[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]
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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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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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 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.
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\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.''
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\8\ 15 U.S.C. 78-3(b)(6).
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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.
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\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).
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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\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-11144 Filed 5-3-99; 8:45 am]
BILLING CODE 8010-01-M