Document ID: SEC-2006-1123-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-08-31T04:00Z

[Federal Register: August 31, 2006 (Volume 71, Number 169)]
[Notices]               
[Page 51879-51882]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31au06-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54360; File No. SR-NASD-2006-088]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Motions To Decide Claims Before a Hearing on the Merits

August 24, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
the National Association of Securities Dealers, Inc. (``NASD'' or 
``Association''), through its wholly owned subsidiary, NASD Dispute 
Resolution, Inc. (``NASD Dispute Resolution'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') on July 
21, 2006, the proposed rule change as described in Items I, II, and III 
below, which Items have been prepared by NASD Dispute Resolution. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing new Rule 12504 and new Rule 13504 of the NASD 
Code of Arbitration Procedure to address motions to decide claims 
before a hearing on the merits (``dispositive motions''). Below is the 
text of the proposed rule change. Proposed new language is Italic; 
proposed deletions are in brackets.
* * * * *

12504. Motions To Decide Claims Before a Hearing on the Merits

    (a) Except as provided in Rule 12206, motions to decide a claim 
before a hearing are discouraged and may only be granted in 
extraordinary circumstances.
    (b) Motions under this rule must be made in writing. Unless the 
parties agree or the panel determines otherwise, motions under this 
rule must be served at least 60 days before a scheduled hearing, and 
parties have 45 days to respond to the motion.
    (c) Motions under this rule will be decided by the full panel. The 
panel may not grant a motion under this rule unless a prehearing 
conference on the motion is held, or waived by the parties. Prehearing 
conferences to consider motions under this rule will be tape-recorded.
    (d) The panel may issue sanctions under Rule 12212 if it determines 
that a party filed a motion under this rule in bad faith.
* * * * *

13504. Motions To Decide Claims Before a Hearing on the Merits

    (a) Except as provided in Rule 13206, motions to decide a claim 
before a hearing are discouraged and may only be granted in 
extraordinary circumstances.
    (b) Motions under this rule must be made in writing. Unless the 
parties agree or the panel determines otherwise, motions under this 
rule must be served at least 60 days before a scheduled hearing, and 
parties have 45 days to respond to the motion.
    (c) Motions under this rule will be decided by the full panel. The 
panel may not grant a motion under this rule unless a prehearing 
conference on the motion is held, or waived by the parties. Prehearing 
conferences to consider motions under this rule will be tape-recorded.
    (d) The panel may issue sanctions under Rule 13212 if it determines 
that a party filed a motion under this rule in bad faith.
* * * * *

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

    In its filing with the Commission, NASD 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. NASD has prepared summaries, set forth in Sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

[[Page 51880]]

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

(1) Purpose
(a) Background
    NASD has filed a series of proposed rule changes with the SEC to 
amend the NASD Code of Arbitration Procedure (``current Code''). The 
proposed rule changes would revise the current Code language in 
accordance with the SEC's Plain English initiative, codify current 
practices, implement several substantive changes, and reorganize the 
current Code into three separate procedural codes: one relating to 
customer disputes (``Customer Code''), one relating to industry 
disputes (``Industry Code''), and one relating to mediations 
(``Mediation Code,'' and collectively with the Customer and Industry 
Codes, the ``Code Rewrite''). Proposed Rules 12504 and 13504 initially 
were proposed as part of the Code Rewrite.
    On June 23, 2005, the SEC published the Code Rewrite for comment in 
the Federal Register. \3\ The SEC received 51 comment letters on the 
Customer Code, one comment letter on the Industry Code, and one comment 
letter on the Mediation Code.\4\
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    \3\ See Securities Exchange Act Rel. No. 51856 (Jun. 15, 2005); 
70 FR 36442 (Jun. 23, 2005) (Customer Code); Securities Exchange Act 
Rel. No. 51857 (Jun 15, 2005); 70 FR 36430 (Jun. 23, 2005) (Industry 
Code); and Securities Exchange Act Rel. No. 51855 (Jun. 15, 2005); 
70 FR 36440 (Jun. 23, 2005); (Mediation Code).
    \4\ The SEC approved the Mediation Code on October 31, 2005, and 
it became effective on January 30, 2006. See Securities Exchange Act 
Rel. No. 52705 (Oct. 31, 2005); 70 FR 67525 (Nov. 7, 2005) (SR-NASD-
2004-013).
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    On May 4, 2006, NASD filed a Response to Comments and Amendment No. 
5 (``Amendment'') to address the commenters' concerns with the Customer 
Code.\5\ The Amendment summarized the commenters' concerns and, where 
appropriate, responded to their concerns by proposing to clarify the 
meaning of some of the rules and to explain arbitration procedure under 
some of the proposed rules. The Amendment also requested that the 
proposal be approved on an accelerated basis.
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    \5\ See Reorganization and Revision of NASD Rules Relating to 
Customer Disputes (visited Aug. 2, 2006); http://www.nasd.com/RulesRegulation/RuleFilings/2003RuleFilings/NASDW_009306.
 A similar 

amendment was filed to address the comment letter on the Industry 
Code. See Reorganization and Revision of NASD Arbitration Rules 
Relating to Industry Disputes (visited Aug. 2, 2006) http://www.nasd.com/RulesRegulation/RuleFilings/2004RuleFilings/NASDW_009295
.

    While none of the 51 commenters addressed specifically the 
Industry Code, many of the issues raised apply to the Industry Code, 
because the two codes contain similar rules and procedures. Thus, 
based on these comments, NASD made similar changes to the Industry 
Code, where applicable.
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    NASD posted the Amendment on its Web site shortly after it was 
filed. As of July 19, 2006, the SEC had received 105 comment letters 
opposing some aspects of the Amendment, and asking the SEC to deny 
NASD's request for accelerated approval.\6\ Several of the 105 comment 
letters objected to the Amendment because it proposed to include in the 
narrative section of the rule filing additional guidance relating to 
proposed rules 12504 and 13504, including examples of ``extraordinary 
circumstances'' in which a dispositive motion could be granted.
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    \6\ See Comments on NASD File No. SR-NASD-2003-158, Notice of 
Filing of Proposed Rule Change and Amendments Nos. 1, 2, 3, and 4 
Thereto to Amend NASD Arbitration Rules for Customer Disputes 
(visited Jul. 19, 2006) http://www.sec.gov/rules/sro/nasd/nasd2003158.shtml
.

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(b) Comments Received on the Description of Proposed Rules 12504 and 
13504

    NASD states that, based on some of the 51 comment letters received 
on the Customer Code \7\ and meetings with various constituents, it 
initially believed that the term ``extraordinary circumstances'' needed 
to be explained to clarify when Proposed Rules 12504 and 13504 would 
apply, and to provide more guidance to arbitrators on the standards to 
use when deciding a dispositive motion. NASD states that it raised this 
issue with its public and industry constituents and suggested that they 
develop language jointly to explain the term ``extraordinary 
circumstances.'' NASD was unable to obtain consensus among its 
constituents. Thus, NASD proposed to insert the following narrative 
language in the Dispositive Motions section of the rule filing:
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    \7\ The comment letter received on the Industry Code did not 
address dispositive motions.

    For purposes of this rule, if a party demonstrates affirmatively 
the legal defenses of, for example, accord and satisfaction, 
arbitration and award, settlement and release, or the running of an 
applicable statute of repose, the panel may consider these defenses 
to be extraordinary circumstances. In such cases, the panel may 
dismiss the arbitration claim before a hearing on the merits if the 
panel finds that there are no material facts in dispute concerning 
the defense raised, and there are no determinations of credibility 
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to be made concerning the evidence presented.

    The proposed narrative language has engendered substantial 
controversy. Of the 105 comment letters received on the Amendment, 22 
specifically opposed the proposed narrative language. In general, these 
commenters contended that the proposed narrative language encourages, 
rather than discourages, the making of dispositive motions. The 
commenters also argued that the proposed language could increase 
investors' costs in defending against these types of motions, and could 
result in a loss of the major benefits of the arbitration process--cost 
effectiveness and expediency.
    As noted, NASD has been unable to obtain a consensus among its 
constituents as to what constitutes ``extraordinary circumstances'' for 
purposes of Proposed Rules 12504 and 13504. Therefore, NASD is re-
filing the original text of Proposed Rules 12504 and 13504 and the 
associated narrative language separately from the Customer and Industry 
Codes, but without the above narrative language that was proposed in 
the Amendment. NASD believes that addressing these provisions 
separately will give the public additional time to provide its input 
without delaying the Commission's review and final action on the 
remaining provisions of the Customer and Industry Codes.

(c) Proposed Rules 12504 and 13504: Motions To Dismiss a Claim Before a 
Hearing on the Merits

    One recurring question in NASD arbitrations is whether, and to what 
extent, arbitrators should decide dispositive motions before a hearing 
on the merits. In its Follow-up Report on Matters Relating to 
Securities Arbitration, the General Accounting Office (``GAO'') noted 
that while NASD's arbitration rules do not specifically provide for 
dispositive motions, case law generally supports the authority of 
arbitrators to grant motions to dismiss claims prior to the hearing on 
the merits.\8\
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    \8\ U.S. General Accounting Office, Follow-up Report on Matters 
Relating to Securities Arbitration (April 11, 2003). GAO has since 
been renamed Government Accountability Office.
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    Generally, NASD believes that parties have the right to a hearing 
in arbitration. However, NASD also acknowledges that in certain 
extraordinary circumstances, it would be unfair to require a party to 
proceed to a hearing. Thus, the proposed rules would:
     Provide that, except for motions relating to the 
eligibility of claims under the current Code's six year time limit, 
motions that would resolve a claim before a hearing on the merits are 
discouraged, and may only be granted in extraordinary circumstances;
     Require that a prehearing conference before the full panel 
must be held to discuss the motion before the panel could grant it; and

[[Page 51881]]

     Allow the panel to issue sanctions against a party for 
making a dispositive motion in bad faith.
    NASD believes that this rule proposal, which was developed over 
several years with input from industry and public members of the NAMC, 
will provide necessary guidance to parties and arbitrators, and make 
the administration of arbitrations more uniform and transparent. NASD 
believes that the rule strikes the appropriate balance between allowing 
the dismissal of claims in limited, extraordinary circumstances and 
reinforcing the general principle that parties are entitled to a 
hearing in arbitration.
(2) Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, 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. NASD believes that the proposed rules will 
provide some guidelines for arbitrators and users of the forum 
concerning dispositive motions practice and will, thereby, make 
administration of arbitrations more uniform and transparent.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    NASD did not solicit written comments. Comments received by the 
Commission prior to this filing are discussed above.

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

    Within 35 days of the date of 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 such 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. In particular, the Commission 
solicits comment on whether the proposed rule change provides for 
arbitration procedures that are fair and consistent with the protection 
of investors for the resolution of their disputes. In addition, the 
Commission solicits comment on the questions included below.
    (A) Need for a Dispositive Motions Rule: NASD has stated that, 
because the current Code provides no guidance with respect to whether 
arbitrators have the authority to grant dispositive motions, arbitrator 
decisions with respect to these motions lack uniformity. Should the 
current Code, or the Customer and Industry Codes, if adopted, contain a 
dispositive motions rule? Is the absence or presence of such a rule 
detrimental to the arbitration process, and if so, how? Assuming that 
arbitrator decisions with respect to dispositive motions lack 
uniformity, are there ways, other than through the proposed rule, to 
address this issue? Commenters are specifically invited to share 
quantifiable costs and benefits that they believe may result should the 
Commission approve or disapprove the proposed rules.
    (B) Proposed Rules: NASD believes that Proposed Rules 12504 and 
13504 strike the appropriate balance between the parties' right to have 
a hearing and the authority of arbitrators to dismiss claims in 
limited, extraordinary circumstances. Do the proposed rules strike an 
appropriate balance, or would they tend to favor one party over 
another?
    (C) Explanatory Language Regarding ``Extraordinary Circumstances'': 
In connection with Proposed Rules 12504 and 13504, as initially filed 
with the Code Rewrite, some commenters stated that the absence of a 
definition for ``extraordinary circumstances'' would promote, rather 
than limit, abusive litigation tactics in arbitration.\9\ Others stated 
that the ``extraordinary circumstances'' standard is too vague,\10\ 
and/or recommended that the term be defined or described in the Code 
Rewrite.\11\ As described in Section II.A.1.b, above, NASD proposed in 
Amendment No. 5 to provide explanatory language in the narrative 
portion of the Code Rewrite filing to clarify the rule language. Since 
Amendment No. 5 was filed, some commenters have opposed providing 
examples of ``extraordinary circumstances'' if the rule is 
approved.\12\ Should additional guidance be provided for what 
constitutes ``extraordinary circumstances''? Why or why not? If so, 
what type of additional guidance would be beneficial? Should a term 
other than ``extraordinary circumstances'' be used? If so, what would 
be a more useful term?
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    \9\ See, e.g., Letter from Jeff Sonn, Esq., Sonn & Erez (Jul. 
14, 2005) (``Sonn letter''); Letter from Steven A. Stolle, Rohde & 
Van Kampen PLLC (Jul. 8, 2005); Letter from Rebecca Davis, Esquire, 
Tate, Lazarini & Beall, PLC (Jul. 14, 2005); and Letter from Mark A. 
Tepper (Jul. 14, 2005).
    \10\  See, e.g., Letter from Barry D. Estell (May 15, 2006) and 
Letter from Daniel A. Ball, Selzer Gurvitch Rabin & Obecny, Chtd. 
(July 14, 2005).
    \11\ See, e.g., Letter from Tim Canning, Law Offices of Timothy 
A. Canning (Jul. 14, 2005); Letter from Scott C. Ilgenfritz (Jul. 
14, 2005); Letter from Richard A. Karoly, Vice President and Senior 
Corporate Counsel, Charles Schwab & Co., Inc. (Jul. 14, 2005); and 
Sonn Letter.
    \12\ See, e.g., Letter from David E. Robbins, Kaufmann, Feiner, 
Yamin, Gildin & Robbins LLP (May 29, 2006) and Letter from Robert S. 
Banks, Jr., Public Investors Arbitration Bar Association (May 26, 
2006).
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    (D) Standard of Pleading: Some commenters have expressed concerns 
about dispositive motions being granted when statements of claim do not 
meet pleading requirements under civil procedure rules. NASD Rule 
10314, however, requires only that the statement of claim specify ``the 
relevant facts and the remedies sought.'' \13\ Should the proposed rule 
provide additional guidance in the context of dispositive motions 
concerning the relevant pleading standard in NASD arbitration?
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    \13\ See Letters from Jill I. Gross and Barbara Black, Directors 
of Advocacy, Pace Investor Rights Project (Jul. 14, 2005 and Jun. 6, 
2006) (``Pace Letters'') and Letter from Brian Lantagne, Chair, 
NASAA Broker-Dealer Arbitration Project Group (Jul. 19, 2006) 
(``NASAA Letter'').
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    (E) Authority of Arbitrators to Limit Filing of Dispositive 
Motions: The proposed rules provide that dispositive motions are 
``discouraged.'' One commenter suggested that the arbitration panel be 
given the authority to manage the arbitration proceeding by denying 
leave to make dispositive motions. Should NASD grant arbitrators this 
authority in the proposed rule?
    (F) Additional Suggestions: Are there other ways in which the 
proposed rule could balance cost effectiveness and efficiency with the 
general principle that parties are entitled to a hearing in 
arbitration?
    Comments may be submitted by any of the following methods:

[[Page 51882]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2006-088 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-088. The file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule 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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of NASD. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to SR-NASD-2006-088 and should be submitted on 
or before September 21, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-14493 Filed 8-30-06; 8:45 am]

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