[Federal Register Volume 59, Number 109 (Wednesday, June 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13876]
[[Page Unknown]]
[Federal Register: June 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34146; File No. SR-NASD-93-75]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the Referral of Matters by Arbitrators for Disciplinary Investigation
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December
16, 1993, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission''), and amended on May 25, 1994,\1\
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\Amendment No. 1 amended to NASD's Statement of the Purpose
of, and Statutory Basis for, the Proposed Rule Change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NSAD is proposing to amend section 5 of the Code of Arbitration
Procedure (``Code'')\2\ to specify that arbitrators, at the conclusion
of a proceeding, may refer matters arising or discovered during the
course of an arbitration proceeding for disciplinary investigation.
Below is the text of the proposed rule change. Proposed new language is
italicized.
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\2\NASD Manual, Code of Arbitration Procedure, part I, section
5, (CCH) 3705.
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Code of Arbitration Procedure
Non-Waiver of Association Objects and Purposes
Sec. 5. The submission of any matter to arbitration under this Code
shall in no way limit or preclude any right, action or determination by
the Association which it would otherwise be authorized to adopt,
administer or enforce. If any matter comes to the attention of an
arbitrator during and in connection with the arbitrator's participation
in a proceeding, either from the record of the proceeding or from
material or communications related to the proceeding, that the
arbitrator has reason to believe may constitute a violation of the
Association's rules or the federal securities laws, the arbitrator may
initiate a referral of the matter to the Association for disciplinary
investigation; provided, however, that any such referral should only be
initiated by an arbitrator after the matter before him has been settled
or otherwise disposed of, or after an award finally disposing of the
matter has been rendered pursuant to section 41 of the Code.
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 place 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
The NASD is proposing to amend section 5 of the Code of Arbitration
Procedure to specify that arbitrators, at the conclusion of a
proceeding, may refer to disciplinary investigation matters which come
to their attention during the course of an arbitration proceeding.
The NASD believes that potential violations uncovered during
arbitration hearings should be investigated by the NASD as part of its
comprehensive regulatory program. The NASD is aware, however, that
while customers who suffer a financial loss as a result of misconduct
by their registered representative may bring arbitration actions, they
often do not pursue formal complaints with a self-regulatory
organization (``SRO'') necessary to trigger an investigation of the
potential violation. Further, while the filing of an arbitration
complaint will alert an SRO to the existence of a potential
violation,\3\ because customer complaints in arbitration often do not
allege or disclose sufficient information to indicate obvious
misconduct on the part of a respondent, they may not trigger a
disciplinary investigation. Indeed, in such cases, violations of the
securities laws or the NASD's rules are not apparent until an
arbitration hearing occurs and the parties testify and introduce
evidence about the relevant events. Thus, in some cases, the NASD never
is made aware of securities law violations or violations of the NASD's
rules, notwithstanding the fact that the financial injury to the
customer resulting from the violations is the subject of an arbitration
proceeding.
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\3\The filing of a customer-initiated arbitration complaint
against an associated person alleging damages of $10,000 or more
triggers a requirement of the member or associated person to amend
the associated person's Form U-4 or U-5, as appropriate. Information
supplied pursuant to such an amendment will be entered into the
Central Registration Depository and will also be forwarded to the
appropriate NASD District office for preliminary investigation.
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The NASD also has observed that arbitrators seldom refer for
disciplinary investigation matters which come to their attention during
the course of an arbitration proceeding. Because the NASD believes that
arbitration matters, and the evidentiary material related to or
produced in such matters, constitute a valuable source of information
concerning potential violations of the NASD's rules and the federal
securities laws, bringing such information to the attention of the
Association's regulatory staff should improve the efficacy of the
NASD's regulatory function. Accordingly, the NASD believes that
specifying a mechanism in the Code for arbitrators to bring such
information to the attention of the NASD's regulatory staff for
investigation will serve the public interest by ensuring that potential
violations of the NASD's rules and the federal securities laws are not
overlooked.
In addition, the NASD believes that it is important for arbitrators
to understand that the arbitration process is for the resolution of
disputes between the securities industry and others, and that there is
also a regulatory apparatus separate from the arbitration process which
is designed to address misconduct which affects the public interest and
the integrity of the financial markets. Thus, to the extent arbitrators
are aware that they may refer matters, in addition to or in lieu of
awarding punitive damages as part of awards,\4\ the fairness of the
arbitration process will be enhanced.
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\4\The NASD, in connection with this rule filing, is not
expressing any official position with respect to the ability of
arbitrators to award punitive damages.
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The proposed amendment to section 5 specifies that if any matter
comes to the attention of an arbitrator during the course of a
proceeding the arbitrator may initiate a referral of the matter to the
Association for disciplinary investigation. The proposed amendment also
specifies, however, that any such referral should be initiated by an
arbitrator only after final disposition of the matter through
settlement or award. Although the NASD is not setting forth a specific
procedure for such referrals, the NASD contemplates that arbitrators
will direct referrals to the Association through the Arbitration
Department staff and the Director of Arbitration.
The NASD believes that the proposed rule change is consistent with
the provisions of section 15A(b)(6)\5\ of the Act is that specifying a
mechanism in the Code for arbitrators to bring information concerning
potential violations of the Association's rules and the federal
securities laws to the attention of the NASD's regulatory staff for
investigation will serve the public interest by ensuring that such
potential violations are not overlooked.
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\5\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
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. 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 any 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-94-75 and should
be submitted by June 29, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. 94-13876 Filed 6-7-94; 8:45 am]
BILLING CODE 8010-01-M
