[Federal Register: January 31, 2007 (Volume 72, Number 20)]
[Notices]
[Page 4573-4609]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31ja07-124]
[[Page 4573]]
-----------------------------------------------------------------------
Part III
Securities and Exchange Commission
-----------------------------------------------------------------------
Self-Regulatory Organizations--Proposed Rule Changes: National
Association of Securities Dealers, Inc.; Notice
[[Page 4574]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55158 ; File Nos. SR-NASD-2003-158; SR-NASD-2004-011]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Amendments 1,
2, 3, and 4 To Amend NASD Arbitration Rules for Customer Disputes and
Notice of Filing and Order Granting Accelerated Approval of Amendments
5, 6, and 7 Thereto; Order Approving Proposed Rule Change and
Amendments 1, 2, 3, and 4 To Amend NASD Arbitration Rules for Industry
Disputes and Notice of Filing and Order Granting Accelerated Approval
of Amendments 5, 6, and 7 Thereto
January 24, 2007.
I. Introduction
The National Association of Securities Dealers, Inc. (``NASD''),
through its wholly owned subsidiary, NASD Dispute Resolution, Inc.
(``NASD Dispute Resolution''), filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') proposed rule changes to amend
the NASD Code of Arbitration Procedure in connection with rules
applicable to customer disputes (``Customer Code'') and to industry
disputes (``Industry Code'') on October 15, 2003 and January 16, 2004,
respectively, pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ Amendments 1,
2, 3, and 4 to the Customer Code were filed with the Commission on
January 3, January 19, April 8, and June 10, 2005, respectively.
Amendments 1, 2, 3, and 4 to the Industry Code were filed with the
Commission on January 3, February 26, April 8, and June 10, 2005,
respectively. The Customer Code and Amendments 1, 2, 3, and 4 thereto
(``Customer Code Notice'') and the Industry Code and Amendments 1, 2,
3, and 4 thereto (``Industry Code Notice'') were published for comment
on June 23, 2005.\3\ The Commission received 51 comments \4\ in
response to the Customer Code Notice and one comment \5\ in response to
the Industry Code Notice, all of which are available on the
Commission's Internet Web site at (http://www.sec.gov/rules/sro.shtml).
On May 4, 2006, NASD filed Amendments 5 to the Customer Code and to the
Industry Code. The Commission received 125 comments following NASD's
posting of Amendment 5 to the Customer Code on its Web site.\6\ The
Commission did not
[[Page 4575]]
receive any comments in connection with Amendment 5 to the Industry
Code. NASD filed Amendments 6 to the Customer Code and Industry Code on
July 21, 2006 and Amendments 7 to Customer Code and Industry Code on
August 15, 2006. NASD requested accelerated approval in connection with
Amendments 5, 6, and 7.\7\ This Order approves the Customer Code and
Industry Code, as amended, accelerating approval of Amendments 5, 6,
and 7 thereto.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing of Proposed Rule Change and Amendment
Nos. 1, 2, 3, and 4 Thereto to Amend NASD Arbitration Rules for
Customer Disputes, Securities Exchange Act Rel. No. 51856 (Jun. 15,
2005), 70 FR 36442 (Jun. 23, 2005); Notice of Filing of Proposed
Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto to Amend NASD
Arbitration Rules for Industry Disputes, Securities Exchange Act
Rel. No. 51857 (Jun. 15, 2005), 70 FR 36430 (Jun. 23, 2005).
\4\ See Letter from Norman B. Arnoff, Esq., dated Aug. 12, 2004
(``Arnoff''); Letter from Daniel A. Ball, Esq., Selzer Gurvitch
Rabin & Obecny, Chtd., dated Jul. 14, 2005; Letter from Gail E.
Boliver, Esq., Boliver Law Firm, dated Jul. 13, 2005 (``Boliver'');
Letter from Timothy A. Canning, Esq., Law Offices of Timothy A.
Canning, dated Jul. 14, 2005 (``Canning''); Letter from Steven B.
Caruso, Esq., Maddox Hargett & Caruso, P.C., dated Jul. 13, 2005
(``Caruso''); Letter from Rebecca C. Davis, Esq., Tate, Lazarini &
Beall, PLC, dated Jul. 14, 2005 (``R. Davis''); Letter from James J.
Eccleston, Esq., Shaheen, Novoselsky, Staat, Filipowski & Eccleston,
P.C., dated Jul. 14, 2005 (``Eccleston''); Letter from Barry D.
Estell, Esq., dated Jul. 14, 2005 (``Estell''); Letter from Jonathan
W. Evans, Esq., Jonathan W. Evans & Associates, dated Jul. 14, 2005
(``Evans''); Letter from Martin L. Feinberg, Esq., dated Jul. 13,
2005 (``Feinberg''); Letter from Jeffrey A. Feldman, Esq., dated
Jul. 11, 2005 (``Feldman''); Letter from Stuart Finer, Esq., dated
Jul. 15, 2005 (``Finer''); Letter from William A. Fynes, dated Jul.
13, 2005 (``Fynes''); Letter from W. Scott Greco, Esq., Greco and
Greco, P.C., dated Jun. 24, 2005 (``Greco''); Letter from Scott C.
Ilgenfritz, Esq., Johnson, Pope, Bokor, Ruppel, and Burns, LLP,
dated Jul. 14, 2005 (``Ilgenfritz''); Letter from James S. Jones,
Esq., dated Mar. 30, 2006 (``Jones''); Letter from Wayne M. Josel,
Esq., Kaufmann, Feiner, Yamin, Gilden, & Robbins LLP, dated Jul. 13,
2005 (``Josel''); Letter from Spiro T. Komninos, Esq., Komninos,
Fowkes & Farrugia Law Group, LLC, dated Jul. 14, 2005
(``Komninos''); Letter from Stephen Krosschell, Goodman & Nekvasil,
dated Jul. 14, 2005 (``Krosschell''); Letter from Cary S. Lapidus,
Esq., Law Offices of Cary S. Lapidus, dated Jul. 14, 2005
(``Lapidus''); Letter from Richard M. Layne, Esq., Layne & Lewis
LLP, dated Jul. 12, 2005 (``Layne''); Letter from Royal Lea, Esq.,
Bingham & Lea, P.C., dated Jul. 14, 2005 (``Lea''); Letter from Dale
Ledbetter, Adorno & Yoss, dated Jul. 14, 2005 (``Ledbetter'');
Letter from Prof. Seth E. Lipner, Zicklin School of Business,
Member/Deutsch & Lipner, dated Jul. 13, 2005 (``Lipner''); Letter
from Jorge A. Lopez, Esq., dated Jul. 21, 2005 (``Lopez''); Letter
from Angela H. Magary, Brickley, Sears & Sorett, dated Jul. 14, 2005
(``Magary''); Letter from Stuart D. Meissner, Esq., Law Offices of
Stuart D. Meissner LLC., dated Jul. 12, 2005 (``Meissner''); Letter
from John J. Miller, Esq., Law Office of John J. Miller, P.C., dated
Jul. 12, 2005 (``Miller''); Letter from Jill I. Gross and Barbara
Black, Directors, Pace Investor Rights Project, dated Jul. 14, 2005
(``PACE''); Letter from J. Boyd Page, Esq. and Samuel T. Brannan,
Esq., Page Perry, LLC, dated Jul. 14, 2005 (``Page''); Letter from
Rosemary J. Shockman, President, and Robert S. Banks, Jr., Executive
Vice President, President Elect, Public Investors Arbitration Bar
Association, dated Jul. 13, 2005 (``PIABA''); Letter from Rosemary
Shockman, President, Public Investors Arbitration Bar Association,
dated Aug. 2, 2005 (``PIABA 2''); Letter from Herbert E.
Pounds, Herbert E. Pounds, Jr., P.C., dated Jul. 14, 2005
(``Pounds''); Letter from M. Clay Ragsdale, Esq., Ragsdale LLC,
dated Jul. 14, 2005 (``Ragsdale''); Letter from Howard M.
Rosenfield, Esq., dated Jul. 14, 2005 (``Rosenfield''); Letter from
Richard P. Ryder, President, Securities Arbitration Commentator,
Inc., dated Jul. 21, 2005 (``Ryder''); Letter from J. Pat Sadler,
dated Jul. 13, 2005 (``Sadler''); Letter from Laurence S. Schultz,
Esq., Driggers, Schultz & Herbst PC, dated Jun. 8, 2005
(``Schultz''); Letter from Laurence S. Schultz, Esq., Driggers,
Schultz & Herbst, dated Jul. 14, 2005 (``Schultz 2'');
Letter from Scott R. Shewan, Esq., Born, Pape & Shewan LLP, dated
Jul. 14, 2005 (``Shewan''); Letter from Edward G. Turan, Esq.,
Chair, Arbitration and Litigation Committee, Securities Industry
Association, dated Jul. 13, 2005 (``SIA''); Letter from Jeff Sonn,
Esq., Sonn & Erez, dated Jul. 14, 2005 (``Sonn''); Letter from Debra
G. Speyer, Esq., Law Offices of Debra G. Speyer, dated Jul. 14, 2005
(``Speyer''); Letter from Arnold Y. Steinberg, P.C., dated Jul. 14,
2005 (``Steinberg''); Letter from Steven A. Stolle, Esq., Rohde &
Van Kampen PLLC, dated Jul. 8, 2005 (``Stolle''); Letter from Andrew
Stoltmann, Stoltmann Law Offices, P.C., dated Jul. 14, 2005
(``Stoltmann''); Letter from Mark A. Tepper, Esq., Mark A. Tepper,
P.A., dated Jul. 14, 2005 (``Tepper''); Letter from Richard A.
Karoly, Vice President and Senior Corporate Counsel, Schwab & Co.,
Inc., dated Jul. 14, 2005 (``Schwab''); Letter from John E.
Sutherland, Esq., Brickley, Sears & Sorett, dated Jul. 14, 2005
(``Sutherland''); Letter from Steele T. Williams, P.A., dated Jul.
15, 2005 (``Williams''); Letter from Michael J. Willner, Esq.,
Miller Faucher and Cafferty LLP, dated Jul. 16, 2005 (``Willner'');
Letter from A. Daniel Woska, Woska & Hayes, LLP, dated Jun. 15, 2005
(``Woska'').
\5\ Letter from Marvin Elster, dated Jun. 30, 2005 (``Elster'').
\6\ Letter from Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari,
dated May 16, 2006 (``Aidikoff''); Letter from Ronald M. Amato,
Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C., dated May
30, 2006 (``Amato''); Letter from Sarah G. Anderson, dated May 15,
2006 (``Anderson''); Letter from Anonymous, dated May 15, 2006
(``Anonymous''); Letter from Robert W. Anthony, dated May 16, 2006
(``Anthony''); Letter from John G. Appel, Jr., dated May 18, 2006
(``Appel''); Letter from Kurt Arbuckle, Kurt Arbuckle, P.C., dated
May 22, 2006 (``Arbuckle''); Letter from C.W. Austin, Jr., dated May
15, 2006 (``Austin''); Letter from Daniel E. Bacine, Barrack, Rodos
& Bacine, dated May 15, 2006 (``Bacine''); Letter from Bruce E.
Baldinger, Levine & Baldinger, LLC, dated May 16, 2006
(``Baldinger''); Letter from Scott I. Batterman, Esq., Clay Chapman
Crumpton Iwamura & Pulice, dated May 15, 2006 (``Batterman'');
Letter from Scot Bernstein, Law Offices of Scot Bernstein, dated May
26, 2006 (``Bernstein''); Letter from Brian P. Biggins, Esq., Brian
P. Biggins & Associates Co., L.P.A., dated May 15, 2006
(``Biggins''); Letter from Rob Bleecher, Esq., dated May 15, 2006
(``Bleecher''); Letter from Gail E. Boliver, Boliver Law Firm, dated
May 15, 2006 (``Boliver 2''); Letter from Sam Brannan, Page
Perry LLC, dated May 16, 2006 (``Brannan''); Letter from Steve
Buchwalter, Law Offices of Steve A. Buchwalter, P.C, dated May 15,
2006 (``Buchwalter''); Letter from John S. Burke, Higgins & Burke,
P.C, dated May 15, 2006 (``J. Burke''); Letter from Thomas F. Burke,
May 22, 2006 (``T. Burke''); Letter from Tim Canning, dated May 15,
2006 (``Canning 2''); Letter from Carl J. Carlson, Carlson
& Dennett, P.S., dated May 12, 2006 (``Carlson''); Letter from
Jeremy B. Chalmers, Mars, Mars and Chalmers, dated May 16, 2006
(``Chalmers''); Letter from Roger F. Claxton, Claxton & Hill, dated
May 15, 2006 (``Claxton''); Letter from Erwin Cohn, Cohn & Cohn,
dated May 16, 2006 (``Cohn''); Letter from Patrick A. Davis, P.A,
dated May 16, 2006 (``P. Davis''); Letter from William F. Davis,
dated May 15, 2006 (``W. Davis''); Letter from Adam Doner, dated May
16, 2006 (``Doner''); Letter from James J. Eccleston, Shaheen,
Novoselsky, Staat, Filipowski & Eccleston, dated May 16, 2006
(``Eccleston 2''); Letter from Richard Elliott, dated May
16, 2006 (``Elliot''); Letter from Barry D. Estell, dated May 15,
2006 (``Estell 2''); Letter from Barry D. Estell, Esq.,
dated May 16, 2006 (``Estell 3''); Letter from Jonathan W.
Evans, Esq., Jonathan W. Evans & Associates, dated May 15, 2006
(``Evans 2''); Letter from Allan J. Fedor, Esq., dated May
22, 2006 (``Fedor''); Letter from Martin L. Feinberg, dated May 15,
2006 (``Feinberg 2''); Letter from Teresa M. Gillis, Esq.,
Shustak & Partners, dated May 16, 2006 (``Gillis''); Letter from
Robert W. Goehring, Esq., dated May 15, 2006 (``Goehring''); Letter
from Eliot Goldstein, Esq., Law Offices of Eliot Goldstein LLP,
dated May 16, 2006 (``Goldstein''); Letter from Jan Graham, Graham
Law Offices, dated May 15, 2006 (``Graham''); Letter from W. Scott
Greco, Greco & Greco, P.C., dated May 15, 2006 (``Greco
2''); Letter from Brian M. Greenman, Esq., dated May 15,
2006 (``Greenman''); Letter from Randall R. Heiner, Heiner Law
Offices, dated May 15, 2006 (``Heiner''); Letter from Eric Hewko,
dated May 20, 2006 (``Hewko''); Letter from Charles C. Hunter, Esq.,
Woska & Hayes, LLP, dated May 23, 2006 (``Hunter''); Letter from
Scott C. Ilgenfritz, dated May 15, 2006 (``Ilgenfritz 2'');
Letter from Wayne M. Josel, Kaufmann, Feiner, Yamin, Gildin &
Robbins, LLP, dated May 15, 2006 (``Josel 2''); Letter from
Jeffrey B. Kaplan, Dimond Kaplan Rothstein, P.A., dated May 16, 2006
(``Kaplan''); Letter from James D. Keeney, dated May 15, 2006
(``Keeney''); Letter from T. Michael Kennedy, dated May 15, 2006
(``Kennedy''); Letter from Joseph C. Korsak, Esq., Law Office of
Joseph C. Korsak, dated May 15, 2006 (``Korsak''); Letter from
Richard M. Layne, Layne & Lewis LLP, dated May 13, 2006 (``Layne
2''); Letter from Royal Lea, Bingham & Lea, P.C., dated May
16, 2006 (``Lea 2''); Letter from Dale Ledbetter, Adorno &
Yoss, dated May 15, 2006 (``Ledbetter 2''); Letter from
Prof. Seth E. Lipner, Zicklin School of Business, Member/Deutsch &
Lipner, dated May 15, 2006 (``Lipner 2''); Letter from
Jorge A. Lopez, Esq., Jorge A. Lopez, P.A., dated May 15, 2006
(``Lopez 2''); Letter from Michael B. Lynch, Esq., Law
Offices of James Richard Hooper, PA, dated May 16, 2006 (``Lynch'');
Letter from Daniel I. MacIntyre, Esq., Shapiro Fussell, dated May
16, 2006 (``MacIntyre''); Letter from Angela H. Magary, Brickley,
Sears & Sorett, dated May 31, 2006 (``Magary 2''); Letter from
Jenice L. Malecki, Esq., Malecki Law, dated May 16, 2006
(``Malecki''); Letter from Emerson R. Marks, Jr., Emerson R. Marks,
Jr., P.L.C., dated May 15, 2006 (``Marks''); Letter from Thomas D.
Mauriello, Law Offices of Thomas D. Mauriello, dated May 15, 2006
(``Mauriello''); Letter from Steven M. McCauley, Esq., Charles C.
Mihalek, P.S.C, dated May 16, 2006 (``McCauley''); Letter from C.
David Mee, Esq., Ajamie LLP, dated May 15, 2006 (``Mee''); Letter
from Stuart Meissner, Esq., The Law Offices of Stuart D. Meissner
LLC., dated May 15, 2006 (``Meissner 2''); Letter from
David P. Meyer, Esq., David P. Meyer Associates, Co. LPA, dated May
16, 2006 (``D. Meyer''); Letter from Stephen P. Meyer, Esq., Meyer &
Ford, dated May 16, 2006 (``S. Meyer''); Letter from John Miller,
Law Office of John J. Miller, P.C., dated May 15, 2006 (``Miller
2''); Letter from Stephen David Murakami, Esq., Hooper &
Weiss, LLC, dated May 16, 2006 (``Murakami''); Letter from Bryan
Lantagne, Director, Massachusetts Securities Division, Chair, NASAA
Broker-Dealer Arbitration Project Group, dated Jul. 19, 2006
(``NASAA''); Letter from Mitchell Ostwald, Law Office of Mitchell
Ostwald, dated May 16, 2006 (``Ostwald''); Letter from Jill Gross
and Barbara Black, Directors, Pace Investor Rights Project, Jun. 6,
2006 (``PACE 2''); Letter from Boyd Page, Page Perry LLC, dated May
16, 2006 (``Page 2''); Steve Parker, Page Perry, LLC, dated
May 16, 2006 (``Parker''); Letter from Henry I. Pass, Esq., The Law
Offices of Henry Ian Pass, dated May 15, 2006 (``Pass''); Letter
from Joseph C. Peiffer, Correro Fishman Haygood Phelps, dated May
15, 2006 (``Peiffer''); Letter from Susan N. Perkins, dated May 16,
2006 (``Perkins''); Letter from Steven B. Caruso, President-Elect,
Public Investors Arbitration Bar Association, dated May 16, 2006
(``PIABA 3''); Letter from Robert S. Banks, Jr., President,
Public Investors Arbitration Bar Association, dated May 26, 2006
(``PIABA 4''); Letter from Robert C. Port, Esq., Cohen Goldstein
Port & Gottlieb, LLP, dated May 20, 2006 (``Port''); Letter from
Herbert Pounds, Herbert E. Pounds, Jr., P.C., dated May 15, 2006
(``Pounds 2''); Letter from Thomas Quarles, Jr., Esq.,
Devine, Millimet & Branch, P.A., dated May 16, 2006 (``Quarles'');
Letter from Adam T. Rabin, Esq., Dimond Kaplan & Rothstein, P.A,
dated May 16, 2006 (``Rabin''); Letter from Kirk Reasonover, Esq.,
Smith & Fawer, L.L.C., dated May 16, 2006 (``Reasonover''); Letter
from Robert H. Rex, Esq., Dickenson Murphy Rex & Sloan, dated May
15, 2006 (``Rex''); Letter from David E. Robbins, Kaufmann, Feiner,
Yamin, Gildin & Robbins LLP, dated May 29, 2006 (``Robbins'');
Letter from J. Pat Sadler, dated May 16, 2006 (``Sadler
2''); Letter from Jay H. Salamon, Hermann Cahn & Schneider
LLP, dated May 15, 2006 (``Salamon''); Letter from Robert K. Savage,
Esq., The Savage Law Firm, P.A., dated May 16, 2006 (``Savage'');
Letter from Martin Seiler, dated May 15, 2006 (``Seiler''); Letter
from Steven Sherman, Law Offices of Steven M. Sherman, dated May 15,
2006 (``Sherman''); Letter from Scott R. Shewan, Born, Pape & Shewan
LLP, dated May 15, 2006 (``Shewan 2''); Letter from
Rosemary J. Shockman, Shockman Law Office, dated May 16, 2006
(``Shockman''); Letter from Brian N. Smiley, Gard Smiley & Bishop
LLP, dated May 15, 2006 (``Smiley''); Letter from James A. Sigler,
dated May 15, 2006 (``Sigler''); Letter from Scott Silver, Esq.,
Blum & Silver, LLP, dated May 17, 2006 (``Silver''); Letter from
Donald A.W. Smith, Esq., dated May 17, 2006 (``Smith''); Letter from
Jeff Sonn, dated May 22, 2006 (``Sonn 2''); Letter from Ben
Stewart, dated May 16, 2006 (``Stewart''); Letter from Tracy Pride
Stoneman, Tracy Pride Stoneman, P.C., dated May 16, 2006
(``Stoneman''); Letter from Mark A. Tepper, Mark A. Tepper P.A.,
dated May 15, 2006 (``Tepper 2''); Letter from William P.
Torngren, dated May 15, 2006 (``Torngren''); Letter from Al Van
Kampen, Rohde & Van Kampen PLLC, dated May 15, 2006 (``Van
Kampen''); Letter from James V. Weixel, Jr., Weixel Law Office,
dated May 15, 2006 (``Weixel''); Letter from Michael J. Willner,
Esq., Miller Faucher and Cafferty LLP, dated May 15, 2006 (``Willner
2''); Letter from A. Daniel Woska, Esq., Woska & Hayes,
LLP, dated May 12, 2006 (``Woska 2''); Letter from Todd
Young, dated May 15, 2006 (``T. Young''); Letter from William B.
Young, Jr., Hooper Weiss, LLC, dated Florida, May 18, 2006 (``W.
Young''); Letter from Elizabeth Zeck, Esq., Willoughby & Hoefer,
P.A., dated May 16, 2006 (``Zeck''). In addition, the Commission
received 15 form letters from individuals that were substantially
similar (``Letter Type A'') and three other form letters (``Letter
Type B'').
\7\ Because the Customer Code and Industry Code, as amended by
Amendments 1, 2, 3, and 4 to each code, already have been published
for comment, the request for accelerated approval applies only to
Amendments 5, 6, and 7 to each code.
---------------------------------------------------------------------------
II. Purpose for and Description of the Proposal
A. Background
NASD proposed to amend the NASD Code of Arbitration Procedure
(``current Code'') to simplify the rule language into plain English,
reorganize the rules, codify certain practices, and implement several
substantive changes. The current Code would be reorganized into three
separate procedural codes: The NASD Code of Arbitration Procedure for
Customer Disputes; the NASD Code of Arbitration Procedure for Industry
Disputes; and the NASD Code of Mediation Procedure.\8\ The three new
codes are intended to replace the current Code in its entirety.
---------------------------------------------------------------------------
\8\ The Mediation Code was filed separately with the Commission
as SR-NASD-2004-013. The Commission approved the Mediation Code on
October 31, 2005, and it became effective on January 30, 2006. See
Order Granting Approval to Proposed Rule Change and Amendments Nos.
1 and 2 Thereto, and Notice of Filing and Order Granting Accelerated
Approval to Amendment No. 3, to Amend NASD Rules for Mediation
Proceedings, Securities Exchange Act Rel. No. 52705 (Oct. 31, 2005),
70 FR 67525 (Nov. 7, 2005) (SR-NASD-2004-013).
---------------------------------------------------------------------------
This approval order pertains to the Customer Code and Industry
Code, the final texts of which are available on the NASD Web site at
http://www.nasd.com/web/[fxsp0]groups/med--arb/[fxsp0]documents/
mediation--arbitration/[fxsp0]nasdw--018335.pdf. Charts comparing the
current Code to the Customer Code and Industry Code are also available
at the URL above. Descriptions of the proposed rule changes, as amended
by Amendments 1, 2, 3, and 4, are contained in the Customer Code Notice
and Industry Code Notice \9\ and are also available at NASD's principal
office and at the Commission's Public Reference Room.
---------------------------------------------------------------------------
\9\ See supra n. 3.
---------------------------------------------------------------------------
B. Purpose and Description
In 1998, the SEC launched an initiative to encourage issuers and
self-regulatory organizations (``SROs'') to use ``plain English'' in
disclosure documents and other materials used by investors. Because the
current Code is used by investors, including investors who appear pro
se in the NASD forum, NASD undertook to rewrite the current Code in
``plain English.'' Over time, the goals of the plain English initiative
expanded beyond simplifying the language and sentence structure of the
rules in the Code to include:
Reorganizing the current Code in a more logical, user-
friendly way, including creating separate codes for
[[Page 4576]]
customer and industry arbitrations, and for mediations; and
Implementing several substantive rule changes, including
codifying several common practices, to provide more guidance to parties
and arbitrators, and to streamline the administration of arbitrations
in the NASD forum.
1. Plain English
When it launched its ``plain English'' initiative in 1998, the SEC
published a ``Plain English Handbook'' to provide guidance to issuers
and SROs in drafting materials intended to be used by investors. The
SEC's Plain English Handbook recommended using shorter, more common
words; breaking long rules into shorter ones; using the active voice
whenever possible; and putting lists into easy-to-read formatting, such
as bullet points.
NASD stated that, in revising the current Code, it implemented
these guidelines wherever possible. Throughout the Customer and
Industry Codes, NASD simplified language and eliminated unnecessarily
legalistic or arcane terminology. Long rules, such as current Rule
10308 (Selection of Arbitrators) and current Rule 10321 (General
Provisions Governing Pre-Hearing Proceedings), have been broken into
several shorter rules.\10\ Where appropriate, NASD has presented lists
in bullet point format and used active verbs.
---------------------------------------------------------------------------
\10\ For example, Rule 10308 of the current Code is contained in
Proposed Rules 12400-12406 for the Customer Code and 13400-13406 for
the Industry Code.
---------------------------------------------------------------------------
The Customer and Industry Codes also contain new definitions rules
(Proposed Rules 12100 and 13100, respectively) that define commonly
used terms applicable throughout the current Code.\11\ NASD believes
that a comprehensive definitions rule will make the Customer and
Industry Codes easier to understand and to use and will help eliminate
confusion about the meaning and scope of frequently used terms. It will
also allow NASD to use shorter phrases, or single words, in place of
longer phrases in its rules.\12\ This makes rules easier to read and
understand, without changing the meaning of the current Code.
---------------------------------------------------------------------------
\11\ Some rules in the current Code, such as Rule 10308, contain
definitions applicable to that rule only. However, there is no
general definitions rule that applies to the entire current Code.
\12\ For example, the phrase ``dispute, claim, or controversy''
has been replaced by the word ``dispute,'' which has been defined in
Proposed Rules 12100 and 13100, respectively, to mean the longer
phrase.
---------------------------------------------------------------------------
2. Reorganization
One of the most frequent criticisms of the current Code is that it
is poorly organized. Parties, particularly infrequent users of the
forum, have difficulty finding the rules they are looking for, because
the organization of the rules is not clear. The confusion is compounded
because certain rules in the current Code apply only to customer cases,
some apply only to industry cases, and others apply to both types of
disputes. In addition, the current Code contains the NASD mediation
rules, even though many matters are submitted directly to mediation,
and do not arise out of an arbitration proceeding.
To address these concerns, NASD proposed to divide the current Code
into three separate Codes: The Customer Code, the Industry Code, and
the Mediation Code.\13\ Although many of the rules in the Customer and
Industry Codes will be identical, NASD believes that maintaining
separate arbitration codes will eliminate confusion regarding which
rules are applicable to which types of disputes. NASD intends to
maintain electronic versions of each code on its Web site, http://www.nasd.com
, and will make paper copies available upon request.
---------------------------------------------------------------------------
\13\ As noted above, the Commission approved the Mediation Code
in October 2005. See supra note 8.
---------------------------------------------------------------------------
In keeping with the current NASD rule numbering system, each code
will be numbered in the thousands, and major sections will be numbered
in the hundreds. Individual rules within those sections will be
numbered in the tens (or ones, if necessary). The current method for
numbering and lettering paragraphs within individual rules will remain
unchanged. In particular, the Customer Code will use the Rule 12000
series, and the Industry Code will use the Rule 13000 series.\14\
---------------------------------------------------------------------------
\14\ Both of these series are currently unused. The Mediation
Code uses the Rule 14000 series. NASD will reserve the Rule 10000
series, which is currently used for NASD's dispute resolution rules,
for future use.
---------------------------------------------------------------------------
To make it easier to find specific rules, the Customer Code will be
divided into the following nine parts, which are intended to
approximate the chronological order of a typical arbitration:
Part I (Rule 12100 et seq.) contains definitions, as well
as other rules relating to the organization and authority of the forum;
Part II (Rule 12200 et seq.) contains general arbitration
rules, including what claims are subject to arbitration in the NASD
forum;
Part III (Rule 12300 et seq.) contains rules explaining
how to initiate a claim, how to respond to a claim, how to amend
claims, and when claims may be combined and separated;
Part IV (12400 et seq.) contains rules relating to the
appointment, authority and removal of arbitrators;
Part V (Rules 12500 et seq.) contains rules governing the
prehearing process, including proposed new rules relating to motions
and discovery;
Part VI (Rules 12600 et seq.) contains rules relating to
hearings;
Part VII (Rules 12700 et seq.) contains rules relating to
the dismissal, withdrawal, or settlement of claims;
Part VIII (Rules 12800 et seq.) contains rules relating to
simplified (small cases) arbitrations and default proceedings; and
Part IX (Rules 12900 et seq.) contains rules relating to
fees and awards. The Industry Code will use the same divisions,
numbered under the 13000 series.
3. Description of Other Changes
In addition to simplifying and reorganizing the current Code, the
Customer and Industry Codes include other changes that NASD states are
intended to make the NASD arbitration process as simple, uniform, and
transparent as possible. Some of these changes codify or clarify
current NASD practice. Others are intended to provide guidance to
parties, resolve open questions, or streamline or standardize the
administration of NASD arbitrations.
4. Relationship Between Proposed Customer Code and Industry Codes
Although the Customer Code and Industry Code are similarly
organized and numbered, there are two main differences. First, some
rules in the current Code contain different provisions for customer and
industry disputes.\15\ For such rules, the Customer Code contains only
the provisions that relate to customer disputes, and the Industry Code
contains only the provisions that relate to industry cases.
---------------------------------------------------------------------------
\15\ E.g., current Rule 10308 (Selection of Arbitrators)
requires that three-arbitrator panels in customer cases consist of a
majority of public arbitrators but provides that the composition of
the panel in industry disputes depends on the nature of the claim.
---------------------------------------------------------------------------
Second, some rules in the current Code apply only to industry
disputes. These rules are included in the Industry Code but have no
counterpart in the Customer Code.\16\ NASD has not proposed any
substantive changes to
[[Page 4577]]
those parts of the current Code that are unique to industry cases.
---------------------------------------------------------------------------
\16\ See, e.g., Rules 10210 and 10211 of the current Code,
governing statutory employment discrimination claims, and Rule 10335
of the current Code, governing injunctive relief.
---------------------------------------------------------------------------
III. Summary of Comments on the Customer Code as Amended by Amendments
1, 2, 3, and 4 Thereto and Description of Amendments 5, 6, and 7 to the
Customer Code \17\
---------------------------------------------------------------------------
\17\ Section III discusses Amendments 5, 6, and 7 to the
Customer Code. Section IV, below, discusses Amendments 5, 6, and 7
to the Industry Code.
---------------------------------------------------------------------------
As noted above, in Amendment 5 to the Customer Code, NASD responded
to comments on the Customer Code Notice,\18\ proposed additional rule
changes, most of which were in response to comments, and requested
accelerated approval of the Customer Code.\19\ After NASD filed
Amendment 5 with the Commission, the Commission received 125 additional
comments. Many of the comments centered on: (1) NASD's request for
accelerated approval; \20\ (2) provisions of Proposed Rules 12506
(Document Production Lists) and 12514 (Exchange of Documents and
Witness Lists Before Hearing), as published in the Customer Code
Notice, that concern the production during discovery of documents
within a party's ``control''; \21\ and (3) Proposed Rule 12504 (Motions
to Decide Claims Before a Hearing on the Merits), as amended by
Amendment 5.\22\ In response to these comments, NASD filed Amendment 6
to the Customer Code with the Commission on July 21, 2006, in which it
withdrew Proposed Rule 12504 (Motions to Decide Claims Before a Hearing
on the Merits) and all references thereto from the Customer Code.\23\
---------------------------------------------------------------------------
\18\ See supra note 3.
\19\ The request for accelerated approval applies to all
amendments filed after the Customer Code Notice, which are
Amendments 5, 6, and 7.
\20\ See, e.g., Aidikoff, Appel, Arbuckle, Austin, Baldinger,
Baccine, Batterman, Bernstein, Biggins, Bleecher, Brannan,
Buchwalter, T. Burke, Canning 2, Chalmers, Claxton, Cohn,
P. Davis, Doner, Elliott, Evans 2, Feinberg 2,
Gillis, Goldstein, Graham, Greco 2, Greenman, Hewko,
Hunter, Kaplan, Keeney, Korsak, Lea 2, Levine, Lopez
2, Lynch, MacIntyre, Magary 2, Malecki, Marks,
McCauley, Mee, Meissner 2, Meyer, S. Meyer, Miller
2, Murakami, Ostwald, Page 2, Parker, Pass,
Peiffer, Perkins, PIABA 3, Port, Pounds 2,
Quarles, Rabin, Reasonver, Robbins, Sadler, Salamon, Savage, Seiler,
Sherman, Shewan 2, Shockman, Sigler, Silver, Smiley, Smith,
Sonn 2, Stewart, Stoneman, Van Kampen, W. Young.
\21\ See, e.g., Eccleston 2, Fedor, Kaplan, Lipner
2, Page 2, Perkins, PIABA 4, Shockman,
Smiley.
\22\ See e.g., Aidikoff, Brannan, Boliver 2, Carlson,
Fedor, Kaufman, Lantagne, Lipner, PACE 2, Page 2,
PIABA 3, PIABA 4, Robbins, Rothstein, Shockman,
Smiley, Sonn 2, Tepper 2.
\23\ Proposed Rule 12504 has been re-filed as a separate
proposed rule change and published for public comment. See
Securities Exchange Act Rel. No. 54360 (Aug. 24, 2006), 71 FR 51879
(Aug. 31, 2006) (SR-NASD-2006-088).
---------------------------------------------------------------------------
NASD filed Amendment 7 to the Customer Code with the Commission on
August 15, 2006. In this amendment, NASD further responded to comments
concerning Proposed Rules 12506 (Document Production Lists) and 12514
(Exchange of Documents and Witness Lists Before Hearing) by amending
Proposed Rule 12508 (Objecting to Discovery; Waiver of Objection). In
addition, NASD amended other proposed rules, provided additional
clarification concerning certain NASD practices and rules, and
responded to one comment submitted in response to Amendment 5 to the
Customer Code.
A summary of comments received in connection with the Customer Code
Notice and NASD's responses, as well as a description of the amendments
to proposed rule text made in Amendments 5, 6, and 7 are included
below. References to Amendments 5, 6, or 7 in this Section 0 refer to
Amendments 5, 6, or 7 to the Customer Code only, unless otherwise
specified. For the text of Amendments 5, 6, and 7, please see the NASD
Web site at http://www.nasd.com/web/[fxsp0
]idcplg?IdcService=[fxsp0]SS--GET--[fxsp0]PAGE&ssDocName=NASDW--
[fxsp0]009306&=802.
A. General Comments
In the Customer Code Notice, the Commission solicited comment on
the differences between provisions in the Customer Code and their
counterparts in the Uniform Code of Arbitration (``Uniform Code'')
developed by the Securities Industry Conference on Arbitration
(``SICA'').\24\ One commenter favored the Uniform Code provisions over
those of the Customer Code, stating that because NASD's arbitration
program operates from a position of dominance, it has abandoned the
premise of uniformity under which SICA operates.\25\
---------------------------------------------------------------------------
\24\ SICA is a cooperative organization that is composed of
public members, as well as representatives of the SROs and the
Securities Industry Association. SICA works toward improving the
dispute resolution process by considering current issues, case law,
and policy in connection with arbitration, and amending the Uniform
Code in light of those considerations when appropriate. SROs have
often revised their own arbitration rules in accordance with changes
in the Uniform Code.
\25\ Ryder.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it participates actively in
SICA and values the input of SICA participants. In some instances,
however, the nature and volume of NASD's caseload require NASD to adopt
rules either in advance of other SROs or that differ from other SROs'.
NASD also stated that to gather a wide range of ideas and information,
it regularly discusses rule proposals with the same constituencies
represented at SICA: Representatives of the investor and industry
communities, as well as arbitrators and mediators.
B. Proposed Rule 12100--Definitions
1. Definitions Added in Amendment 5
As noted above, the Customer Code includes a comprehensive
definitions section. Two commenters suggested defining the term
``customer'' to help clarify jurisdictional and standing issues related
to arbitration.\26\ One commenter also suggested defining the term
``pleadings'' to assist pro se claimants to understand which documents
are required for their arbitration claims.\27\ Another commenter
suggested defining the term ``award'' to minimize the confusion
concerning what type of ruling by the panel constitutes an award.\28\
NASD proposed to define these terms in the Customer Code in Amendment
5.\29\ As amended, Proposed Rule 12100 would define an ``award'' in
paragraph (b) as ``a document stating the disposition of a case.''
Paragraph (i) would define a ``customer'' as not including a broker or
dealer. NASD noted that the definition of ``customer'' would be the
same as that found in the general definitions for NASD rules, Rule
0129(g). Paragraph (s) of the rule would define a ``pleading'' as ``a
statement describing a party's causes of action or defenses. Documents
that are considered pleadings are: a statement of claim, an answer, a
counterclaim, a cross claim, a third party claim, and any replies.''
---------------------------------------------------------------------------
\26\ PACE and Ryder.
\27\ PACE.
\28\ Ryder.
\29\ As a result of these new definitions, the remaining
definitions would be re-designated in alphabetical order.
---------------------------------------------------------------------------
2. Proposed Rule 12100(a)--Definition of Associated Person; Proposed
Rule 12100(r)--Definition of Person Associated With a Member
Proposed Rules 12100(a) and 12100(r) provide that, for purposes of
the Customer Code, an associated person includes a person formerly
associated with a member. One commenter suggested that, consistent with
NASD By-Laws,\30\ the concept of a formerly associated person should be
limited to persons who have been associated within two years.\31\ This
commenter asserted that when read in conjunction with Proposed Rule
12200 (concerning mandatory arbitration), these definitions would
subject formerly associated persons to NASD Dispute Resolution's
jurisdiction in perpetuity. In the
[[Page 4578]]
commenter's view, no NASD by-laws or NASD Dispute Resolution rules
permit lifelong jurisdiction.
---------------------------------------------------------------------------
\30\ See NASD By-Laws, Art. V, Sec. 4.
\31\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that the two-year retention of
jurisdiction in Article V, Section 4 of NASD's By-Laws is for NASD
regulatory purposes and does not apply to arbitrations. In the
arbitration context, NASD maintains jurisdiction over a formerly
associated person for events that occurred while the person was
associated with a member firm (or related to the person's termination
of employment with a member firm, in the case of industry disputes).
NASD noted that such arbitrations would be subject to any applicable
statutes of limitation, as well as the six-year eligibility rule under
Proposed Rule 12206. NASD thus is not proposing to amend Proposed Rules
12100(a) and 12100(r).
3. Proposed Rule 12100(u)--Definition of Public Arbitrator; Proposed
Rule 12100(p)--Definition of Non-Public Arbitrator
NASD proposed to define ``public arbitrator'' and ``non-public
arbitrator'' in the Customer Code the same way as in Rules 10308(a)(5)
and (a)(4), respectively, of the current Code. Twenty-three commenters
expressed concern with the definitions of public arbitrator and non-
public arbitrator.\32\ As a preliminary matter, they urged NASD to
change the term ``non-public arbitrator'' to ``industry arbitrator.''
In their view, the current terminology is not consistent with the goal
of rewriting the Customer Code in plain English. They suggested that
the term ``industry arbitrator'' would assist pro se parties or
inexperienced attorneys with no background in arbitration.
---------------------------------------------------------------------------
\32\ Boliver, Canning, Caruso, Estell, Evans, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PIABA,
Pounds, Rosenfield, Sadler, Schultz 2, Shewan, Stoltmann,
Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that it has used the term ``non-public
arbitrator'' since the Commission approved the Neutral List Selection
System (``NLSS'') in 1998.\33\ NASD expressed the belief that users of
its forum understand the term, and thus did not agree that the term
should be changed.
---------------------------------------------------------------------------
\33\ See Securities Exchange Act Rel. No. 40555, 63 FR 56670
(Oct. 22, 1998) (SR-NASD-1998-48).
---------------------------------------------------------------------------
Commenters also suggested several changes to the definition of
``public arbitrator'' and objected to the inclusion of a non-public
arbitrator on three-person panels.\34\ In Amendment 5, NASD responded
that because it did not propose substantive amendments to these
provisions in the Customer Code, those suggestions are outside the
scope of the rule filing. The Commission notes that changes to the
definition of ``public arbitrator'' are addressed in a separate rule
filing.\35\
---------------------------------------------------------------------------
\34\ Boliver, Canning, Caruso, Estell, Evans, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PIABA,
Pounds, Rosenfield, Sadler, Schultz 2, Shewan, Stoltmann,
Sutherland, and Willner.
\35\ The Commission recently approved the rule changes proposed
in the rule filing. See Order Approving Proposed Rule Change and
Amendment No. 1 Thereto Relating to Amendments to the Classification
of Arbitrators Pursuant to Rule 10308 of the NASD Code of
Arbitration Procedure, Securities Exchange Act Rel. No. 54607 (Oct.
16, 2006), 71 FR 62026 (Oct. 20, 2006) (SR-NASD-2005-094); Notice of
Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating
to Amendments to the Classification of Arbitrators Pursuant to Rule
10308 of the NASD Code of Arbitration, Securities Exchange Act Rel.
No. 52332 (Aug. 24, 2005), 70 FR 51365 (Aug. 30, 2005) (SR-NASD-
2005-094).
---------------------------------------------------------------------------
C. Proposed Rule 12102--National Arbitration and Mediation Committee
Proposed Rule 12102 includes the size and composition requirements
of the National Arbitration and Mediation Committee (``NAMC''). One
commenter noted that these requirements are not in the current
Code.\36\ NASD responded in Amendment 5 that Proposed Rule 12102 would
codify the requirements of the Plan of Allocation and Delegation of
Functions by NASD to Subsidiaries.\37\
---------------------------------------------------------------------------
\36\ Ryder.
\37\ See NASD Manual, Plan of Allocation and Delegation of
Functions by NASD to Subsidiaries, Part V(c)(1)(b); Securities
Exchange Act Rel. No. 37107 (Apr. 11, 1996) (SR-NASD-96-16).
---------------------------------------------------------------------------
D. Proposed Rule 12103--Director of Dispute Resolution
Proposed Rule 12103 includes a delineation of the duties and
responsibilities of the Director of Dispute Resolution with respect to
the NAMC. One commenter noted that the proposed rule would change the
Director's relationship with the NAMC.\38\ Specifically, the current
Code provides that the Director ``shall be directly responsible to the
NAMC and shall report to it at periodic intervals established by the
Committee and at such other times as called upon by the Committee to do
so.'' The Customer Code provides that the Director ``shall consult with
the NAMC upon the NAMC's request.''
---------------------------------------------------------------------------
\38\ Ryder.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that the proposed rule reflects current
practice. Pursuant to Article V, Section 5.1 of the NASD Dispute
Resolution By-Laws, the Director reports to the President of NASD
Dispute Resolution and, ultimately as an officer, to the NASD Dispute
Resolution Board. The Director meets with the NAMC, usually every
quarter, and updates the Committee on the state of the arbitration
forum. At this time, the Director receives feedback and suggestions on
arbitration rules and procedures from NAMC.
Another commenter expressed concern regarding provisions in
Proposed Rule 12103 that would give the Director the authority to
delegate certain functions.\39\ In this commenter's experience,
arbitrators seek out the advice of NASD staff on certain issues, such
as subpoenas, discovery matters, and motions. This commenter believes
NASD staff should not provide opinions on such issues, but rather they
should be addressed to the panel and, if necessary, argued by the
parties.
---------------------------------------------------------------------------
\39\ Magary.
---------------------------------------------------------------------------
NASD responded in Amendment 5 that its current policy is for staff
to advise arbitrators on procedural matters, but not to provide
opinions on substantive issues. If arbitrators ask staff about
substantive matters, NASD staff suggest that the arbitrators ask the
parties to brief the issue so that the arbitrators can make a decision.
NASD stated that it would emphasize this policy when it trains its
staff on the Customer Code.
E. Proposed Rule 12104--Effect of Arbitration on NASD Regulatory
Activities
Proposed Rule 12104 provides that submitting a dispute to
arbitration does not prevent NASD from taking additional regulatory
action, if warranted. The rule would allow any arbitrator to make
disciplinary referrals at the conclusion of an arbitration.
One commenter suggested that the proposed rule also should
authorize regulatory sanctions for breaches of the procedural
requirements of the arbitration rules.\40\ In Amendment 5, NASD
responded that because Proposed Rule 12104 is substantially the same as
Rule 10105 of the current Code, the comment is outside the scope of the
rule filing.
---------------------------------------------------------------------------
\40\ Ryder.
---------------------------------------------------------------------------
F. Proposed Rule 12105--Agreement of the Parties
As published in the Customer Code Notice, Proposed Rule 12105(a)
would allow parties to modify a provision of the Code or a decision of
the Director or the panel by written agreement. Proposed Rule 12105(b)
provides that if the Director or the panel determines that a named
party is inactive in the arbitration or has failed to respond after
adequate notice has been given, the
[[Page 4579]]
Director or the panel may determine that the written agreement of that
party is not required while the party is inactive or not responsive. In
the Customer Code Notice, the Commission requested comment on whether
the term ``inactive'' is defined sufficiently.
While one commenter thought the concept of an ``inactive'' party is
sufficiently clear,\41\ others suggested specifying that an
``inactive'' party is a party in default for failure to file a response
to a claim, counter-claim, or cross claim.\42\
---------------------------------------------------------------------------
\41\ PACE.
\42\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD stated that based on current practices in its
forum, the term ``inactive'' could apply to: (1) A party who answers
and then fails to respond to administrative matters or correspondence;
(2) a claimant who cannot be found, after the claimant's attorney
withdraws; or (3) a party who does not answer. In Amendment 7, NASD
proposed to include a non-exhaustive list inactive parties. Proposed
Rule 12105 is amended in Amendment 7 as follows (new language in
italics):
12105. Agreement of the Parties
(a) No change.
(b) If the Director or the panel determines that a named party is
inactive in the arbitration, or has failed to respond after adequate
notice has been given, the Director or the panel may determine that the
written agreement of that party is not required while the party is
inactive or not responsive. For purposes of this rule, an inactive
party could be, but is not limited to: (1) A party that does not
answer; (2) a party that answers and then fails to respond to
correspondence sent by the Director; (3) a party that answers and then
fails to respond to correspondence sent by the panel in cases involving
direct communication under Rule 12211; or (4) a party that does not
attend pre-hearing conferences.
G. Proposed Rule 12200--Arbitration Under an Arbitration Agreement or
the Rules of NASD
1. Insurance Business Exception
Proposed Rule 12200 provides that parties must arbitrate a dispute
under the Customer Code if (1) A written agreement requires it or the
customer requests it; (2) the dispute is between a customer and a
member or associated person of a member; and (3) the dispute arises in
connection with the business activities of a member or associated
person, unless the claims involve the insurance business activities of
a member that is also an insurance company. Eighteen commenters argued
that the rule could be read to exclude variable annuity claims from
arbitration because some state statutes treat these products solely as
insurance products, not securities.\43\ In their view, the choice of
whether to arbitrate variable annuity claims against NASD members
should belong to the investor.
---------------------------------------------------------------------------
\43\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that variable annuities are securities
and are not excluded from arbitration under the exception for disputes
involving the insurance business of a member that is also an insurance
company in current Rule 10101 (concerning matters eligible for
submission). According to NASD, no substantive change is intended in
Proposed Rule 12200.
2. Requests by the Customer to Arbitrate
Under Proposed Rule 12200, parties must arbitrate if ``requested by
the customer,'' and if the other requirements of the rule are
satisfied. One commenter suggested inserting the words ``of the
member'' after the word ``customer'' in the proposed rule text.\44\
This commenter asserted that this change would eliminate attempts by
customers to demand arbitration of disputes against firms with which
the customer does not have an account or other relationship. Another
commenter opposed this suggestion because it could preclude ``selling
away'' claims (allegations that an associated person engaged in
securities activities outside his or her firm).\45\ This commenter
stated that substantial judicial precedent supports the right of a
customer to file a selling away claim against the brokerage firm that
employed such an associated person, even if the customer has no account
with that firm.
---------------------------------------------------------------------------
\44\ SIA.
\45\ Eccleston.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that adding the words ``of the
member'' after the word ``customer'' would inappropriately narrow the
scope of claims that are required to be arbitrated under the Customer
Code. Further, NASD noted that because Proposed Rule 12200 is
substantially the same as Rule 10301 of the current Code, the comment
is outside the scope of the rule filing.
3. ``Business Activities''
Rule 10301(a) of the current Code provides that a dispute, claim,
or controversy arising in connection with the ``business of'' a member
or the ``activities of'' an associated person is eligible for
arbitration. In comparison, Proposed Rule 12200 would provide that
disputes arising from the ``business activities of the member or the
associated person'' must be arbitrated if the other conditions of the
rule are satisfied. One commenter suggested that this change could
alter the scope of disputes that members must arbitrate with customers,
as well as the scope of the exception for disputes involving
``insurance business activities'' of a member.\46\
---------------------------------------------------------------------------
\46\ Ryder.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that Proposed Rule 12200 is
substantively the same as Rule 10301 of the current Code and is not
intended to change the scope of arbitrable disputes. NASD also proposed
deleting the insurance company exception from Proposed Rule 12200,
noting that it is included in Proposed Rule 12201.
NASD reconsidered this decision in Amendment 7, and again proposed
to include the insurance business exception in Proposed Rule 12200.
Rule 10101 of the current Code provides that insurance disputes are not
eligible for arbitration,\47\ and Rules 10201 and 10301 of the current
Code delineate the eligible disputes that parties are required to
arbitrate. According to NASD, the proposed rules in the Customer Code
were rearranged to place the mandatory arbitration provision before the
elective arbitration provision in the Customer Code. Because of this
organization, NASD believes that clarity requires the insurance
exception to be included in both provisions.
---------------------------------------------------------------------------
\47\ Rule 10101 provides, ``This Code of Arbitration Procedure
is prescribed and adopted pursuant to Article VII, Section 1(a)(iv)
of the By-Laws of the Association for the arbitration of any
dispute, claim, or controversy arising out of or in connection with
the business of any member of the Association, or arising out of the
employment or termination of employment of associated person(s) with
any member, with the exception of disputes involving the insurance
business of any member which is also an insurance company.''
---------------------------------------------------------------------------
NASD also proposed to clarify in Amendment 7 that the term
``business activities of a member'' in Proposed Rule 12200 would
include ``selling away'' claims. Under the current Code, NASD accepts
cases brought by customers against associated persons in selling away
cases, and cases by customers against the associated person's member
firm if there is any allegation that the member was or
[[Page 4580]]
should have been involved in the events, such as an alleged failure to
supervise the associated person. As stated in Amendment 5, Proposed
Rule 12200 is not intended to change the scope of arbitrable disputes.
NASD reiterated in Amendment 7 that it would continue to accept these
types of cases under the Customer Code.
H. Proposed Rule 12201--Elective Arbitration
1. Business Activities
The elective arbitration provision of Proposed Rule 12201, like the
mandatory arbitration provision of Proposed Rule 12200, describes the
scope of disputes that parties may choose to arbitrate, if the other
conditions of the rule are satisfied, as relating to the ``business
activities of a member or an associated person, except disputes
involving the insurance business activities of a member that is also an
insurance company.'' One commenter suggested that this phrasing, and in
particular the term ``business activities,'' could alter the scope of
disputes that parties could elect to arbitrate.\48\ This commenter
viewed the reference to ``business activities'' of an associated person
as a substantive change to the types of cases that parties may agree to
arbitrate, stating that the phrase implies a ``scope of employment''
construction. This commenter also noted that including the ``insurance
company'' exception in the elective arbitration rule implies that NASD
cannot entertain the arbitration of such disputes, even if all the
parties agree.
---------------------------------------------------------------------------
\48\ Ryder.
---------------------------------------------------------------------------
In Amendment 5, NASD disagreed with the commenter, stating that
Proposed Rule 12201 is not intended to alter the scope of claims that
currently are eligible for voluntary arbitration under Rule 10101 of
the current Code. Thus, NASD did not propose to amend Proposed Rule
12201. (See also Section 0, regarding selling away claims.)
2. Disclosures Regarding Insurance
Three commenters suggested that respondents should be required to
disclose ``the presence and amount of insurance, if applicable.'' \49\
These commenters stated that small brokerage firms that have insurance
are able to coerce small settlements by falsely claiming an inability
to pay. Two commenters also stated, ``[c]laimants, who are selecting
arbitrators (some of whom have insurance affilations) need to know
whether an insurance company lawyer is defending.'' \50\ In Amendment
5, NASD stated that because Proposed Rule 12201 is substantively the
same as Rule 10101 of the current Code, these comments are outside the
scope of the rule filing.
---------------------------------------------------------------------------
\49\ Canning, Lipner, and Sutherland.
\50\ Canning, Lipner.
---------------------------------------------------------------------------
I. Proposed Rule 12203--Denial of NASD Forum
Rule 10301(b) of the current Code provides that the Director of
Arbitration, upon approval of the NAMC or its Executive Committee, may
decline to permit the use of the NASD arbitration forum if the
``dispute, claim, or controversy is not a proper subject matter for
arbitration.'' Proposed Rule 12203(a) would provide that the Director
``may decline to permit the use of the NASD arbitration forum if the
Director determines that, given the purposes of NASD and the intent of
the Code, the subject matter of the dispute is inappropriate, or that
accepting the matter would pose a risk to the health or safety of
arbitrators, staff, or parties or their representatives.'' To ensure
that the authority to deny the forum could not be delegated by the
Director, the rule would provide that only the Director or the
President of NASD Dispute Resolution may exercise the Director's
authority under the rule.
One commenter suggested that the proposed rule should clarify that
if the Director or President denies the use of the forum, and if there
is no alternative forum specified in the arbitration agreement, a
customer can pursue his or her remedies in court.\51\ In Amendment 5,
NASD responded that it does not believe it is appropriate for NASD to
offer an opinion as to any other remedies that a party might be able to
pursue. Accordingly, NASD amended the title of the proposed rule to
read ``Denial of NASD Forum'' to avoid the suggestion that it is under
an obligation to refer a party to another forum.
---------------------------------------------------------------------------
\51\ PACE.
---------------------------------------------------------------------------
Another commenter expressed concern that the proposed rule would no
longer require the Director to obtain the approval of the NAMC or the
Executive Committee to deny access to the arbitration forum.\52\ In
Amendment 5, NASD stated that the proposed rule is intended to address
circumstances that may require immediate resolution, such as security
concerns and other unusual but serious situations, and in which the
Director needs flexibility. Noting that the proposed rule provides that
this authority may only be exercised by the Director or the President
of NASD Dispute Resolution, NASD did not propose an amendment to
Proposed Rule 12203 in connection with this comment.
---------------------------------------------------------------------------
\52\ Ryder.
---------------------------------------------------------------------------
J. Proposed Rule 12204--Class Actions
Rule 10301 of the current Code provides that a claim is not
eligible for arbitration at NASD if it is (1) submitted as a class
action, or (2) filed by a member or members of a putative or certified
class action, if the claim is encompassed by a putative or certified
class action filed in federal or state court, or is ordered by a court
for class-wide arbitration at an arbitral forum not sponsored by an
SRO. Such claims, however, may become eligible for arbitration at NASD
if a claimant demonstrates that he or she has elected not to
participate in the putative or certified class action or, if
applicable, has complied with any conditions for withdrawing from the
class prescribed by the court. Rule 10301 of the current Code also
provides that a panel of arbitrators may hear disputes concerning
whether a particular claim is encompassed by a putative or certified
class action. Alternatively, either party may elect to petition the
court with jurisdiction over the putative or certified class action to
resolve such disputes. As published in the Customer Code Notice,
Proposed Rule 12204 is intended to be substantively the same as Rule
10301.
Eighteen commenters raised two interpretive issues with respect to
the class action rule under the current Code.\53\ First, they indicated
that respondents may argue that any claim involving a security that is
also the subject of a pending class action lawsuit is ineligible for
arbitration. In their experience, respondents have offered this
argument even though claims in the arbitration case are factually and
legally distinguishable from those in the class action. They also
stated that respondents that are not defendants in the class action may
make motions to dismiss, citing this argument.
---------------------------------------------------------------------------
\53\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
Second, the commenters argued that, although the current Code
allows a party to opt out of the class action, it does not explain how
a party can demonstrate to NASD that he or she is not participating in
the class action, either before or after a class has been certified.
In Amendment 5, NASD proposed to clarify in Proposed Rule 12204(b)
that only claims based on the same facts and law and that involve the
same
[[Page 4581]]
defendants as in a class action are not arbitrable. NASD also proposed
to clarify in Proposed Rule 12204(b) the procedure a party would use to
demonstrate to NASD that he or she is opting or has opted out of a
class action. In particular, NASD proposed to amend Proposed Rule 12204
as follows (new language in italics; deleted language in [brackets]):
12204. Class Action Claims
(a) No change.
(b) [No claim that is included] Any claim that is based upon the
same facts and law, and involves the same defendants as in a court-
certified class action or a putative class action, or that is ordered
by a court for class-wide arbitration at a forum not sponsored by a
self-regulatory organization, [will] shall not be arbitrated under the
Code, unless the party bringing the claim [shows] files with NASD one
of the following:
(1) A copy of a notice filed with the court in which the class
action is pending that [it is not participating] the party will not
participate in the class action[,] or in any recovery that may result
from the class action, or has withdrawn from the class according to any
conditions set by the court[, if any]; or
(2) a notice that the party will not participate in the class
action or in any recovery that may result from the class action.
(c) No change.
(d) No change.
* * * * *
K. Proposed Rule 12206--Time Limits
Proposed Rule 12206 provides, in pertinent part, that claims are
not eligible for arbitration under the Customer Code when six years
have elapsed from the occurrence or event giving rise to the claim, and
that the panel will resolve any questions regarding the eligibility of
a claim. One commenter suggested eliminating the proposed rule.\54\ In
this commenter's view, the Customer Code should authorize the
arbitration panel to apply relevant statutes of limitation instead. In
Amendment 5, NASD responded that because Proposed Rule 12206 is
substantively the same as Rule 10304 of the current Code, this comment
is outside the scope of the rule filing.
---------------------------------------------------------------------------
\54\ PACE.
---------------------------------------------------------------------------
One commenter suggested that NASD amend the proposed rule to state
that it is not a statute of repose.\55\ In Amendment 5, NASD responded
that it believed the suggestion could make the proposed rule confusing
and therefore declined to amend the rule on this issue.
---------------------------------------------------------------------------
\55\ Magary.
---------------------------------------------------------------------------
L. Proposed Rule 12207--Extension of Deadlines
In relevant part, Proposed Rule 12207(c) provides that the Director
may extend or modify any deadline set by the Code for good cause, or by
the panel in extraordinary circumstances. Two commenters suggested that
the standard for extending deadlines for answering the statement of
claim should remain the same as under Rule 10314 of the current Code,
which provides that extensions of the time to answer are disfavored and
will not be granted by the Director except in extraordinary
circumstances.\56\ In their view, Proposed Rule 12207, when read
together with Proposed Rule 12303, would be less stringent than the
current standard.
---------------------------------------------------------------------------
\56\ Canning and Feinberg.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it believes that having a
single, uniform standard for extensions of deadlines by the Director
simplifies the Customer Code and is in the public interest. Such
extensions would not be automatic upon request but would require
respondents to demonstrate that they have good cause for seeking an
extension of time to answer the statement of claim.
One commenter noted that the proposed rule would give the Director
authority to override a panel deadline.\57\ Even though this rule would
expressly limit this authority to extraordinary circumstances, the
commenter questioned the Director's need for this authority and for
overriding a case-specific ruling made by a panel.
---------------------------------------------------------------------------
\57\ Ryder.
---------------------------------------------------------------------------
NASD responded that the phrase ``extraordinary circumstances''
would encompass such unexpected and uncontrollable events as a weather-
related or security emergency. NASD noted that there have been
instances, such as hurricanes and terrorist attacks, when NASD Dispute
Resolution offices had to be evacuated, the offices of parties and
counsel were damaged, and hearings could not be held safely. NASD
believes that in such situations, the Director needs the authority to
postpone deadlines until order is restored. For the above reasons, NASD
is not proposing to amend Proposed Rule 12207 at this time.
M. Proposed Rule 12212--Sanctions
Rule 10305(b) of the current Code (Dismissal of Proceedings)
provides that the ``arbitrators may 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) if lesser
sanctions have proven ineffective.'' In addition, the NASD Discovery
Guide (``Discovery Guide'') states that ``[t]he panel has wide
discretion to address noncompliance with discovery orders.'' Proposed
Rule 12212 would incorporate and codify these current sanctions
provisions and extend them beyond the discovery context to apply to
non-compliance with any provision of the Code, or order of the panel or
a single arbitrator authorized to act on behalf of the panel. NASD
stated that this rule change would encourage parties to comply with
both the Customer Code and orders of the panel, and would also clarify
the authority of arbitrators to ensure the fair and efficient
administration of arbitration proceedings when parties do not comply.
1. Procedural Guidance
Two commenters stated that Proposed Rule 12212 grants broad
authority to the panel to impose sanctions without providing guidance
on how and when sanctions should be applied.\58\ One of these
commenters suggested that the lack of procedural and substantive
standards creates the risk that sanctions will become a routine part of
arbitration practice.\59\ This commenter urged NASD to, among other
things, require notice and an opportunity to be heard and eliminate the
panel's authority to sanction a party for failing to comply with any
provision of the Customer Code.
---------------------------------------------------------------------------
\58\ Ragsdale and SIA.
\59\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD explained that the panel has the authority to
control all aspects of an arbitration, and, therefore, must have the
ability to enforce the rules of the forum as well as its orders.
Therefore, the proposed rule specifically provides that the panel has
the authority to impose sanctions for violations of any provision of
the Customer Code. NASD believes that underscoring the panel's
authority will deter parties from violating the Customer Code and from
employing abusive tactics, which require considerable time and effort
to address. In turn, NASD believes reducing the incidence of violations
and abusive tactics will expedite arbitrations. NASD also stated that
it intends to provide guidance in arbitrator training materials on the
Customer Code on how and when this proposed rule should be applied.
[[Page 4582]]
2. Sanctions Between the Time a Claim Is Filed and the Time a Panel Is
Selected
One commenter expressed support for Proposed Rule 12212 but noted
that no panel is available to enforce compliance with the provisions of
the Customer Code between the time a claim is filed and the time a
panel is selected.\60\ This commenter suggested amending the proposed
rule to provide explicit authority to a single arbitrator appointed
during this time, or the panel, once appointed, to sanction parties for
abusive or violative conduct that may occur during this time.
---------------------------------------------------------------------------
\60\ PACE.
---------------------------------------------------------------------------
In Amendment 5, NASD stated that Proposed Rule 12212 would give the
panel discretion to impose sanctions for any violations of the Customer
Code, regardless of when they occurred. For this reason, NASD is not
proposing to amend the proposed rule at this time.
3. Disciplinary Referrals
One commenter suggested that Proposed Rule 12212 should emphasize
that a panel can make a disciplinary referral for a violation of NASD
rules that either occurred during an arbitration or is related to
conduct addressed as a claim in arbitration.\61\ In Amendment 5, NASD
explained that it intends to address the use of disciplinary referrals
in NASD arbitrator training materials on the Customer Code.
---------------------------------------------------------------------------
\61\ Magary.
---------------------------------------------------------------------------
4. Other Comments
One commenter noted that a party cannot appeal an abusive or
excessive ruling, and that arbitrators are not required to explain
their decision to impose sanctions.\62\ This commenter suggested
amending Proposed Rule 12212 to require forum fees to be assessed
against respondents, except when a claim is brought in bad faith. This
commenter also suggested requiring the panel to explain its findings if
it assesses fees against a party.
---------------------------------------------------------------------------
\62\ Ragsdale.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that a panel's rulings cannot be
appealed under the Customer Code, and NASD is not proposing to create
an appellate process. NASD stated that parties may ask the arbitrators
to explain their imposition of sanctions in the award. It also noted
that, as under the Customer Code, parties may seek to vacate or modify
an award under the Customer Code on grounds provided by applicable
federal or state arbitration laws. Although sanctions are rarely
imposed, NASD intends to recommend in arbitrator training that
arbitrators provide a written explanation for any sanctions in the
award. Thus, NASD is not proposing to amend Proposed Rule 12212 at this
time.
N. Proposed Rule 12213--Hearing Locations
Proposed Rule 12213 provides that the Director generally will
select the hearing location closest to the customer's residence at the
time of the events giving rise to the dispute. The proposed rule also
would clarify that before arbitrator lists are sent to the parties
under Rule 12403, the parties may agree in writing to a different
hearing location other than the one selected by the Director, and that
the Director may change the hearing location upon motion of a party.
One commenter supported the proposed rule but expressed concerned
that a pro se customer might be discouraged from submitting an
arbitration claim because the customer could not afford to travel to a
distant hearing location.\63\ This commenter suggested that NASD amend
the proposed rule to clarify that a customer may request a more
convenient hearing location upon filing a claim.
---------------------------------------------------------------------------
\63\ PACE.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that Proposed Rule 12213 is
substantively the same as Rule 10315 of the current Code and stated
that the commenter's suggested change may provide customers with the
false impression that their request will be the only factor used to
determine where the hearing is held. Currently, parties may request a
hearing location, and this request is considered along with other
factors in determining the hearing location for an arbitration. This
practice would not change under the Customer Code.
NASD also noted that the panel, once appointed, would have the
authority to change the hearing location. Although this authority is
already included in Proposed Rule 12503(c)(2), NASD stated that it
would be logical to include this authority in Proposed Rule 12213, as
well. Therefore, NASD proposed to amend Proposed Rule 12213 as follows
(new language in italics):
12213. Hearing Locations
(a) U.S. Hearing Location
(1) No change.
(2) No change.
(3) No change.
(4) After the panel is appointed, the panel may decide a motion
relating to changing the hearing location.
(b) Foreign Hearing Location
No change.
* * * * *
O. Proposed Rule 12300--Filing and Serving Documents; Proposed Rule
12302--Filing an Initial Statement of Claim
Under the current Code, initial statements of claim are filed with
the Director and served on the other parties by the Director. This
procedure would be the same under Proposed Rules 12300 and 12302. Two
commenters suggested that the proposed rules should allow a claimant to
directly serve the respondent with the statement of claim and the
uniform submission agreement.\64\ In their view, this would be
especially helpful to a claimant when time is of the essence.
---------------------------------------------------------------------------
\64\ Canning and Feinberg.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that Proposed Rules 12300 and 12302 do
not change the current process for serving claims. It also explained
that it currently tries to serve claims as quickly as possible, and if
its staff is notified that a party is elderly or infirm, NASD will try
to expedite the process even further.\65\
---------------------------------------------------------------------------
\65\ See Press Release, NASD, NASD Implements Expedited Dispute
Resolution Proceedings for Elderly or Seriously Ill Parties (Jun.
18, 2004), available at http://www.nasd.com/PressRoom/NewsReleases/2004NewsReleases/NASDW_002820
.
---------------------------------------------------------------------------
One commenter suggested that NASD amend Proposed Rule 12302 to
state that the statement of claim is not required to plead legal causes
of action or legal theories.\66\ In Amendment 5, NASD responded that
because Proposed Rule 12302 is substantially the same as paragraphs (1)
and (2) of Rule 10314(a) of the current Code, the comment is outside
the scope of the rule filing.
---------------------------------------------------------------------------
\66\ PACE.
---------------------------------------------------------------------------
P. Proposed Rule 12301--Service on Persons Currently Associated With a
Member
Proposed Rule 12301 provides that service on an associated person
may be made either on the member or directly on the associated person.
If service is made on the member, the member would be required to serve
the associated person, even if the member would not be representing the
associated person in the arbitration. One commenter noted that the
proposed rule is not limited to use by the Director or to initial
pleadings.\67\ The commenter noted that Proposed Rule 12301 would allow
a claimant to serve all documents only on the member, which could cause
confusion if the member and associated person are separately
represented. It also would delay service on the
[[Page 4583]]
associated person. Thus, the commenter suggested amending the proposed
rule to apply only to service of initial pleadings, or only to the
Director for service of statements of claim.
---------------------------------------------------------------------------
\67\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it did not intend to make any
substantive changes from the current Code, which permits (but does not
require) the Director to serve statements of claim on currently
employed associated persons through their firms when the associated
person and the firm are both respondents. NASD stated that in practice,
it rarely uses this form of service. NASD nonetheless proposed to
clarify the proposed rule to reflect current procedure and to specify
that only the Director may serve associated persons by serving the
member, and that this method of service may only be used for initial
statements of claim. Proposed Rule 12301, as amended in Amendment 5,
provides (new language in italics; deleted language in [brackets]):
12301. Service on Associated Persons [Currently Associated With a
Member]
(a) [If a member and a person currently associated with the member
are named as respondents to the same arbitration,] The Director will
serve the initial statement of claim on [service on the person] an
associated person [with the member] directly at the person's
residential address or usual place of abode [may be made on the member
or directly on the associated person]. If service cannot be completed
at the person's residential address or usual place of abode, the
Director will serve the initial statement of claim on the associated
person at the person's business address.
(b) If a member and a person currently associated with the member
are named as respondents to the same arbitration, and the Director
cannot complete service as provided in paragraph (a), then the Director
may serve the member with the initial statement of claim on behalf of
the associated person. If service is made on the member, the member
must serve the associated person, even if the member will not be
representing the associated person in the arbitration. If the member is
not representing the associated person in the arbitration, the member
must notify, and provide the associated person's current address to,
all parties and the Director.
* * * * *
Q. Proposed Rule 12307--Deficient Claims
Proposed Rule 12307 provides that the Director will not serve any
claim that is deficient and lists the reasons that a claim may be
deficient. In the Customer Code Notice, the Commission specifically
asked for comment on whether any changes intended to be nonsubstantive
were actually substantive. In the event commenters identified
substantive changes, the Commission asked why they are substantive, how
they will affect the arbitration process or the rights of the parties,
and whether they are an improvement over the current Code.
Several commenters stated that Proposed Rule 12307 represents a
substantive change and is biased in favor of respondents.\68\ They
explained that if claimants file a deficient claim, the arbitration
would be delayed until all deficiencies are corrected, and if the
respondent files a deficient answer the claims also would be delayed.
They suggested amending the rule to provide that deficient filings by
respondents shall not delay the service of the arbitrator list
selection materials, so as not to delay the case. Similarly, some
commenters suggested that NASD should not transmit a deficient answer
and gave as examples respondents' failure to submit a uniform
submission agreement, or filing of a one-page denial as an initial
answer, and subsequent submission of an amended answer.\69\ These
commenters also argued that there should be uniformity in application
of the proposed rule.
---------------------------------------------------------------------------
\68\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
\69\ Meissner.
---------------------------------------------------------------------------
Two commenters expressed concern that the sanctions imposed on
respondents under Proposed Rule 12308 (Loss of Defenses Due to Untimely
or Incomplete Answer) are not the same as those imposed on claimants
for similar conduct.\70\ They noted that if a claimant fails to file a
uniform submission agreement, then NASD would consider the claim to be
deficient under Proposed Rule 12307, but if the respondent fails to
file a uniform submission agreement, the arbitration would proceed.
These commenters suggested that NASD amend Proposed Rule 12308 to
require respondents to submit a uniform submission agreement in a
timely manner. They also suggested that NASD not transmit the answer to
arbitrators unless the respondent files a uniform submission agreement,
and that respondents should be precluded from engaging in any
arbitration-related activity until they file the uniform submission
agreement.
---------------------------------------------------------------------------
\70\ Canning and Feinberg.
---------------------------------------------------------------------------
In Amendment 5, NASD confirmed that a deficient claim would not be
processed until the deficiencies are corrected, and that the same is
not true if a respondent's answer is deficient. NASD explained that it
does not have a mechanism to delay or prevent service of answers
because while it serves initial statements of claim, it does not serve
answers. NASD further responded that the proposed rule codifies current
deficiency practice. NASD noted that, nonetheless, a respondent could
lose the ability to assert any claims or defenses at the hearing under
Proposed Rule 12308 for an untimely or deficient answer and also could
be subject to sanctions under Proposed Rule 12212. Therefore, NASD is
not proposing to amend the proposed rule at this time based on these
comments but stated that it would consider them when determining
whether future amendments are warranted.
R. Proposed Rule 12308--Loss of Defenses Due to Untimely or Incomplete
Answer
One commenter, citing the proposed definition of ``claim,'' stated
that Proposed Rule 12308(a) could impose a severe penalty, including
default proceedings under Proposed Rule 12801, for failure to answer
any allegation regardless of materiality, a party's ability to
investigate by the time the answer is due, or the ``boilerplate''
nature of the allegation.\71\
---------------------------------------------------------------------------
\71\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that Proposed Rule 12308 is
substantially the same as Rule 10314(b)(2) of the current Code and that
the comments made on this issue are outside the scope of the rule
filing. In Amendment 7 NASD further explained that Rule 10314(b)(2)(C)
of the current Code, which is the basis for Proposed Rule 12308(a), is
meant to address the timeliness of the answer, rather than its
completeness. It stated that the other provisions of Rule
10314(b)(2)(C), addressing completeness, were included in Proposed Rule
12308(b). NASD also proposed in Amendment 7 to clarify that: (1) The
listed sanctions apply only if a party does not file an answer within
the time period specified in the Code; and (2) default proceedings
apply only if the other conditions of Proposed Rule 12801, such as a
member's expulsion from NASD, for example, are met. The proposed rule
is amended as follows (new language in italics; deleted language in
[brackets]):
12308. Loss of Defenses Due to Untimely or Incomplete Answer
(a) If a party [fails to] does not answer [any claim] within the
time period
[[Page 4584]]
specified in the Code, the panel may, upon motion, bar that party from
presenting any defenses or facts at the hearing, unless the time to
answer was extended in accordance with the Code. The party may also be
subject to default proceedings under Rule 12801, if the conditions of
Rule 12801(a) apply.
(b) No change.
* * * * *
S. Proposed Rule 12309--Amending Pleadings; Proposed Rule 12310--
Answering Amended Claims
Rule 10314 of the current Code establishes the general procedures
for filing initial pleadings and answers. Rule 10328 of the current
Code pertains to amended pleadings and their responses. Two commenters
reported that under the current Code, respondents attempt to prevent
claimants from submitting a response to amended pleadings by alleging
that Rule 10314 only allows the claimant to reply to a counterclaim,
even though Rule 10328 of the current Code permits any party to submit
a response to any amended pleading, in accordance with Rule
10314(b).\72\ They suggested that NASD amend Proposed Rule 12310, which
pertains to answering amended claims, to clarify that all parties have
a right to file a response to any amended pleading, as currently
permitted by Rule 10328.
---------------------------------------------------------------------------
\72\ Canning and Meissner.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it did not intend to change
current practice in the Customer Code. NASD explained that Rule 10314
neither prohibits nor permits the practice of responding to amended
pleadings.\73\ NASD proposed to revise Proposed Rule 12309 to clarify
that all parties have a right to file a response to any amended
pleading. The proposed rule would allow 20 days from the receipt of the
amended pleading for the service of the response, unless the panel
determines otherwise. NASD also proposed to clarify in Proposed Rule
12309(a)(1) that the service requirements of Proposed Rule 12300
(Filing and Serving Documents) also apply to Proposed Rule 12309. The
proposed rule change is amended as follows (new language in italics):
---------------------------------------------------------------------------
\73\ Telephone conversation among Jean Feeney, Vice President,
NASD; Mignon McLemore, Assistant Chief Counsel, NASD Dispute
Resolution; Lourdes Gonzalez, Assistant Chief Counsel--Sales
Practices, Division of Market Regulation, SEC; and Gena Lai, Special
Counsel, Division of Market Regulation, SEC (Dec. 1, 2006).
---------------------------------------------------------------------------
12309. Amending Pleadings
(a) Before Panel Appointment.
Except as provided in paragraph (c), a party may amend a pleading
at any time before the panel has been appointed.
(1) To amend a statement of claim that has been filed but not yet
served by the Director, the claimant must file the amended claim with
the Director, with additional copies for each arbitrator and each other
party. The Director will then serve the amended claim in accordance
with Rules 12300 and 12301.
(2) No change.
(b) No change.
(c) No change.
(d) Responding to an Amended Pleading.
Any party may file a response to an amended pleading, provided the
response is filed and served within 20 days of receipt of the amended
pleading, unless the panel determines otherwise.
* * * * *
T. Proposed Rule 12310--Answering Amended Claims
Proposed Rule 12310 establishes the procedural requirements for
answering amended claims. One commenter noted that the proposed rule
would give a respondent 20 days to answer an amended statement of claim
and suggested that NASD amend the proposed rule so that the 20-day
period would be calculated from the respondent's receipt of the amended
statement of claim.\74\
---------------------------------------------------------------------------
\74\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that, as part of the initiative to
standardize time limits in the Customer Code, the time to answer an
amended claim was extended from 10 business days to 20 calendar days.
Thus, a respondent would have more time to respond to an amended claim
under the Customer Code than under the current Code. Therefore, NASD is
not proposing to amend the proposed rule at this time.
U. Proposed Rule 12312--Multiple Claimants; Proposed Rule 12313--
Multiple Respondents
Proposed Rules 12312 and 12313 set forth standards by which parties
or claims may be joined in the same arbitration case. Proposed Rule
12312 provides that one or more parties may join multiple claims in the
same arbitration if the claims contain common questions of law and fact
and the claims: (1) Assert any right to relief jointly and severally;
or (2) arise out of the same transaction or occurrence, or series of
transactions or occurrences. Proposed Rule 12313 provides that one or
more parties may name one or more respondents in the same arbitration
if the claims contain any questions of law or fact common to all
respondents and the claims: (1) assert any right to relief jointly and
severally; or (2) arise out of the same transaction or occurrence, or
series of transactions or occurrences. Both proposed rules also provide
that the Director may separate claims into two or more cases and
establish procedures for parties to appeal the Director's action.
1. ``Joint and Several Relief''
Two commenters compared Rule 10314(d) of the current Code and
Proposed Rules 12312 and 12313 to Rule 20 of the Federal Rules of Civil
Procedure (Permissive Joinder of Parties) (``FRCP Rule 20'').\75\ In
their view, Proposed Rules 12312 and 12313 do not track FRCP Rule 20
correctly. They explained that parties seeking to join claims or
respondents under FRCP Rule 20 must satisfy two criteria: (1) The
parties' claims must have arisen out of the same transaction or
occurrence or series of transactions or occurrences; and (2) the claims
must contain common questions of law or fact. Both commenters argued
that joint and several relief should not be an alternative to the
``same transaction or occurrence or series of transactions or
occurrences'' requirement, and therefore should be deleted from the
rule. They also stated that Proposed Rules 12312 and 12313
substantively change the joinder requirements for multiple parties
contained in Rule 10314(d).
---------------------------------------------------------------------------
\75\ Krosschell and SIA. FRCP Rule 20 provides ``All persons may
join in one action as plaintiffs if they assert any right to relief
jointly, severally, or in the alternative in respect of or arising
out of the same transaction, occurrence, or series of transactions
or occurrences and if any question of law or fact common to all
these persons will arise in the action.''
---------------------------------------------------------------------------
In Amendment 5, NASD responded that the joinder requirements in
Proposed Rules 12312 and 12313 were not intended to differ in substance
from those in Rule 10314(d). In NASD's view, the reference to joint and
several relief in FRCP Rule 20 and Rule 10314(d) of the current Code is
an alternative requirement to the ``same transactions or occurrences''
requirement and is appropriately written in the alternative in the
proposed rules. Therefore, NASD did not propose changes to the proposed
rules on this issue.
2. Standards for Severing Claims
Proposed Rule 12312(b) provides that after all responsive pleadings
have been served, claims joined together under paragraph (a) of the
rule may be separated into two or more arbitrations
[[Page 4585]]
by the Director before a panel is appointed, or by the panel after the
panel is appointed. One commenter argued that Proposed Rule 12312(b)
would give the Director unfettered discretion to sever claims, without
providing any standards for doing so.\76\ This commenter also contended
that severing claims could impose a financial hardship on some parties.
The commenter suggested that NASD amend the proposed rule to
incorporate the standards used to determine when to sever a claim.
---------------------------------------------------------------------------
\76\ Magary.
---------------------------------------------------------------------------
In Amendment 5, NASD explained that Proposed Rules 12312 and 12313
provide the standard for when cases may be joined. Conversely, cases
involving multiple claimants or multiple respondents that do not meet
these criteria may be severed. NASD explained that it did not intend to
change the current policy that the Director's decision to consolidate
claims is preliminary and may be reconsidered by the panel. The
Director's decision to sever claims also is preliminary. Accordingly,
in Amendment 5, NASD proposed to clarify the current procedure for
appealing the Director's decision to sever claims. Because there are at
least two surviving panels when the Director severs claims, multiple
panels could review the Director's decision, with potentially
conflicting results. To avoid inconsistent results and to expedite the
arbitration process, NASD currently forwards any motion to rejoin
severed claims to the panel on the lowest numbered case (i.e., the
panel from the first-filed claim in the matter that was severed) to
decide a motion to re-join the claims. In Amendment 5, NASD amended
Proposed Rules 12312(b) and 12313(b) as follows to codify current
practice (new language in italics):
12312. Multiple Claimants
(a) No change.
(b) After all responsive pleadings have been served, claims joined
together under paragraph (a) of this rule may be separated into two or
more arbitrations by the Director before a panel is appointed, or by
the panel after the panel is appointed. A party whose claims were
separated by the Director may make a motion to the panel in the lowest
numbered case to reconsider the Director's decision.
* * * * *
12313. Multiple Respondents
(a) No change.
(b) After all responsive pleadings have been served, claims joined
together under paragraph (a) of this rule may be separated into two or
more arbitrations by the Director before a panel is appointed, or by
the panel after the panel is appointed. A party whose claims were
separated by the Director may make a motion to the panel in the lowest
numbered case to reconsider the Director's decision.
* * * * *
3. Greater Panel Discretion to Join Claims
One commenter expressed concern that the changes to Proposed Rule
12312 would prevent the joinder of claimants in certain situations,
which would result in added expense and repetitious hearings for the
parties.\77\ The commenter argued that the proposed rule should be
revised to give a panel more discretion to join claims if it would save
time and money and not be unreasonably prejudicial to the parties. In
Amendment 5, NASD responded that the joinder requirements in Proposed
Rules 12312 and 12313 were not intended to differ in substance from
those in Rule 10314(d), and that therefore this comment is outside the
scope of the rule filing.
---------------------------------------------------------------------------
\77\ Greco.
---------------------------------------------------------------------------
V. Proposed Rule 12314--Combining Claims
Proposed Rule 12314 provides that before ranked arbitrator lists
are due to the Director under Proposed Rule 12404(c), the Director may
combine separate but related claims into one arbitration. Once a panel
has been appointed, the panel may reconsider the Director's decision
upon motion of a party. One commenter expressed concern that the panel
would no longer have the authority to review the Director's decision to
sever or consolidate claims sua sponte.\78\ In this commenter's view,
the Director has preliminary authority to make rulings on these issues,
but the panel has plenary authority to review any such rulings.
---------------------------------------------------------------------------
\78\ Ryder.
---------------------------------------------------------------------------
In Amendment 5, NASD disagreed with the commenter and stated that,
under Rule 10314(d) of the current Code and current practice, panels
review these rulings upon a motion of a party.
W. Proposed Rule 12400--Neutral List Selection System and Arbitrator
Rosters
1. Proposed Rule 12400(a)--Neutral List Selection System
Nineteen commenters suggested that NASD hire a neutral third-party,
not connected to NASD or the securities industry, to conduct an annual
audit of NLSS \79\ and make the results of the audit publicly available
on NASD's Web site.\80\
---------------------------------------------------------------------------
\79\ NLSS is the computer program NASD Dispute Resolution uses
to appoint arbitrators. NASD Dispute Resolution is upgrading its
computer technology platform, in what is known as the MATRICS
Computer Project. MATRICS stands for Mediation and Arbitration
Tracking and Retrieval Interactive Case System. MATRICS will replace
two legacy case management systems, NLSS and CRAFTIS, the software
application that NASD Dispute Resolution uses to support its case
administration functions.
\80\ Boliver, Canning, Estell, Evans, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it is committed to ensuring
that its list selection system operates as described in the Customer
Code. Thus, NASD stated that it plans to hire an independent auditor to
conduct an initial audit of the system and will make public the results
of the audit. NASD stated that thereafter, it will conduct audits on an
as-needed basis.
2. Proposed Rule 12400(b)--Arbitrator Rosters
As published in the Customer Code Notice, Proposed Rule 12400(b)
provides that NASD will maintain three separate arbitrator rosters: One
of public arbitrators who may serve as a chairperson of a panel
(``chair-qualified''), one of public arbitrators not eligible to serve
as a chairperson (``non-chair public''), and one of non-public
arbitrators. Lists would be generated from these rosters and sent to
the parties so that the parties may select their arbitrators. Chair-
qualified public arbitrators would not be included in the non-chair
public roster. The Commission solicited comment on whether this
approach would limit the pool of arbitrators available to serve on
panels, particularly in regions where relatively few arbitrators are
available, and whether chair-qualified arbitrators should be permitted
to serve in a non-chair capacity, as well.
Twenty-three commenters stated that excluding chair-qualified
arbitrators from the non-chair public arbitrator roster would decrease
the pool of experienced, knowledgeable public arbitrators, particularly
in regions of the country where the size of the arbitrator pool is
already limited.\81\ Many of these commenters also asserted that
arbitration panels selected under this approach would have less overall
[[Page 4586]]
experience and expertise than current panels, which would be bad for
all parties.
---------------------------------------------------------------------------
\81\ Boliver, Canning, Evans, Feldman, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PACE, PIABA,
Pounds, Rosenfield, Schwab, Shewan, Stolle, Stoltmann, Sutherland,
and Willner.
---------------------------------------------------------------------------
Eighteen commenters stated that the proposed rule would create a
class of ``professional'' arbitrators who would strive for the
appearance of fairness to both sides by issuing more compromise
awards.\82\ In Amendment 5, NASD disagreed, stating that the random
selection function of the list selection system would allow the full
use of the entire arbitrator pool. NASD also noted that all arbitrators
take an oath in which they affirm their neutrality and ability to
decide a matter fairly, and that NASD expects all arbitrators to adhere
to these basic principles, regardless of their classification.
---------------------------------------------------------------------------
\82\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
NASD further stated in Amendment 5 that it believes chair-qualified
arbitrators should be included in the non-chair public roster, as well
as in the chair-qualified roster. Therefore, it proposed to amend
Proposed Rule 12400(b) to adopt this approach.\83\ NASD also clarified
that its list selection software would be programmed so that no
arbitrator's name would appear on both the chair-qualified and non-
chair public lists sent to the parties for arbitrator selection in a
particular case. NASD believes this approach would provide users of the
forum with access to the most experienced public arbitrators.
---------------------------------------------------------------------------
\83\ NASD also proposed to amend the title of Proposed Rule
12400(b) to correct a typographical error.
---------------------------------------------------------------------------
The proposed rule, as amended in Amendment 5, is as follows (new
language in italics; deleted language in [brackets]):
12400. Neutral List Selection System and Arbitrator Rosters
(a) Neutral List Selection System
No change.
(b) Arbitrator[s] Rosters
NASD maintains the following roster of arbitrators:
A roster of non-public arbitrators as defined in Rule
12100(n);
A roster of public arbitrators as defined in Rule
12100(r); and
A roster of arbitrators who are eligible to serve as
chairperson of a panel as described in paragraph (c). Arbitrators who
are eligible to serve as chairperson will also be included in the
roster of public arbitrators, but will only appear on one list in a
case.
* * * * *
Subsequent to the filing of Amendment 5 with the Commission, one
commenter expressed opposition to NASD's proposal to include chair-
qualified arbitrators with non-chair public arbitrators on the non-
chair public roster.\84\ This commenter included statistical models in
support of his position that chair-qualified arbitrators would be
selected more frequently than non-chair public arbitrators. This
commenter also asserted that chair-qualified arbitrators would become
``professional'' arbitrators.
---------------------------------------------------------------------------
\84\ See Bernstein.
---------------------------------------------------------------------------
In Amendment 7, NASD declined to comment on the statistical
analysis provided by the commenter, stating that the hypothesized
outcome was speculative. NASD explained that it believes having
arbitrators with the most experience serving more frequently on panels
would be in the public interest. Moreover, NASD stated that the
proposed standards to become eligible to serve as chair-qualified
arbitrators are reasonable and necessary to provide investors with
access to well-qualified arbitrators. NASD believes this proposal will
enhance the efficiency of the arbitration process. Therefore, NASD
declined to amend the proposed rule on this issue.
Subsequent to Amendment 7, this commenter submitted a second letter
reiterating his arguments and providing additional information.\85\ The
Commission staff obtained data from NASD relating to the number of
arbitrators at each NASD hearing location, including the number of
arbitrators who are classified as ``public'' under the definition found
in rule 10308(a)(5) of the current Code, and who would be classified as
chair-qualified under Proposed Rule 12100(u) of the Customer Code.\86\
Applying the formulas provided in the letter, the Commission staff
determined that NASD's proposal to include chair-qualified arbitrators
with non-chair public arbitrators in the non-chair public roster would
not in all circumstances increase the frequency of chair-qualified
arbitrators being appointed to panels. Moreover, even assuming that the
odds would increase in certain circumstances, the staff could not find
empirical evidence to indicate that the increased odds would result in
bias in the NASD arbitration forum or otherwise outweigh the benefit of
the increased training and experience among arbitrators.
---------------------------------------------------------------------------
\85\ See Letter from Scot D. Bernstein, Esq. and C. Thomas Mason
III, Esq., dated Oct. 20, 2006.
\86\ See Letter from Linda D. Fienberg, President, NASD Dispute
Resolution, to Catherine McGuire, Chief Counsel, Division of Market
Regulation, SEC, dated Nov. 9, 2006.
---------------------------------------------------------------------------
3. Proposed Rule 12400(c)--Eligibility for Chairperson Roster
To be chair-qualified, Proposed Rule 12400(c) would require an
arbitrator to complete the NASD training program or have
``substantially equivalent training or experience,'' and be either: (1)
An attorney who has sat through two SRO arbitration cases through the
award stage; or (2) a non-attorney who has sat through at least three
such cases. Twenty-five commenters opposed the creation of the chair-
qualified roster and questioned the eligibility requirements.\87\ One
commenter supported the concept of the chair-qualified roster but
criticized the eligibility requirements.\88\ Commenters' key concerns
were that: (1) The term ``substantially equivalent training or
experience'' is not defined and allows for subjective interpretation,
which could lead to inexperienced persons serving as chairs; (2) the
chair roster would create a class of ``professional arbitrators'' who
would strive for the appearance of fairness to both sides by issuing
more compromise awards; \89\ and (3) a law degree and litigation
experience are better predictors of chair qualification than serving as
an arbitrator on two or three cases.
---------------------------------------------------------------------------
\87\ Boliver, Canning, Caruso, Estell, Evans, Greco, Ilgenfritz,
Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary,
Meissner, Miller, PIABA, Pounds, Rosenfield, Sadler, Shewan,
Stoltmann, Sutherland, and Willner.
\88\ PACE.
\89\ See NASD's response to comments regarding professional
arbitrators in Section 0, Proposed Rule 12400(b) (Arbitrator
Rosters), above.
---------------------------------------------------------------------------
In Amendment 5, NASD stated that it believes that the term
``substantially equivalent training or experience'' was defined
sufficiently in the narrative portion of its rule filing. In
particular, the rule filing states that ``substantially equivalent
training or experience would include service as a judge or
administrative hearing officer, chairperson training offered by another
recognized dispute resolution forum, or the like.'' NASD also noted
that other factors, such as peer, party, and staff evaluations and a
willingness to serve as chair, would be used in determining whether an
arbitrator should be added to the chair roster. It stated that while
these standards would require the use of judgment, the Commission
oversees NASD for its compliance with its own rules. NASD also stated
that it does not plan to grandfather any current arbitrators solely
because they may have served as chairs on previous panels.
[[Page 4587]]
In addition, NASD stated that it believes the requirement that an
arbitrator serve on at least three arbitrations through award to be
eligible for the chair roster is an objective standard that is easily
measured,\90\ though not easy to meet. NASD stated that of the
arbitration cases filed in the past four years, approximately 22% went
to hearing.\91\ NASD believes that the experience and training gained
in the time it takes to serve on three hearings through award should
qualify an arbitrator to serve as a chair, even without legal training
or experience.
---------------------------------------------------------------------------
\90\ Similarly, the requirements that the chair have a law
degree and be a member of the Bar are also objective standards,
subject only to verification.
\91\ NASD stated that this average is based on data on NASD's
Web site under Dispute Resolution Statistics, How Arbitration Cases
Close (visited Apr. 13, 2006) at http://www.nasd.com/web/[fxsp0
]idcplg?IdcService=SS--[fxsp0]GET--
PAGE&nodeId=516&[fxsp0]ssSourceNodeId=12.
---------------------------------------------------------------------------
For the reasons stated above, NASD is not proposing to amend the
proposed rule change in connection with these issues.
X. Proposed Rule 12401--Number of Arbitrators
As published in the Customer Code Notice, Proposed Rule 12401
provides that in cases involving claims of more than $25,000 but not
more than $50,000, the panel will consist of one arbitrator, unless any
party requests a panel of three arbitrators. One commenter suggested
that NASD amend the proposed rule to increase the limit for a single
arbitrator panel to $150,000 or more.\92\ In this commenter's view, the
current limitation of $25,000 is antiquated, and there is no empirical
evidence to suggest that a single arbitrator cannot decide a claim
involving a larger amount in dispute. In Amendment 5, NASD responded
that, although this comment is beyond the scope of the rule filing, it
would consider it when determining whether future amendments are
warranted.
---------------------------------------------------------------------------
\92\ Caruso.
---------------------------------------------------------------------------
In Amendment 7, NASD amended Proposed Rule 12401(b) to require that
the request for a three-arbitrator panel be made in a party's initial
pleading. NASD stated that proposed change would codify current
practice in the forum.\93\ The proposed rule is amended as follows (new
language in italics):
---------------------------------------------------------------------------
\93\ See Rule 10308(b)(1)(A)(ii) of the current Code.
---------------------------------------------------------------------------
12401. Number of Arbitrators
(a) Claims of $25,000 or Less
No change.
(b) Claims of More Than $25,000 Up To $50,000
If the amount of a claim is more than $25,000 but not more than
$50,000, exclusive of interest and expenses, the panel will consist of
one arbitrator unless any party requests a panel of three arbitrators
in its initial pleading.
(c) Claims of More Than $50,000; Unspecified or Non-Monetary Claims
No change.
* * * * *
Y. Proposed Rule 12403--Generating and Sending Lists to Parties;
Proposed Rule 12404--Striking and Ranking Arbitrators
Under the current Code, NLSS provides the parties with a list of
five names for a single arbitrator customer case, and one list of ten
public arbitrators and one list of five non-public arbitrators for a
three-arbitrator case.\94\ Once the parties receive the lists, they
begin the process of selecting the members of their panel by striking
arbitrators from each list and ranking the remaining ones.
---------------------------------------------------------------------------
\94\ The Commission approved NASD's generating lists of only
three names per arbitrator slot in the smaller hearing locations.
See Order Granting Approval to Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval to Amendment Nos. 3
and 4 to Proposed Rule Change by the National Association of
Securities Dealers, Inc. Relating to the Selection of Arbitrators in
Arbitrations Involving Public Customers, Securities Exchange Act
Rel. No. 40555, 63 FR 56670, 56673 (Oct. 22, 1998) (SR-NASD-98-48).
---------------------------------------------------------------------------
1. Reducing Need for Extended Lists
Currently, the parties have an unlimited number of strikes, which
they may exercise for any reason. This often results in so many strikes
by both sides that an insufficient number of names remain on the list
to fill a panel. When this happens, NLSS must generate additional names
in the appropriate public/non-public categories and ``extend'' the list
to fill the panel. Parties have often expressed concern with extended
lists because the parties may not exercise additional strikes and can
only challenge the inclusion of ``extended list'' arbitrators for
cause.
As published in the Customer Code Notice, Proposed Rule 12403
increases the number of arbitrators on each list and limits the number
of strikes that the parties may exercise. NASD intended this change to
increase the likelihood that more names from the initial lists would
remain after the striking process. In cases involving three-member
panels, NASD proposed that seven arbitrators from each arbitrator
roster (chair-qualified, non-chair public, and non-public) would be
selected at random to generate the lists to be sent to the parties.
Each separately represented party could strike up to five of the seven
arbitrators on each list for any reason, but two names would remain on
each list.
Some commenters found the proposed procedures to be an improvement
over the current system, but noted that entire lists could still be
stricken.\95\ For example, if a claimant strikes arbitrators one
through five from a seven-name list and a respondent strikes
arbitrators three through seven, then the parties collectively will
have stricken the entire list. Thus, these commenters believed the
likelihood that NASD would need to extend lists would remain high.
Commenters suggested amending the rule to provide that if all the
arbitrators are stricken from a list, a subsequent list would be
generated, accompanied by a limited number of strikes. Commenters also
noted that if each party only ranks two arbitrators from the list,
there is a likelihood for ties in the rankings by claimants and
respondents.\96\
---------------------------------------------------------------------------
\95\ Boliver, Canning, Caruso, Estell, Evans, Greco, Ilgenfritz,
Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary,
Meissner, Miller, Pounds, Rosenfield, Sadler, Shewan, Stoltmann,
Sutherland, and Willner.
\96\ Id.
---------------------------------------------------------------------------
In Amendment 5, NASD proposed to increase the number of arbitrators
on each list to eight, and to allow each separately represented party
to exercise only four strikes. By increasing the number of arbitrators
and reducing the number of strikes per list, NASD believes there is a
greater likelihood that arbitrators from each initial list would remain
on the list after the parties exercise their strikes and the lists are
consolidated.\97\ This, in turn, should reduce the likelihood that
extended lists would be necessary, thus providing parties with more
control in the arbitrator selection process. In addition, in light of
the comments concerning Proposed Rule 12400(b), NASD is proposing to
amend Proposed Rule 12403 to clarify that chair-qualified arbitrators
also would be included in the roster of non-chair public arbitrators,
but would only appear on one list in a particular case. The proposed
rule change is amended as
[[Page 4588]]
follows (new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------
\97\ NLSS will select randomly one name at a time for each list
(i.e., chair-qualified, non-chair public, non-public), and list the
names in the order in which they were selected. The first arbitrator
selected would be Arbitrator 1; the second would be
Arbitrator 2, etc. After the parties have made their
selections and the lists have been consolidated, in the unlikely
event of a tie among arbitrators, NLSS will break the tie based on
the order in which the arbitrators were initially placed on the
list. So, for example, if Arbitrators 3 and 5 are ``tied'' after the
non-chair public lists are consolidated, NLSS will select Arbitrator
3 for the non-chair public position.
---------------------------------------------------------------------------
12403. Generating and Sending Lists to the Parties
(a) Generating Lists
(1) If the panel consists of one arbitrator, the Neutral List
Selection System will generate a list of [seven] eight public
arbitrators from the NASD's chairperson roster.
(2) If the panel consists of three arbitrators, the Neutral List
Selection System will generate:
A list of [seven] eight arbitrators from the NASD's non-
public arbitrator roster;
A list of [seven] eight arbitrators from the NASD's public
arbitrator roster; and
A list of [seven] eight public arbitrators from the NASD's
chairperson roster.
(3) If the panel consists of three arbitrators, the Neutral List
Selection System will generate the chairperson list first. Chair-
qualified arbitrators who were not selected for the chairperson list
will be eligible for selection on the public list. An individual
arbitrator cannot appear on both the chairperson list and the public
list for the same case.
(4) No change.
(b) Sending Lists to Parties
No change.
* * * * *
12404. Striking and Ranking Arbitrators
(a) Each separately represented party may strike up to [five] four
of the arbitrators from each list for any reason by crossing through
the names of the arbitrators. [Two] At least four names must remain on
each list.
(b) No change.
(c) No change.
* * * * *
2. Pre-Screening for Conflicts
One commenter suggested that Proposed Rule 12404 should include a
procedure for replacing arbitrators who have disqualifying conflicts
before the parties are required to submit their rankings.\98\
---------------------------------------------------------------------------
\98\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it intends to implement a new
computer platform, MATRICS,\99\ which would be programmed to check for
certain conflicts before the lists are sent to the parties. For
example, MATRICS would eliminate from a list any arbitrator who is
currently employed by a firm that is a party to the case. MATRICS would
also eliminate any arbitrator with a securities account at a firm that
is a party to the case. In these instances, parties would not have to
use a strike to eliminate an arbitrator with such conflicts.
---------------------------------------------------------------------------
\99\ See supra note 79.
---------------------------------------------------------------------------
Z. Proposed Rule 12406--Appointment of Arbitrators; Discretion to
Appoint Arbitrators Not on List
Proposed Rule 12406 provides that each three-arbitrator panel will
consist of a non-public arbitrator, a chair-qualified public
arbitrator, and a non-chair public arbitrator. Many commenters opposed
the inclusion of a non-public arbitrator on three-person panels.\100\
In Amendment 5, NASD noted that because Proposed Rule 12406 would not
change the substantive requirements in Rule 10308(c)(4) of the current
Code concerning arbitrator appointments, the comments are outside the
scope of the rule filing. NASD also noted that it proposed changes to
the definition of ``public arbitrator'' in a separate rule filing.\101\
In addition, NASD stated that in approving the NLSS, the Commission
found that NASD had created reasonable procedures for implementing the
list selection process, which it determined should give investors and
other parties more input into the selection of the arbitration panel,
and were consistent with the Exchange Act.\102\ Finally, NASD indicated
that independent studies performed on the NASD arbitration forum do not
show bias on the part of industry arbitrators.\103\ For these reasons,
NASD is not proposing to amend the proposed rule at this time.
---------------------------------------------------------------------------
\100\ See, e.g., Boliver, Canning, Caruso, Estell, Evans, Fynes,
Greco, Ilgenfritz, Jones, Josel, Komninos, Lapidus, Layne, Lea,
Lipner, Lopez, Magary, Meissner, Miller, PIABA, Pounds, Rosenfield,
Sadler, Shewan, Stoltmann, Sutherland, and Willner.
\101\ These proposed rule changes were recently approved by the
Commission. See supra note 35.
\102\ See Order Granting Approval to Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 3 and 4 to Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to the Selection of
Arbitrators in Arbitrations Involving Public Customers, supra note
94.
\103\ See Industry Arbitration Award Survey, Securities
Arbitration Commentator, Volume 2005, No. 4 (May 2005); U.S. General
Accounting Office, Securities Arbitration: How Investors Fare, GAO/
GGD 92-74 (May 11, 1992); E-mail from Mignon McLemore, Assistant
Chief Counsel, NASD Dispute Resolution, to Gena Lai, Special
Counsel, Division of Market Regulation, SEC, dated Dec. 1, 2006.
---------------------------------------------------------------------------
In the Customer Code Notice, the Commission noted that under
Proposed Rules 12406 (Appointment of Arbitrators; Discretion to Appoint
Arbitrators Not on List), 12410 (Removal of Arbitrator by Director),
and 12411 (Replacement of Arbitrators), parties to an arbitration would
not be given a peremptory strike for arbitrators appointed from an
extended list. The Commission specifically asked for commenters' views
on which is the better alternative when the Uniform Code differs from
the proposed NASD rules with respect to appointment of arbitrators by
the Director.
Many commenters stated that allowing a peremptory strike when an
arbitrator is appointed from an extended list would be preferable.\104\
In their view, the proposed requirements for the removal of an
arbitrator would be overly restrictive and unlikely to provide
assurances of impartiality to an investor regarding an arbitrator whom
he or she had no voice in selecting.
---------------------------------------------------------------------------
\104\ Boliver, Canning, Caruso, Evans, Greco, Ilgenfritz, Josel,
Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary, Meissner,
Miller, PACE, PIABA, Pounds, Rosenfield, Shewan, Stoltmann,
Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that because Proposed Rule 12410 has not
changed the substantive requirements concerning arbitrator removal in
Rules 10308(d)(1)-(3) and (f), and Rule 10312(d) of the current Code,
the comments are outside the scope of the rule filing. NASD also
believes that the changes proposed to Proposed Rules 12403 and 12404 in
Amendment 5 would minimize the need for extended lists. Therefore, NASD
is not proposing to allow peremptory strikes when the list is extended.
AA. Proposed Rule 12408--Disclosures Required of Arbitrators
As published in the Customer Code Notice, Proposed Rule 12408(a)
provides, in relevant part, that arbitrators must disclose ``any
existing or past service as a mediator.'' In the Customer Code Notice,
the Commission indicated that Proposed Rule 12408(a)(4) could be
interpreted as either requiring arbitrators to disclose (1) only any
service as a mediator that might preclude the arbitrator from rendering
an objective and impartial determination in the proceeding, or (2) any
existing or past service as a mediator, even if it has no connection
with the proceeding. The Commission asked whether the proposed rule
should be amended to reflect one or the other interpretation.
Many commenters thought the proposed rule should require disclosure
of service as a mediator on any case, not just service that the
arbitrator thinks would affect his/her impartiality in a particular
proceeding.\105\ One commenter asserted an arbitrator's
[[Page 4589]]
ethical obligations would preclude a more constrained reading of the
rule.\106\
In Amendment 5, NASD responded that it believes interpreting
Proposed Rule 12408(a)(4) to require disclosure of all existing or past
service as a mediator is too broad. NASD stated that some of the
arbitrators in NASD's forum have served as mediators for a significant
number of cases, and the list of cases could change frequently. NASD
believes that it would be unduly burdensome and of little value to
parties, and may result in a significant reduction in the arbitrator
roster, to require these arbitrators to disclose all of their existing
or past service as a mediator on any case. In Amendment 5, NASD stated
that it believes that arbitrators who serve as mediators should
disclose whether they have served as a mediator for any of the parties
in the case for which they have been selected. NASD also stated that it
plans to update its arbitrator disclosure forms to include a question
that will require arbitrators to provide this information.
---------------------------------------------------------------------------
\105\ Boliver, Canning, Caruso, Estell, Evans, Greco,
Ilgenfritz, Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez,
Magary, Meissner, Miller, PACE, PIABA, Pounds, Rosenfield, Sadler,
Shewan, Stoltmann, Sutherland, and Willner.
\106\ PACE.
---------------------------------------------------------------------------
In Amendment 7, NASD determined to include the requirement to make
this disclosure in the proposed rule. NASD amended the proposed rule as
follows (new language in italics):
12408. Disclosures Required of Arbitrators
(a) Before appointing arbitrators to a panel, the Director will
notify the arbitrators of the nature of the dispute and the identity of
the parties. Each potential arbitrator must make a reasonable effort to
learn of, and must disclose to the Director, any circumstances which
might preclude the arbitrator from rendering an objective and impartial
determination in the proceeding, including:
(1) No change;
(2) No change;
(3) No change; and
(4) Any existing or past service as a mediator for any of the
parties in the case for which the arbitrator has been selected.
(b) No change.
(c) No change.
* * * * *
One commenter suggested that NASD's arbitrator disclosure
obligations should parallel those established by the California
Judicial Council, which require a prospective arbitrator to disclose,
among other things, all arbitrations in which he or she was a panelist,
which forums conducted the arbitrations, and whether any of the parties
or their counsel in the current proceeding were involved in any
proceeding in which the arbitrator was a panelist.\107\
---------------------------------------------------------------------------
\107\ Canning.
---------------------------------------------------------------------------
In Amendment 5, NASD noted that, apart from subparagraph (a)(4) of
Proposed Rule 12408, which was added to reflect approval of a proposed
rule change by the SEC on March 7, 2005,\108\ Proposed Rule 12408 does
not contain any substantive changes from Rules 10312(a), (b), (c), and
(e) of the current Code, and that therefore, this comment is outside
the scope of the rule filing.
---------------------------------------------------------------------------
\108\ See Order Approving Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to a Proposal to
Adopt a New IM-10308 on Mediators Serving as Arbitrators, Securities
Exchange Act Rel. No. 51325 (Mar. 7, 2005), 70 FR 12522 (Mar. 14,
2005) (SR-NASD-2005-007).
---------------------------------------------------------------------------
BB. Proposed Rule 12409--Arbitrator Recusal
Proposed Rule 12409 provides that any party may ask an arbitrator
to recuse himself or herself from the panel for good cause, and that
such requests are decided by the arbitrator who is the subject of the
recusal. One commenter asserted that parties have attempted to engage
in ``panel shopping'' by requesting the recusal of an arbitrator on the
grounds that an adverse ruling prior to the hearing on the merits
constituted good cause.\109\ This commenter suggested that NASD should
amend the rule to provide that a prior ruling adverse to the party
requesting recusal does not constitute good cause.
---------------------------------------------------------------------------
\109\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that arbitrators are aware that some
parties may use recusal requests as a way to obtain a more favorable
panel. NASD believes that arbitrators have the discretion to determine
whether the party making the request has demonstrated good cause for
its request and does not believe it is appropriate to limit this
discretion. Therefore, NASD is not proposing to amend the rule at this
time.
CC. Proposed Rule 12410--Removal of Arbitrator by Director
In pertinent part, Proposed Rule 12410 provides that the Director
will grant a party's request to remove an arbitrator if the arbitrator
``is biased, lacks impartiality, or has a direct or indirect interest
in the outcome of the arbitration,'' and that close questions regarding
challenges to an arbitrator by a customer will be resolved in favor of
the customer. One commenter asserted that the term ``indirect'' is
vague and should not be used in the rule.\110\ This commenter also
stated that the rule would create a ``double standard'' that lacks
justification and suggested revising the proposed rule to provide that
arbitrator challenges will be resolved in favor of the party making the
challenge.
---------------------------------------------------------------------------
\110\ Id.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that because Proposed Rule 12410
does not change the substantive requirements of current Rules
10308(d)(1)-(3) and (f), and Rule 10312(d) of the current Code,
concerning arbitrator removal, these comments are outside the scope of
the rule filing.
DD. Proposed Rule 12411--Replacement of Arbitrators
In pertinent part, Proposed Rule 12411 provides that, if an
arbitrator is removed or becomes otherwise unable or unwilling to
serve, the Director will appoint a replacement arbitrator, unless the
parties agree in writing to proceed with the two remaining arbitrators.
Rule 10308(d) of the current Code, on the other hand, provides that the
director ``shall provide the parties information'' concerning the
proposed replacement arbitrator, and the parties ``shall have the right
to object.'' One commenter, noting that Proposed Rule 12411 lacks the
notice requirement, expressed concern that the Director could replace
an arbitrator before the parties become aware of the vacancy.\111\
---------------------------------------------------------------------------
\111\ Ryder.
---------------------------------------------------------------------------
In Amendment 5, NASD stated that Proposed Rule 12411 codifies
current practice in the forum, which NASD has determined is the most
efficient method for addressing arbitrator replacements. Currently, if
an arbitrator becomes unavailable and must be replaced, the parties
rarely agree to proceed with only the two remaining arbitrators. To
expedite the replacement process, NASD selects the replacement
arbitrator and notifies the parties of the replacement simultaneously.
NASD currently gives the parties five business days from the date of
the notice to accept the replacement or agree to proceed with the two
remaining arbitrators. This procedure would continue under Proposed
Rule 12411, except that the parties have an unlimited time to elect to
proceed with only the remaining arbitrators.\112\
---------------------------------------------------------------------------
\112\ Parties may at any time stipulate to the removal of an
arbitrator, including a replacement arbitrator. Telephone
conversation among Jean Feeney, Vice President, NASD; Mignon
McLemore, Assistant Chief Counsel, NASD Dispute Resolution; and Gena
Lai, Special Counsel, Division of Market Regulation, SEC (Dec. 19,
2006).
---------------------------------------------------------------------------
[[Page 4590]]
EE. Proposed Rule 12500--Initial Prehearing Conferences; Proposed Rule
12501--Other Prehearing Conferences
Proposed Rules 12500 and 12501 establish procedures for scheduling
initial and other prehearing conferences. Two commenters expressed
concern that, in contrast to the current Code, Proposed Rules 12500 and
12501 would not give the Director the authority to hold an initial
prehearing conference (``IPHC'') with the parties before the panel is
selected.\113\
---------------------------------------------------------------------------
\113\ Canning and Feinberg.
---------------------------------------------------------------------------
In Amendment 5, NASD agreed that the proposed rules would not
grant the Director the explicit authority to hold an IPHC before the
panel is selected. It also agreed that on rare occasions, parties may
need to request a prehearing conference before the panel is appointed
to resolve discovery disputes or to discuss jurisdictional issues.
Thus, NASD proposed to revise Proposed Rule 12501 to make this
authority explicit. Proposed Rule 12501 is amended as follows (new
language in italics):
12501. Other Prehearing Conferences
(a) A prehearing conference may be scheduled upon the joint request
of the parties or at the discretion of the Director. The Director will
set the time and place of the prehearing conference and appoint a
person to preside.
(b) No change.
(c) No change.
* * * * *
FF. Proposed Rule 12503--Motions
Proposed Rule 12503 establishes procedures to make and decide
motions or responses to motions.
1. Oral Motions
One commenter contended that Proposed Rule 12503(a)(1) would allow
a party to make an oral motion on short notice and would allow the
panel to decide on motions without giving the opposing party an
adequate opportunity to respond.\114\ The commenter suggested that oral
motions should be limited to matters that could not have been
anticipated and that require immediate consideration. The commenter
also suggested that the party opposing the oral motion should be given
10 days to respond, unless there is good cause for deciding the motion
on a shorter timeframe.
---------------------------------------------------------------------------
\114\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that Proposed Rule 12503(a)(1)
requires a party to make an effort to resolve a matter with the other
parties before making a motion, and that both oral and written motions
must describe that effort. Therefore, the panel would be able to
consider these factors, and any objections, in ruling on a motion or in
deferring a decision to allow more time to respond.
2. Service Methods
One commenter suggested that Proposed Rule 12503(a)(2) should allow
for some variation in service methods, rather than requiring all
parties to be served at the same time and in the same manner.\115\ NASD
responded that, based on current practice in the forum, NASD believes
the service requirements in Proposed Rule 12503(a)(2) are reasonable
because they would prevent a party from attempting to gain an advantage
in the proceeding by delaying service of a motion on some parties.
---------------------------------------------------------------------------
\115\ Krosschell.
---------------------------------------------------------------------------
3. Panel Approval of Motions on Short Notice
Two commenters opposed requiring panel approval in Proposed Rule
12503(a)(3) for motions filed within 20 days before the hearing.\116\
In their experience, motions are usually filed because of an emergency,
and requiring a panel to grant advance permission would reduce the time
for the panel to decide a motion. They suggested that parties should
not need permission to file a motion in arbitration, and that Proposed
Rule 12503(a)(4) should be amended to allow a party to submit
additional documents with a motion to amend a pleading to add a party.
---------------------------------------------------------------------------
\116\ Canning and Feinberg.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that, in order to prevent any
unnecessary delays to the start of a hearing, it believes the panel
should control events and procedures that occur close to that time. In
addition, NASD noted that Proposed Rule 12300 (Filing and Serving
Documents) allows for additional information to be submitted in
connection with amended pleadings.
4. Deadlines for Responses
One commenter urged NASD to delete the provision in Proposed Rule
12503(b) requiring responses to written motions within 10 calendar days
of receipt.\117\ The commenter suggested that NASD continue with
current procedure, in which responses to motions are due after the
first IPHC. The commenter suggested that thereafter, deadlines to
respond to motions should be set by the panel at the prehearing
conference or otherwise.
---------------------------------------------------------------------------
\117\ Krosschell.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that, if a party submits a motion
before the IPHC, NASD staff forwards it to the panel, along with any
responses that were voluntarily submitted by other parties. Based on
current practice in the forum, NASD believes Proposed Rule 12503(b)
would provide parties with adequate time to respond to written motions.
In addition, the parties and the panel have the ability to extend the
10-day timeframe under Proposed Rule 12207.
5. Motions Regarding Hearing Location
Two commenters opposed giving the Director authority to decide
motions regarding hearing location, under Proposed Rule
12503(c)(2).\118\ In their view, the hearing location should always be
set where it would be most convenient for the customer, as indicated on
the customer's statement of claim. In Amendment 5, NASD responded that,
under the Customer Code, a party may request a convenient hearing
location, but there may be reasons that a party's request is not
granted. NASD believes the Director should have the authority to change
the hearing location before a panel is appointed.\119\
---------------------------------------------------------------------------
\118\ Canning and Stolle.
\119\ See also discussion concerning hearing locations in
Section 0, above.
---------------------------------------------------------------------------
6. Number of Arbitrators to Hear Motions
One commenter, noting that Proposed Rule 12503(c)(3) would allow
the full panel to hear discovery motions only under certain
circumstances (e.g., at the request of a party or on the arbitrator's
initiative), contended that the full panel should be required to hear
and decide any discovery-related motion.\120\ In Amendment 5, NASD
responded that Proposed Rule 12503(c)(3) is based on current practice
in the forum and allows the parties or designated arbitrator to
determine which motions require consideration by the full panel.
Further, NASD believes the commenter's suggestion would increase the
costs of arbitration, since the parties would have to pay the
honorarium for two additional arbitrators.
---------------------------------------------------------------------------
\120\ SIA.
---------------------------------------------------------------------------
For the reasons stated above, NASD is not proposing to amend
Proposed Rule 12503 at this time.
GG. Proposed Rule 12504--Motions to Decide Claims Before a Hearing on
the Merits
As published in the Customer Code Notice, Proposed Rule 12504
provided that, except in connection with time limits under arbitration,
motions to decide a claim before a hearing
[[Page 4591]]
(``dispositive motions'') ``are discouraged and may only be granted in
extraordinary circumstances.'' Most commenters criticized the proposed
rule. Some industry commenters argued that it would improperly
discourage dispositive motions and improperly impose an ``extraordinary
circumstances'' requirement.\121\ In their view, dispositive motions
could be appropriate in circumstances that are not extraordinary. One
industry commenter also contended that NASD should continue to allow
arbitrators to decide whether to grant dispositive motions on a case-
by-case basis, instead of codifying a limit on dispositive
motions.\122\ Moreover, this commenter argued that the lack of guidance
on the meaning of ``extraordinary circumstances'' would have a chilling
effect on the filing of dispositive motions and may expose respondents'
counsel to sanctions.\123\
---------------------------------------------------------------------------
\121\ R. Davis, Schwab, and SIA.
\122\ Schwab.
\123\ Id.
---------------------------------------------------------------------------
Investor representatives also criticized the proposed rule, but for
different reasons.\124\ Most of these commenters asserted that a party
has a fundamental right to a hearing in arbitration and that Proposed
Rule 12504 would eliminate this right. They also predicted that the
proposed rule would be a tool for abuse by defense counsel to delay the
arbitration process and would hinder claimants' attempts to have their
claims heard by an arbitration panel. In addition, they believed that
the proposed rule would cause claimants, who have already suffered
losses, to incur additional expense and delay in responding to these
motions. In their view, Proposed Rule 12504 would cause the use of
these motions to become more prevalent.
---------------------------------------------------------------------------
\124\ Ball, Boliver, Brannan, Canning, Estell, Finer,
Ilgenfritz, Krosschell, Layne, Ledbetter, Lopez, Miller, Page,
Pounds, Schultz, Schultz 2, Shewan, Sonn, Speyer,
Steinberg, Stolle, Sutherland, Tepper, Williams, and Woska.
---------------------------------------------------------------------------
Some commenters believed the proposed rule should be amended to
expressly safeguard the rights of the non-moving party, particularly an
investor who has suffered harm or loss.\125\ Another commenter also
supported the safeguards, while also stating that the rule should not
be included in the Customer Code.\126\
---------------------------------------------------------------------------
\125\ PACE, PIABA, Lea, Josel, Evans, Komninos, Stoltmann,
Willner, Rosenfield, Lapidus, Lipner, Magary, and Eccleston. In
particular, they suggested that:
All factual allegations made by the non-moving party
are to be taken as true for the purposes of the motion.
The motion must be denied whenever credibility is at
issue, there are any facts in dispute, or the panel must make
factual findings against the non-moving party.
If the non-moving party asserted that it can cure any
defect by filing an amended statement of claim, that party should be
given an opportunity to do so.
The rule should clarify that arbitrators should not
apply a ``failure to state a claim'' standard, since claimants are
not required to plead legally cognizable claims.
\126\ Schultz 2.
---------------------------------------------------------------------------
Two commenters suggested that Proposed Rule 12504 should be amended
to require the costs incurred in opposing a dispositive motion to be
awarded against the firm immediately and automatically upon the denial
of a motion.\127\ In their view, the panel should not wait to include
costs in the final award, as the deterrent effect would be lost with a
delay in assessing penalties. NASD responded that Proposed Rule 12504
is not intended to change the current practice of assessing costs and
expenses of a hearing at the end of a case, in the award. Thus, NASD
stated that these comments are outside the scope of the rule filing.
---------------------------------------------------------------------------
\127\ Canning and Lipner.
---------------------------------------------------------------------------
Finally, another commenter suggested that a claimant should not
have to respond to a dispositive motion if it is frivolous or without
merit.\128\ This commenter also noted that the proposed rule does not
expressly state that the panel can deny leave to make such a motion,
and contended that by setting forth timeframes for briefing and
consideration, it implies that all motions will be considered. In
Amendment 5, NASD responded that it would revisit this issue when the
forum has some experience with the new motions practice rules.
---------------------------------------------------------------------------
\128\ Ryder.
---------------------------------------------------------------------------
Acknowledging the commenters' concerns, NASD stated that it had
considered the effects the proposed rule would have on public and
industry users of the forum. NASD noted, however, that the current Code
does not provide any guidance with respect to motions to dismiss, and
that arbitrator decisions in this area may lack uniformity. NASD stated
that, as motions to dismiss are filed more frequently, the proposed
rule is necessary to provide some uniform guidelines to arbitrators and
users of the forum concerning this practice. NASD believes that the
proposed rule would provide valuable guidance to parties and
arbitrators and make the administration of arbitrations more uniform
and transparent.
NASD also agreed with commenters that the term ``extraordinary
circumstances'' should be explained to clarify when Proposed Rule 12504
would apply and that more guidance should be provided on the standards
to use when deciding a motion to dismiss. NASD stated that, in meeting
with various constituent groups of the arbitration forum, including
investor and industry representatives, it suggested amending the
proposed rule to provide that a panel may grant a motion to dismiss
before a hearing only if it determines that there are no material facts
in dispute or that there are no credibility determinations to be made.
NASD stated that none of the constituencies indicated that they would
support the suggested amendments, and that they were unable to reach a
consensus on any amendments to the proposed rule. As a compromise, NASD
suggested amending the narrative portion of the rule filing to explain
under what circumstances a motion to dismiss might be granted. NASD
stated that it believed the various constituencies supported this
compromise.
Therefore, in Amendment 5, NASD proposed the following guidance:
For purposes of this rule, if a party demonstrates affirmatively
the legal defenses of, for example, accord and satisfaction,
arbitration and award, settlement and release, or the running of an
applicable statute of repose, the panel may consider these defenses
to be extraordinary circumstances. In such cases, the panel may
dismiss the arbitration claim before a hearing on the merits if the
panel finds that there are no material facts in dispute concerning
the defense raised, and there are no determinations of credibility
to be made concerning the evidence presented.
The Commission received 125 comment letters on Amendment 5. Most of
the commenters objected to NASD's proposed guidance. As a result, NASD
filed Amendment 6 to the proposed rule change, withdrawing Proposed
12504 and all references to the rule from the Customer Code.\129\ The
text of Amendment 6 is available on NASD's Web site: http://www.nasd.com/RulesRegulation/RuleFilings/2003RuleFilings/NASDW_009306?=802
.
---------------------------------------------------------------------------
\129\ Proposed Rule 12504 has been re-filed as a separate
proposed rule change and published for public comment. See supra
note 23.
---------------------------------------------------------------------------
HH. Proposed Rule 12505--Cooperation of Parties in Discovery
As published in the Customer Code Notice, Proposed Rule 12505
provides that the parties must cooperate to the fullest extent
practicable in the voluntary exchange of documents and information to
expedite the arbitration. One commenter contended that the proposed
rules should explicitly provide that the discovery procedures
[[Page 4592]]
are mandatory and suggested eliminating the word ``voluntary'' from
Proposed Rule 12505.\130\
NASD agreed with this comment, stating that this change would help
to ensure that the parties understand the importance of complying with
the discovery process. The proposed rule change is amended as follows
(new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------
\130\ PACE.
---------------------------------------------------------------------------
12505. Cooperation of Parties in Discovery
The parties must cooperate to the fullest extent practicable in the
[voluntary] exchange of documents and information to expedite the
arbitration.
* * * * *
II. Proposed Rule 12506--Document Production Lists
Proposed Rule 12506 establishes procedures for producing or
objecting to document production requirements under the Discovery Guide
and the document production lists it contains (``Document Production
Lists''), as amended in the Customer Code.
1. ``Control''
As published in the Customer Code Notice, Proposed Rule 12506(b)
provides that parties must produce to all other parties all documents
in their ``possession or control'' that are described in the applicable
Document Production Lists. Similarly, Proposed Rule 12514(a) (Exchange
of Documents and Witness Lists Before Hearing) provides that parties
must exchange certain materials in their ``possession or control'' that
they intend to use at the hearing that have not already been produced.
Several commenters argued that the term ``control'' should be deleted
from Proposed Rules 12506(b) and 12514(a), noting that the concept of
``control'' in the discovery context has been defined, through case
law, to include not only possession of the requested documents, but
also the legal right to obtain those documents.\131\ As a result, these
commenters contended that customers could incur increased costs to
comply with these proposed rules, or face sanctions if they are unable
to gain access to documents from third-parties or unable to do so in a
timely manner.
---------------------------------------------------------------------------
\131\ Boliver, Canning, Estell, Evans, Feinberg, Ilgenfritz,
Josel, Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that the addition of the term
``control'' to Proposed Rules 12506(b) and 12514(a) is intended to
expand, not narrow, the range of documents that are to be produced in
discovery. NASD believes that under these proposed rules, it should be
easier for customers to gain access to documents held by third-parties
on behalf of respondents, because respondents would be required to
produce documents, regardless of where the documents are stored or
maintained. NASD believes that, under these proposed rules, the
customer would have more control in the discovery process. For these
reasons, NASD did not propose to amend Proposed Rules 12506(b) and
12514(a) in response to this issue. In Amendment 7, however, noting
additional comments submitted on this issue,\132\ NASD stated that it
is sensitive to customers' concerns regarding the costs they could
incur under the discovery process and amended Proposed Rule 12508 to
address this issue.\133\
---------------------------------------------------------------------------
\132\ See supra note 21 and accompanying text.
\133\ See Section 0, Proposed Rule 12508 (Objecting to
Discovery; Waiver of Objection), below.
---------------------------------------------------------------------------
2. Good Faith Standard
Proposed Rules 12506(b)(1) and 12507(b)(1) provide that, in
response to a Document Production List requirement or a discovery
request, a party has the option of identifying and explaining the
reason that a particular document or piece of information cannot be
produced within the required time, and stating when the documents would
be produced (``delay provisions''). Several commenters asserted that
parties would abuse the delay provisions by setting a self-imposed
deadline with the purpose of impeding and delaying discovery.\134\ They
also noted that the proposed rules would not subject a party to
sanctions for using the delay provisions in bad faith, including
Proposed Rule 12511 (Discovery Sanctions).
---------------------------------------------------------------------------
\134\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel,
Komninos, Lapidus, Lipner, Lea, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
NASD responded that it believes the expectation for parties to act
in good faith is implied in the discovery provisions of both the
current Code and the Customer Code. NASD agreed, however, that Proposed
Rules 12506(a) and 12507(b) of the Customer Code should be amended to
eliminate any ambiguity concerning the applicability of a ``good
faith'' standard. Therefore, NASD proposed in Amendment 5 to include an
explicit ``good faith'' standard so that frivolous delays, unreasonable
timeframes, or bad faith objections would be subject to sanctions.
Proposed Rule 12506 is amended as follows (new language in italics):
12506. Document Production Lists
(a) No change.
(b) Time for Responding to Document Production Lists
(1) Unless the parties agree otherwise, within 60 days of the date
that the answer to the statement of claim is due, or, for parties added
by amendment or third-party claim, within 60 days of the date that
their answer is due, parties must either:
* * * * *
(2) A party must act in good faith when complying with subparagraph
(1) of this rule. ``Good faith'' means that a party must use its best
efforts to produce all documents required or agreed to be produced. If
a document cannot be produced in the required time, a party must
establish a reasonable timeframe to produce the document.
(c) No change.
* * * * *
3. Discovery Deadlines
Proposed Rules 12506(b) and 12507(b) would extend the time to
produce documents from 30 days under the current Code to 60 days. Some
commenters viewed this as authorizing a delay of another month before
parties may initiate the process to compel discovery and suggested that
the standard timeframe for document exchange should remain 30
days.\135\ In Amendment 5, NASD responded that this extension of time
is intended to address concerns of many frequent users of the forum
that the current time frame is unrealistic and sometimes leads to
unnecessary disputes.
---------------------------------------------------------------------------
\135\ Canning, Estell, Feinberg, Feldman, Komninos, and Stolle.
---------------------------------------------------------------------------
Several commenters observed that because Proposed Rule 12506 would
require parties to produce documents required by the Document
Production Lists within 60 days of the date the answer to the statement
of claim is due, and Proposed Rule 12303 would provide that an answer
is due 45 days from the receipt of the statement of claim, respondents
would have 105 days to produce documents required by the Document
Production Lists.\136\ They argued that Proposed Rule 12506 should be
amended to require a party to provide substantial justification for the
failure to produce documents within 105 days, or face sanctions.
---------------------------------------------------------------------------
\136\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that a party would face sanctions
for
[[Page 4593]]
failing to comply with the discovery provisions of the Customer Code
under Proposed Rule 12511, unless the panel determines that there is
substantial justification for the failure to comply. A party would have
to provide evidence of substantial justification for the panel to make
this determination. For the above reasons, NASD is not proposing to
amend these proposed rules at this time in response to these issues.
4. Discovery of Insurance Coverage
Several commenters contended that the Document Production Lists
should be revised to require the production of information and
documents regarding insurance policies that might provide coverage on
the dispute.\137\ They stated that courts uniformly require production
of this information because it assists the parties in evaluating
settlement possibilities and aids in screening for conflicts. In
Amendment 5, NASD responded that Proposed Rule 12506(a) has not changed
the documents or information required under the current Document
Production Lists, and that therefore these comments are outside the
scope of the rule filing.
---------------------------------------------------------------------------
\137\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltman, Sutherland, and Willner.
---------------------------------------------------------------------------
5. Standard by Which Documents are Discoverable
One commenter believes that the documents on the Document
Production Lists should be automatically, not presumptively,
discoverable.\138\ This commenter also expressed the view that
brokerage firms do not have grounds to assert confidentiality of
compliance manuals and recommended amending the Customer Code to state
that the party asserting confidentiality has the burden of establishing
that the documents in question legitimately require confidential
treatment. In Amendment 5, NASD responded that, although this comment
is outside the scope of the rule filing, it would be considered when
NASD determines whether future amendments are warranted.
---------------------------------------------------------------------------
\138\ PACE.
---------------------------------------------------------------------------
JJ. Proposed Rule 12507--Other Discovery Requests
Proposed Rule 12507 establishes procedures for making and
responding to discovery requests for items that are not included in the
Document Production Lists. This and certain other discovery provisions
of the Customer Code would codify provisions of the current Discovery
Guide. Three commenters recommended also incorporating into the
Customer Code the provisions of the Discovery Guide concerning the
limited purpose of information requests, to discourage the use of
overly broad information requests that are the equivalent of
interrogatories.\139\
---------------------------------------------------------------------------
\139\ PACE, PIABA, SIA.
---------------------------------------------------------------------------
In light of these comments, NASD incorporated Section V of the
Discovery Guide into Proposed Rule 12507(a). In addition, as discussed
under Proposed Rule 12506, NASD included an express ``good faith''
standard in 12507(b).\140\ Proposed Rule 12507 is amended as follows
(new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------
\140\ See Section 0, above.
---------------------------------------------------------------------------
12507. Other Discovery Requests
(a) Making Other Discovery Requests
(1) Parties may also request additional documents or information
from any party by serving a written request directly on the party.
Requests for information are generally limited to identification of
individuals, entities, and time periods related to the dispute; such
requests should be reasonable in number and not require narrative
answers or fact finding. Standard interrogatories are generally not
permitted in arbitration.
(2) [Such] Other discovery requests may be served:
Remainder of subparagraph (2)--No change.
(b) Responding to Other Discovery Requests
(1) Unless the parties agree otherwise, within 60 days from the
date a discovery request other than the Document Production Lists is
received, the party receiving the request must either:
Remainder of subparagraph (1)--No change.
(2) A party must act in good faith when complying with subparagraph
(1) of this rule. ``Good faith'' means that a party must use its best
efforts to produce all documents or information required or agreed to
be produced. If a document or information cannot be produced in the
required time, a party must establish a reasonable timeframe to produce
the document or information.
* * * * *
KK. Proposed Rule 12508--Objecting to Discovery; Waiver of Objection
Proposed Rule 12508(a) describes how a party may object to
producing a document required by the proposed Document Production Lists
or requested by a party. Proposed Rule 12508 requires a party to
specifically identify which documents or requested information the
party is objecting to and why. One commenter contended that the
proposed rule would impose a burden on the parties to locate and
identify the specific documents and information to which they are
objecting.\141\ This commenter suggested amending the proposed rule to
require an objecting party to specify only the request for documents or
information that it is objecting to and the reasons for its objection.
---------------------------------------------------------------------------
\141\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it believes the provisions of
Proposed Rule 12508(a) are appropriate, and that allowing parties to
object to an entire document or information request would undermine the
purpose of the proposed rule, which is to require more specificity in
objections.
Proposed Rule 12508(b) provides that any objection not made within
the required time is waived unless the panel determines that the party
had substantial justification for failing to make the objection within
the required time. One commenter contended that this provision would
unnecessarily require the parties to anticipate every possible
objection or face the penalty of waiver.\142\ In this commenter's view,
the proposed rule would encourage objections as a protective measure,
even though a party may be sanctioned under Proposed Rule 12511 for
frivolous objections. Stating that parties would need to balance the
risk of waiver against the risk of sanctions, this commenter suggested
deleting Proposed Rule 12508(b). In Amendment 5, NASD responded that
Proposed Rule 12508 is based on current practice in the forum, and that
it believes the provisions and intent of Proposed Rule 12508(b) are
clear.
---------------------------------------------------------------------------
\142\ Id.
---------------------------------------------------------------------------
For the above reasons, NASD is not proposing to amend the proposed
rule in connection with these issues at this time.
In connection with commenters' concerns regarding the term
``control'' in Proposed Rules 12506 and 12514, discussed above,\143\
NASD amended Proposed Rule 12508 as follows (new language in italics):
---------------------------------------------------------------------------
\143\ See Section 0, Proposed Rule 12506 (Document Production
Lists), above, and Section 0, Proposed Rule 12514 (Exchange of
Documents and Witness Lists Before Hearing), below.
---------------------------------------------------------------------------
12508. Objecting to Discovery; Waiver of Objection
(a) No change.
(b) No change.
(c) In making any rulings on objections, arbitrators may consider
the relevance of documents or discovery
[[Page 4594]]
requests and the relevant costs and burdens to parties to produce this
information.
LL. Proposed Rule 12509--Motions to Compel Discovery
Proposed Rule 12509 provides that a party may make a motion asking
the panel to order another party to produce documents or information if
the other party has: (1) Failed to comply with Proposed Rules 12506 or
12507; or (2) objected to the production of documents or information
under Proposed Rule 12508. Two commenters contended that the proposed
rule should include other reasons that a motion to compel may be filed,
such as a bad faith use of the delay provisions of Proposed Rules
12506(b) and 12507(b), which would allow parties to name self-imposed
deadlines for producing specified documents.\144\ These commenters
argued that a motion to compel may be warranted if the parties' reason
for using the delay provisions is in bad faith or the self-imposed
deadline is unreasonably long and expressed concern that this conduct
would not be subject to sanctions under Proposed Rule 12511.
---------------------------------------------------------------------------
\144\ Feinberg and Canning. See Section 0, Proposed Rule 12506
(Document Production Lists), above, concerning delay provisions.
---------------------------------------------------------------------------
As discussed in connection with Proposed 12506 and 12507, above,
NASD stated in Amendment 5 that the concept of ``good faith'' is
implied in the discovery provisions of the current Code and the
Customer Code, and proposed to amend those rules to explicitly include
a ``good faith'' standard for compliance. NASD believes the issues
raised concerning Proposed Rule 12509 would be addressed with these
proposed changes.
Several commenters suggested that costs and attorneys fees be
assessed immediately against the losing party in a discovery motion
seeking the production of documents and information required by
Document Production Lists 1 and 2, absent a finding by the panel of
substantial justification.\145\ In Amendment 5, NASD responded that
motions to compel are issued to enforce compliance with the discovery
rules and are not meant to be punitive. It noted, however, that
arbitrators may impose a range of sanctions, as provided in Proposed
Rules 12212 and 12511, in appropriate circumstances.
---------------------------------------------------------------------------
\145\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
For the reasons stated above, NASD is not proposing to amend
Proposed Rule 12509 at this time.
MM. Proposed Rule 12510--Depositions
Proposed Rule 12510 provides that depositions are discouraged but
may be approved by the panel in very limited circumstances. Some
commenters contended that, when time is of the essence, the requirement
to receive arbitrator approval in advance could result in the loss of
testimony or evidence.\146\ They suggested that the proposed rule
should include a procedure that permits a deposition to be taken before
a panel is selected.
---------------------------------------------------------------------------
\146\ Canning and Feinberg.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it is sensitive to the
commenters' concerns and noted that the proposed rule would not prevent
parties from mutually agreeing to take the testimony of an ill or dying
witness before a panel has been selected. For this reason, NASD is not
proposing to amend Proposed Rule 12510 at this time.
NN. Proposed Rule 12511--Discovery Sanctions
Under Proposed Rule 12511, a party would face sanctions for failing
to cooperate in the exchange of documents and information as required
under the Customer Code. Several commenters suggested that the proposed
rule also should permit sanctions if parties do not timely produce the
requisite documents from Document Production Lists 1 and 2 without good
cause.\147\ In Amendment 5, NASD responded that Proposed Rule 12511
specifically states that the panel may issue sanctions against any
party in accordance with Proposed Rule 12212(a) for failure to comply
with the discovery provisions of the Customer Code. It thus believes
the commenters' concern is sufficiently addressed under Proposed Rule
12511.
---------------------------------------------------------------------------
\147\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
One commenter noted that Proposed Rule 12511 expands the scope of a
panel's authority beyond current practice by permitting arbitrators to
impose sanctions for violations of the Customer Code, rather than for
violations of panel orders only.\148\ In Amendment 5, NASD explained
that the purpose of this provision is to specify that the panel has the
authority to control all aspects of an arbitration, not just discovery,
and therefore must have the ability to enforce the rules of the forum
as well as its orders.
---------------------------------------------------------------------------
\148\ SIA.
---------------------------------------------------------------------------
Two commenters noted that a bad faith use of the delay provisions
in Proposed Rules 12506 and 12507 is not subject to sanctions under
Proposed Rule 12511 and suggested amending Proposed Rule 12511 to
address this issue.\149\ As previously discussed, NASD proposed in
Amendment 5 to amend Proposed Rules 12506 and 12507 to include
expressly a ``good faith'' standard for compliance. NASD believes the
issues raised concerning Proposed Rule 12511 will be addressed with the
proposed changes in Proposed Rules 12506 and 12507.
---------------------------------------------------------------------------
\149\ Canning and Feinberg.
---------------------------------------------------------------------------
For these reasons stated above, NASD is not proposing to amend
Proposed Rule 12511 at this time.
OO. Proposed Rule 12512--Subpoenas
Proposed Rule 12512 provides that subpoenas may be issued ``as
provided by law.'' Similarly, Rule 10322 of the current Code provides,
``The arbitrators and any counsel of record to the proceeding shall
have the power of the subpoena process as provided by law.'' Seven
commenters contended that brokerage firms abusively issue overly broad
subpoenas to non-parties, while failing to provide notice of the
subpoena to claimants in a timely manner.\150\ These commenters stated
that claimants usually receive a copy of the subpoena only after the
subpoenaed party has produced the requested documents, thereby
eliminating the opportunity to make a meaningful objection. They argued
that parties should be allowed to object to the subpoena before it is
issued. Several commenters also suggested that the proposed rule should
state clearly that only arbitrators may issue subpoenas.\151\
---------------------------------------------------------------------------
\150\ Canning, Feinberg, Greco, Layne, Miller, Stolle, and
Stoltmann.
\151\ Canning, Feinberg, Greco, Layne, Stolle, Stoltman.
---------------------------------------------------------------------------
In Amendment 5, NASD agreed that changes to the subpoena process
were needed and noted that it had separately filed proposed rule
changes relating to subpoenas.\152\ NASD stated that it intends to
incorporate any approved changes into the Customer Code.
---------------------------------------------------------------------------
\152\ The Commission recently approved these proposed rule
changes. See Order Approving Proposed Rule Change and Amendment Nos.
1, 2, and 3 Thereto and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 4 to Revise Rule 10322 of the
NASD Code of Arbitration Procedure Pertaining to Subpoenas and the
Power to Direct Appearances, Securities Exchange Act Rel. No. 55038
(Jan. 3, 2007), 72 FR 1353 (Jan. 11, 2007) (SR-NASD-2005-079).
---------------------------------------------------------------------------
PP. Proposed Rule 12513--Authority of Panel to Direct Appearances of
Associated Person Witnesses and Production of Documents Without
Subpoenas
Proposed Rule 12513 allows the panel to order the appearance of any
employee
[[Page 4595]]
or associated person of an NASD member without the use of subpoenas.
One commenter noted that Proposed Rules 12100(a) and (r) consider
former associated persons to be associated persons.\153\ In this
commenter's view, while Proposed Rule 12513 would permit a panel to
order a former associated person to attend an arbitration hearing, this
would be impractical because the panel would have no means to enforce
an order compelling that person's attendance. This commenter suggested
limiting the proposed rule to current associated persons and stated
that the attendance of former associated persons should be compelled by
subpoena only.
---------------------------------------------------------------------------
\153\ SIA. See also Section 0, Proposed Rule 12100(a)
(Definition of Associated Person) and Proposed Rule 12100(r)
(Definition of Person Associated with a Member), above.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that Proposed Rule 12100(r) is a
codification of current policy, under which, in the arbitration
context, NASD maintains jurisdiction over a former associated person
for events that occurred while the person was associated with a member
firm (or are related to the person's termination of employment with a
member firm). It also noted that such arbitrations would be subject to
any applicable statute of limitations and the six-year eligibility rule
under both the current Code and Proposed Rule 12206. With regard to
Proposed Rule 12513, NASD acknowledged that arbitrators have limited
means of requiring former associated persons to appear or produce
documents. Nevertheless, some former associated persons may cooperate
with these orders to facilitate resolution of the matter. If they do
not, they may be subject to a subpoena. Because Proposed Rule 12513 is
substantively the same as current policy, NASD is not proposing to
amend this proposed rule at this time.
QQ. Proposed Rule 12514--Exchange of Documents and Witness Lists Before
Hearing
As published in the Customer Code Notice, Proposed Rule 12514(c)
provides that parties may not present at the hearing any documents or
other materials not already produced or any witnesses not already
identified at an earlier stage in the arbitration, unless the panel
determines that good cause exists for the earlier failure. Proposed
Rule 12514(c) also specifically states that the need to use documents
or call witnesses for rebuttal or impeachment purposes based on
developments during the hearing constitutes good cause.
1. ``Control''
Proposed Rule 12514(a) (Documents and Other Materials) provides
that at least 20 days before the first scheduled hearing date, all
parties must provide all other parties with copies of all documents and
other materials in their possession or control that they intend to use
at the hearing that have not already been produced. Several commenters
objected to the use of the term ``control'' in Proposed Rule 12514(a)
and Proposed Rule 12506.\154\ NASD responded in Amendment 5 that it
believed the use of the term ``control'' would make it easier for
customers to gain access to documents held by third-parties on behalf
of respondents, because respondents would be required to produce
documents regardless of where the documents are stored or maintained.
In Amendment 7, NASD proposed to amend Proposed Rule 12508 to address
this issue.\155\
---------------------------------------------------------------------------
\154\ Boliver, Canning, Estell, Evans, Feinberg, Ilgenfritz,
Josel, Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
\155\ See Sections 0, Proposed Rule 12506 (Document Production
Lists), and 0, Proposed Rule 12508 (Objecting to Discovery; Waiver
of Objection), above.
---------------------------------------------------------------------------
2. Scope of ``Rebuttal''
Several commenters suggested that, to avoid any misunderstanding of
what constitutes rebuttal, Proposed Rule 12514(c) should include
information currently contained in a form letter that NASD sends to the
parties advising them of the hearing date and location.\156\ This
information instructs parties that documents and lists of witnesses in
defense of a claim are not considered rebuttal and, therefore, must be
exchanged by the parties. In response to this comment, NASD agreed in
Amendment 5 to include this provision, noting that it would be
codifying current practice.\157\ The proposed rule is amended as
follows (new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------
\156\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
\157\ NASD also proposed to amend Proposed Rule 12514(b) to
correct a grammatical error.
---------------------------------------------------------------------------
12514. Exchange of Documents and Witness Lists Before Hearing
(a) Documents and Other Materials
No change.
(b) Witness Lists
At least 20 days before the first scheduled hearing date, all
parties must provide each other party with the names and business
affiliations of all witnesses they intend to present at the hearing. At
the same time, [each party] all parties must file their witness lists
with the Director, with enough copies for each arbitrator.
(c) Exclusion of Documents or Witnesses
Parties may not present any documents or other materials not
produced and or any witnesses not identified in accordance with this
rule at the hearing, unless the panel determines that good cause exists
for the failure to produce the document or identify the witness. Good
cause includes the need to use documents or call witnesses for rebuttal
or impeachment purposes based on developments during the hearing.
Documents and lists of witnesses in defense of a claim are not
considered rebuttal or impeachment information and, therefore, must be
exchanged by the parties.
* * * * *
3. ``Good Cause''
One commenter expressed concern that the exception allowing
documents not exchanged to be admitted for ``good cause'' would create
uncertainty that a panel would accept documents or witnesses not
produced or identified during the 20-day exchange during the
hearing.\158\ Similarly, two commenters expressed concern that the
phrase ``impeachment purposes based on developments during the
hearing'' is ambiguous, would create more uncertainty in the hearing
preparation process, and would be difficult for arbitrators to
apply.\159\ These commenters recommended retaining the ``good cause''
requirement, but replacing the standard of ``rebuttal or impeachment
purposes'' with the cross-examination standard from Rule 10321 of the
current Code.\160\ Another commenter objected to the provision in
Proposed Rule 12514(c) that would require parties to exchange documents
contemplated for use on cross-examination, stating that this disclosure
is antithetical to the concept of cross-examination because it would
give each party time to formulate responses.\161\ This commenter
suggested that the proposed rule should specifically except cross-
examination documents from the
[[Page 4596]]
20-day exchange, as under the current Code.
---------------------------------------------------------------------------
\158\ Ryder.
\159\ Canning and Feinberg.
\160\ Canning and Feinberg. Current Rule 10321 (General
Provisions Governing Pre-Hearing Proceedings) provides in relevant
part that parties do not need to exchange documents or identify
witnesses ``which parties may use for cross-examination or
rebuttal.''
\161\ Schwab.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that the proposed rule creates a
presumption that, at the hearing, parties may not present any documents
that were not exchanged or witnesses who were not identified within the
time provided by the proposed rule. NASD stated, however, that the
``good cause'' exception is intended to allow for the need to use
documents or call witnesses for rebuttal or impeachment purposes based
on developments at the hearing. NASD also stated that in developing
Proposed Rule 12514(c), it learned from some of its constituents that
parties have been abusing the ``cross examination'' exception of Rule
10321 of the current Code by inappropriately designating certain
documents as cross-examination documents. Subsequently, at the hearing,
parties allegedly ``surprised'' their opponents with these documents,
which limited the opponents' ability to effectively rebut their
significance. NASD stated that Proposed Rule 12514(c) is intended to
prevent this practice. For these reasons, NASD is not proposing to
amend the proposed rule at this time.
4. Other Comments
Under the current and proposed Discovery Guides, if a party states
that no responsive information or documents exist in connection with a
discovery request, that party must make certain affirmations at the
request of the party seeking the discovery request. Specifically, the
responding party must: (1) State in writing that he/she conducted a
good faith search for the requested information or documents; (2)
describe the extent of the search; and (3) state that, based on the
search, no such information or documents exist. Two commenters asserted
that these affirmations are inadequate and suggested that they be
amended.\162\ NASD responded that the Customer Code is not changing the
affirmation provision in the Discovery Guide, and thus that this
comment is outside the scope of this rule filing.
---------------------------------------------------------------------------
\162\ Canning and Feinberg.
---------------------------------------------------------------------------
Two commenters asserted that Proposed Rule 12514 would cause
parties to provide more documents than they intend to use at the
hearing, thus limiting any meaningful analysis of the evidence that the
opposing parties actually intend to offer at the hearing.\163\ They
suggested that Proposed Rule 12514 should require parties to provide
notebooks of numbered exhibits with an index to opposing parties 20
days before hearing, and to the panel at the hearing.
---------------------------------------------------------------------------
\163\ Canning and Layne.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that Proposed Rule 12514 is meant to
provide general guidance on the exchange or documents and witness lists
before a hearing, and is substantively the same as Rule 10321(a) of the
current Code. Thus, it stated that these comments are outside the scope
of the rule filing.
RR. Proposed Rule 12600--Required Hearings
As published in the Customer Code Notice, Proposed Rule 12600(c)
provides that if a hearing will be held, the Director will notify the
parties of the time and place of the hearing at least 10 days before
the hearing begins, unless the parties agree to a shorter time. The
Commission specifically solicited comment on whether parties need
notice of the hearing earlier than 10 days in advance. Several
commenters indicated that the proposed 10-day notice could be
insufficient.\164\ One commenter stated that such short notice might
cause a small investor to lose his or her counsel, as that counsel's
schedule might not allow an appearance for a hearing on 10 days'
notice, which in turn could mean that the investor could be forced to
proceed at the hearing without counsel.\165\ Other commenters suggested
that it would be difficult for parties and witnesses who are traveling
from out of town to make travel arrangements on 10 days' notice.\166\
In Amendment 5, NASD explained that the term ``place'' in Proposed Rule
12600(c) refers to the specific facility where the hearings will be
held, and that under current practice, parties normally are notified of
the city in which the hearing will take place prior to the IPHC.
Parties also generally agree to hearing dates at the IPHC. NASD stated
that it does not expect this practice to change under Proposed Rule
12600(c). In response to the comments and to ensure consistent
timeframes under the Customer Code, however, NASD is proposing to amend
Proposed Rule 12600(c) to increase the notice period from 10 to 20
days. The proposed rule change is amended as follows (new language in
italics; deleted language in [brackets]):
---------------------------------------------------------------------------
\164\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PACE, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
\165\ PACE.
\166\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
12600. Required Hearings
(a) No change.
(b) No change.
(c) The Director will notify the parties of the time and place at
least [10] 20 days before the hearing begins, unless the parties agree
to a shorter time.
* * * * *
In addition, Proposed Rule 12600 provides that hearings will be
held, unless the arbitration is administered under the provisions under
the Customer Code applicable to simplified arbitrations or default
proceedings, the parties agree otherwise in writing, or the arbitration
has been settled, withdrawn, or dismissed. One commenter noted that
Proposed Rule 12600(a) would not include cases dismissed without a
hearing under Proposed Rule 12504 and suggested amending the proposed
rule to include this additional exception.\167\
---------------------------------------------------------------------------
\167\ SIA.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it believes the language and
intent of Proposed Rule 12600(a) are clear, and as a result, did not
propose to amend this rule. In Amendment 6, NASD withdrew Proposed Rule
12504 and all references to that rule from the Customer Code.\168\
Therefore, this comment is no longer applicable to this rule filing.
---------------------------------------------------------------------------
\168\ Proposed Rule 12504 has since been re-filed as a separate
proposed rule change. See supra note 23.
---------------------------------------------------------------------------
SS. Proposed Rule 12601--Postponement of Hearings
Proposed Rule 12601 governs the postponement of hearings and
provides, in relevant part, that a panel may not grant a motion to
postpone a hearing made within 10 days of the date that the hearing is
scheduled to begin, unless the panel determines that good cause exists.
One commenter asserted that, at times, arbitrators have attempted
to ignore the agreement of the parties to postpone an arbitration and
compel parties to proceed.\169\ To eliminate this possibility, this
commenter suggested that the proposed rule should provide that a
hearing must be postponed by agreement of the parties and may be
postponed under the other listed circumstances. Another commenter noted
that Proposed Rule 12601(a) appears to give the parties the unfettered
right to postpone the hearing whenever they agree to do so, which would
contradict an arbitrator's duty to keep cases moving toward
resolution.\170\ This commenter suggested
[[Page 4597]]
incorporating some provisions from Rule 10319(c) of the current Code to
give the panel express control over the number of times a case may be
postponed and to eliminate repeat postponements.
---------------------------------------------------------------------------
\169\ SIA.
\170\ Elster. While this commenter's views pertained to Proposed
Rule 13601(a) of the Industry Code, his comments are relevant to the
Customer Code as well. See supra note 5.
---------------------------------------------------------------------------
NASD responded that it believes the parties should have the
discretion to postpone a hearing if they mutually agree, to facilitate
settlement negotiations among the parties. NASD believes, however, that
the proposed postponement fees in the rule, which are non-refundable,
should serve as a deterrent to multiple postponements.\171\ Moreover,
Proposed Rule 12601(c) would allow a panel to dismiss an arbitration
without prejudice if the parties request or agree to more than two
postponements. In this situation, a party could re-file the claim,
subject to all applicable fees and costs under the Customer Code.
---------------------------------------------------------------------------
\171\ Both Rule 10319(b) of the current Code and Proposed Rule
12601(b) require parties to pay a postponement fee equal to the
applicable hearing session fee if the party's postponement request
is granted. Under Rule 10319(b), a party would pay twice the hearing
session fee for each subsequent postponement, whereas under Proposed
Rule 12601(b), the fee would not increase for subsequent requests.
See Section 0, below.
---------------------------------------------------------------------------
In light of these comments, however, NASD also amended Proposed
Rule 12601 to expressly distinguish between when a hearing may be
postponed and when a hearing must be postponed. NASD also added
paragraph (b)(2) to the rule, which includes provisions of a proposed
rule change that had been approved by the Commission, but were
inadvertently omitted from the last amendment to the Customer
Code.\172\ The proposed rule change is amended as follows (new language
in italics; deleted language in [brackets]):
---------------------------------------------------------------------------
\172\ See Order Approving Proposed Rule Change and Amendment
Nos. 1 and 2 Relating to the Adjournment of an Arbitration Hearing
Within Three Business Days of the First Scheduled Hearing Session,
Securities Exchange Act Rel. No. 49716 (May 17, 2004), 69 FR 29342
(May 21, 2004) (SR-NASD-2003-164).
---------------------------------------------------------------------------
12601. Postponement of Hearings
(a) [When a Hearing May Be Postponed] Postponement of Hearings
(1) When a Hearing Shall Be Postponed
A hearing shall be postponed by agreement of the parties.
(2) When a Hearing May Be Postponed
A hearing may be postponed [only]:
[By agreement of the parties;]
By the Director, in extraordinary circumstances;
By the panel, in its own discretion; or
By the panel, upon motion of a party. The panel may not
grant a motion to postpone a hearing made within 10 days of the date
that the hearing is scheduled to begin, unless the panel determines
that good cause exists.
(b) Postponement Fees
(1) No change.
(2) If a postponement request is made by one or more parties and
granted within three business days before a scheduled hearing session,
the party or parties making the request shall pay an additional fee of
$100 per arbitrator. If more than one party requests the postponement,
the arbitrators shall allocate the $100 per arbitrator fee among the
requesting parties. The arbitrators may allocate all or a portion of
the $100 per arbitrator fee to the non-requesting party or parties, if
the arbitrators determine that the non-requesting party or parties
caused or contributed to the need for the postponement. In the event
that a request results in the postponement of consecutively scheduled
hearing sessions, the additional fee will be assessed only for the
first of the consecutively scheduled hearing sessions. In the event
that an extraordinary circumstance prevents a party or parties from
making a timely postponement request, the arbitrators may use their
discretion to waive the fee, provided verification of such circumstance
is received.
(3) No change.
(c) No change.
* * * * *
One commenter asked whether a motion for postponement outside of
the 10-day window under Proposed Rule 12601(a) would require a ``good
cause'' explanation.\173\ In Amendment 5, NASD explained that if a
party requests to postpone a hearing more than 10 days from the date
the hearing is scheduled to begin, it would not need to demonstrate
good cause. Rather, a panel may grant a party's request based solely on
the request, and the party would be required to pay any applicable
fees.
---------------------------------------------------------------------------
\173\ Ryder.
---------------------------------------------------------------------------
TT. Proposed Rule 12602--Attendance at Hearings
Proposed Rule 12602 provides that the parties and their
representatives are entitled to attend all hearings, and the panel will
decide who else may attend any or all of the hearings. Several
commenters viewed Proposed Rule 12602 as inconsistent with directions
given in the Securities Industry Conference on Arbitration Manual,
which creates a presumption for the attendance of expert witnesses and
an investor's representative.\174\ They suggested that the proposed
rule should expressly allow expert and other fact witnesses to attend
hearings.
---------------------------------------------------------------------------
\174\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, and Sutherland.
---------------------------------------------------------------------------
In Amendment 5, NASD agreed that expert witnesses should be allowed
to attend all hearings, but stated that the panel should have the
discretion to allow other persons to attend hearings (e.g., an
individual assisting an elderly or disabled party) or to bar someone
who may be disruptive to the proceeding.
In response to comments, the proposed rule change is amended as
follows (new language in italics):
12602. Attendance at Hearings
The parties and their representatives are entitled to attend all
hearings. Absent persuasive reasons to the contrary, expert witnesses
should be permitted to attend all hearings. The panel will decide who
else may attend any or all of the hearings.
* * * * *
UU. Proposed Rule 12607--Order of Presentation of Evidence and
Arguments
Proposed Rule 12607 provides that while the claimant generally will
present its case, followed by the respondent's defense, the panel may
vary the order in which the hearing is conducted, as long as each party
is given a fair opportunity to present its case. Three commenters noted
that no other proposed rule addresses the order of the presentation of
evidence.\175\ They recommended that Proposed Rule 12607 should
expressly address opening statements and closing arguments, and clarify
that rebuttal testimony is allowed. Several commenters suggested that
Proposed Rule 12607 should give claimants the right to reserve any or
all of their closing argument for rebuttal, some noting that this would
be consistent with current practice and IM-10317 under the current
Code.\176\
---------------------------------------------------------------------------
\175\ Canning, Feinberg, and Stoltmann.
\176\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
NASD responded that it believes the panel has the authority to
control a hearing, which includes determining the order in which the
hearing is conducted. Consistent with that principle, Proposed Rule
12607 is intended to provide the panel with discretion to vary the
order in which the hearing is conducted, provided each
[[Page 4598]]
party is given a fair opportunity to present its case. For these
reasons, NASD is not proposing to amend this rule at this time.
VV. Proposed Rule 12700--Dismissal of Proceedings Prior to Award
Proposed Rule 12700 lists the circumstances in which a panel may or
must dismiss an arbitration or claim prior to award. One commenter
stated that dismissals under Proposed Rule 12700(b) should be
classified as an award and put into writing pursuant to Proposed Rule
12904 (Awards).\177\ In this commenter's opinion, because dismissal
orders require a dispositive determination of the arbitrators and are
subject to vacatur challenges in court, they are legally ``awards.''
---------------------------------------------------------------------------
\177\ Ryder.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it believes its proposed
definition of ``award'' under Proposed Rule 12100 addresses this
commenter's concern.\178\ Moreover, NASD explained that panels issue
awards under current practice if they determine that cases should be
dismissed, with or without prejudice. For these reasons, NASD is not
proposing to amend Proposed Rule 12700(b) at this time.
---------------------------------------------------------------------------
\178\ See discussion in Section 0, Proposed Rule 12100(b)
(Definition of Award), above.
---------------------------------------------------------------------------
WW. Proposed Rule 12702--Withdrawal of Claims
Proposed Rule 12702(a) provides that before a claim has been
answered by a party, the claimant may withdraw the claim against that
party with or without prejudice. Proposed Rule 12702(b) provides that
after a claim has been answered by a party, the claimant may only
withdraw the claim against that party with prejudice unless the panel
decides, or the parties agree, otherwise. In the Customer Code Notice,
the Commission asked whether Proposed Rule 12702(b) appropriately
addresses the concern of allowing claimants to withdraw claims without
prejudice, while protecting respondents from expending significant
resources to respond to a claim that is later withdrawn or having to
respond to the same claim multiple times.
Several commenters opposed Proposed Rule 12702(b), contending that,
in their collective experiences, there are few instances in which a
claim had to be withdrawn after an answer was filed.\179\ These
commenters argued that, at the very least, the proposed rule should
provide arbitrators with the authority to decide whether a claim, if
withdrawn after an answer is filed, should be withdrawn with or without
prejudice.
---------------------------------------------------------------------------
\179\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that Proposed Rule 12702(b) is
intended to deter claimants' gamesmanship in withdrawing and refiling
claims in order to select a new panel. NASD noted that under Proposed
Rule 12702, if claimants have legitimate reasons to withdraw claims
without prejudice after the answer is filed, they may ask the
arbitrators to allow them to do so. NASD believes that this provision
is a reasonable accommodation of the competing interests in the forum
and declined to amend Proposed Rule 12702(b) at this time.
XX. Proposed Rule 12800--Simplified Arbitration
Proposed Rule 12800 establishes procedures for simplified
arbitration, which are claims of $25,000 or less. While respondents
have only 20 days to answer a simplified arbitration claim under the
current Code, they would have 45 days to do so under the Customer Code,
consistent with cases submitted under regular arbitration. In the
Customer Code Notice, the Commission asked whether the proposed 45-day
deadline should be shortened in simplified cases to reflect the fact
that they are meant to take place more expeditiously than regular
cases.
Several commenters opposed the proposed 45-day deadline, contending
that firms should be able to respond more quickly to small,
uncomplicated claims.\180\ Moreover, these commenters believe that the
longer deadline would diminish the benefits of simplified arbitrations
as a quick, inexpensive option for small investors. As an alternative,
several commenters suggested a 30 day deadline, similar to the
requirements in most state courts for the filing of an answer.\181\
---------------------------------------------------------------------------
\180\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PACE, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
\181\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that it is sensitive to the
commenters' concerns, but noted that the 45-day deadline reflects
current practice in the forum. NASD stated that frequent users of the
forum and NASD staff report that parties routinely extend the deadlines
in simplified arbitration that are provided under Rule 10302 of the
current Code. Because parties so often extend existing deadlines, NASD
believes that Proposed Rule 12800 would simplify and streamline the
administration of simplified arbitrations without resulting in
additional delay.
One commenter contended that, while the current Code permits a
claimant to reply to the respondent's answer, the Customer Code does
not explicitly authorize this practice.\182\ In this commenter's view,
because many claimants filing simplified arbitration claims are pro se,
the procedures controlling these arbitrations should be expressly
stated. This commenter suggested defining ``pleadings'' to clarify that
replies can be filed to respondents' answers in simplified arbitration.
This commenter also suggested providing that claimants have 10 days to
file such replies following the close of the discovery period.
---------------------------------------------------------------------------
\182\ PACE.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that although it agrees that a
definition of ``pleadings'' should be included in the Customer Code,
(see Section 0, above) it does not agree with the suggestion that
claimants be given 10 days to file a reply following the close of the
discovery period. NASD explained that, because time limits under the
Customer Code are meant to be standardized, the proposed rule does not
include the special time limits or deadlines for simplified cases from
the current Code.
One commenter objected that the only arbitrators eligible to hear
simplified arbitration cases are those included on the chairperson-
eligible arbitrator roster.\183\ In Amendment 5, NASD responded that,
because simplified arbitration cases are decided by only one
arbitrator, it believes the arbitrator should have had the experience
of sitting on prior cases. Proposed Rule 12800, however, would give
parties the option to select an arbitrator from a different roster if
they mutually agree.
---------------------------------------------------------------------------
\183\ Caruso.
---------------------------------------------------------------------------
For these reasons, NASD is not proposing to amend Proposed Rule
12800 at this time.
YY. Proposed Rule 12801--Default Proceedings
Proposed Rule 12801 addresses the applicability of, and procedures
involved in, default proceedings. One commenter noted that default
proceedings under Rule 10314(e) of the current Code apply to defunct
firms only, and asserted that the reference to default proceedings in
Proposed Rule 12308, concerning failure to answer claims, would expand
the use of default proceedings to all respondents who fail
[[Page 4599]]
to answer, whether active or defunct.\184\ NASD explained that, like
Rule 10314(e) of the current Code, Proposed Rule 12801 would apply only
to a respondent within one of the following four categories: (1) A
member whose membership has been terminated, suspended, canceled, or
revoked; (2) a member that has been expelled from the NASD; (3) a
member that is otherwise defunct; or (4) or an associated person whose
registration is terminated, revoked, or suspended. Therefore, Proposed
Rule 12801 would not apply to active firms and would not change the
substantive requirements of the default procedures under the current
Code.
---------------------------------------------------------------------------
\184\ Ryder.
---------------------------------------------------------------------------
Two commenters suggested that Proposed Rule 12801 should: (1)
Permit default proceedings when a respondent (including current members
and associated persons with active registrations) has failed to file
both an answer and a uniform submission agreement; (2) limit the time a
party has to file the answer and uniform submission agreement; (3)
provide that, under the proposed default process, determinations should
be dispositive only in favor of the claimant; and (4) give movants the
opportunity to present the case in evidentiary hearing on any issues
not favorably ruled on.\185\
---------------------------------------------------------------------------
\185\ Canning and Feinberg.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that Proposed Rule 12801 has not
changed the substantive requirements concerning default procedures in
Rule 10314(e) of the current Code, which requires claimants to present
a sufficient basis to support the granting of an award. It therefore
stated that this comment is outside the scope of the rule filing.
ZZ. Proposed Rule 12900--Fees Due When a Claim Is Filed
Proposed Rule 12900 establishes filing fees due from each party
based on the amount in controversy. Several commenters contended that
industry members should pay the majority of the customer filing fee,
suggesting that the filing fee for public customers should be limited
to $200.\186\ In their view, while public customers should be subject
to the panel's allocation of fees in the award, they should not have to
incur undue expense at the outset to file a claim.
---------------------------------------------------------------------------
\186\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
Another commenter suggested that the lack of an increase in fees
for claims above one million dollars seems to favor wealthier
claimants.\187\ This commenter indicated that the fee schedules could
be perceived as unfair because mid-level claimants appear to be
shouldering a disproportionate percentage of the forum fees. To shift
the cost burden to those who stand to benefit the most, while
eliminating the perception that the fee changes impact the middle-class
investor the most, this commenter suggested that NASD should amend
Proposed Rule 12900 to charge a fixed percentage as an additional fee
for any amounts claimed over one million dollars.
---------------------------------------------------------------------------
\187\ Ryder.
---------------------------------------------------------------------------
In Amendment 5, NASD responded that Proposed Rule 12900 made very
minimal changes to the fee schedules in Rule 10332 of the current Code,
and that the proposed changes would not result in an increase in the
total amount of fees paid by customers or associated persons when
filing a claim. As NASD explained, for claims of $30,000 to $50,000,
the customer's overall filing fees would decrease by $50, and for
claims of $1 million to $3 million, the customer's overall filing fees
would decrease by $100. NASD also stated that its fee schedules are
commensurate with the dollar amount of the claims filed and damages
requested. In its view, the proposed, simplified fee schedules would
make it easier for parties to understand the total amount due upon
filing. For these reasons, NASD is not proposing to amend Proposed
12900 at this time.
One commenter expressed concern that the expense of arbitration
(i.e., filing fees) may prevent access to the forum and suggested that
NASD amend Proposed Rule 12900(d) to expressly disclose that fee
waivers may be granted to parties who can demonstrate financial
hardship.\188\ This commenter also stated that the proposed rule should
explain the practice and procedure for applying for fee waivers and
NASD's criteria for granting them. In Amendment 5, NASD responded that,
although this comment is beyond the scope of the rule filing, it would
consider the comment in considering whether future amendments are
warranted. In Amendment 7, NASD noted that the procedures to request a
filing fee waiver already are located on NASD's Web site in the Uniform
Forms Guide, at: http://www.nasd.com/web/groups/med_arb/documents/mediation_arbitration/nasdw_007954.pdf
.
---------------------------------------------------------------------------
\188\ PACE.
---------------------------------------------------------------------------
AAA. Proposed Rule 12902--Hearing Session Fees, and Other Costs and
Expenses
Proposed Rule 12902 establishes hearing session fees due from the
parties based on the amount in controversy. Several commenters noted
that, although Proposed Rule 12902 would require a party to pay one
fee, which includes the filing fee and the hearing session deposit fee,
it does not provide that any of the fee will be applied to any hearing
fees incurred.\189\ These commenters contended that a claimant would
pay for the first hearing session twice--once through the filing fee
and then again when the hearing session fees are assessed.
---------------------------------------------------------------------------
\189\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
NASD responded that it did not intend to increase the fee for
submitting a claim to arbitration under the Customer Code and agreed
that clarification is needed. Thus, NASD proposed to amend Proposed
Rule 12902(b) to provide that an amount equal to one hearing session
fee would be deducted from the total amount of the hearing session fees
assessed against the party who paid the filing fee. The proposed rule
change is amended as follows (new language in italics):
12902. Hearing Session Fees, and Other Costs and Expenses
(a) No change.
(b) Payment of Hearing Session Fees
(1) No change.
(2) No change.
(3) In the award, the amount of one hearing session fee will be
deducted from the total amount of hearing session fees assessed against
the party who paid the filing fee. If this amount is more than any
fees, costs, and expenses assessed against this party under the Code,
the balance will be refunded to the party.
(c) No change.
(d) No change.
* * * * *
In Amendment 5, NASD also proposed to amend Proposed Rule 12902 to
address the issue of refund payments. NASD stated that it receives
numerous requests from non-parties to make refunds payable to the
attorneys or other non-parties that may have made payment on behalf of
named parties. Currently, when any money remains in a party's account
after all fees and charges are assessed, NASD's practice is to refund
the money directly to the party. Because parties themselves sign the
uniform submission agreement and
[[Page 4600]]
are liable for any fees or costs incurred under the current Code, NASD
believes it is inappropriate to issue refunds to anyone other than a
party. Therefore, NASD is proposing to codify its practice by adding a
new provision to Proposed Rule 12902. The proposed rule change is
amended as follows (new language in italics):
12902. Hearing Session Fees, and Other Costs and Expenses
* * * * *
(e) Refund Payments
Any refunds of fees or costs incurred under the Code will be paid
directly to the named parties, even if a non-party made a payment on
behalf of the named parties.
* * * * *
BBB. Proposed Rule 12904--Awards
Proposed Rule 12904, in pertinent part, establishes the required
content of awards. One commenter suggested defining the term ``award''
under the Customer Code.\190\ In Amendment 5, NASD agreed with this
comment and included a definition of ``award.'' \191\ The same
commenter also stated that dismissal of an entire claim should be
considered an award. In Amendment 5, NASD agreed and stated that the
proposed definition of ``award'' under Proposed Rule 12100 addresses
this issue.
---------------------------------------------------------------------------
\190\ Ryder.
\191\ See Section 0, Proposed Rule 12100 (Definitions), above.
---------------------------------------------------------------------------
Finally, this commenter noted that although Rule 10330 requires all
awards to be in writing and signed by a majority of the arbitrators,
parties nonetheless may agree to permit one arbitrator to sign a
stipulated award that directs expungement relief on behalf of the whole
panel. In this commenter's view, parties should not be allowed to have
one arbitrator sign a stipulated award on behalf of the entire panel,
even if the parties mutually agree.
In Amendment 7, NASD explained that under current practice, which
would continue under the Customer Code, parties are not permitted to
agree to the appointment of selected arbitrators for the sole purpose
of entering a stipulated award.\192\ Moreover, parties may not agree to
having only one arbitrator of a three-member panel sign the stipulated
award. Stipulated awards, like awards issued after a hearing on the
merits, must be signed by a majority of the panel.\193\
---------------------------------------------------------------------------
\192\ Telephone conversation between Mignon McLemore, Assistant
Chief Counsel, NASD Dispute Resolution, and Gena Lai, Special
Counsel, Division of Market Regulation, SEC (Sept. 15, 2006). In
Amendment 5, NASD responded that, under the current Code and
Customer Code, if the parties mutually agree for one arbitrator to
sign a stipulated award on behalf of the panel, the request should
be honored.
\193\ See Proposed Rule 12904(a).
---------------------------------------------------------------------------
IV. Summary of Comments on the Industry Code as Amended by Amendments
1, 2, 3, and 4 and Description of Amendments 5, 6, and 7 to the
Industry Code
A. Summary of Comments on the Industry Code as Amended by Amendments 1,
2, 3, and 4
NASD filed Amendment 5 to the Industry Code with the Commission on
May 4, 2005. Only one commenter specifically addressed the Industry
Code Notice.\194\ This commenter noted that Proposed Rule 13601(a)
appears to give the parties the unfettered right to postpone the
hearing whenever they agree to do so, which the commenter viewed as
contradicting an arbitrator's duty to keep the cases moving toward
resolution. The commenter suggested incorporating some provisions from
current Rule 10319(c) (Adjournments) to give the panel some express
control over the number of times a case may be postponed and to
eliminate repeat postponements. NASD's response to the commenter's
concerns is discussed above in Section 0, Proposed Rule 12601
(Postponement of Hearings). NASD amended Proposed Rule 13601 of the
Industry Code consistent with Proposed Rule 12601 of the Customer Code.
---------------------------------------------------------------------------
\194\ See Elster, supra note 5.
---------------------------------------------------------------------------
B. Amendment 5 to the Industry Code
As noted above, the Commission received 51 comments on the Customer
Code. While none of these comments specifically addressed the Industry
Code, because the two codes contain similar rules and procedures,
comments on the Customer Code were also relevant to the Industry Code.
Thus, NASD made corresponding amendments to both the Customer Code and
the Industry Code. Amendment 5 to the Industry Code also corrects
typographical, grammatical, and other technical errors. NASD requested
accelerated approval for the amendments to the Industry Code that were
not yet published. As with the Customer Code, this request applies to
the amendments filed after the Customer Code Notice.
The table below shows which Industry Code and Customer Code rules
were similarly amended in Amendments 5 to each proposed code.
Changes To Customer & Industry Codes as a Result of Comment Letters
------------------------------------------------------------------------
Customer Code Industry Code
------------------------------------------------------------------------
12100--Definitions..................... 13100--Definitions.
12203--Denial of NASD Forum............ 13203--Denial of NASD Forum.
12204--Class Action Claims............. 13204--Class Action Claims.
12213--Hearing Locations............... 13213--Hearing Locations.
12214--Payment of Arbitrators.......... 13214--Payment of Arbitrators.
12301--Service on Associated Persons... 13301--Service on Associated
Persons.
12309--Amending Pleadings.............. 13309--Amending Pleadings.
12312--Multiple Claimants.............. 13312--Multiple Claimants.
12313--Multiple Respondents............ 13313--Multiple Respondents.
12400(b)--Arbitrator Rosters........... 13400(b)--Arbitrator Rosters.
12403--Generating and Sending Lists to 13403--Generating and Sending
Parties. Lists to Parties.
12404--Striking and Ranking Arbitrators 13404--Striking and Ranking
Arbitrators.
12501--Other Prehearing Conferences.... 13501--Other Prehearing
Conferences.
12505--Cooperation of Parties in 13505--Cooperation of Parties
Discovery. in Discovery.
12506(b)--Time for Responding to ...............................
Documents Production Lists.
12507(b)--Responding to Other Discovery 13507(b)--Responding to
Requests. Discovery Requests.
12507(a)--Making Other Discovery 13506(a)--Discovery Requests.
Requests.
12514(c)--Exclusions of Documents or 13514(c)--Exclusion of
Witnesses. Documents or Witness.
12600--Required Hearings............... 13600--Required Hearings.
[[Page 4601]]
12601--Postponement of Hearings........ 13601--Postponement of
Hearings.
12602--Attendance at Hearings.......... 13602--Attendance at Hearings.
12902(b)--Payment of Hearing Session 13902(b)--Payment of Hearing
Fees. Session Fees.
12902(e)--Refund Payments.............. 13902(e)--Refund Payments.
------------------------------------------------------------------------
C. Amendment 6 to the Industry Code
In Amendment 6 to the Industry Code, in response to commenters'
concerns regarding Proposed Rule 12504 (Motions to Decide Claims Before
a Hearing on the Merits) of the Customer Code, NASD withdrew Proposed
Rule 13504 (Motions to Decide Claims Before a Hearing on the Merits)
and all references to that rule.\195\
---------------------------------------------------------------------------
\195\ See Section 0, Proposed Rule 12504 (Motions to Decide
Claims Before a Hearing on the Merits), above.
---------------------------------------------------------------------------
D. Amendment 7 to the Industry Code
In Amendment 7 to the Industry Code, NASD made changes that
correspond to those in Amendment 7 to the Customer Code.\196\ NASD also
amended Proposed Rule 13800(c) (Simplified Arbitration) to provide that
no hearing will be held in simplified arbitrations of industry cases
unless the claimant requests a hearing. Previously, the rule
inaccurately provided that a customer could request a hearing under the
rule, although Proposed Rule 13800(c) does not apply to customer cases.
Proposed Rule 13800(c) is amended as follows (new language in italics;
deleted language in [brackets]):
---------------------------------------------------------------------------
\196\ There were no changes corresponding to those for Proposed
Rule 12200 (concerning insurance business activities of a member),
however, because there is no corollary in the Industry Code.
---------------------------------------------------------------------------
13800. Simplified Arbitration
(a)-(b) No change.
(c) Hearings
(1) No hearing will be held in arbitrations administered under this
rule unless the [customer] claimant requests a hearing.
(2) No change.
(d)-(f) No change.
* * * * *
For the text of Amendments 5, 6, and 7 to the Industry Code,
including amendments to the narrative portion and exhibits of the
Industry Code filing, please see NASD's Web site at the following URL:
http://www.nasd.com/RulesRegulation/RuleFilings/2004RuleFilings/NASDW_009295
.
V. Discussion
After careful review, the Commission finds that the proposed rule
changes (SR-NASD-2003-158 and SR-NASD-2004-011), as amended, are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\197\ In particular, the Commission finds that the
proposals, as amended, are consistent with the provisions of Section
15A(b)(6) of the Act,\198\ which requires, among other things, that the
rules of a national securities association be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest. The Commission finds that NASD's proposals, as
amended, are designed to protect investors and the public interest by
providing an accessible and clearly organized set of rules to
facilitate the resolution of disputes by users and administrators of
the arbitration forum. The revision of the current NASD rules into
plain English will make the process of arbitration more transparent and
more accessible to users of the forum, including those who may file
arbitration claims pro se. Moreover, the reorganization of the current
Code into three separate codes should minimize confusion as to which
rules apply to customer cases or industry cases and further improve the
transparency of the arbitration process, thereby improving the
efficiency with which cases are processed in the NASD dispute
resolution forum.\199\
---------------------------------------------------------------------------
\197\ In approving this proposal, the Commission has considered
the proposed rules' impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\198\ 15 U.S.C. 78o-3(b)(6).
\199\ The Commission already has approved the Mediation Code.
See supra note 8.
---------------------------------------------------------------------------
Particular provisions of the Customer Code and Industry Code that
vary substantively from the current Code are discussed below.
A. Proposed Rules 12105 and 13105--Agreement of the Parties
The current Code does not specifically address the parties'
modification of a provision of the current Code or a decision of the
Director or the panel by written agreement. Proposed Rules 12105(a) and
13105(a) of the Customer Code and Industry Code, respectively,
generally allow these modifications. Furthermore, Proposed Rules
12105(b) and 13105(b) provide that if the Director or the panel
determines that a named party is inactive in the arbitration or has
failed to respond after adequate notice has been given, the Director or
the panel may determine that the written agreement of that party is not
required while the party is inactive or not responsive. Proposed Rules
12105(b) and 13105(b) are designed to allow the active parties in an
arbitration to continue to exercise the control intended by Proposed
Rules 12105(a) and 13105(a), in the event that a party whose agreement
is needed is not participating in the arbitration or is otherwise
unresponsive. The Commission notes that NASD has clarified the meaning
of ``inactive party'' by amending Proposed Rules 12105(b) and 13105(b)
to provide examples of who an inactive party is in the rule text. As
amended, these proposed rules should improve the efficacy and
efficiency with which arbitration cases can proceed.
B. Proposed Rules 12203 and 13203--Use of the Forum
Rule 10301(b) of the current Code allows the Director of
Arbitration to decline the use of the NASD arbitration forum only if
the ``dispute, claim, or controversy is not a proper subject matter for
arbitration,'' and only upon approval of the NAMC or its Executive
Committee. Proposed Rules 12203(a) and 13203(a) of the Customer Code
and Industry Code, respectively, provide that the Director ``may
decline to permit the use of the NASD arbitration forum if the Director
determines that, given the purposes of NASD and the intent of the Code,
the subject matter of the dispute is inappropriate, or that accepting
the matter would pose a risk to the health or safety of arbitrators,
staff, or parties or their representatives.'' Proposed Rules 12203 and
13203 are intended to give the Director the flexibility needed in
emergency situations. The proposed rules also would provide that this
authority may be exercised only by the Director or the President of
NASD Dispute Resolution and cannot be delegated.
[[Page 4602]]
The Commission believes that the proposed rules should facilitate
excluding cases from the NASD arbitration forum that are beyond its
mandate, allowing it to focus on the cases that are appropriately in
the forum. This, in turn, should promote the efficacy and efficiency of
the arbitration forum in processing its claims. The Commission agrees
that in emergency situations, it is reasonable for the Director to have
the authority and flexibility to act quickly to protect the health and
safety of users and administrators of the forum. We note that this
authority, which cannot be delegated by the Director or President of
NASD Dispute Resolution, should be limited by application in only a
very narrow range of unusual circumstances.
C. Proposed Rules 12205 and 13205--Shareholder Derivative Actions
The current Code does not specifically address whether shareholder
derivative actions may be arbitrated at NASD. NASD has stated that such
claims are not eligible for arbitration in it is forum because, by
definition, they involve corporate governance disputes that do not
arise out of, or in connection with, the business of a member firm or
an associated person. Nonetheless, the question arises from time to
time, occasionally after a claimant has filed a statement of claim.
Proposed Rules 12205 and 13205 of the Customer Code and Industry Code,
respectively, would provide that shareholder derivative actions are not
eligible for arbitration at NASD.
The Commission believes that the inclusion of these proposed rules
should provide guidance to parties and obviate the need for parties to
expend resources in an attempt to arbitrate shareholder derivative
claims at NASD, thereby improving the efficiency of the arbitration
forum. Clarifying which cases may be heard in the Customer Code and
Industry Code is consistent with the purposes of the proposed rule
changes.
D. Proposed Rules 12207 and 13207--Extensions of Deadlines
Rule 10314(b)(5) of the current Code provides that deadlines
established by the Code for filing or serving pleadings may be extended
by the Director, or with the consent of the initial claimant. It
further provides that extensions for filing an answer are disfavored
and will only be granted in extraordinary circumstances, but does not
provide guidance with respect to the extensions of other deadlines
established by the Code, the panel, or the Director. Proposed Rules
12207(a) and 13207(a) of the Customer Code and Industry Code,
respectively, provide that the parties, with written notification to
the Director, may agree in writing to extend or modify any deadline for
serving an answer, returning arbitrator or chairperson lists,
responding to motions, or exchanging documents or witness lists.
Proposed Rules 12207(b) and 13207(b) provide that the panel also may
extend or modify any of the specified deadlines, or any other deadline
set by the panel, either on its own initiative or upon motion of a
party. Finally, Proposed Rules 12207(c) and 13207(c) provide that the
Director may extend or modify any deadline set by the Customer Code or
Industry Code, respectively, for good cause, or by the panel in
extraordinary circumstances.
The Commission believes that Proposed Rules 12207 and 13207 should
give parties more control over various aspects of the arbitration
process, subject to their mutual agreement. The proposed rules also
would give arbitrators and the Director more authority to manage the
arbitration process. We note that under Proposed Rules 12207(c) and
13207(c), respectively, the Director must satisfy a good cause standard
to extend a deadline established by the Customer Code or Industry Code,
or find that extraordinary circumstances exist to extend a deadline
established by the panel. By introducing more flexibility into the
arbitration process and providing parties, arbitrators, and the
Director with more authority to control the process, the proposed rules
should promote the efficacy and efficiency of the arbitration process
and forum.
E. Proposed Rules 12210 and 13210--Ex Parte Communications
The current Code does not explicitly address ex parte
communications. Proposed Rules 12210 and 13210 in the Customer Code and
Industry Code, respectively, are intended to provide additional
guidance to arbitrators and parties and to further ensure the integrity
of the NASD arbitration process. Proposed Rules 12210 and 13210 would
expressly prohibit ex parte communications between parties and
arbitrators, except in accordance with Proposed Rules 12211 and 13211,
respectively.\200\ NASD stated that Proposed Rules 12210 and 13210 are
based on general ex parte rules applicable in court proceedings, and
current NASD practice, as reflected in the NASD Arbitrators' Manual,
other NASD arbitrator training materials, and materials provided to
parties, all of which advise against ex parte communications.
---------------------------------------------------------------------------
\200\ Proposed Rules 12211 and 13211 (Rule 10334 in the current
Code) allow direct communication between parties and arbitrators
subject to certain conditions. These conditions include the
representation of parties by counsel, an agreement to use direct
communication by all arbitrators and parties, an agreement regarding
the scope of the direct communication, and facsimile or e-mail
capability by all arbitrators and parties.
---------------------------------------------------------------------------
The Commission believes that the proposed rules should aid
arbitrators in maintaining neutrality and avoiding the appearance of
impropriety, thereby promoting the fairness of the arbitration process
and forum.
F. Proposed Rules 12212 and 13212--Sanctions
Rule 10305(b) of the current Code, governing the dismissal of
proceedings, provides that the ``arbitrators may 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) if lesser sanctions have proven ineffective.'' In
addition, the current Discovery Guide states that ``[t]he panel has
wide discretion to address noncompliance with discovery orders.'' For
example, the panel may make an adverse inference against a party or
assess adjournment fees, forum fees, costs and expenses, and/or
attorneys' fees caused by noncompliance.''
Proposed Rules 12212 and 13212 of the Customer Code and Industry
Code, respectively, would codify the sanctions available to arbitrators
that are described in the current Discovery Guide, and extend them
beyond the discovery context to apply to non-compliance with any
provision of the Customer Code or Industry Code, respectively, or order
of the panel or a single arbitrator authorized to act on behalf of the
panel. The rules also would allow a panel to dismiss a claim, defense,
or arbitration under the same conditions as they may currently,
although it would use the term ``prior,'' rather than ``lesser,''
sanctions, in order to avoid potential confusion regarding whether a
prior sanction was ``lesser'' or ``greater.''
The Commission notes the authority of NASD arbitrators to impose
sanctions for violations of any provision of the Customer Code or the
Industry Code, rather than only for violations of orders of the panel,
as under the current Code. The Commission believes that this expanded
authority should help to promote just and equitable principles of
trade, and in general, to protect investors and the public interest by
[[Page 4603]]
deterring conduct that seeks to generate frivolous additional disputes
or hinder dispute resolution, and by clarifying that arbitrators have
the authority to ensure the fair and efficient administration of
arbitration proceedings when parties fail to comply with the Customer
Code or Industry Code or orders of the panel. The Commission also notes
that under the Customer Code and Industry Code, arbitrators would
continue to have the authority to make disciplinary referrals at the
end of arbitrations in connection with potential violations of NASD
rules.
G. Proposed Rules 12213 and 13213--Hearing Locations
In relevant part, Rule 10315 of the current Code provides that the
Director shall determine the time and place of the first meeting of the
arbitration panel and the parties, whether that meeting is a pre-
hearing conference or a hearing, and shall notify the parties of the
time and place at least 15 business days before the meeting. The
arbitrators determine the time and place for all subsequent meetings,
whether the meetings are pre-hearing conferences, hearings, or any
other type of meetings, and give notice as the arbitrators may
determine. Proposed Rule 12213(a)(1) of the Customer Code provides that
the Director will select the hearing location for the arbitration, and
that generally, this selection will be the hearing location closest to
the customer's residence at the time of the events giving rise to the
dispute. Proposed Rule 13213(a)(1) of the Industry Code provides that
the Director generally will select the hearing location closest to
where the associated person was employed at the time the dispute
arose.\201\ Proposed Rules 12213(a)(2) and 13213(a)(2) also provide,
however, that before arbitrator lists are sent to the parties, the
parties may agree in writing to a hearing location other than the one
selected by the Director, and that the Director or panel may change the
hearing location upon a party's motion.
---------------------------------------------------------------------------
\201\ This standard would be interpreted to refer to the time of
the events giving rise to the dispute. Telephone conversation among
Jean Feeney, Vice President, NASD; Mignon McLemore, Assistant Chief
Counsel, NASD Dispute Resolution; and Gena Lai, Specia Counsel,
Division of Market Regualtion, SEC (Dec. 19, 2006).
---------------------------------------------------------------------------
NASD stated that Proposed Rules 12213 and 13213 codify current
practice and are intended to make the arbitration process more
transparent. The proposed rules also would give the Director discretion
to select another location that would be more appropriate or less
burdensome to the parties given the specific facts of the case.
The Commission believes that the proposed rules should provide
useful guidance to the parties and thereby facilitate and improve the
transparency of the arbitration process. We also note that NASD
clarified in Amendments 5 to the Customer Code and Industry Code that
parties may appeal the Director's selection of hearing location to the
arbitration panel, once it is assembled.
H. Proposed Rules 12304, 12305, 13304 and 13305--Time to Answer
Counterclaims and Cross Claims
Rule 10314 of the current Code provides that claimants have 10 days
to answer a counterclaim, and respondents have 45 days to answer a
cross claim. Proposed Rules 12304 and 13304 of the Customer Code and
Industry Code, respectively, would extend the time that a claimant has
to answer a counterclaim from 10 to 20 days from receipt of the
counterclaim. In addition, Proposed Rules 12305 and 13305 of the
Customer Code and Industry Code, respectively, would shorten the time
that a respondent has to answer a cross claim from 45 days to 20 days
from the date that the respondent's answer to the statement of claim is
due, or from the receipt of the cross claim.
NASD stated that standardizing these time frames would give parties
who have already filed or served a pleading the same amount of time to
respond to subsequent pleadings, and would reduce unnecessary delay in
the proceeding.
The Commission believes that standardizing the time frames within
which parties may answer counterclaims and cross claims is consistent
with the purpose of maintaining a transparent, efficient, and fair
arbitration forum.
I. Proposed Rules 12307 and 13307--Deficient Claims
Under current NASD practice, if a claimant files a deficient, or
incomplete, claim, NASD will notify the claimant, and the claimant has
30 days to correct the deficiency. If the deficiency is not corrected
within that time, the claim is dismissed without prejudice. NASD stated
that this practice is consistent with SICA's published Arbitration
Procedures. The current Code, however, does not expressly address what
constitutes a deficiency, or explain the process for identifying and
correcting deficiencies.
Proposed Rules 12307 and 13307 of the Customer Code and Industry
Code, respectively, would codify NASD's deficiency practice and provide
that the Director will not serve a deficient, or incomplete, claim.
They also would enumerate the most common types of deficiencies. The
proposed rules also would make clear that the same standards apply to
deficient counterclaims, cross claims, and third-party claims served
directly by parties, and would prohibit arbitrators from considering
such claims unless the deficiencies were corrected within the time
allowed.
The Commission believes that, by including deficiency standards and
procedures in the Customer Code and Industry Code and clarifying the
information required in an initial statement of claim, the proposed
rules should help to reduce delay in NASD arbitrations by reducing the
number of deficient claims. They thus should improve the efficacy and
efficiency of the arbitration process and of the forum generally. We
note that NASD stated it would consider comments raised regarding
Proposed Rule 12307 when considering whether future amendments are
made.
J. Proposed Rules 12309 and 13309--Amending Pleadings to Add Parties
Under Rule 10328 of the current Code, parties may amend their
pleadings at any time prior to the appointment of the arbitration panel
but must obtain approval of the arbitrators before amending a pleading
after panel appointment. If a party is added to an arbitration
proceeding before the Director has consolidated the other parties'
arbitrator rankings, the newly-added party may participate in the
arbitrator selection process. However, if a party amends a pleading to
add a new party to the proceeding between the time that the Director
consolidates the arbitrator rankings and the time the panel is
appointed, the newly-added party is not able to participate in the
arbitrator selection process, or to object to being added to the
arbitration.
Proposed Rules 12309 and 13309 of the Customer Code and Industry
Code, respectively, would provide that no party may amend a pleading to
add a party between the time that ranked arbitrator lists are due to
the Director and the time the panel is appointed. Proposed Rules
12309(c) and 13309(c) would provide that the party to be added after
panel appointment must be given an opportunity to be heard before the
panel decides the motion to amend. This is intended to ensure that a
party added to an arbitration by amendment either will be able to
participate in the arbitrator selection process, or will have the
opportunity to object to being added to the proceeding.
The Commission believes that the proposed rules should promote the
[[Page 4604]]
efficacy and efficiency of the arbitration process and of the forum
generally. We also note that the proposed rules explain the rights of a
party added to an NASD arbitration proceeding with respect to
arbitrator selection.
K. Proposed Rules 12310 and 13310--Time to Answer Amended Pleadings
Rule 10328 of the current Code provides that parties have 10
business days to answer an amended pleading. Other rules in the current
Code refer to calendar days. In the interest of uniformity, Proposed
Rules 12100(j) and 13100(j) of the Customer Code and Industry Code,
respectively, define the term ``day'' to mean calendar day. To reflect
these definitions, Proposed Rules 12310 and 13310 would give parties 20
calendar days, rather than 10 business days, to respond to amended
pleadings. NASD stated that, although this represents a slight
extension of time, it is consistent with the time to respond to
counterclaims and cross claims under Proposed Rules 12304 and 12305
under the Customer Code and Proposed Rules 13304 and 13305 under the
Industry Code. NASD further stated that standardizing time frames is
part of NASD's plain English initiative, and 20 calendar days is an
appropriate time period for responding to amended pleadings.
The Commission believes that standardizing the time frames for
answering amended pleadings is consistent with the purpose of
maintaining a transparent, efficient, and fair arbitration forum.
L. Proposed Rules 12400 and 13400--Neutral List Selection System and
Arbitrator Rosters
Under the current Code, NASD maintains a roster of public and non-
public arbitrators. Whether a panel consists of public or non-public
arbitrators, and in what combination, depends on the amount in dispute,
and, in industry cases, the nature of the dispute. Once the panel is
appointed, the parties jointly select the chairperson from the panel,
or, if the parties do not agree, the Director appoints the highest-
ranked arbitrator on the panel to serve as chairperson.\202\ Although
NASD provides voluntary chairperson training to its arbitrators,
arbitrators who serve as chairpersons are not currently required to
have chairperson training, to have any particular experience, or to
meet any other specific criteria beyond the requirements for serving as
an arbitrator. NASD stated that, over the years, one of the most
frequent suggestions for improving the quality and efficiency of NASD
arbitrations is to ensure that chairpersons, who play a vital role in
the administration of cases, have some degree of arbitrator experience
and training.
---------------------------------------------------------------------------
\202\ NASD estimates that parties agree on a chairperson only
about 20% of the time. See supra note 3, Notice of Filing of
Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto to
Amend NASD Arbitration Rules for Customer Disputes, Securities
Exchange Act Rel. No. 51856, at n. 6, and Notice of Filing of
Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto to
Amend NASD Arbitration Rules for Industry Disputes, Securities
Exchange Act Rel. No. 51857, at n. 8.
---------------------------------------------------------------------------
Both the Customer Code and Industry Code would require NASD to
create and maintain a third roster of arbitrators who are qualified to
serve as chairpersons. Proposed Rule 12400 would provide that, to be
chair-qualified, an arbitrator would need to be a public arbitrator and
complete the NASD training program or have ``substantially equivalent
training or experience,'' and be either: (1) An attorney who has sat
through two SRO arbitration cases through the award stage; or (2) a
non-attorney who has sat through at least three such cases. Chairperson
eligibility requirements under Proposed Rule 13400 of the Industry Code
are the same as under the Proposed Rule 12400, except that chairpersons
in industry cases could be public or non-public, depending on the
nature of the claim.
The Commission believes that these specified criteria balance the
need to have qualified and experienced chairpersons administer NASD
arbitration cases with the goal of allowing arbitrators of all
professional backgrounds to qualify as chairpersons. The proposed rules
should help to ensure that chairpersons, who play a vital role in the
administration of cases, have some degree of arbitrator experience and
training, which in turn should improve the administration of cases in
NASD's forum.
M. Proposed Rules 12401 and 13401--Number of Arbitrators
Rule 10308(b) of the current Code provides that if the amount of a
claim is $25,000 or less, the arbitration panel consists of one
arbitrator, unless that arbitrator requests a three-arbitrator panel.
If the claim is more than $25,000 but not more than $50,000, the panel
consists of one arbitrator, unless either that arbitrator, or any party
in its initial pleading, requests a three-arbitrator panel. A claim of
more than $50,000 is heard by a three-arbitrator panel.
Proposed Rules 12401 and 13401 of the Customer Code and Industry
Code, respectively, would eliminate the ability of a single arbitrator
to request a three-arbitrator panel for any claim of $50,000 or less.
Parties, however, could still request a three-arbitrator panel in cases
involving more than $25,000, but not more than $50,000. NASD stated
that the proposed change is intended to streamline the administration
of smaller claims and minimize the cost of pursuing small claims.
The Commission believes that allowing only the parties to decide
whether additional arbitrators are needed in these smaller claims
should give the parties more control over the costs of this aspect of
arbitration. This, in turn, should improve the efficacy of the
arbitration process.
N. Proposed Rules 12403 and 13403--Generating and Sending Lists to the
Parties
Rule 10308 of the current Code provides that if the panel will
consist of one arbitrator, NASD will send the parties one list of
public arbitrators, unless the parties agree otherwise. If the panel
will consist of three arbitrators, NASD will send the parties two
lists, one with the names of public arbitrators and one with the names
of non-public arbitrators. The lists of public and non-public
arbitrators are provided in a ratio of approximately two to one,
respectively, to the extent possible, based on the roster of available
arbitrators. The parties have an unlimited number of strikes. In
addition, parties may request that the lists include arbitrators with
particular, designated expertise.
Proposed Rules 12403 and 13403 of the Customer Code and Industry
Code, respectively, would expand the number of arbitrators named on
each list, but limit the number of strikes that each party may
exercise. In addition, the proposed rules would eliminate the ability
of parties to unilaterally request arbitrators with particular
expertise, which NASD stated is an ongoing source of controversy, and
burdensome for NASD staff to administer.
The Commission believes that expanding the lists, but limiting the
number of strikes each party may exercise, should expedite panel
appointment and reduce the likelihood that the Director will have to
appoint an arbitrator who was not on the original lists sent to
parties. The Commission notes that in Amendments 5 to the Customer Code
and Industry Code, NASD proposed additional changes to the list
selection procedures to further reduce the likelihood that extended
lists would be needed. NASD also explained changes in the list
selection software that would check for certain arbitrator conflicts
before lists are sent to
[[Page 4605]]
parties.\203\ Taken as a whole, these changes should improve the
efficacy and efficiency of the arbitration process and of the forum
generally.
---------------------------------------------------------------------------
\203\ For example, MATRICS would exclude from the lists sent to
the parties arbitrators who are family members, employees, clients,
or shareholders of a party, or have an account with, have initiated
legal action against, or performed legal services for a party.
---------------------------------------------------------------------------
O. Proposed Rules 12406 and 13406--Appointment of Arbitrators
While the current Code is silent on when arbitrators are appointed,
it can be the subject of questions. NASD stated that Proposed Rules
12406(d) and 13406(d) under the Customer Code and Industry Code,
respectively, would clarify that the appointment of arbitrators occurs
when the Director sends notice to the parties of the names of the
arbitrators on the panel. In addition, consistent with the purpose of
reorganizing the current Code, the arbitrator oath requirement that is
in Rule 10327 of the current Code would be included in Proposed Rules
12406 and 13406.
The Commission believes that these proposed rules should improve
the clarity of the arbitration rules and promote the efficacy and
efficiency of the arbitration process and forum generally.
P. Proposed Rules 12409 and 13409--Arbitrator Recusal
The current Code does not address arbitrator recusal. To provide
guidance to parties, Proposed Rules 12409 and 13409 of the Customer
Code and Industry Code, respectively, would provide that any party may
ask an arbitrator to recuse himself or herself from the panel for good
cause. The proposed rule would also clarify procedures for seeking an
arbitrator's recusal.
The Commission believes that, in clarifying the procedures for
seeking an arbitrator's recusal, the proposed rules promote the
efficacy and efficiency of the arbitration process and forum.
Q. Proposed Rules 12411 and 13411--Replacement of Arbitrators
Under the current Code, the provisions regarding the replacement of
arbitrators are contained in several different sections, and contain
numerous cross-references to other rules. Proposed Rules 12411 and
13411 of the Customer Code and Industry Code, respectively, consolidate
the various current rules, but contain no substantive changes, with two
exceptions. Under Rule 10313 of the current Code, if an arbitrator is
disqualified or becomes otherwise unable or unwilling to serve after
the first pre-hearing conference or the first hearing begins, whichever
is earlier, but before the award is issued, the parties may elect to
proceed with the remaining arbitrators by notifying the Director within
five business days of their being notified of the vacancy. Under
Proposed Rules 12411 and 13411 of the Customer Code and Industry Code,
respectively, the parties may agree to proceed with only the remaining
arbitrators regardless of when the vacancy occurs.\204\
---------------------------------------------------------------------------
\204\ In addition, parties may stipulate to the removal of an
arbitrator, including a replacement arbitrator, at any time.
Telephone conversation among Jean Feeney, Vice President, NASD;
Mignon McLemore, Assistant Chief Counsel, NASD Dispute Resolution;
and Gena Lai, Special Counsel, Division of Market Regulation, SEC
(Dec. 19, 2006).
---------------------------------------------------------------------------
The Commission believes that, by allowing for more flexibility in
the arbitration process and giving parties more control in arbitrator
selection, the proposed rules should improve the efficacy and
efficiency of the arbitration process and of the forum generally. We
also note that NASD has explained that parties would be informed of the
vacancy and their options simultaneously.
R. Proposed Rules 12414 and 13414--Determinations of Arbitration Panel
Rule 10325 of the current Code provides that all rulings and
determinations of the panel must be made by a majority of the
arbitrators. Proposed Rules 12414 and 13414 of the Customer Code and
Industry Code, respectively, provide that all rulings and
determinations of the panel must be made by a majority of the
arbitrators, unless the parties agree, or unless the Customer Code or
Industry Code, respectively, or applicable law, provides otherwise. The
proposed rules reflect that under the Customer Code or Industry Code,
and applicable law, some decisions of the panel may be made by a single
member of a three-arbitrator panel.\205\ Also, applicable law may
permit a single arbitrator to issue a subpoena. The Commission notes,
however, that an award must contain the signature of a majority of the
panel, notwithstanding the agreement of the parties.\206\
---------------------------------------------------------------------------
\205\ For example, Proposed Rules 12503 and 13503 provide that
some motions may be decided by a single arbitrator.
\206\ See Section 0, Proposed Rule 12904 (Awards).
---------------------------------------------------------------------------
The Commission believes that, by allowing for more flexibility in
the arbitration process and by clarifying that arbitrators must make
determinations in accordance with applicable law, the proposed rules
promotes the efficacy and efficiency of the arbitration process and of
the forum generally.
S. Proposed Rules 12500 and 13500--Initial Prehearing Conferences
Since the adoption of the current Discovery Guide in 1999, IPHCs
have become standard practice in NASD arbitrations. The IPHC gives the
panel and the parties an opportunity to organize the management of the
case, set a discovery cut-off date, identify and establish a schedule
for potential motions, schedule hearing dates, determine whether
mediation is desirable, and resolve many other preliminary issues. NASD
stated that users of the forum have found the IPHC to be a valuable
tool in managing the administration of arbitrations. Proposed Rules
12500 and 13500 of the Customer Code and Industry Code, respectively,
would codify the portion of the current Discovery Guide relating to
IPHCs.
The Commission believes that codifying the provisions in the
current Discovery Guide concerning IPHCs should streamline the
administration of arbitrations and clarify the purposes and procedures
of IPHCs. Thus, the proposed rules should promote the efficacy and
efficiency of arbitration proceedings and of the forum generally.
T. Proposed Rules 12502 and 13502--Recording Prehearing Conferences
The current Code is silent with respect to whether and under what
circumstances a prehearing conference will be tape-recorded. Proposed
Rules 12502 and 13502 of the Customer Code and Industry Code,
respectively, would provide that prehearing conferences are generally
not tape-recorded as a matter of course, but that a panel may decide to
tape-record a prehearing conference on its own initiative, or at the
request of a party.
The Commission believes that the proposed rules would inform
parties that the option to tape-record a prehearing conference is
available and provide useful guidance to parties and arbitrators
regarding when and under what circumstances prehearing conferences may
be tape-recorded. Thus, the proposed rules should promote the efficacy
and efficiency of arbitration proceedings and of the forum generally.
U. Proposed Rules 12503 and 13503--Motions
Although motions are increasingly common in arbitration, the
current Code does not refer to motions or provide any guidance with
respect to motions practice. As a result, NASD stated that motions
practice lacks uniformity, and
[[Page 4606]]
that both parties and arbitrators are often unsure how motions should
be made, responded to, or decided. Proposed Rules 12503 and 13503 of
the Customer Code and Industry Code, respectively, would establish
procedures and deadlines for making, responding to, and deciding
motions.
The Commission believes that the proposed rules would provide
standardized guidance to parties concerning a frequent practice in
arbitration, while balancing the goal of maintaining the informal
nature of arbitration. This is consistent with the purpose of providing
an accessible, user-friendly set of rules to users and administrators
of the arbitration forum and of improving the efficacy and efficiency
of the arbitration forum. Infrequent users of the arbitration forum in
particular should benefit from being informed that motions practice may
be a part of arbitration, and what procedures may be involved.
In light of concerns expressed by commenters, the Commission
expects NASD to monitor the effects of these rules on the efficacy and
efficiency of the arbitration forum, including any increases in
hearings scheduled as a result of motions, the length of time in which
cases are resolved, or costs to the customer, in an ongoing effort to
determine whether future amendments may be warranted.
V. Proposed Rules 12505-12511 and 13505-13511--Discovery
The current Discovery Guide establishes guidelines for discovery,
rather than mandatory procedures. As a result, NASD stated that a
frequent comment made by users of the NASD forum, particularly with
respect to customer cases, is that discovery procedures are routinely
ignored, resulting in significant delay and the frequent need for
arbitrator intervention in the discovery process.
Proposed Rules 12505-12511 of the Customer Code would codify the
discovery procedures outlined in the current Discovery Guide, with some
changes designed to minimize the number of discovery disputes in NASD
arbitrations. The Customer Code would not contain the Document
Production Lists, which would remain in the Discovery Guide, but would
make clear that either producing or objecting to documents on
applicable lists, as well as other documents requested by parties, is
mandatory. Proposed Rules 13505-13511 of the Industry Code would
contain similar changes, providing specific guidance about how to make
and respond to discovery requests, and clarifying that compliance with
the discovery provisions of the Industry Code is mandatory.
The proposed rules would also extend the time that parties have to
respond from 30 to 60 days. In addition, Proposed Rules 12512 and 13512
would codify the sanctions provisions of the Discovery Guide, and
clarify the authority of arbitrators to sanction parties for non-
compliance with discovery rules or orders of the panel.
The Commission believes that codifying the discovery procedures
outlined in the Discovery Guide and the authority of arbitrators to
impose sanctions for violating those procedures should encourage
parties to comply with their discovery obligations, thereby minimizing
discovery disputes and allowing cases to proceed as expeditiously as
possible. Thus, the proposed rules should improve the efficacy and
efficiency of the arbitration process and of the forum generally.
W. Proposed Rules 12512 and 13512--Subpoenas
Rule 10322 of the current Code provides that arbitrators and any
counsel of record to a proceeding shall have the power of the subpoena
process as provided by law, and that all parties must be given a copy
of a subpoena upon its issuance. The rule also provides that parties
shall produce documents and make witnesses available to each other to
the fullest extent possible without resort to the subpoena process.
Proposed Rules 12512 and 13512 of the Customer Code and Industry
Code, respectively, are substantially similar to Rule 10322, but also
would require a party issuing a subpoena to send copies to all other
parties at the same time and in the same manner as the party that was
issued the subpoena.
The Commission believes that the proposed rules should help ensure
that all parties receive notice of a subpoena in a timely manner. Thus,
they should improve the efficacy and efficiency of the arbitration
process and of the forum generally. We note that NASD acknowledged
commenters' concerns and noted that a separate rule filing, recently
approved by the Commission, addresses additional changes to the
subpoena process.\207\
X. Proposed Rules 12514 and 13514--Exchange of Documents and Witness
Lists
Rule 10321 of the current Code provides that, at least 20 calendar
days before the first scheduled hearing date, all parties must serve on
each other copies of the documents in their possession and identify the
witnesses that they intend to present at the hearing. The arbitrators
may exclude from the arbitration any documents not exchanged or
witnesses not identified as part of this exchange. Parties need not
exchange copies of documents or identify witnesses that may be used for
cross-examination or rebuttal, however.
Proposed Rules 12514 and 13514 would provide that parties would
only need to exchange the documents or identify the witnesses that they
intend to present at the hearing that were not already exchanged or
identified, e.g., through the discovery process. The proposed rules
would create a presumption that parties could not present any documents
not exchanged or call any witnesses not identified within the time
provided by the rules, unless the panel determines that good cause
exists. The proposed rules specifically provide that good cause
includes the need to use documents or call witnesses for rebuttal or
impeachment purposes based on developments at the hearing.
The Commission believes that the proposed rules, by minimizing the
volume of documents and amount of information that parties must
exchange before a hearing, should improve the efficiency of the
arbitration process. We particularly note that in Amendments 5 to the
Customer Code and Industry Code, NASD clarified the meaning of
``rebuttal or impeachment purposes.''
Y. Proposed Rules 12601 and 13601--Postponements
Rule 10319 of the current Code provides that the arbitrator(s) may,
in their discretion, adjourn any hearing either upon their own
initiative or upon the request of any party to the arbitration.
Proposed Rules 12601 and 13601 of the Customer Code and Industry Code,
respectively, would provide that a panel may not grant requests to
postpone a hearing that are made within 10 days of a scheduled hearing
session unless the panel determines that good cause exists. NASD stated
that these provisions are intended to reduce the number of last-minute
requests for postponements, a practice that many users of the forum
believe results in unnecessary delay and unfairness to parties. The
proposed
[[Page 4607]]
rules also would codify applicable postponement fees. Under the
Proposed Rule 12601(b), however, the postponement fee would no longer
double for a subsequent postponement request by the same party, as
under the current Code. According to NASD, this change is intended to
avoid the confusion that may result when one party requesting a
postponement has made a previous request, but another party requesting
the same postponement has not. Instead, parties would pay the same
amount per postponement request.
---------------------------------------------------------------------------
\207\ See Order Approving Proposed Rule Change and Amendment
Nos. 1, 2, and 3 Thereto and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 4 to Revise Rule 10322 of the
NASD Code of Arbitration Procedure Pertaining to Subpoenas and the
Power to Direct Appearances, supra note 152.
---------------------------------------------------------------------------
The Commission believes that the proposed rules strike a balance
between providing parties with the flexibility to postpone hearings,
while discouraging parties from abusing this flexibility by requiring
good cause for last-minute postponements. The proposed rules also
reasonably address potential confusion in the way postponement fees are
imposed and respond to the unnecessary delay and potential unfairness
that last-minute postponements may cause.
Z. Proposed Rules 12702 and 13702--Withdrawal of Claims
The current Code does not contain any guidance with respect to
withdrawing claims. According to NASD, this occasionally causes
confusion, particularly with respect to the consequences of withdrawing
a claim at a particular stage in an arbitration. To provide guidance to
parties, Proposed Rules 12702 and 13702 of the Customer Code and
Industry Code, respectively, would provide that before a claim has been
answered by a party, a claimant may withdraw the claim against that
party with or without prejudice. However, after a claim has been
answered by a party, a claimant may only withdraw its claim against
that party with prejudice, unless the panel decides, or the claimant
and that party agree, otherwise.
In the Customer Code Notice and Industry Code Notice, the
Commission solicited comment on whether Proposed Rules 12702 and 13702
of the Customer Code and Industry Code, respectively, appropriately
address the concern of allowing claimants to withdraw claims without
prejudice, while protecting respondents from expending significant
resources to respond to a claim that is later withdrawn or having to
respond to the same claim multiple times. Several commenters stated
that Proposed Rule 12702(b) has no corollary in any court's civil
procedure rules.\208\ These commenters suggested that Proposed Rule
12702 should give arbitrators the authority to decide whether a claim,
if withdrawn after an answer is filed, should be withdrawn with or
without prejudice.
---------------------------------------------------------------------------
\208\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------
The Commission notes that Proposed Rules 12702(b) and 13702(b)
would provide arbitrators with the authority suggested by the
commenters and also allow a claim to be withdrawn without prejudice
after an answer is filed if the parties mutually agree. The Commission
believes that the rationale for the proposed rules would deter the
withdrawal and refiling of claims in order to select a new panel, and
are a reasonable accommodation of the competing interests in the forum.
AA. Proposed Rules 12800 and 13800--Simplified Arbitration
Rule 10302 of the current Code includes the provisions that apply
to simplified arbitrations. Some of these provisions repeat procedures
that also apply to regular cases, while others, such as deadlines for
pleadings, are particular to simplified cases. Proposed Rules 12800 and
13800 of the Customer Code and Industry Code, respectively, would be
streamlined, by including only those provisions that are unique to
simplified cases. The proposed rules also would harmonize the deadlines
for pleadings in simplified cases with those in regular cases. NASD
stated that frequent users of the forum report that the deadlines in
simplified cases are routinely extended under the current rule. To
provide better guidance to parties, NASD stated that the Customer and
Industry Codes should reflect that, in practice, the time to answer in
simplified cases is typically the same as it is in regular cases.
Therefore, as in regular cases, requests for extensions would now be
governed by Proposed Rules 12207 or 13207 (Extension of Deadlines), as
appropriate, which would provide that deadlines set by the Customer
Code or Industry Code, as appropriate, may be extended by the Director
for good cause. In simplified cases, the Director would consider the
expedited nature of simplified cases in determining whether good cause
existed.
In addition, Proposed Rules 12800 and 13800 would address the
selection and use of a single arbitrator and when a three-arbitrator
panel would be required, and would eliminate the ability of the single
arbitrator to require a hearing, but still allow the customer to
request a hearing. Furthermore, the arbitrator would no longer have the
option of dismissing without prejudice a counterclaim or other
responsive pleading that increased the amount in dispute above the
simplified case threshold. If a pleading increased the amount in
dispute above the threshold, the case would be administered under the
regular provisions of the Code.
The Commission believes that these changes should make the
simplified arbitration process easier for parties to understand, and
should streamline and simplify the administration of small claims in
the NASD forum. The proposed rules thus should promote the efficacy and
efficiency of the arbitration process and of the forum generally, for
simplified cases.
BB. Proposed Rules 12900-12903 and 13900-13903--Fees
NASD stated that a frequent criticism of the current Code is that
the fee schedules are difficult to understand, particularly with
respect to what claimants must pay at the time of filing. To address
this issue, and to make the fee schedules easier to read, the fee
schedules in Proposed Rules 12900-12903 and Proposed Rules 13900-13903
of the Customer Code and Industry Code, respectively, vary from those
of the current Code in two significant ways.
First, the filing fee and the hearing session deposit--two separate
fees due at filing--have been combined into one single fee that is paid
when a claim is filed. With two exceptions, described below, the
amounts paid by claimants would not change. Although what is now the
refundable hearing session deposit would no longer be paid separately,
an amount equal to the current hearing session deposit or a portion
thereof may be refunded if NASD receives notice that the case has been
settled more than 10 calendar days prior to the hearing on the merits.
The consolidation of the filing fee and the hearing session deposit is
intended to make it easier for claimants to understand how much they
have to pay when they file a claim and what, if any, portion of that
fee may be refunded.
Second, the filing fee schedule has been simplified. Currently,
there are 14 separate fee brackets in the filing fee schedule for
claimants. The proposed changes would result in little change to the
total amount of fees paid by claimants when filing a claim. In
particular, a claimant's overall filing fees would decrease by $50 for
claims of $30,000 to $50,000, and would increase by $100 for claims of
$1 million to $3 million. The member filing
[[Page 4608]]
fee schedule includes corresponding changes.
The Commission believes that the proposed changes will simplify the
fee schedule, eliminate three repetitive high-end brackets, and align
the brackets in the filing fee schedule with the brackets in the member
filing fee and surcharge schedules. Taken as a whole, the proposed
rules should make the fee schedules easier to understand and therefore
make the arbitration process more transparent. The Commission finds
that these proposed changes are consistent with Section 15A(b)(5) \209\
of the Act, which requires that a national securities association have
rules that provide for the equitable allocation of reasonable dues,
fees, and other charges among its members and other persons using its
facilities. In addition, the Commission finds that these proposed
changes are consistent with Section 15A(b)(6),\210\ which provide,
among other things, that the rules of a national securities association
may not be designed to permit unfair discrimination between customers,
issuers, brokers or dealers, to fix minimum profits, or to impose any
schedule or fix rates of commissions, allowances, discounts, or other
fees to be charged by its members.
---------------------------------------------------------------------------
\209\ 15 U.S.C. 78o-3(b)(5).
\210\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
VI. Amendments 5, 6, and 7 to the Customer Code and Amendments 5, 6,
and 7 to the Industry Code
The Commission finds that the proposed changes in Amendments 5, 6,
and 7 to the Customer Code and Amendments 5, 6, and 7 to the Industry
Code are consistent with the Act and, in particular, are designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest. The Commission finds that the
proposed changes are designed to accomplish these ends by providing a
user-friendly, reorganized set of rules that make the arbitration
process more transparent and by clarifying certain aspects and
procedures of arbitration in the NASD forum.\211\
---------------------------------------------------------------------------
\211\ In approving these amendments, the Commission has
considered the amendments' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
A. Amendment 5 to the Customer Code and Amendment 5 to the Industry
Code
The Commission finds good cause for approving Amendment 5 to the
Customer Code and Amendment 5 to the Industry Code prior to the
thirtieth day after the date of publication of notice thereof in the
Federal Register. The Commission believes that NASD's responses and
proposed changes in Amendment 5 to the Customer Code and Amendment 5 to
the Industry Code, as summarized in Sections 0 and 0, above, reasonably
address concerns expressed in comments submitted in connection with the
Customer Code and Industry Code. The changes proposed in Amendment 5 to
the Customer Code and Amendment 5 to the Industry Code provide
clarification and do not significantly alter the Customer Code and
Industry Code, as amended by Amendments 1, 2, 3, and 4 of each
respective code, which were subject to a full notice and comment
period.
In connection with the Customer Code, commenters suggested various
substantive changes relative to current practices or policies
established under the current Code. NASD stated that many of these
comments were beyond the scope of the rule filing, the principal
purposes of which were stated in the Customer Code Notice as: (1)
Revising the current Code into plain English; (2) reorganizing the
current Code into more logical, user-friendly sections, including
creating separate codes for customer and industry arbitrations and for
mediations; and (3) implementing specific substantive rule changes,
including codifying several common practices to provide more guidance
to parties and arbitrators, and streamlining the administration of
arbitrations in the NASD forum.\212\ The Commission finds NASD's
determination that these comments are beyond the scope of the rule
filing to be reasonable because they suggest substantive changes from
the current Code that were not intended to be addressed by this rule
filing. Thus, the Commission finds NASD's determination not to amend
the proposed rule changes in connection with these comments at this
time also to be reasonable. We note that NASD has committed to consider
some of these comments in determining whether future amendments are
warranted, as indicated in Section 0.
---------------------------------------------------------------------------
\212\ See comments relating to Proposed Rule 12100(n)--
Definition of Public Arbitrator/Proposed Rule 12100(r)--Definition
of Non-Public Arbitrator (Section 0); Proposed Rule 12200--
Arbitration Under an Arbitration Agreement or the Rules of NASD
(Section 0); Proposed Rule 12101--Elective Arbitration (Section 0);
Proposed Rule 12206--Time Limits (Section 0); Proposed Rule 12300--
Filing and Serving Documents/Proposed Rule 12302--Filing an Initial
Statement of Claim (Section 0); Proposed Rule 12307--Deficient
Claims/Proposed Rule 12308--Loss of Defenses Due to Untimely or
Incomplete Answer (Section 0); Proposed Rule 12312--Multiple
Claimants/Proposed Rule 12313 Multiple Respondents (Section 0);
Proposed Rule 12401--Number of Arbitrators (Section 0); Proposed
Rule 12406--Appointment of Arbitrators; Discretion to Appoint
Arbitrators Not on List (Section 0); Proposed Rule 12408--
Disclosures Required of Arbitrators (Section 0); Proposed Rule
12410--Removal of Arbitrator by Director (Section 0); Proposed Rule
12506--Document Production Lists (Sections 0, 0); Proposed Rule
12514--Exchange of Documents and Witness Lists Before Hearing
(Section 0); Proposed Rule 12801--Default Proceedings (Section 0);
Proposed Rule 12900--Fees Due When a Claim is Filed (Section 0).
---------------------------------------------------------------------------
For all the foregoing reasons and the overall importance of the
proposed rules, the Commission finds good cause for granting
accelerated approval to Amendments 5 to the Customer Code and Industry
Code, and finds that these amendments are consistent with Section
19(b)(2) of the Act.
B. Amendment 6 to the Customer Code and Amendment 6 to the Industry
Code
The Commission finds good cause for approving Amendment 6 to the
Customer Code and Amendment 6 to the Industry Code prior to the
thirtieth day after the date of publication of notice thereof in the
Federal Register. In these amendments, NASD responded to concerns
raised by commenters in connection with Amendment 5 to the Customer
Code, which has not previously been published by the Commission for
public comment but nonetheless was the subject of 125 comments after it
was made public by NASD. These commenters' concerns centered on
Proposed Rule 12504, summarized in Section 0, above. In Amendment 6 to
the Customer Code and Amendment 6 to the Industry Code, respectively,
NASD withdrew Proposed Rule 12504 and all references thereto from the
Customer Code, and withdrew Proposed Rule 13504 and all references
thereto from the Industry Code.\213\
---------------------------------------------------------------------------
\213\ Proposed Rule 12504 has been re-filed as a separate
proposed rule change and published for public comment. See supra
note 23.
---------------------------------------------------------------------------
The Commission finds that NASD's withdrawal of Proposed Rules 12504
and 13504 from the proposed rule changes is a reasonable response to
commenters' concerns that will allow the present proposed rule changes
to proceed while providing NASD with time to consider concerns relating
to dispositive motions separately. For all the foregoing reasons and
the overall importance of the proposed rules, the Commission finds good
cause for granting accelerated approval to Amendment 6 to the Customer
Code and Amendment 6 to the Industry Code, and finds that they are
consistent with Section 19(b)(2) of the Act.
C. Amendment 7 to the Customer Code and Amendment 7 to the Industry
Code
The Commission finds good cause for approving Amendment 7 to the
[[Page 4609]]
Customer Code and Amendment 7 to the Industry Code prior to the
thirtieth day after the date of publication of notice thereof in the
Federal Register. In these amendments, NASD makes further
clarifications to the proposed rule changes and responds to certain
comments, as described in Sections 0 and 0, above. The Commission
believes that NASD's responses and proposed changes in these amendments
reasonably address commenters' concerns. The Commission believes the
changes proposed in Amendment 7 to the Customer Code and Amendment 7 to
the Industry Code provide clarification and do not significantly alter
the Customer Code and Industry Code, as amended by Amendments 1, 2, 3,
and 4 of each code, which were subject to a full notice and comment
period. For all the foregoing reasons and the overall importance of the
proposed rules, the Commission finds good cause for granting
accelerated approval to Amendment 7 to the Customer Code and Amendment
7 to the Industry Code, and finds that they are consistent with Section
19(b)(2) of the Act.
VII. Text of Amendments 5, 6, and 7 to the Customer Code
For the text of Amendment 5, 6, and 7 to the Customer Code, as well
as amendments to the narrative portion and the exhibits of the Customer
Code filing, please see NASD's Web site at the following URL: http://www.nasd.com/
[fxsp0]RulesRegulation/RuleFilings/[fxsp0]2003RuleFilings/
NASDW--009306?=802.
VIII. Text of Amendments 5, 6, and 7 to the Industry Code
For the text of Amendments 5, 6, and 7 to the Industry Code, as
well as amendments to the narrative portion and exhibits of the
Industry Code filing, please see NASD's Web site at the following URL:
http://www.nasd.com/RulesRegulation/[fxsp0]RuleFilings/2004RuleFilings/
[fxsp0]NASDW--009295.
IX. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendments 5, 6,
and 7 to the Customer Code and Amendments 5, 6, and 7 to the Industry
Code are consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASD-2003-158 or SR-NASD-2004-011, as appropriate, on
the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2003-158 or SR-
NASD-2004-011, as appropriate. The file number should be included on
the subject line if e-mail is used. To help the Commission process and
review your comments more efficiently, please use only one method. The
Commission will post all comments on the Commission's Internet Web site
(http://www.sec.gov/rules/sro.shtml). Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rule changes that are filed with the Commission, and all
written communications relating to the proposed rule changes 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 Section, 100 F Street, NE., Washington, DC 20549. Copies of
such filing will also be available for inspection and copying at the
principal office of NASD. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to SR-NASD-2003-
158 or SR-NASD-2004-011, as appropriate, and should be submitted on or
before February 21, 2007.
X. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\214\ that the proposed rule changes (SR-NASD-2003-158 and SR-NASD-
2004-011), as amended, be, and hereby are, approved.
---------------------------------------------------------------------------
\214\ 15 U.S.C. 78s(b)(2).
\215\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\215\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-1382 Filed 1-30-07; 8:45 am]
BILLING CODE 8011-01-P