[Federal Register Volume 64, Number 228 (Monday, November 29, 1999)]
[Notices]
[Pages 66681-66684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30836]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42160; File No. SR-NASD-98-74]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to Amendments to NASD Rule 3110(f) Governing Use of Predispute
Arbitration Agreements With Customers
November 19, 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 October 6, 1998, 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'') a proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by NASD Regulation. On May 26, 1999 and July 27, 1999 the
NASD submitted Amendments No. 1 and 2 to the proposed rule change,
respectively.\3\ 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\ See letter to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission, from Alden S. Adkins, Sr.
Vice President and General Counsel, NASD Regulation, dated May 26,
1999 and letter to Richard C. Strasser, Assistant Director, Division
of Market Regulation, Commission, from Joan C. Conley, Sr. Vice
President and Corporate Secretary, NASD Regulation, dated July 26,
1999.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NASD is proposing to amend NASD Rule 3110(f) to: require
additional disclosure in predispute arbitration agreements regarding
the arbitration process, including possible limits on eligibility of
claims; require member firms to provide certain information regarding
arbitration and predispute arbitration agreements to customers upon
request; and clarify the rule regarding use of choice of law provisions
in predispute arbitration agreements. Below is the text of the proposed
rule change. Proposed new language is in italic; proposed deletions are
in brackets.
* * * * *
RULES OF THE ASSOCIATION
3000. RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS, EMPLOYERS, AND
OTHERS' EMPLOYEES
3110. BOOKS AND RECORDS
(f) Requirements When Using Predispute Arbitration Agreements
[With] for Customer Accounts
(1) Any predispute arbitration agreement clause shall be
highlighted and shall be immediately preceded by the following
[disclosure] language [(printed] in outline form [as set forth herein)
which shall also be highlighted].
This agreement contains a predispute arbitration clause. By signing
an arbitration agreement, the parties agree as follows:
(A) [Arbitration is final and binding on the parties.] All parties
to this agreement are giving up the right to sue each other in court,
including the right to a trial by jury, except as provided by the rules
of the arbitration forum in which a claim is filed.
(B) [The parties are waiving their right to seek remedies in court,
including the right to a jury trial.] Arbitration awards are generally
final and binding; a party's ability to have a court reverse or modify
an arbitration award is very limited.
(C) [Pre-arbitration discovery is generally more limited than and
different from court proceedings.] The ability of the parties to obtain
documents, witness statements and other discovery is generally more
limited in arbitration than in court proceedings.
(D) [The arbitrators' award is not required to include factual
findings or legal reasoning and any party's right to appeal or seek
modification of rulings of the arbitrators is strictly limited.] The
arbitrators do not have to explain the reason(s) for their award.
(E) The panel of arbitrators will typically include a minority of
arbitrators who were or are affiliated with the securities industry.
(F) The rules of some arbitration forums may impose time limits for
bringing a claim in arbitration. In some cases, a claim that is
ineligible for arbitration may be brought in court.
(G) The rules of the arbitration forum in which the claim is filed,
and any amendments thereto, shall be incorporated into this agreement.
(2) (A) [Immediately preceding the signature line,] In any
agreement containing a predispute arbitration agreement, there shall be
a highlighted statement immediately preceding any signature line or
other place for
[[Page 66682]]
indicating agreement [which shall be highlighted] that states that the
agreement contains a predispute arbitration clause. the statement shall
also indicate at what page and paragraph the arbitration clause is
located.
(B) At the time of signing, a copy of the agreement containing any
such clause shall be given to the customer who shall acknowledge
receipt thereof on the agreement or on a separate document.
(3) [A copy of the agreement containing any such clause shall be
given to the customer who shall acknowledge receipt thereof on the
agreement or on a separate document.]
(A) A member shall provide a customer with a copy of any predispute
arbitration clause or customer agreement executed between the customer
and the member, or inform the customer that the member does not have a
copy thereof, within ten business days of receipt of the customer's
request.
(B) Upon request by a customer, a member shall provide the customer
with the names of, and information on how to contact or obtain the
rules of, all arbitration forums in which a claim may be filed under
the agreement.
(4) [No agreement shall include any condition which limits or
contradicts the rules of any self-regulatory organization or limits the
ability of a party to file any claim in arbitration or limits the
ability of the arbitrators to make any award.]
(A) No predispute arbitration agreement shall include any condition
that:
(i) limits or contradicts the rules of any self-regulatory
organization;
(ii) limits the ability of a party to file any claim in
arbitration;
(iii) limits the ability of a party to file any claim in court
permitted to be filed in court under the rules of the forums in which a
claim may be filed under the agreement;
(vi) limits the ability of arbitrators to make any award.
(B) No member may seek to enforce any choice-of-law provision
unless there is a significant contact or relationship between (i) the
law selected and (ii) either the transaction at issue or one or more of
the parties.
(5) [The requirements of subapragraphs (1) through (4) shall apply
only to new agreements signed by an existing or new customer of a
member after September 7, 1989.[ If a customer files a complaint in
court against a member that contains claims that are subject to
arbitration pursuant to predispute arbitration agreement between the
member and the customer, the member may seek to compel arbitration of
the claim that are subject to arbitration. If the member seeks to
compel arbitration of such claims, the member must agree to arbitrate
all of the claims contained in the complaint if the customer so
requests.
(6) All agreements shall include a statement that ``No person shall
bring a putative or certified class action to arbitration, nor seek to
enforce any predispute arbitration agreement against any person who has
initiated in court a putative class action; or who is a member of a
putative class action who has not opted out of the class with respect
to any claims encompassed by the putative class action until: (i) the
class certification is denied; or (ii) the class is decertified; or
(iii) the customer is excluded from the class by the court. Such
forbearance to enforce an agreement to arbitrate shall not constitute a
waiver of any rights under this agreement except to the extent stated
herein.''
(7) [The requirements of subparagraph (6) shall apply only to a new
agreements signed by an existing or new customer of a member after
October 28, 1993.] The provisions of this Rule shall become effective
on (effective date). Agreements signed by a customer before (effective
date) are subject to the provisions of this Rule in effect at the time
the agreement was signed.
(g)-(h) Unchanged.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, 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 staements 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 purpose of the proposed rule change is threefold: to require
additional disclosure in predispute arbitration agreements regarding
the arbitration process, including possible limits on eligibility of
claims; to require member firms to provide certain information
regarding arbitration and predispute arbitration agreements to
customers upon request; and to clarify the rule regarding use of
choice-of-law provisions in predispute arbitration agreements.
Background
Many broker-dealers require that customers seeking to open
accounts, particularly margin and option accounts or accounts with a
checking or money market feature, agree in writing to arbitrate
disputes concerning the account, typically in an SRO-sponsored forum.
These agreements, called ``predispute arbitration agreements,'' are
generally part of the non-negotiated customer agreement drafted by the
firm.
To ensure that customers are advised about what they are agreeing
to when they sign predispute arbitration agreements, NASD Conduct Rule
3110(f) requires that such agreements contain highlighted disclosure
about the differences between arbitration and litigation, including
notice that by agreeing to arbitrate their disputes, customers may be
waiving certain rights that would be available in court. Rule 3110(f)
also requires that the agreement itself be highlighted, and that a copy
of the agreement be given to the customer and acknowledged by the
customer in writing.
Despite these precautions, investor representatives have expressed
concern that many customers who sign predispute arbitration agreements
still do not adequately understand what they are agreeing to. For
example, some predispute arbitration agreements contain ``choice-of-
law'' provisions that specify that the law of a certain state will
govern disputes arising out of the agreement. In some cases, the member
knows that the law of the chosen state may limit the ability of a
customer to bring a claim or obtain an award, but the customer would
not be aware of these restrictions from the face of the agreement. By
signing an agreement that contained a choice-of-law provision, a
customer might inadvertently waive certain rights and remedies.
Customers' perceptions of unfairness are heightened by the fact that,
when customers must sign predispute arbitration agreements in order to
open accounts, their participation in SRO-sponsored arbitration may be
involuntary.
Consequently, in its 1996 report, Securities Arbitration Reform:
Report of the Arbitration Policy Task Force to the Board of Governors,
National Association of Securities Dealers, Inc. (``Task Force
Report''), the Arbitration Task Force, chaired by David Ruder (formerly
Chairman of the SEC and a
[[Page 66683]]
former NASD Board member), recommended that members be required to
provide more disclosure about arbitration to customers who sign
predispute arbitration agreements, and that the use of certain
provisions that limit rights and remedies be restricted.
Moreover, the NASD noted in its rule filings concerning the
proposed eligibility (SR-NASD-97-44) and punitive damages rules (SR-
NASD-97-47) that the NASD would amend Rule 3110(f) to require
disclosure of the limitations contained in those rules. This rule
filing amends Rule 3110(f) to provide disclosure of the proposed
eligibility rules. Simultaneous with this filing, the NASD filed an
amendment to the punitive damages rule filing to include proposed
amendments to Rule 3110(f) relating to punitive damages.
Proposed Amendments
Required Disclosure and Notice of Possible Restrictions on Eligibility
Currently, paragraph (f)(1) of Rule 3110 mandates certain
disclosure language about the differences between litigation and
arbitration that must be included in predispute arbitration agreements.
The proposed amendments would simplify the existing language in some
existing provisions, and would add new provisions.
One of the most significant new provisions concerns notice of
possible limits in some arbitration forums on the time for bringing
claims. Paragraph (f)(1)(F) would require disclosure that the rules of
some arbitration forums may impose time limits for bringing claims in
arbitration, and that, in some cases, claims that are ineligible for
arbitration may be brought in court. This provision is intended to give
notice to customers of the NASD's proposed eligibility rule, as well as
the rules in other forums.
Applicability of Disclosure Requirements to New and Existing Account
Agreements
Members would be required to add the new disclosure requirements to
all new customer account agreements containing predispute arbitration
agreements as of the effective date of the rule. The proposed rule does
not require members to replace existing agreements with current
customers.
Incorporation of Arbitration Forum Rules
Paragraph (f)(1)(G) would provide that the rules of the arbitration
forum in which a claim is brought, and any amendments thereto, shall be
incorporated into the agreement. The purpose of this provision is to
ensure that the rules of a forum apply to cases brought in that forum,
and to avoid having to execute new agreements each time a forum changes
its rules. For example, if a customer filed a complaint in an NASD
Regulation arbitration forum, the NASD's arbitration rules would apply
in all respects to the agreement.
Requirement That Members Provide Copies of Customer Agreements and
Information Regarding Arbitration Forums to Customers Upon Request
In some cases, customers have complained that they have not been
able to obtain copies of the predispute arbitration agreements they
have signed from members in a timely manner, and that they had unequal
access to information about the respective rules of the arbitration
forums in which claims may be filed under a given agreement. Under the
proposed amendments, paragraph (f)(3)(A) would require that, within ten
days of receiving a request, members must provide a customer with a
copy of any predispute arbitration agreement clause or agreement that
the customer had signed, or inform the customer that the member does
not have a copy of the agreement. In addition, paragraph (f)(3)(B)
would require that, upon request of a customer, a member must provide
the customer with the names of, and information on how to contact or
obtain the rules of, all arbitration forums in which a claim may be
filed under the agreement.
Restrictions on Provisions That Limit Rights and Remedies
Much of the criticism of predispute arbitration agreements has
focused on the use of choice-of-law provisions. A choice-of-law
provision specifies that the law of a certain state will govern
disputes arising our of an agreement. In some cases, the law of a state
might limit the availability of certain remedies, such as punitive
damages, or the ability of a customer to bring a claim. For example,
previously under New York law, courts could award punitive damages, but
arbitrators could not. A customer who agree to arbitrate disputes under
New York law could inadvertently forfeit the ability to obtain punitive
damages that might have been available in court. (New York law on this
subject has begun to shift in favor of arbitrators being able to award
punitive damages.) Customers have argued that it is unfair for members
to include provisions in predispute arbitration agreements that limit
the availability of remedies, particularly when the effects of the
provisions are not explained in the agreement.
Currently, Rule 3110(f) prohibits any choice-of-law provision that
limits or contradicts the rules of any self-regulatory organization, or
that limits the ability of a party to file any claim in arbitration or
of arbitrators to make any award. However, the application of this
provision has not always been consistent or clear. In addition, some
investors have expressed concern that choice-of-law provisions select
arbitrary jurisdictions that have no relationship to the customer or
the transaction at issue.
To address these concerns, paragraph (f)(4) of the Rule would be
amended to clarify the prohibition against provisions that limit rights
or remedies, including provisions that would circumvent the eligibility
rule. The amendment rule would also state that no choice-of-law
provision will be enforceable unless there is a significant contact or
relationship between the law selected and either the transaction at
issue or the one or more of the parties.
Non-Bifurcation Provision
The NASD's proposed eligibility rule contains certain provisions
intended to provide customers with a forum for all of their claims but
to prevent them from having to bifurcate their claims, that is, from
being forced to litigate their claims in two forums (court and
arbitration) at the same time.\4\ NASD Regulation also stated in the
eligibility rule filing that it would amend Rule 311(f) to include a
provision prohibiting members from seeking to compel arbitration of
some but not all of a customer's court-filed claims, in order to
prevent members from forcing customers to litigate in two forums when
they filed a complaint in court that contained both eligible and
ineligible claims. Therefore, NASD Regulation is proposing to add a new
paragraph (f)(5) to Rule 3110(f) that would require members seeking to
compel arbitration of claims filed in court to agree to arbitrate all
of the claims contained in the court-filed complaint, even if some of
the claims would be ineligible for arbitration under the eligibility
rule. The purpose of these provisions in the eligibility rule and Rule
3110(f) is to give the customer
[[Page 66684]]
control over whether claims are bifurcated.
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\4\ Under the proposed eligibility rule, if the Director of
Arbitration rules that the claims contained in a complaint are
ineligible for arbitration because they are based on occurrences or
events that took place more than six years before the complaint was
filed, the customer may file the complaint in court. If the Director
rules that some of the transactions are eligible for arbitration,
the customer has the option either to pursue the eligible claims in
arbitration and the ineligible claims in court, or to pursue both
the eligible and ineligible claims in court.
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Effective Date Provisions
The proposed amendments to Rule 3110(f) would require various
changes to the customer agreements used by member firms, including
adding disclosure of proposed amendments to the NASD's eligibility rule
contained in a currently-pending rule filing (SR-NASD-97-44). The
proposed punitive damages rule (SR-NASD-97-47) would also require
changes to the customer agreements used by member firms. In order to
prevent multiple amendments to customer agreements as a result of these
three rule filings, the NASD has determined that these three rule
filings, if approved, should take effect at the same time. In addition,
the effective date of the rules must provide enough time for firms to
modify their customer agreements. Therefore, the proposed amendments to
Rule 3110(f) and the eligibility rule, and the proposed punitive
damages rule, will become effective 120 days after final Commission
action on the last of the three rule filings. The NASD will announce
the effective date of the rules in a Notice to Members published prior
to the effective date.
The proposed amendments to Rule 3110(f) would also provide that
agreements signed before the effective date of the Rule amended would
be subject to the provisions of 3110(f) in effect at the time the
agreement was signed.
Restriction of Rule of Customer Account Agreements
Some members of the NASD's National Arbitration and Mediation
Committee (``NAMC'') expressed concern that the rule, which currently
applies to all predispute arbitration clauses in any agreement between
member firms and customers, could be construed to apply to agreements
between a member firm and large institutional clients with whom they
had face-to-face negotiations over the terms of the agreement. To
address this concern, the rule would be amended to clarify that it only
applies to customer accounts and not to other agreements between member
firms and large institutional clients with whom they had negotiated
contract terms.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) 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. The NASD believes that the
proposed amendments to Rule 3110(f) will serve the public interest by
providing customers with more complete information about the
arbitration process.
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
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of 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 such 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, 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 File No. SR-NASD-98-74 and should
be submitted by December 20, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-30836 Filed 11-26-99; 8:45 am]
BILLING CODE 8010-01-M