[Federal Register Volume 63, Number 78 (Thursday, April 23, 1998)]
[Notices]
[Pages 20230-20232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10754]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39880; File No. SR-NASD-98-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Relating to Mandatory Arbitration of Claims Involving Exempted 
Securities

April 16, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January 
27, 1998,\1\ the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ The NASD filed amendments to the proposed rule change on 
February 11, and March 31, 1998, the substance of which is 
incorporated into this notice. See letters from Elliott R. Curzon, 
Assistant General Counsel, NASD Regulation, to Katherine A. England, 
Assistant Director, Market Regulation, Commission, dated February 6, 
1998 (``Amendment No. 1'') and March 30, 1998 (``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to change the interpretation of the 
NASD's Code of Arbitration Procedure (``Code'') such that claims 
relating to transactions in exempted securities, including government 
and municipal securities, may be submitted to the Office of Dispute 
Resolution (``Office'') for arbitration under the Code without 
limitation. Accordingly, when such claims arise involving public 
customers, Rule 10301 of the Code will require member firms and 
associated persons to arbitrate them at the request of the customer. In 
addition, when such claims arise between members and other members or 
associated persons, Rule 10201 (which governs intra-industry disputes) 
will require them to be arbitrated at the request of one of the 
parties. Finally, when such claims arise between a member firm and a 
customer, customers may be required under the terms of a predispute 
arbitration agreement to arbitrate the claims.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Background. Since at least 1989, the Office has declined to accept 
claims for mandatory \2\ arbitration involving transactions in exempted 
securities \3\ naming member firms that were

[[Page 20231]]

registered solely under Section 15C of the Act.\4\ The Office will, 
however, accept claims where both parties agree to submit the claim to 
arbitration. If the claim involves a municipal securities transaction 
by a member firm,\5\ the Office will accept the claim for arbitration, 
but will ask the claimants if they want the claim referred to the 
Municipal Securities Rulemaking Board (``MSRB'') for arbitration.\6\ 
Finally, if a claim involves a government securities transaction by a 
general securities broker/dealer member firm, the Office will accept 
the claim for mandatory arbitration.
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    \2\ ``Mandatory'' arbitration is when one party to a dispute is 
compelled to submit the claim to arbitration by rule or contract. 
For example, Rule 10201 of the Code requires members and associated 
persons to arbitrate claims at the request of another member or 
associated person, and Rule 10301 requires members and associated 
persons to arbitrate claims at the request of a customer.
    \3\ The term ``exempted securities'' is defined in Section 
3(a)(12) of the Act, 15 U.S.C. 78c(a)(12), to mean government 
securities, municipal securities, and several other types of 
securities classified as exempted for specific purposes under the 
Act.
    \4\ Section 15C of the Act, 15 U.S.C. 78o-5, governs the 
registration of government securities broker/dealers. Since 1986, 
when Section 15C was adopted under the Government Securities Act, 
government securities broker/dealers have been required to become 
members of an exchange or the NASD.
    \5\ Section 15B of the Act, 15 U.S.C. 78o-4, governs the 
registration of municipal securities dealers. Municipal securities 
dealers are not required to become members of an exchange or the 
NASD. Nevertheless, some NASD members which are engaged in a general 
securities business are registered as municipal securities dealers, 
and some firms which are exclusively municipal securities dealers 
have become members of the NASD.
    \6\ Rule 10301(c) of the Code permits claims ``which arise out 
of a readily identifiable market'' to be referred to the arbitration 
forum for that market if the claimant consents. Since this provision 
was adopted, the Office will ask the claimants in a case involving 
municipal securities if they want their case referred to the MSRB. 
No cases have been referred, and the Commission recently approved an 
MSRB proposed rule change that terminates the MSRB's arbitration 
program and requires the financial institutions that are subject to 
its rules to submit to arbitration in the NASD's forum as if they 
were NASD members. See Securities Exchange Act Release No. 39378 
(December 1, 1997), 62 FR 64417 (December 5, 1997).
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    Until recently, NASD Regulation had limited regulatory jurisdiction 
over member firm activities in connection with government securities 
and no jurisdiction over firms that engaged only in exempted securities 
activities. The policy with respect to accepting or rejecting claims 
for mandatory arbitration was based on the view that the subject matter 
jurisdiction of NASD Regulation's arbitration forum should not be 
significantly different from the regulatory jurisdiction of the NASD.
    With the broadening of NASD Regulations's regulatory jurisdiction 
over government securities as a result of the Government Securities Act 
Amendments of 1993, and the recent adoption of amendments of the NASD's 
rules in recognition of the broader jurisdiction,\7\ NASD Regulation 
has revisited the policy. NASD Regulation believes it would be 
appropriate to include claims involving exempted securities by members 
engaged exclusively in exempted securities activities within the scope 
of those claims that are subject to mandatory arbitration under the 
Code.
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    \7\ In Notice to Members 96-66, published in October 1996, the 
NASD announced the consolidation of its Government Securities Rules 
into the Conduct Rules, ending the regulatory distinction between 
the activities of general securities broker/dealers and government 
securities broker/dealers.
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    Discussion. Rule 10101 of the Code provides that disputes ``arising 
out of or in connection with the business of any member'' are eligible 
for submission to arbitration under the Code. The definition of 
``investment banking or securities business'' in Article I, paragraph 
(l) of the By-Laws means ``the business carried on by a broker, dealer, 
or municipal securities dealer * * *, or government securities broker 
or dealer * * *.'' Rule 10301(a) provides that eligible disputes 
``arising in connection with the business of [a] member or in 
connection with the activities of [an] associated person'' must be 
arbitrated pursuant to any enforceable arbitration agreement or upon 
the demand of a customer. While these rules (and the definition) sweep 
in a very broad range of disputes, Rule 10301(b) permits the Office to 
decline to arbitrate certain matters.
    In reliance on Rule 10301(b), and the NASD's limited regulatory 
jurisdiction over government securities-only member firms, the Office 
has for many years declined to accept for arbitration claims that 
involved transactions in government securities by member firms engaged 
only in activities involving government securities unless both parties 
voluntarily agreed to submit the claim. The Office's position means 
that these claims cannot be compelled into arbitration under either a 
demand for arbitration or a predispute arbitration agreement. Members 
engaged in municipal securities transactions have been required to 
arbitrate their claims because they are either general securities 
broker/dealers that are otherwise required to arbitrate all of their 
other claims, or because they voluntarily became NASD members. The 
Office's decision to decline to mandate arbitration of government 
securities claims was based on the following rationale: (1) The NASD 
only regulated the exempted securities activities of member firms to 
the limited extent permitted in Section 15A(f)(2) of the Act; and, (2) 
the subject matter jurisdiction of the arbitration forum should not be 
significantly different from the NASD's regulatory jurisdiction over 
its members and associated persons.
    In response to the passage of the Government Securities Act 
Amendments of 1993, which amended Section 15A(f)(2) of the Act and 
granted the NASD the authority to regulate broadly the business 
practices of members with respect to government securities,\8\ NASD 
Regulation amended its rules to consolidate the Government Securities 
Rules it had adopted pursuant to Section 15A(f)(2) of the Act with its 
more generally applicable Conduct Rules. NASD Regulation now regulates 
the activities of members engaged in government securities activities 
that are both general securities broker/dealers and limited purpose 
government securities broker/dealers.
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    \8\ The NASD is still barred from establishing regulations 
covering the municipal securities activities of broker/dealers; that 
authority is reserved to the MSRB.
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    NASD Regulation believes that with its broad new authority to 
regulate the government securities business of its members, it is 
appropriate to open its arbitration forum to disputes involving 
transactions in all kinds of securities, including exempted securities, 
consistent with the plain language of the Code and the By-Laws. While 
the subject matter jurisdiction of the arbitration forum now extends to 
municipal securities activities that are not strictly within the 
regulatory scope of NASD Regulation, such activities are ``business'' 
within the definitions of the By-Laws and the meaning of the Code. 
Moreover, NASD Regulation does not believe that there should be 
unreasonable barriers to customers seeking relief in arbitration for 
claims relating to the business of members. Therefore, compelling NASD 
members to arbitrate municipal securities claims would be consistent 
with the intent of the MSRB's rule filing.\9\
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    \9\ See footnote 6, supra.
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    Under this policy, a member that is registered solely as a 
government securities broker/dealer and that has a dispute with a 
customer over a transaction in exempted securities shall be required to 
submit the dispute to arbitration upon the demand of the customer.\10\ 
Such disputes also may be compelled to arbitration pursuant to a valid 
predispute arbitration agreement. Intra-industry disputes involving 
exempted securities also will be subject to mandatory arbitration upon 
the request of one of the parties.
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    \10\ NASD Regulation notes that few government securities claims 
involving public customers have been filed or attempted to be filed 
with the Office. Most of the claims involving government securities 
have involved member-to-member claims.
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    NASD Regulation also believes the policy should permit any claim 
involving exempted securities to be submitted for arbitration without 
regard to when the transaction occurred;

[[Page 20232]]

however, if more than six years have elapsed from the transaction, 
occurrence, or event giving rise to the claim, under Rule 10304 of the 
Code, the claim will not be eligible for submission to arbitration.\11\ 
All claims involving general securities broker/dealers will continue to 
be accepted for arbitration consistent with past practice. Claims 
previously submitted that the Office has already declined to arbitrate 
under the old policy cannot be resubmitted under the policy being 
announced herein.
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    \11\ NASD Regulation notes that it has a proposed amendment to 
Rule 10304, rule filing SR-NASD-97-44, pending approval with the 
SEC. Under the proposed rule change all claims are presumed to be 
eligible; however, the presumption can be overcome if the respondent 
challenges the claim on the basis that more than six years have 
elapsed since the act or occurrence giving rise to the claim.
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2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act \12\ in 
that eliminating a barrier to the arbitration of disputes involving 
exempted securities, public customers and members will have access to a 
fair, efficient, and cost-effective forum for the resolution of such 
disputes.
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    \12\ 15 U.S.C. 78--3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-98-04 and should 
be submitted by May 14, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10754 Filed 4-22-98; 8:45 am]
BILLING CODE 8010-01-M