Self-Regulatory Organizations; Filing of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Exclusion of Class Action Claims From Arbitration

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33506; File No. SR-NASD-93-65

Self-Regulatory Organizations; Filing of Proposed Rule Change by

National Association of Securities Dealers, Inc. Relating to Exclusion

of Class Action Claims From Arbitration

January 24, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November

4, 1993, the National Association of Securities Dealers, Inc. (``NASD''

or ``Association'') filed with the Securities and Exchange Commission

(``SEC'' or ``Commission'') the proposed rule change as described in

Items I, II, and III, below, which Items have been prepared by the

NASD. The Commission is publishing this notice to solicit comments on

the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The NASD is proposing to amend Section 12(d)(3) of the Code of

Arbitration Procedure (``Code'') relating to the exclusion of class

action claims from arbitration. Below is the text of the proposed rule

change. Proposed new language is italicized.

Code of Arbitration Procedure

Required Submission

Sec. 12.

* * * * *

(d) Class Action Claims

* * * * *

(3) No member or associated person shall seek to enforce any

agreement to arbitrate against a customer, other member or person

associated with a member who has initiated in court a putative class

action or is a member of a putative or certified class with respect to

any claims encompassed by the class action unless and until: (A) The

class certification is denied: (B) the class is decertified: (C) the

customer, other member or person associated with a member is excluded

from the class by the court: or (D) the customer, other member or

person associated with a member elects not to participate in the

putative or certified class action or, if applicable, has complied with

any conditions for withdrawing from the class prescribed by the court.

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the 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. The NASD has prepared summaries, set forth in Sections

(A), (B), and (C) below, of the most significant aspects of such

statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

Section 12(d)(3) of the Code bars members or associated persons

from seeking to enforce an agreement to arbitrate against a customer

where the customer has initiated in court a putative class action or is

a member of a putative or certified class with respect to any claims

encompassed by the class action. The section, however, omits reference

to claimants who are associated persons and member-to-member disputes.

As a result, some respondents have argued that class actions

encompassing such claimants can be submitted to arbitration under the

Code. The NASD has determined that the original intent of the section

was to exclude class action claims by associated persons, including

employment-related claims, and other industry class actions from

arbitration, as well as customer-related class actions. Accordingly,

the NASD is proposing to amend Section 12(d)(3) of the Code to clarify

that the prohibition in the provision is total and encompasses class

actions in which a member or an associated person may be the subject of

a class action.

The proposed amendment to Section 12(d)(3) of the Code adds

references to ``other member and person associated with a member'' to

clarify that the prohibition against seeking to enforce an agreement to

arbitrate applies not only to class actions in which a claimant is a

customer, but to class actions in which an associated person or a

member is a party.

The NASD believes that the proposed rule change is consistent with

the provisions of Section 15A(b)(6) of the Act\1\ in that the proposed

rule change will facilitate the arbitration process for all

participants by preventing certain categories of actions from being

brought in the NASD's arbitration forum and for which forum does not

have the procedures or resources to handle. The proposed rule change,

by preventing such claims from being brought in arbitration, will also

facilitate the disposition of such actions in court by preventing the

diversion of resources to efforts to enforce agreements to arbitrate

such claims.

---------------------------------------------------------------------------

\1\15 U.S.C. 78o3 (1988).

---------------------------------------------------------------------------

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

The 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

Written comments were neither solicited nor received.

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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

Copies of the submission, all subsequent amendments, all written

statements with respect to the proposed rule change that are filed with

the Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. 552, will be available for inspection and copying in the

Commission's Public Reference Room. Copies of such filing will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to the file number in the caption

above and should be submitted by February 21, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

[FR Doc. 94-2016 Filed 1-28-94; 8:45 am]

BILLING CODE 8010-01-M