[Federal Register Volume 63, Number 123 (Friday, June 26, 1998)]
[Notices]
[Pages 34951-34952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17083]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40103; File No. SR-NASD-98-04]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval to Proposed Rule Change Relating
to Mandatory Arbitration of Claims Involving Exempted Securities.
June 19, 1998.
I. Introduction
On January 27, 1998, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') submitted to the Securities
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the interpretation of
the NASD's Code of Arbitration Procedure (``Code'') such that all
claims relating to transactions in exempted securities, including
government and municipal securities, may be submitted to the Office of
Dispute Resolution (``Office'') for arbitration under the Code without
limitation. Accordingly, when such claims arise involving public
customers, Rule 10301 of the code will require member firms and
associated persons to arbitrate them at the request of the customer. In
addition, when such claims arise between members and other members or
associated persons, Rule 10201 (which governs intra-industry disputes)
will require them to be arbitrated at the request of one of the
parties. Finally, when such claims arise between a member firm and a
customer, customers can be required under the terms of a predispute
arbitration agreement to arbitrate the claims.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposed rule change, together with the substance of
the proposal, was published for comment in Securities Exchange Act
Release No. 39880 (April 16, 1998), 63 FR 20230 (April 23, 1998). No
comments were received on the proposal.
II. Description
Since at least 1989, the Office had declined to accept claims for
mandatory arbitration involving transactions in government securities
naming member firms that were registered solely under Section 15C of
the Act as government securities broker/dealers.\3\ By contrast, if a
claim involves a government securities transaction by a general
securities broker/dealer member firm, the Office will accept the claim
for mandatory arbitration. If the claim involves a municipal securities
transaction by a member firm,\4\ the Office will accept the claim for
arbitration.\5\ In addition, the Office will accept claims where both
parties agree to submit the claim to arbitration.
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\3\ Section 15C of the Act, 15 U.S.C. 78o-5, governs the
registration of government securities broker/dealers. Since 1986,
when Section 15C was adopted as part of the Government Securities
Act, government securities broker/dealers have been required to
become members of an exchange or the NASD.
\4\ Section 15B of the Act, 15 U.S.C. 78o-4, governs the
registration of municipal securities dealers. Municipal securities
dealers are not required to become members of an exchange or the
NASD. Nevertheless, some NASD members which are engaged in a general
securities business are registered as municipal securities dealers,
and some firms which are exclusively municipal securities dealers
have become members of the NASD.
\5\ The NASD previously asked claimants in these cases if they
wanted the claim referred to the Municipal Securities Rulemaking
Board (``MSRB'') for arbitration. However, the Commission recently
approved an MSRB proposed rule change terminating the MSRB's
arbitration program and requiring the financial institutions that
are subject to its rules to submit to arbitration in the NASD's
forum as if they were NASD members. See Securities Exchange Act
Release No. 39378 (December 1, 1997), 62 FR 64417 (December 5,
1997). The Commission believes that compelling NASD members to
arbitrate municipal securities claims would be consistent with the
intent of the MSRB's rule filing eliminating its arbitration program
and sending its arbitration cases to the NASD. The Commission notes
that NASD members engaged in municipal securities transactions
already are required to arbitrate their claims because they are
either general securities broker/dealers that are otherwise required
to arbitrate all of their other claims, or because they voluntarily
became NASD members. The Commission notes that this filing does not
affect the arbitration of municipal securities.
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Rule 10101 of the Code provides that disputes ``arising out of or
in connection with the business of any member'' are eligible for
submission to arbitration under the Code. The definition of
``investment banking or securities business'' in Article I, paragraph
(l) of the By-Laws means ``the business carried on by a broker, dealer,
or municipal securities dealer * * *.'' Rule 10301(a) provides that
eligible disputes ``arising in connection with the business of [a]
member or in connection with the activities of [an] associated person''
must be arbitrated pursuant to any enforceable arbitration agreement or
upon the demand of a customer. While these rules (and the definition)
sweep in a very broad range of disputes, Rule 10301(b) permits the
Office to decline to arbitrate certain matters.
In reliance on Rule 10301(b), and the NASD's limited regulatory
jurisdiction over government securities-only member firms the Office
has for many years declined to accept for arbitration claims that
involved transactions in government securities by member firms engaged
only in activities involving government securities unless both parties
voluntarily agreed to submit the claim. The Office's position means
that these claims cannot be compelled into arbitration under either a
demand for arbitration or a presidpute arbitration agreement. The
Office's decision to decline to mandate arbitration of government
securities claims was based on the following rationale: (1) the NASD
only regulated the exempted securities activities of member firms to
the limited extent permitted in Section 15A(f)(2) of the Act; and, (2)
the subject matter jurisdiction of the arbitration forum should not be
significantly different from the NASD's regulatory jurisdiction over
its members and associated persons.
In response to the passage of the Government Securities Act
Amendments of 1993, which amended Section 15A(f)(2) of the Act and
granted the NASD the authority to regulate broadly the business
practices of members with respect to government securities,\6\ NASD
Regulation amended its rules to consolidate the Government Securities
Rules it had adopted pursuant to Section 15A(f)(2) of the Act with its
more generally applicable
[[Page 34952]]
Conduct Rules. NASD Regulation now regulates the activities of members
engaged in government securities activities that are both general
securities broker/dealers and limited purpose government securities
broker/dealers.
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\6\ The NASD is still barred from establishing regulations
covering the municipal securities activities of broker/dealers; that
authority is reserved to the MSRB.
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Under the new policy, a member that is registered solely as a
government securities broker/dealer and that has a dispute with a
customer over a transaction in exempted securities shall be required to
submit the dispute to arbitration upon the demand of the customer.\7\
Such disputes also may be compelled to arbitration pursuant to a valid
predispute arbitration agreement. Intra-industry disputes involving
exempted securities also will be subject to mandatory arbitration upon
the request of one of the parties.
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\7\ NASD Regulation notes that few government securities claims
involving public customers have been filed or attempted to be filed
with the Office. Most of the claims involving government securities
have involved member-to-member claims.
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NASD Regulation also believes the policy should permit any claim
involving exempted securities to be submitted for arbitration without
regard to when the transaction occurred; however, if more than six
years have elapsed from the transaction, occurrence, or event giving
rise to the claim, under Rule 10304 of the Code, the claim will not be
eligible for submission to arbitration.\8\ All claims involving general
securities broker/dealers will continue to be accepted for arbitration
consistent with past practice. Claims previously submitted that the
Office has already declined to arbitrate under the old policy cannot be
resubmitted under the new policy.
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\8\ NASD Regulation proposed an amendment to Rule 10304, rule
filing SR-NASD-97-44, pending approval with the SEC. Under the
proposed rule change all claims are presumed to be eligible;
however, the presumption could be overcome if the respondent
challenges the claim on the basis that more than six years have
elapsed since the act or occurrence giving rise to the claim.
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III. Discussion
The Commission believes that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act \9\ in that
eliminating a barrier to the arbitration of disputes involving exempted
securities will allow public customers and members access to the
arbitration forum for the resolution of such disputes. The Commission
believes it is reasonable, given the broadening of NASD Regulation's
regulatory jurisdiction over government securities and the recent
adoption of amendments to the NASD's rules in recognition of the
broader jurisdiction,\10\ for NASD Regulation to amend its arbitration
policy to include claims involving government securities by members
engaged exclusively in exempted securities activities \11\ within the
scope of those claims that are subject to mandatory arbitration under
the Code.\12\
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\9\ 15 U.S.C. 78o-3.
\10\ In Notice to Members 96-66, published in October 1996, the
NASD announced the consolidation of its Government Securities Rules
into the Conduct Rules, ending the regulatory distinction between
the activities of general securities broker/dealers and government
securities broker/dealers. See Securities Exchange Act Release No.
37588 (August 20, 1996) 61 FR 44100 (August 27, 1996).
\11\ As noted above, general securities broker/dealers are
already required to arbitrate all their claims, including those
involving government securities.
\12\ As required by Section 19(b)(5) of the Act, the Commission
has consulted with the Treasury Department on this proposal.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-NASD-98-04) is approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17083 Filed 6-25-98; 8:45 am]
BILLING CODE 8010-01-M
