[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 56986-56987]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28315]
[[Page 56986]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37888; File No. SR-NASD-96-34]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the Filing of Injunctive Relief Actions Under the Code of Arbitration
Procedure
October 29, 1996.
Purusant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), \1\ notice is hereby given that on September 12, 1996, the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') 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 the NASD.
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).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NASD is proposing to amend Rule 10335 of the Code of
Arbitration Procedure (``Code'') \2\ to clarify that parties are
required to expedite any proceeding covered by Rule 10335 where a court
has issued temporary injunctive relief and that failure to expedite a
proceeding under Rule 10335 will constitute a failure to arbitrate in
violation of the NASD's rules. Below is the text of the proposed rule
change. The text of the proposed rule is below. Proposed new language
is in italic; proposed deletions are in brackets.
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\2\ Formerly Section 47 of the Code of Arbitration Procedure.
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* * * * *
Code of Arbitration Procedure
* * * * *
Rule 10335 Injunctions
In industry or clearing disputes required to be submitted to
arbitration pursuant to Section 8, parties to the arbitration may seek
injunctive relief either within the arbitration process or from a court
of competent jurisdiction. Within the arbitration process, parties may
seek either an ``interim injunction'' from a single arbitrator or a
permanent injunction from a full arbitration panel. From a court of
competent jurisdiction, parties may seek a temporary injunction. A
party seeking temporary injunctive relief from a court with respect to
an industry or clearing dispute required to be submitted to arbitration
pursuant to Rule 10201 shall simultaneously file with the Department a
claim for permanent relief under this Code with respect to the same
dispute [with the Director in the manner specified under the Code];
provided however, that if an existing agreement between the parties
permits the dispute to be arbitrated in another arbitration forum, the
dispute may be filed in such other forum only if the other forum will
expedite the proceedings on the dispute and the party seeking temporary
injunctive relief requests and agrees to expedite the proceedings on
the dispute in such other forum, unless the parties to the dispute
agree in writing to waive this requirement. This Rule 10335 contains
procedures for obtaining an interim injunction. Paragraph (g) of this
Rule relates to the effect of court-imposed injunctions on arbitration
proceedings. If any injunction is sought as part of the final award,
such request should be made in the remedies portion of the Statement of
Claim, pursuant to Rule 10315(a).
II. Self-Regulatory Organization's Statement of the Purpose of and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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. The 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 NASD has recently become aware of certain forum shopping
practices that have developed since the codification of the injunctive
relief provisions in Rule 10335 of the Code. Since Rule 10335 became
effective on January 3, 1996, it has been invoked in over seventy (70)
proceedings and has resulted in expedited resolution of some of those
cases.\2\ One of the most important provisions of Rule 10335 is the
requirement that a party seeking injunctive relief in court must
simultaneously file an arbitration action under the Code. The effect of
the requirement is to bring the dispute under the Code and Rule 10335
relating to expedited proceedings. This provision prevents the party
initiating the action from benefitting from any delayed resolution of a
dispute that proceeds according to the normal arbitration schedule
specified in the Code, where such delayed resolution may effectively
preclude the arbitration of the dispute.\3\
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\2\ Disputes that arise under this provision are usually member-
to-member raiding cases where one member hires a high producing
registered representative away from another member.
\3\ In a ``raiding'' case the former employer seeking to enforce
a non-compete clause in the employment contract will typically seek
a preliminary injunction that prevents the former employee from
contacting clients that the former employer contends belongs to it
until the dispute is finally resolved in arbitration. Because the
typical arbitration case lasts approximately 11 months, the effect
of the preliminary injunction is to prevent the former employee from
contacting clients for at least one year. In such a case, if the
dispute is ultimately resolved in favor of the registered
representative there is little or no effective remedy for the delay;
the opportunity to contact clients immediately after the registered
representatives moves to the new firm is lost, along with the
likelihood of retaining existing clients.
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The NASD Regulation, Inc.'s (``NASDR'') Office of Dispute
Resolution has noted, however, that with respect to member-employee
disputes, some firms seeking court injunctions are filing their
arbitration proceedings with another self-regulatory organization
(``SRO'') because either: (1) The agreement between member firms and
employers in the Form U-4 permits them to arbitrate in the arbitration
forum of any SRO with which the employee (and, therefore, the member)
is registered; or (2) the member has a separate employment agreement
with the employee that permits the arbitration of a dispute in another
forum. The arbitration rules of other SROs do no universally provide
for expedited arbitration proceedings, although such SROs may expedite
a proceeding upon the request of both parties. Therefore, a case filed
with another SRO may proceed according to the normal arbitration
schedule specified in the rules of such SRO and the party having sought
injunctive relief in court, unless it agrees to expedited proceedings,
may gain an unfair advantage.
As noted above, the provision in the preamble of Rule 10335
requiring the party seeking an injunction in court to file
simultaneously an arbitration proceeding under the Code was intended to
prevent the filing of an arbitration under the regular rules as a
delaying tactic in the ultimate resolution of a dispute after obtaining
court-ordered injunctive relief. The NASD believes, therefore, that the
practice of filing an arbitration claim with another SRO and not
seeking expedited proceedings defeats the intent
[[Page 56987]]
of Rule 10335--that is, to expedite the arbitration of matters eligible
for arbitration between or among members and associated persons.
To give effect to the Rule's intent the NASD notes that under
Articles III and IV of the By-Laws, members and associated persons
agree to comply with all the provisions of the Association's rules.
Rule 10201 of the Code of Arbitration Procedure expressly provides that
disputes between or among members and associated persons must be
arbitrated at the instance of any member or associated party to the
dispute.
Under the Resolution of the NASD Board of Governors concerning the
failure to act under the provisions of the Code of Arbitration
Procedure, a member's failure to submit a dispute to arbitration may be
deemed a violation of the NASD's Rules of Fair Practice. Because the
failure to abide by the requirements of Rule 10335 can negate the
ability to arbitrate disputes effectively, the NASD believes that the
failure of a member or associated person to comply with the
requirements of Rule 10335 and seek expedited resolution of a dispute
should be considered to be a failure to submit to arbitration under the
Code. If the Commission approves the proposed rule change, the NASD
will announce to its membership upon the approval that failure to file
a claim for permanent relief in compliance with Rule 10335 will
constitute a failure to submit to arbitration, subjecting the member or
associated person to disciplinary action.
Finally, the NASD is proposing to amend Rule 10335 to clarify that
if a party to a dispute required to be submitted to arbitration seeks
an injunction in court it must simultaneously file an arbitration claim
with the NASD under the NASD's Code. The NASD is also proposing to
amend rule 10335 to provide that if an existing agreement between the
parties permits the dispute to be arbitrated in another forum, the
dispute may be filed with the other forum only if the other forum will
expedite the proceedings and the party seeking the injunction requests
and agrees to expedite the proceedings. This provision is intended to
recognize the contractual provisions that may permit the parties to
arbitrate in another forum; the NASD does not intend to force the
parties into the NASD's forum. The provision does intend to place the
burden of expediting the proceedings on the party seeking injunctive
relief, just as Rule 10335 places the burden on that party.
(2) Statutory Basis
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act \4\ in that the proposed
rule change will facilitate the arbitration process by clarifying the
provisions requiring expedited proceedings in intra-industry disputes
and emphasizes that the intent of the rule is to expedite such
proceedings.
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\4\ 15 U.S.C. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The 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. The Commission requests that, in
addition to any general comments concerning whether the proposed rule
change is consistent with Section 15A(b)(6) of the Act, commenters
specifically address the following issues:
1. The United States Supreme Court has stated that arbitration
represents an appropriate form of dispute resolution, ``so long as the
prospective litigant effectively may vindicate [his or her] * * * cause
of action in the arbitral forum. * * *'' \5\ The NASD has suggested
that the proposed rule change is necessary to provide fair arbitration
proceedings. The Commission invites comment on whether parties
temporarily enjoined by a court are effectively precluded from
vindicating their rights in arbitration if they are not afforded
expedited proceedings.
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\5\ See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
Inc., 473 U.S. 614, 637 (1991).
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2. If the proposed rule change is adopted, it may affect the
operation of arbitration fora sponsored by other SROs. For example, the
New York Stock Exchange, Inc. currently offers expedited proceedings to
parties in its arbitration forum, but it does not require that they
accept them. Would coordinated SRO rulemaking be preferable to this
NASD action? If so, should the Commission encourage other SROs to
submit similar proposed rule changes?
Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 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 the file number in the caption above and
should be submitted by November 26, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).\6\
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\6\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28315 Filed 11-04-96; 8:45 am]
BILLING CODE 8010-01-M
