Amicus Curiae Brief — Rodriguez De Quijas v. Shearson/American Express, Inc.
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IN THE
Supreme Court of the United States
OCTOBER TERM, 1988
>
OFELIA RODRIGUEZ DE QUUAS, ef a/.,
Petitioners,
SS
SHEARSON/ AMERICAN EXPRESS, INC,
its successors and assigns,
Respondents.
ON WRIT OF CERTIORARI TO THE UNITED S ATES
COURT OF APPEALS FOR THE FIFTH CIRCUIT
————————— ———
BRIEF OF AMICI CURIAFE
IN SUPPORT OF RESPONDENTS
JAMES K. MANNING
Counsel of record; and
PAUL WINDEIS III
BROWN & Woop
One World Trade Center
New York, New York 10048
212) 839-5300
Attorneys for Securities Industry
Association, D.A. Davidson & Co., Inc.,
Dain Bosworth Incorporated, Dean Witter
Reynolds Inc., Goldman, Sachs & Co.,
J. C. Bradford & Co., 3.).B. Hillard,
W.L. Lyons, Inc., Johnston Lemon & Co.
Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Piper, Jaffray & Hopwood
Inc., The Advest Group, Inc., and Wheat,
First Securities, Inc., as Annci Curiae
—_—
TABLE OF CONTENTS
PAGE
Table of Authorities .............. seneeeuesenneuts iil
Brief of Amici Curiae ............ eaéeesenenset l
Preliminary Statement............ itaeaneeeds ]
Interest of Amici Curiae P
Summary of Argument ..... obeene ;
ARGUMENT
l. The United States Arbitration Act Mandates
That Arbitration be Recognized as an Efficient
and Widely Accepted Means of Resolving
Broker-Customer Disputes in the Securities
Dn? saecececoex (paedaeesaeiind aioe 5
ll. Wilko v. Swen Ignored the Standard for Finding
an Implied Repeal of the United States Arbitra-
tron Act 16
CONCLUSION 19
APPENDICES
A. Proposed Amendments to the Arbitration Rules
of the New York Stock Exchange, Inc., filed by
the New York Stock Exchange with the Secur-
ties and Exchange Commission, pursuant to
Securities Exchange Act Rule 19b-4, on October
17, 1988, File No. SR-NYSE-88-29 A.)
B. Survey Taken by Deloitte Haskins & Sells at the
Request of the New York Stock Exchange, Inc.,
of Arbitration and Litigation Results of Cus-
tomer Disputes with Six Brokerage Firms Dur-
ing a 3-month Period in 1987 and 1988,
transmitted by the New York Stock Exchange to
the Securities and Exchange Commission on
October 17, 1988, and also filed with the United
States District Court for the District of Massa-
chusetts in Secwrities Industry Association v.
Connolly, Civil Action No. 88-2153-WD, and
attached as an Exhibit to the Affidavit of Paul J.
Dubow, Sworn to November 28, 1988
PAGE
ill
TABLE OF AUTHORITIES
Cases: PAGE
Allen v. McCurry, 449 U.S. 90 (1980)... 2... eens 17
AVC Nederland B.V. v. Atrium Inv. Partnership, 740
Pe DOG, BE ccocenccanccccecessescones lin
Axelrod & Co. vy. Kordich, Victor & Neufeld, 320 F.
Supp. 193 (S.D.N.Y. 1970), aff'd, 451 F.2d 838 (2d
Perr rrr ry rr TTreT TTT Tr TTT TTT Tc lin
Brown v. Gilligan, Will & Co., 287 F. Supp. 766
Cee OE ccc cvcccccdccccesccsccesessesseoee lin
Commissioner v. Estate of Church, 335 U.S. 632 (1949) 15
Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985) 2
Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).... 15
Gardner v. Shearson, Hammill & Co., 433 F.2d 367 (Sth
Cir. 1970) (per curiam), cert. denied, 401 U.S. 978
EPCOT OTTTTTTTTTeTT TT TT TTT TTT TT lin
Girouard v. United States, 328 U.S. 61 (1946)......... 15, 18
Helvering v. Hallock, 309 U.S. 106 (1940) ..........+. 15
Johnson v. O’Brien, 420 N.W. 2d 264 (Minn. App.
1988), review denied, No. C9-97-1784 slip op. (Minn.
May 18, 1988), petition for cert. filed sub nom. Dain
Bosworth Incorporated v. Johnson, No. 88-246. .3, 7n, 16n
Kaiser Steel Corp. v. Mullins, 455 U.S. 72 (1982)...... 4,17
May v. Heiner, 281 U.S. 238 (1930)... 6... eee eee 15
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
Jnc.. 473 U.S. 614 (IDES)... cece ccc ccccccsecccees passim
iv
PAGE
Moran v. Paine, Webber, Jackson & Curtis, 389 F.2d 242
eres Mos s dbbdkandedbdGeddeueke conosenecca. lin
Morton v. Mancari, 417 U.S. $35 Pt natiaddennete 4,17
Moses H. Cone Memorial Hospital v. Mercury Construc-
Mon Canp., 460 U.S. 1 (IGBBD ...cccccccccceccceee 4,5
Rodriguez de Quijas v. Shearson/Lehman Brothers. 845
F.2d 1296 (Sth Cir. 1988)..................... eee 13
Scherk v. Alberto-Culver Co., 417 U.S. $06 (1974) .... 5
Shearson/American Express, Inc. vy. McMahon, 482
U.S. 220, 107 S. Ct. 2332 (1987).................. passim
Securities Industry Association v. Connally, [Current]
Fed. Sec. L. Rep. (CCH) § 94,107 (D. Mass. Dec. 18,
SRG uinusés6nbedeaeussckdueds usueen.. 13n
Southland Corp. v. Keating, 465 U.S. | ae 4,5
United States v. Bland, 283 U.S. 6% Se 15
United States v. Macintosh, 283 U.S. 605 a 15
United States v. Schwimmer, 279 U.S. 644 ae 15
Wilko v. Swan, 346 U.S. 427 (1953)................. passim
Statutes:
Securities Act of 1933
Section 12(2), 15 U.S.C. § 77M2)................ passim
Te ee passim
Securities Exchange Act of 1934
Section 10(b), 15 U.S.C. § 78j(b)...........0055. 3,7
Se es a Or )
Section 29(a), 15 U.S.C. § T8cc(u) .........0000ee ae
United States Arbitration Act
ey ee Os 1 OP bts Scavicndicbveecenqusus passim
PAGE
Regulations:
Securities Exchange Act Rule 19b-4, 17 C.F.R.
DBD ov ccccccscccssceccesccsecccsososcvcee 9
Rules:
American Stock Exchange, Inc., Arbitration Rules, 2
Am. Stock Ex. Guide (CCH) 4§ 9540-9551) ..8n, lin, 12n,
13n, 14n
Code of Arbitration Procedure of the National Associa-
tion of Securities Dealers, Inc., N.A.S.D. Manual
COCHE GE SPOR BPED . oc cccccccccccccscccscvcvcnce passim
Constitution of the New York Stock Exchange, Inc., Art.
VIII, 2 N.Y.S.E. Guide (CCH) 44 1351-1357........ 8n
New York Stock Exchange, Inc., Arbitration Rules, 2
N.Y.S.E. Guide (CCH) 94 2600-2634 ........ 8n, lin, 12n,
13n, 14n
Proposed Amendments to the Arbitration Rules of the
New York Stock Exchange, Inc., filed by the New
York Stock Exchange with the Securities and Exchange
Commission, pursuant to Securities Exchange Act
Rule 19b-4, on October 17, 1988, File No. SR-NYSE-
88-29 (Appendix A to this Brief) .... 6.6.66. e ee ees passim
Uniform Code of Arbitration § 1, reprinted in Fifth
Report of the Securities Industry Conference on Arbi-
tration (April 1986). .......66 66 e eee eee 8n, lin, 12n,
13n, 14n
Articles:
C. Katsoris, The Arbitration of a Public Securities Dis-
pute, $3 Fordham L. Rev. 279 (1984) .....---..0: 13, 13n
vi
PAGE
Miscellaneous:
Administrative Office of the United States Courts, Fed-
eral Court Management Statistics 1987 .............. l4n
American Stock Exchange, Inc., Panel of Arbitrators
1988-89, 1 Am. Stock Ex. Guide (CCH) 158-59 ___.. 10
Annual Report of the Director of the Administrative
Office of the United States Courts, Appendix I, Table
C2 (1987)
Fifth Report of the Securities Industry Conference on
Arbitration Statistical Report (April 1986) (Exhibit A) 14
H.R. Conf. Rep. No, 94-229 (1975), reprinted in 1975
U.S. Code Cong. & Ad. News, at 179.............. 18
Minutes of the June 24, 1988, Meeting of the Securities
Industry Conference on Arbitration.............. .l2n, 14
SEC Exchange Act Release No. 16390 (S.E.C. Nov. 30,
1979), 18 S.E.C. Docket 1197 (1979) ............... 8-9
Survey Taken by Deloitte Haskins & Sells at the Request
of the New York Stock Exchange, Inc., of Arbitration
and Litigation Results of Customer Disputes with Six
Brokerage Firms During a 3-Month Period in 1987 and
1988 (Appendix B to this Brief)................ 12-13, 13n
IN THE
Supreme Court of the United States
OCTOBER TERM, 1988
No. 88-385
>
OFELIA RODRIGUEZ DE QUIJAS, ef al.,
Petitioners,
—_—V.—
SHEARSON/ AMERICAN EXPRESS, INC.,
its successors and assigns,
Respondents.
>_>
BRIEF OF AMICI CURIAE |
IN SUPPORT OF RESPONDENTS
PRELIMINARY STATEMENT
The Securities Industry Association (‘‘SIA*’), D.A. Davidson
& Co., Inc. (“‘D.A. Davidson’’), Dain Bosworth Incorporated
(‘Dain Bosworth’’), Dean Witter Reynolds Inc. (‘Dean Wit-
ter’’), Goldman, Sachs & Co. (“‘Goldman"’), J.C. Bradford &
Co. (J.C. Bradford’), J.J.B. Hilliard, W.L. Lyons, Inc.
(‘Hilliard Lyons”), Johnston, Lemon & Co. Inc. ( Johnston
Lemon’’), Merrill Lynch, Pierce, Fenner & Smith Incorporated
(‘Merrill Lynch"’), Piper, Jaffray & Hopwood Inc. (‘Piper
Jaffray’’), The Advest Group, Inc. (““Advest s and Wheat,
First Securities, Inc. (‘‘Wheat First’), submit this brief as amici
curiae in support of respondents, and urge this Court to ape
the opinion and judgment of the | United States Court .
Appeals for the Fifth Circuit below in Rodriguez de Quijas Vv.
Shearson/Lehmen Brothers, 845 F.2d 1296 (Sth Cir. 1988). The
consents of petitioner Ofelia Rodriguez de Quijas and of
,
respondent Shearson/American Express, Inc., have been
obtained and the originals thereof have been filed with the
Clerk of the Court.
INTEREST OF AMICI CURIAE
SIA is the principal trade association of the securities indus-
try, having as members more than five hundred and fifty securi-
ties firms in the United States and Canada. As such, it has a
substantial interest in the extent to which agreements to arbi-
trate claims between securities firms and their customers may be
enforced. B&tause arbitration is an ef ficient, fair, and economi-
cal manner of resolving disputes, most of S1LA’s members have
agreed with many of their customers to arbitrate any controver-
Sies arising between them. Among these members are amici
Advest, D.A. Davidson, Dain Bosworth, Dean Witter, Gold-
man, Hilliard Lyons, J.C. Bradford, Johnston Lemon, Merril]
Lynch, Piper Jaffray, and Wheat First.
Certain amici are parties to cases pending in the lower federa!
courts that involve the issue presented on this petition. The pro-
cedural outcome of those actions will be affected by any dec-
sion taken by this Court on this petition. Amici therefore have a
substantial interest in seeing this Court resolve whether agree-
ments to arbitrate claims arising under Section 12(2) of the
Securities Act of 1933, 15 U.S.C. §$ 7742) (the “Securities
Act"’), are enforceable as valid contracts under Section 2 of the
United States Arbitration Act. 9 U.S.C. § 2 (the “‘Arbitration
Act"), as is the case with claims arising under the Securities
Exchange Act of 1934, 15 U.S.C $$ 78a ef seq. (the “‘Exchange
Act"’). Amici seek to clarify and make uniform the law on this
issue so that the enforceability of arbitration provisions in
agreements with their customers can be predicted and relied
Upon. SIA and certain amici also filed briefs amicus curiae with
this Court on the enforceability of agreements to arbitrate
Exchange Act claims in Dean Witter Revnolds, Inc. v. Byrd.
470 U.S. 213 (1985), and in Shearson/ American Express, Inc.
v. McMahon, 482 U.S. 220, 107 S. Ct. 23324 1987), and moved
tor leave to file a brief with respect [oO a petition raising the iden-
3
tical issue in Dain Bosworth Incorporated v. Johnson, No. 88-
284.
SUMMARY OF ARGUMENT
The issue before the Court is whether predispute agreements
to arbitrate claims arising under Section 12(2) of the Securities
Act, 1S U.S.C. § 7742) are enforceable. In Shearson/American
Express, Inc. v. McMahon, 482 U.S. 220, 107 S. Ct. 2332
(1987), the Court held that agreements to arbitrate claims under
Section 10(b) of the Exchange Act, 15 U.S.C. § 78}(b), were
enforceable under the Arbitration Act.
McMahon rejected an argument based on Wilko v. Swan,
346 U.S. 427 (1953), that a predispute agreement to arbitrate
securities claims waives substantive rights under the federal
securities laws. Wilko held that an agreement to arbitrate Sec-
tion 12(2) claims waives substantive rights bestowed by the
Securities Act and that Section 14 of the Act, 1S U.S.C. § 77n,
which voids any waiver of compliance with that Act, therefore
voids such agreements to arbitrate. Yet the Court subsequently
held in Mitsubishi Motors Corp. v. Soler Chrysier-Plymouth,
Inc., 473 U.S. 614 (1985), that, by agreeing to arbitrate a statu-
tory claim, a party does not forego the substantive rights
afforded by the statute under which the claim arose. Following
Mitsubishi, the Court in McMahon found that arbitration as
practiced in the securities industry today offers a fair and effi-
cient means of resolving disputes and that an agreement to arbi-
trate securities disputes does mot waive substantive rights under
the Exchange Act. McMahon thus disavowed both Wi/ko’s gen-
eral hostility to the arbitration process and its specific reason-
ing.
in light of McMahon, the United States Court of Appeals for
the Fifth Circuit below held that predispute agreements to arbi-
trate Section 12(2) claims are enforceable under (ve Arbitration
Act. Rodriguez de Quijas v. Shearson/Lehman Brothers, 845
F.2d 1296 (Sth Cir. 1988). Because McMahon rejected the ana-
lytical predicate of the decision in Wi/kKo—that an agreement to
4
arbitrate waives substantive rights—the Fifth Circuit inter-
preted McMahon as having effectively overruled Wilko and
therefore did not feel constrained to follow Wilko.
The Fifth Circuit below correctly recognized Wilko’s ‘‘obso-
lescence’’ in light of the McMahon decision. Wilko reflects the
suspicion courts once held of the arbitral process, as opposed to
the congressionally enacted federal policy recognizing arbitra-
tion as an efficient means of resolving disputes. See Shearson/
American Express, Inc. v. McMahon, 107 S. Ct. at 2340;
Mitsubishi Motors Corp. v. Soler Chrysler-Piymouth, Inc.:
Southland Corp. v. Keating, 465 U.S. 1 (1984); Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. |
(1983). Wilko did not apply the correct standard for determin-
ing whether Section 12(2) repealed the Arbitration Act by impli-
cation, a standard this Court has reiterated in Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., Kaiser Steel
Corp. v. Mullins, 455 U.S. 72 (1982), and Morton v. Mancari,
417 U.S. 535 (1974). Rather than searching for statutory lan-
guage in the Securities Act conflicting with the Arbitration Act
or legislative history indicating congressional intent to repeal
the Arbitration Act, Wi/ko overruled the substantive, congres-
sional policies embodied in the Arbitration Act solely on the
basis of its own conception of public policy.
Amici respectfully submit that, given the fairness and effi-
ciency of arbitration in the securities industry, as found in
McMahon, the Court should have no hesitation in holding a
predispute agreement to arbitrate Section 12(2) claims as
enforceable as any other contract. That result would make the
law uniform for all agreements to arbitrate securities claims and
conform to the well settled rule as to the enforceability of arbi-
tration agreements in general. See Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc.
5
POINT I
THE UNITED STATES ARBITRATION ACT MANDATES
THAT ARBITRATION BE RECOGNIZED AS AN
EFFICIENT AND WIDELY ACCEPTED MEANS OF
RESOLVING BROKER-CUSTOMER DISPUTES
IN THE SECURITIES INDUSTRY
The United States Arbitration Act provides that an agree-
ment to arbitrate in a contract involving interstate commerce 1s
valid to the same extent as any other contract. When Congress
passed the Arbitration Act in 1925, it established a clear federal
policy favoring the use of arbitration to resolve disputes. That
policy marked a decisive shift from the hostility to arbitration
then prevalent in the courts.
In its recent decisions, this Court has found occasion to rec-
ognize the policy behind the Arbitration Act. In Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., the Court
observed:
[W]e are well past the time when judicial suspicion of the
desirability of arbitration and the competence of arbitral
tribunals inhibited the development of arbitration as an
alternative means of dispute resolution.
473 U.S. at 626-27. Accord Moses H. Cone Memorial Hospital
v. Mercury Constr. Corp., 460 U.S. at 24 (the Arbitration Act
‘‘is a congressional declaration of a liberal federal policy favor-
ing arbitration . . . [and] questions of arbitrability must be
addressed with a healthy regard for the federal policy favoring
arbitration’’); Southland Corp. v. Keating, 465 U.S. at 10 (in
passing the Arbitration Act, ‘*Congress declared a national pol-
icy favoring arbitration. . . [that] mandated the enforcement
of arbitration agreements’’); Scherk v. Alberto-Culver Co., 417
U.S. 506, 510-11 (1974); see also Wilko v. Swan, 346 U.S. at
439 Frankfurter, J., dissenting) (‘‘[t}here is nothing in the rec-
ord. . . to indicated that the arbitral system a would not
afford the plaintiff the rights to which he is entitled’’).
6
Since this Court has decisively abandoned both the analytical
reasoning and the deep suspicion of arbitration that permeates
the opinion in Wilko v. Swan, there is no reason that Wilko
should hold sway even in the narrow space to which it is now
restricted. Wilko is premised on a fundamental hostility to arbi-
tration. See Shearson/American Express, Inc. v. McMahon
107 S. Ct. at 2340. Proceeding from that premise Wilko
espoused the theory that an agreement to arbitrate Securities
Act controversies waives substantive rights under that statute
Because Section 14 of the Securities Act, 15 U.S.C § 77h,
invalidates “‘any .. . stipulation. . . to waive compliance
with any provision’’ of the Securities Act, and because the
Court doubted that arbitration panels would adequately
enforce compliance with that Act, it therefore found predispute
agreements to arbitrate Section 12(2) claims void. !
The decision in Wilko flatly ignored the substantive federal
policy embodied in the Arbitration Act. In equating an agree-
ment to arbitrate Securities Act controversies with a waiver of
compliance with that Act, Wilko put the blind eye to Congress’s
unmistakable mandate that arbitration was to be a respected
method of resolving disputes and that there was no public pol-
icy against agreements to arbitrate.
As this Court has recognized, its recent decisions substan-
tially differ from Wil/ko’s hostilit itrati
y to arbitration.
McMehon observed: For example,
l Wilko’'s language shows extraordinary cynicism as to the compe-
tence of arbitration tribunals:
[A Securities Act] case requires subjective findings on the purpose
and knowledge of an alleged violator of the Act. They must not
only be determined but applied by the arbitrators without judicial
instruction on the law. As their award may be made without expla-
nauon of their reasons and without a complete record of their pro-
ceedings, the arbitrators’ conception of the legal meaning of such
Statutory requirements as ‘‘burden of proof,’’ ‘‘reasonable care’’ or
**material fact’’. . . cannot be examined.
346 U.S. at 4358-36.
-
It is difficult to reconcile Wilko’s mistrust of the arbitral
process with this Court’s subsequent decisions involving
the Arbitration Act.
107 S. Ct. at 2341. Moreover, this Court has twice rejected the
predicate of the Wilko decision, the notion that an agreement to
arbitrate controversies under a federal statute waives compli-
ance with the provisions of that statute:
By agreeing to arbitrate a statutory claim, a party does not
forgo the substantive rights afforded by the statute; it only
submits their resolution to an arbitral, rather than judicial
forum. It trades the procedures and opportunity for
review of the courtroom for the simplicity, informality,
and expedition of arbitration.
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. at 628; accord, Shearson/American Express, Inc. V.
McMahon, 107 S. Ct. at 2339."
Not only did McMahon abandon Wilko’s reasoning, it
reached the exact opposite holding: it held that an agreement to
arbitrate claims arising under Section 10(b) of the Exchange Act
was not a ‘‘stipulation . . . to waive compliance with’’ the
Exchange Act, which is void under Section 29(a) of that Act, 15
U.S.C. § 78cc(a), whereas Wilko had held that such an agree-
ment was a “‘stipulation . . . to waive compliance with’’ the
2 The fallacy in Wilko’s confusion between a forum selection clause
and a waiver of substantive rights is manifested in Johnson v. O'Brien,
420 N.W.2d 264 (Minn. App. 1988), review denied, No. C9-97-1784
slip op. (Minn. May 18, 1988), petition for cert. filed sub nom, Dain
Bosworth Incorporated v. Johnson, No. 88-246. The plaintiffs in
Johnson brought suit in state court, foregoing any procedural safe-
guards offered by the federal courts. Because the Securities Act vests
both the state and federal courts with jurisdiction to hear Securities
Act claims, an agreement requiring that all Securities Act claims be
brought in a particular state court would not waive compliance with
the Securities Act under Section 14. Yet there is nothing that ensures
that a state court will provide a more advantageous forum for Securi-
ties Act claims than arbitration. To the contrary, the stock exchanges’
powers to compel the presence of registered persons at arbitrations, for
example, can far exceed that of state courts. See note 16, infra, at 12.
Securities Act. Yet, although McMahon questioned Wilko’s
continuing vitality (‘‘indeed most of the reasons given in Wilko
have been rejected subsequently by the Court as a basis for
holding claims to be nonarbitrable’’), it nonetheless cautioned
that ‘‘stare decisis concerns may counsel against upsetting
Wilko’s contrary conclusion under the Securities Act.’’ 107 S.’
Ct. at 2341,
Wilko’s inconsistency with the state of arbitration in the
securities industry today not only explains but justifies this
Court’s reluctance to follow Wilko’s holding or its policy pro-
nouncements. The established structure of arbitration in the
securities industry refutes Wilko’s assumption that the enforce-
ment of contracts to arbitrate securities disputes will dilute the
protection of investors under the securities laws. Securities
exchanges and the Nationa] Association of Securities Dealers.
Inc. (the “*N.A.S.D.’’), under the supervision of the Securities
and Exchange Commission, provide arbitration facilities for
disputes between member firms and their public customers.'
The current procedures have evolved since 1872, when the New
York Stock Exchange, Inc. (the ““N.Y.S.E.’’), first conducted
customer arbitrations. The N.A.S.D. has maintained arbitra-
tion facilities for more than forty years. The exchanges and the
N.A.S.D. also have permanent arbitration staffs. Their rules
0 constitutions contain detailed codes of arbitration proce-
ures.
Moreover, the Securities and Exchange Commission has
approved the implementation and Operation of this arbitral sys-
tem, see Exchange Act Release No. 16390 (S.E.C. Nov. 30
3 See, e.g., 2 Am. Stock Ex. Guide (CCH) € 9542 (Rule 602):
N.A.S.D. Manual (CCH) ¢ 3701; 2 N.Y.S.E. Guide (CCH) $ 2600
(Rule 600); Uniform Code of Arbitration § 1, reprinted in Fifth Report
of the Securities Industry Conference on Arbitration (April 1986).
4 See, e.g., Constitution of the New York Stock Exchange, Inc., Art
Vill, 2 N.Y.S.E. Guide (CCH) €€ 1351-1357: Rules 600-634 of the
New York Stock Exchange, Inc., id. € 2600-2634; Code of Arbitra-
uion Procedure of the National Association of Securities Dealers Inc
N.A.S.D. Manual (CCH) 9 3701-3743: Arbitration Rules of the
American Stock Exchange — .
ge, Inc., 2 Am. k £ . —
€4 9540-955] ). . m. Stock Ex. Guide (CCH)
9
1979), 18 S.E.C. Docket 1197 (1979), and retains jurisdiction to
monitor the fairness of arbitration proceedings. See Section 19
of the Exchange Act, 15 U.S.C. § 78s. As the Commission itself
argued to this Court in McMahon, in a brief signed by its Gen-
eral Counsel and Solicitor:
[T]he Commission has had the power to ensure that arbi-
tration procedures prescribed by the SROs [Self-
Regulatory Organizations] are adequate to enforce the
rights of customers against brokerage firms that are mem-
bers of SROs. In these circumstances, the suspicion of
arbitration on which Wilko rested is inappropriate, and an
agreement to arbitrate accordingly should not be deemed a
waiver of rights under the Exchange Act.
Shearson/American Express, Inc. v. McMahon, No. 86-44,
Brief of the Securities and Exchange Commission as amicus
curiae at 13.
That the Securities Industry Conference on Arbitration
(‘‘SICA’’) and the Commission have worked together to add
further improvements to SRO arbitration codes in the year fol-
lowing the McMahon decision proves that the Commission can
and will exercise its oversight authority and that SROs will
respond in a constructive manner. During the Summer of 1988,
the Commission invited SICA and the stock exchanges to
review and possibly revise their arbitration rules in certain
respects. SICA and the stock exchanges considered the matter
and drafted amendments to their arbitration rules, which they
have filed with the Commission pursuant to Exchange Act Rule
19b-4, 17 C.F.R. § 240.19b-4.°
As changed, the rules would require that any arbitration
clause in a broker-customer agreement be highlighted and in
plain language. In addition, the arbitration clause must disclose
to the customer that he is thereby foregoing a jury trial in any
lawsuit against his broker and agreeing to limits on discovery
S$ The N.Y.S.E.’s proposed rule changes, which are substantively iden-
tical with SICA’s and were filed with the Commission on October 17,
1988, File No. SR-NYSE-88-29, are set forth as Appendix A to this
brief.
10
and appellate review. The contract must also disclose the pres-
ence of the arbitration clause unmediately before the a
tomer’s Signature line.’ The proposed amendments further
require that discovery requests be responded to within 30 days
and provide for a prehearing conference before an arbitration
panel to resolve discovery disputes.* Retired securities industry
personnel (as well as professionals who do substantial business
with securities firms) who serve as arbitrators may only serve as
industry arbitrators, and all arbitrators must provide their
employment history for the prior ten years to the parties.’ Last
a record, either stenographic or taped, must be kept of all arbi-
tration proceedings, and arbitration awards must state the issue
The long established competence of securities industry arbi-
trators to adjudicate disputes should dispel any suspicion of the
arbitral process in that industry. The stock exchanges and the
N.A.S.D. keep permanent lists of arbitrators. These lists com-
prise senior securities industry personnel, attorneys, and other
professionals from outside the industry, who are well versed in
the field. See, e.g., Panel of Arbitrators 1988-89, 1 Am. Stock
Ex. Guide (CCH) 158-59; N.A.S.D. Manual (CCH) 4 3702
Most have previously served as arbitrators and are therefore
well acquainted with arbitration procedures and customs. Thus
this Court’s observation in Mitsubishi that ‘adaptability and
access to expertise are hallmarks of arbitration,’’ 473 U.S. at
633, hits the mark with respect to the securities industry. As this
Court stated after reviewing the state of arbitration in the secu-
rities industry in McMahon, ‘“‘Even if Wiiko’s assumptions
regarding arbitration were valid at the time Wilko was decided,
6 See Appendix A, Proposed N.Y.S.E. Rule 637(1), at A-19.
7 See Appendix A, Proposed N.Y.S.E. Rule 637(2), at A-19.
8 See Appendix A, Proposed Rule 61% anby(2), (d) at A-12-13.
9 See Appendix A, Proposed N.Y.S.E. Rule 610, at A-6-7.
10 = See Appendix A, Proposed N.Y.S.E. Rules 623 and 627, at A-15-16.
1]
most certainly they do not hold true today. . . .”? 107S. Ct. at
2341."
The arbitration rules of the N.A.S.D. and the various securi-
ties exchanges further ensure that arbitration practice in the
securities industry will be efficient and impartial. For example,
these rules require that panels of arbitrators include members of
the securities industry and of the public. '2 They require a major-
ity of ‘‘public’’ arbitrators (i.e., unaffiliated with member
firms) in disputes between public customers and member firms
unless the customer requests otherwise.'® Arbitrators are
required to disclose any business affiliation with any parties
before them, and may be disqualified for cause for even the
11 Far from considering themselves as the only tribunal capable of
hearing securities disputes, the federal courts have recognized securities
industry arbitrators as qualified to resolve those claims. Courts have
long compelled arbitration of Exchange Act disputes between members
of a securities exchange or the N.A.S.D. See, e.g., Shearson/American
Express, Inc. v. McMahon, 107 S. Ct. 2332; Axelrod & Co. v. Kor-
dich, Victor & Neufeld, 320 F. Supp. 193 (S.D.N.Y. 1970), aff'd, 451
F.2d 838 (2d Cir. 1971); Brown v. Gilligan, Will & Co., 287 F. Supp.
766, 774-75 (S.D.N.Y. 1968). Claims under the Exchange Act are rou-
tinely arbitrated if the public customer chooses to arbitrate. See
Gardner v. Shearson, Hammill & Co., 433 F.2d 367 (Sth Cir. 1970)
(per curiam), cert. denied, 401 U.S. 978 (1971); Moran v. Paine, Web-
ber, Jackson & Curtis, 389 F.2d 242 (3d Cir. 1968); cf, AVC Neder-
land B.V. v. Atrium Iny. Partnership, 740 F.2d 148 (2d Cir. 1984)
(affirming the dismissal of an Exchange Act claim because the parties
had agreed to try all disputes in the Netherlands).
See, e.g., 2 Am. Stock Ex. Guide (CCH) € 9541 (Rule 601);
N.A.S.D. Manual (CCH) § 3719; 2 N.Y.S.E. Guide (CCH) § 2607
(Rule 607); Uniform Code of Arbitration § 8.
13. See, e.g., 2 Am. Stock Ex. Guide (CCH) 4 9542 (Rule 602);
N.A.S.D. Manual (CCH) § 3719; 2 N.Y.S.E. Guide (CCH) § 2607
(Rule 607); Uniform Code of Arbitration § 8. As noted above at 9-10,
the 1988 SICA proposed rule changes would set specific criteria for
qualification as a ‘‘public’’ arbitrator. See Proposed N.Y.S.E. Rules
607, 608, 610 at A-4-7; N.Y.S.E. Guidelines for Classification of Arbi-
trators at A-20-21.
appearance of a conflict of interest.'* Each party in an arbitra-
tion is accorded at least one peremptory challenge.
The arbitration itself proceeds much like a trial. The parties
have the right to be present at the hearing, to be represented by
counsel, to cross-examine witnesses, and to take a transcript of
the hearing. They may subpoena witnesses and documents just
as In a court proceeding, and may also compel the presence of
any employee of a member of the sponsoring institution at a
hearing, regardless of whether that employee would be within
the subpoena power of the courts of the state where the hearin
is held.” Moreover, arbitrators serve, and witnesses testif ‘
under oath.’’ The fairness of these rules and procedures is
borne out by the results of arbitrations conducted under them
In 1987, 55% of public customer cases that went to arbitration
before one of the securities exchanges or the N.A.S.D. and wer
decided—rather than settled—awarded damages to the am
tomer. A study prepared for the NYSE by the accounting firm
of Deloitte Haskins & Sells (““‘DH&S’’) of arbitration and litiga-
tion results of customer public cases of six major amen e
firms suggests that arbitration may offer at least as ime
14 ide |
= 7 e.g., 2 Am. Stock Ex. Guide (CCH) § 9542(f) (Rule 602)(f):
.A.S.D. Manual (CCH) § 3723; 2 N.Y.S.E. Guide (CCH) € 2610
(Rule 610); Uniform Code of Arbitration § 11.
1§ See, e.g., Uniform Code of Arbitration § 10.
16 See, e.g., 2 Am. Stock Ex. Guide (CC
a ' x, e (CCH) §§ 9546, 9548-49, 9S5S51A
(Rules 606, 608-09, 612); 2 N.Y.S.E. Guide (CCH) 4$§ 2614-15, 2619-
20, 2624 (Rules 614-15 . : . ’
16, 20-21, 25. * 614-15, 619-624); Uniform Code of Arbitration §§ 15-
17 See, e.g., 2 Am. Stock Ex. Guide (CCH) § 9SS5I1B (Rule 613); 2
N.Y.S.E. Guid -_ 5) : :
tion § 26. suide (CCH) § 2625 (Rule 625); Uniform Code of Arbitra-
18 See Minutes of the June 24, 1988, Meeting of the Securities Industry
Conference on Arbitration, which reported arbitration statistics for
1987 similar to those previously reported to the Securities and
Exchange Commission. A table of these statistics, and of the 1986 sta-
tistics compiled by SICA, is set forth as Appendix A to the Brief of the
Securities Industry Association as amicus curiae in support of th i
tion for a writ of certiorari herein. 7 sata
13
results as litigation to public customers.’” According to the
DH&S survey, which reflects data from a three month period
during 1987 and 1988, litigation plaintiffs recovered 2.6% of
their original claims (including settlements), as opposed to
14.81% (including settlements) for arbitration claimants.
Moreover, the arbitration process significantly reduces dis-
covery expenses and minimizes delay in reaching a hearing. See
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. at 628; C. Katsoris, The Arbitration of a Public Securities
Dispute, 53 Fordham L. Rev. 279, 286 (1984). For example,
state laws generally provide subpoena power to arbitrators and
counsel, and parties are encouraged to produce documents ‘‘to
the fullest extent possible without resort to the issuance of the
subpoena process.’””’ Arbitrators may also direct the appear-
ance of persons associated with member organizations or the
production of records of these organizations without using the
subpoena process.” That most stock exchanges and the
N.A.S.D offer a streamlined arbitration procedure for smaller
claims also enables customers to resolve small disputes without
19 The DH&S survey, which was annexed by the NYSE to its response
to the Commission, and which was also filed with the United States
District Court for the District of Massachusetts in Securities Industry
Association v. Connally, Civil Action No. 88-2153-WD as an Exhibit
to the Affidavit of Paul J. Dubow, sworn to November 28, 1988, and
cited by the Court in its opinion granting summary judgment in favor
of SIA, [Current] Fed. Sec. L. Rep. (CCH) € 94,107 at 91,217 (D.
Mass. Dec. 18, 1988), is set forth as Appendix B to this brief.
20 See Appendix B at A-24.
21 See, e.g., 2 Am. Stock Ex. Guide (CCH) 4 9548 (Rule 608);
N.A.S.D. Manual (CCH) § 3732; 2 N.Y.S.E. Guide (CCH) § 2619
(Rule 619); Uniform Code of Arbitration § 20; C. Katsoris, supra, at
286. As noted above at 10, the proposed amendment to the SICA code
would provide specific deadlines for responses to discovery requests,
see Appendix A, Proposed N.Y.S.E. Rule 619(a)(b)(2), at A-12, and
for discovery conferences, see Appendix A, Proposed N.Y.S.E. Rule
619d), at A-13.
22 See, e.g., 2 Am. Stock Ex. Guide (CCH) € 9549 (Rule 609);
N.A.S.D. Manual (CCH) € 3733; 2 N.Y.S.E. Guide (CCH) © 2620
(Rule 620); Uniform Code of Arbitration § 21.
14
incurring great expense.*’ Arbitration also offers an expeditious
result. According to statistics compiled by SICA, 4,364 securi-
ties industry arbitrations were filed with securities exchanges
and the N.A.S.D. in 1987, and 2,936 arbitrations in the securi-
ties industry were resolved during that year.“ The 1987 figures
—— than three times the number of arbitrations filed
In .
Finally, the excessive caseload in the federal district courts
makes it all the more important that arbitrable claims between
securities firms and their customers proceed to arbitration. Fil-
ings of securities and commodities claims increased to 2.844 in
1987. Since the average caseload per United States District
Judge in 1987 was 460 cases,”’ permitting agreements to arbi-
trate all securities laws claims would help to relieve the federal
courts of their overloaded dockets and could effectively free as
many as six federal district judges to handle other matters.
Wilko thus stands bereft of any factual, legal, or policy sup-
port. Arnici respect fully submit that Wi/ko’s negation of con-
gressional policy, its analytical inconsistency with this Court’s
23 _ See, e.g., 2 Am. Stock Ex. Guide (CCH) © 9551H (Rule 619);
N.A.S.D. Manual ‘CCH) $3710; 2 N.Y.S.E. Guide (CCH) $ 2601
(Rule 601); Uniform Code of Arbitration § 2. .
See Brief of the Securities Industry Association as amicus curiae in
support of the petition for a writ of certiorari herein, Appendix A.
The number of filings rose from 1,340 in 1982 to 4,364 in 1987. See
Fifth Report of the Securities Industry Conference on Arbitration Sta-
tistical Report (April 1986) (Exhibit A), which is reproduced in Appen-
dix B to the Brief of the Securities Industry Association as os
curiae in support of the petition for a writ of certiorari herein. |
Annual Report of the Director of the Administrative Office of the
United States Courts, Appendix I, Table C2 (1987). This table is repro-
duced in excerpied form as Appendix C to the Brief of the Securities
Industry Association as amicus curiae in support of the petition for a
writ of certiorari herein. These figures are calculated on the vasis of a
year beginning July 1; ‘‘1987"" statistics therefore refer to the period
July 1, 1986, through June 30, 1987.
Administrative Office of the United States Courts, Federal Court
Management Statistics 1987 at 167. |
15
more recent decisions, and its invalid factual assumptions take
it out of the shelter of stare decisis. As the Court has long recog-
nized, ‘‘stare decisis, in statutory construction, is a useful rule,
not an inexorable command.”’ Erie Railroad Co. v. Tompkins,
304 U.S. 64, 92 (1938) (Reed, J., concurring). Thus, the Court
has overturned its own precedent in order to achieve consis-
tency in interpreting statutory provisions. See Commissioner v.
Estate of Church, 335 U.S. 632 (1949). The Court in Church
reconsidered the construction of the ‘‘possession or enjoy-
ment’’ clause under Section 811(c) of the Internal Revenue
Code it had adopted in May v. Heiner, 281 U.S. 238 (1930). It
did so because its subsequent decision in Helvering v. Hallock,
309 U.S. 106 (1940), had construed the same ‘‘possession or
enjoyment”’ clause in Section 811(c) of the Code differently
from May. Church found that the decision in Hallock
amounted to a complete rejection of the rationale in May, even
though it did not expressly overrule May. Commissioner v.
Estate of Church, 335 U.S. at 643-45. While acknowledging the
interests inherent in the doctrine of stare decisis, the Court
overruled May in order to bring an inconsistent holding in line
with its later decision. See Commissioner v. Estate of Church,
335 U.S. at 649-50. As stated in Helvering v. Hallock, where the
Court was also confronted with incompatible decisions, the
‘real problem. . . is to determine whether we are to adhere to
a harmonizing principle. . . or whether we are to multiply gos-
samer distinctions between the present cases and the. . . ear-
lier ones.’’ 309 U.S. at 118. Here, too, a holding that Section
12(2) claims are arbitrable would make the law with respect to
those claims consistent with the law regarding Exchange Act
claims.
Likewise, .he Court has not hesitated to overrule decisions
that ‘‘do not state the correct rule of law.’’ See Girouard v.
United States, 328 U.S. 61, 69 (1946) (overruling United States
v. Schwimmer, 279 U.S. 644 (1929), United States v. MacIn-
tosh, 283 U.S. 605 (1931), and United States v. Bland, 283 U.S.
636 (1931)). Here, again, where Wilko’s legal reasoning and
policy consideration cannot pass muster under this Court’s
16
more recent Arbitration Act decisions, Wi/ko cannot ‘‘state the
correct rule of law’’ and should therefore be overruled.
Last, should the Court overrule Wilko, it will bestow the
additional policy advantage of making the law uniform for all
securities law claims. Parties will have no incentive to continue
to plead a Section 12(2) claim as a means of avoiding arbitra-
tion.™ The federal court system will therefore be spared sub-
stantial motion practice over pleading matters, as a well as over
difficult collateral estoppel issues that invariably arise when
claims arising under the same set of facts must be resolved by
different tribunals.
POINT II
WILKO Vv. SWAN IGNORED THE STANDARD FOR FIND-
ING AN IMPLIED REPEAL OF THE UNITED STATES
ARBITRATION ACT
By holding that Section 12(2) claims are not arbitrable on the
basis of its own perception of arbitration practice, Wilko
usurped Congress’s role in setting federal policy. Specifically,
“nile purporting to resolve a conflict between ‘‘two policies
not easily reconcilable’’, 346 U.S. at 438, Wilko in fact manu-
factured that conflict on the basis of its hostility to arbitration.
Notwithstanding Congress’s policy favoring arbitration, Wilko
equated an agreement to arbitrate Securities Act claims with a
waiver of compliance with the Securities Act in order to void
such an agreement under Section 14.
Wilko’s analysis stands at odds with many of this Court’s
more recent rulings, in particular McMahon and Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc. Mitsubishi
28 Dain Bosworth Incorporated v. Johnson appears to be a good exam-
ple of this sort of practice. In Johnson, the plaintiffs Originally
brought a claim under the Minnesota Securities Act. When the defen-
dants moved to compel arbitration, the plaintiffs amended their com-
plaini to add a Section 12(2) claim and then again to delete their
Minnesota Securities Act claim so that it could not be arbitrated. See
Dain Bosworth Incorporated v. Johnson, No. 88-284, Petition for a
Writ of Certiorari at 4-5, A-15-47.
17
requires that any finding of an implied repeal of the Arbitration
Act be supported by ‘‘congressional intention expressed in
some other statute. . . .”’ 473 U.S. at 627. This is simply a
reiteration of the traditional standard for finding that a federal
statute has been repealed by implication by a sabsequently
enacted federal statute. Kaiser Steel Corp. v. Mullins, 455 U.S.
at 88 (‘‘ ‘repeals by implication [of a prior statue by a subse-
quently enacted one] are disfavored’ ’’) (quoting Alien v.
McCurry, 449 U.S. 90, 99 (1980)); Morton v. Mancari, 417
U.S. at 550 (‘‘In the absence of some affirmative showing of an
intention [by Congress] to repeal, the only permissible justifica-
tion for a repeal by implication is when the earlier and later stat-
utes are irreconcilable’’).
In Mitsubishi, this Court stated:
We must assume that if Congress intended the substantive
protection afforded by a given statute to include protec-
tion against waiver of the right to a judicial forum, that
intention will be deducible from text or legislative history.
473 U.S. at 628”
Under this test, there can be no question that predispute
agreements to arbitrate Section 12(2) claims are enforceable
under the Arbitration Act. The Securities Act contains no statu-
tory language that restricts a party’s ability to choose an arbi-
tral forum with respect to claims brought thereunder. Section
14, on which Wilko relied, concerns waivers of compliance with
the Securities Act, not agreements as to what forum a c.aim
under the Securities Act may be tried before. This Court has
already marked this distinction in Mitsubishi and McMahon to
the extent of holding that Section 29 of the Exchange Act, a
nonwaiver provision substantially identical to Sectioa 14, did
not void agreements to arbitrate in McMahon.
29 ~—s- The opinion in Mitsubishi cited Wilko v. Swan for this proposition,
in spite of the fact that Wilko did not rely on text or legislative history,
but rather on its hostile view of arbitration practice and its conception
of an agreement to arbitrate statutory claims as 2 wai\ © of comphance
with the siaiute in question, both of which notions Mitsubishi rejected
in no uncertain terms.
18
Nor is there any evidence in the legislative history of the Secu-
rities Act that Congress intended to repeal the Arbitration Act
with respect to Securities Act claims. That Congress in amend-
ing the securities laws in 1975 did not affirmatively overrule
Wilko has no bearing on what Congress intended in 1933, the
critical inquiry at bar. Likewise, although the Conference
Report pertaining to those amendments observed that the
amendments were not intended to change existing law as to
waivers and then cited Wilko v. Swan, that language is not con-
nected with any affirmative act of Congress, either in 1975 or in
1933, and hardly amounts to the direct legislation necessary to
repeal the Arbitration Act in this context. See H.R. Conf. Rep.
No. 94-229, at 111 (1975), reprinted in 1975 U.S. Code Cong. &
Ad. News, at 179, 342. Indeed, the Court in McMahon found
the language quoted from that Conference Report so obscure as
not to be probative of anything, with the result that “the Wilko
issue was left to the courts.”’ 107 S. Ct. at 2343. Moreover, such
subsequent legislative inaction will not prevent a Court from
revisiting a decision that was ill-founded, as amici respectfully
Suggest is the case here. For example, in Girouard v. United
States, the Court overruled its prior interpretation of a statute
after Congress had rejected amendments to that statute that
would have overruled the prior interpretation. See 328 U.S. at
72-76 (Stone, C.J., dissenting). As the majority held, “‘it is at
best treacherous to find in congressional silence alone the adop-
tion of a controlling rule of law. We do not think under the cir-
cumstances of this legislative history that we can properly place
on the shoulders of Congress the burden of the Court’s own
error.’’ 328 U.S. at 69-70.
Absent specific legislative evidence to the contrary, the Arbi-
tration Act must apply to Securities Act claims and agreements
to arbitrate those claims must be honored as ordinary contracts.
19
CONCLUSION
For the reasons set forth above, amici curiae the Securities
Industry Association, D.A. Davidson & Co., Inc., Dain
Bosworth Incorporated, Dean Witter Reynolds Inc., Goldman,
Sachs & Co., J.C. Bradford & Co., J.J.B. Hilliard, W.L.
Lyons, Inc., Johnston Lemon & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Piper, Jaffray & Hop-
wood Inc., The Advest Group, Inc., and Wheat, First Securi-
ties, Inc., respectfully request that the decision of the United
States Court of Appeals for the Fifth Circuit below be
affirmed.
Dated: February 17, 1989 Respectfully submitted,
JAMES k. MANNING
Counsel of record; and
PAUL WINDELS III
BROWN & WooD
One World Trade Center
New York, New York 10048
(212) 839-5300
Attorneys for Amici Curiae
Of Counsel:
William J. Fitzpatrick, Esq.
Gerard J. Quinn, Esq.
Bruce A. Mackenzie, Esq.
Louis L. Bulba, Esq.
Paul J. Dubow, Esq.
Robert Katz, Esq.
R. Patrick Shepherd, Esq.
James C. Stone III, Esq.
\ _
Gene E. Carasick, Esq.
Philip M. Mandel, Esq.
David Rosedahl, Esq.
Lee G. Kuckro, Esq.
William B. Lucas, Esq.
SECURITIES INDUSTRY
ASSOCIATION
D.A. DAVIDSON & Co.,
INCORPORATED
DAIN BOSWORTH
INCORPORATED
DEAN WITTER REYNOLDS INC.
GOLDMAN, SACHS & Co.
J.C. BRADFORD & Co.
J.J.B. HILLIARD, W.L. LYONS,
INC.
JOHNSTON, LEMON & Co.
INCORPORATED
MERRILL LYNCH, PIERCE,
FENNER & SMITH
INCORPORATED
PIPER, JAFFRAY & HOPWOOD
INCORPORATED
THE ADVEST GROUP, INC.
WHEAT, FIRST SECURITIES, INC.
A-l
APPENDIX A
PROPOSED AMENDMENTS TO THE ARBITRATION
RULES OF THE NEW YORK STOCK EXCHANGE, INC..,
AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON OCTOBER 17, 1988,
FILE NO. SR-NYSE-88-29
[ ] DELETED LANGUAGE
italics NEW LANGUAGE
Rule 601. SIMPLIFIED ARBITRATION
(a) Any dispute, claim or controversy, arising between a
public customer(s) and an associated person or a member
subject to arbitration under this Code involving a dollar
amount not exceeding $10,000 exclusive of attendant
costs and interest, shall upon demand of the customer(s)
or, by written consent of the parties, be arbitrated as
hereinafter provided.
(b) The Claimant shall file with the Director of Arbitration
fone (1) executed Submission Agreement and one (1)
copy of the Statement of Claim of the controversy in dis-
pute,] an executed Submission Agreement and a copy of
the Statement of Claim of the controversy in dispute and
the required deposit, together with documents in support
of the Claim. Sufficient copies of the Submission Agree-
ment and the Statement of Claim and supporting docu-
ments shall be provided to the Director of Arbitration for
each party and the arbitrator. The Statement of Claim
shall specify the relevant facts, the remedies sought and
whether or not a hearing is demanded.
(c) The claimant shall pay the sum of $15.00 if the amount in
controversy is $1,000 or less, $25.00 if the amount in con-
troversy is more than $1,000 but $2,500 or less, $100 if
the amount in controversy is more than $2,500 but does
not exceed $5,000, or $200 if the amount in controversy is
more than $5,000 but does not exceed $10,000 upon filing
A-2
of the Submission Agreement. The final disposition of
this sum shall be determined by the arbitrator.
(d) The Director of Arbitration shall endeavor ,to serve
promptly by mail or otherwise on the Respondent(s) one
(1) copy of the Submission Agreement and one (1) copy
of the Statement of Claim.
[The respondent(s) shall, within twenty (20) calendar
days from receipt of service, file with the Director of
Arbitration one (1) executed Submission Agreement and
one (1) copy of the Respondent’s Answer, together with
supporting documents.]
Within twenty (20) calendar days from receipt of the
Statement of Claim, Respondent(s) shall serve each party
with an executed Submission Agreement and a copy.of
Respondent’s Answer. Respondent’s executed Submis-
sion Agreement and Answer shall aiso be filed with the
Director of Arbitration with sufficient copies for the
arbitrator(s) along with any deposit required under the
schedule of fees. The Answer shall designate all available
defenses to the Claim and may set forth any related
Counterclaim and/or related Third Party Claim the
Respondent(s) may have against the Claimant or any
other person. If the Respondent(s) has interposed a Third
Party Claim, [The Director of Arbitration shall endeavor
to serve promptly by mail or otherwise a copy of same,
together with a copy of the Submission Agreement on
such Third Party who shall respond in the manner herein
provided for response to the claim.] the Respondent(s)
Shall serve the Third Party Respondent with an executed
Submission Agreement, a copy of Respondent’s Answer
containing the Third Party Claim and a copy of the origi-
nal Claim filed by the Claimant. The Third Party
Respondent shall respond in the manner herein proviaed
for response to the claim. lf the Respondent(s) files a
related Counterclaim exceeding $10,000, the arbitrator
may refer the Claim, Counterclaim and/or Third Party
Claim if any, to a panel of three (3) or more arbitrators in
(e)
(f)
A-3
accordance with Rule 607 of this Code or, he may dismiss
the Counterclaim and/or Third Party Claim, without
prejudice to the Counterclaimant(s) and/or Third Party
Claimant(s) pursuing the Counterclaim and/or Third
Party Claim in a separate proceeding. The costs to the
Claimant under either proceeding shall in no event exceed
$200.
[The Director of Arbitration shall endeavor to serve
promptly by mail or otherwise on the Claimant a copy of
the Answer, Counterclaim, Third Party Claim or other
responsive pleading, if any. The Claimant, if a Counter-
claim is asserted against him, shall within ten (10) calen-
dar days either (i) file’a Reply to any Counterclaim with
the Director of Arbitration who will serve a copy of the
Reply on the Respondent(s) or,] A// parties shall serve
promptly by mail or otherwise on all other parties and the
Director of Arbitration, with sufficient copies for the
arbitrators, a copy of the Answer, Counterclaim, Third
Party Claim or other responsive pleading, if any. The
Claimant, if a Counterclaim is asserted against him, shall
within ten (10) calendar days either:
(i) serve on each party a reply to any counterclaim, or
(ii) if the amount of the Counterclaim exceeds the
Claim, have the right to file a statement withdrawing
the Claim. If the Claimant withdraws the Claim, the
proceedings will be discontinued without prejudice to
the rights of the parties.
The dispute, claim or controversy shall be submitted to a
single arbitrator knowledgeable in the securities industry
selected by the Director of Arbitration. Unless the public
customer demands or consents to a hearing, or the arbi-
trator(s) calls a hearing, the arbitrator shall decide the
dispute, claim or controversy solely upon the pleadings
and evidence filed by the parties. If a hearing is neces-
sary, such hearing shall be held as soon as practicable at a
locale selected by the Director of Arbitration.
A-4
(g) The Director of Arbitration may grant extensions of time
to file any pleading upon a showing of good cause.
(h) The arbitrator shall be authorized to require the submis-
sion of further documentary evidence as he, in his sole
discretion deems advisable.
(i) Upon the request of the arbitrator, the Director of Arbi-
tration shall appoint two (2) additional arbitrators to the
panel which shall decide the matter in controversy.
(j) In any case where there is more than one (1) arbitrator,
the majority will be public arbitrators.
(k) In his discretion, the arbitrator may, at the request of any
party, permit such party to submit additional documen-
tation relating to the pleadings.
(1) Except as otherwise provided herein, the general arbitra-
tion rules of the New York Stock Exchange, Inc. shall be
applicable to proceedings instituted under this Code.
Rule 607. DESIGNATION OF NUMBER OF ARBITRATORS
(a) (1) In all arbitration matters involving public customers
and non-members where the matter in controversy
exceeds $10,000, or where the matter in controversy
does not involve or disclose a money claim, the Direc-
tor of Arbitration shall appoint an arbitration panel
which shall consist of no less than three (3) arbitra-
tors, at least a majority of whom shall not be from
the securities industry, unless the public customer or
non-member requests a panel consisting of at least a
majority from the securities industry.
(2) An arbitrator will be deemed as being from the secu-
rities industry if he or she is:
1. is @ person associated with a member, or broker/
dealer, government securities broker, government
securities dealer or registered investment adviser,
or
A-5
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 devoted twenty (20) percent or more of his or
her professional work effort to securities industry
clients within the last two (2) years.
(3) 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 associated with a registered broker, dealer,
municipal securities dealer, government securities
broker, government securities dealer or investment
adviser.
(b) Composition of Panels
The individuals who shall serve on a particular arbitra-
tion panel shall be determined by the Director of Arbitra-
tion. The Director of Arbitration may name the
chairman of each panel.
Rule 608. NOTICE OF SELECTION OF ARBITRATORS
The Director of Arbitration shall inform the parties of the
names [and business affiliations of the arbitrators] and employ-
ment histories of the arbitrators for the past ten years, as well as
information disclosed pursuant to Rule 610 at least eight (8)
business days prior to the date fixed for the initial hearing ses-
sion. A party may make further inquiry of the Director of Arbi-
tration concerning an arbitrator’s background. In the event that
any arbitrator, after appointment and prior to the first hearing
session, should resign, die, withdraw, be disqualified or other-
wise be unable to perform as an arbitrator, the Director of
Arbitration shall appoint a new member to the panel to fill any
vacancy. The Director of Arbitration shall inform the parties of
the name and employment history of the arbitrator for the past
A-6
fen years, as well as information disclosed pursuant to Rule
610, as soon as possible. A party may make further inquiry of
the Director of Arbitration concerning the background of any
arbitrator and within the time remaining prior to the first hear-
ing session or the five (5) day period provided under Rule 609,
whichever is shorter, may exercise its right to challenge the
replacement arbitrator as provided in Rule 609.
Rule 610. DISCLOSURES REQUIRED OF ARBITRATORS
(a) Each arbitrator shall be required to disclose to the Direc-
tor of Arbitration any circumstances which might pre-
clude such arbitrator from rendering an objective and
impartial determination.
[Prior to the commencement of the first hearing session
the Director of Arbitration may remove an arbitrator
who discloses such information. ]
Each arbitrator shall disclose:
(1) Any direct or indirect financial or personal interest in
the outcome of the arbitration;
(2) Any existing or past financial, business, professional,
family or social relationships which are likely to
affect impartiality or which might reasonably create
an appearance of partiality or bias. Persons
requested to serve as arbitrators should disclose any
such relationships which they personally have with
any party or its counsel, or with any individual whom
they have been told will be a witness. They should
also disclose any such relationship involving mem-
bers of their families or their current employers, part-
ners or business associates.
(b) Persons who are requested to accept appointment as arbi-
trators should make a reasonable effort to inform them-
selves of any interests or relationships described in
Paragraph (a) above.
A-7
(c) The obligation to disclose interests, relationships, or cir-
cumstances which might preclude an arbitrator from ren-
dering an objective and impartial determination
described in subsection (a) hereof is a continuing duty
which requires a person who accepts appointment as an
arbitrator to disclose, at any stage of the arbitration, any
such interests, relationships, or circumstances which
arise, or which are recalled or discovered.
(d) Prior to the commencement of the first hearing session,
the Director of Arbitration may remove an arbitrator
based on information disclosed pursuant to this section.
The Director of Arbitration shall also inform the parties
of any information disclosed pursuant to this section, if
the arbitrator who disclosed the information is not
removed.
Rule 611. DISQUALIFICATION OR OTHER DISABILITY
OF ARBITRATORS
[In the event that any arbitrator, after the commencement of
the first session but prior to the rendition of the award should
become disqualified, resign, die, refuse or be unable to perform
or discharge his duties, the Director of Arbitration, upon such
proof as he deems satisfactory, shall, where permited by law,
either (a) appoint a new member to the panel to replace such
arbitrator, obtaining the consent of the parties; or (b) with the
consent or waiver of the parties, direct that the arbitration pro-
ceed without the substitution of a new arbitrator.]
In the Event that any arbitrator, after the commencement of
the first hearing sessions and prior to the rendition of the
award, should resign, die, withdraw, be disqualified or other-
wise be unable to perfc..n as an arbitrator, the remaining arbi-
trator(s) may continue with the hearing and determination of
the controversy, unless such continuation is objected to by any
party within five (5) days of notification of such resignation,
death, withdrawal, disqualification, or other inability. Upon
objection, the Director of Arbitration shall appoint a new mem-
ber to the panel to fill any vacancy. The Director of Arbitration
A-8
shall inform the parties as soon as possible of the name and
employment history for the past ten (10) years of the replace-
ment arbitrator, as well as information disclosed pursuant to
Rule 610. A party may make further inquiry of the Director of
Arbitration concerning the replacement arbitrator’s back-
ground and within the time remaining prior to the next schea-
uled hearing session or the five (5) day period provided under
Rule 609, whichever is shorter, may exercise its right to chal-
lenge the replacement arbitrator as provided in Rule 609.
—s
—
kule 612. INITIATION OF PROCEEDINGS
Except as otherwise provided herein, an arbitration proceed-
ing under this Code shall be instituted as follows:
(a) Statement of Claim
The Claimant shall file with the Director of Arbitration
[three (3) executed copies of the Submission Agreement
and three (3) copies of the Statement of Claim of the con-
troversy in dispute, together with the documents in sup-
port of the claim.] an executed Submission Agreement, a
Statement of Claim and the required deposit. Sufficient
copies of the Submission Agreement and the Statement
of Claim and supporting documents shall be provided to
the Director of Arbitration for each party and arbitra-
tor(s). The Statement of Claim shall specify the relevant
facts and the remedies sought. The Director of Arbitra-
tion shall endeavor to serve promptly by mail or other-
wise on the Respondent(s) one (1) copy of the Submission
Agreement and one (1) copy of the Statement of Claim.
(b) Service and Filing with the Director of Arbitration
For purposes of the Code of Arbitration Procedure, ser-
vice may be effected by mail or other means of delivery.
Service and filing are accomplished on the date of maiil-
ing with first-class postage pre-paid or, in the case of
other means of service, on the date of delivery. Filing
with the Director of Arbitration shall be made on the
same date as service.
A-9
[(b)](c) Answers—Defenses, Counterclaims and/or
Cross-Claims
[(1) The Respondent(s) shal! within twenty (20) business
days from receipt of service file with the Director of
Arbitration one (1) copy of the Respe dent’s(s’)
Answer.]
(1) Within twenty (20) business days from receipt of the
Statement of Claim, the Respondent(s) shall serve
each party with an executed Submission Agreement
and a copy of Respondent(s) Answer. Respondent(s)
executed Submission Agreement and Answer shall
also be filed with the Director of Arbitration with
sufficient copies for the arbitrator(s), along with any
deposit required under the schedule of fees. The
Answer shall specify all available defenses and rele-
vant facts that will be relied upon at the hearing and
may set forth any related Counterclaim the Respon-
dent(s) may have against the Claimant, [and any
third party claim against any other party or person
upon any existing dispute, claim or controversy to
arbitration under this Code.] any Cress-Claim, the
Respondent(s) may have against any other named
Respondent(s) and any Third Party Claim against
any other party or person upon any existing dispute,
claim or controversy subject to arbitration under this
Code.
(2) (i) A Respondent, Responding Claimant, Cross-
Claimant, Cross-Respondent or Third Party
Respondent who pleads only a general denial as
an answer may, [upon written objection by the
adversary party before the hearing to the Direc-
tor of Arbitration] upon objection by a party, in
the discretion of the arbitrators, be barred from
presenting any fact or defenses at the time of the
hearing.
(ii) A Respondent, Responding Claimant, Cross-
Claimant, Cross-Respondent or Third Party
(3)
(4)
A-10
Respondent who fails to specify all available
defenses and relevant facts in such party’s
answer may, upon objection by [the adversary] a
party, in the discretion of the arbitrators, be
barred from presenting such facts or defenses
not included in such party’s answer at the hear-
ing.
(iii) A Respondent, Responding Claimant, Cross-
Claimant, Cross-Respondent or Third Party
Respondent who fails to file an answer within
twenty (20) business days from receipt of service,
or unless the time to answer has been extended
pursuant to paragraph (5), may, in the discretion
of the arbitrators, be barred from presenting any
matter, arguments or defenses at the hearing.
[If the Respondent(s) has interposed a third party
claim the Director of Arbitration shall endeavor to
serve promptly by mail or otherwise a copy of same
together with a copy of the Submission Agreement on
such third party who shall respond in the manner
herein provided for response to the Claim.] Respon-
dent(s) shall serve each party with a copy of any
Third Party Claim. The Third Party Claim shall also
be filed with the Director of Arbitration with suffi-
cient copies for the arbitrator(s), along with any
deposit required under the schedule of fees. Third
Party Respondent(s) shall respond in the manner pro-
vided for response to the Claim, as provided herein
above.
[The Director of Arbitration shall endeavor to serve
promptly by mail or otherwise on the Claimant a
copy of the Answer, Counterclaim, Third Party
Claim or other responsive pleading, if any. The
Claimant may within ten (10) business days file a
Reply to the Counterclaim with the Director of Arbi-
tration who will serve a copy of the Reply on the
Respondent(s).] The Claimant shall serve each party
A-ll
with a reply to a counterclaim within ten (10) business
days of receipt of an answer containing a counter-
claim. The reply shall also be filed with the Director
of Arbitration with sufficient copies for the arbitra-
tor(s).
(5) [The time period to file any pleading, whether such
be denominated as a Claim, Answer, Counterclaim,
Reply or Third Party pleading, may be extended for
such further periods as may be granted by the Direc-
tor of Arbitration.] The Director of Arbitration may
extend any time period in this section whether such be
denominated as a Claim, Answer, Counterclaim,
Cross-Claim, Reply or Third Party pleading.
[(c)](d) Joining and Consolidation—Multiple Parties.
(1) With respect to any dispute, claim or controversy
submitted to arbitration, any party or person eligible
to submit a claim under this Code shall have the right
to proceed in the same arbitration against any other
party or person upon any claim directly related to
such dispute.
(2) For purposes of this subsection, the Director of Arbi-
tration shall be authorized to determine preliminarily
whether a claim is directly related to the matter in dis-
pute and to join any other party to the dispute and to
consolidate the matter for hearing and award pur-
poses. In arbitrations where there are multiple Claim-
ants, Respondents and/or Third Party Respondents,
the Director of Arbitration shall be authorized to
determine preliminarily whether such parties should
proceed in the same or separate arbitrations.
(3) All final determinations with respect to joining, con-
solidation and multiple parties under this subsection
shall be made by the arbitration panel.
A-12
Rule 619. GENERAL PROVISION GOVERNING PRE-HEARING
PROCEEDING
(a) Requests for Documents and Information
The parties shall cooperate to the fullest extent practica-
ble in the voluntary exchange of information to expedite
the arbitration. Any request for documents or other
information should be specific, relate to the matter in
controversy, and afford the party to whom the request is
made a reasonable period of time to respond without
interfering with the time set for the hearing.
(b) Document Production and Information Exchange
(1) Any party may serve a written request for informa-
tion or documents (“information request’’) upon
another party twenty (20) business days or more after
service of the Statement of Claim by the Director of
Arbitration or upon filing of the Answer, whichever
is earlier. The requesting party shall serve the infor-
mation request on all parties and file a copy with the
Director of Arbitration. The parties shall endeavor to
resolve disputes regarding an information request.
Such efforts shall be set forth in the objection.
(2) Unless a greater time is allowed by the requesting
party, information requests shall be satisfied or
objected to within thirty (30) calendar days from the
date of service. Any objection to an information
request shall be served by the objecting party on all
parties and filed with the Director of Arbitration.
(3) Any response to objections to information requests
shall be served on all parties and filed with the Direc-
tor of Arbitration within ten (10) calendar days of
receipt of the objection.
(4) Upon the written request of a party whose informa-
tion request is unsatisfied, the matter will be referred
by the Director of Arbitration to either a pre-hearing
conference under paragraph (d) of this section or to a
A-13
selected arbitrator under paragraph (e) of this sec-
tion.
(c) Pre-Hearing Exchange
At least ten (10) calendar days prior to the first scheduled
hearing date, all parties shall serve on each other copies
of documents in their possession and shall identify wit-
nesses they intend to present at the hearing. The arbitra-
tor(s) may exclude from the arbitration, any documents
not exchanged or witnesses not identified. This para-
graph does not require service of copies of documents or
identification of witnesses which parties may use for
cross-examination or rebuttal.
(d) Pre-Hearing Conference
(1) Upon the written request of a party, an arbitrator, or
at the discretion of the Director of Arbitration, a pre-
hearing conference shall be scheduled. The Director
of Arbitration shall set the time and place of a pre-
hearing conference and appoint a person to preside.
The pre-hearing conference may be held by tele-
phone. The presiding person shall seek to achieve
agreement among the parties on any issues that relate
to the pre-hearing process or to the hearing, including
but not limited to, the exchange of information,
exchange or production of documents, identification
of witnesses, identification and exchange of hearing
documents, stipulations of facts, identification and
briefing of contested issues, and any other matters
which will expedite the arbitration proceedings.
(2) Any issues raised at the pre-hearing conference that
are not resolved may be referred by the Director of
Arbitration to a single member of the Arbitration
Panel for decision.
(e) Decisions by Selected Arbitrator
The Director of Arbitration may appoint a single mem-
ber of the Arbitration Panel to decide all unresolved
if)
A-14
issues referred to under this section and sections (f) and
(g). Such arbitrator shall be authorized to act on behalf
of the panel to issue subpoenas, direct appearances and
production of documents, and set deadlines. Decisions
under this paragraph shall be made upon the papers sub-
mitted by the parties, unless the arbitrator calls a hearing.
The arbitrator may elect to refer any issue under this par-
agraph to the full panel.
Subpoenas
The arbitrator(s) and any counsel of record to the pro-
ceedings shall have the power of the subpoena process as
provided by law. A// parties shall be given a copy of the
subpoena upon its issuance. [However] The parties shall
produce witnesses and present proofs tathe fullest extent
possible without resort to the [issuance of the] subpoena
process.
[(b) Prior to the first hearing session, the parties shall cooper-
(g)
ate in the voluntary exchange of such documents and
information as will serve to expedite the arbitration. If
the parties agree, they may also submit additional docu-
ments to the Director of Arbitration for forwarding to
the arbitrators.]
Power to Director Appearance and Production of
Documents
The arbitrator(s) shall be empowered without resort to
the subpoena process to direct the appearance of any per-
son employed or associated with any member or member
organization of the New York Stock Exchange, Inc. and/
or the production of any records in the possession or con-
trol of such persons or members. Unless the arbitrator(s)
direct otherwise, the party requesting the appearance of a
person or the production of documents under this section
shall bear all reasonable costs of such appearance and/or
production
7
A-15
Rule 623. RECORD OF PROCEEDINGS
[Unless requested by the arbitrators or a party or parties to a
dispute, no record of any arbitration proceeding is required to
be kept. If a record is kept, it shall be a verbatim record.] A ver-
batim record by stenographic reporter or tape recording of all
arbitration hearings shall be kept. 1f a party or parties to a dis-
pute elect to have the record transcribed, the cost of such tran-
scription shall be borne by the party or parties making the
request unless the arbitrators direct otherwise. The arbitrators
may also direct that the record be transcribed. If the record is
transcribed at the request of any party, a copy shall be provided
to the arbitrators.
Rule 627. AWARDS
(a) All awards shall be in writing and signed by a majority of
the arbitrators or in such manner as it is required by law.
Such awards may be entered as a judgment in any court
of competent jurisdiction.
(b) Unless the law directs otherwise, all awards rendered pur-
suant to this Code shall be deemed final and not subject
to review or appeal.
(c) The Director of Arbitration shall endeavor to serve a
copy of the award: (i) by registered or certified mail upon
all parties or their counsel, at the address of record; or (ii)
by personally serving the award upon the parties; or (iii)
by filing or delivering the award in such a manner as may
be authorized by law.
(d) The arbitrator(s) shall endeavor to render an award
within thirty (30) business days from the date the record
is closed.
(e) The award shall contain the names of the parties, a sum-
mary of the issues in controversy, the damages and/or
other relief requested, the damages and/or other relief
awarded, a statement of any other issues resolved, the
a
A-16
names of the arbitrators and the signatures of the arbitra-
tors concurring in the award.
Summary information contained in the awards shall be
made publicly available in accordance with the policies of
the sponsoring self-regulatory organization.
Rule 629. SCHEDULE OF FEES FOR CUSTOMER DISPUTES
(a) At the time of filing a [Submission Agreement, a Claim-
ant] Claim, Counterclaim, Third-Party Claim or Cross-
Claim, a party shall deposit with the Exchange the
amount indicated below unless such deposit is specifically
waived by the Director or Arbitration
Amount in Dispute Deposit
(Exclusive of interest and expenses)
ee cena cesceccecces $ 15
Above $1,000 but not exceeding $2,500........ . =
Above $2,500 but not exceeding $5,000........ $ 100
Above $5,000 but not exceeding $10,000....... $ 200
Above $10,000 but not exceeding $50,000... ... $ 400
Above $50,000 but not exceeding $100,000..... $ 500
Above $100,000 but not exceeding $500,000.... $ 750
Te ee eehenecesesecocececesc: $1,000
Where the amount in dispute is $10,000 or less, no addi-
tional deposits shall be required despite the number of
hearing sessions. Where the amount in dispute is above
$10,000 and multiple hearing sessions are required, the
arbitrators may require any of the parties to make addi-
tional deposits for each additional hearing session. In no
event shall the aggregate amount deposited per hearing
session exceed the amount of the initial deposit(s) as set
forth in the above schedule.
(b) A hearing session is any meeting between the parties and
one arbitrator(s), including a pre-hearing conference,
which lasts four (4) hours or less.
A-17
[(b)](c) The arbitrators, in their awards, may determine the
amount chargeable to the parties as forum fees (fees) and
shall determine by whom such fees shall be borne. Where
the amount in dispute is $10,000 or less, total [forum]
fees chargeable to the parties shall not exceed the amount
of the total initial deposit deposited by the parties,
regardless of the number of hearing sessions conducted.
Where the amount in dispute is above $10,000, total fees
chargeable to the parties per hearing session may equal
but shall not exceed the amount of the total initial
deposit(s) deposited by the parties. [Where the amount in
dispute is above $10,000 but does not exceed $50,000, the
maximum fee shall be $400 per session. Where the
amount in dispute is above $50,000 but does not exceed
$100,000, the maximum fee shall be $500 per session.
Where the amount in dispute is above $100,000, the max-
imum fee shall be $750 per session. Where the amount in
dispute is above $500,000, the maximum fee shall be
$1,000 per session.] Amounts deposited by a party shall
be applied against fees, if any. If the fees are not assessed
against a party who had made a deposit, the deposit will
be refunded. Jn addition to forum fees, the arbitrator(s)
may determine in their awards the amount of costs
incurred pursuant to Rules 617, 619 and 624; and unless
applicable law directs otherwise, other costs and expenses
of the parties and arbitrator(s) which are within the scope
of the agreement of the parties. The arbitrator(s) shall
determine by whom such costs shall be borne.
{(c)](d) If the dispute, Claim or controversy does not involve or
disclose a money Claim, the amount to be deposited by
the Claimant shall be [$100] $200, or such amount as the
Director of Arbitration or the panel of arbitrators may
require, but shall not exceed $1,000.
[(d)]/e) Any matter submitted and thereafter settled or with-
drawn prior to the commencement of the first hearing
session shall entitle the parties to a refund of all but $100
of the amount deposited with the Association. This sec-
A-18
tion shall not apply to claims filed under Section 2 of this
Code.
[(e)]|() Any matter submitted and thereafter settled or with-
drawn subsequent to the commencement of the first hear-
ing sessions may be subject to such refund of assessed
deposits, if any, as the panel of arbitrators presiding may
determine.
[(f)]}(g) The arbitrators may assess forum fees and costs incurred
pursuant to Rules 617, 619 and 624 [Rule 620 costs] in
any matter settled or withdrawn subsequent to the com-
mencement of the first session.
(h) The fee for pre-hearing conferences shall be 75 per cent
of the fees contained in subsection (a).
{Rule 620. POWER TO DIRECT APPEARANCES
The arbitrators shall be empowered without resort to the sub-
poena process to direct the appearance of any person
employed or associated with any member or member organi-
zation of the New York Stock Exchange, Inc. and/or the pro-
duction of any records in the possession or contro! of such
persons, members or member organizations. Unless the arbi-
trators direct otherwise, the party requesting the appearance
of a person or the production of documents under this sec-
tion shall bear all reasonable costs of such appearance and/or
production.]
Succeeding rules will be renumbered.
[Rule 638. EXCHANGE OF DOCUMENTS
At least ten days prior to the date assigned for a hearing, the
parties shall exchange documents in their possession which
they intend to introduce to the arbitrators. The arbitrators
may exclude from the arbitration any document not so
exchanged. }
A-19
Rule 637. REQUIREMENTS WHEN USING PRE-DISPUTE ARBI-
TRATION AGREEMENTS WITH CUSTOMERS
(1) Any pre-dispute arbitration clause shall be highlighted
and shall be immediately preceded by the following dis-
closure language which shall also be highlighted:
(a) Arbitration is final and binding on the parties.
(b) The parties are waiving their right to seek remedies in
court, including the right to jury trial.
(c) Pre-arbitration discovery is generally more limited
than and different from court proceedings.
(d) The arbitrators’ award is not required to include fac-
tual findings or legal reasoning and any party’s right
to appeal or to seek modification of rulings by the
arbitrators is strictly limited.
(e) The panel of arbitrators will typically include a
minority of arbitrators who were or are affiliated with
the securities industry.
(2) Immediately preceding the signature line, there shall be a
statement that the agreement contains a pre-dispute arbi-
tration clause.
(3) A copy of the agreement containing any such clause shall
be given to the customer who shall acknowledge receipt
thereof on the agreement or on a separate document.
(4) No agreement shall include any condition which limits or
contradicts the rules of any self-regulatory organization
or limits the ability of a party to file any claim in arbitra-
tion or limits the ability of the arbitrators to make any
award.
(5) The requirements of this section shall apply only to new
agreements signed by an existing or new customer of a
member or member organization after
A-20
NEW YORK STOCK EXCHANGE, INC.
GUIDELINES FOR
CLASSIFICATION OF ARBITRATORS
In order to insure continued investor confidence in the arbi-
tration process, the New York Stock Exchange has adopted the
following policies with regard to the classification of securities
industry and public arbitrators and to the exercise of challenges
for cause:
1.
Individuals with close securities industry ties such as attor-
neys, accountants or other professionals who routinely
represent industry firms or individuals, will either be
reclassified as industry arbitrators or not be used.
. Individuals who have spent a substantial part of their
business careers in the securities industry shall always be
classified as industry arbitrators.
. Individuals who have spent a relatively minor portion of
their career in the securities industry shall not be classified
as public arbitrators until at least five (5) years have
elapsed from the date of their last industry affiliation. All
such past affiliations shall be disclosed and challenges for
cause based upon such past affiliations shall be sustained.
Close family relationships with broker/dealers shall be
disclosed and challenges for cause based on such relation-
ships shall be honored.
. Attorneys, accountants and other professionals whose
firms have close securities industry ties will still be classi-
fied as public arbitrators provided the attorney or other
professional does not routinely represent industry firms or
individuals. Challenges for cause based on such industry
ties will be honored.
All arbitrators shall read and become familiar with the
Code of Ethics for Arbitrators developed by the American
Bar Association and the American Arbitration Associa-
tion.
A-21
7. Any close question on arbitrator classification or on chal-
lenges for cause shall be decided in favor of public cus-
tomers.
8. Spouses of securities industry personnel may not serve as
arbitrators.
THESE GUIDELINES WILL BE USED BY THE
NEW YORK STOCK EXCHANGE IN
APPLYING RULE 607.
A-22
APPENDIX B
SURVEY TAKEN BY DELOITTE HASKINS & SELLS
AT THE REQUEST OF THE NEW YORK STOCK
EXCHANGE, INC., OF ARBITRATION AND LITIGA-
TION RESULTS OF CUSTOMER DISPUTES WITH SIX
BROKERAGE FIRMS
Deloitte Haskins & Sells
One World Trade Center
New York, New York 10048-0601
(212) 669-5000
International & Domestic Telex
4995706
New York Stock Exchange
11 Wall Street
New York, New York 10005
Attention: Mr. James E. Buck
Senior Vice President and Secretary
Dear Sir:
We have performed the procedures requested by you, as
described below, with respect to certain customer originated
cases which were terminated either by arbitration, litigation or
settlement, as shown in Exhibit A. The procedures that we per-
formed are summarized as follows:
1. We prepared a questionnaire to obtain data from various
securities brokerage firms (Exhibit B)
2. We selected six securities brokerage firms with large retail
brokerage business and distributed the questionnaires. The
six firms were Dean Witter Reynolds Inc., Merrill Lynch,
Pierce, Fenner & Smith Inc., Paine Webber Inc., Piper, Jaf-
fray & Hopwood Inc., Shearson Lehman Hutton Inc., and
Smith Barney, Harris Upham & Co. Inc.
3. We obtained responses from the firms regarding all cases
terminated during a recent three month period. The period
A-23
selected was the most recent period for which the firms could
obtain data. Such periods were between October 1, 1987 and
June 30, 1988.
4. We accumulated the data and prepared Exhibit A based
upon the responses received.
Because the information was obtained from securities broker-
age firms and was not subjected to procedures in accordance
with generally accepted auditing standards, we are not in a posi-
tion to express an opinion on the data obtained from the firms.
However, in our opinion, Exhibit A summarizes fairly the data
obtained.
Yours truly,
/s/
DELOITTE HASKINS & SELLS
A-24 A-25
Exhibit A Notes to Exhibit A Fi
Summary of Data Obtained : ; , ;
(dctne eenvents chown a heenade l. One isolated case was omitted because it was considered to
bias the remainder of the sample. The impact of this case is
Litigation as follows (dollar amounts shown in thousands):
Transferred
to All Litigated Totals
Litigated (1) Arbitrated Arbitration Arbitration Individual Case If Included
Number of Cases 66 142 35 -177 Average Elapsed Time 926 604
% 27.16% 58.44% 14.40% 72.84% (days)
Average Elapsed Time 599 434 1,056 557 Original Claim:
(days) Compensatory $ 15,000 $ 23,826
Original Claim: Punitive/Treble 100,000 155,075
Compensatory 8,826 $10,768 $10,333 $21,101 Total 115,000 178.901
Punitive/Treble 55,075 10,013 10,643 20,656 ,
Total 63,901 20,781 20,976 41,757 Payments:
Compensatory 200 1,859
—— (2) in eee eden ae Punitive/Treble 0 0
ompensatory / ‘ . .
Punitive/Treble 0 10 ; 11 Ls = sane
Total 1,659 4,067 2,115 6,182 Legal Costs:
a Outside Attorneys 348 1,366
Outside Attorneys «1,018 += 498.—s«1,392——‘1,890 aetna Aasoensions $ a
Internal Allocations 303 671 348 1,019 Total 354 1,675
Total 1,321 1,169 1,740 2,909 Average Original Claim - 2,670
Average Original Claim 968 146 599 236 Average Payment 7 28
Average Payment 25 29 60 35 Average Legal Costs - 25
Average Legal Costs 20 8 50 16 Payments as % of
Payments as % of 2.60% 19.57% 10.08% 14.81% Original Claim 17% 1.04%
Original Claim Legal Costs as % of
Legal Costs as 79.66% 28.75% 82.75% 47.06% Payments 177.00% 90.10%
of Payments
How Concluded Settlement -
See Notes to Exhibit A
A-26 A-27
2. Total Payments may be categorized as follows (in thou- Exhibit B
sands): - NEW YORK STOCK EXCHANGE
Litigated |
— - C Q lonnaire
Litigation Arbitrated Arbitration Arbitrated The New York Stock Exchange is preparing to respond to the
Securities and Exchange Commission's request to study arbitra-
174 - - -
Judgments : tion. To assist the Exchange in its preparation please provide
Arbitration | the information requested below for certain public customer
Awards - $2,226 $1,317 $3,543 | originated cases. The information should be given for each mat-
Settlements 1485 1,841 _798 2,639 | ter of dispute which was terminated either by arbitration, litiga-
tion or settlement during a selected three month period. The
Total $1,659 _ $4,067 $2,115 $6,182 period may be selected by you but it should be a recent period.
The matter of dispute should be given an identifying number.
The names of parties to the dispute need not be given.
1. Case number
2. Arbitrated LL Litigated (0 Litigated/Arbitrated (
3. If arbitrated:
NYSE CC
NASD lL
AAA Lo
Other
4. If litigated please give court or jurisdiction
Date of original claim
6. Amount of original claim:
Compensatory
Punitive/Treble _
7. Date matter was concluded
8. How concluded:
Arbitration Award
Judgment
Settlement
Other
OOO
A-28
9. Amount of Award, Judgment or Settlement:
Compensatory
Punitive/Treble
10. Costs of processing the dispute:
A. Fees of outside counsel
B. Allocated cost of internal legal department
Please send the completed information for your firm to Deloitte
Haskins & Sells, One World Trade Center, New York, New
York 10048-0601, Attention of Edward Lill no later than
September 23, 1988. For questions relating to your response
please call Edward Lill at Deloitte Haskins & Sells (212) 669-
5083.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.