[Federal Register Volume 65, Number 242 (Friday, December 15, 2000)]
[Notices]
[Pages 78520-78521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31959]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43695; File No. SR-NASD-00-34]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Relating to the Authority of the Director of Arbitration to Remove 
Arbitrators for Cause

December 8, 2000.

I. Introduction

    On June 13, 2000, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly owned subsidiary, NASD Dispute 
Resolution, Inc. (``NASD Dispute Resolution''), filed with the 
Securities and Exchange Commission (``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\ On July 28, 2000, NASD 
Dispute Resolution submitted Amendment No. 1 to the proposed rule 
change.\3\ The proposed rule change

[[Page 78521]]

amends NASD Rules 10308 and 10312 to provide authority to the Director 
of Arbitration (``Director'') to remove arbitrators for cause after 
hearings have begun. Notice of the proposed rule change was published 
for comment in the Federal Register on September 22, 2000.\4\ The 
Commission received two comment letters regarding the proposal.\5\ This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Jean I. Feeney, Special Advisor to the 
President, NASD Dispute Resolution, to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission, dated 
July 27, 2000. Amendment No. 1 clarified certain portions of the 
description of the proposed rule change and made technical 
amendments to the text of the proposed rule langauge.
    \4\ See Securities Exchange Act Release No. 34-43291 (September 
14, 2000), 65 FR 59036 (September 22, 2000) (``Notice'')
    \5\ See letters to the Secretary, Securities and Exchange 
Commission, from Jonathan Kord Lagemann, dated October 6, 2000 the 
Authority of the Director of Arbitration to Remove Arbitrators for 
Cause (``Lagemann letter''), and letter from Cynthia A. Cain, 
Director of Arbitration, National Futures Association (``NFA 
letter''), dated October 12, 2000.
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II. Description of the Proposed Rule Change

    NASD Dispute Resolution proposes to amend NASD Rules 10308 and 
10312, relating to arbitration, by permitting the disqualification or 
removal of arbitrators for cause after the first pre-hearing or hearing 
session begins, and by deleting current provisions to the contrary. 
Under the proposed amendments, disqualification or removal would only 
be permitted based on information that was required to be disclosed by 
the arbitrator pursuant to Rule 10312, and that was not known to the 
parties when the arbitrator was selected. The proposal further provides 
that only the Director or the President of NASD Dispute Resolution 
could so remove arbitrators. This authority could not be delegated.
    In addition to the changes described above, NASD Dispute Resolution 
proposes to amend Rule 10312, its arbitrator disclosure rule, in 
several places. First, the word ``personally'' would be deleted from 
Rule 10312(a)(2), and the phrase ``or circumstances'' would be added to 
paragraphs (b) and (e). These changes are intended to broaden the 
categories of information to be disclosed by arbitrators, so that all 
such information, and not only information involving ``relationships'' 
(as stated in the current rule) is disclosed. Thus, the disclosure of 
any existing or past financial, business, professional, family, social, 
or other relationships or circumstances that are likely to affect 
impartiality, or that might reasonably create an appearance of 
partiality or bias, should be disclosed. Second, NASD Dispute 
Resolution proposes to amend Rule 10312 to clarify that the Director 
may entertain for-cause challenges based on sources of information 
other than the arbitrator. Finally, Rule 10312(f) would be deleted as 
unnecessary in light of the preceding changes.

III. Summary of Comments

    The Commission received two letters regarding the proposed rule 
change. The National Futures Association (``NFA'') supported the 
proposal, noting that it employed similar procedures in administering 
its arbitration program. NFA asserted that the proposal would be 
efficient, would ensure the integrity of arbitration proceedings, and 
would resolve conflicts without requiring the parties to seek judicial 
intervention.\6\ A second letter from a practitioner in securities 
arbitration opposed the proposed rule change. The commenter stated that 
the authority to remove for cause presents conflicts of interest, and 
that determinations of bias should be resolved by the courts.\7\
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    \6\ See NFA Letter.
    \7\ See Lagemann Letter.
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities association.\8\ The 
Commission finds that the proposal is consistent with the requirements 
of Section 15A(b)(6) of the Act,\9\ which requires that the rules of a 
registered national securities 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.
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    \8\ In approving the proposal, the Commission has considered the 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \9\ 15 U.S.C. 78o(b)(6).
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    The proposed rule change will permit the Director or the President 
of NASD Dispute Resolution to remove an arbitrator at any juncture, 
based on information not known to the parties at the time of the 
arbitrator's appointment and that should have been disclosed by the 
arbitrator pursuant to Rule 10312. The Commission notes that NASD 
Dispute Resolution's current rules do not allow for removal of an 
arbitrator with a subsequently discovered conflict of interest. In this 
situation, parties may be forced to resort to judicial intervention to 
address these conflicts. This creates litigation expenses, diminishes 
confidence in the arbitration system, and undermines the purpose of 
arbitration.
    The Commission believes that these amendments to NASD Rules 10308 
and 10312 should provide for the protection of, and will benefit, users 
of the arbitration program. The Commission notes that the Director 
already has the authority to remove arbitrators for cause before the 
first hearing or pre-hearing conference. This proposal extends that 
authority beyond the first hearing or pre-hearing conference. The new 
provisions should result in lower litigation expenses for parties, 
because they will be able to request the Director to remove an 
arbitrator, rather than be required to seek judicial intervention. The 
Commission further believes that the proposal will help ensure greater 
confidence in the fairness and neutrality of the administration of 
arbitration proceedings. Further, the Commission believes the proposed 
revisions will help protect investors' interests by allowing the 
Director the flexibility to remove arbitrators for cause at any time 
during an arbitration proceeding, based on information that should have 
been disclosed by the arbitrator, regardless of the source of that 
information. This authority is consistent with that provided for in the 
rules of other arbitration programs.\10\ Finally, the proposed 
revisions should facilitate speedy resolution of potential conflicts of 
interest.
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    \10\ See Notice, 65 FR 57413, 57415, notes 8, 10 and 11 (citing 
the rules of other arbitration programs).
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    The Commission also believes that the proposed rule changes will 
benefit investors by providing for broader disclosure by arbitrators. 
The rule change will clarify that arbitrators are required to disclose 
not only personal relationships, but also any circumstances that are 
likely to affect their actual or perceived impartiality. This 
additional information should assist parties in arbitration in their 
efforts to select neutral and fair arbitrators. It should also increase 
confidence in the neutrality and objectivity of the arbitration 
process.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act, and the 
rules and regulations thereunder.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NASD-00-34) is approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31959 Filed 12-14-00; 8:45 am]
BILLING CODE 8010-01-M