[Federal Register Volume 63, Number 229 (Monday, November 30, 1998)]
[Notices]
[Pages 65834-65837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31818]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40695; File No. SR-NYSE-98-27]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Arbitration 
Rules

November 19, 1998.

I. Introduction

    On September 8, 1998, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission

[[Page 65835]]

(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Rule 600 to exclude shareholder 
derivative actions from arbitration; to amend Rules 604 and 621 to 
allow arbitrators to dismiss pleadings, with or without prejudice, as a 
sanction for a willful failure to comply with their orders; to amend 
Rules 608 and 613 to increase the minimum notice of the appointment of 
arbitrators and the initial hearing date from eight to fifteen business 
days; to amend Rule 608 to reflect the proposed change to Rule 609 to 
extend the time within which to exercise a peremptory challenge, with 
regard to replacement arbitrators; to amend Rules 609 and 611 to extend 
the time to exercise a peremptory challenge from five to ten business 
days; and to amend Rule 627 to require the award to be served 
contemporaneously on all parties and to allow the Exchange to serve 
awards via facsimile or other electronic means. The proposed rule 
change also adds new Rule 638 to require, on a two year pilot basis, a 
single mediation session in non-customer cases, where the amount of the 
claim is $500,000 or more. Rule 638 will also provide mediation, with 
the parties' consent, in cases involving public customers where the 
amount of the claim is $500,000 or more, and provide for mediation in 
all other cases upon the consent of the parties and at their expense. 
Finally, the proposed rule change adds new Rule 639 which will require, 
on a two year pilot basis, an administrative conference between the 
parties and arbitrators in all cases where the amount of the claim is 
$500,000 or more. The NYSE states that the proposed rule change, with 
the exception of amendments to Rule 600 and new Rules 638 and 639, is 
based on proposals developed by the Securities Industry Conference on 
Arbitration.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 40524 (October 6, 1998), 63 FR 55170 (October 14, 1998). 
One comment was received on the proposal.\3\ This order approves the 
proposed rule change as proposed.
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    \3\ See letter from Stephen G. Sneeringer, Chairman, Securities 
Industry Association (``SIA'') Arbitration Committee, to Margaret H. 
McFarland, Deputy Secretary, Commission, dated November 3, 1998 
(``SIA Letter'').
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II. Description

    The Exchange proposes to amend Rule 600 to exclude shareholder 
derivative actions from arbitration. The Exchange also proposes 
amendments to Rules 604 and 612 to provide that arbitrators may dismiss 
claims or defenses, with or without prejudice, as a sanction for a 
willful failure to comply with their orders. The Exchange will keep 
records of any dismissals under the amended rules. The proposed rule 
change amends Rules 608 and 613 to provide that the minimum notice of 
the appointment of arbitrators and the initial hearing date be extended 
from eight to 15 business days. Additionally, the proposed rule change 
amends Rules 609 and 611 to extend the parties' time to exercise a 
peremptory challenge from five to ten business days after notification 
of the identity of the arbitrators. The proposed rule change also 
amends Rule 627 to provide that the Exchange may serve awards via 
facsimile or other electronic means, and that the Director of 
Arbitration (``Director'') shall try to serve a copy of the award 
contemporaneously on all parties.
    The proposed rule change adds Rule 638 which requires, on a pilot 
basis for two years from the date of Commission approval, a single 
mediation session, in non-customer cases where the amount of the claim 
is $500,000 or more. The mediator's fee for this first session will be 
borne by the Exchange. The pilot will also provide for mediation, with 
the parties' consent, in cases involving public customers where the 
amount of the claim is $500,000 or more. The mediator's fee for this 
first session also will be borne by the Exchange. Moreover, mediation 
will be available upon the consent of the parties and at their expense 
in all other cases. Where the parties have not selected a mediator on 
their own, the Exchange will provide the names and profiles of five 
mediators.\4\ The parties have ten days to agree on a mediator from the 
list, or choose their own mediator. If the parties cannot agree, the 
Director will select a mediator from the list, unless the parties 
object to all the names on the list, in which case the Director will 
appoint a mediator from outside the list.
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    \4\ If the parties select their own mediator from outside the 
list of mediators proposed by the NYSE, the parties are responsible 
for any difference in the mediator's fee.
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    The NYSE states that the current ``Arbitrator Profile'' form will 
be used to provide the parties with biographical and disclosure data 
regarding the proposed mediators. The profile form includes the 
employment histories of the mediators for the past ten years and any 
information disclosed regarding conflicts of interest. The profile also 
includes information about the mediator's education, business and 
professional background, mediation experience and training and 
membership in professional associations.
    Finally, the proposed rule change adds Rule 639, which requires, on 
a pilot basis for two years from the date of Commission approval, an 
administrative conference between the parties and arbitrators in all 
cases where the amount of the claim is $500,000 or more. The Director 
shall schedule the conference within thirty days after the answer is 
filed. At the hearing, the arbitrators can establish a schedule for 
discovery and the hearing, issue subpoenas and direct the appearance of 
witnesses, and resolve or narrow any other issue which may expedite the 
arbitration.

III. Summary of Comments

    The Commission received one comment letter on the proposal, which 
supports the proposed amendments and, subject to certain qualifications 
and clarifications, supports the new rules pertaining to mediation and 
administrative conferences.\5\
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    \5\ See supra note 3.
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    The SIA supports proposed Rule 638 to the extent it would encourage 
litigants in non-customer cases of $500,000 or more to participate in a 
mediation session, but opposes the portion of Rule 638 which would make 
a mediation session mandatory with respect to these cases. The SIA 
believes that mediation should always be a voluntary process. In 
addition, the SIA requests that the final rules, adopting release, or 
accompanying Information Circular clarify that the mediation sessions 
or administrative conference provided for in Rules 638 and 639, 
respectively, be conducted via telephone at the request of any party.
    The NYSE, in its response to the SIA Letter,\6\ agrees that 
mediation by its very nature is a voluntary process, but that the 
proposed rule change does not alter that. The NYSE states that while 
the rule requires participation in a mediation session, it does not 
mandate that the mediation be successful, nor does it require the 
parties to compromise their positions. The NYSE developed the mediation 
program based upon its experience in non-customer disputes involving 
large damage claims;

[[Page 65836]]

these cases often contain multiple allegations that can be quickly 
resolved or eliminated through mediation. In addition, early resolution 
of some issues can minimize time and expense of resolving core issues. 
The NYSE states that the mediation program is intended to encourage 
parties to sit down early in the process and try to find an agreeable 
resolution before each side incurs the expense of preparing for a 
hearing.
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    \6\ See letter from Robert S. Clemente, Director, Arbitration, 
to Jonathan G. Katz, Secretary, Commission, dated November 11, 1998 
(``NYSE Response'').
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    The NYSE also states that, with regard to conducting mediation and 
administrative conferences by telephone, the decision on how to proceed 
should be left to the arbitrators, and that the rule leaves open the 
possibility that a mediator may decide that a telephone session is 
sufficient. However, the NYSE states that experience shows that 
telephone conferences with all three arbitrators become counter-
productive, and that while it may be technically possible to conduct a 
mediation over the telephone, it would be impractical in most 
circumstances. The Exchange believes that to be successful, a mediation 
should be conducted in person.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of section 6(b).\7\ Specifically, the 
Commission believes the proposal is consistent with the section 6(b)(5) 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, and, in general, to protect investors and the public 
interest.\8\ In particular, the Commission believes that the proposed 
rule change will help ensure that NYSE members and member organizations 
and the public have a fair and impartial forum for the resolution of 
their disputes.
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    \7\ 15 U.S.C. 78f(b).
    \8\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes it is reasonable for the Exchange to 
exclude derivative actions from arbitration. The Exchange's Arbitration 
rules already exclude class actions. The Exchange believes that 
shareholder derivative actions, like class actions, are representative 
in nature,\9\ and that the court system is better equipped to manage 
shareholder derivative actions which involve parties in different 
jurisdictions and issues such as the notification of shareholders, the 
appointment of counsel and the awarding of attorneys' fees. The 
Commission also notes that the Exchange has previously declined the use 
of its arbitration facilities for shareholder derivative actions 
pursuant to Article XI, section 3 of the Exchange Constitution, which 
grants the Exchange discretion to ``decline in any case to permit the 
use of the arbitration facilities of the Exchange.''
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    \9\ ``Shareholder controversies are not appropriately within the 
mandatory arbitration provisions of the Exchange's Constitution.'' 
In re Salomon Inc. Shareholders' Derivative Litigation, 68 F.3d 554, 
556 (1995) (Judge McLaughlin of the Second Circuit quoting from the 
Exchange's decision denying jurisdiction in a shareholder derivative 
action).
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    The Commission believes that the portion of the proposed rule 
change to Rules 604 and 612, relating to dismissal of arbitration 
proceedings with and without prejudice, is consistent with the Act. 
This portion of the proposed rule change will help provide for a fair, 
efficient and cost-effective arbitration process by clarifying that the 
arbitrators can dismiss the proceeding either with or without 
prejudice; currently, Rule 604 does not distinguish between these two 
choices. Also, the proposed rule change amends Rule 604 to add that the 
arbitrators, when dismissing without prejudice, can refer the parties 
to any dispute resolution forum agreed to by the parties, in addition 
to their judicial remedies.
    The Commission believes that the proposed change to Rule 604 
allowing for dismissal with prejudice, which is intended to encourage 
compliance with the arbitrators' orders on discovery issues and other 
pre-hearing matters, should help establish clearly that arbitrators 
have the power to issue orders in aid of the arbitration process and to 
enforce those orders by use of the sanction of dismissal with 
prejudice. Such a sanction could be used, for example, where a party 
refused to produce documents that the arbitrators already have ordered 
them to produce as necessary for another party's claim or defense. In 
such instances, after the arbitrators have imposed lesser sanctions 
that have not induced compliance with their order, the arbitrators may 
dismiss a claim, defense, or the entire arbitration proceeding, with 
prejudice. The Commission also believes that this proposed rule change 
would provide for a more efficient arbitration process because it will 
allow the arbitrators to assert greater control over the proceedings 
and will provide parties with clear notice of the possible consequences 
of non-compliance with an order of the arbitrators. It also would help 
to protect all parties to an arbitration, and ensure that one party to 
the proceeding does not take advantage of the other.\10\
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    \10\ The Commission notes that the NYSE has stated its intention 
to keep records of any dismissals under the amended rules. The 
Commission believes the NYSE should maintain records of any 
dismissals so it can monitor the use of this sanction.
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    The Commission believes that the proposed changes to Rules 608, 
609, 611, and 613 providing for an extension of time limitations 
relating to the notice of the appointment of arbitrators and the 
initial hearing date, peremptory challenges, and arbitrator disclosures 
are consistent with the Act because they allow the parties additional 
time to prepare for the arbitration proceedings. Specifically, the 
amendments will allow parties more time to research and gather 
information on the arbitrators, in order to evaluate the arbitrators 
and decide whether to issue a peremptory challenge.\11\
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    \11\ The proposed changes extend the time limitations for a 
party to (1) seek additional information under Rules 608 and 611 
about initial and replacement arbitrators, by extending the time 
that the Director shall inform the parties of the names of the 
arbitrators, as well as any information on the arbitrators, from 
eight to fifteen days prior to the initial hearing session, and 
extending the time within which a party can exercise the right to 
challenge a replacement arbitrator; and (2) exercise a peremptory 
challenge under Rules 609 and 611, from 5 days to 10 business days 
after notification of the identity of the person(s) proposed as 
arbitrators. In addition, the proposed rule change amends Rule 608 
to change the Director's obligation to provide the parties with the 
names and histories of the arbitrators from eight to fifteen days 
before the date of the first hearing. Also, the proposed rule change 
amends Rule 613 to extend the time when the Director must give 
notice of the time and place of the initial hearing from eight to 
fifteen business days prior to the date fixed for the hearing.
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    The Commission believes that the proposed change to Rule 627 that 
allows for service by means other than registered mail or personal 
service, such as facsimile or other electronic transmission, is 
reasonable under the Act because it will help to provide for more 
efficient service. The Commission notes that the proposed rule change 
provides adequate safeguards to allow for all parties to receive notice 
of the awards contemporaneously, for purposes of time limitations on 
post-award motions. The amendment is intended to enable the Exchange to 
deliver the award in the fastest and most reliable way. The amendment 
is intended to adapt Exchange arbitration practices to technological 
changes.
    The Commission believes that it is consistent with the Act to allow 
for mediation of arbitration because it may result in savings of time 
and money for

[[Page 65837]]

the parties. Mediation is a method of dispute resolution where a 
mediator attempts to facilitate a settlement of the dispute. The NYSE 
states that when mediation is successful, cases are settled earlier, 
often with significant cost savings. The Commission recognizes the 
SIA's concern that mediation should be a voluntary process and that the 
proposed new rule requires a single mediation session in certain 
instances. However, the Commission believes that in this instance, 
where the requirement is limited to non-customer cases, is only for 
large cases, and is required for a two year period the possible 
benefits outweigh any perceived inequity.\12\ In addition, the 
Commission notes it is only the first session that is mandatory, that 
the NYSE is paying the mediator's fee, and that any settlement reached 
must be with the participation and consent of each party.
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    \12\ The Commission expects the NYSE to review the effectiveness 
of the requirement over the two year pilot period.
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    Finally, the Commission believes it is reasonable under the Act to 
require an administrative conference between the parties and the 
arbitrator in all large cases, in order to attempt to expedite the 
arbitration process and reduce costs of the arbitration. An 
administrative conference early in the process will allow the 
arbitrators to intervene to establish discovery schedules, resolve 
discovery disputes and other preliminary matters, and to attempt to 
narrow the issues in dispute and avoid costly contests over procedural 
matters.\13\
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    \13\ In responses to SIA's comment, the Commission notes that 
the rules do not restrict arbitrators from conducting mediation 
sessions and administrative conferences by telephone, and that the 
decision whether or not to do so is best left to the arbitrators.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-98-27) is approved. The 
mediation program, Rule 638, and the administrative conference rule, 
Rule 639, are each approved on a two-year pilot basis through November 
20, 2000.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31818 Filed 11-27-98; 8:45 am]
BILLING CODE 8010-01-M