[Federal Register Volume 62, Number 157 (Thursday, August 14, 1997)]
[Notices]
[Pages 43568-43571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21445]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38907; File No. SR-NASD-97-34]
Order of Granting Approval; Notice of Filing and Order Granting
Accelerated Approval
August 6, 1997.
Self-Regulatory Organizations; National Association of
Securities Dealers, Inc.; Order Granting Approval to Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval
of Amendment Nos. 3 and 4 to Proposed Rule Change Relating to
Miscellaneous Amendments to Arbitration Procedures and
Clarifications of the Code of Arbitration Procedure.
I. Introduction
On May 5, 1997,\1\ 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'') \2\ and Rule 19b-4
thereunder,\3\ a proposed rule change to amend and clarify its
arbitration procedures.
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\1\ The NASD filed Amendment Nos. 1 and 2 with the Commission on
May 13, 1997, and May 22, 1997, respectively, the substance of which
was incorporated into the notice. See letters from Elliott R.
Curzon, Assistant General Counsel, NASDR, to Katherine A. England,
Assistant Director, Market Regulation, Commission, dated May 8, 1997
(``Amendment No. 1'') and May 20, 1997 (``Amendment No. 2).
\2\ 15 U.S.C. 78s(b)(1).
\3\ 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. 38692 (May 29, 1997), 62 FR 30920 (June 5, 1997). No
comments were received on the proposal. The NASD subsequently filed
Amendment Nos. 3 and 4 on July 15, 1997 \4\ and July 25, 1997,
respectively.\5\
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\4\ Amendment No. 3 amends Rule 10330 to state that the Director
will serve a copy of the award by using any method available and
convenient to the parties and the Director, and that is reasonably
expected to cause the award to be delivered to all parties, or their
counsel, on the same day. Methods available include, but are not
limited to, registered or certified mail, hand delivery, and
facsimile or other electronic means. Amendment No. 3 also amends the
purpose section of the proposed rule change to state that it is
important to permit service by means other than registered mail or
personal service, because the Office is frequently asked to provide
arbitration awards by facsimile, and could be asked to provide
service by other alternative means. In addition, Amendment No. 3
states that it is important that all parties be served with
arbitration awards at approximately the same time so that there is
no confusion about when the time to seek review of an award begins
to run, and parties all have approximately the same amount of time
to prepare for and seek review of an award. Also, Amendment No. 3
states that parties should not be required to accept service of
awards through means that are inconvenient or unavailable to them,
nor should the Office be required to serve an award in a manner that
is not readily available. See letter from Elliott R. Curzon,
Assistant General Counsel, NASD Regulation, to Katherine A. England,
Assistant Director, Market Regulation, Commission, dated July 14,
1997 (``Amendment No. 3'').
\5\ Amendment No. 4 states that NASDR's Office of Dispute
Resolution intends to modify its case tracking system to add a
status code that will show when a claim, defense, or proceeding has
been dismissed with prejudice and whether the dismissal was a
sanction for failing to comply with an order. In order to allow for
sufficient time to implement this change to the system, NASDR will
make the proposed rule changes in this rule filing effective within
forty-five days following Commission approval. See letter from
Elliott Curzon, Assistant General Counsel, to Katherine A. England,
Assistant Director, Market Regulation, Commission, dated July 23,
1997 (``Amendment No. 4'').
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[[Page 43569]]
II. Description
NASD Regulation, Inc. (``NASDR'') is proposing to amend the Code of
Arbitration Procedure (``Code'') to make certain minor procedural
changes designed to enhance the arbitration process.\6\ Specifically,
NASDR is proposing to amend: (1) Rule 10305 (formerly Section 16), to
permit arbitrators to dismiss claims with and without prejudice; (2)
Rule 10310 (formerly Section 21), to extend the time periods for notice
of selection of arbitrators and further inquiries concerning an
arbitrator; (3) Rule 10311 (formerly Section 22), to permit the
Director of Arbitration to grant additional peremptory challenges of
arbitrators; (4) Rule 10313 (formerly Section 24), to extend the time
in which a party can exercise its right to challenge a replacement
arbitrator; and (5) Rule 10330 (formerly Section 41), to permit awards
to be served by means other than registered mail or personal
service.\7\
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\6\ While NASDR does not believe that the changes proposed in
this filing will conflict with amendments to the Code to be proposed
in response to the recommendations of the NASD's Arbitration Policy
Task Force, some of the changes proposed herein will ultimately be
replaced or superseded by those amendments and are, therefore,
temporary in nature. For example, the proposed change to the
peremptory challenge provision discussed below will be superseded
when the Association's list selection rule is filed with and
approved by the Commission. Nevertheless, NASDR believes that the
rule changes in this proposed rule filing are important enough to be
made now even if some of them will eventually be superseded.
\7\ See Amendment No. 3, supra note 4.
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NASDR is proposing to amend Rule 10305 of the Code (formerly
Section 16), which relates to dismissal of arbitration proceedings, to
clarify that the arbitrators may dismiss a proceeding without prejudice
to the claims or defenses of the parties and refer the parties to their
judicial remedies and, in addition, to any other dispute resolution
forum agreed to by the parties. The Code does not specify the grounds
for dismissals without prejudice; however, such dismissals would
generally occur only when appropriate and in the interest of justice,
such as where the parties have agreed to the dismissal (especially if
they have agreed to proceed in another forum), or where an
indispensable party cannot be jointed in the arbitration.
NASDR is also proposing to amend Rule 10305 by adding a new
subsection (b) granting arbitrators the express authority to dismiss a
claim, defense, or proceeding with prejudice as a sanction for willful
and intentional material failure to comply with an order of the
arbitrator(s), but only if lesser sanctions have proven ineffective.\8\
This provision is intended to establish clearly that arbitrators have
the power to issue orders in aid of the arbitration process and to
enforce those orders by use of the ultimate sanction of dismissal with
prejudice. Such a sanction would be used, for example, where a party
refused to produce documents necessary for another party's claim or
defense. In such instances, after the arbitrators have imposed lesser
sanctions that have not induced compliance with the order, the
arbitrators may dismiss a claim, defense, or the entire arbitration
proceeding, with prejudice.\9\
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\8\ While the NASD believes that arbitrators currently have
plenary power to issue such dismissal orders, this power is rarely
exercised because it is not expressly provided for in the Code and
arbitrators appear to be reluctant to wield such sanctioning power
without express authority.
\9\ The Commission notes that NASDR has stated its intention to
modify its case tracking system in order to show when a claim,
defense, or proceeding has been dismissed with prejudice, and
whether the dismissal was a sanction for failing to comply with an
order of the arbitrators. See Amendment No. 4, supra note 5.
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NASDR is proposing to amend Rules 10310, 10311, and 10313 of the
Code (formerly Sections 21, 22, and 23), which relate to arbitrator
selection, peremptory challenges and arbitrator disclosures, to extend
the time limitations on a party to (1) seek additional information
under Rules 10310 and 10313 about replacement arbitrators, and (2)
exercise a peremptory challenge under Rule 10311, from 5 days to 10
business days after notification of the identity of the person(s)
proposed as arbitrators.\10\ In addition, Rule 10310 is proposed to be
amended to extend the Arbitration Department's obligation to provide
the parties with the names and histories of the arbitrators from 8 to
15 days prior to the date of the first hearing. The proposed rule
change further amends Rule 10310 to replace ``the Director of
Arbitration'' with ``the Director'' whenever it occurs.
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\10\ Although the notice prepared by the NASD stated in the
purpose section describing the proposed rule change that the time
limitation to exercise a peremptory challenge under Rule 10311 was
extended from 5 to 10 days prior to the hearing, the actual language
of the rule under the proposed rule change states that the time
limitation to exercise a peremptory challenge is 10 business days,
``of notification of the identity of the person(s) named under Rule
10310 or Rule 10321 (d) or (e), whichever comes first.''
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NASDR is also proposing to amend Rule 10311 to permit the Director
to grant additional peremptory challenges under certain circumstances.
Currently, the rule permits the Director to grant additional peremptory
challenges in multi-party cases when the Director, ``in the interests
of justice,'' determines that additional peremptory challenges are
warranted by the circumstances of the case. For example, on occasion a
party will discover grounds for a cause challenge to one arbitrator
after the party has used its peremptory challenge against that
arbitrator. In such an instance, the party may argue that it would have
used its peremptory challenge differently had it known of the
information. Under the current rule, if that circumstance arose in a
multi-party case, the Director may, ``in the interests of justice,''
grant additional challenges. NASDR believes that similar circumstances
may arise in single-party cases and, therefore, is seeking to amend the
rule to permit the Director to grant such additional challenges.
NASDR is also proposing to amend Rule 10330 of the Code (formerly
Section 41) to permit the Office of Dispute Resolution to serve
arbitration awards by means other than registered mail or personal
service.\11\ The Office frequently is asked to provide arbitration
awards to parties by facsimile. Because the Code does not provide for
this method of service, the Office serves the award by facsimile and
also duplicate service by one of the other methods specified in the
Code. In addition, the Office may be asked to provide arbitration
awards by methods other than registered, facsimile, or personal
service.\12\ By amending the Code to permit facsimile service, the
Office will not be required to serve duplicates by another approved
method.
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\11\ See Amendment No. 3, supra note 4.
\12\ See Amendment No. 3, supra note 4.
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Also, it is important that all parties be served with arbitration
awards at approximately the same time so that there is no confusion
about when the time to seek review of an award begins to run, and
parties all have approximately the same amount of time to prepare for
and seek review of an award. Finally, parties should not be required to
accept service of awards through means that are inconvenient or
unavailable to them; nor should the Office be required to serve an
award in a manner that is not readily available. Thus, if Party A does
not have access to a facsimile machine, the Office may serve other
parties by facsimile as long as the Office serves the award on Party A
in a manner that is reasonably expected to secure delivery to Party A
on the same day.\13\
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\13\ See Amendment No. 3, supra note 4.
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The proposed rule change also amends references to numbers, such as
``eight (8)'' or ``fifteen (15)'', throughout the proposed rule change
to delete the
[[Page 43570]]
word form and retain the Arabic numeral.
III. Discussion
The Commission believes that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act \14\ in that
clarifying procedures, eliminating ambiguities, and adjusting
procedures to accommodate changing practices are consistent with the
NASD's goal of providing the investing public with a fair, efficient,
and cost-effective forum for the resolution of disputes.\15\
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\14\ 15 U.S.C. 78o-3.
\15\ 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).
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The Commission believes that the portion of the proposed rule
change to Rule 10305, relating to dismissal of arbitration proceedings
with and without prejudice, is consistent with the Act. This portion of
the proposed rule change will provide for a fair, efficient and cost-
effective arbitration process by clarifying that the arbitrators can
dismiss the proceeding either with or without prejudice; currently,
Rule 10305 does not distinguish between these two choices. Also, the
proposed rule change amends Rule 10305 to add that the arbitrators,
when dismissing without prejudice, can refer the parties to any dispute
resolution forum agreed to by the parties, in addition to their
judicial remedies. The Commission notes that the NASD stated in the
notice that such dismissals without prejudice would generally occur
only where appropriate and in the interest of justice, such as where
the parties have agreed to the dismissal (especially if they have
agreed to proceed in another forum), or where an indispensable party
cannot be joined in the arbitration.
The Commission notes that the proposed change to Rule 10305
allowing for dismissal with prejudice is intended to establish clearly
that arbitrators have the power to issue orders in aid of the
arbitration process and to enforce those orders by use of the sanction
of dismissal with prejudice. Such a sanction would be used, for
example, where a party refused to produce documents that the
arbitrators already have ordered them to produce as necessary for
another party's claim or defense. In such instances, after the
arbitrators have imposed lesser sanctions that have not induced
compliance with their order, the arbitrators may dismiss a claim,
defense, or the entire arbitration proceeding, with prejudice. The
Commission believes that this proposed rule change would provide for a
more efficient arbitration process because it will allow the
arbitrators to assert greater control over the proceedings and will
provide parties with clear notice of the possible consequences of non-
compliance with an order of the arbitrators. It also would help to
protect all parties to an arbitration, and ensure that one party to the
proceeding does not take advantage of the other.\16\
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\16\ As previously noted, NASDR has stated its intention to
modify its case tracking system in order to show when a claim,
defense, or proceeding has been dismissed with prejudice, and
whether the dismissal was a sanction for failing to comply with an
order of the arbitrators. See supra note 9 and Amendment No. 4,
supra note 5.
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The Commission believes that the proposed changes to Rules 10310,
10311, and 10313 providing for an extension of time limitations
relating to arbitrator selection, peremptory challenges, and arbitrator
disclosures are consistent with the Act because they allow the parties
more time to gather information to prepare for the arbitration
proceedings.\17\
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\17\ The proposed changes extend the time limitations on a party
to (1) seek additional information under Rules 10310 and 10313 about
replacement arbitrators, and (2) exercise a peremptory challenge
under Rule 10311, from 5 days to 10 business days after notification
of the identity of the person(s) proposed as arbitrators. In
addition, Rule 10310 is proposed to be amended to change the Office
of Dispute Resolution's obligation to provide the parties with the
names and histories of the arbitrators from 8 to 15 days before the
date of the first hearing.
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The Commission believes that the proposed change to Section 10311
that allows the Director of Arbitration to grant additional peremptory
challenges in certain circumstances is reasonable under the Act. This
proposed rule change allows the Director to grant additional peremptory
challenges where there is a single claimant or respondent, in
appropriate circumstances, which the Director may already do in cases
where there are multiple claimants or respondents. For example, the
NASDR noted in its filing that on occasion a party will discover
grounds for a cause challenge to one arbitrator after the party has
used its peremptory challenge against the arbitrator. In such an
instance, the party may argue that it would have used its peremptory
challenge differently had it known of the information. Under the
current rule if that circumstance arose in a multi-party case, the
Director may, ``in the interests of justice,'' grant additional
challenges. The proposed rule change provides clearly that the Director
may grant additional challenges in a case with a single claimant or
respondent.
The Commission finds good cause to approve Amendment Nos. 3 and 4
to the proposed rule change prior to the thirtieth day after the date
of publication of notice of filing thereof in the Federal Register. The
Commission believes that the proposed change to Rule 10330, including
Amendment No. 3, that allows for service by means other than registered
mail or personal service, such as facsimile or other electronic
transmission, is reasonable under the Act because it will help to
provide for more efficient service.\18\ The NASD has stated that its
Office frequently is asked to provide arbitration awards to parties by
facsimile, but because the Code does not provide for this method of
service, the Office provides the award by facsimile but it also
duplicates service by one of the other methods specified in the Code.
By amending the Code to permit alternative means of service, the Office
will not be required to duplicate service by another approved method.
The Commission notes that the proposed rule change provides adequate
safeguards to allow for all parties to receive notice of the awards in
a way that is reasonably expected to provide notice on the same day,
for purposes of time limitations on post-award motions. Also, the NASD
states that the Office will not serve awards on parties in a way that
is inconvenient or unavailable to the party, and the Office will not be
required to serve an award in a manner that is not readily
available.\19\
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\18\ Amendment No. 3 amends Rule 10330 to allow for service of
awards by alternative means while still providing for service in a
manner reasonably expected to ensure notice to all the parties on
the same day, and in a manner that is not inconvenient or
unavailable to them. Amendment No. 3 is designed to avoid confusion
as to when the time to seek review of an award begins to run and to
provide all parties approximately the same amount of time to prepare
for and seek review of an award. In addition, by allowing for
alternative means of service, such as by facsimile, the Office will
not be required to make duplicative service, as they do now when
they are asked to serve an award by facsimile or other means not
allowed in the current rule.
\19\ See Amendment No. 3, supra note 4. In addition, the
proposed rule change also amends references to numbers, such as
``eight (8)'' or ``fifteen (15)'', throughout the proposed rule
change to delete the word form and retain the Arabic numeral.
Finally, the proposed rule change amends Rule 10310 to replace ``the
Director of Arbitration'' with ``the Director'' whenever it occurs.
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Amendment No. 4, which states that the NASDR intends to modify its
case tracking system to show when claims, defenses, or proceedings are
dismissed with prejudice and whether the dismissal was a sanction for
failing to comply with an order of the arbitrators, is consistent with
the Act because it will help to protect investors and the public by
monitoring when arbitrators use the sanction of dismissal with
prejudice. Finally, the Commission notes that the
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proposed rule change was noticed for the full comment period and no
comment letters were received. Accordingly, the Commission believes
that it is consistent with Section 15A(b)(6) of the Act to approve
Amendment No. 3 to the proposal on an accelerated basis.
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 3 and 4 to the rule proposal.
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 at the Commission's Public
Reference Room. Copies of such filing also will be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-97-34 and should be
submitted by September 4, 1997.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-NASD-97-34), as amended, is
approved.
\20\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-21445 Filed 8-13-97; 8:45 am]
BILLING CODE 8010-01-M
