[Federal Register Volume 63, Number 205 (Friday, October 23, 1998)]
[Notices]
[Pages 56957-56961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28465]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40556; File No. SR-NASD-98-64]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by National
Association of Securities Dealers, Inc., Relating to Extending the
Arbitrator List Selection Method to Disputes Involving Members and
Associated Persons
October 14, 1998.
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 August 25, 1998, 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''), and amended on
September 30, 1998 and October 2, 1998,\3\ the proposed rule change as
[[Page 56958]]
described in Items I and II below, which Items have been prepared by
NASD Regulation. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons. For the
reasons discussed below, the Commission is granting accelerated
approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment Nos. 1 and 2 made technical changes to the
original rule filing which are incorporated into this notice and
order granting accelerated approval. See letters from John M.
Ramsay, Vice President and General Counsel, NASD Regulation
(``Ramsay'') to Katherine A. England, Assistant Director, Division
of Market Regulation (``England''), dated September 29, 1998
(``Amendment No. 1''); and Ramsay to England, dated October 2, 1998
(``Amendment No. 2'').
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I. Self Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing to amend Rules 10202, 10203, and 10308
of the NASD to extend the previously proposed arbitrator list selection
method to intra-industry disputes.\4\ Below is the text of the proposed
rule change. Proposed new language is italicized; proposed deletions
are in brackets.
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\4\ The arbitrator list selection rule proposal for customer
disputes is contained in SR-NASD-98-48, which was published by the
Commission for comment in Securities Exchange Act Release No. 40261
(July 24, 1998), 63 FR 40761 (July 30, 1998), and is being approved
simultaneously with this rule filing.
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* * * * *
10202. Composition of Panels
(a) In disputes subject to arbitration that arise out of the
employment or termination of employment of an associated person, and
that relate exclusively to disputes involving employment contracts,
promissory notes or receipt of commissions, the panel of arbitrators
shall be appointed as provided by paragraph (b)(1) or (2) or Rule
10203, whichever is applicable. In all other disputes arising out of
the employment or termination of employment of an associated person,
the panel of arbitrators shall be appointed as provided by Rule 10302
or Rule 10308, whichever is applicable.
(b)(1) Composition of Arbitration Panel.
(A) Claims of $50,000 or Less
If the amount of a claim is $50,000 or less, the Director shall
appoint an arbitration panel composed of one non-public arbitrator,
unless the parties agree to the appointment of a public arbitrator.
(i) If the amount of a claim is $25,000 or less and an arbitrator
appointed to the case requests that a panel of three arbitrators be
appointed, the Director shall appoint an arbitrator panel composed of
three non-public arbitrators, unless the parties agree to a different
panel composition.
(ii) If the amount of a claim is greater than $25,000 and not more
than $50,000 and a party in its initial filing or an arbitrator
appointed to the case requests that a panel of three arbitrators be
appointed, the Director shall appoint an arbitration panel composed of
three non-public arbitrators, unless the parties agree to a different
panel composition.
(B) Claims of More Than $50,000
If the amount of a claim is more than $50,000, the Director shall
appoint an arbitration panel composed of three non-public arbitrators,
unless the parties agree to a different panel composition.
(2) Except as otherwise provided in paragraph (a), in all
arbitration matters between or among members and/or persons associated
with members and where the amount in controversy exceeds $50,000,
exclusive of attendant costs and interest, a panel shall consist of
three arbitrators, all of whom shall be [from the securities industry]
non-public arbitrators.
(c) In proceedings relating to injunctions under Rule 10335, the
provisions of Rule 10335 shall supersede the provisions of this Rule.
(d) Except as otherwise provided in this Rule or Rule 10203, the
provisions of Rule 10308 shall apply to intra-industry disputes.
10203. Simplified Industry Arbitration
(a) Any dispute, claim, or controversy arising between or among
members or associated persons submitted to arbitration under this Code
involving a dollar amount not exceeding $25,000, exclusive of attendant
costs and interest, shall be resolved by an arbitration panel
constituted pursuant to the provisions of subparagraph (1) hereof
solely upon the pleadings and documentary evidence filed by the
parties, unless one of the parties to the proceeding files with the
Office of the Director of Arbitration within ten (10) business days
following the filing of the last pleading a request for a hearing of
the matter.
(1) In any proceeding pursuant to this Rule, an arbitration panel
shall consist of [no fewer than one (1) but no more than three (3)
arbitrators, all of whom shall be from the securities industry] a
single non-public arbitrator.
(2) (Unchanged)
(b) Unchanged)
* * * * *
10308. Selection of Arbitrators [in Customer Disputes]
This rule specifies how parties may select or reject arbitrators,
and who can be a public arbitrator [in arbitration proceedings
involving a customer]. (Remainder unchanged)
* * * * *
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 by 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
The proposed rule change is designed to conform the arbitrator
selection process for intra-industry disputes to the recently proposed
list selection method for disputes involving public customers.\5\
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\5\ See supra note 4. This proposed rule change relates only to
process, rather than substance. NASD Regulation stated that it may,
at a later date, consider amendments to the panel composition rules
for industry disputes in general and for statutory employment
discrimination disputes in particular.
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Background
In its report published in January 1996 (``Task Force Report''),
the Arbitration Policy Task Force (``Task Force'') \6\ made
recommendations to improve the securities arbitration process
administered by the NASD. Recommendation No. 8 provided: ``Arbitrator
selection, quality, training, and performance should be improved by
various means, including adoption of a list selection method, earlier
appointment of arbitrators, enhancement of arbitrator training, and
increased compensation.'' A footnote in the Task Force Report stated,
``We also recommend that a form of list selection be used in employee-
firm and member-member arbitration.'' \7\
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\6\ The NASD formed the Arbitration Policy Task Force in
September 1994 for the purposes of studying the securities
arbitration process administered by the NASD and of making
suggestions for reform. The Task Force delivered its Report (``Task
Force Report'') to the NASD Board in January 1996.
\7\ Task Force Report at 96 n.134.
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[[Page 56959]]
Principles Underlying the Previously Filed Customer List Selection
Rule Proposal
NASD Regulation considered the Task Force's recommendations at
length, and consulted with the National Arbitration and Mediation
Committee (``NAMC'') and others about the efficacy of the proposals.
All persons consulted favored the selection of arbitrators by the
parties using a form of list selection. In addition, most were in favor
of developing a system featuring the capability, when appropriate and
as technologically feasible, to generate the arbitrator lists from a
computer system programmed to incorporate relevant selection factors,
such as geographic proximity of an arbitrator to the proposed site of
the hearing, subject matter knowledge, and classification of an
arbitrator as a public arbitrator or a non-public arbitrator, rather
than developing a system in which the lists of arbitrators to be
forwarded to parties for ranking would be generated solely on the basis
of the staff's judgment.
Following the principle that parties in arbitration should be given
more input into the selection of arbitrators, NASD Regulation developed
a rule for customer arbitrations providing that, in a one-arbitrator
case, the parties to the arbitration will be provided a list of public
arbitrators, and, in a three-arbitrator panel case, the parties will be
provided a list of public arbitrators and a list of non-public
arbitrators. The parties will use the lists to express numerical
preferences for the arbitrators listed and those rankings will
determine the outcome of the arbitrator selection process, unless an
arbitrator declines to serve because the arbitrator is unavailable,
recuses him or herself, or is disqualified because of a conflict of
interest.
Extension of List Selection Method to Intra-Industry Disputes
NASD Regulation believes that the proposed methodology for
selecting arbitrators in customer arbitration will also benefit
employees and members in their use of the arbitration forum for intra-
industry disputes. The same considerations of giving parties more
choice in choosing their panelists and allowing for computerized
rotation of arbitrators will also apply in the intra-industry context.
The proposed rule change is also expected to eliminate the increased
costs that would result from continuing the current method of staff
selection of arbitrators only for intra-industry arbitrations after the
new system for customer arbitration is effective. NASD Regulation
expects that the proposed rule will be viewed as a significant
improvement over the current method of selecting arbitrators in intra-
industry disputes, in that it provides employees and members with the
same choice in picking their arbitration panels that are being extended
to customers and members in the area of customer disputes.
NASD Regulation's computerized Neutral List Selection System
(``NLSS''), now in the final stages of development, is designed to
produce lists of arbitrators using the factors identified above. The
NLSS will not need to be amended to accommodate the requested change,
because it already has the capability of generating lists of public or
non-public arbitrators. Moreover, the pool of arbitrators from which
panelists are chosen is the same for both customer and intra-industry
disputes. For those intra-industry disputes that require use of an all-
industry (non-public) panel, only the non-public arbitrator list will
be generated. For disputes that currently require a public arbitrator
or a majority of public arbitrators, as provided in the second sentence
of Rule 10202(a), the provisions of Rule 10308 will apply in the same
way as they would apply to customer disputes.
The arbitrator database contains information relating to the
background of the arbitrators, so subject matter knowledge can be
considered if the parties would like an arbitrator with specialized
experience, such as employment compensation, employment discrimination,
or specific securities products. The extension of list selection to
intra-industry arbitration will not have any effect on the quality of
arbitrators chosen for a particular case, and gives the parties more of
a voice in choosing their panelists than they currently have. It also
will allow for computerized rotation of arbitrators used in both
customer and intra-industry arbitrations.
Desciption of Amendments
The proposed rule change amends Rules 10202, 10203, and 10308.
References in Rules 10202 and 10203 to arbitrators ``from the
securities industry'' have been amended to comport with the terminology
used in Rule 10308, ``non-public arbitrators.'' The method of
arbitrator selection is not currently specified in Rules 10202 and
10203. A new paragraph has been added to Rule 10202, however, to make
it explicit that the arbitrator selection method of Rule 10308 will
apply to intra-industry disputes.
Rule 10202(a) continues to provide that, in disputes subject to
arbitration that arise out of the employment or termination of
employment of an associated person, and that relate exclusively to
disputes involving employment contracts, promissory notes or receipt of
commissions, a panel of non-public arbitrators will be appointed as
provided by paragraph (b)(1) or (2) Rule 10203, whichever is
applicable. In all other disputes arising out of the employment or
termination of employment of an associated person, the panel of
arbitrators will be appointed as provided by Rule 10302 or Rule 10308,
whichever is applicable. Accordingly, other claims, including those
involving allegations of defamation or employment discrimination,\8\
would be heard by a public panel as provided in Rules 10302 (for small
claims) or 10308 (for all other claims).
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\8\ Pursuant to recent amendments to Rule 10201, claims of
employment discrimination in violation of a statute are not required
by NASD rules to be arbitrated after January 1, 1999; however,
parties may agree to arbitrate such claims. See SR-NASD-97-77,
approved by the Commission in Securities Exchange Act Release No.
40109 (June 22, 1998), 63 FR 35299 (June 29, 1998).
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The amendment to Rule 10202(b)(1) parallels the provisions of
proposed amendments to Rule 10308(b)(1) made in Amendment No. 3 to SR-
NASD-98-48, the companion list selection rule proposal for customer
arbitration, except that the panels will consist of either one or three
non-public arbitrators unless the parties agree otherwise. Rule
10202(b)(1)(A) provides that, for claims of $50,000 or less, the
Director will appoint a single non-public arbitrator, unless the
parties agree to the appointment of a public arbitrator. Paragraph
(b)(1)(A) also clarifies that certain cases that are for a claim of
$50,000 or less may be arbitrated by a three-person panel rather than
by one arbitrator in certain circumstances. Under paragraph
(b)(1)(A)(i), for a claim of $25,000 or less, a single arbitrator
already appointed to the case may request that the Director appoint two
additional arbitractors. Under paragraph (b)(1)(A)(ii), for a claim of
more than $25,000 and not more than $50,000, any party (in its initial
filing) or an appointed arbitrator may request that the Director
appoint a three-arbitrator panel. Also, the phrase, ``a party,'' is
used to clarify that either a claimant or a respondent may request a
three-arbitrator panel under this subparagraph. Under paragraph
(b)(1)(B), for claims of more than $50,000, the Director will appoint
three non-public arbitrators, unless the parties agree to a different
panel composition.
[[Page 56960]]
Rule 10202(b)(2) provides that, except as otherwise provided in
paragraph (a), in all arbitration matters between or among members and/
or persons associated with members, and where the amount in controversy
exceeds $50,000, exclusive of attendant costs and interest, a panel
shall consist of three arbitrators, all of whom shall be non-public.
New paragraph (c) was added to Rule 10202 to avoid any confusion
over the interaction between this rule and the injunction rule, Rule
10335.\9\ Paragraph (c) provides that, in proceedings relating to
injunctions under Rule 10335, the provisions of Rule 10335 supersede
the provisions of Rule 10202. Rule 10335 contains a corresponding
provision, stating that, except as otherwise provided in Rule 10335,
the remaining provisions of the Code apply to proceedings instituted
under that Rule.
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\9\ NASD Regulation has filed a proposed rule change to Rule
10335 in SR-NASD-98-49. See Securities Exchange Act Release No.
40441 (September 15, 1998), 63 FR 50611 (September 22, 1998).
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New paragraph (d) clarifies the relationship between the arbitrator
selection rules for industry and customer disputes. This provision was
added to alert parties to the fact that the proposed list selection
method will also be used for intra-industry disputes, excluding cases
arising under Rule 10202(a), because the proposed list selection rule
was initially intended to apply only to customer disputes until further
changes were made to the industry arbitration rules.
Rule 10203 has been changed to provide that a single non-public
arbitrator will be appointed in simplified industry arbitrations
brought under that rule. Under the old rule, a panel of one to three
arbitrators was appointed.
In Rule 10308, references to customers in the title and
introductory language have been deleted to avoid confusion when those
rules are used in intra-industry arbitration. NASD Regulation does not
believe that other amendments are needed to Rule 10308 to indicate
differences that might apply in intra-industry arbitration, because
Rule 10204 already provides as follows:
Except as otherwise provided in Rule 10200 Series, the Rules and
procedures applicable to arbitrations concerning industry and
clearing controversies shall be those set forth hereinafter under
the Rule 10300 Series.
Therefore, specific provisions of the Rule 10200 Series will
supersede any contrary provisions of Rule 10308. Any doubts as to
whether a provision should be superseded would continue to be resolved
in favor of using the Rule 10300 Series provision. For example, Rule
10308(c)(5) provides that if the parties are unable to agree on a
chairman, the Director will appoint one of the public arbitrators as
the chairperson. In an intra-industry dispute, if all arbitrators on
the panel are non-public, this provision would be superseded and the
Director would appoint one of the non-public arbitrators to be the
chairperson. If, on the other hand, the intra-industry dispute were one
in which there are two public arbitrators and one non-public arbitrator
on the panel, Rule 10308(c)(5) would apply as written, and one of the
public arbitrators would be chosen to serve as the chairperson. Because
the current practice is for the customer arbitration rules to apply by
default where they are not specifically superseded by the intra-
industry rules, NASD Regulation does not believe that confusion will
occur.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act,\10\
which requires, among other things, that the Association's rules 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 promote the public interest by
simplifying the arbitration process and reducing administrative time
and expense by conforming the intra-industry arbitrator list selection
process to the customer process.
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\10\ 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.
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. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. 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-98-64 and should
be submitted by November 13, 1998.
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of Section 15A(b) of the Act and the rules and
regulations thereunder applicable to a national securities association
in general and, in particular, the requirements of Section 15A(b)(6) of
the Act,\11\ which requires, among other things, that the Association's
rules 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.\12\ The
Commission believes that it is reasonable to extend the arbitrator list
selection method to disputes involving members and association persons,
as well as customer disputes, because the proposed rule change will
promote a neutral resolution of disputes by allowing members and
associated persons greater input in the selection of the arbitrators to
hear their cases. The Commission also believes that is reasonable to
conform the simplified industry arbitration rule to the simplified
arbitration rule used by investors by changing the number of
arbitrators appointed in these cases to one as opposed to a panel of
one to three. The Commission believes the proposed rule change will
simplify the arbitration process and, by substantially conforming the
intra-industry arbitrator list selection process to the customer
[[Page 56961]]
process, reduce administrative time and expense.\13\
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\11\ 15 U.S.C. 78o-3(b)(6).
\12\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\13\ Simultaneously with the approval of this proposed rule
change, the Commission has approved the arbitrator list selection
rule proposal for customer disputes contained in SR-NASD-98-48. The
Discussion Section of the order approving that rule change is
incorporated into this approval order. See Securities Exchange Act
Release No. 40555.
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Pursuant to Section 19(b)(2) of the Act,\14\ the Commission finds
good cause for approving the proposed rule change prior to the 30th day
after the date of publication of notice of filing thereof in the
Federal Register in that accelerated approval will benefit parties in
intra-industry arbitration by extending to them the same arbitrator
list selection method proposed to be implemented for customer
arbitration.
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\14\ 15 U.S.C. 78s(b)(2).
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It is therefore ordered, pursuant to Section 19(b)(2) \15\ of the
Act, that the proposed rule change (SR-NASD-98-64) be, and hereby is,
approved.
\15\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\15\ 17 CFR 200.30-3(a))(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28465 Filed 10-22-98; 8:45 am]
BILLING CODE 8010-01-M
