[Federal Register Volume 64, Number 234 (Tuesday, December 7, 1999)]
[Notices]
[Pages 68400-68404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31639]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42185; File No. SR-NASD-99-54]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Creating
a Voluntary Single Arbitrator Pilot Program
November 30, 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 5, 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 (``Commission'' or ``SEC'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by NASD Regulation. On November 26, 1999, NASD Regulation
submitted Amendment No. 1 to the proposed rule change.\3\ The
Commission is publishing this notice of the rule change, as amended, 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 from Alden S. Adkins, Senior Vice President and
General Counsel, NASD Regulation, to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), Commission,
dated November 24, 1999. In Amendment No. 1, NASD Regulation made
changes to clarify certain aspects of the proposal (``Amendment No.
1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation proposes to amend the Code of Arbitration Procedure
of the NASD to implement a voluntary single arbitrator pilot program.
Below is the text of the proposed rule change. Proposed Rule 10337
contains all new language.
* * * * *
Rules of the Association
1000. Code of Arbitration Procedure
* * * * *
10337. Single Arbitrator Pilot Program
This Rule allows parties with claims of $50,000.01 to $200,000 to
select a single arbitrator to hear their cases, rather than the panel
of three arbitrators they would otherwise select. This Pilot Program is
voluntary, and includes provisions that allow the parties to
communicate directly with the arbitrators under certain conditions. The
Pilot Program should result in lower arbitration fees and quicker
resolution of arbitration claims for participants.
(a) Claims Eligible for Single Arbitrator Pilot Program
(1) Claims arising between a customer and an associated person or a
member for amounts from $50,000.01 to $200,000, including damages,
interest, costs, and attorneys' fees, will be eligible to be heard by a
single arbitrator pursuant to this Rule (``Pilot Program''), except as
provided in paragraph (a)(2) or (b)(3) below.
(2) Claims that include a request for punitive damages will not be
eligible for the Pilot Program unless all parties agree.
(b) Arbitrator Selection Procedure
(1) After parties receive notice that a panel of three arbitrators
has been selected for their case, as provided in Rule 10308, the
parties may agree to have one of the arbitrators serve as the single
arbitrator who will hear their case.
(2) The parties shall have 15 days from the date the Director sends
notice of the names of the arbitrators to agree on a single arbitrator.
This 15-day period will run concurrently with the time period to select
a chairperson under Rule 10308(c)(5).
(3) If the parties do not agree to have one of the arbitrators
serve as the single arbitrator, then the claim will not be eligible for
the Pilot Program and will proceed instead under the usual procedures
of Rule 10308.
[[Page 68401]]
(c) Communications With Arbitrators
(1) Parties may send written materials, including information
requests and motions, directly to the single arbitrator, provided that
copies of such materials are sent simultaneously and in the same manner
to all parties and to the Director. Parties shall send the Director,
arbitrator, and all parties proof of service of such written materials,
indicating the time, date, and manner of service upon the artibtrator
and all parties. Service by mail is complete upon mailing. If the
arbitrator and all parties agree, written materials may be served
electronically.
(2) If the arbitrator agrees, parties may initiate conference calls
with the arbitrator, provided that all parties are on the line before
the arbitrator joins the call. At the discretion of the arbitrator,
such conference calls may be tape recorded.
(3) The arbitrator may initiate conference calls with the parties,
provided all parties are on the line before the conference begins. At
the discretion of the arbitrator, such conference calls may be tape
recorded.
(4) Parties may not communicate orally with the arbitrator unless
all parties are present.
(d) Fees
(1) Filing fees, member surcharges, and process fees for the Pilot
Program will be the same as in Rules 10332 and 10333.
(2) Hearing session deposits for the Pilot Program are as follows:
(A) Hearing session deposits for claims of $50,000.01 to $100,000
will be $550 per session.
(B) Hearing session deposits for claims of $100,000.01 to $200,000
will be $750 per session.
(C) The forum fee for a telephone pre-hearing conference call with
the arbitrator will be $450.
(e) Awards
The single arbitrator may not award the parties more than a total
of $200,000, including damages, interest, costs, and attorneys' fees,
unless all parties agree that the arbitrator may award a larger amount.
In addition, the arbitrator shall allocate forum fees to the parties as
provided in Rule 10332(c).
(f) Applicability of Code
Except as provided in this Rule, the remaining provisions of the
Code will apply to the Pilot Program.
(g) Temporary Effectiveness
This Rule shall remain in effect until [two years after effective
date].
* * * * *
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
NASD Regulation proposes to implement a two-year voluntary pilot
arbitration program in which parties may choose to use a single
arbitrator for cases involving claims of $50,000.01 to $200,000, which
would otherwise require three arbitrators.
Background
In developing a proposal to provide parties in a public customer
case with the alternative of a single arbitrator at a reduced cost,
NASD Regulation sought feedback from the Public Investors Arbitration
Bar Association, the Securities Industry Association and the NASD's
Small Firm Advisory Board to determine if investors and the industry
would support such a program. After evaluating the feedback provided,
NASD Regulation decided to offer, on a trial basis, an optional
modification of current Neutral List Selection System (``NLSS'')
procedures. NLSS is a computerized program developed to generate lists
of arbitrators (``neutrals'') for selection by the parties. The program
is the foundation for the NASD's recently adopted list selection rule,
Rule 10308, which was approved by the SEC effective November 17,
1998.\4\
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\4\ See Exchange Act Release No. 40555 (Oct. 14, 1998), 62 FR
56670 (Oct. 22, 1998) (File No. SR-NASD-98-48); Exchange Act Release
No. 40556 (Oct. 14, 1998), 63 FR 56957 (Oct. 23, 1998) (File No. SR-
NASD-98-64).
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Description of Proposed Amendments
The proposed rule change adds a new Rule, proposed to be numbered
as Rule 10337, entitled Single Arbitrator Pilot Program (``Pilot
Program''), which will be effective for a two-year period. The
introductory language explains in simple terms that the rule will allow
parties with claims of $50,000.01 to $200,000 to select a single
arbitrator to hear their cases, rather than the panel of three
arbitrators they would otherwise select. The introductory language also
indicates that the program is voluntary and that it will allow the
parties to communicate directly with the arbitrators under certain
conditions. Finally, the introductory language states that the program
should result in lower arbitration fees and quicker resolution of
arbitration claims for participants.
Amount in Controversy/Punitive Damages
Proposed paragraph (a)(1) describes the types of claims that are
eligible for the Program. It sates that claims arising between a
customer and an associated person or a member are eligible for the
Program. The Program will not be available for the resolution of
employment disputes or other intra-industry disputes. The Pilot Program
will be limited to claims seeking between $50,000.01 and $200,000. The
minimum number was chosen because a single arbitrator is already
generally prescribed by Rule 10308(b)(1)(A) for claims of up to
$500,000. Interest, attorneys' fees, and other costs will be included
within the Pilot's $200,000 claim limitation. All types of claims by
all parties, including any counterclaims, third-party claims, and
cross-claims, would be counted in the $200,000 limitation, although
NASD Regulation anticipates that most cases handled by the Pilot
Program will be relatively straight forward. The arbitrator will
allocate forum fees to the parties, as already provided in the Code, in
addition to the amount of the award. This means that forum fees will
not be counted in the $200,000 limitation.
Paragraph (a)(2) provides that the Pilot Program will exclude any
case seeking punitive damages unless all of the parties in such a case
request a single arbitrator.
Arbitrator Selection Process
In the normal arbitrator selection process, parties are given lists
of possible arbitrators as provided in Rule 10308. Parties then may
strike one or more of the arbitrators and rank any remaining
arbitrators. Using NLSS, NASD Regulation then consolidates the parties'
lists and prepares a list of three arbitrators who have been selected
for the case.\5\ After parties receive notice
[[Page 68402]]
that a panel of three arbitrators has been selected, rule 10308(b)(5)
provides that they have 15 days in which to select a chairperson. At
this point, NASD Regulation proposes that its staff will inform the
parties of the terms of the voluntary Pilot Program if their case
appears to fit the criteria for the Pilot Program.\6\ As provided in
proposed paragraph (b)(1), parties then can determine whether they want
to choose one of their three selected arbitrators to serve as the
single arbitrator in the Pilot Program.
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\5\ If the number of arbitrators available to serve from the
consolidated list is not sufficient to fill a panel, NASD Regulation
staff will select one or more arbitrators to complete the panel.
Rule 10308(c)(4)(B). Information about such arbitrators will be sent
to the parties, who may object as provided in rule 10308(d)(1).
\6\ parties may have received information about the Pilot
Program earlier in the process, and if so, they will be reminded
that this option is available. If approved, the proposal provides
for a delay in the effective date of the pilot so that parties can
become familiar with the program.
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This method was chosen because, based on user feedback, it appeared
that parties would not be willing to use the Pilot Program unless they
knew in advance who the single arbitrator would be. Under the proposed
rule change, the parties will have background information on the
potential panel members and will be able to make an informed decision
as to whether to proceed with a single arbitrator. Because the parties
may choose any one of the three arbitrators, it is possible that the
single arbitrator will not be a public arbitrator. That person will,
however, be a person agreed to by all parties.
Paragraph (b)(2) provides that parties will have 15 days from the
date the director sends notice of the names of the arbitrators to agree
on a single arbitrator. This 15-day period will run concurrently with
the time period to select a chairperson under Rule 10308(c)(5). It is
expected that the arbitrator who would have been chosen as the
chairperson is most likely the same person who will be chosen as the
single arbitrator. Thus, if the parties decide not to proceed in the
Pilot Program, they can proceed under normal procedures without delay.
If the parties do not agree on a single arbitrator, paragraph
(b)(3) provides that the case will proceed under normal NLSS procedures
with three arbitrators.
Communication With Arbitrators
Unlike the procedures normally used, the Pilot Program will allow
parties to communicate directly without NASD Regulation staff
involvement. To expedite case resolution, proposed paragraph (c)(1)
provides that the parties will be permitted to send written materials,
including information (discovery) requests and motions, directly to the
selected arbitrator. Copies of such materials must be sent
simultaneously and in the same manner to all parties \7\ and to the
Director. Parties also must send the Director, arbitrator, and all
parties proof of service of such written materials, indicating the
time, date, and manner of service upon the arbitrator and all parties.
No particular format is prescribed; parties may use the same type of
Certificate of Service used in state or federal courts or another
format that includes the necessary information (including the address
to which the materials were sent). As is true under the Federal Rules
of Civil Procedure,\8\ service by mail is complete upon mailing.
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\7\ Since parties may be represented by counsel at any stage of
an NASD arbitration proceeding (see Rule 10316), service upon a
party's counsel of record will be considered to be service on the
party.
\8\ See Fed. R. Civ. P. 5(b).
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For purposes of the proposed rule, ``mailing'' might include
depositing the materials in a facility of the United States Postal
Service or sending them by means of a messenger or overnight delivery
service. If the arbitrator and all parties agree, written materials may
be served by facsimile (fax) or other electronic means. Such agreement
might be given at the point of entry into the Pilot Program or at any
time thereafter by providing an electronic mail (E-mail) address or a
facsimile number. Once such agreement is given, it will be presumed to
continue unless the arbitrator and parties are notified otherwise. If
the arbitrator or any party does not have access to an electronic means
of communication, then such means may not be used.
Proposed paragraph (c)(2) provides that, if the arbitrator agrees,
parties may initiate conference calls with the arbitrator, provided
that all parties are on the line before the arbitrator joins the
call.\9\ Similarly, paragraph (c)(3) provides that the arbitrator may
initiate conference calls with the parties, provided all parties are on
the line before the conference begins.
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\9\ Under paragraph (d)(2)(C), fees for pre-hearing telephone
conference calls will be capped at $450 as they are in Rule
10332(k). To the extent that such calls resolve issues relating to
timing, motions, witnesses, or discovery, they ultimately may save
the parties time and expense by expediting the hearing process.
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At the discretion of the arbitrator, conference calls may be tape
recorded. The current practice for taping pre-hearing conference calls
will be followed for taping conference calls under the Pilot Program.
That practice is that the person wishing to tape record the call
notifies NASD Regulations staff in advance, and arrangements are made
either to (i) use tape recording equipment operated by the arbitrator
or an NASD Regulation staff member, or (ii) have the conference
operator tape record the call. The cost of tape recording the
conference call may be allocated to one or more parties by the
arbitrator at the conclusion of the case, as provided in Rule 10332(c).
Alternatively, the arbitrator may direct one of the parties to prepare
a written summary of the decisions reached during the call, and send
the summary by facsimile to the arbitrator and all parties within a
short period of time (normally 24 hours) while memories are still
fresh.
Paragraph (c)(4) states that parties may not communicate orally
with the arbitrator unless all parties are present.
Paragraph (c) thus provides for flexibility and yet ensures that
there are no improper ex parte contacts between the arbitrator and the
parties.
Filing Fees, Member surcharges, and Hearing Session Deposits
Filing fees, member surcharges, and member processing fees will not
change under the Pilot Program. Rather, proposed paragraph (d)(1)
provides that such fees will be the same as in Rules 10332 and 10333.
However, hearing session fees will be reduced in the Pilot Program to
reflect lower arbitrator honoraria (payments) and other costs. The fee
for a pre-hearing conference call with an arbitrator will be the same
as at present, $450. Specifically:
Paragraph (d)(2)(A) provides that, for claims of
$50,000.01 to $100,000.00, hearing session fees under the Pilot Program
will be $550 per session or $1,100 per typical two session day. The new
fee structure represents a reduction of $200 per session for the
parties as compared with normal case procedures (or a $400 reduction
per typical two session day).
Paragraph (d)(2)(B) provides that, for claims of
$100,000.01 to $200,000.00, hearing session fees under the Pilot
Program will be $750 per session or $1,500 per typical two session day.
The new fee structure represents a reduction of $375 per session for
the parties as compared with normal case procedures (or a $750
reduction per typical two session day).
Paragraph (d)(2)(C) provides that the fee for a pre-
hearing conference call with the arbitrator will be $450. This fee does
not vary with the amount of the claim.
NASD Regulation can afford to pass on to parties the above savings
in hearing session fees because the use of a single arbitrator rather
than three arbitrators will result in savings in the
[[Page 68403]]
honoraria paid to arbitrators.\10\ Some costs are fixed, however,
regardless of the size of the panel. since a tentative panel of three
arbitrators will be selected before parties decide on a single
arbitrator, the cost of the arbitrator selection process will remain
the same as if a three-arbitrator panel were to be used. Such costs
include: production of a list of up to 15 possible arbitrators
(referred to herein as ``potential arbitrators'') from which the
parties may select the initial panel of three arbitrators, preparation
and mailing of additional information concerning potential arbitrators
(if requested), gathering and mailing of the five most recent awards
rendered by each of the potential arbitrators, staff review of
potential arbitrators for conflicts of interest specific to the pending
case, Central Registration Depository (CRD) background checks on any
potential arbitrators who have worked in the securities industry,
consolidation and ranking of potential arbitrators, contacting the
potential arbitrators to determine their availability, and, if a single
arbitrator is chosen under the Pilot Program, notifying two of the
final three arbitrators that they will not be needed.
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\10\ For each hearing session, NASD Regulation will save $400 in
arbitrator honoraria. Conversation between Linda Fienberg, Executive
Vice President, NASD Regulation, and Joseph P. Corcoran, Attorney,
Division, Commission on November 29, 1999.
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In addition, many fixed costs of holding hearings will also be the
same, regardless of whether the panel consists of three arbitrators or
one. These costs include hearing room usage costs (which may include
rental fees for commercial facilities or reimbursement to the NASD for
use of NASD office space), and staff time and travel expenses (if staff
attend the hearing). For these reasons, NASD Regulation believes the
proposed fees for the single arbitrator program are fair and
reasonable.
Limitations on the Amount of the Award
Proposed paragraph (e) provides that the single arbitrator may not
award the parties more than a total of $200,000, including damages,
interest, costs, and attorneys' fees, unless all parties agree that the
arbitrator may award a larger amount. In addition, the arbitrator will
allocate forum fees to the parties as provided in rule 10332(c).
Therefore, parties will want to evaluate their claims carefully to
ensure that they fit within the parameters of the Pilot Program.
In the unlikely event that, during the course of the arbitration, a
claimant learns of information that leads the claimant to believe there
are additional claims, or higher claims than originally made, which
would raise the total amount in controversy over the $200,000 maximum,
the claimant has the option of (i) asking the arbitrator to dismiss the
case without prejudice under rule 10305 and, if that request is
granted, re-filing the revised claim as a regular, three-arbitrator
case.\11\ or (ii) asking the other parties to stipulate that the single
arbitrator may award more than $200,000. NASD Regulation does not
anticipate that such issues will arise with any frequency.
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\11\ rule 10305(a) provides that arbitrators may dismiss a
proceeding at the request of a party or on the arbitrators' own
initiative. Therefore, the single arbitrator has the discretion to
determine whether or not to grant a request for dismissal. Rule
10305(c) provides that arbitrators shall dismiss a proceeding at the
joint request of all the parties.
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To assist parties in understanding the proposed rule change, NADS
Regulation staff is preparing informational material that will be given
to parties, most likely when the claim is served and again when the
list of appointed arbitrators is mailed, so that parties can make an
informed decision as to whether their case is appropriate for the Pilot
Program. In addition, training material regarding the Pilot Program
will be given to arbitrators who are selected to serve as single
arbitrators under the Pilot Program.
Applicability of Code
Proposed paragraph (f) of the Rule provides that, except as
provided in this rule, the remaining provisions of the Code will apply
to the Pilot Program. This means that the normal arbitration rules and
procedures will apply unless they are specifically superseded in the
proposed rule.
Duration of Pilot Program
Paragraph (g) provides that the proposed rule will remain in effect
until two years after the effective date. Prior to the expiration of
the Pilot Program, NASD Regulation may decide to extend the Program,
and would then request SEC approval for an extension. NASD Regulation
staff will develop an evaluation form to solicit feedback from Pilot
participants. This feedback will be used to consider whether to
continue or terminate the Pilot, or whether additional refinements to
the Pilot are necessary.
Benefits to Customers and the Securities Industry
Under the Pilot Program, the parties have full control over the
single arbitrator selection process. They may agree to select either a
public arbitrator or an industry arbitrator to preside as the single
arbitrator. In addition, the parties' hearing session costs will be
reduced. Scheduling of pre-hearing conferences and hearing dates will
be easier with a single arbitrator. Parties may file discovery requests
and motions directly with the assigned arbitrator, which will eliminate
delay. Parties also will be permitted to contact the arbitrators for
conference calls at the convenience of the parties and arbitrator
without the involvement of NASD Regulation staff.
Effective Date
The NASD will announce the effective date of the proposed rule
change in a Notice to Members to be published no later than 60 days
following Commission approval. The effective date will be 30 days
following publication of the Notice to Members announcing Commission
approval.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) \12\ 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 providing a streamlined and less expensive voluntary
alternative for arbitration claims that meet the Pilot Program
criteria.
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\12\ 15 U.S.C. 78o-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
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
[[Page 68404]]
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
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-99-54 and should
be submitted by December 28, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-31639 Filed 12-6-99; 8:45 am]
BILLING CODE 8010-01-M