[Federal Register Volume 67, Number 11 (Wednesday, January 16, 2002)]
[Notices]
[Pages 2258-2263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1105]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45261; File No. SR-NASD-00-02]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Amending 
the NASD Code of Arbitration Procedure Rules 10335 and 10205(h) 
Relating to Injunctive Relief

January 9, 2002.

I. Introduction

    On January 13, 2000, the National Association of Securities 
Dealers, Inc. (``NASD''), through its wholly-owned subsidiary NASD 
Regulation Inc. (``NASD Regulation'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change amending the NASD Code of 
Arbitration Procedure (``Code'') Rules 10335 and 10205(h) relating to 
injunctive relief.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    NASD Regulation submitted to the Commission Amendment No. 1 to its 
proposed rule change on March 9, 2000 \3\ and Amendment No. 2 on March 
25, 2000.\4\ On April 27, 2000, the proposed rule change, as amended, 
was published for comment in the Federal Register.\5\ The Commission 
received 13 comment letters on the proposed rule change, as amended by 
Amendments No. 1 and 2.\6\ On December 19, 2000, NASD, through NASD 
Dispute Resolution Inc. (``NASD Dispute Resolution''), filed Amendment 
No. 3 and a response to comments \7\ and on December 21, 2000, filed a 
supplemental response to comments.\8\ In response to Amendment No. 3 
and NASD Supplemental Response, the Commission received two additional 
comment letters on the proposal.\9\ NASD, through NASD Dispute 
Resolution, filed Amendment No. 4 and Amendment No. 5 on May 17, 2001 
and August 10, 2001, respectively.\10\ On October 25, 2001, the 
proposed rule change, as amended by Amendment Nos. 3, 4, and 5, was 
published for comment in the Federal Register.\11\ The Commission 
received one additional comment letter on the amended proposal.\12\ As 
discussed below, this

[[Page 2259]]

order approves the proposed rule change, as amended.
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    \3\ See letter from Patrice Gliniecki, Vice President and Deputy 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated March 7, 2000 (``Amendment No. 1'').
    \4\ See letter from Patrice Gliniecki, Vice President and Deputy 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division, Commission, dated March 24, 2000 (``Amendment 
No. 2'').
    \5\ See Securities Exchange Act Release No. 42606 (April 3, 
2000), 65 FR 18405 (April 7, 2000).
    \6\ Letter from Alan Foxman, Esq. Chairman, National Association 
of Investment Professionals, Government and Regulatory Committee, 
and T. Sheridan O'Keefe, President, National Association of 
Investment Professionals, to Jonathan G. Katz, Secretary, 
Commission, dated April 26, 2000 (``Foxman Letter''); letter from 
Thomas M. Campbell, Smith Campbell & Paduano, to Katherine A. 
England, Assistant Director, Division, Commission, dated April 27, 
2000 (``Campbell Letter''); letter from John W. Shaw and Jeffrey A. 
Ziesman, Berkowitz, Feldmiller, Stanton, Brandt, Williams & Stueve, 
LLP, counsel to Sutro & Co. Incorporated, to Secretary, Commission, 
dated April 28, 2000 (``Sutro Letter''); letter from Dana N. 
Pescosolido, Law Offices of Saul, Ewing, Weinberg & Green, counsel 
to Ferris, Baker Watts, Incorporated, Janney Montgomery Scott LLC, 
Legg Mason Wood Walker, Incorporated, Morgan Keegan & Company, Inc. 
and Raymond James & Associates, Inc. to Jonathan G. Katz, Secretary, 
Commission, dated April 28, 2000 (``Pescosolido Letter''); letter 
from Dan Jamieson, Public Investor, to Jonathan Katz, Secretary, 
Commission, dated May 1, 2000 (``Jamieson Letter''); e-mail from 
Joseph G. Kathrein Jr. to Commission, dated May 23, 2000 (``Kathrein 
E-mail''); letter from Gary R. Irwin, Vice President and Group 
Counsel, American Express Financial Corporation, American Express 
Financial Advisors, to Jonathan G. Katz, Secretary, Commission, 
dated May 25, 2000 (``Irwin Letter''); e-mail from Kosta, to 
Commission, dated July 10, 2000 (``Kosta E-mail''); e-mail from 
Michael A. Yoakum, to Commission, dated July 10, 2000 (``Yoakum E-
mail''); e-mail from Frank Louis Blair Koucky III to Commission, 
dated July 11, 2000 (``Koucky E-mail''); e-mail from Gilbert A. 
Armour, Financial Consultant, Kirlin Securities, to Commission, 
dated July 11, 2000 (``Armour E-mail''); letter from Bob Chernow, to 
J. Katz, Secretary, Commission, dated July 10, 2000 (``Chernow 
Letter''); and letter from Dan Jamieson, to Jonathan Katz, 
Secretary, Commission, dated January 3, 2001 (``Jamieson Letter 
2'').
    \7\ See letter from Laura Leedy Gansler, Counsel, NASD Dispute 
Resolution, to Katherine A. England, Assistant Director, Division, 
Commission, dated December 18, 2000 (``Amendment No. 3'').
    \8\ See letter from Laura Leedy Gansler, Counsel, NASD Dispute 
Resolution, to Katherine A. England, Assistant Director, Division, 
Commission, dated December 21, 2000 (``NASD Supplemental Response'')
    \9\ Letter from Dan Jamieson, to Jonathan Katz, Secretary, 
Commission, dated January 4, 2001 (``Jamieson Letter 3''); and 
letter from Dana N. Pescosolido, Saul Ewing LLP, to Katherine A. 
England, Assistant Director, Division, Commission, dated January 20, 
2001 (``Pescosolido Letter 2,'' and together with Pescosolido 
Letter, ``Pescosolido Letters'').
    \10\ See letter from Laura Leedy Gansler, Counsel, NASD Dispute 
Resolution, to Florence Harmon, Senior Special Counsel, Division, 
Commission, dated May 17, 2001 (``Amendment No 4''), and letter from 
Laura Leedy Gansler, Counsel, NASD Dispute Resolution, to Florence 
Harmon, Senior Special Counsel, Division, Commission, dated August 
10, 2001 (``Amendment No. 5'').
    \11\ See Securities Exchange Act Release No. 44950 (October 18, 
2001), 66 FR 54041 (October 25, 2001) (``Second Release'').
    \12\ See letter from Dan Jamieson, to Jonathan Katz, Secretary, 
Commission, dated November 1, 2001 (``Jamieson Letter 4,'' and 
together with Jamieson Letter, Jamieson Letter 2 and Jamieson Letter 
3, ``Jamieson Letters'').
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II. Description

Background

    NASD proposes to amend Rules 10335 and 10205(h) of the Code to 
simplify and clarify the procedures for obtaining injunctive relief in 
certain disputes subject to arbitration. Rule 10335, the NASD's pilot 
injunctive relief rule, provides procedures for obtaining interim 
injunctive relief in controversies involving member firms and 
associated persons in arbitration. NASD Rule 10335 currently provides 
that parties to arbitration may seek temporary injunctive relief within 
the arbitration process or from a court of competent jurisdiction. NASD 
represents that this rule has primarily been used in ``raiding cases,'' 
or cases involving the transfer of an employee to another firm. NASD 
Rule 10335 took effect on January 3, 1996 for a one-year pilot period. 
The Commission has periodically extended the initial pilot period in 
order to permit NASD Dispute Resolution to assess the effectiveness of 
the rule. The pilot rule is currently due to expire on July 1, 
2002.\13\
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    \13\ See Securities Exchange Act Release Act No. 45162 (December 
18, 2001), 66 FR 66489 (December 26, 2001). The rules approved 
pursuant to this order supersede and replace the pilot program.
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    NASD represents that the principal objectives of the amended 
proposal are to simplify and expedite the procedures for seeking 
immediate injunctive relief in intra-industry disputes and to fairly 
and effectively integrate court-ordered initial injunctive relief with 
the arbitration of the underlying claims in the same disputes.\14\ The 
amended proposal would (i) eliminate the option of seeking temporary 
injunctive relief within the arbitration process by requiring parties 
to seek temporary injunctive relief in a court of competent 
jurisdiction; (ii) require simultaneous filing of an arbitration claim 
for permanent injunctive and all other relief; (iii) require 
arbitration to be expedited once interim relief has been granted; (iv) 
set forth the procedures for establishing the composition of the 
arbitration panel; (v) specify the applicable legal standard for 
granting or denying a request for permanent injunctive relief; (vi) 
address the effect of court-ordered temporary injunctive relief during 
and after arbitration; and (vii) address the allocation of arbitration 
fees, costs and expenses, and arbitrator honoraria.
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    \14\ See Second Release, supra note 11.
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Temporary Injunctive Relief

    The proposed rule change would eliminate arbitration as a forum for 
seeking temporary injunctive relief. Parties would still be able to 
seek temporary injunctive relief, but only in a court of competent 
jurisdiction. Under the proposal, a party may seek temporary injunctive 
relief in court if another party has already filed a claim arising from 
the same dispute in arbitration, provided that an arbitration hearing 
on a request for permanent injunctive relief has not yet begun. NASD 
Dispute Resolution clarified that an arbitration hearing on permanent 
injunctive relief would not include preparations for the arbitration 
hearing, such as pre-hearing conferences or assembling an arbitration 
panel or resolving discovery or other pre-hearing matters.\15\ The 
proposal would require any party seeking a temporary injunctive order 
from a court to simultaneously file a Statement of Claim in arbitration 
requesting permanent injunctive and all other relief.
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    \15\ Telephone call between Florence Harmon, Senior Special 
Counsel, Division, Commission, and Laura Leedy Gansler, Counsel, 
NASD Dispute Resolution, on January 3, 2002.
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    Several commenters criticized the elimination of arbitration as a 
forum for the issue of temporary injunctive relief.\16\ Two commenters 
argued that NASD did not offer any statistical data or evidence 
justifying the elimination of this option.\17\ Three commenters believe 
that requiring parties to seek interim relief from courts and having 
the ultimate conflict resolved by arbitrators is inefficient and will 
increase the expense to the parties.\18\ Another commenter argued that 
the experience and training of NASD arbitrators made them more 
qualified that judges to make decisions relating to temporary 
injunctive relief.\19\ In response, NASD explained that its experience 
has shown that it is not possible to obtain temporary injunctive relief 
in arbitration as quickly as in court, due largely to the need to 
appoint and convene arbitrators specifically for each case.\20\ One 
commenter responded by arguing that arbitration is the preferred option 
for some parties in spite of time delays.\21\
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    \16\ See Foxman Letter, Jamieson Letter and Sutro Letter, supra 
note 6.
    \17\ See Foxman Letter and Jamieson Letters, supra notes 6, 9 
and 12.
    \18\ See Foxman Letter, Sutro Letter, and Jamieson Letter, supra 
note 6.
    \19\ See Sutro Letter, supra note 6.
    \20\ See Amendment No. 3, supra note 7.
    \21\ See Pescosolido Letter 2, supra note 9.
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    Commenters concerned about the interests of associated persons 
stated that eliminating arbitration as a forum for temporary injunctive 
relief favors the party requesting injunctive relief because these 
commenters believe that courts are more likely to grant injunctive 
relief than arbitrators.\22\ NASD believes that this premise is flawed 
because the proposed NASD Rule 10335 does not govern when such relief 
is appropriate, either in court or in arbitration. NASD notes that the 
same substantive legal standards for granting injunctive relief apply 
in both forums. NASD contends that the elimination of the option of 
seeking temporary injunctive relief in arbitration would only 
discriminate against associated persons and investors if courts applied 
the applicable legal standards in a discriminatory manner. NASD 
believes that because there is no evidence that courts apply the 
applicable legal standard in a discriminatory manner, the elimination 
of the option of seeking temporary injunctive relief in arbitration is 
a procedural change designed to expedite this process and should not 
affect the likelihood of whether such relief is granted or denied.\23\ 
One commenter responded by arguing that Rule 10335 is more than a 
procedural rule.\24\
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    \22\ See Foxman Letter, Pescosolido Letter, Jamieson Letter, 
Kosta E-mail, Yoakum E-mail, Koucky E-mail, Armour E-mail, and 
Chernow Letter, supra note 6.
    \23\ See Amendment No. 3, supra note 7.
    \24\ See Pescosolido Letter 2, supra note 9.
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    The same commenters argued that injunctions are anticompetitive, as 
highly profitable for firms, are prejudicial to the investing public, 
and conflict with other NASD rules that protect customers' rights.\25\ 
In response, NASD stated that while these questions may warrant 
attention, NASD Rule 10335 is not the appropriate vehicle for 
addressing them because it is a procedural rule.\26\ In addition, NASD 
notes that temporary restraining orders were always an option under the 
pilot rule, which the Commission approved as consistent with the 
Exchange Act.\27\
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    \25\ See Foxman Letter, Pescosolido Letter, Jamieson Letter, 
Kosta E-mail, Yoakum E-mail, Koucky E-mail, Armour E-mail, and 
Chernow Letter, supra note 6.
    \26\ See Amendment No. 3, supra note 7. We note that on December 
21, 2001, NASD Dispute Resolution submitted a proposed rule change, 
which was effective upon filing, that expressly interprets NASD Rule 
2110 to prohibit members from interfering with a customer's request 
to transfer his or her account in connection with the change in 
employment of the customer's registered representative, provided 
that the account is not subject to any lien for monies owed by the 
customer or other bona fide claim. See Securities Exchange Act 
Release No. 45239 (January 4, 2001) (pertaining to NASD IM-2110-7 
Interfering With the Transfer of Customer Accounts in the Context of 
Employment Disputes).
    \27\ See Amendment No. 3, supra note 7.

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[[Page 2260]]

    Two comments made suggestions for improving the provision requiring 
simultaneous filing of the court and arbitration claims.\28\ In 
response, NASD amended the proposal to require the party seeking 
temporary injunctive relief to simultaneously file with the Director of 
Arbitration a Statement of Claim requesting permanent injunctive and 
all other relief and to serve such Statement of Claim on all other 
parties in the same manner and at the same time as it is filed with the 
Director.\29\ The proposal provides that the filing and service of both 
the court filed complaint seeking temporary injunctive relief and the 
simultaneous arbitration filed complaint seeking permanent injunctive 
and all other relief shall be made by facsimile, overnight delivery or 
messenger.\30\
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    \28\ See Sutro Letter and Campbell Letter, supra note 6.
    \29\ See Amendment No. 5, supra note 10.
    \30\ See Amendment No. 4, supra note 10.
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Hearing or Request for Permanent Relief; Selection of Arbitrators; 
Appointment of Chairperson

    The proposal initially provided that if a court issues a temporary 
injunctive order, the hearing on the request for permanent relief must 
begin within 15 calendar days of the date the court issued its 
temporary injunctive order. One commenter stated that parties' lawyers 
would be able to stall the arbitration hearing by claiming to be 
unavailable within 15 days.\31\ Another commenter found the language 
unclear as to whether the hearing itself was required to begin or 
whether preparations for the hearing, such as assembling an arbitration 
panel, were required to have begun within 15 days.\32\ In response, 
NASD amended the proposal by adding language to paragraph (a)(1) of 
proposed Rule 10335 to clarify that the hearing itself would be 
required to begin within 15 days of the date a court issues a temporary 
injunctive order.\33\ NASD Dispute Resolution clarified that the 
arbitration hearing on the merits must begin within 15 calendar days of 
the date that the court issues the order, and that this does not 
include preparations for the arbitration hearing, such as pre-hearing 
conferences or assembling a panel or resolving discovery disputes or 
other pre-hearing matters.\34\
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    \31\ See Pescosolido Letter 2, supra note 9.
    \32\ See Sutro Letter, supra note 9.
    \33\ See Amendment No. 4, supra note 10.
    \34\ Telephone call between Florence Harmon, Senior Special 
Counsel, Division, Commission, and Laura Leedy Gansler, Counsel, 
NASD Dispute Resolution, on January 3, 2002. See supra note 15.
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    Under the proposed rule change, the hearing on the request for 
permanent injunctive relief would be heard by a panel of three 
arbitrators. In cases in which the underlying dispute would be heard by 
a panel of non-public arbitrators as defined in NASD Rule 10308(a)(4), 
the three arbitrators would be non-public. In cases in which the 
underlying dispute would be heard by a public arbitrator or panel 
consisting of a majority of public arbitrators under NASD Rule 10202, 
the three arbitrator panel hearing the request for permanent relief 
would consist of a majority of public arbitrators as defined in NASD 
Rule 10308(a)(5).
    In cases in which all of the members of the arbitration panel are 
non-public, the Director of Arbitration would generate and provide to 
the parties a list of seven arbitrators from a national roster of 
arbitrators. NASD originally proposed that at least a majority of the 
arbitrators on the list would be lawyers specializing in injunctive 
relief. Each party would be able to exercise one strike to the 
arbitrators on the list.
    In cases in which the panel of arbitrators consists of a majority 
of public arbitrators, the Director of Arbitration would generate and 
provide to the parties a list of nine arbitrators from a national 
roster of arbitrators. NASD originally proposed that at least a 
majority of the arbitrators in those cases would be (1) public 
arbitrators and (2) lawyers specializing in injunctive relief. In those 
cases, the parties would be able to exercise two strikes to the 
arbitrators on the list.
    Regardless of the number of strikes given to the parties, the rule 
would incorporate by reference other NASD Code of Arbitration rules 
providing unlimited strikes for cause, so that parties would always be 
able to strike arbitrators who were unqualified due to conflicts of 
interest or for other reasons constituting cause.
    Under the proposed rule change, the parties would be required to 
inform the Director of their preference of chairperson of the 
arbitration panel by the close of business on the next business day 
after receiving notice of the panel members. If the parties did not 
agree on a chairperson within that time, the Director would select the 
chairperson. The proposal initially provided that, in cases in which 
the panel consists of a majority of public arbitrators, the chairperson 
would be one of the public arbitrators who is a lawyer specializing in 
injunctive relief; and in cases in which the panel consists of non-
public arbitrators, the chairperson would be a lawyer specializing in 
injunctive relief. The proposal initially provided that, whenever 
possible, the Director would select as chairperson the lawyer 
specializing in injunctive relief whom the parties have ranked the 
highest. The proposed rule change also provides that the Director of 
Arbitration may exercise discretionary authority and make any decision 
that is consistent with the purposes of the rule and the arbitrator 
selection rule (NASD Rule 10308) to facilitate the appointment of 
arbitration panels and the selection of the chairperson.
    Several commenters concerned with the interests of associated 
persons expressed dissatisfaction with a list of potential arbitrators 
(and a chairman) composed of a majority of ``lawyers specializing in 
injunctive relief.'' \35\ They found this requirement unclear, too 
limiting and fraught with the potential for bias.\36\ In response, NASD 
amended the proposal to provide that one less than a majority of the 
list of arbitrators be lawyers ``with experience litigating cases 
involving injunctive relief'' and that the chairman of the panel, if 
possible, also be a lawyer with ``experinece litigating cases involving 
injunctive relief.'' \37\
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    \35\ See Sutro Letter, Campbell Letter, Pescosolido Letters, 
Jamieson Letter 3 and Jamieson Letter 4, supra notes 6, 9 and 12.
    \36\ Id.
    \37\ See Amendment No. 3, supra note 7 and Amendment No. 5, 
supra note 10.
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    NASD also made the following changes to the procedure for selecting 
an arbitration panel: the Director shall send to the parties the 
employment history for the past 10 years and other background 
information for each listed arbitrator; the Director shall consolidate 
the parties' rankings; and shall appoint arbitrators based on the order 
of rankings on the consolidated list, subject to the arbitrators' 
availability and disqualification; and, in cases in which the panel 
consists of a majority of public arbitrators, the Director shall select 
a public arbitrator as chairperson.\38\
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    \38\ See Amendment No. 4 and Amendment No. 5, supra note 10.
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Applicable Legal Standard

    The proposed rule change provides that the decision to grant or 
deny a request for permanent injunctive relief would be governed by an 
enforceable choice of law agreement between the parties, or, if there 
were no such agreement, then by the law of the state where the events 
upon which the request is based occurred. Some commenters argued that 
permitting an enforceable choice of law agreement between the parties 
to establish the

[[Page 2261]]

governing law would be unfair to associated persons since firms draft 
these agreements in their own favor and force associated persons to 
sign them.\39\ One commenter was also concerned that the absence of a 
uniform legal standard would yield wildly inconsistent results.\40\ In 
response, NASD stated that this provision codifies the status quo, 
which is that enforceable choice of law agreements are applicable to 
requests for injunctive relief in arbitration and that this provision 
would not render any otherwise unenforceable choice-of-law provision or 
employment contract enforceable.\41\
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    \39\ See Foxman Letter, Sutro Letter, Jamieson Letter 2 and 
Jamieson Letter 3, supra notes 6, 9 and 12.
    \40\ See Sutro Letter, supra note 6.
    \41\ See Amendment No. 3, supra note 7.
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Temporary Injunctive Order in Effect During Hearing

    The proposed rule change provides that, in the event that a court-
issued temporary injunctive order is still in effect, after a full and 
fair presentation of evidence from all relevant parties, an arbitration 
panel may prohibit the parties from seeking an extension of the pending 
court order, and, if appropriate, may order the parties to jointly move 
the court to modify or dissolve the pending order. In the event that a 
panel's order conflicts with a pending court order, the panel's order 
will become effective upon expiration of the pending court order.
    Some commenters expressed concern that this process would keep the 
injunctive order in place longer than was fair and appropriate because 
arbitrators could not make decisions on injunctive issues until a full 
and fair hearing had occurred. Commenters argued that this could be an 
extended period of time because of the potential for a fifteen day 
delay before an arbitration hearing would be required to begin; the 
hearing would not be required to be expedited; the hearing would not be 
required to be held on consecutive days; and the temporary injunctive 
order could not be terminated until the parties petitioned the court 
after arbitration was complete.\42\
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    \42\ See Foxman Letter, Sutro Letter, Pescosolido Letters, 
Jamieson Letters, and Campbell Letter, supra notes 6, 9 and 12.
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    NASD responded that it does not believe that arbitration panels 
have the authority to dissolve, modify or supersede a court order; 
rather, arbitrators have the authority to order parties not to seek 
extensions of pending orders, or to jointly ask the court to modify or 
dissolve a pending order, if necessary. NASD does not believe 
arbitrators should exercise this authority until they have heard a full 
and fair presentation of the evidence regarding a request for permanent 
relief to ensure that arbitrators will be in a position to make an 
informed decision. In response to commenters' concerns about how long 
it would take arbitrators to reach a decision after a full and fair 
hearing, NASD stated that statistics on the average length of 
evidentiary hearings on requests for permanent injunctive relief 
suggest that, in most cases, arbitrators will be in a position to make 
that decision in a short period of time because the average duration of 
such hearings is 1.36 days, and almost 80% of all cases that go to a 
hearing are resolved after one day of hearings.\43\ NASD also revised 
the proposal to expedite a hearing on permanent injunctive relief. 
Under the amended proposal, unless the parties agreement otherwise, a 
hearing lasting more than one day would be held on consecutive days 
when reasonably possible.\44\ NASD also added language to make clear 
that arbitrators may make decisions on the issue of permanent 
injunctive relief and hold subsequent hearing sessions to decide other 
issues between the parties, including damages or other relief, to allow 
the parties time to gather or present additional evidence without 
delaying the termination of a temporary injunctive order.\45\
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    \43\ See Amendment No. 3, supra note 7. One commenter responded 
that these statistics were inaccurate. This commenter, however, 
conceded that if hearings took place within 15 days following an 
injunction on consecutive days his concerns would not be as 
critical. See Pescosolido Letter 2, supra note 9.
    \44\ See Amendment No. 4 supra note 10.
    \45\ See Amendment No. 4, supra note 10.
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    In response to a comment that judges often include language in 
their orders that transfer authority to arbitrators,\46\ NASD further 
stated that the provision requiring arbitrators to have a full and fair 
hearing before ordering parties to petition the court for dismissal of 
a temporary injunctive order does not apply to court orders that expire 
by their own terms or otherwise contain provisions that confer 
authority on arbitrators to modify, amend, or dissolve the order.\47\
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    \46\ See Pescosolido Letter 2, supra note 9.
    \47\ See Amendment No. 4, supra note 10.
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Fees

    NASD originally proposed that the parties would jointly bear the 
travel-related costs and expenses of the arbitrators appointed to hear 
the request for permanent injunctive relief and prohibited arbitrators 
from reallocating arbitrator travel costs and expenses among the 
parties. Under the proposed rule change, notwithstanding any other 
provision of the Code, the chairperson of the panel hearing a request 
for permanent injunctive relief pursuant to this rule shall receive an 
honorarium of $375 for each single session, and $700 for each double 
session, of the hearing. Each other member of the panel shall receive 
an honorarium of $300 for each single session, and $600 for each double 
session, of the hearing. The proposal initially provided for the 
parties to share the difference between these amounts and the amounts 
panel members and the chairperson would otherwise receive under the 
Code and prohibited arbitrators from reallocating these amounts among 
the parties.\48\
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    \48\ NASD proposes that the payment of ordinary honoraria, as 
provided in NASD IM-10104 of the Code, shall not be affected by this 
provision.
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    The proposed rule change also provides that the party seeking 
injunctive relief shall pay the expedited hearing fees pursuant to Rule 
10205(h), or, where both sides seek such relief, both parties shall pay 
such fees. In either event, the proposed rule specifically provides 
that the arbitrators shall have the authority to allocate such fees 
among the parties. The proposed rule would have no effect on the 
obligations of parties to pay, or on the authority of arbitrators to 
allocate, any other hearing fees required under the Code.
    Several commenters argued that the provision prohibiting 
arbitrators from reallocating the travel-related costs and expenses of 
the arbitrators among the parties was unfair to associated persons.\49\ 
In response, NASD amended the text of the proposed rule change to 
expressly permit arbitrators to reallocate the travel-related costs and 
expenses of arbitrators and the arbitrators' fees among the 
parties.\50\ NASD also clarified that the parties were responsible for 
the ``reasonable'' travel-related costs and expenses incurred by 
arbitrators who are required to travel to a hearing location other than 
their primary hearing location or locations.\51\
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    \49\ See James Letters, Sutro Letter, Pescosolido Letter, and 
Campbell Letter, supra notes 6, 9 and 12.
    \50\ See Amendment No. 3 and Amendment No. 4, supra note 7 and 
note 10.
    \51\ See Amendment No. 4, supra note 10.
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Development of Proposal

    Several commenters stated that the subcommittee that worked on the 
proposal consisted only of representatives from retail firms, and did 
not include representatives from associated persons and the investing

[[Page 2262]]

public.\52\ In response, NASD stated that it believed that interests of 
all relevant parties, including member firms, associated persons and 
the investing public were represented during the process. The committee 
included member firms with interests on both sides of raiding cases. 
NASD believes that views of associated persons and the investing public 
were represented by these firms. In addition, the proposal was reviewed 
and approved by the full National Arbitration and Mediation Committee, 
which consists of a majority of public members, as well as the Board of 
Directors of NASD Dispute Resolution. NASD believes that ``advocates of 
the interests of associated persons, as well as investors, have had 
ample opportunity to express opinions about the proposed rule change at 
all levels of review, and changes have been made throughout the process 
to address the interests of both constituencies''.\53\
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    \52\ See Foxman Letter, Campbell Letter, Pescosolido Letter, and 
Jamieson Letters, supra note 6.
    \53\ See Amendment No. 3, supra note 7.
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III. Discussion

    After careful review, the Commission finds, for the reasons 
discussed below, that the proposed rule change, as amended, is 
consistent with the Exchange Act and the rules and regulations 
thereunder applicable to the NASD. Specifically, the Commission finds 
the proposed rule change, as amended, is consistent with sections 
15A(b)(5), 15A(b)(6) and 15A(b)(9) of the Exchange Act.\54\
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    \54\ 15 U.S.C. 78o-3(b)(5), 15 U.S.C. 78o-3(b)(6) and 15 U.S.C. 
78o-3(b)(9).
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    NASD Rule 10335 was initially adopted as a pilot program in order 
to give NASD the opportunity to assess the rule's effectiveness.\55\ 
NASD represents, based on its experience with Rule 10335, that the 
current rule is confusing and unnecessarily complex. NASD represents 
that the proposed rule change is the result of lengthy deliberation and 
careful compromise by the Injunctive Relief Rule Subcommittee of the 
National Arbitration and Mediation Committee (``NAMC''). Before the 
proposal was filed with the Commission, it was approved by the National 
Arbitration and Mediation Committee, which consisted of a majority of 
public members, as well as the board of NASD Regulation. The proposal 
was published for comment on two separate occasions, after Amendment 
No. 2 and Amendment No. 5 were filed, respectively. The Commission 
received 16 comment letters. The NASD incorporated many of the 
commenters' suggestions in the proposal, as amended.
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    \55\ See Securities Exchange Act Release No. 36145 (August 23, 
1995), 60 FR 45200 (August 30, 1995); Securities Exchange Act 
Release No. 38069 (December 20, 1996), 61 FR 68806 (December 30 
1996); Securities Exchange Act Release No. 39458 (December 17, 
1997), 62 FR 67423 (December 24, 1997), Securities Exchange Act 
Release No. 40124 (June 24, 1998), 63 FR 36282 (July 2, 1998); 
Securities Exchange Act Release No. 40846 (December 28, 1998), 64 FR 
548 (January 5, 1999); Securities Exchange Act Release No. 41532 
(June 16, 1999), 64 FR 33335 (June 22, 1999); Securities Exchange 
Act Release No. 42280 (December 28, 1999), 65 FR 1211 (January 7, 
2000) and Securities Exchange Act Release No. 43813 (January 5, 
2001), 66 FR 2629 (January 16, 2001).
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    In approving this proposal, the Commission does not address the 
merit of injunctive relief in the context of NASD Rule 10335. In large 
part, NASD Rule 10335 is a procedural rule that establishes the process 
for seeking temporary injunctive relief. The Commission notes that NASD 
Dispute Resolution has recently provided interpretive guidance to NASD 
Rule 2110 designed to protect investors by prohibiting members from 
interfering with a customer's request to transfer his or her account in 
connection with the change in employment of the customer's registered 
representative.\56\
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    \56\ See note 26, supra.
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    Further, the Commission notes that the proposal, as amended, 
contains provisions that address the commenters' concerns pertaining to 
associated persons and public investors. A party seeking temporary 
injunctive relief is required to file its permanent claim at the same 
time it files its temporary claim and must simultaneously serve such 
claim on all parties by facsimile, overnight delivery or messenger. To 
keep the arbitration process as short as possible, once temporary 
injunctive relief has been granted, an arbitration hearing on permanent 
injunctive and all other relief must begin within 15 calendar days, 
must be held on consecutive days when reasonably possible, and 
arbitrators may hold separate subsequent hearings to decide other 
issues in order to expedite the ``full and fair'' hearing on permanent 
injunctive relief.
    To address commenters' concerns regarding the composition of the 
arbitration panel, NASD made a number of changes to the proposal. In 
particular, a portion, but not a majority, of the list of potential 
arbitrators will be required to be lawyers with experience litigating 
cases involving injunctive relief. Further, the parties will be 
provided with a 10-year employment history for each potential 
arbitrator and the arbitrators will be selected based on the 
consolidated rankings of the parties. In addition, NASD modified the 
proposal to address certain commenters' concerns about fees. 
Specifically, the arbitrators now have the discretion to reallocate the 
reasonable travel-related costs and expenses incurred by the 
arbitrators and the arbitrators' fees among the parties.\57\
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    \57\ Jamieson Letter 4 argued that in the context of 
arbitration, cost-splitting is illegal even if the arbitrators are 
permitted to reallocate costs based on a recent California Supreme 
court decision. Armendariz v. Foundation Health Psychcare Services, 
Inc., 6 P.3d 669 (2000). This court decision is not relevant to NASD 
00-02 because the court's decision was directed to the validity of a 
predispute arbitration agreement involving certain employment 
matters, not the validity of the arbitration forum's fees (or the 
arbitration forum's procedural rules). In California, NASD-DR has 
limited the arbitration fees for employees in applicable cases 
involving employment disputes pursuant to this court decision, 
including those filed under the procedural injunctive relief rule. 
See note 12, supra.
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IV. Commission Findings and Order Granting Approval of the Proposed 
Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the provisions of section 
15A of the Exchange Act and the rules and regulations thereunder that 
govern NASD.\58\ In particular, the Commission finds that the proposal 
is consistent with section 15A(b)(6) of the Exchange Act \59\ because 
the proposal establishes procedures that allow for the quick resolution 
of disputes involving injunctive relief, provides a process for 
selecting a balanced arbitration panel, and improves procedural notice 
and service of injunctive relief claims. The Commission also finds that 
the proposed rule change, as amended, is consistent with the provisions 
of sections 15A(b)(5) of the Exchange Act \60\ because the rule change 
provides that the parties are responsible for the ``reasonable'' 
travel-related costs and expenses of the arbitrators, and permits the 
arbitrators to use their discretion to reallocate costs and fees among 
the parties.
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    \58\ 15 U.S.C. 78o-3.
    \59\ 15 U.S.C. 78o-3(b)(6).
    \60\ 15 U.S.C. 78o-3(b)(5).
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    In reviewing this proposal, the Commission is required to consider 
whether the proposal will promote competition, efficiency and capital 
formation.\61\ In this regard, the proposal provides a process that 
should help expedite and streamline the process for obtaining 
injunctive relief and deciding cases on the merits where injunctive 
relief is ordered. Further, the Commission does not believe that this 
procedural process, which does not address employment contracts, should

[[Page 2263]]

result in any burden on competition not necessary or appropriate in 
furtherance of the Exchange Act. Therefore, the Commission finds that 
the proposal is consistent with section 15A(b)(9) of the Exchange 
Act.\62\
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    \61\ 15 U.S.C. 78c(f).
    \62\ 15 U.S.C. 78o-3(b)(9).
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act 
\63\ that the proposed rule change (SR-NASD-00-02), as amended, be, and 
hereby is, approved.
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    \63\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\64\
Margaret H. McFarland,
Deputy Secretary.
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    \64\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 02-1105 Filed 1-15-02; 8:45 am]
BILLING CODE 8010-01-M