Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices 40761

8 In reviewing this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

9 17 CFR 200.30–3(a)(12).

1The NASD filed Amendment Nos. 1 and 2 to the

proposed rule change on July 14, 1998 and July 23,

1998, respectively, the substance of which is

incorporated into this notice. See letters from Alden

S. Adkins, Senior Vice-President and General

Counsel, NASD Regulation, to Katherine A.

England, Assistant Director, Market Regulation,

Commission, dated July 14, 1998 (‘‘Amendment No.

1’’) and July 23, 1998 (‘‘Amendment No. 2’’).

2NASD Regulation also intends to file a proposed

rule change to use a similar list selection process

for intra-industry arbitrations.

or otherwise in furtherance of the

purposes of the Act. 8

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, NW,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–98–46 and should be

submitted by August 20, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20363 Filed 7–29–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40261; File No. SR–NASD–

98–48]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Relating to the Selection

of Arbitrators in Arbitrations Involving

Public Customers

July 24, 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 July 10, 1998,1 the

National Association of Securities

Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’), through its whollyowned subsidiary NASDA Regulation,

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 selfregulatory organization. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation is proposing to

amend Rule 10308 to set forth new

procedures to be used to select

arbitrators for arbitrations involving

public customers.2 Under the new

procedures, NASD Regulation will

allow the parties to an arbitration to

rank arbitrators from lists generated

primarily using an automated process,

providing parties with a substantial role

in determining the composition of their

arbitration panels. NASD Regulation is

proposing conforming changes to Rules

10104, 10309, 10310, 10311, 10312, and

10313. In addition, NASD Regulation

proposes to amend Rule 10315

concerning the scheduling of the first

meeting of the parties and the

arbitration panel to reflect that such

meetings usually occur prior to the first

hearing of an arbitration proceeding.

Finally, NASD Regulation proposes to

correctly state in the Rule 10000 Series

and any other Rules the name of the

NASD Regulation committee that

addresses arbitration and related

matters, the National Arbitration and

Mediation Committee.

Below is the text of the proposed rule

change. Proposed new language is in

italics proposed deletions are in

brackets.

* * * * *

10104. Composition and Appointment

of Panels

Except as otherwise specifically

provided in Rule 10308, t[T]he Director

[of Arbitration] shall compose and

appoint panels of arbitrators from the

existing pool of arbitrators of the

Association to conduct the arbitration of

any matter which shall be eligible for

submission under this Code. [The

Director of Arbitration may request that

the Executive Committee of the National

Arbitration Committee undertake the

composition and appointment of a panel

or undertake consultation with the

Executive Committee regarding the

composition and appointment of a panel

in any circumstance where he

determines such action to be

appropriate.]

* * * * *

10308. [Designation of Number of

Arbitrators] Selection of Arbitrators in

Customer Disputes

[(a) Except as otherwise provided in

Rule 10302, in all arbitration matters

involving public customers and where

the amount in controversy does not

exceed $30,000, the Director of

Arbitration shall appoint a single public

arbitrator knowledgeable in but who is

not from the securities industry to

decide the dispute, claim or

controversy. Upon the request of a party

in its initial filing or the arbitrator, the

Director of Arbitration shall appoint a

panel of three (3) arbitrators which shall

decide the matter in controversy. At

least a majority of the arbitrators

appointed shall not be from the

securities industry, unless the public

customer requests a panel consisting of

at least a majority from the securities

industry.

(b) In arbitration matters involving

public customers and where the amount

in controversy exceeds $50,000,

exclusive of attendant costs and interest,

or where the matter in controversy does

not involve or disclose a money claim,

the Director of Arbitration shall appoint

a panel of three (3) arbitrators, at least

a majority of whom shall not be from

the securities industry, unless the

public customer requests a panel

consisting of at least a majority from the

securities industry.

(c) An arbitrator will be deemed as

being from the securities industry if he

or she:

(1) Is a person associated with a

member or other broker/dealer,

municipal securities dealer, government

securities broker, or government

securities dealer, or

(2) Has been associated with any of

the above within the past three (3) years,

or

(3) Is retired from any of the above, or

(4) Is an attorney, accountant, or other

professional who has devoted twenty

(20) percent or more of his or her

professional work effort to securities

industry clients within the last two

years, or

(5) Is an individual who is registered

under the Commodity Exchange Act or

is a member of a registered futures

association or any commodities
40762 Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices

exchange or is associated with any such

person(s).

(d) An arbitrator who is not from the

securities industry shall be deemed a

public arbitrator. A person will not be

classified as a public arbitrator if he or

she has a spouse or other member of the

household who is a person who is

associated with a member of other

broker/dealer, municipal securities

dealer, government securities broker, or

government securities dealer.]

This rule specifies how parties may

select or reject arbitrators, and who can

be a public arbitrator in arbitration

proceedings involving a customer.

(a) Definitions

(1) ‘‘Day’’

For purposes of this rule, the term

‘‘day’’ means calendar day.

(2) ‘‘Claimant’’

For purposes of this rule, the term

‘‘claimant’’ means one or more persons

who file a single claim.

(3) ‘‘Neutral List Selection System’’

The term ‘‘Neutral List Selection

System’’ means the software that

maintains the roster of arbitrators and

performs various functions relating to

the selection of arbitrators.

(4) ‘‘Non-Public Arbitrator’’

The term ‘‘non-public arbitrator’’

means a person who is otherwise

qualified to serve as an arbitrator and:

(A) Is, or within the past three years,

was:

(i) Associated with a broker or a

dealer (including a government or a

municipal securities broker or dealer);

(ii) Registered under the Commodity

Exchange Act;

(iii) A member of a commodities

exchange or a registered futures

association; or

(iv) Associated with a person or firm

registered under the Commodity

Exchange Act;

(B) Is retired from engaging in any of

the business activities listed in

subparagraph (4)(A);

(C) Is an attorney, accountant, or

other professional who has devoted 20

percent or more of his or her

professional work, in the last two years,

to clients who are engaged in any of the

business activities listed in

subparagraph (4)(A); or

(D) Is an employee of a bank or other

financial institution and effects

transactions in securities and

commodities futures or options or

supervises or monitors the compliance

with the securities and commodities

laws of employees who engage in such

activities.

(5) ‘‘Public Arbitrator’’

(A) The term ‘‘public arbitrator’’

means a person who is otherwise

qualified to serve as an arbitrator and is

not:

(i) Engaged in the conduct or

activities described in paragraphs

(a)(4)(A) through (D); or

(ii) The spouse or an immediate

family member of a person who is

engaged in the conduct or activities

described in paragraphs (a)(4)(A)

through (D).

(B) For the purpose of this rule, the

term ‘‘immediate family member’’

means:

(i) A family member who shares a

home with a person engaged in the

conduct or activities described in

paragraphs (a)(4)(A) through (D);

(ii) A person who receives financial

support of more than 50 percent of his

or her annual income from a person

engaged in the conduct or activities

described in paragraphs (a)(4)(A)

through (D); or

(iii) A person who is claimed as a

dependent for federal income tax

purposes by a person engaged in the

conduct or activities described in

paragraphs (a)(4)(A) through (D).

(6) ‘‘Respondent’’

For purposes of this rule, the term

‘‘respondent’’ means one or more

persons who individually or jointly file

an answer to a complaint.

(7) ‘‘Send’’

For purposes of this rule, the term

‘‘send’’ means to send by first class

mail, facsimile, or any other method

available and convenient to the parties

and the Director.

(b) Composition of Arbitration Panel;

Preparation of Lists for Mailing to

Parties

(1) Composition of Arbitration Panel

(A) General Rule Regarding Panel

Composition

(i) If the amount of a claim is $50,000

or less, the Director shall appoint an

arbitration panel composed of one

public arbitrator, unless the parties

agree otherwise.

(ii) If the amount of a claim is more

than $50,000, the Director shall appoint

an arbitration panel composed of one

non-public arbitrator and two public

arbitrators, unless the parties agree

otherwise.

(B) Special Request

If the amount of a claim is greater

than $25,000 and not more than

$50,000 and the claimant requests that

a panel of three arbitrators be

appointed, the Director shall appoint an

arbitration panel composed of one nonpublic arbitrator and two public

arbitrators, unless the parties agree

otherwise.

(2) One List for Panel of One Arbitrator

If one arbitrator will serve as the

arbitration panel, the Director shall

send to the parties one list of public

arbitrators, unless the parties agree

otherwise.

(3) Two List for Panel of Three

Arbitrators

If three arbitrators will serve as the

arbitration panel, the Director shall

send two lists to the parties, one with

the names of public arbitrators and one

with the names of non-public

arbitrators. The lists shall contain

numbers of public and non-public

arbitrators, in a ratio of approximately

two to one, respectively, to the extent

possible, based on the roster of available

arbitrators.

(4) Preparation of Lists

(A) Except as provided in

subparagraph (B) below, the Neutral List

Selection System shall generate the list

of public and non-public arbitrators on

a rotating basis within a designated

geographic hearing site and shall

exclude arbitrators based upon conflicts

of interest.

(B) If a party requests that the lists

include arbitrators with expertise

classified in the Neutral List Selection

System, the list may include some

arbitrators having the designated

expertise.

(5) Sending of Lists to Parties

The Director shall send the list of

arbitrators to all parties at the same

time approximately 30 days after the

last answer is due.

(6) Information About Arbitrators

The Director shall send to the parties

employment history for each listed

arbitrator for the past 10 years and any

information disclosed by the arbitrator

under Rule 10312 relating to personal

financial interests or the existence of a

relationship that gives rise to an

appearance of a conflict of interest or

bias. If a party requests additional

information about an arbitrator, the

Director shall send such request to the

arbitrator, and shall send the

arbitrator’s response to all parties at the

same time. When a party requests

additional information, the Director

may, but is not required to, toll the time

for the parties to return the ranked lists

under paragraph (c)(2).
Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices 40763

(c) Striking, Ranking, and Appointing

Arbitrators on Lists

(1) Striking and Ranking Arbitrators

(A) Striking An Arbitrator

A party may strike one or more of the

arbitrators from each list for any reason.

(B) Ranking—Panel of One Arbitrator

Each party shall rank all of the

arbitrators remaining on the list by

assigning each arbitrator a different,

sequential, numerical ranking.

(C) Ranking—Panel of Three Arbitrators

Each party shall rank all of the public

arbitrators remaining on the list by

assigning each arbitrator a different,

sequential, numerical ranking, and

separately shall rank all of the nonpublic arbitrators remaining on the list,

using the same procedure.

(D) Joint Action Permitted

All claimants may act jointly and all

respondents, including thirdparty

respondents, may act jointly to file a

single list that reflects their unanimous

agreement as to the striking and ranking

of arbitrators. If multiple claimants or

respondents do not act jointly, the

rankings of multiple claimants or

respondents will be consolidated as

described in subparagraph (b)(3)(A).

(2) Period for Ranking Arbitrators;

Failure To Timely Strike and Rank

A party must return to the Director the

list or lists with the ranking not later

than 20 days after the Director sent the

lists to the parties, unless the Director

has extended the period. If a party does

not timely return the list or lists, the

Director shall treat the party as having

retained all the arbitrators on the list or

lists and as having no preferences.

(3) Process of Consolidating Parties’

Rankings

(A) General Rule

The Director shall prepare one or two

consolidated lists of arbitrators, as

appropriate under subparagraph (b)(2)

or (b)(3), based upon the parties’

numerical rankings. The arbitrators

shall be ranked by adding the rankings

of all claimants together and all

respondents together, including thirdparty respondents, to produce separate

consolidated rankings of the claimants

and the respondents. The Director shall

then rank the arbitrators by adding the

consolidated rankings of the claimants,

the respondents, including third party

respondents, and any other party

together, to produce a single

consolidated ranking number, excluding

arbitrators who were stricken by any

party.

(B) Exception

If the Director determines that the

interests of a party are sufficiently

different from the interests of other

claimants or respondents, the Director

may determine not to consolidate the

rankings of that party with the rankings

of the other claimants or respondents.

(4) Appointment of Arbitrators

(A) Appointment of Listed Arbitrators

The Director shall appoint arbitrators

to serve on the arbitration panel based

on the order of rankings on the

consolidated list of lists, subject to

availability and disqualification.

(B) Discretion To Appoint Arbitrators

Not on List

If the number of arbitrators available

to serve from the consolidated list is not

sufficient to fill a panel, the Director

shall appoint one or more arbitrators to

complete the arbitration panel;

provided, however, unless the parties

agree otherwise, the Director may not

appoint a non-public arbitrator under

paragraphs (a)(4)(B) or (a)(4)(C).

(5) Selecting a Chairperson for the Panel

The parties shall have 15 days from

the date the Director sends notice of the

names of the arbitrators to select a

chairperson. If the parties cannot agree,

the Director shall appoint one of the

public arbitrators as the chairperson.

Unless all parties agree otherwise, the

Director shall not appoint as the

chairperson a public arbitrator who:

(A) Is an attorney, accountant, or

other professional, and

(B) Has devoted 50% or more of his

or her professional or business

activities, within the last two years, to

representing or advising public

customers in matters relating to

disputed securities or commodities

transactions or similar matters.

(6) Additional Parties

If a party is added to an arbitration

proceeding before the Director has

consolidated the other parties’ rankings,

the Director shall send to that party the

list or lists or arbitrators and permit the

party to strike and rank the arbitrators.

The party must return to the Director

the list or lists with numerical rankings

not later than 20 days after the Director

sent the lists to the party. The Director

shall then consolidate the ranking as

specified in this paragraph (c).

(d) Disqualification and Removal of

Arbitrator Due to Conflict of Interest or

Bias

(1) Disqualification by Director

After the appointment of an arbitrator

and prior to the commencement of the

earlier of (i) the first prehearing

conference or (ii) the first hearing, if the

Director or a party objects to the

continued service of the arbitrator, the

Director shall determine if the arbitrator

should be disqualified. If the Director

sends a notice to the parties that the

arbitrator shall be disqualified, the

arbitrator will be disqualified unless the

parties unanimously agree otherwise in

writing and notify the Director not later

than 15 days after the Director sent the

notice.

(2) Authority of Director of Disqualify

Ceases

After the commencement of the

earlier of (i) the first prehearing

conference or (ii) the first hearing, the

Director’s authority to remove an

arbitrator from an arbitration panel

ceases.

(3) Vacancies Created by

Disqualification or Resignation

If an arbitrator appointed to an

arbitration panel is disqualified or

resigns from an arbitration panel, the

Director shall appoint from the

consolidated list of arbitrators the

arbitrator who is the most highly ranked

available arbitrator of the proper

classification remaining on the list. If

there are no available arbitrators of the

proper classification in the consolidated

list, the Director shall appoint an

arbitrator of the proper classification

subject to the limitation set forth in

paragraph (s)(4)(B).

(e) Discretionary Authority

The Director may exercise

discretionary authority and make any

decision that is consistent with the

purposes of this rule and the Rule 10000

Series to facilitate the appointment of

arbitration panels and the resolution of

arbitration disputes.

Rule 10309. Composition of Panels

Except as otherwise specifically

provided in Rule 10308, t[T]he

individuals who shall serve on a

particular arbitration panel shall be

determined by the Director [of

Arbitration]. Except as otherwise

specifically provided in Rule 10308,

t[T]he Director [of Arbitration] may

name the chairman of the panel.
40764 Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices

Rule 10310. Notice of Selection of

Arbitrators

(a) The Director shall inform the

parties of the arbitrators’ names and

employment histories for the past 10

years, as well as information disclosed

pursuant to Rule 10312, at least 15

business days prior to the date fixed for

the first hearing session. A party may

make further inquiry of the Director [of

Arbitration] concerning an arbitrator’s

background. In the event that, prior to

the first hearing session, any arbitrator

should become disqualified, resign, die,

refuse or otherwise be unable to perform

as an arbitrator, the Director shall

appoint a replacement arbitrator to fill

the vacancy on the panel. The Director

shall inform the parties as soon as

possible of the name and employment

history of the replacement arbitrator for

the past 10 years, as well as information

disclosed pursuant to Rule 10312. A

party may make further inquiry of the

Director [of Arbitration] concerning the

replacement arbitrator’s background and

within the time remaining prior to the

first hearing session or the 10 day

period provided under Rule 10311,

whichever is shorter, may exercise its

right to challenge the replacement

arbitrator as provided in Rule 10311.

(b) This rule shall not apply to

arbitration proceedings that are subject

to Rule 10308.

Rule 10311. Peremptory Challenge

(a) In an[y] arbitration proceeding,

each party shall have the right to one

[(1)] peremptory challenge. In

arbitrations where there are multiple

Claimants, Respondents, and/or ThirdParty Respondents, the Claimants shall

have one [(1)] peremptory challenge, the

Respondents shall have one [(1)]

peremptory challenge, and the ThirdParty Respondents shall have one [(1)]

peremptory challenge. The Director [of

Arbitration] may in the interests of

justice award additional peremptory

challenges to any party to an arbitration

proceeding. Unless extended by the

Director [of Arbitration], a party wishing

to exercise a peremptory challenge must

do so by notifying the Director [of

Arbitration] in writing within 10

business days of notification of the

identity of the person(s) named under

Rule 10310 or Rule 10321(d) or (e),

whichever comes first. There shall be

unlimited challenges for cause.

(b) This rule shall not apply to

arbitration proceedings that are subject

to Rule 10308.

Rule 10312. Disclosures Required of

Arbitrators and Director’s Authority To

Disqualify

(a) through (c) No change.

* * * * *

(d) The Director shall inform the

parties to an arbitration proceeding of

any information disclosed to the

Director under this Rule unless the

arbitrator who disclosed the information

withdraws from being considered for

appointment voluntarily and

immediately after the arbitrator learns

of any interest or relationship described

in paragraph (a) that might preclude the

arbitrator from rendering an objective

and impartial determination in the

proceeding.

([d]e) [Prior to the commencement of

the first hearing session] Prior to the

commencement of the earlier of (i) the

first prehearing conference or (ii) the

first hearing, the Director [of

Arbitration] may remove an arbitrator

based on information disclosed

pursuant to this Rule. [The Director of

Arbitration shall also inform the parties

of any information disclosed pursuant

to this Rule if the arbitrator who

disclosed the information is not

removed.]

(f) After the commencement of the

earlier of (i) the first prehearing

conference or (ii) the first hearing, the

Director’s authority to remove an

arbitrator from an arbitration panel

ceases.

Rule 10313. Disqualification or Other

Disability of Arbitrators

In the event that any arbitrator, after

the commencement of the first hearing

session but prior to the rendition of the

award, should become disqualified,

resign, die, refuse or otherwise be

unable to perform as an arbitrator, the

remaining arbitrator(s) shall continue

with the hearing and determination of

the controversy, unless such

continuation is objected to by any party

within 5 days of notification of the

vacancy on the panel. Upon objection,

the Director [of Arbitration] shall

appoint a replacement arbitrator to fill

the vacancy and the hearing shall

continue. The Director [of Arbitration]

shall inform the parties as soon as

possible of the name and employment

history of the replacement arbitrator for

the past 10 years, as well as information

disclosed pursuant to Rule 10312. A

party may make further inquiry of the

Director [of Arbitration] concerning the

replacement arbitrator’s background. If

the arbitration proceeding is subject to

Rule 10308, the party may exercise his

or her right to challenge the

replacement arbitrator within the time

remaining prior to the next scheduled

hearing session by notifying the Director

in writing of the name of the arbitrator

challenged and the basis for such

challenge. If the arbitration proceeding

is not subject to Rule 10308, [and]

within the time remaining prior to the

next scheduled hearing session or the 5

day period provided under Rule 10311,

whichever is shorter, a party may

exercise the party’s [its] right to

challenge the replacement arbitrator as

provided in Rule 10311.

* * * * *

Rule 10315. Designation of Time and

Place of First Meeting [Hearing]

The Director shall determine [T]the

time and place of the first meeting of the

arbitration panel and the parties,

whether the first meeting is a prehearing conference or a hearing, [initial

hearing shall be determined by the

Director of Arbitration and each hearing

thereafter by the arbitrators.] and shall

give [N]notice of the time and place [for

the initial hearing shall be given] at least

[eight (8)]15 business days prior to the

date fixed for the first meeting [hearing]

by personal service, registered or

certified mail to each of the parties

unless the parties shall, by their mutual

consent, waive the notice provisions

under this Rule. The arbitrators shall

determine the time and place for all

subsequent meetings, whether the

meetings are pre-hearing conferences,

hearings, or any other type of meetings,

and shall give [N]notice [for each

hearing thereafter shall be given] as the

arbitrators may determine. Attendance

at a meeting [hearing] waives notice

thereof.

* * * * *

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.
Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices 40765

3Task Force Report at 2.

4Task Force Report at 94.

5Task Force Report at 94–95.

6Task Force Report at 96.

7Task Force Report at 97.

8The NAMC is a balanced committee of NASD

Regulation. Committee members are individuals

with broad and diverse experience in securities

arbitration and mediation as representatives of

investors, firms, firm employees, and neutrals

(arbitrators and mediators).

9The membership of SICA is diverse and

includes persons representing the interests of

public customers (including members of the Public

Investors Arbitration Bar Association (‘‘PIABA’’)),

representatives from the self-regulatory

organizations, and the Securities Industry

Association (‘‘SIA’’).

10The term ‘‘public arbitrator’’ is defined in

proposed Rule 10308(a)(5).

11The term ‘‘non-public arbitrator’’ is defined in

proposed Rule 10308(a)(4).

12 In this rule filing, for ease of reference the

discussion of the process of selecting an arbitration

panel focuses more on the selection of a threeperson arbitration panel than a one-person panel

because the process of selecting one arbitrator is

simpler and much less frequently employed.

13The term ‘‘Neutral List Selection System’’ is

defined in proposed Rule 10308(a)(3).

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

Background

Recommendations of the Task Force

The Arbitration Policy Task Force

(‘‘Task Force’’) in Securities Arbitration

Reform: Report of the Arbitration Policy

Task Force To the Board of Governors

of NASD (‘‘Task Force Report’’),

published in January 1996, made

fourteen broad recommendations to the

NASD Board to improve the securities

arbitration process administered by the

NASD. Recommendation No. 8

provided: ‘‘Arbitrator selection, quality,

training, and performance should be

improved by various means, including

adoption of a list selection method,

earlier appointment of arbitrators,

enhancement of arbitrator training, and

increased [arbitrator] compensation.’’ 3

The Task Force recommended that the

NASD adopt ‘‘a variant of the AAA’s

method of selecting arbitrators’’

(‘‘Recommendation One’’).4 Under the

system proposed by the Task Force:

The parties would be provided with three

lists of candidates: (1) A list of public

arbitrators qualified to be panel chairs to

contain no fewer than three names, (ii) a list

of other public arbitrators, to contain no

fewer than five names; and (iii) a list of

industry arbitrators, to contain no fewer than

five names. Each party could strike names

from any of the lists and would then rank the

remaining names on each list in order of

preference. If mutually agreeable arbitrators

are not selected, new lists would be provided

for each category in which agreement was not

reached. This process would continue for no

more than three rounds. If, at the end of three

rounds, an industry and two public

arbitrators, one qualified as a panel chair,

had not been chosen, the NASD Arbitration

Department would appoint the remaining

arbitrator or arbitrators. Arbitrators selected

by the staff could be challenged only for

cause. (Footnotes omitted) 5

The Task Force also made two other

recommendations to implement

improvements in the selection of

arbitrators. The Task Force

recommended that the appropriate

NASD staff (now NASD Regulation’s

Office of Dispute Resolution (‘‘ODR’’)

should be able to exercise flexibility in

designating arbitrators as either

‘‘public’’ or ‘‘industry’’

(‘‘Recommendation Two’’).6 In addition,

the Task Force recommended that

arbitrators be placed on the selection

lists on a rotating basis to promote more

frequent selection of arbitrators who

complete an arbitrator training program

(‘‘Recommendation Three’’).7

Parties Consulted in Development of

Rule

NASD Regulation considered the Task

Force’s recommendations at length.

NASD Regulation also consulted with

its National Arbitration and Mediation

Committee (‘‘NAMC’’),8 the Securities

Industry Conference on Arbitration

(‘‘SICA’’),9 PIABA, the staff of the SEC,

and others about the efficacy of the

proposals. All persons consulted

favored the selection of arbitrators by

the parties using some form of list

selection. In addition, most were in

favor of developing a system featuring

the capability, when appropriate and as

technologically feasible, to generate the

arbitrator lists from a computer

programmed to incorporate relevant

selecting factors, such as geographic

proximity of an arbitrator to the

proposed site of the hearing, subject

matter expertise, and classification of an

arbitrator as a public arbitrator 10 or a

non-public arbitrator,11 rather than

developing a system in which the lists

of arbitrators to be forwarded to parties

for ranking would be generated solely

on the basis of ODR’s judgment.

General Principles Underlying Proposed

Rule Change

NASD Regulation recommends as a

general principle that parties in

arbitration be given more input into the

selection of arbitrators. In furtherance of

this principle, NASD Regulation has

developed a rule providing that, in a

one-arbitrator panel case, the parties to

the arbitration will be provided a list of

public arbitrators, and, in a threearbitrator panel case, the parties will be

provided a list of public and a list of

non-public arbitrators.12 The parties

will use the lists to express numerical

preferences for the arbitrators listed and

those rankings will determine the

outcome of the arbitrator selection

process, unless all ranked arbitrators

decline to serve because they are

unavailable, recuse themselves, or are

disqualified because of conflicts of

interests.

The list or lists of arbitrators will be

generated from an arbitrator database by

a computer to further fairness and

neutrality. This automated system is the

Neutral List Selection System

(‘‘NLSS’’).13 However, to preserve the

exercise of discretion and judgment

when appropriate and to act on behalf

of a party’s request, when a party or

parties express a request for a process

that may legitimately be considered in

the selection of an arbitration panel but

that NLSS is not capable of performing,

or request an arbitration panel that may

not be ‘‘selected’’ or ‘‘sorted’’ using

NLSS, the Director of Arbitration

(‘‘Director’’) may supplement the NLSS

process.

In developing an arbitrator list

selection rule to implement the Task

Force’s Recommendation One, NASD

Regulation concluded that there were

not enough arbitrators on the arbitrator

roster of the ODR to provide sufficient

names for three selection rounds. In

addition, although NASD Regulation

also initially considered a two-round,

two-list selection method, NASD

Regulation concluded that the

operational burdens of administering

such a process, especially given the

limited number of arbitrators relative to

the large caseload, would be too great.

Also, NASD Regulation was concerned

that a two-round, two-list selection

method would make the process of

appointing arbitrators too lengthy and

would be too costly. Accordingly, NASD

Regulation is proposing that the list

selection contain a single-round, twolist selection process as set forth in

greater detail below.

Notwithstanding, NASD Regulation’s

proposed rule change implements the

fundamental aspect of Recommendation

One in that it sets forth a list selection

process that allows the parties to play

the dominant role in selecting their

arbitrators. In this proposed rule filing,

NASD Regulation is also implementing

Recommendation Three by placing

arbitrators on a rotating list. By

implementing Recommendations One

and Three, the list selection process will

function primarily through the
40766 Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices

14However, the ODR will have authority to

change the classification of an arbitrator already

classified in the NLSS based upon new information

(e.g., an arbitrator changes his or her employment

and, after such change, the arbitrator fits the criteria

for non-public arbitrator, rather than the criteria for

a public arbitrator).

15See Miscellaneous Related Proposed Rule

Changes, infra.

16See Request for Comments on Specific Issue,

Infra.

operation of the NLSS, supplemented by

the actions and judgments of the

Director, but only when required to

effect the appointment of a panel.

NASD Regulation is not implementing

the Task Force’s Recommendation Two

that NASD staff should have

discretionary authority regarding the

classification of an arbitrator. Applying

the explicit standards set forth in

proposed paragraph (a) of Rule 10308,

ODR will designate an arbitrator as

either ‘‘public’’ or ‘‘non-public’’ (i.e.,

‘‘industry’’) based upon the information

provided about the person. At this time,

NASD Regulation believes that it is

impracticable to grant to the Director or

the ODR the discretion or flexibility to

modify the classification of an arbitrator

based on information or criteria other

than that which is set forth in the

defined terms of ‘‘public arbitrator’’ or

‘‘non-public’’ arbitrators. Perceptions

and expectations of participants about

the backgrounds of potential arbitrators

indicate that the participants do not

believe that this flexibility would

enhance the arbitrator selection

process.14

NASD Regulation believes that the

proposed methodology for selecting

arbitrators will benefit investors, firms,

associated persons, and other users of

the arbitration forum. First, proposed

Rule 10308 and NLSS, the technology

developed to implement key parts of the

proposed Rule, provide a system for

selecting arbitrators that allows parties

to have the greatest impact in the

composition of their arbitration panel.

Second, Proposed Rule 10308 is a more

streamlined process than the process

envisioned in the Task Force’s

Recommendation One. Third, proposed

Rule 10308, a single-round process, will

be less costly. Fourth, the proposed

process borrows from the process used

successfully for some time by the

American Association of Arbitration

(‘‘AAA’’), the largest domestic

arbitration forum sponsor

Description of Proposed Rule Change

The proposed rule change, which

only governs the selection of arbitrators

in cases involving public customers, is

divided into five parts. Paragraph (a)

contains definitions. In paragraph (b),

NASD Regulation specifies how the lists

of public and non-public arbitrators will

be compiled and forwarded to the

parties. Paragraph (c) specifies how the

parties indicate their preferences by

numerical rankings and how the

Director reconciles the preferences of

the parties, selects the arbitrators,

selects the chairperson if the parties do

not make the selection, and, if

necessary, disqualifies an arbitrator

before the arbitrator is appointed.

Paragraph (d) describes generally how

parties and the Director may remove a

person from serving as an arbitrator if

the person has a conflict of interest or

a bias. Paragraph (e) specifies that the

Director has discretionary authority to

resolve issues arising in the

administration of the list selection

process.

There are several other rules in the

Rule 10000 Series that NASD Regulation

must amend in order to make the Rule

Series 10000 consistent. The proposed

amendments to those rules are

discussed at the end of the discussion

of the proposed changes to Rule

10308.15 Finally, NASD Regulation

requests comments on the proposed rule

change, including one important

specific topic set forth separately

below.16

Definitions—Paragraph (a)

Paragraph (a) of Rule 10308 of the

proposed rule change contains seven

definitions: ‘‘day,’’ ‘‘claimant,’’ ‘‘Neutral

List Selection System,’’ ‘‘non-public

arbitrator ,’’ ‘‘public arbitrator,’’

‘‘respondent’’ and ‘‘send.’’ ‘‘Public

arbitrator,’’ ‘‘non-public arbitrator,’’ and

‘‘Neutral List Selection System’’ are the

three terms that are central to

understanding how proposed Rule

10308, the proposed list selection rule,

will operate.

In proposing paragraph (a)(4) of Rule

10308, a ‘‘non-public arbitrator’’ is

defined as a person who is otherwise

qualified to be an arbitrator and is

employed in or retired from the

securities or commodities industry or in

a related position in the banking

industry. The rule includes in the

definition a person who is a

professional, such as a lawyer or an

accountant, who has a substantial client

base that is engaged in the securities or

commodities industry, or in a related

banking activity described in the rule.

Specifically, for arbitrator classification

purposes, a non-public arbitrator is a

person who:

(A) Is, or within the past three years,

was:

(i) Associated with a broker or a

dealer (including a government or a

municipal securities broker or dealer);

(ii) Registered under the Commodity

Exchange Act;

(iii) A member of a commodities

exchange or a registered futures

association; or

(iv) Associated with a person or firm

registered under the Commodity

Exchange Act;

(B) Is retired from engaging in any of

the business activities listed in

subparagraph (4)(A);

(C) Is an attorney, accountant, or other

professional who has devoted 20

percent or more of his or her

professional work, in the last two years,

to clients who are engaged in any of the

business activities listed in

subparagraph (4)(A); or

(D) is an employee of a bank or other

financial institution and effects

transactions in securities and

commodities futures or options or

supervises or monitors the compliance

with the securities and commodities

laws of employees who engage in such

activities.

The definition largely retains the

existing definition of the Rule 10000

Series of an arbitrator who is deemed to

be ‘‘from the securities industry,’’ but it

adds to that defined term persons

employed by banks and other financial

institutions who are engaged in

securities activities or in the supervision

of such activities.

The second key defined term, ‘‘public

arbitrator,’’ is defined in paragraph

(a)(5) of Rule 10308. ‘‘Public arbitrator’’

generally means a person who is

otherwise qualified to serve as an

arbitrator and is not engaged in the

conduct of, or business activities that

indicate an affiliation with, the

securities industry or the related

industries. Thus, in order to be

classified as a public arbitrator one may

not be engaged in any of the activities

listed under the definition of ‘‘nonpublic arbitrator’’ in paragraphs

(a)(4)(A) through (D), set forth above.

The definition generally excludes: A

person currently employed in the

securities or commodities industry or a

person retired from such business

activities; a professional who devotes 20

percent or more of his or her time to

securities industry clients; and an

employee of a bank or other financial

institution who is engaged in securities

activities or in the supervision of such

activities.

In addition, a spouse or an immediate

family member of a current or retired

member of the securities or

commodities industry, or a person

engaged in any of the other types of

business activities that require one to be

classified as a ‘‘non-public arbitrator,’’ is

also excluded from being a ‘‘public
Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices 40767

17 ‘‘Immediate family member’’ means:

(i) a family member who shares a home with a

person engaged in the conduct or activities

described in paragraphs (a)(4)(A) through (D);

(ii) a person who receives financial support of

more than 50 percent of his or her annual income

from a person engaged in the conduct or activities

described in paragraphs (a)(4)(A) through (D); or

(iii) a person who is claimed as a dependent for

federal income tax purposes by a person engaged

in the conduct or activities described in paragraphs

(a)(4)(A) through (D).

18A small group of persons will be excluded from

serving as either public or non-public arbitrators

(e.g., spouse and immediate family members of

registered representatives). Excluded by

subparagraph (a)(5) from serving as public

arbitrators, such persons are also excluded from

serving under subparagraph (a)(4) as non-public

arbitrators because a non-public arbitrator must

have the professional securities experience (or the

related qualifications) listed in subparagraph (a)(4).

For example, unless the spouse of a registered

representative was also employed in the securities

or commodities industry (or engaged in one of the

business activities related to the securities

industry), that person might not possess securities

industry experience (or the related qualifications)

and therefore could not serve as a non-public

arbitrator. In addition, because of the marital

relationship, the spouse would be excluded from

serving as a public arbitrator.

19Proposed Rule 10308(a)(3).

20Proposed Rule 10308(a)(6).

21The consolidation process is described in

greater detail below. However, it should be noted

that a group of claimants that does not file a single

claim, or, similarly, a group of respondents that

does not file a single answer, does not obtain an

advantage in the consolidation process or in the

weighting of their preferences for arbitrators. For

example, if in a case there are two claimants who

are not viewed as one claimant under the rule, and

one respondent, the two claimants’ arbitrator

rankings will be weighted as only 50% of the total;

the one respondent’s arbitrator rankings will be

weighted as the other 50%.

22The terms ‘‘day’’ and ‘‘send’’ are also defined

in paragraph (a).

23Proposed Rule 10308(b)(1)(A)(i).

24Proposed Rule 10308(b)(1)(A)(ii).

25Obtaining a three-person panel under this

subparagraph then obligates the parties to pay

hearing session deposit fees for a three-person panel

under Rule 10332.

26Although in theory the parties could agree to

an arbitration panel composed of three public

arbitrators, experience indicates that a panel of this

type for disputes involving customers is almost

never convened.

27Proposed Rule 10308(b)(2).

28Proposed Rule 10308(b)(3).

arbitrator’’ because such persons’

economic interests are too closely tied

to those of the securities or commodities

industry, even though such spouses and

immediate family members may not be

directly involved in the relevant

business activities. ‘‘Immediate family

member’’ is defined in proposed Rule

10308(a)(5)(B) with reference to the

person’s familial or economic ties to the

person associated with the securities or

commodities industry.17 A person who

has a close familial, personal, or

economically dependent relationship

with an associated person may be

viewed as possessing a bias in favor of

the securities or commodities industry

even though he or she is not involved

directly with the identified industry.18

The third key defined term, ‘‘Neutral

List Selection System,’’ defines the new

software program that will implement

the proposed list selection rule. NASD

Regulation defines ‘‘Neutral List

Selection System’’ as ‘‘the software that

maintains the roster of arbitrators and

performs various functions relating to

the selection of arbitrators.’’19 Among

other things, NLSS will maintain the

roster of arbitrators, identify arbitrators

as public or non-public, screen

arbitrators for conflicts of interest with

parties, list arbitrators according to

geographic hearing sites and, on

occasion, by expertise, and consolidate

the numerical rankings that parties

assign to listed arbitrators.

Two other terms, ‘‘claimant’’ and

‘‘respondent,’’ are defined in paragraph

(a) to simplify certain aspects of the

rule. Under proposed Rule 10308(a)(2),

if one or more persons files a single

claim they will be treated as one

claimant. A parallel definition is

proposed for respondents; one or more

persons who file the same answer will

be treated as one respondent.20 The

ODR views claimants who file one claim

or respondents who file one answer as

generally having sufficiently similar

interests in the outcome of the

proceeding to be considered as one

party for purposes of the list selection

process.21 This approach will simplify

consolidating the parties’ preferences

for arbitrators described below.22

Composition of Arbitration Panel;

Compilation of Lists of Arbitrators for

Parties’ Selection—Paragraph (b)

Under proposed Rule 10308(b)(1), the

rule sets for the number of arbitrators

that the Director should appoint to a

panel, general panel composition

requirements, and exceptions to those

requirements. If the claim is $50,000 or

less, the claim will be heard by a single

public arbitrator, unless the parties

agree otherwise.23 If the claim is more

than $50,000, a panel of two public

arbitrators and one non-public arbitrator

will hear the dispute, unless the parties

agree otherwise.24 Under proposed

paragraph (b)(1)(B) of Rule 10308, a

claimant with a claim valued greater

than $25,000 and not more than $50,000

may request a three-person arbitration

panel.25 Whether for a one-person or a

three-person panel, the requirement that

public arbitrators be empaneled is for

the protection of investors, and parties

may agree to waive this compositional

requirement.

When the parties agree to change the

composition of an arbitration panel from

that set forth in proposed paragraph

(b)(1)(A) (i) or (ii), references in the

balance of the rule to a panel must be

interpreted according to the panel

composition that the parties have

chosen. For example, if the parties agree

to a panel composed of three public

arbitrators, under proposed paragraph

(c)(1)(C) the parties would rank a list of

public arbitrators only, since the

Director would not send the parties a

list of non-public arbitrators. In

addition, parties should be aware that if

the panel composition varies from that

provided in proposed paragraph

(b)(1)(A) (i) or (ii), NLSS is not capable

of processing all such combinations.

NLSS can generate the lists and

consolidate the rankings for a oneperson panel of either public or nonpublic classification. For a three-person

panel, NLSS can generate the lists and

consolidate the rankings for a panel

composed of one non-public and two

public arbitrators or three non-public

arbitrators. NLSS cannot process

requests for a panel composed for one

public arbitrator and two non-public

arbitrators or three public arbitrators.26

Under proposed paragraphs (b)(2) and

(b)(3) of Rule 10308, the Director will

send lists of names of arbitrators for

ranking to the claimant and the

respondent. As noted above, by

operation of paragraph (a) of the

proposed rule, a group of claimants who

have filed one complaint will be viewed

as one claimant; the same treatment is

accorded to respondents who file a

single answer. Thus, when reviewing

the lists and otherwise taking action

under the proposed rule, one or more

persons viewed as one claimant must

act jointly, and one or more persons

viewed as one respondent must act

jointly.

When only one arbitrator will hear the

proceeding, the Director will send to the

parties one list of public arbitrators.27

When three arbitrators will hear the

proceeding, the Director will sent the

parties two lists, one containing the

names of public arbitrators and the

other containing the names of nonpublic arbitrators.28

(i) Director’s Minimum Numbers for

Lists

Proposed Rule 10308 is flexible, and

although subparagraphs (b)(2) and (b)(3)

do not set a fixed ratio of arbitrators or

a minimum number of arbitrators that

ODR must list, ODR has established the

following guidelines, For a panel of one

arbitrator, the Director intends to

provide five names of public arbitrators

whenever possible, but not less than

three names. For a panel of three
40768 Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices

29The NLSS rotation feature also may be

described as a ‘‘first-in-first-out’’ feature. For a case

that will be heard by one public arbitrator, the

following steps would apply. As an arbitrator’s

name rise to the top of the list of all arbitrators who

are, for example, public arbitrators and found in

one hearing location, the arbitrator’s name will be

generated by NLSS, absent an identified conflict of

interest, on a list for ranking by parties to an

arbitration. Once the arbitrator’s name is sent to the

parties, even if the arbitrator is later not appointed

an arbitrator for the panel, NLSS places such

arbitrator at the bottom of the computerized NLSS

list. Thus, an arbitrator may be listed, and thereafter

rotated to the bottom of the NLSS list even if: (1)

The arbitrator recuses him or herself: (2) the

arbitrator is not ranked highly enough by the parties

to be appointed or the arbitrator was struck; or (3)

the arbitrator is ranked highly enough to serve, is

contacted, has no conflict or interest or bias that

would disqualify him, to is unavailable to serve.

When a three person panel will be appointed,

generally two public arbitrators and one non-public

arbitrator are needed. For the generation of the list

of non-public arbitrators and the list of public

arbitrators, the same process would be used. For the

selection of the non-public arbitrators, the first five

non-public arbitrators in the system will be rotated

forward for the first arbitration case. However, if,

for example, the case is against Firm X and the first

person that NLSS generates, Arbitrator A51000, is

employed by Firm X, NLSS will not select

Arbitrator A51000 but will skip over time or her

and will list the next person classified as a nonpublic arbitrator. Arbitrator A51000 will remain at

the top of the internal NLSS rotating list for nonpublic arbitrators, and the NLSS will generate his

or her name when next requested to produce the

names of non-public arbitrators for a case in the

same hearing location. The process for obtaining the

list of public arbitrators is the same.

30Proposed Rule 10308(b)(4). NLSS can identify

only obvious, disclosed conflicts of interest. For

example, NLSS recognizes a conflict of interest

when the member firm that is the respondent is also

the employer of an arbitrator rotating forward in

NLSS. NLSS would not list such a person on a nonpublic arbitrator list being generated for that case.

31The two other types of case expertise, expertise

involving injunctive relief and employment issues,

are used only in intra-industry arbitrations.

32An arbitrator is deemed to have certain subject

matter expertise if he or she represents on an NASD

arbitration intake form that he or she possesses it.

ODR does not verify such representations.

arbitrators, the Director intends to

provide lists that contain up to 10

public arbitrator names and five nonpublic arbitrator names; when that is

not possible, the Director will provide a

public arbitrator list of not less than six

names, and a non-public arbitrator list

of not less than three names. In

addition, as illustrated by the example

of the minimum numbers set forth

above, to the extent possible, for a threeperson panel, the list of public

arbitrators will contain approximately

twice as many names as the list of nonpublic arbitrators. The Director’s ability

to provide full lists of names will vary

and is dependent on the number of

available arbitrators and the local

demands on the arbitrator roster.

Circumstances may arise where a small

arbitrator roster in a particular hearing

location (for example, Richmond, Va.,

Norfolk, Va., Alaska, or Hawaii),

combined with a high demand for

arbitrators, will prevent the Director

from meeting the objectives.

To address possible arbitrator

shortages, the Director plans to combine

arbitrators from proximate hearing

locations when necessary. For example,

under proposed paragraph (b)(2), the list

to be sent to the parties should contain,

at a minimum, three names of public

arbitrators. If, with one hearing location

coded into NLSS, NLSS does not

generate the names of three public

arbitrators, the Director will return to

NLSS, add a second hearing location

code, and generate a list of public

arbitrators that will include the

additional arbitrators. The second

hearing location coded will be one that

is geographically proximate to the first

hearing location code used (e.g., for a

Richmond, VA hearing, the Richmond

hearing location code will be used first,

and then the Atlanta or the Washington,

D.C. hearing location code could be

added). The additional process in NLSS

will be performed at no additional cost

to the parties. The same process will be

used to address any shortages in

arbitrators under the lists prepared

under proposed paragraph (b)(3).

(ii) NLSS Functions and Capabilities

Proposed paragraphs (b)(2), (3), and

(4) of Rule 10308 together set forth the

four factors which are used by NLSS to

generate the list or lists of arbitrators by

‘‘selecting’’ or ‘‘sorting’’ the NLSS

database. The four factors are arbitrator

classification, hearing location code,

rotation, and identified conflicts of

interests.

To generate a list, NLSS performs the

following steps. NLSS first identified

the subgroup of arbitrators by

classification (public or non-public

arbitrators). NLSS then identifies those

arbitrators in the same hearing location

as the arbitration. Thereafter, NLSS

selects such public or no-public

arbitrators who are located in the

hearing location in rotation from the

NLSS database.29 Finally, NLSS

excludes from the selection an arbitrator

subject to a clear conflict of interest

with one of the parties.30

Although some who participated in

developing the proposed rule suggested

selecting arbitrators on a random basis,

NASD Regulation selected the rotation

method instead. Among other things,

random number selection algorithms in

computer programs are extremely

difficult to design, and such algorithms

ultimately do not produce

mathematically perfect randomness. If

NASD Regulation used an imperfect

random-selection software program,

over time, some arbitrators would be

chosen more often than others.

Arbitrators chosen less often or not at all

would be underutilized even though

they might be highly qualified. By using

a rotation method, all arbitrators on the

roster will be placed on a selection list

with the same regularity.

Under proposed Rule 10308(b)(4)(B),

the automated NLSS selection process

that generate the arbitrators may be

altered in order to accommodate a fifth

factor, expertise. Expertise has three

subcategories: (1) Subject matter

expertise (also know as a controversy

code); (2) security expertise (also known

as a security code); and (3) case

expertise (also known as a qualification

code).

Two of these types of expertise,

subject matter expertise and security

expertise, are factors that may be

included in the NLSS’ selection or

sorting process at the option of a party

as provided in proposed paragraph

(b)(4)(B) of Rule 10308. These are

discussed in the following paragraphs.

The third type of expertise, case

expertise, will be a factor in the NLSS

selection process at the option of the

Director or at the request of the parties;

the category is very narrow and its use

is primarily to aid in the administration

of a case. Case expertise contains only

three subcategories: injunctive relief

cases; employment law cases; and large

and complex cases. Only one of the

subcategories, that identifying expertise

in large and complex cases, is relevant

for any customer arbitration and is very

infrequently utilized.31 When used, the

NLSS will search for the names of

arbitrators, if such arbitrators exists, in

the appropriate hearing location with

expertise in large and complex cases.

As noted above, the two types of

expertise that may be factors to be

included in the NLSS’s selection or

sorting process at the option of a party

are subject matter expertise and security

expertise. First, a party may request for

listing arbitrators who possess certain

types of subject matter expertise.32

Thus, although NLSS will always ‘‘sort’’

or ‘‘search’’ for arbitrators according to

the four primary factors (arbitrators

classification, hearing location code,

rotation, and identified conflicts of

interest), when a party requests that the

lists include arbitrators with subject

matter expertise, the NLSS will add the

additional factor and sort or select for

placement on the lists some arbitrators

having the subject matter expertise

identified. However, the Director is not

obligated to provide a list that contains

one or more arbitrators having the

requested subject matter expertise
Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices 40769

33The areas of subject matter expertise that are

coded in NLSS are those that previously have been

identified in arbitrator disclosure forms. NASD

Regulation plans in the future to update and to

amend the designated subject matter areas. At that

time, NASD Regulation will make corollary changes

to NLSS.

34See discussion regarding proposed Rule

(b)(4)(A) and n. 30, supra.

35At this stage of the arbitrator appointment

process, ODR staff would not make telephone

inquiries.

36Proposed Rule 10308(c)(1)(A).

37Proposed Rule 10308(b)(5). 38Proposed Rule 10308(c)(1).

because (1) such arbitrators may not be

available in the applicable hearing

location; or, (2) even if such persons

exist in the hearing location, the NLSS

or the Director may be required to

exclude them from the lists under

another provision of the proposed rule

(e.g., a conflict of interest identified by

the ODR upon a review of the proposed

arbitrator’s Central Registration

Depository (‘‘CRD’’) record, discussed

below). In addition, NLSS currently is

limited to those areas of subject matter

expertise that have been coded for the

NLSS and, if not coded into the NLSS,

ODR does not have the administrative

capacity to identify arbitrators who

might possess in-depth knowledge in

the desired subject (e.g., bankruptcy is

not a category of expertise identified in

the NLSS; ‘‘churning’’ and ‘‘suitability’’

are subject matter categories that are

identified.) 33

The second subcategory of expertise,

security expertise, is also added to the

NLSS selection process at the option of

a party. There are 22 security

subcategories, listing various types of

securities or other financial instruments

(e.g., common stock, municipal bonds,

stock index futures, Ginnie Maes, etc.),

and a party may indicate whether

expertise regarding a particular

instrument is desired. The same

procedure described above regarding

NLSS selection to accommodate the

additional factor of subject matter

expertise will apply if a party opts to

include security expertise in the NLSS

selection process. If available in the

hearing location, certain arbitrators may

be include in the arbitrator lists

generated by NLSS. However, the

Director is not obligated to provide a list

that contains one or more names having

the requested security expertise.

(iii) Conflicts-of-Interest

During the preparation of the

arbitrator lists, two types of conflict-ofinterest checks will occur. The first is

the check for conflicts of interests

between parties and potential arbitrators

that will be performed as part of the

automated NLSS process that was noted

above.34 The second process will be

review for conflicts of interest

performed manually by ODR.

The second review for conflicts of

interest will occur after the NLSS

creates a list of arbitrators, but before

the list is finalized, ODR will perform a

review based upon information that

each arbitrator discloses to ODR and, for

non-public arbitrators, additional

information found in the CRD. After a

review of available information, ODR

may remove an arbitrator based upon

such disclosure.35 ODR’s screening for a

conflict of interest will avoid limiting

the parties’ choices later. ODR will

eliminate arbitrators from a list who

would almost certainly be disqualified

at a later stage in the proceeding due to

conflict of interest. If arbitrators are

eliminated during his process, ODR will

replace them by returning to NLSS so

that the minimum number of public

arbitrators, and, if applicable, nonpublic arbitrators, are on the list or lists

that will be mailed to the parties.

After the parties receive the lists, the

parties also will have the ability to

review information disclosed by the

potential arbitrators to determine if a

conflict of interest exists. Under

proposed paragraph (b)(6) of Rule

10308, for each arbitrator listed, the

Director will provide the parties with

the arbitrator’s employment history for

the past 10 years and other background

information. This information may

disclose a conflict of interest between a

party and the arbitrator listed and

permits the parties to make more

informed decisions during the process

of ranking and striking the listed

arbitrators. Under paragraph (b)(6), the

parties may request additional

information from the arbitrators; any

response by an arbitrator is forwarded to

all parties. If a party identifies a conflict

of interest, the party’s remedy is to

strike the person from the list, in the

process described in greater detail

below.36

(iv) Transmittal to Parties

The Director shall send the lists to all

parties approximately 30 days after the

respondent’s answer is due, or, if there

are multiple respondents,

approximately 30 days after the last

answer is due. If there is a third-party

claim, the Director shall send the lists

approximately 30 days after the thirdparty respondent’s answer is due or, if

there are multiple third-party

respondents, approximately 30 days

after the last answer is due.37 Under

proposed paragraph (a)(7) of Rule

10308, ‘‘send’’ means to send by first

class mail, facsimile, or any other

method available and convenient to the

parties and the Director, and the lists

and all other transmissions between the

parties and the Director shall be sent

using one of these methods.

Striking, Ranking, and Appointing

Arbitrators—Paragraph (c)

Generally, paragraph (c) of proposed

Rule 10308 sets forth the method by

which a party strikes and ranks

arbitrators and the procedures ODR will

use to consolidate the parties’

preferences and appoint an arbitration

panel. Under paragraph (c), the parties

rank the arbitrators on the list according

to the parties’ preferences, and strike

arbitrators to remove them from

consideration. Proposed paragraph (c)

will implement the most important

feature of the list selection rule, that of

allowing a party to exercise significant

influence over the composition of the

party’s arbitration panel.

(i) Striking and Ranking Arbitrators

Proposed paragraph (c)(1) provides

the basic structure for the parties to

exercise their influence in selecting

arbitrators for their arbitration

proceeding. First, each claimant and

each respondent may strike any one or

more arbitrators from the list (or lists, if

there are two lists) for any reason,

including the party’s concern that the

arbitrator may have a conflict of interest.

Second, the party ranks each arbitrator

remaining on the list by assigning the

arbitrator a different numerical ranking.

A ‘‘1’’ rank indicates the party’s first

choice, a ‘‘2’’ indicates the party’s

second choice, and so on, until all the

arbitrators are ranked. When a party

receives one list of public arbitrators

and one list of non-public arbitrators,

the party must rank arbitrators on each

list separately.38 As noted above, all

claimants who file a single claim are

treated as one claimant; and similar

treatment is accorded to all respondents

who file one answer. Thus, frequently,

persons must act jointly to determine

which arbitrators to strike and how to

rank the remaining arbitrators on the

lists in order for persons who are parties

to have their preferences for arbitrators

weighed appropriately. Moreover, even

when all claimants do not file a single

claim (or all respondents do not file a

single answer), the party claimants’ (or

the party respondents’) rankings will be

consolidated prior to the consolidation

that occurs of claimant and respondent

rankings, where the party claimants (or
40770 Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices

39See proposed Rule 10308(c)(1)(D).

40 In this process, when only the four factors are

considered in the NLSS-list generation process (e.g.,

arbitrator classification, hearing location code,

rotation, and no identified conflicts of interest), the

person who has taken part in the fewest list

selection processes (i.e., having a higher rotation

number) would be placed higher on the NLSSgenerated list than a person who has participated

in more list selection processes. (E.g., P, a public

arbitrator in Richmond, Virginia who has

participated in the list selection process six times

would be listed more highly by NLSS than Z, a

public arbitrator from Richmond, Virginia who has

participated in the list selection process seven

times, if both were generated for the same list.

Therefore, if a party failed to rank both P and Z,

the Director would refer to the original NLSSgenerated list and rank P more highly than Z). If

additional factors are introduced, such as subject

matter expertise, those persons having the greatest

cluster of desired factors or characteristics would be

listed most highly on the NLSS-generated lists and

that ordering would be used by the Director for the

default ‘‘ranking’’ process list is used only when the

parties fail to rank multiple arbitrators.

41Proposed Rule 10308(c)(3).

42Proposed Rule 10308(c)(1)(D).

43Proposed Rule 10308(c)(3). The proposed rule

also accommodates the interests of a party added

to the case if the party is added before the Director

has consolidated the other parties’ rankings.

Proposed rule 10308(c)(6).

44Proposed Rule 10308(c)(3)(B).

45The example illustrates the process that will be

used for each list of arbitrators distributed to the

parties. Therefore, in cases where a panel of one

non-public and two public arbitrators will be

selected, this process will be used to produce two

consolidated arbitrators lists.

party respondents) do not submit one

set of rankings.39

Under proposed paragraph (c)(2), each

party’s lists of arbitrators reflecting the

party’s strikes and rankings must be

returned to the Director not later than

twenty days after the Director’s letter

communicating the lists was sent. If a

party does not timely return the lists,

the Director shall treat the party as

having retained all the arbitrators on the

lists and as having no preferences. If the

lists are returned but a party fails to

rank an arbitrator on a list, the Director

will assign the arbitrator the next lower

ranking after the lowest-ranked

arbitrator on that list. For example, if a

party ranks arbitrators on a list

containing ten public arbitrators by

striking six arbitrators and ranking

arbitrators A, B, and C, as ‘‘1,’’ ‘‘2,’’ and

‘‘3,’’ respectively, and fails to rank

public arbitrator D, ODR will assign

arbitrator D a ranking of ‘‘4.’’

If a party fails to rank more than one

arbitrator on the same list or gives two

or more arbitrators on the same list the

same numerical ranking, then the

Director shall rank the multiple,

unranked arbitrators in the same order

of preference that the list originally

generated by NLSS reflected and

transmitted to the parties for their

ranking. (When NLSS generates a list,

the person listed first is ranked as high

or higher by NLSS selection factors than

the person listed second, third, and so

on. Generally, this NLSS ranking is not

relevant because the ranking by the

parties is the basis for appointing

arbitrators. NLSS ‘‘ranking’’ only

becomes relevant when the parties fail

to rank, or improperly rank multiple

arbitrators on a list.) 40

(ii) Consolidating Parties’ Rankings

After the claimant and respondent

have returned their lists to the Director,

the Director implements the parties’

preferences for arbitrator selection using

the process described in proposed

paragraph (c)(3) of Rule 10308. Under

proposed paragraph (c)(3), the Director,

using the NLSS, creates a consolidated

list of the public arbitrators, and, if nonpublic arbitrators are also ranked, a

second consolidated list of non-public

arbitrators, using a one or two-step

consolidation process.

Since generally all parties who file a

single claim are treated as one claimant

and all respondents who file one answer

are treated as one respondent, in most

cases, the Director will consolidate the

parties’ preferences for arbitrators using

a one-step process. The Director will

add the consolidated rankings of the

claimant and the respondent to produce

a single consolidated list for the public

arbitrators and, if necessary, a second

consolidated list for the non-public

arbitrators.41 NLSS performs the

consolidation functions.

When there are multiple claimants or

respondents, the Director will use a twostep consolidation process. First, the

Director will consolidate all rankings of

the multiple claimants or respondents.

For example, if there are two

respondents, R #1 and R #2, the rankings

of R #1 and R #2 are added together,

resulting in one consolidated

respondent ranking for each listed nonpublic arbitrator. This first step in the

two-step consolidation process may be

avoided by cooperation. The parties

may file a list to which the parties have

jointly agreed.42 The first step of the

consolidation process, consolidating all

the preferences of multiple claimants

and, separately, those of multiple

respondents, prevents numerous parties

on one side of the case from unfairly

affecting the selection of the arbitrators.

By consolidating the rankings of parties

on the same side, the process ensures

that claimants’ and respondents’ choices

will have the same weight in the

arbitrator selection process. Second, as

previously described, the NLSS will

consolidate the rankings of the

claimants and the respondents to

produce a single consolidated list for

public arbitrators and, if necessary, a

second list for non-public arbitrators.43

In instances where the Director

determines the interests of a claimant or

a respondent (including a third party

respondent) are so substantially

different from the interests of other

claimants or respondents, the Director

may determine not to consolidate the

numerical rankings of that party with

the numerical rankings of the other

claimants (or with the other

respondents, as the case may be).44 In

those instances, NLSS will not have the

capacity to create the consolidated list

(or lists). Instead, the consolidated list

(or lists) will be created based upon

calculations performed manually by the

ODR with each party’s rankings having

an equal weighting (e.g., where a

claimant, a respondent, and a third

party respondent are recognized as

having substantially different interests,

each of the parties rankings will have a

331⁄3% weight in the consolidated list or

lists).

The following examples illustrate the

consolidation process.

• If the dispute will be heard by one

public arbitrator, the NLSS will produce

a consolidated list that will contain the

names of five public arbitrators, ranked

1 through 5, based upon the

consolidated rankings derived from the

parties’ rankings.

• If the list of public arbitrators sent

to both parties contained five names and

the claimant strikes one name, then the

consolidated list will rank, numerically,

the four names remaining on the list. If

the claimant strikes one name and the

respondent strikes a second name, then

the consolidated list will contain only

the names of the three public arbitrators

that neither party chose to strike.

A detailed example is set forth

below: 45

ORIGINAL LIST

Arb# 46 List

position Arb name

A00001 ................... 1 Red.

A00100 ................... 2 Orange.

A01000 ................... 3 Yellow.

A10000 ................... 4 Green.

A10001 ................... 5 Blue.

A00500 ................... 6 Indigo.

A99999 ................... 7 Violet.

A20000 ................... 8 Cvan.

A00200 ................... 9 Magenta.

A02200 ................... 10 Fuchsia.
Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices 40771

46Each arbitrator in the NLSS is assigned an

arbitrator identification number as he or she enters

the system. For example, a person who has been an

NASD arbitrator since 1995 has a lower arbitration

identification number (e.g., A13888) than a person

who has been an NASD arbitrator since 1997 (e.g.,

A17050).

WITH PARTIES’ RANKINGS

Arb# List position Arb name

Consolidated

claimant

Consolidated respondent

Total Difference

A00001 ............................................. 1 Red ................................................... 1 .............. 6 .............. 7 .............. 5

A00100 ............................................. 2 Orange ............................................. Strike ....... 7 .............. N/A .......... N/A

A01000 ............................................. 3 Yellow ............................................... 2 .............. 1 .............. 3 .............. 1

A10000 ............................................. 4 Green ............................................... 3 .............. 5 .............. 8 .............. 2

A10001 ............................................. 5 Blue .................................................. 4 .............. 4 .............. 8 .............. 0

A00500 ............................................. 6 Indigo ............................................... 5 .............. 3 .............. 8 .............. 2

A99999 ............................................. 7 Violet ................................................ 6 .............. 2 .............. 8 .............. 4

A20000 ............................................. 8 Cyan ................................................. 7 .............. Strike ....... Strike ....... N/A

A00200 ............................................. 9 Magenta ........................................... 8 .............. 8 .............. 16 ............ 0

A02200 ............................................. 10 Fuchsia ............................................. 9 .............. Strike ....... Strike ....... N/A

SYSTEM RESULTS

Arb# List position Arb name Consolidated

rank Notes

A00001 ...................................................................................................... 1 Red .............. 2 ................... Total is 7.

A00100 ...................................................................................................... 2 Orange ......... Strike ............ N/A.

A01000 ...................................................................................................... 3 Yellow .......... 1 ................... Total is 3.

A10000 ...................................................................................................... 4 Green ........... 4 ................... Total is 8

Difference is 2

List Position is 4.

A10001 ...................................................................................................... 5 Blue .............. 3 ................... Total is 8

Difference is 0

List Position is 5.

A00500 ...................................................................................................... 6 Indigo ........... 5 ................... Total is 8

Difference is 2

List Position is 6.

A99999 ...................................................................................................... 7 Violet ............ 6 ................... Total is 8

Difference is 4

List Position is 7.

A20000 ...................................................................................................... 8 Cyan ............ Strike ............ N/A

A00200 ...................................................................................................... 9 Magenta ....... 7 ................... Total is 16

A02200 ...................................................................................................... 10 Fuchsia ........ Strike ............ N/A.

REARRANGED BY RANK

Arb# Arb name Consolidated rank Notes

A01000 ..................................................................... Yellow ...................................................................... 1 Total is 3.

A00001 ..................................................................... Red .......................................................................... 2 Total is 7

A10001 ..................................................................... Blue ......................................................................... 3 Total is 8

Difference is 0

List Position is 7.

A10000 ..................................................................... Green ....................................................................... 4 Total is 8

Difference is 2

List Position is 4.

A00500 ..................................................................... Indigo ....................................................................... 5 Total is 8

Difference is 2

List Position is 6.

A99999 ..................................................................... Violet ........................................................................ 6 Total is 8

Difference is 4

List Position is 7.

A00200 ..................................................................... Magenta ................................................................... 7 Total is 16.

Numerical ties between two or more

arbitrators during consolidation will be

broken by NLSS by the following

principles. First, NLSS will break a tie

during consolidation by preferentially

ranking one arbitrator above another

based upon which of the tied arbitrators

has a set of rankings, that, when

compared, result in the smallest

numerical difference between the

claimant ranking and the respondent

ranking. For example, in the tabular

example above, the consolidated

rankings of the consolidated claimant

and the consolidated respondent have
40772 Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices

47Current Rule 10312, also discussed below,

requires an arbitrator to disclose, with respect to a

particular case and the issues, parties, and

witnesses in the case, any information which might

preclude the arbitrator from rendering an objective

and impartial determination in the case.

48Proposed Rule 10308(c)(4).

49Proposed Rule 10308(c)(5).

50Specifically, proposed paragraph (c)(5) of Rule

10308 prohibits the Director from appointing as the

chairperson a public arbitrator who:

(A) is an attorney, accountant, or other

professional, and

(B) has devoted 50% or more of his or her

professional or business activities, within the last

two years, to representing or advising public

customers in matters relating to disputed securities

or commodities transactions or similar matters.

51Although a party does not have the right to

strike an arbitrator appointed under the process

described in proposed paragraph (c)(4)(B), a party

retains the right to request that the Director

consider disqualifying an arbitrator appointed

pursuant to proposed Rule 10308(c)(4)(B).

resulted in four arbitrators, Green, Blue,

Indigo, and Violet, each receiving a

consolidated ranking of 8, resulting in a

four-way tie. (See table entitled ‘‘With

Parties Rankings.’’) Of the four tied

arbitrators, Blue will be assigned a

ranking as the most preferred arbitrator

because the difference between Blue’s

consolidated claimant’s ranking and

Blue’s consolidated respondent’s

ranking is 0 (i.e., 4¥4=0); conversely,

Violet would be given the fourth (or

lowest or least preferred) ranking of the

four arbitrators in the four-way tie

because of the largest difference in the

rankings that the consolidated claimant

and the consolidated respondent gave

Violet, compared to the three others

(i.e., the consolidated claimant ranked

Violet 6 and the consolidated

respondent ranked Violet 2, resulting in

a difference of 4 (i.e., 6¥2=4), whereas

the differences in the rankings assigned

Blue, Green, and Indigo are,

respectively, 0,2 and 2.) (See table

entitled, ‘‘Rearranged by Rank’’).

A second principle that governs tiebreaking within NLSS is that, given an

equal difference in the consolidated

ranking, an arbitrator who was listed

higher (as more preferred) on the list as

originally generated by the NLSS and

transmitted to the parties will be given

a more preferred or higher ranking in

order to break this type of tie. Referring

to the same example, Green and Indigo

both show consolidated rankings of 8,

resulting in the first type of tie

discussed above. In addition, Green and

Indigo each received rankings from

consolidated claimants and respondents

that are different by only 2. The first

principle applied to break a tie does not

provide any assistance; the second

principle must be applied. Applying the

second principle, during the

consolidation process NLSS will rank

Green as more preferred (or higher) than

Indigo because, on the original list

generated by NLSS, Green had a list

position of 4, which was higher than

Indigo’s list position of 6. (See table

entitled, ‘‘Rearranged by Rank,’’ and the

column entitled ‘‘Notes,’’ for the final

NLSS consolidated rankings taking into

account these two tie-breaking

principles, and the table entitled

‘‘Original List’’ for the position of the

arbitrators on the list as originally

generated by NLSS.)

(iii) Appointing Arbitrators

Proposed Rule 10308(c)(4) sets forth

the steps the Director will take to

appoint arbitrators after consolidation

occurs. Assuming that the tabular

example above is a list of public

arbitrators, if the arbitration is to be

heard by one public arbitrator, the

Director contacts the public arbitrator

ranked highest on the list. Thus, the

Director would contact Yellow first to

determine if Yellow was available to

serve and, if not disqualified, Yellow

would be appointed. Using the tabular

example above, if the Director were

required to appoint a three-person

arbitration panel, the Director would

contact Yellow and Red to determine if

they were available to serve and, if not

disqualified, would appoint them. If

necessary, due to the unavailability or

disqualification of one of the two

arbitrators, the Director would then

contact Blue, and invite Blue to serve.

The Director would refer to a second

list, generated according to the same

principles, to determine which nonpublic arbitrator should be contacted

first.

The contact is to determine if the

arbitrator is available and, after being

provided the issues of the case and the

names of the parties, if the arbitrator is

aware of any conflicts of interest or bias

or other reason that may preclude the

arbitrator from rendering an objective

and impartial decision. Based upon the

information that the arbitrator has

previously provide, any information

provided to the Director under Rule

10312,47 and any information obtained

from any other source, the Director shall

determine if the arbitrator should be

disqualified. If the Director determines

that the arbitrator should not be

disqualified and that the arbitrator is

available, the Director appoints the

arbitrator.48

The Director will establish a time

frame for ODR’s guidance if a listed

arbitrator is contacted but fails to

respond to ODR’s inquiries regarding

availability and disqualification. For

example, if an arbitrator is telephoned

and fails to respond, ODR will eliminate

such arbitrator and contact the next

listed arbitrator after an appropriate, but

relatively brief, period. ODR must

exercise such discretion in fairness to

all parties who are waiting for their

arbitration cases to be resolved.

(iv) Selecting a Chairperson

The Director notifies the parties of the

appointments and requests that the

parties appoint a chairperson. The

parties may jointly select one of the

arbitrators (including the non-public

arbitrator) to be the chairperson of the

panel.49 If the parties fail to appoint a

chairperson by mutual agreement

within 15 days, the Director will

appoint the chairperson. If the Director

appoints the chairperson, the

chairperson will be one of the public

arbitrators, but one who is not an

attorney or other professional who has

devoted 50% or more of his or her

professional or business activities,

within the past two years, to

representing or advising public

customers in adversarial proceedings

concerning disputed securities or

commodities transactions or related

matters.50 This provision also excludes

a person who is employed by a person

engaged in the listed professional

activities from being appointed as

chairperson.

(v) When the Consolidated List Is

Insufficient

Under proposed Rule 10308(c)(4), if

the Director is not able to appoint the

number of arbitrators needed for the

panel using the consolidated list, the

Director may appoint other arbitrators

from the NLSS roster as necessary. If the

Director is required to appoint a nonpublic arbitrator, the Director may not

appoint a non-public arbitrator who

meets the criteria set forth in paragraph

(a)(4)(B) or (a)(4)(C), unless the parties

otherwise agree. A non-public arbitrator

in proposed paragraph (a)(4)(B) is one

who is retired form the securities or

commodities industry; proposed

paragraph (a)(4)(C) describes a nonpublic arbitrator who is a professional

who devotes 20 percent or more of his

or her professional time to clients who

are engaged in any of the securities or

commodities business activities

described in subparagraph (a)(4).51

When the Director appoints a nonpublic arbitrator in this state of the

proceeding, the parties no longer have

the ability to strike. Thus, the rule

requires that the Director choose a nonpublic arbitrator who is active and fully

involved in the securities or
Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices 40773

52As noted above, disqualification issues that

arise after the Director, using NLSS, has begun

consolidating parties’ preferred arbitrators, may be

addressed by the Director directly as part of the

appointment process described in paragraph (c)(4).

53Proposed Rule 10308(d)(2).

54Rule 10104 and certain other rules in the Rule

10000 Series may be amended further or rescinded

when a list of selection rule applicable to intraindustry arbitration proceedings is approved. NASD

Regulation plans to file a rule shortly so that NLSS

may be used for panel selection in intra-industry

arbitrations, as well as in customer arbitrations.

commodities industry or related

industry.

Arbitrator Disclosures and Removing

Arbitrators—Paragraph (d)

Proposed Rule 10308(d)(1) provides a

mechanism for the Director to disqualify

an arbitrator after the arbitrator has been

appointed by the Director under

proposed paragraph (c)(4). As noted

previously, during the period that a

party is reviewing and ranking the lists

of arbitrators (see paragraphs (c)(1) and

(2)), a party has an unlimited right to

eliminate a listed arbitrator by striking

the arbitrator from the list, and may do

so to eliminate an arbitrator who the

party believes may not be impartial or

fair, among other reasons. Thus, prior to

sending the party’s rankings to the

Director for consolidation, the party has

an unlimited right to strike any

potential arbitrator as to whom the party

suspects bias. Proposed paragraph (d)(1)

applies after the parties has exercised

this unlimited right to strike, the

arbitrator lists have been consolidated,

the arbitrators have made initial

disclosures to the Director under Rule

10312 about concerns regarding the

specific parties, issues and witnesses in

the case as discussed below, and the

arbitrators have been appointed.52

An arbitrator has a continuing

obligation under Rule 10312 of the Code

to disclose to the Director any

circumstances that might preclude the

arbitrator from rendering an objective

and impartial determination in an

arbitration, including a direct or indirect

financial or personal interest in the

outcome of the arbitration, or any

existing or past financial, business,

professional, family or social

relationships with a party, counsel, or

representative (or, when later identified,

a witness) that might affect impartiality

or might reasonably create an

appearance of partiality or bias.

Generally, the ODR, in turn, must

disclose to the parties any information

the arbitrators provide.

Under paragraph (d)(1), a party or the

Director may raise a disqualification

issue. However, the decision to

disqualify an arbitrator already

appointed lies solely with the Director.

The Director may not make any decision

to disqualify an arbitrator, however,

after the commencement of the earlier of

two events: (i) The first prehearing

conference or (ii) the first hearing.53 At

that point or thereafter, if a party

believes that an arbitrator should be

disqualified, the matter must be raised

before the arbitration panel. Vacancies

created as a result of a disqualification

under proposed paragraph (d)(1) are

filled by the Director by referring to the

appropriate consolidated list from

which the panelists were originally

obtained (proposed Rule 10308(d)(3)) or,

if there are no persons remaining on the

consolidated list, by a person the

Director selects under proposed Rule

10308(c)(4)(B).

Discretionary Authority—Paragraph (e)

Under paragraph (e) of Rule 10308,

the Director’s authority to exercise

discretionary authority is stated

explicitly. In paragraph (e), the Director

has authority to resolve a problem that

arises relating to the appointment of

arbitrators or any other procedure under

the rule if (i) the rule does not have an

applicable provision, or (ii) the

application of a specific provision in the

rule would not result in a resolution of

the underlying problem because the

facts and circumstances are

unanticipated or unusual.

Miscellaneous Related Proposed Rule

Changes

Proposed Conforming Amendments

NASD Regulation is proposing

conforming amendments to Rules

10104, 10309, 10310, 10311, 10312, and

10313.

NASD Regulations proposes to make

parallel amendments to Rule 10104 and

Rule 10309. NASD Regulation proposes

to amend Rule 10104 to reflect that the

specific provisions of proposed Rule

10308, rather than the general

provisions of Rule 10104, regarding the

composition and appointment or

arbitrators panels, will apply to

arbitrations involving public customers.

Rule 10104 would not apply to a

question regarding the composition and

appointment of such arbitrator panels

unless none of the specific provisions in

proposed Rule 10308 would be

applicable.54 NASD Regulation

proposes the same types of amendment

to Rule 10309, a similarly general

provision relating to the composition of

arbitrator panels.

NASD Regulations proposes to amend

Rule 10310 and 10311 to make both of

them inapplicable to proceedings

subject to Rule 10308. Under Rule

10310, NASD Regulation notifies parties

of arbitrators appointed, and under Rule

10311, parties have the right to a

peremptory challenge of an arbitrator.

Because proposed Rule 10308 deals

with both types of procedures, NASD

Regulations proposes to amend Rules

10310 and Rule 10311 so that neither

will apply to arbitration proceedings

involving public customers.

NASD Regulation is proposing to

amend Rule 10312 to make it consistent

with proposed Rule 10308. Both Rules

contain provisions regarding an

arbitrator’s obligation to disclose

information to the Director and

disqualification based upon such

disclosure. The proposed changes to

Rule 10312 state explicitly when the

Director’s authority to disqualify an

arbitrator terminates, and provide an

arbitrator the option to withdraw from

an arbitration panel prior to disclosure

of arbitrator information to the parties.

A final change in Rule 10312 makes the

timing of a disclosure consistent with

the parallel provision in proposed Rule

10308.

The proposed changes to Rule 10313

are necessary because Rule 10313

incorporates by reference certain

procedures in Rule 10311, and that rule,

if amended, will not apply to

arbitrations involving public customers.

Specifically, NASD Regulation proposes

to amend the last sentence of current

Rule 10313 so that, for arbitration

proceedings involving public customers,

a party may exercise the right to

challenge a replacement arbitrator

within the time remaining prior to the

next scheduled hearing session by

notifying the Director in writing of the

challenge arbitrator’s name and the

basis for such challenge.

Proposed Amendments to Rule 10315

In the past, the first formal meeting of

the arbitration panel and the parties

generally was the first hearing. As the

arbitration process has evolved, NASD

Regulation has encouraged most

arbitration panels to hold prehearing

conferences. For most arbitrations

currently, the first formal meeting of the

arbitration panel and the parties is a

prehearing telephone conference. NASD

Regulation proposes to amend Rule

10315 regarding the scheduling of the

first meeting to reflect the current

practice.

NASD Regulation also proposes to

amend from eight business days to 15

business days the period that NASD has

for giving notice of the first meeting to

the parties and the arbitrators. The

period is being amended to conform to

the 15 business day period set forth in

Rule 10310, which formerly also was a

period of only eight business days.
40774 Federal Register / Vol. 63, No. 146 /Thursday, July 30, 1998 / Notices

55See e.g., Rule 10102, Rule 10103, Rule 10104

referenced specifically above, Rule 10301, and Rule

10401.

56 15 U.S.C. 78o–3. 57 17 CFR 200.30–3(a)(12).

Proposed Amendments to Various Rules

To Correctly Identify Committee Name

The committee of NASD Regulation

that addresses arbitration matters is the

National Arbitration and Mediation

Committee. NASD Regulation proposes

to amend each rule in which the

outdated term ‘‘National Arbitration

Committee’’ is used by replacing the

outdated term with the current

committee name, the ‘‘National

Arbitration and Mediation

Committee.’’ 55

Request for Comments on Specific

Topic

NASD Regulation proposes to allow

parties to have the right to strike an

unlimited number of arbitrators from

lists under proposed Rule

10308(c)(1)(A). NASD Regulation

specifically requests comment on

whether parties should have an

unlimited number of strikes, or whether

the right to strike should be limited. If

a claimant, for example, strikes every

arbitrator listed, all the listed arbitrators

are ineligible, the respondent’s

preferences are nullified, and the

Director appoints arbitrators who are

not listed. Thus, the unlimited right to

strike any be too broad to accomplish

the purposes intended by the rule

proposal.

NASD Regulation is requesting that

the proposed rule change be effective

within 45 days of SEC approval.

2. Statutory Basis

NASD Regulation believes that the

proposed rule change is consistent with

the provisions of Section 15A(b)(6) of

the Act,56 which requires, among other

things, that the Association’s rules must

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.

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, NW.,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–98–48 and should be

submitted by August 20, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.57

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20364 Filed 7–29–98; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

[Declaration of Disaster #3110]

State of Florida

Polk County and the contiguous

Counties of Hardee, Highlands,

Hillsborough, Lake, Manatee,

Okeechobee, Orange, Osceola, Pasco,

and Sumter in Florida constitute a

disaster area as a result of damages

caused by a fire at the International

Market World Flea Market in

Auburndale that occurred on July 14,

1998. Applications for loans for

physical damages may be filed until the

close of business on September 21, 1998

and for economic injury until the close

of business on April 21, 1999 at the

address listed below or other locally

announced locations: Small Business

Administration, Disaster Area 2 Office,

One Baltimore Place, Suite 300, Atlanta,

GA 30308.

The interest rates are:

Percent

For Physical Damage:

Homeowners with credit available elsewhere ........................ 6.875

Homeowners without credit available elsewhere ........................ 3.437

Businesses with credit available

elsewhere ................................ 8.000.

Businesses and non-profit organizations without credit available elsewhere ........................ 4.000

Others (including non-profit organizations) with credit available

elsewhere ................................ 7.125

For Economic Injury:

Businesses and small agricultural

cooperatives without credit

available elsewhere ................. 4.000

The number assigned to this disaster

for physical damage is 311005 and for

economic injury the number is 994400.

(Catalog of Federal Domestic Assistance

Program Nos. 59002 and 59008)

Dated: July 21, 1998.

Aida Alvarez,

Administrator.

[FR Doc. 98–20333 Filed 7–29–98; 8:45 am]

BILLING CODE 8025–01–P

SMALL BUSINESS ADMINISTRATION

[Declaration of Disaster #3108]

State of Florida; (And Contiguous

Counties in Georgia)

Leon County and the contiguous

Counties of Gadsden, Jefferson, Liberty,

and Wakulla in Florida, and Grady and

Thomas Counties in Georgia constitute

a disaster area as a result of damages

caused by heavy rains and flooding that

occurred on July 13, 1998. Applications

for loans for physical damages as a

result of this disaster may be filed until

the close of business on September 18,

1998 and for economic injury until the

close of business on April 20, 1999 at

the address listed below or other locally

announced locations: Small Business

Administration, Disaster Area 2 Office,