[Federal Register Volume 60, Number 168 (Wednesday, August 30, 1995)]
[Notices]
[Pages 45200-45202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21499]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36145; File No. SR-NASD-93-38]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
Interim Injunctive Relief in Intra-Industry Disputes and Certain Other
Changes to the NASD Code of Arbitration Procedure
August 23, 1995.
On August 11, 1995,\1\ the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule
change pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposed rule
change amends the Code of Arbitration Procedure (``Code'') \4\ by: (1)
amending Sections 22 and 44; and (2) adding a new Section 47 to the
Code as a one year pilot program relating to procedures governing
applications for interim injunctive relief in intra-industry disputes
under Section 8 of the Code.\5\
\1\ The NASD initially submitted the proposed rule change on
July 13, 1993. Amendment No. 1 made technical changes to the text of
the rule. See Letter form Suzanne E. Rothwell, Associate General
Counsel, NASD, to Selwyn Notelovitz, Branch Chief, Over-the-Counter
Regulation, Division of Market Regulation, SEC (February 8, 1994).
Amendments Nos. 2 and 3, submitted after publication of notice of
the proposed rule change in the Federal Register, also were minor
clarifying and technical amendments, the text of which may be
examined in the Commission's Public Reference Room. See Letter from
Elliott R. Curzon, Assistant General Counsel, NASD, to Ethan Corey,
Attorney, Over-the-Counter Regulation, Division of Market
Regulation, SEC (April 28, 1995) and Letter from Suzanne E.
Rothwell, Associate General Counsel, NASD, to Mark P. Barracca,
Branch Chief, Over-the-Counter Regulation, Division of Market
Regulation, SEC.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ NASD Manual, Code of Arbitration Procedure, (CCH)
Paras. 3701 et seq.
\5\ NASD Manual, Code of Arbitration Procedure, Art. II, Sec.
(CCH) para. 3708.
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Notice of the proposed rule change, together with the substance of
the proposal as amended by Amendment No. 1, was provided by issuance of
a Commission release (Securities Exchange Act Release No. 34355, July
12, 1994) and publication in the Federal Register (59 FR 36465, July
18, 1994). Six comment letters were received.\6\ This order approves
the proposed rule change.
\6\ See Letter from David E. Rosedahl, Managing Director and
General Counsel, Piper Jaffray, Inc. (``Piper'') to Brandon Becker,
Director, Division of Market Regulation, Commission, dated March 31,
1994; Letter from Michael J. McAllister, Esq., Lane & Mittendorf
(``Lane'') to Jonathan G. Katz, Secretary, Commission, dated July
29, 1994; Letter from John W. Shaw, Esq. and Matthew V. Bartle,
Esq., Bryan Cave on behalf of Sutro & Co. to Jonathan G. Katz,
Secretary, Commission, dated August 8, 1994 (``Bryan Cave Letter'');
Letter from Joel E. Davidson, Senior Vice President and Deputy
General Counsel, PaineWebber Incorporated (``PaineWebber'') to
Jonathan G. Katz, Secretary, Commission, dated August 8, 1994
(``PaineWebber Letter''); Letter from Cliff Palefsky, Esq., National
Employment Lawyers Association (``NELA'') to Jonathan Katz,
Secretary, Commission, dated August 10, 1994; Letter from Walter
Baumgardner, Esq. (``Baumgardner'') to Jonathan Katz, Secretary,
Commission, dated February 17, 1995.
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I. Introduction
The rule change approved today is intended to provide a pilot
system within the NASD arbitration forum to process requests for
temporary injunctive relief. The NASD has indicated that certain NASD
member firms have been seeking injunctions in court against registered
representatives who move to other firms, presumably to enforce non-
competition covenants.\7\ The rule change approved today is intended
principally to facilitate the disposition of employment disputes and
related disputes concerning whether such registered representatives may
transfer their accounts to their new firms.\8\
\7\ See Letter from Elliott R. Curzon, Assistant General
Counsel, NASD to Ethan Corey, Attorney, Division of Market
Regulation, SEC (December 16, 1994) (available in Commission's
Public Reference Room).
\8\ Id.
II. Description of Proposed Rule Change
A. Section 22--Peremptory Challenge to Arbitrator Who Handled Request
for Injunction
Section 22 \9\ has been amended to except proceedings for
injunctive orders under new Section 47 from the provision granting a
party one peremptory challenge to an arbitrator. As discussed further
infra, the NASD has stated that this provision is intended to ensure
that there are no unnecessary delays in processing requests for
temporary injunctive relief.
\9\ NASD Manual, Code of Arbitration Procedure, Art. III, Sec.
22 (CCH) para. 3722.
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B. Section 44--Non-refundable Surcharge for Expedited Proceedings
Section 44 imposes a non-refundable surcharge of $2,500 on all
parties in an expedited proceeding. The rule change provides for
expedited proceedings in connection with a request for interim
injunctive relief under new Section 47 and as a result of a court
granting injunctive relief. The rule change amends Section 44(h) to
provide that the total surcharge of $2,500 is to be paid initially only
by the party or parties requesting expedited proceedings.
Under new Section 47(g), an arbitration will proceed in an
expedited manner if a court has issued a temporary injunction even if
no party has requested expedited proceedings. Accordingly, for purposes
of the assessment of fees in Section 44(h), a party will be deemed to
have requested expedited proceedings if a court issues a temporary
injunction for which it has applied.\10\ In addition, the rule change
provides that the arbitrator may require a party to reimburse another
party for a surcharge it has paid.
\10\ See Amendment No. 2, supra n. 1.
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C. Section 47--Procedure for Granting Interim Injunctive Relief
The introduction to new Section 47 states that arbitrators may
grant interim injunctive relief in intra-industry disputes and
clarifies the ability of parties to seek temporary injunctive relief in
court if they wish. The introduction states that parties may seek
either an ``interim injunction'' or a ``permanent injunction'' within
the arbitration process, that new Section 47 contains the procedure for
obtaining an interim injunction, and notes that subsection (g) of new
Section 47 describes the effect of court-imposed temporary injunctions
on an arbitration proceeding. A party that seeks temporary injunctive
relief with respect to an intra-industry dispute must file a claim for
permanent relief with respect to the same dispute simultaneously with
the Director of Arbitration (``Director''), even if the request for
temporary injunctive relief has been made in court.\11\ Finally, the
introduction clarifies that Section 25(a) governs
[[Page 45201]]
requests for injunctive relief as part of the final award.\12\
\11\ Id.
\12\ NASD Manual, Code of Arbitration Procedure, Art. III, Sec.
25 (CCH) para. 3725.
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While new Section 47 permits parties to seek temporary injunctive
relief in court, Section 6 of the Code \13\ provides that ``no party
shall commence any suit, action or proceeding against any other party
touching upon any of the matters referred to arbitration pursuant to
this Code.'' The NASD has stated that it interprets Section 6 to bar
only parallel actions in court seeking to litigate the substance of the
dispute in arbitration.\14\ Given that temporary injunctions do not
constitute a final disposition on the merits of a matter, the NASD has
stated that Section 6 should not operate to prohibit parties from
seeking temporary injunctions in court.
\13\ NASD Manual, Code of Arbitration Procedure, Art. I, Sec. 6
(CCH) para. 3706.
\14\ Amendment No. 3, supra n. 1.
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Subsection (a) provides that applications for interim injunctions
will be heard by a single arbitrator. Subsection (b) requires the party
seeking interim injunctive relief to make a clear showing that it is
likely to succeed on the merits, that it will suffer irreparable injury
unless the relief is granted, and that the balancing of the equities
lies in its favor. The NASD has stated that these standards are
intended to mirror those traditionally employed by many courts.
Subsection (c) lists the documents that must be filed to apply for
interim injunctive relief. A party must file a Statement of Claim, a
statement of facts demonstrating the necessity for injunctive relief,
and a properly-executed Submission Agreement on the party or parties
against whom injunctive relief is sought.
Subsection (d) sets forth the procedure and timetable for handling
applications for interim injunctive relief. Under subsection (d)(1), an
expedited timetable is provided for handling applications for Immediate
Injunctive Orders, which the NASD intends to be analogous to court-
issued temporary restraining orders, in that the party against whom an
Immediate Injunctive Order is sought is not required to respond to the
application. In such cases, the Director must attempt to schedule a
hearing within one to three business days after receipt of the
application. Information required to be given to parties may be sent by
facsimile transmission, and the hearing may be held by telephone or in
person in a limited number of cities, at the discretion of the
arbitrator or the Director. The NASD has stated that it contemplates
holding such hearings in New York, Chicago and San Francisco. Under the
subsection, the arbitrator will attempt to grant or deny the
application within one business day after the hearing and record are
closed. The duration of an Immediate Injunctive Order will be
determined by the arbitrator, but must expire not later than the date
of the issuance or denial of a Regular Injunctive Order (if any) or a
decision on the merits of the entire controversy.
The NASD has stated that it will act to ensure that Immediate
Injunctive Orders do not remain in effect for an extended period of
time pending a decision on the merits of the entire controversy.\15\
The NASD has stated that it will advise and train arbitrators reviewing
applications for Immediate Injunctive Orders that they should consider
setting short time limits on the duration of such orders. The NASD also
has stated that it will advise parties who have been enjoined that they
may seek reconsideration (including termination or limitation) of an
Immediate Injunctive Order at any stage of the proceedings and that it
will monitor cases in which Immediate Injunctive Orders have been
granted to determine whether any party is being disadvantaged unfairly
while the order remains in effect.
\15\ Id.
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Subsection (d)(2) establishes procedures and timetables for
handling applications for Regular Injunctive Orders, which the NASD
intends to be analogous to court-issued preliminary injunctions. This
subsection requires the Director to schedule a hearing within three to
five business days after the response is filed or due to be filed,
whichever is earlier. Failure to file a response will not, however,
delay the hearing, and the responding party may choose to present
evidence at the hearing whether or not it has previously filed a
response. As in subsection (d)(1), hearings may be held by telephone or
in selected cities. Regular Injunctive Orders expire as determined by
the arbitrator, but not later than the date of a decision on the merits
of the underlying controversy.
The NASD has stated that it will advise and train arbitrators
reviewing applications for Regular Injunctive Orders that they should
consider limiting the duration of an order to remove incentives for the
applicant to delay proceedings on the merits of the underlying
controversy.\16\ The NASD also has stated that it will advise parties
who have been enjoined that they may seek reconsideration (including
termination or limitation) of the Regular Injunctive Order at any stage
of the proceedings.
\16\ Id.
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New Section 47(e) permits unlimited challenges for cause to the
single arbitrator appointed to hear the application for an interim
injunction, but prohibits peremptory challenges. Moreover, peremptory
challenges may not be made later to an arbitrator who heard an
application for an injunctive order and who subsequently is appointed
to participate on the arbitration panel hearing the same arbitration on
the merits. As noted above, the NASD represents that the elimination of
peremptory challenges is intended to promote the expedited nature of
temporary injunctive proceedings, while still preserving the parties'
rights to challenge an arbitrator for cause.
New Section 47(f) requires the arbitration of the underlying
controversy to proceed in an expedited manner according to a timetable
and procedures specified by the arbitration panel. This continues the
expedited treatment of cases in which interim injunctive relief has
been granted, to provide a faster resolution of the merits of the
dispute. The Subsection requires the Director to appoint a panel
immediately following the issuance of an Immediate Injunctive Order or
Regular Injunctive Order.\17\ The Subsection also permits the
arbitrators to specify procedures and time limitations for actions by
the parties different from those specified in the Code.\18\ Thus, for
example, arbitrators may permit parties to serve requests for
information on other parties pursuant to Subsection 32(b) \19\
immediately rather than waiting for twenty days to elapse. The NASD
represents that this is intended to ensure that parties are able to
obtain access to necessary information prior to the hearing on the
merits.
\17\ Id.
\18\ Id.
\19\ NASD Manual, Code of Arbitration Procedure, Art. III, Sec.
32(b) (CCH) para. 3732.
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New Section 47(g) calls for an arbitration to proceed in an
expedited manner if a court has issued a temporary injunction. No
request for expedited proceedings is required. Subsection (h) permits
the arbitrator to require a party to deposit security in an amount that
the arbitrator deems proper for the payment of any costs or damages
that might be incurred by the adverse party if it were wrongfully
enjoined. Any such deposit shall be held in a separate bank trust or
escrow account
[[Page 45202]]
for the benefit of the party against whom injunctive relief is
sought.\20\
\20\ Amendment No. 3, supra n. 1.
Subsection (i) of new Section 47 contains a ``sunset'' clause under
which the pilot program will expire in one year unless the Commission
approves any proposed rule change filed by the NASD under Rule 19b-4 to
extend the pilot period or to eliminate the expiration date. The NASD
has stated that it intends to assess, among other things, whether
parties should be restricted to arbitrator-issued interim injunctions
during this pilot period. In connection with this review, the NASD has
undertaken to provide two reports to the Commission on the usage and
operation of new Section 47.\21\
\21\ Id.
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D. Resolution of the Board of Governors
The rule change amends the Resolution of the Board of Governors
\22\ to provide that failure to comply with any interim injunctive
order issued pursuant to new Section 47 will be added to the types of
conduct that may be considered to violate Article III, Section 1 of the
Rules of Fair Practice.
\22\ NASD Manual, Code of Arbitration Procedure, (CCH) para.
3744.
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III. Comments Received
As noted above, the Commission received six comment letters
concerning the rule change. Two commenters supported the rule
change.\23\ Two commenters did not express support for or opposition to
the rule change.\24\ Two commenters objected to the rule change.\25\
\23\ Piper, Lane.
\24\ PaineWebber, NELA.
\25\ Bryan Cave, Baumgardner.
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The Bryan Cave Letter asks whether a temporary injunction is
intended to refer to a court-issued temporary restraining order, court-
issued preliminary injunction or both. The NASD amended the proposed
rule change to clarify that the term ``temporary injunction'' is
intended to encompass both temporary restraining orders and preliminary
injunctions issued by courts and interim injunctions issued by
arbitrators.\26\
\26\ Amendment No. 2, supra n. 1.
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The Bryan Cave Letter also stated that the new Section does not
distinguish clearly between legal standards to be applied in issuing an
immediate injunction and a regular injunction. The NASD has stated that
it expects the parties to present arguments to the arbitrators to
permit them to determine appropriate standards for decision. As noted
above, the NASD also has represented that it will train arbitrators
hearing applications for interim injunctive relief to ensure that any
relief granted does not disadvantage unfairly any party against whom
relief is sought.
The Bryan Cave Letter also noted that the NASD intended to hold
hearings on immediate injunctive relief in only 3 cities. The Bryan
Cave Letter noted that individuals will find it a greater burden to
travel for a hearing than will firms. The NASD has represented to the
Commission that it will be sensitive to such concerns and will attempt
to accommodate parties to the extent possible.\27\ In this regard, the
NASD has stated that it intends to hold hearings on a telephone basis
whenever an in-person hearing would pose an undue burden to a party if
the nature of the hearing and the evidence to be presented will permit.
\27\ Amendment No. 3, supra n. 1.
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Bryan Cave and PaineWebber noted that Subsections (f) and (g)
provide that the arbitration concerning a matter in which either an
interim injunction under the section or a court injunction has been
issued will be expedited, under a schedule specified by the arbitration
panel appointed under the Code. The Bryan Cave Letter and the
PaineWebber Letter argued that the NASD should set time parameters for
panels as they schedule a hearing on the merits; otherwise, an
expedited hearing may not in fact be expedited. As noted above, Section
47 has been amended to require the Director to appoint a panel
immediately following the issuance of an Immediate Injunctive Order or
Regular Injunctive Order and to permit the arbitrators to specify
procedures and time limitations for actions by the parties different
from those specified in the Code.
IV. Conclusion
The Commission finds that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act \28\ because the
rule change will facilitate the arbitration process in the public
interest by codifying authority of arbitrators to grant interim
injunctive relief in intra-industry disputes that are subject to NASD
arbitration. The Commission believes that it is in the public interest
to provide parties with the opportunity to have applications for
interim injunctive relief considered in the same forum as hearings on
the merits of the dispute.
\28\ 15 U.S.C. 78o-3.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that File No. SR-NASD-93-38 be, and hereby is, approved on a one-year
pilot basis, effective January 3, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21499 Filed 8-29-95; 8:45 am]
BILLING CODE 8010-01-M
