[Federal Register Volume 64, Number 85 (Tuesday, May 4, 1999)]
[Notices]
[Pages 23887-23889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11144]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41339; File No. SR-NASD-99-19]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to the Use of Non-SRO Arbitration 
Forums

April 28, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 14, 1999, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly owned subsidiary, 
NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD Regulation. The proposed rule change has been 
filed by the Association as a ``non-controversial'' rule change under 
Rule 19b-4(f)(6) \3\ under the Act. The Association proposes to make 
the rule change operative on May 17, 1999. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend the Code of Arbitration 
Procedure to facilitate use of dispute resolution programs offered by 
providers other than self-regulatory organizations. Below is the text 
of the proposed rule change. Proposed new language is in italic; 
proposed deletions are in brackets:

10000. CODE OF ARBITRATION PROCEDURE

10100. ADMINISTRATIVE PROVISIONS

IM-10100. Failure to Act Under Provisions of Code of Arbitration 
Procedure

    It may be deemed conduct inconsistent with just and equitable 
principles of trade and a violation of Rule 2110 for a member or a 
person associated with a member to:
    (a)-(c) No change.
    (d) fail to honor an award, or comply with a written and executed 
settlement agreement, obtained in connection with an arbitration 
submitted for disposition pursuant to the procedures specified by the 
National Association of Securities Dealers, Inc., the New York, 
American, Boston, Cincinnati, Chicago, or Philadelphia Stock Exchanges, 
the Pacific Exchange, Inc., the Chicago Board Options Exchange, the 
Municipal Securities Rulemaking Board, or pursuant to the rules 
applicable to the arbitration of [securities] disputes before the 
American Arbitration Association or other dispute resolution forum 
selected by the parties where timely motion has not been made to vacate 
or modify such award pursuant to applicable law; or
    (e) No change.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation 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. NASD Regulation has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change is intended to facilitate use of dispute 
resolution programs offered by providers other than self-regulatory 
organizations, and to ensure that NASD Regulation may take disciplinary 
action for the failure of a member or associated person to comply with 
an award obtained pursuant to the rules and procedures of such dispute 
resolution programs.

[[Page 23888]]

    Background and Description of Proposed Amendment. In the NASD Code 
of Arbitration Procedure, IM-10100 provides that it shall be a 
violation of Rule 2110 \4\ for a member or a person associated with a 
member to fail to honor an award or comply with a written and executed 
settlement agreement obtained in connection with an arbitration at 
various self-regulatory organizations (SRO) or the American Arbitration 
Association (AAA), an organization that is not affiliated with the 
securities industry.
---------------------------------------------------------------------------

    \4\ Rule 2110 provides as follows: ``A member, in the conduct of 
his business, shall observe high standards of commercial honor and 
just and equitable principles of trade.''
---------------------------------------------------------------------------

    Prior to 1991, the interpretive material now numbered IM-10100 
provided only that it was a violation of NASD rules for members and 
associated persons to fail to honor awards rendered pursuant to the 
NASD's Code of Arbitration Procedure. The interpretive material was 
amended in 1991 to include awards issued in arbitration forums 
sponsored by the other SROs and the AAA. The amendment was intended to 
encompass awards rendered pursuant to the Uniform Code of Arbitration 
utilized by all members of the Securities Industry Conference on 
Arbitration (SICA),\5\ or pursuant to the rules applicable to the 
arbitration of securities disputes before the AAA, which some broker/
dealers had begun to offer to their customers as an alternative forum.
---------------------------------------------------------------------------

    \5\ SICA is a group composed of representatives of the self-
regulatory organizations that provide arbitration forums, of public 
investors, and of the securities industry. Staff of the SEC 
participate as non-voting invitees.
---------------------------------------------------------------------------

    In recent years, many alternative dispute resolutions forums have 
been created and achieved some popularity. Under the sponsorship of 
SICA, several member broker/dealers are now considering a voluntary 
pilot program in which they will arbitrate to completion, during a two-
year period, a specified number for cases at one of several dispute 
resolution forums that are not sponsored by the SROs. Under this pilot 
program, the firms will designate to SICA one or more alternative 
forums that meet certain due process standards, and will agree to 
arbitrate all eligible cases at a designated non-SRO forum at their 
customers' election. Firms may not selectively choose which of their 
cases will be tried before a non-SRO forum. Cases eligible for the SICA 
program are customer-initiated cases in which the customer is 
represented by counsel. \6\
---------------------------------------------------------------------------

    \6\ The pilot program will not be available for disputes 
involving employment-related or member to member cases, class 
actions, partnership investments, claims for transactions that 
occurred more than four years before the pilot program began, or 
claims in which a respondent firm or associated person has not 
agreed to participate in the pilot program.
---------------------------------------------------------------------------

    SICA developed the pilot program partly in response to a petition 
by an organization of attorneys who represent investors, the Public 
Investors Arbitration Bar Association (PIABA). PIABA had petitioned the 
SEC to require NASD Regulation to establish the AAA as an alternative 
forum for all customer arbitrations. Such a requirement would supersede 
any contrary forum selection clauses in arbitration agreements between 
members and their customers. The SEC referred the petition to SICA and 
NASD Regulation for consideration.
    In the pilot program the participating non-SRO forums will send 
copies of all awards to the SRO where the claim either was filed or 
would have been filed absent the pilot program. Parties are required by 
the program's guidelines to pay all awards within 30 days of receipt 
unless a motion to vacate is filed.
    While NASD Regulation believes that use of the SICA pilot program 
does not require a rule change, since it is entirely voluntary and a 
matter of contract between firms and their customers, NASD Regulation 
is concerned that there might be some difficulty in bringing 
disciplinary action for any noncompliance with an award issued by a 
forum that is not listed in IM-10100. Therefore, NASD Regulation 
proposes to amend IM-10100 to add language clarfying that failure to 
comply with awards issued by any dispute resolution forum could be 
grounds for disciplinary action.
    In connection with the above change, NASD Regulation also 
recommends deletion of the word ``securities'' in paragraph (d) of IM-
10100, which currently refers to awards obtained ``pursuant to the 
rules applicable to the arbitration of securities disputes'' at a non-
SRO forum. This change is recommended for two reasons. First, most non-
SRO dispute resolution forums do not have separate rules for securities 
arbitration. Second, the change will also accommodate another emerging 
trend in which firms are contracting with outside dispute resolution 
forums to resolve disputes between the firms and their employees. Such 
disputes would be arbitrated according to employment or commercial 
rules of the dispute resolution forum, rather than the securities 
rules. NASD Regulation believes that the use of a non-SRO forum should 
not allow members or associated persons to circumvent the NASD's rules 
requiring them to comply with arbitration awards. Therefore, more 
inclusive language is proposed. \7\
---------------------------------------------------------------------------

    \7\ The inclusiveness of this new language does not expand the 
scope of matters covered by the Code of Arbitration Procedure, 
which, as specified in Rule 10101, was prescribed and adopted ``for 
the arbitration of any dispute, claim, or controversy arising out of 
or in connection with the business of any member of the Association, 
or arising out of the employment or termination of employment of 
associated person(s) with any member, with the exception of disputes 
involving the insurance business of any member which is also an 
insurance company.'' Telephone conversation, April 21, 1999, between 
Jean I. Feeney, Assistant General Counsel, NASD Regulation, and Ira 
L. Brandriss, Staff Attorney, Division of Market Regulation, 
Commission.
---------------------------------------------------------------------------

    IM-10100, paragraph (d), currently provides that it shall be 
violation of Rule 2110 for a member or associated person to fail to 
honor an award, or comply with a written and executed settlement 
agreement, obtained in connection with an arbitration submitted for 
disposition pursuant to the procedures specified by the listed SROs or 
``pursuant to the rules applicable to the arbitration of securities 
disputes before the American Arbitration Association where timely 
motion has not been made to vacate or modify such award pursuant to 
applicable law.'' NASD Regulation proposes to delete the word 
``securities'' from paragraph (d), and to add the phrase ``or other 
dispute resolution forum selected by the parties'' after ``American 
Arbitration Association.'' This will have the effect of bringing under 
the coverage of the interpretive material an award or settlement 
agreement obtained pursuant to the arbitration rules of any dispute 
resolution forum to which the parties have agreed to submit their 
dispute. It also will no longer restrict the application of IM-10100 to 
disputes decided under the securities rules of the non-SRO dispute 
resolution forum, but will apply as well to the employment arbitration 
rules or general commercial rules of the dispute resolution forum, if 
applicable to the dispute.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) \8\ of the Act, 
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. NASD Regulation believes 
that the proposed rule change will protect investors and the public 
interest by ensuring that

[[Page 23889]]

members and associated persons have a duty to comply with awards 
obtained in non-SRO forums.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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

    The foregoing proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) thereunder \10\ 
because the proposed rule change: (1) Does not significantly affect the 
protection of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
until May 17, 1999, more than 30 days from April 14, 1999, the date on 
which it was filed, and NASD Regulation provided the Commission with 
written notice of its intent to file the proposed rule change at least 
five days prior to the filing date. At any time within 60 days of the 
filing of such proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the pubic interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In reviewing this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether it is consistent 
with the Act. Persons making written submissions should file six copies 
thereof with the Secretary, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, D.C. 20549-0609. Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to the file number in the caption above and 
should be submitted by May 26, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-11144 Filed 5-3-99; 8:45 am]
BILLING CODE 8010-01-M