[Federal Register Volume 65, Number 35 (Tuesday, February 22, 2000)]
[Notices]
[Pages 8753-8756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4150]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42226; File No. SR-NASD-99-54]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the National Association of Securities Dealers, 
Inc. Creating a Voluntary Single Arbitrator Pilot Program

February 15, 2000.

I. Introduction

    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 (``SEC'' or ``Commission'') a proposed rule 
change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ In its proposal, NASD 
Regulation seeks to implement a voluntary single arbitrator pilot 
program for cases involving claims of $50,000.01 to $200,000. Notice of 
the proposal, as amended by Amendment No. 1, was published in the 
Federal Register December 7, 1999 (``Notice'') \3\ The Commission 
received one comment letter on the filing.\4\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42185 (November 30, 
1999), 64 FR 68400 (File No. SR-NASD-99-54).
    \4\ See letter from Richard T. Chase, General Counsel and 
Managing Director, US Bancorp Piper Jaffray, to Jonathan G. Katz, 
Secretary, Commission, dated October 27, 1999 (``US Bancorp Letter''
---------------------------------------------------------------------------

II. Description of the Proposal

    NASD Regulation proposes to implement a two-year voluntary pilot 
arbitration program in which parties may choose to use a single 
arbitrator for public customer cases involving claims of $50,000.01 to 
$200,000 (``Pilot Program''). Currently, NASD Rule 10308 calls for the 
appointment of three arbitrators for claims greater than $50,000.\5\ 
NASD Regulation anticipates

[[Page 8754]]

that the Pilot Program should result in lower arbitration fees and 
quicker resolution of arbitration claims for participants.
---------------------------------------------------------------------------

    \5\ See NASD Rule 10308(b)(1)(B).
---------------------------------------------------------------------------

Amount in Controversy/Punitive Damages

    The Pilot Program is limited to disputes between public customers 
and associated persons or firms and 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. This $200,000 limitation includes attorneys' fees, interest, 
and other costs. Further, the aggregate dollar amount of all claims by 
all parties--including any counterclaims, third-party claims, and 
cross-claims--will be counted toward the $200,000 limitation. Forum 
fees will not be counted in the $200,000 limitation, and the arbitrator 
will allocate forum fees among the parties, as already provided in the 
Code. In addition, cases involving punitive damages will not be 
eligible for the Pilot Program unless all parties agree to use a single 
arbitrator and to allow that arbitrator to award punitive damages.

Arbitrator Selection Process

    Pursuant to the procedures in the NASD's Code of Arbitration 
Procedure (``Code''), parties will go through the process of choosing 
arbitrators to serve on a three-person panel. After the arbitrators 
have been chosen, NASD Regulation 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\ Parties then will have 15 days from 
the date the Director sends notice of the arbitrator names to agree on 
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.
---------------------------------------------------------------------------

    \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. Parties also may have informally 
agreed to participate in the Pilot Program.
---------------------------------------------------------------------------

    The 15 day period corresponds with the 15 days period that parties 
have to select a chairperson of the panel. NASD Regulation expects 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.

Communications With Arbitrators

    Unlike the procedures normally used, the Pilot Program will allow 
parties to communicate directly with the arbitrator without NASD 
Regulation staff involvement. To expedite case resolution, parties will 
be permitted to send written materials, including information 
(discovery) requests and motions, directly to the selected arbitrator. 
If the arbitrator and all parties agree, written materials may be 
served by facsimile (fax) or other electronic means provided that all 
parties have access to such means of communication.
    NASD Regulation have established procedures to guard against 
improper ex parte communications with the arbitrator. Copies of written 
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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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. Similarly, 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, 
conference calls may be tape recorded. Under NASD Regulation practice, 
the arbitrator also prepares a written summary of the decisions reached 
during the call or may direct one of the parties to summarize the call 
and send the summary by facsimile to the arbitrator and all parties 
within a short period of time while memories are still fresh.

Filing Fees, Member Surcharges, and Hearing Session Deposits

    Filing fees, member surcharges, and member processing fees will not 
change under the Pilot Program. Rather, the Pilot Program 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 costs.\9\ Regardless of the amount in controversy in 
the Pilot Program, the fee for a pre-hearing conference call with an 
arbitrator will be the same as at present, $450. The hearing session 
fees are as follows:
---------------------------------------------------------------------------

    \9\ 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 of Market Regulation (``Division''), Commission on November 
29, 1999.
---------------------------------------------------------------------------

     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).
     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).

Limitations on the Amount of the Award

    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, NASD Regulation recommends that 
parties 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,\10\ or (ii) asking the other parties to stipulate that the single 
arbitrator may award more than $200,000. NASD Regulation does

[[Page 8755]]

not anticipate that such issues will arise with any frequency.\11\
---------------------------------------------------------------------------

    \10\ 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.
    \11\ Under the Code, the single arbitrator has discretion to 
determine whether to allow a party to file a new or amended pleading 
except when a party is responding to a new or amended pleading. See 
Rule 10328(b). Accordingly, if a party seeks to amend a pleading to 
raise the total amount in controversy over the $200,000 maximum, the 
party must first receive the arbitrator's consent. Because the Pilot 
Program is designed to add flexibility to the Code, parties and 
arbitrators faced with these facts could, for example, agree to 
continue with a single arbitrator, or ascertain whether two other 
arbitrators already ranked in the initial list selection process 
might still be available, allowing the case to continue without 
serious interruption. In the alternative, a party can request to 
have the case dismissed and the adverse party can contest the 
request. If that request is granted, the party can re-file the 
revised claim as a regular, three-arbitrator case. Parties 
considering this step should understand that filing a new case would 
involve the payment of the initial filing fees and hearing session 
deposit for the new case. They should also consider any applicable 
eligibility or statute of limitations defenses the new filing date 
might raise.
---------------------------------------------------------------------------

Applicability of Code and Effectiveness of the Pilot Program

    The Pilot Program rules provide that, except as otherwise provided 
for in the rules of the Pilot Program, 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 by the rules of the Pilot Program. 
Additionally, 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. Once the Pilot Program has become effective, it will remain 
in effect for two years. 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.

III. Summary of Comments and Discussion

    The Commission received one comment letter on the proposal and this 
letter supports the Pilot Program.\12\ The commenter endorses the Pilot 
Program as a means of simplifying and expediting the arbitration 
process. Further, the commenter suggests that the use of a single 
arbitrator should be expanded in the future, and states that US Bancorp 
would support mandating the use of a single arbitrator down the road.
---------------------------------------------------------------------------

    \12\ See US Bancorp Letter.
---------------------------------------------------------------------------

    The commenter raises a question as to whether punitive damages, if 
all parties agree to use a single arbitrator, are included in the 
$200,000 limitation. According to the Pilot Program Rules, cases 
involving punitive damages are not eligible for the Pilot Program 
unless all of the parties agree to use a single arbitrator. However, if 
the parties in a case involving punitive damages agree to use a single 
arbitrator, the punitive damages will be counted toward the $200,000 
limitation.\13\
---------------------------------------------------------------------------

    \13\ Conversation between Jean I. Feeney, Office of General 
Counsel, NASD Regulation, and Joseph P. Corcoran, Attorney, 
Division, Commission on January 11, 2000.
---------------------------------------------------------------------------

    Lastly, the commenter expresses disappointment that the NASD has 
not further reduced fees to encourage participation in the Pilot 
Program. The commenter notes its view that arbitration fees are not 
strictly cost-based. As an example, the commenter states that hearing 
session fees vary depending on the dollar amount of the claims in the 
matter even though the costs of the hearing sessions are the same. The 
commenter believes that reduced fees would be an appropriate incentive 
to help the Pilot Program succeed and suggests that the NASD revisit 
its fee schedule if the Pilot Program were made permanent. This issue 
was addressed in an earlier filing by the NASD, SR-NASD-97-79, which 
involved a comprehensive revision of the NASD's arbitration fee 
schedule.\14\ In this filing, NASD Regulation stated that the Office of 
Dispute Resolution's experience shows that the costs of conducting 
hearings vary as the amount in dispute and the number of parties 
involved increase.\15\
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 39346 (November 21, 
1997), 62 FR 63580 (December 1, 1997) (Notice of filing of SR-NASD-
97-79); Securities Exchange Act Release No. 14056 (February 16, 
1999), 64 FR 10041 (March 1, 1999) (Order approving SR-NASD-97-79) 
(``SR-NASD-97-79 Order'').
    \15\ See SR-NASD-97-79 Order, at note 94.
---------------------------------------------------------------------------

    The Pilot Program procedures should help expedite the arbitration 
process for claims that fit within the Pilot Program. For example, the 
Pilot Program allows parties to communicate directly with the 
arbitrator without NASD Regulation staff involvement while also 
providing procedures that should guard against improper ex parte 
communications with the arbitrator. To speed up case resolution, 
parties will be permitted to send written material, including 
information requests and motions, directly to the arbitrator. However, 
parties must send copies of the written material simultaneously and in 
the same manner to all parties and the Director. Further, parties must 
send proof of service to the Director, arbitrator, and all parties. 
Phone calls with the arbitrator are also permitted, provided that all 
of the parties are on the line before the arbitrator joins the call or 
before the conference begins. These procedures should help expedite 
case resolution and at the same time, protect against improper ex parte 
communications.
    The reduction of fees is an appropriate means to encourage 
participation in the Pilot Program. By using one arbitrator, NASD 
Regulation will save $400 in arbitrator honoraria for each hearing 
sesion.\16\ For claims of $50,000.01 to $100,000, the parties will save 
$200 per hearing session.\17\ NASD Regulation is passing approximately 
one half of its savings in arbitrator honoraria to the parties in these 
claims. For claims of $100,000.01 to $200,000, the parties will save 
$375 per hearing session.\18\ In these claims, NASD Regulation is 
passing on almost all of its savings in arbitrator honoraria to the 
parties. The reduced fees should help encourage parties to participate 
in the Pilot Program and are reasonable under the circumstances.
---------------------------------------------------------------------------

    \16\ See supra note 9.
    \17\ Under the current NASD fee schedule, the hearing session 
fee for a claim between $50,000.01 and $100,000 is $750. Under the 
Pilot Program, the hearing session fee for a claim in this dollar 
amount would be $550.
    \18\ Under the current NASD fee schedule, the hearing session 
fee for a claim between $100,000.01 and $200,000 is $1.125. Under 
the Pilot Program, the hearing session fee for a claim in this 
dollar amount would be $750.
---------------------------------------------------------------------------

    Based on the foregoing reasons, the Commission finds that the 
proposal is consistent with the requirements of Section 15A of the Act 
\19\ and the rules and regulations thereunder that govern the NASD.\20\ 
In particular, the Commission finds that the proposal is consistent 
with Section 15A(b)(6) of the Act \21\ which requires, among other 
things, that the rules of an association 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; and are not designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78o-3.
    \20\ In addition, pursuant to Section 3(f) of the Act, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78o3(b)(6).
---------------------------------------------------------------------------

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NASD-99-54) is here 
approved.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(2).


[[Page 8756]]


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

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 00-4150 Filed 2-18-00; 8:45 am]
BILLING CODE 8010-01-M