (a)
Paragraph (a) of Rule 10308 of the proposed rule change contains
seven definitions: ``day,'' ``claimant,'' ``Neutral List Selection
System,'' ``non-public arbitrator ,'' ``public arbitrator,''
``respondent'' and ``send.'' ``Public arbitrator,'' ``non-public
arbitrator,'' and ``Neutral List Selection System'' are the three terms
that are central to understanding how proposed Rule 10308, the proposed
list selection rule, will operate.
In proposing paragraph (a)(4) of Rule 10308, a ``non-public
arbitrator'' is defined as a person who is otherwise qualified to be an
arbitrator and is employed in or retired from the securities or
commodities industry or in a related position in the banking industry.
The rule includes in the definition a person who is a professional,
such as a lawyer or an accountant, who has a substantial client base
that is engaged in the securities or commodities industry, or in a
related banking activity described in the rule. Specifically, for
arbitrator classification purposes, a non-public arbitrator is a person
who:
(A) Is, or within the past three years, was:
(i) Associated with a broker or a dealer (including a government or
a municipal securities broker or dealer);
(ii) Registered under the Commodity Exchange Act;
(iii) A member of a commodities exchange or a registered futures
association; or
(iv) Associated with a person or firm registered under the
Commodity Exchange Act;
(B) Is retired from engaging in any of the business activities
listed in subparagraph (4)(A);
(C) Is an attorney, accountant, or other professional who has
devoted 20 percent or more of his or her professional work, in the last
two years, to clients who are engaged in any of the business activities
listed in subparagraph (4)(A); or
(D) is an employee of a bank or other financial institution and
effects transactions in securities and commodities futures or options
or supervises or monitors the compliance with the securities and
commodities laws of employees who engage in such activities.
The definition largely retains the existing definition of the Rule
10000 Series of an arbitrator who is deemed to be ``from the securities
industry,'' but it adds to that defined term persons employed by banks
and other financial institutions who are engaged in securities
activities or in the supervision of such activities.
The second key defined term, ``public arbitrator,'' is defined in
paragraph (a)(5) of Rule 10308. ``Public arbitrator'' generally means a
person who is otherwise qualified to serve as an arbitrator and is not
engaged in the conduct of, or business activities that indicate an
affiliation with, the securities industry or the related industries.
Thus, in order to be classified as a public arbitrator one may not be
engaged in any of the activities listed under the definition of ``non-
public arbitrator'' in paragraphs (a)(4)(A) through (D), set forth
above. The definition generally excludes: A person currently employed
in the securities or commodities industry or a person retired from such
business activities; a professional who devotes 20 percent or more of
his or her time to securities industry clients; and an employee of a
bank or other financial institution who is engaged in securities
activities or in the supervision of such activities.
In addition, a spouse or an immediate family member of a current or
retired member of the securities or commodities industry, or a person
engaged in any of the other types of business activities that require
one to be classified as a ``non-public arbitrator,'' is also excluded
from being a ``public
[[Page 40767]]
arbitrator'' because such persons' economic interests are too closely
tied to those of the securities or commodities industry, even though
such spouses and immediate family members may not be directly involved
in the relevant business activities. ``Immediate family member'' is
defined in proposed Rule 10308(a)(5)(B) with reference to the person's
familial or economic ties to the person associated with the securities
or commodities industry.\17\ A person who has a close familial,
personal, or economically dependent relationship with an associated
person may be viewed as possessing a bias in favor of the securities or
commodities industry even though he or she is not involved directly
with the identified industry.\18\
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\17\ ``Immediate family member'' means:
(i) a family member who shares a home with a person engaged in
the conduct or activities described in paragraphs (a)(4)(A) through
(D);
(ii) a person who receives financial support of more than 50
percent of his or her annual income from a person engaged in the
conduct or activities described in paragraphs (a)(4)(A) through (D);
or
(iii) a person who is claimed as a dependent for federal income
tax purposes by a person engaged in the conduct or activities
described in paragraphs (a)(4)(A) through (D).
\18\ A small group of persons will be excluded from serving as
either public or non-public arbitrators (e.g., spouse and immediate
family members of registered representatives). Excluded by
subparagraph (a)(5) from serving as public arbitrators, such persons
are also excluded from serving under subparagraph (a)(4) as non-
public arbitrators because a non-public arbitrator must have the
professional securities experience (or the related qualifications)
listed in subparagraph (a)(4). For example, unless the spouse of a
registered representative was also employed in the securities or
commodities industry (or engaged in one of the business activities
related to the securities industry), that person might not possess
securities industry experience (or the related qualifications) and
therefore could not serve as a non-public arbitrator. In addition,
because of the marital relationship, the spouse would be excluded
from serving as a public arbitrator.
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The third key defined term, ``Neutral List Selection System,''
defines the new software program that will implement the proposed list
selection rule. NASD Regulation defines ``Neutral List Selection
System'' as ``the software that maintains the roster of arbitrators and
performs various functions relating to the selection of
arbitrators.''\19\ Among other things, NLSS will maintain the roster of
arbitrators, identify arbitrators as public or non-public, screen
arbitrators for conflicts of interest with parties, list arbitrators
according to geographic hearing sites and, on occasion, by expertise,
and consolidate the numerical rankings that parties assign to listed
arbitrators.
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\19\ Proposed Rule 10308(a)(3).
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Two other terms, ``claimant'' and ``respondent,'' are defined in
paragraph (a) to simplify certain aspects of the rule. Under proposed
Rule 10308(a)(2), if one or more persons files a single claim they will
be treated as one claimant. A parallel definition is proposed for
respondents; one or more persons who file the same answer will be
treated as one respondent.\20\ The ODR views claimants who file one
claim or respondents who file one answer as generally having
sufficiently similar interests in the outcome of the proceeding to be
considered as one party for purposes of the list selection process.\21\
This approach will simplify consolidating the parties' preferences for
arbitrators described below.\22\
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\20\ Proposed Rule 10308(a)(6).
\21\ The consolidation process is described in greater detail
below. However, it should be noted that a group of claimants that
does not file a single claim, or, similarly, a group of respondents
that does not file a single answer, does not obtain an advantage in
the consolidation process or in the weighting of their preferences
for arbitrators. For example, if in a case there are two claimants
who are not viewed as one claimant under the rule, and one
respondent, the two claimants' arbitrator rankings will be weighted
as only 50% of the total; the one respondent's arbitrator rankings
will be weighted as the other 50%.
\22\ The terms ``day'' and ``send'' are also defined in
paragraph (a).
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Composition of Arbitration Panel; Compilation of Lists of Arbitrators
for Parties' Selection--Paragraph (b)
Under proposed Rule 10308(b)(1), the rule sets for the number of
arbitrators that the Director should appoint to a panel, general panel
composition requirements, and exceptions to those requirements. If the
claim is $50,000 or less, the claim will be heard by a single public
arbitrator, unless the parties agree otherwise.\23\ If the claim is
more than $50,000, a panel of two public arbitrators and one non-public
arbitrator will hear the dispute, unless the parties agree
otherwise.\24\ Under proposed paragraph (b)(1)(B) of Rule 10308, a
claimant with a claim valued greater than $25,000 and not more than
$50,000 may request a three-person arbitration panel.\25\ Whether for a
one-person or a three-person panel, the requirement that public
arbitrators be empaneled is for the protection of investors, and
parties may agree to waive this compositional requirement.
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\23\ Proposed Rule 10308(b)(1)(A)(i).
\24\ Proposed Rule 10308(b)(1)(A)(ii).
\25\ Obtaining a three-person panel under this subparagraph then
obligates the parties to pay hearing session deposit fees for a
three-person panel under Rule 10332.
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When the parties agree to change the composition of an arbitration
panel from that set forth in proposed paragraph (b)(1)(A) (i) or (ii),
references in the balance of the rule to a panel must be interpreted
according to the panel composition that the parties have chosen. For
example, if the parties agree to a panel composed of three public
arbitrators, under proposed paragraph (c)(1)(C) the parties would rank
a list of public arbitrators only, since the Director would not send
the parties a list of non-public arbitrators. In addition, parties
should be aware that if the panel composition varies from that provided
in proposed paragraph (b)(1)(A) (i) or (ii), NLSS is not capable of
processing all such combinations. NLSS can generate the lists and
consolidate the rankings for a one-person panel of either public or
non-public classification. For a three-person panel, NLSS can generate
the lists and consolidate the rankings for a panel composed of one non-
public and two public arbitrators or three non-public arbitrators. NLSS
cannot process requests for a panel composed for one public arbitrator
and two non-public arbitrators or three public arbitrators.\26\
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\26\ Although in theory the parties could agree to an
arbitration panel composed of three public arbitrators, experience
indicates that a panel of this type for disputes involving customers
is almost never convened.
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Under proposed paragraphs (b)(2) and (b)(3) of Rule 10308, the
Director will send lists of names of arbitrators for ranking to the
claimant and the respondent. As noted above, by operation of paragraph
(a) of the proposed rule, a group of claimants who have filed one
complaint will be viewed as one claimant; the same treatment is
accorded to respondents who file a single answer. Thus, when reviewing
the lists and otherwise taking action under the proposed rule, one or
more persons viewed as one claimant must act jointly, and one or more
persons viewed as one respondent must act jointly.
When only one arbitrator will hear the proceeding, the Director
will send to the parties one list of public arbitrators.\27\ When three
arbitrators will hear the proceeding, the Director will sent the
parties two lists, one containing the names of public arbitrators and
the other containing the names of non-public arbitrators.\28\
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\27\ Proposed Rule 10308(b)(2).
\28\ Proposed Rule 10308(b)(3).
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(i) Director's Minimum Numbers for Lists
Proposed Rule 10308 is flexible, and although subparagraphs (b)(2)
and (b)(3) do not set a fixed ratio of arbitrators or a minimum number
of arbitrators that ODR must list, ODR has established the following
guidelines, For a panel of one arbitrator, the Director intends to
provide five names of public arbitrators whenever possible, but not
less than three names. For a panel of three
[[Page 40768]]
arbitrators, the Director intends to provide lists that contain up to
10 public arbitrator names and five non-public arbitrator names; when
that is not possible, the Director will provide a public arbitrator
list of not less than six names, and a non-public arbitrator list of
not less than three names. In addition, as illustrated by the example
of the minimum numbers set forth above, to the extent possible, for a
three-person panel, the list of public arbitrators will contain
approximately twice as many names as the list of non-public
arbitrators. The Director's ability to provide full lists of names will
vary and is dependent on the number of available arbitrators and the
local demands on the arbitrator roster. Circumstances may arise where a
small arbitrator roster in a particular hearing location (for example,
Richmond, Va., Norfolk, Va., Alaska, or Hawaii), combined with a high
demand for arbitrators, will prevent the Director from meeting the
objectives.
To address possible arbitrator shortages, the Director plans to
combine arbitrators from proximate hearing locations when necessary.
For example, under proposed paragraph (b)(2), the list to be sent to
the parties should contain, at a minimum, three names of public
arbitrators. If, with one hearing location coded into NLSS, NLSS does
not generate the names of three public arbitrators, the Director will
return to NLSS, add a second hearing location code, and generate a list
of public arbitrators that will include the additional arbitrators. The
second hearing location coded will be one that is geographically
proximate to the first hearing location code used (e.g., for a
Richmond, VA hearing, the Richmond hearing location code will be used
first, and then the Atlanta or the Washington, D.C. hearing location
code could be added). The additional process in NLSS will be performed
at no additional cost to the parties. The same process will be used to
address any shortages in arbitrators under the lists prepared under
proposed paragraph (b)(3).
(ii) NLSS Functions and Capabilities
Proposed paragraphs (b)(2), (3), and (4) of Rule 10308 together set
forth the four factors which are used by NLSS to generate the list or
lists of arbitrators by ``selecting'' or ``sorting'' the NLSS database.
The four factors are arbitrator classification, hearing location code,
rotation, and identified conflicts of interests.
To generate a list, NLSS performs the following steps. NLSS first
identified the subgroup of arbitrators by classification (public or
non-public arbitrators). NLSS then identifies those arbitrators in the
same hearing location as the arbitration. Thereafter, NLSS selects such
public or no-public arbitrators who are located in the hearing location
in rotation from the NLSS database.\29\ Finally, NLSS excludes from the
selection an arbitrator subject to a clear conflict of interest with
one of the parties.\30\
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\29\ The NLSS rotation feature also may be described as a
``first-in-first-out'' feature. For a case that will be heard by one
public arbitrator, the following steps would apply. As an
arbitrator's name rise to the top of the list of all arbitrators who
are, for example, public arbitrators and found in one hearing
location, the arbitrator's name will be generated by NLSS, absent an
identified conflict of interest, on a list for ranking by parties to
an arbitration. Once the arbitrator's name is sent to the parties,
even if the arbitrator is later not appointed an arbitrator for the
panel, NLSS places such arbitrator at the bottom of the computerized
NLSS list. Thus, an arbitrator may be listed, and thereafter rotated
to the bottom of the NLSS list even if: (1) The arbitrator recuses
him or herself: (2) the arbitrator is not ranked highly enough by
the parties to be appointed or the arbitrator was struck; or (3) the
arbitrator is ranked highly enough to serve, is contacted, has no
conflict or interest or bias that would disqualify him, to is
unavailable to serve.
When a three person panel will be appointed, generally two
public arbitrators and one non-public arbitrator are needed. For the
generation of the list of non-public arbitrators and the list of
public arbitrators, the same process would be used. For the
selection of the non-public arbitrators, the first five non-public
arbitrators in the system will be rotated forward for the first
arbitration case. However, if, for example, the case is against Firm
X and the first person that NLSS generates, Arbitrator A51000, is
employed by Firm X, NLSS will not select Arbitrator A51000 but will
skip over time or her and will list the next person classified as a
non-public arbitrator. Arbitrator A51000 will remain at the top of
the internal NLSS rotating list for non-public arbitrators, and the
NLSS will generate his or her name when next requested to produce
the names of non-public arbitrators for a case in the same hearing
location. The process for obtaining the list of public arbitrators
is the same.
\30\ Proposed Rule 10308(b)(4). NLSS can identify only obvious,
disclosed conflicts of interest. For example, NLSS recognizes a
conflict of interest when the member firm that is the respondent is
also the employer of an arbitrator rotating forward in NLSS. NLSS
would not list such a person on a non-public arbitrator list being
generated for that case.
---------------------------------------------------------------------------
Although some who participated in developing the proposed rule
suggested selecting arbitrators on a random basis, NASD Regulation
selected the rotation method instead. Among other things, random number
selection algorithms in computer programs are extremely difficult to
design, and such algorithms ultimately do not produce mathematically
perfect randomness. If NASD Regulation used an imperfect random-
selection software program, over time, some arbitrators would be chosen
more often than others. Arbitrators chosen less often or not at all
would be underutilized even though they might be highly qualified. By
using a rotation method, all arbitrators on the roster will be placed
on a selection list with the same regularity.
Under proposed Rule 10308(b)(4)(B), the automated NLSS selection
process that generate the arbitrators may be altered in order to
accommodate a fifth factor, expertise. Expertise has three
subcategories: (1) Subject matter expertise (also know as a controversy
code); (2) security expertise (also known as a security code); and (3)
case expertise (also known as a qualification code).
Two of these types of expertise, subject matter expertise and
security expertise, are factors that may be included in the NLSS'
selection or sorting process at the option of a party as provided in
proposed paragraph (b)(4)(B) of Rule 10308. These are discussed in the
following paragraphs. The third type of expertise, case expertise, will
be a factor in the NLSS selection process at the option of the Director
or at the request of the parties; the category is very narrow and its
use is primarily to aid in the administration of a case. Case expertise
contains only three subcategories: injunctive relief cases; employment
law cases; and large and complex cases. Only one of the subcategories,
that identifying expertise in large and complex cases, is relevant for
any customer arbitration and is very infrequently utilized.\31\ When
used, the NLSS will search for the names of arbitrators, if such
arbitrators exists, in the appropriate hearing location with expertise
in large and complex cases.
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\31\ The two other types of case expertise, expertise involving
injunctive relief and employment issues, are used only in intra-
industry arbitrations.
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As noted above, the two types of expertise that may be factors to
be included in the NLSS's selection or sorting process at the option of
a party are subject matter expertise and security expertise. First, a
party may request for listing arbitrators who possess certain types of
subject matter expertise.\32\ Thus, although NLSS will always ``sort''
or ``search'' for arbitrators according to the four primary factors
(arbitrators classification, hearing location code, rotation, and
identified conflicts of interest), when a party requests that the lists
include arbitrators with subject matter expertise, the NLSS will add
the additional factor and sort or select for placement on the lists
some arbitrators having the subject matter expertise identified.
However, the Director is not obligated to provide a list that contains
one or more arbitrators having the requested subject matter expertise
[[Page 40769]]
because (1) such arbitrators may not be available in the applicable
hearing location; or, (2) even if such persons exist in the hearing
location, the NLSS or the Director may be required to exclude them from
the lists under another provision of the proposed rule (e.g., a
conflict of interest identified by the ODR upon a review of the
proposed arbitrator's Central Registration Depository (``CRD'') record,
discussed below). In addition, NLSS currently is limited to those areas
of subject matter expertise that have been coded for the NLSS and, if
not coded into the NLSS, ODR does not have the administrative capacity
to identify arbitrators who might possess in-depth knowledge in the
desired subject (e.g., bankruptcy is not a category of expertise
identified in the NLSS; ``churning'' and ``suitability'' are subject
matter categories that are identified.) \33\
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\32\ An arbitrator is deemed to have certain subject matter
expertise if he or she represents on an NASD arbitration intake form
that he or she possesses it. ODR does not verify such
representations.
\33\ The areas of subject matter expertise that are coded in
NLSS are those that previously have been identified in arbitrator
disclosure forms. NASD Regulation plans in the future to update and
to amend the designated subject matter areas. At that time, NASD
Regulation will make corollary changes to NLSS.
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The second subcategory of expertise, security expertise, is also
added to the NLSS selection process at the option of a party. There are
22 security subcategories, listing various types of securities or other
financial instruments (e.g., common stock, municipal bonds, stock index
futures, Ginnie Maes, etc.), and a party may indicate whether expertise
regarding a particular instrument is desired. The same procedure
described above regarding NLSS selection to accommodate the additional
factor of subject matter expertise will apply if a party opts to
include security expertise in the NLSS selection process. If available
in the hearing location, certain arbitrators may be include in the
arbitrator lists generated by NLSS. However, the Director is not
obligated to provide a list that contains one or more names having the
requested security expertise.
(iii) Conflicts-of-Interest
During the preparation of the arbitrator lists, two types of
conflict-of-interest checks will occur. The first is the check for
conflicts of interests between parties and potential arbitrators that
will be performed as part of the automated NLSS process that was noted
above.\34\ The second process will be review for conflicts of interest
performed manually by ODR.
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\34\ See discussion regarding proposed Rule (b)(4)(A) and n. 30,
supra.
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The second review for conflicts of interest will occur after the
NLSS creates a list of arbitrators, but before the list is finalized,
ODR will perform a review based upon information that each arbitrator
discloses to ODR and, for non-public arbitrators, additional
information found in the CRD. After a review of available information,
ODR may remove an arbitrator based upon such disclosure.\35\ ODR's
screening for a conflict of interest will avoid limiting the parties'
choices later. ODR will eliminate arbitrators from a list who would
almost certainly be disqualified at a later stage in the proceeding due
to conflict of interest. If arbitrators are eliminated during his
process, ODR will replace them by returning to NLSS so that the minimum
number of public arbitrators, and, if applicable, non-public
arbitrators, are on the list or lists that will be mailed to the
parties.
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\35\ At this stage of the arbitrator appointment process, ODR
staff would not make telephone inquiries.
---------------------------------------------------------------------------
After the parties receive the lists, the parties also will have the
ability to review information disclosed by the potential arbitrators to
determine if a conflict of interest exists. Under proposed paragraph
(b)(6) of Rule 10308, for each arbitrator listed, the Director will
provide the parties with the arbitrator's employment history for the
past 10 years and other background information. This information may
disclose a conflict of interest between a party and the arbitrator
listed and permits the parties to make more informed decisions during
the process of ranking and striking the listed arbitrators. Under
paragraph (b)(6), the parties may request additional information from
the arbitrators; any response by an arbitrator is forwarded to all
parties. If a party identifies a conflict of interest, the party's
remedy is to strike the person from the list, in the process described
in greater detail below.\36\
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\36\ Proposed Rule 10308(c)(1)(A).
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(iv) Transmittal to Parties
The Director shall send the lists to all parties approximately 30
days after the respondent's answer is due, or, if there are multiple
respondents, approximately 30 days after the last answer is due. If
there is a third-party claim, the Director shall send the lists
approximately 30 days after the third-party respondent's answer is due
or, if there are multiple third-party respondents, approximately 30
days after the last answer is due.\37\ Under proposed paragraph (a)(7)
of Rule 10308, ``send'' means to send by first class mail, facsimile,
or any other method available and convenient to the parties and the
Director, and the lists and all other transmissions between the parties
and the Director shall be sent using one of these methods.
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\37\ Proposed Rule 10308(b)(5).
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Striking, Ranking, and Appointing Arbitrators--Paragraph (c)
Generally, paragraph (c) of proposed Rule 10308 sets forth the
method by which a party strikes and ranks arbitrators and the
procedures ODR will use to consolidate the parties' preferences and
appoint an arbitration panel. Under paragraph (c), the parties rank the
arbitrators on the list according to the parties' preferences, and
strike arbitrators to remove them from consideration. Proposed
paragraph (c) will implement the most important feature of the list
selection rule, that of allowing a party to exercise significant
influence over the composition of the party's arbitration panel.
(i) Striking and Ranking Arbitrators
Proposed paragraph (c)(1) provides the basic structure for the
parties to exercise their influence in selecting arbitrators for their
arbitration proceeding. First, each claimant and each respondent may
strike any one or more arbitrators from the list (or lists, if there
are two lists) for any reason, including the party's concern that the
arbitrator may have a conflict of interest. Second, the party ranks
each arbitrator remaining on the list by assigning the arbitrator a
different numerical ranking. A ``1'' rank indicates the party's first
choice, a ``2'' indicates the party's second choice, and so on, until
all the arbitrators are ranked. When a party receives one list of
public arbitrators and one list of non-public arbitrators, the party
must rank arbitrators on each list separately.\38\ As noted above, all
claimants who file a single claim are treated as one claimant; and
similar treatment is accorded to all respondents who file one answer.
Thus, frequently, persons must act jointly to determine which
arbitrators to strike and how to rank the remaining arbitrators on the
lists in order for persons who are parties to have their preferences
for arbitrators weighed appropriately. Moreover, even when all
claimants do not file a single claim (or all respondents do not file a
single answer), the party claimants' (or the party respondents')
rankings will be consolidated prior to the consolidation that occurs of
claimant and respondent rankings, where the party claimants (or
[[Page 40770]]
party respondents) do not submit one set of rankings.\39\
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\38\ Proposed Rule 10308(c)(1).
\39\ See proposed Rule 10308(c)(1)(D).
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Under proposed paragraph (c)(2), each party's lists of arbitrators
reflecting the party's strikes and rankings must be returned to the
Director not later than twenty days after the Director's letter
communicating the lists was sent. If a party does not timely return the
lists, the Director shall treat the party as having retained all the
arbitrators on the lists and as having no preferences. If the lists are
returned but a party fails to rank an arbitrator on a list, the
Director will assign the arbitrator the next lower ranking after the
lowest-ranked arbitrator on that list. For example, if a party ranks
arbitrators on a list containing ten public arbitrators by striking six
arbitrators and ranking arbitrators A, B, and C, as ``1,'' ``2,'' and
``3,'' respectively, and fails to rank public arbitrator D, ODR will
assign arbitrator D a ranking of ``4.''
If a party fails to rank more than one arbitrator on the same list
or gives two or more arbitrators on the same list the same numerical
ranking, then the Director shall rank the multiple, unranked
arbitrators in the same order of preference that the list originally
generated by NLSS reflected and transmitted to the parties for their
ranking. (When NLSS generates a list, the person listed first is ranked
as high or higher by NLSS selection factors than the person listed
second, third, and so on. Generally, this NLSS ranking is not relevant
because the ranking by the parties is the basis for appointing
arbitrators. NLSS ``ranking'' only becomes relevant when the parties
fail to rank, or improperly rank multiple arbitrators on a list.) \40\
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\40\ In this process, when only the four factors are considered
in the NLSS-list generation process (e.g., arbitrator
classification, hearing location code, rotation, and no identified
conflicts of interest), the person who has taken part in the fewest
list selection processes (i.e., having a higher rotation number)
would be placed higher on the NLSS-generated list than a person who
has participated in more list selection processes. (E.g., P, a
public arbitrator in Richmond, Virginia who has participated in the
list selection process six times would be listed more highly by NLSS
than Z, a public arbitrator from Richmond, Virginia who has
participated in the list selection process seven times, if both were
generated for the same list. Therefore, if a party failed to rank
both P and Z, the Director would refer to the original NLSS-
generated list and rank P more highly than Z). If additional factors
are introduced, such as subject matter expertise, those persons
having the greatest cluster of desired factors or characteristics
would be listed most highly on the NLSS-generated lists and that
ordering would be used by the Director for the default ``ranking''
process list is used only when the parties fail to rank multiple
arbitrators.
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(ii) Consolidating Parties' Rankings
After the claimant and respondent have returned their lists to the
Director, the Director implements the parties' preferences for
arbitrator selection using the process described in proposed paragraph
(c)(3) of Rule 10308. Under proposed paragraph (c)(3), the Director,
using the NLSS, creates a consolidated list of the public arbitrators,
and, if non-public arbitrators are also ranked, a second consolidated
list of non-public arbitrators, using a one or two-step consolidation
process.
Since generally all parties who file a single claim are treated as
one claimant and all respondents who file one answer are treated as one
respondent, in most cases, the Director will consolidate the parties'
preferences for arbitrators using a one-step process. The Director will
add the consolidated rankings of the claimant and the respondent to
produce a single consolidated list for the public arbitrators and, if
necessary, a second consolidated list for the non-public
arbitrators.\41\ NLSS performs the consolidation functions.
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\41\ Proposed Rule 10308(c)(3).
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When there are multiple claimants or respondents, the Director will
use a two-step consolidation process. First, the Director will
consolidate all rankings of the multiple claimants or respondents. For
example, if there are two respondents, R #1 and R #2, the rankings of R
#1 and R #2 are added together, resulting in one consolidated
respondent ranking for each listed non-public arbitrator. This first
step in the two-step consolidation process may be avoided by
cooperation. The parties may file a list to which the parties have
jointly agreed.\42\ The first step of the consolidation process,
consolidating all the preferences of multiple claimants and,
separately, those of multiple respondents, prevents numerous parties on
one side of the case from unfairly affecting the selection of the
arbitrators. By consolidating the rankings of parties on the same side,
the process ensures that claimants' and respondents' choices will have
the same weight in the arbitrator selection process. Second, as
previously described, the NLSS will consolidate the rankings of the
claimants and the respondents to produce a single consolidated list for
public arbitrators and, if necessary, a second list for non-public
arbitrators.\43\
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\42\ Proposed Rule 10308(c)(1)(D).
\43\ Proposed Rule 10308(c)(3). The proposed rule also
accommodates the interests of a party added to the case if the party
is added before the Director has consolidated the other parties'
rankings. Proposed rule 10308(c)(6).
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In instances where the Director determines the interests of a
claimant or a respondent (including a third party respondent) are so
substantially different from the interests of other claimants or
respondents, the Director may determine not to consolidate the
numerical rankings of that party with the numerical rankings of the
other claimants (or with the other respondents, as the case may
be).\44\ In those instances, NLSS will not have the capacity to create
the consolidated list (or lists). Instead, the consolidated list (or
lists) will be created based upon calculations performed manually by
the ODR with each party's rankings having an equal weighting (e.g.,
where a claimant, a respondent, and a third party respondent are
recognized as having substantially different interests, each of the
parties rankings will have a 33\1/3\% weight in the consolidated list
or lists).
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\44\ Proposed Rule 10308(c)(3)(B).
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The following examples illustrate the consolidation process.
If the dispute will be heard by one public arbitrator, the
NLSS will produce a consolidated list that will contain the names of
five public arbitrators, ranked 1 through 5, based upon the
consolidated rankings derived from the parties' rankings.
If the list of public arbitrators sent to both parties
contained five names and the claimant strikes one name, then the
consolidated list will rank, numerically, the four names remaining on
the list. If the claimant strikes one name and the respondent strikes a
second name, then the consolidated list will contain only the names of
the three public arbitrators that neither party chose to strike.
A detailed example is set forth below: \45\
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\45\ The example illustrates the process that will be used for
each list of arbitrators distributed to the parties. Therefore, in
cases where a panel of one non-public and two public arbitrators
will be selected, this process will be used to produce two
consolidated arbitrators lists.
Original List
------------------------------------------------------------------------
List
Arb# \46\ position Arb name
------------------------------------------------------------------------
A00001............................... 1 Red.
A00100............................... 2 Orange.
A01000............................... 3 Yellow.
A10000............................... 4 Green.
A10001............................... 5 Blue.
A00500............................... 6 Indigo.
A99999............................... 7 Violet.
A20000............................... 8 Cvan.
A00200............................... 9 Magenta.
A02200............................... 10 Fuchsia.
------------------------------------------------------------------------
[[Page 40771]]
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\46\ Each arbitrator in the NLSS is assigned an arbitrator
identification number as he or she enters the system. For example, a
person who has been an NASD arbitrator since 1995 has a lower
arbitration identification number (e.g., A13888) than a person who
has been an NASD arbitrator since 1997 (e.g., A17050).
With Parties' Rankings
--------------------------------------------------------------------------------------------------------------------------------------------------------
List Consolidated Consolidated
Arb# position Arb name claimant respondent Total Difference
--------------------------------------------------------------------------------------------------------------------------------------------------------
A00001.............................. 1 Red................... 1................... 6................... 7................... 5
A00100.............................. 2 Orange................ Strike.............. 7................... N/A................. N/A
A01000.............................. 3 Yellow................ 2................... 1................... 3................... 1
A10000.............................. 4 Green................. 3................... 5................... 8................... 2
A10001.............................. 5 Blue.................. 4................... 4................... 8................... 0
A00500.............................. 6 Indigo................ 5................... 3................... 8................... 2
A99999.............................. 7 Violet................ 6................... 2................... 8................... 4
A20000.............................. 8 Cyan.................. 7................... Strike.............. Strike.............. N/A
A00200.............................. 9 Magenta............... 8................... 8................... 16.................. 0
A02200.............................. 10 Fuchsia............... 9................... Strike.............. Strike.............. N/A
--------------------------------------------------------------------------------------------------------------------------------------------------------
System Results
----------------------------------------------------------------------------------------------------------------
List
Arb# position Arb name Consolidated rank Notes
----------------------------------------------------------------------------------------------------------------
A00001........................ 1 Red.............. 2................ Total is 7.
A00100........................ 2 Orange........... Strike........... N/A.
A01000........................ 3 Yellow........... 1................ Total is 3.
A10000........................ 4 Green............ 4................ Total is 8
Difference is 2
List Position is 4.
A10001........................ 5 Blue............. 3................ Total is 8
Difference is 0
List Position is 5.
A00500........................ 6 Indigo........... 5................ Total is 8
Difference is 2
List Position is 6.
A99999........................ 7 Violet........... 6................ Total is 8
Difference is 4
List Position is 7.
A20000........................ 8 Cyan............. Strike........... N/A
A00200........................ 9 Magenta.......... 7................ Total is 16
A02200........................ 10 Fuchsia.......... Strike........... N/A.
----------------------------------------------------------------------------------------------------------------
Rearranged by Rank
----------------------------------------------------------------------------------------------------------------
Consolidated
Arb# Arb name rank Notes
----------------------------------------------------------------------------------------------------------------
A01000.............................. Yellow................. 1 Total is 3.
A00001.............................. Red.................... 2 Total is 7
A10001.............................. Blue................... 3 Total is 8
Difference is 0
List Position is 7.
A10000.............................. Green.................. 4 Total is 8
Difference is 2
List Position is 4.
A00500.............................. Indigo................. 5 Total is 8
Difference is 2
List Position is 6.
A99999.............................. Violet................. 6 Total is 8
Difference is 4
List Position is 7.
A00200.............................. Magenta................ 7 Total is 16.
----------------------------------------------------------------------------------------------------------------
Numerical ties between two or more arbitrators during consolidation
will be broken by NLSS by the following principles. First, NLSS will
break a tie during consolidation by preferentially ranking one
arbitrator above another based upon which of the tied arbitrators has a
set of rankings, that, when compared, result in the smallest numerical
difference between the claimant ranking and the respondent ranking. For
example, in the tabular example above, the consolidated rankings of the
consolidated claimant and the consolidated respondent have
[[Page 40772]]
resulted in four arbitrators, Green, Blue, Indigo, and Violet, each
receiving a consolidated ranking of 8, resulting in a four-way tie.
(See table entitled ``With Parties Rankings.'') Of the four tied
arbitrators, Blue will be assigned a ranking as the most preferred
arbitrator because the difference between Blue's consolidated
claimant's ranking and Blue's consolidated respondent's ranking is 0
(i.e., 4-4=0); conversely, Violet would be given the fourth (or lowest
or least preferred) ranking of the four arbitrators in the four-way tie
because of the largest difference in the rankings that the consolidated
claimant and the consolidated respondent gave Violet, compared to the
three others (i.e., the consolidated claimant ranked Violet 6 and the
consolidated respondent ranked Violet 2, resulting in a difference of 4
(i.e., 6-2=4), whereas the differences in the rankings assigned Blue,
Green, and Indigo are, respectively, 0,2 and 2.) (See table entitled,
``Rearranged by Rank'').
A second principle that governs tie-breaking within NLSS is that,
given an equal difference in the consolidated ranking, an arbitrator
who was listed higher (as more preferred) on the list as originally
generated by the NLSS and transmitted to the parties will be given a
more preferred or higher ranking in order to break this type of tie.
Referring to the same example, Green and Indigo both show consolidated
rankings of 8, resulting in the first type of tie discussed above. In
addition, Green and Indigo each received rankings from consolidated
claimants and respondents that are different by only 2. The first
principle applied to break a tie does not provide any assistance; the
second principle must be applied. Applying the second principle, during
the consolidation process NLSS will rank Green as more preferred (or
higher) than Indigo because, on the original list generated by NLSS,
Green had a list position of 4, which was higher than Indigo's list
position of 6. (See table entitled, ``Rearranged by Rank,'' and the
column entitled ``Notes,'' for the final NLSS consolidated rankings
taking into account these two tie-breaking principles, and the table
entitled ``Original List'' for the position of the arbitrators on the
list as originally generated by NLSS.)
(iii) Appointing Arbitrators
Proposed Rule 10308(c)(4) sets forth the steps the Director will
take to appoint arbitrators after consolidation occurs. Assuming that
the tabular example above is a list of public arbitrators, if the
arbitration is to be heard by one public arbitrator, the Director
contacts the public arbitrator ranked highest on the list. Thus, the
Director would contact Yellow first to determine if Yellow was
available to serve and, if not disqualified, Yellow would be appointed.
Using the tabular example above, if the Director were required to
appoint a three-person arbitration panel, the Director would contact
Yellow and Red to determine if they were available to serve and, if not
disqualified, would appoint them. If necessary, due to the
unavailability or disqualification of one of the two arbitrators, the
Director would then contact Blue, and invite Blue to serve. The
Director would refer to a second list, generated according to the same
principles, to determine which non-public arbitrator should be
contacted first.
The contact is to determine if the arbitrator is available and,
after being provided the issues of the case and the names of the
parties, if the arbitrator is aware of any conflicts of interest or
bias or other reason that may preclude the arbitrator from rendering an
objective and impartial decision. Based upon the information that the
arbitrator has previously provide, any information provided to the
Director under Rule 10312,\47\ and any information obtained from any
other source, the Director shall determine if the arbitrator should be
disqualified. If the Director determines that the arbitrator should not
be disqualified and that the arbitrator is available, the Director
appoints the arbitrator.\48\
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\47\ Current Rule 10312, also discussed below, requires an
arbitrator to disclose, with respect to a particular case and the
issues, parties, and witnesses in the case, any information which
might preclude the arbitrator from rendering an objective and
impartial determination in the case.
\48\ Proposed Rule 10308(c)(4).
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The Director will establish a time frame for ODR's guidance if a
listed arbitrator is contacted but fails to respond to ODR's inquiries
regarding availability and disqualification. For example, if an
arbitrator is telephoned and fails to respond, ODR will eliminate such
arbitrator and contact the next listed arbitrator after an appropriate,
but relatively brief, period. ODR must exercise such discretion in
fairness to all parties who are waiting for their arbitration cases to
be resolved.
(iv) Selecting a Chairperson
The Director notifies the parties of the appointments and requests
that the parties appoint a chairperson. The parties may jointly select
one of the arbitrators (including the non-public arbitrator) to be the
chairperson of the panel.\49\ If the parties fail to appoint a
chairperson by mutual agreement within 15 days, the Director will
appoint the chairperson. If the Director appoints the chairperson, the
chairperson will be one of the public arbitrators, but one who is not
an attorney or other professional who has devoted 50% or more of his or
her professional or business activities, within the past two years, to
representing or advising public customers in adversarial proceedings
concerning disputed securities or commodities transactions or related
matters.\50\ This provision also excludes a person who is employed by a
person engaged in the listed professional activities from being
appointed as chairperson.
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\49\ Proposed Rule 10308(c)(5).
\50\ Specifically, proposed paragraph (c)(5) of Rule 10308
prohibits the Director from appointing as the chairperson a public
arbitrator who:
(A) is an attorney, accountant, or other professional, and
(B) has devoted 50% or more of his or her professional or
business activities, within the last two years, to representing or
advising public customers in matters relating to disputed securities
or commodities transactions or similar matters.
---------------------------------------------------------------------------
(v) When the Consolidated List Is Insufficient
Under proposed Rule 10308(c)(4), if the Director is not able to
appoint the number of arbitrators needed for the panel using the
consolidated list, the Director may appoint other arbitrators from the
NLSS roster as necessary. If the Director is required to appoint a non-
public arbitrator, the Director may not appoint a non-public arbitrator
who meets the criteria set forth in paragraph (a)(4)(B) or (a)(4)(C),
unless the parties otherwise agree. A non-public arbitrator in proposed
paragraph (a)(4)(B) is one who is retired form the securities or
commodities industry; proposed paragraph (a)(4)(C) describes a non-
public arbitrator who is a professional who devotes 20 percent or more
of his or her professional time to clients who are engaged in any of
the securities or commodities business activities described in
subparagraph (a)(4).\51\ When the Director appoints a non-public
arbitrator in this state of the proceeding, the parties no longer have
the ability to strike. Thus, the rule requires that the Director choose
a non-public arbitrator who is active and fully involved in the
securities or
[[Page 40773]]
commodities industry or related industry.
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\51\ Although a party does not have the right to strike an
arbitrator appointed under the process described in proposed
paragraph (c)(4)(B), a party retains the right to request that the
Director consider disqualifying an arbitrator appointed pursuant to
proposed Rule 10308(c)(4)(B).
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Arbitrator Disclosures and Removing Arbitrators--Paragraph (d)
Proposed Rule 10308(d)(1) provides a mechanism for the Director to
disqualify an arbitrator after the arbitrator has been appointed by the
Director under proposed paragraph (c)(4). As noted previously, during
the period that a party is reviewing and ranking the lists of
arbitrators (see paragraphs (c)(1) and (2)), a party has an unlimited
right to eliminate a listed arbitrator by striking the arbitrator from
the list, and may do so to eliminate an arbitrator who the party
believes may not be impartial or fair, among other reasons. Thus, prior
to sending the party's rankings to the Director for consolidation, the
party has an unlimited right to strike any potential arbitrator as to
whom the party suspects bias. Proposed paragraph (d)(1) applies after
the parties has exercised this unlimited right to strike, the
arbitrator lists have been consolidated, the arbitrators have made
initial disclosures to the Director under Rule 10312 about concerns
regarding the specific parties, issues and witnesses in the case as
discussed below, and the arbitrators have been appointed.\52\
---------------------------------------------------------------------------
\52\ As noted above, disqualification issues that arise after
the Director, using NLSS, has begun consolidating parties' preferred
arbitrators, may be addressed by the Director directly as part of
the appointment process described in paragraph (c)(4).
---------------------------------------------------------------------------
An arbitrator has a continuing obligation under Rule 10312 of the
Code to disclose to the Director any circumstances that might preclude
the arbitrator from rendering an objective and impartial determination
in an arbitration, including a direct or indirect financial or personal
interest in the outcome of the arbitration, or any existing or past
financial, business, professional, family or social relationships with
a party, counsel, or representative (or, when later identified, a
witness) that might affect impartiality or might reasonably create an
appearance of partiality or bias. Generally, the ODR, in turn, must
disclose to the parties any information the arbitrators provide.
Under paragraph (d)(1), a party or the Director may raise a
disqualification issue. However, the decision to disqualify an
arbitrator already appointed lies solely with the Director. The
Director may not make any decision to disqualify an arbitrator,
however, after the commencement of the earlier of two events: (i) The
first prehearing conference or (ii) the first hearing.\53\ At that
point or thereafter, if a party believes that an arbitrator should be
disqualified, the matter must be raised before the arbitration panel.
Vacancies created as a result of a disqualification under proposed
paragraph (d)(1) are filled by the Director by referring to the
appropriate consolidated list from which the panelists were originally
obtained (proposed Rule 10308(d)(3)) or, if there are no persons
remaining on the consolidated list, by a person the Director selects
under proposed Rule 10308(c)(4)(B).
---------------------------------------------------------------------------
\53\ Proposed Rule 10308(d)(2).
---------------------------------------------------------------------------
Discretionary Authority--Paragraph (e)
Under paragraph (e) of Rule 10308, the Director's authority to
exercise discretionary authority is stated explicitly. In paragraph
(e), the Director has authority to resolve a problem that arises
relating to the appointment of arbitrators or any other procedure under
the rule if (i) the rule does not have an applicable provision, or (ii)
the application of a specific provision in the rule would not result in
a resolution of the underlying problem because the facts and
circumstances are unanticipated or unusual.
Miscellaneous Related Proposed Rule Changes
Proposed Conforming Amendments
NASD Regulation is proposing conforming amendments to Rules 10104,
10309, 10310, 10311, 10312, and 10313.
NASD Regulations proposes to make parallel amendments to Rule 10104
and Rule 10309. NASD Regulation proposes to amend Rule 10104 to reflect
that the specific provisions of proposed Rule 10308, rather than the
general provisions of Rule 10104, regarding the composition and
appointment or arbitrators panels, will apply to arbitrations involving
public customers. Rule 10104 would not apply to a question regarding
the composition and appointment of such arbitrator panels unless none
of the specific provisions in proposed Rule 10308 would be
applicable.\54\ NASD Regulation proposes the same types of amendment to
Rule 10309, a similarly general provision relating to the composition
of arbitrator panels.
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\54\ Rule 10104 and certain other rules in the Rule 10000 Series
may be amended further or rescinded when a list of selection rule
applicable to intra-industry arbitration proceedings is approved.
NASD Regulation plans to file a rule shortly so that NLSS may be
used for panel selection in intra-industry arbitrations, as well as
in customer arbitrations.
---------------------------------------------------------------------------
NASD Regulations proposes to amend Rule 10310 and 10311 to make
both of them inapplicable to proceedings subject to Rule 10308. Under
Rule 10310, NASD Regulation notifies parties of arbitrators appointed,
and under Rule 10311, parties have the right to a peremptory challenge
of an arbitrator. Because proposed Rule 10308 deals with both types of
procedures, NASD Regulations proposes to amend Rules 10310 and Rule
10311 so that neither will apply to arbitration proceedings involving
public customers.
NASD Regulation is proposing to amend Rule 10312 to make it
consistent with proposed Rule 10308. Both Rules contain provisions
regarding an arbitrator's obligation to disclose information to the
Director and disqualification based upon such disclosure. The proposed
changes to Rule 10312 state explicitly when the Director's authority to
disqualify an arbitrator terminates, and provide an arbitrator the
option to withdraw from an arbitration panel prior to disclosure of
arbitrator information to the parties. A final change in Rule 10312
makes the timing of a disclosure consistent with the parallel provision
in proposed Rule 10308.
The proposed changes to Rule 10313 are necessary because Rule 10313
incorporates by reference certain procedures in Rule 10311, and that
rule, if amended, will not apply to arbitrations involving public
customers. Specifically, NASD Regulation proposes to amend the last
sentence of current Rule 10313 so that, for arbitration proceedings
involving public customers, a party may exercise the right to challenge
a replacement arbitrator within the time remaining prior to the next
scheduled hearing session by notifying the Director in writing of the
challenge arbitrator's name and the basis for such challenge.
Proposed Amendments to Rule 10315
In the past, the first formal meeting of the arbitration panel and
the parties generally was the first hearing. As the arbitration process
has evolved, NASD Regulation has encouraged most arbitration panels to
hold prehearing conferences. For most arbitrations currently, the first
formal meeting of the arbitration panel and the parties is a prehearing
telephone conference. NASD Regulation proposes to amend Rule 10315
regarding the scheduling of the first meeting to reflect the current
practice.
NASD Regulation also proposes to amend from eight business days to
15 business days the period that NASD has for giving notice of the
first meeting to the parties and the arbitrators. The period is being
amended to conform to the 15 business day period set forth in Rule
10310, which formerly also was a period of only eight business days.
[[Page 40774]]
Proposed Amendments to Various Rules To Correctly Identify Committee
Name
The committee of NASD Regulation that addresses arbitration matters
is the National Arbitration and Mediation Committee. NASD Regulation
proposes to amend each rule in which the outdated term ``National
Arbitration Committee'' is used by replacing the outdated term with the
current committee name, the ``National Arbitration and Mediation
Committee.'' \55\
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\55\ See e.g., Rule 10102, Rule 10103, Rule 10104 referenced
specifically above, Rule 10301, and Rule 10401.
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Request for Comments on Specific Topic
NASD Regulation proposes to allow parties to have the right to
strike an unlimited number of arbitrators from lists under proposed
Rule 10308(c)(1)(A). NASD Regulation specifically requests comment on
whether parties should have an unlimited number of strikes, or whether
the right to strike should be limited. If a claimant, for example,
strikes every arbitrator listed, all the listed arbitrators are
ineligible, the respondent's preferences are nullified, and the
Director appoints arbitrators who are not listed. Thus, the unlimited
right to strike any be too broad to accomplish the purposes intended by
the rule proposal.
NASD Regulation is requesting that the proposed rule change be
effective within 45 days of SEC approval.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act,\56\
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.
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78o-3.
---------------------------------------------------------------------------
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.
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, 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, 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-98-48 and should
be submitted by August 20, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\57\
---------------------------------------------------------------------------
\57\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20364 Filed 7-29-98; 8:45 am]
BILLING CODE 8010-01-M