[Federal Register Volume 70, Number 135 (Friday, July 15, 2005)]
[Notices]
[Pages 41065-41067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3770]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52009; File No. SR-NASD-2005-032]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto, to Provide Written Explanations in Arbitration 
Awards Upon the Request of Customers, or of Associated Persons in 
Industry Controversies

July 11, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 15, 2005, the National Association of 
Securities Dealers, Inc. (``NASD'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD. On April 14, 2005, and July 7, 2005, NASD filed 
Amendment Nos. 1 and 2, respectively, to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original rule filing in its 
entirety. Amendment No. 2 represented a partial amendment, and its 
changes have been incorporated into this Notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend the NASD Code of Arbitration Procedure 
(``Code'') to provide written explanations in arbitration awards upon 
the request of customers, or of associated persons in industry 
controversies. The proposed rule change consists of amendments to NASD 
IM-10104 and NASD Rules 10214, 10321, 10330, and 10332. The text of the 
proposed rule change is available on NASD's Web site (http://www.nasd.com), at NASD's principal office, and at the Commission's 
Public Reference Room.

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 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 has prepared summaries, set forth in Sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend the Code of 
Arbitration Procedure (Code) to provide written explanations in 
arbitration awards upon the request of customers, or of associated 
persons in industry controversies.
    Currently, Rule 10330(e) of the Code requires only that arbitration 
awards contain the names of the parties and counsel; a summary of the 
issues; the damages and other relief requested and awarded; a statement 
of any other issues resolved; the names of the arbitrators; the dates 
the claim was filed and the award rendered; the location, number, and 
dates of hearing sessions; and the signatures of the arbitrators 
concurring in the award. \4\ Arbitrators may also include the rationale 
underlying their decision in the award, but they currently are not 
required to do so \5\ and, therefore, usually do not provide one. \6\
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    \4\ Pursuant to Rule 10214, awards in intra-industry cases 
involving employment discrimination claims also shall include ``a 
statement regarding the disposition of any statutory claim(s).''
    \5\ NASD is proposing to codify this policy in Rule 10330(i).
    \6\ The United States Supreme Court has found that there is no 
general requirement for an arbitrator to explain the reasons for an 
award. Wilko v. Swan, 346 U.S. 427 (1953).
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    Arbitration parties occasionally raise the issue of the lack of 
written explanations or opinions in arbitration awards. Specifically, 
customers and associated persons who lose in arbitration (or consider 
their recovery insufficient) often request written explanations or 
opinions from the arbitrators. Since these requests are usually made 
after the awards are issued, arbitrators are unlikely to provide them 
because they were not advised in advance that they would be writing an 
explained award and do not want to undermine their award. The lack of 
reasoning or explanations in awards is one of the most common 
complaints of non-prevailing participants in NASD's arbitration forum.
    In order to increase investor confidence in the fairness of the 
NASD arbitration process, NASD is proposing to amend the Code to allow 
customers or associated persons in industry controversies to require an 
explained decision. \7\ An explained decision will constitute a fact-
based award that states the reason(s) each alleged cause of action was 
granted or denied and will address all claims involved in the case, 
whether brought by the party requesting the explained decision or 
another party. \8\ The inclusion of legal authorities or damage 
calculations, however, will not be required in an explained decision in 
order to limit the additional costs and processing time associated with 
explained decisions. Specifically, requiring the inclusion of legal 
authorities and damage calculations would significantly increase the 
processing time of awards because it would result in the drafting of 
complex and lengthy judicial-type decisions. This, in turn, would 
require the payment of considerably more honoraria to arbitrators. NASD 
believes that requiring only the fact-based reasons underlying an award 
in explained decisions will provide customers and associated persons 
with the information that they desire while at the same time 
maintaining the speed and efficiency of arbitration. \9\
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    \7\ A customer or associated person may require an explained 
decision regardless of whether he or she is the claimant or 
respondent in the arbitration.
    \8\ While Rule 10323 provides that arbitrators shall determine 
the materiality and relevance of any evidence proffered, NASD 
intends that, as with current arbitration awards, explained 
decisions will have no precedential value in other cases. Thus, 
arbitrators will not be required to follow any findings or 
determinations that are set forth in prior explained decisions. In 
order to ensure that users of the forum are aware of the non-
precedential nature of explained awards, NASD plans to revise the 
template for all awards to include the following sentence: ``If the 
arbitrators have provided an explanation of their decision in this 
award, the explanation is for the information of the parties only 
and is not precedential in nature.''
    \9\ NASD estimates that arbitrators will be able to render 
explained decisions within the 30 business day timeframe currently 
set forth in Rule 10330(d).
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    Although customers, and associated persons in industry 
controversies, will be able to require the issuance of explained 
decisions, NASD members will not have the ability to do so. Limiting 
the parties that can require an explained decision in this manner will 
protect customers and associated persons, because they alone will 
determine whether to request an explained decision while bearing in 
mind the potential costs and the prospect that a reviewing court might 
find grounds in the explanation to vacate the award.\10\ Furthermore,

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providing member firms with the ability to request explained decisions 
could result in conflicts between co-respondents who may disagree on 
whether to request a decision. NASD members will be able to request 
that a panel issue an explained decision but, unlike those situations 
involving customers and associated persons, the arbitrator(s) will not 
be required to comply with the request.
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    \10\ See, e.g., Dawahare v. Spencer, 210 F.3d 666, 669 (6th Cir. 
2000) (``Arbitrators are not required to explain their decisions. If 
they choose not to do so, it is all but impossible to determine 
whether they acted with manifest disregard of the law.'') (citation 
omitted).
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    However, no parties will be able to require explained decisions in 
two types of arbitration proceedings. The first is simplified 
arbitrations that are decided solely upon the pleadings and evidence 
filed by the parties, as described in Rules 10203 and 10302.\11\ The 
second is arbitrations that are conducted under the default procedures 
provided for in Rule 10314(e). Explained decisions would not be 
appropriate in either of these situations due to the abbreviated nature 
of these arbitration proceedings.
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    \11\ An eligible party may require an explained decision if 
there is a hearing in a simplified arbitration proceeding.
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    Under the proposed rule, an eligible party that wishes to require 
an explained decision must make his or her request at least 20 calendar 
days prior to the first scheduled hearing date. This is the same time 
frame for the parties to exchange documents and lists of the witnesses 
that they intend to present at the hearing, which is set forth in Rule 
10321(c). NASD believes that this time frame provides eligible parties 
with a sufficient opportunity to determine whether they would like to 
request an explained decision and also allows arbitrators adequate 
notice that a case will require an explained decision. Any requests for 
an explained decision that are made after the deadline, including any 
post-award requests, would be granted only where the arbitrators agree 
to provide them after reviewing all the parties' arguments on the 
issue.
    Since cases involving an explained decision will require additional 
time and effort on the part of arbitrators, the proposed rule provides 
each arbitrator with an additional $200 honorarium for cases in which 
an explained decision is required under Rule 10330(j). The panel will 
allocate $100 of each arbitrator's honorarium to the parties as part of 
the final award, along with the other allocable fees. NASD will pay the 
other $100 of each arbitrator's honorarium in order to help defray the 
costs associated with explained decisions. In order to avoid any 
potential conflict of interest, the arbitrator(s) will not receive the 
additional $200 honorarium if the panel issues an explained decision 
that is not required by Rule 10330(j).\12\ Specifically, NASD does not 
want to provide a financial incentive for arbitrators to write an 
explained decision when they are not required to do so.
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    \12\ For example, the arbitrator(s) will not receive the 
additional $200 honorarium for writing an explained decision in 
response to an NASD member's request or a request made by a customer 
or associated person after the deadline set forth in Rule 
10321(c)(2).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which requires, among other 
things, that NASD'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 believes that allowing customers and associated 
persons in industry disputes to request explained decisions will 
enhance investor confidence in the fairness of NASD's arbitration 
forum.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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 date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. In particular, the 
Commission solicits comment on the deadline for requesting explained 
decisions under the proposed rule change. Should customers and 
associated persons be permitted to require an explained decision if the 
request is made after the time for the pre-hearing exchange of 
documents and witness lists under NASD Rule 10321(c)?
    In addition, the Commission solicits comment on explained decisions 
in simplified cases decided without a hearing. Should customers and 
associated persons in those arbitrations also have the ability to 
require arbitrators to provide explained decisions?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2005-032 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

    All submissions should refer to File Number SR-NASD-2005-032. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, Station Place, 
100 F Street, NE., Washington, DC 20549. Copies of such filing also 
will be available for inspection and copying at the principal office of 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from

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submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to the File Number SR-
NASD-2005-032 and should be submitted on or before August 5, 2005.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3770 Filed 7-14-05; 8:45 am]
BILLING CODE 8010-01-P