Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Procedures for Large and Complex Arbitration Cases

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34998; File No. SR-NASD-94-10]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by National Association of Securities Dealers, Inc. Relating to

Procedures for Large and Complex Arbitration Cases

November 22, 1994.

Pursuant to section19(b)(1) of the Securities Exchange Act of 1934

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

18, 1994, 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.\1\ The Commission is publishing this notice to solicit

comments on the proposed rule change from interested persons.

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

\1\The NASD initially submitted the proposed rule change on

February 15, 1994. Amendment No. 1, submitted on October 12, 1994,

clarified various aspects of the proposed rule change, altered the

manner in which arbitrators are selected to a panel and altered the

disclosures required with respect to unsuccessful settlement

discussions. Amendment No. 2 amended proposed Subsection (g) to

clarify that arbitrators may, at their own initiative, issue an

award accompanied by a statement of reasons or basis of award and

that parties may specifically agree to require arbitrators issue a

statement of reasons when they issue an award. See Letter from

Suzanne E. Rothwell, Associate General Counsel, NASD, to Mark

Barracca, Branch Chief, Over-the-Counter Regulation, SEC (available

in Commission's Public Reference Room).

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

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

of the Proposed Rule Change

The NASD is proposing to amend the Code of Arbitration Procedure

(``Code'')\2\ by amending Part III, Sections 43\3\ and 44\4\ and adding

Section 46 to provide procedures for large and complex arbitration

cases. Below is the text of the proposed rule change. Proposed new

language is in italics.

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

\2\NASD Manual, Code of Arbitration Procedure, (CCH) 3701 et

seq.

\3\NASD Manual, Code of Arbitration Procedure, Part III, Sec. 43

(CCH) 3743.

\4\NASD Manual, Code of Arbitration Procedure, Part III, Sec. 44

(CCH) 3746.

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

Code of Arbitration Procedure

* * * * *

Schedule of Fees for Customer Disputes

Sec. 43.

* * * * *

(h) If an eligible matter is submitted for arbitration as a large

and complex case under the procedures set forth in Section 46 of the

Code, or under procedures agreed upon by the parties, following the

Administrative Conference specified in Subsection 46(c) of the Code,

the fees and deposits for such matter shall be those set forth in the

schedule of fees for claims over $5,000,000.

* * * * *

Schedule of Fees for Industry and Clearing Controversies

Sec. 44.

* * * * *

(i) If an eligible matter is submitted for arbitration as a large

and complex case under the procedures set forth in Section 46 of the

Code, or under procedures agreed upon by the parties, following the

Administrative Conference specified in Subsection 46(c) of the Code,

the fees and deposits for such matter shall be those set forth in the

schedule of fees for claims over $5,000,000.

Procedures for Large and Complex Cases

Sec. 46.

Applicability

(a)(1) Any dispute, claim or controversy, otherwise eligible for

disposition under the Code shall be deemed a matter eligible for

disposition pursuant to the procedures set forth in this Section where:

(A) the claim or counterclaim of any party is at least $1 million,

including punitive or exemplary damages, but exclusive of interest,

costs and fees; or (B) all parties agree. Unless otherwise agreed to by

the parties, in the event of a conflict, the procedures set forth in

this Section shall supersede the procedures set forth elsewhere in the

Code.

(2) Any eligible matter shall be scheduled for an Administrative

Conference pursuant to Subsection (b), below. An eligible matter shall

not be eligible for further proceedings under this Section following

the Administrative Conference unless all parties agree.

(3) Any agreement among the parties to an eligible proceeding to

continue with further proceedings following the Administrative

Conference, either pursuant to the provisions of this Section or

pursuant to agreed upon procedures, may be modified or cancelled upon

the agreement of all parties and, if cancelled, the parties shall

proceed under the procedures set forth elsewhere in the Code. Following

the appointment of the last arbitrator pursuant to a procedure agreed

upon by the parties or pursuant to the procedure specified under

subsection (d)(3) of this Section, the withdrawal or disqualification

of an arbitrator shall not reopen consideration of the terms of such

agreement unless such reconsideration is ordered by the remaining

arbitrators.

(4) Unless waived in whole or in part by the Director of

Arbitration, the parties to an eligible matter shall pay the arbitrator

fees, hearing session deposits and any other fees and deposits required

pursuant to the Code prior to the commencement of the first or the next

hearing session before the arbitrators, as applicable. Unless

apportioned by the arbitrators, 50 percent of all other fees and

charges assessed on the parties following the payment of the hearing

session deposit specified in Sections 43 or 44 of the Code shall be

paid by the Claimants (apportioned equally among all Claimants) and 50

percent shall be paid by the Respondents (apportioned equally among all

Respondents). The arbitrators shall, in their award, determine the

party or parties responsible for arbitrator or forum fees and may

direct the return of monies previously deposited by a party. The waiver

of the deposit requirement shall not preclude the assessment of forum

fees against a party in the award. If an agreement to proceed under

this Section is cancelled, or the parties otherwise settle or abandon

the proceeding after agreeing to arbitrate under this Section, the

parties shall not be entitled to a refund of any fees or charges paid.

Administrative Conference

(b) The Director of Arbitration shall designate a member of the

Arbitration Department staff to conduct an Administrative Conference of

the parties to an eligible matter. The Administrative Conference may be

conducted in person or by telephone conference at the discretion of the

Director of Arbitration. The purposes of the Administrative Conference

include, but are not limited to:

(1) obtaining additional information about the nature of and amount

in dispute;

(2) determining the anticipated length of hearing and other

scheduling issues;

(3) determining the preferences of the parties with respect to the

qualifications of arbitrators;

(4) considering whether mediation or another non-adjudicative

method of dispute resolution would be of interest to the parties in

resolving the dispute;

(5) determining what discovery is sought by the parties and setting

a schedule to complete discovery and to resolve other procedural

disputes;

(6) considering the schedule, arrangements, form and scope of any

depositions or interrogatories sought;

(7) determining a schedule for settlement discussions and the

method for certifying to the NASD that settlement discussions occurred;

(8) developing a statement of (A) the matters in dispute, (B) the

positions of each party on the matters in dispute, and (C) the legal

authorities related to the matters in dispute to be brought to the

attention of the arbitrators;

(9) developing a schedule for: (i) identifying witnesses, including

experts (and with respect to experts, arranging for the production of

resumes and summaries of anticipated testimony, including any testimony

on calculating damages), and (ii) determining the availability of such

witnesses for hearings; and

(10) determining the form of the hearing record, and, if

transcribed, any arrangements for payment by the parties for

transcription and transmission of copies to the arbitrators.

Appointment of Arbitrators

(c)(1) Eligible matters shall be heard and determined by a panel of

three arbitrators, at least one of which shall be an attorney;

provided, however, that the parties may agree to submit an eligible

matter to a single mutually acceptable arbitrator selected pursuant to

the provisions of this subsection (c).

(2) Arbitrators shall be appointed (A) pursuant to Section 19 of

the Code if the parties cannot agree on another method of selection,

(B) provided the parties agree, pursuant to the procedures set forth in

paragraph (3), below, or (C) pursuant to another procedure agreed upon

by the parties.

(3)(A) Each party will be provided simultaneously with two lists of

arbitrators chosen from the pool of arbitrators: (i) the first list

will be securities industry arbitrators; and (ii) the second list will

be public arbitrators. Each list also will include the employment and

background information specified under Section 21 of the Code.

Additional biographical information about arbitrators appearing on the

lists will be furnished to a party upon request. Copies of such

additional information will be forwarded to all parties. As soon as

practicable following the appointment of the last arbitrator, the

arbitrators shall comply with and the Director shall act in accordance

with the provisions of Section 23 of the Code.

(B) Not more than 20 business days following transmittal of the

lists of arbitrators, the parties shall: (i) challenge, either on a

peremptory basis for cause, any or all arbitrators on the lists; (ii)

number any remaining arbitrators on the lists in order of preference,

with one (1) being the most preferred; and (iii) return the lists with

challenges and preferences noted to the Director of Arbitration. In the

event a party fails to return the lists to the Director of Arbitration

within the time specified, all arbitrators on the lists will be deemed

acceptable to that party.

(C) Following receipt of the lists from the parties, the Director

of Arbitration shall prepare consolidated lists of arbitrators

acceptable to both parties ranked according to consolidated preference

rankings. Consolidated preference rankings shall be determined by

adding the numerical ranking of each party on each arbitrator and

ranking the arbitrators according to sum of the rankings. The Director

of Arbitration shall then extend invitations to the highest ranked

attorney arbitrators on either list, and appoint an attorney from

attorneys accepting the invitations, giving preference to acceptances

in the order of the consolidated preference ranking of the arbitrators.

The Director of Arbitration shall then extend invitations to all of the

remaining ranked arbitrators, including attorney arbitrators who

accepted but were not named to the panel in the first round, and

appoint a panel from arbitrators accepting the invitations, giving

preference to the acceptances in the order of the consolidated

preference ranking of the arbitrators.

(D) If a complete panel cannot be appointed from the consolidated

lists, or after invitations have been extended to arbitrators on the

consolidated lists and declined, the Director of Arbitration will

submit lists of proposed arbitrators to each party as provided under

Section 19 of the code. Arbitrators already named to the panel pursuant

to Subsection (c), above, will remain on the panel. Parties may

exercise unlimited challenges for cause and one peremptory challenge

with respect to arbitrators appointed pursuant to Section 19 of the

Code.

(E) In the event of a successful challenge for cause following

appointment of the panel, the Director of Arbitration may reopen the

selection process at the point in the process where the last arbitrator

was selected and continue with the process as though the challenged

arbitrator had never been appointed.

(4) Upon the agreement of the parties, or at the discretion of the

Director of Arbitration according to the magnitude and complexity of an

eligible matter, compensation shall be paid to the arbitrators by the

parties in addition to the honorarium specified by the Board of

Governors. The amount of any compensation to be paid to the arbitrators

by the parties will be decided before the arbitrators are selected.

The parties shall deposit any additional compensation agreed or

ordered to be paid with the Association no later than 10 days prior to

the first hearing. Such additional compensation shall be assessed and

paid pro rata on the basis of the number of parties. The arbitrators

may assess any additional compensation paid pursuant to this subsection

against any or all of the parties as part of the final award.

Preliminary Hearing

(d) As promptly as practicable after the selection of the

arbitrators, the arbitrators shall convene a preliminary hearing of the

parties or their representatives, either in person or by telephone

conference. The Director of Arbitration shall appoint one member of the

panel to preside over the preliminary hearing and, with respect to any

matter arising before or after the preliminary hearing, to act on

behalf of the panel. Matters that may be considered at the preliminary

hearing include, but are not limited to:

(1) stipulations to any uncontested facts;

(2) exchange and pre-marking of exhibits or evidence that each

party believes may be offered at the hearing;

(3) the schedule, form, scope and use of any sworn statements and/

or depositions;

(4) whether mediation or another non-adjudicative method of dispute

resolution would be of interest to the parties in resolving the

dispute; and

(5) issues which are or will be ripe for prehearing resolution.

Nothing in this subsection, however, shall prevent the arbitrator

conducting a preliminary hearing from referring any matter to the full

panel for consideration.

Settlement of Eligible Matters

(e) If an eligible matter is not settled prior to the first hearing

date, the parties shall submit a joint statement or individual

statements to the arbitrators setting forth the date(s) and duration of

settlement discussion, and the fact that such settlement discussions

did not result in settlement. Such statements shall not disclose the

dollar value of any settlement offer or proposal discussed by the

parties.

Management of Proceedings

(f)(1) Arbitrators are authorized to take such actions and issue

such rulings as are necessary or desirable consistent with the

objective of a just, speedy and cost-effective resolution of an

eligible matter.

(2) Arbitrators are authorized to order, at the request of a party,

the deposition of, or the propounding of interrogatories to, persons

who may possess information relevant to the disposition of an eligible

matter and who may not be available to testify at the hearings. Unless

otherwise agreed to by the parties, depositions or interrogatories

shall be limited to determining and preserving testimony and facts

relevant to the determination of the matter, not for conducting

discovery. Unless otherwise agreed to by the parties, interrogatories

shall be limited to twenty (20) questions, including parts and

subparts. Arbitrators are authorized to order audio/video depositions

or audio/video site review.

(3) Arbitrators are authorized to conduct special proceedings as

necessary (either through a hearing or on the written submissions of

the parties, at the discretion of the arbitrators) to rule on

dispositive motions, such as motions for summary judgment as to

liability or damages or the applicability of a statute of limitations.

Form of Award

(g) The award of the arbitrators shall be in the form prescribed in

Section 41 of the Code. In addition, all parties may specifically agree

that the award be accompanied by a statement of reasons or basis of the

award.

Temporary Effectiveness

(h) This Section 46 shall remain in effect for one year from [the

effective date of the proposed rule change] unless modified or extended

prior thereto by the board of Governors.

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

As a result of the experience gained managing the securities

industry's largest arbitration forum, the NASD has become aware that

certain large and complex cases may require special management. In

response to the perceived need, the NASD is proposing to amend the Code

to add a new section 46 setting forth procedures for handling and

managing large and complex cases. The proposed procedures are patterned

after rules recently adopted by the American Arbitration Association

(``AAA'') for processing large and complex cases. The proposed

procedures also add the hearing plan features of the arbitration rules

of the National Futures Association. The NASD is aware that many of the

procedures provided in the proposed rules are already available in the

Code; however, placing them in the proposed rules serves to emphasize

the utility of these procedures for large and complex cases.

The procedures are intended to encourage the parties to come to an

agreement on the rules that will govern the disposition of the matter.

Beyond the mandatory administrative conference, any party to an

eligible matter must agree to continue with a proceeding under the

rules. The emphasis in the rules is on flexibility: most of the

provisions of the proposed rules allow the parties to adopt an

alternative procedure of their own creation if they can come to an

agreement on such procedures.

The proposed rules include procedures for an administrative

conference, the appointment of arbitrators, and a preliminary hearing.

The provisions of the proposed rule change are described in more detail

below.

Finally, the NASD is proposing to adopt the proposed rules as a one

year pilot program. They will remain in effect for cases filed within

one year from the date of effectiveness unless modified or extended by

the Board of Governors. During the pilot program the NASD will monitor

the implementation and usefulness of the proposed rules in order to

determine whether to make them a permanent addition to the Code.

Fees

The NASD is proposing to amend Sections 43 and 44 of the Code,

which specify the schedule of fees for customer disputes and industry

disputes, respectively, to add subsections specifying that the fees and

deposits for matters submitted for arbitration under the large and

complex case rules shall be the fees and deposits otherwise specified

for claims over $5,000,000. The increased complexity of managing large

and complex cases necessitates higher fees and deposits to defray the

costs to the NASD associated with providing a forum for such matters.

Applicability

Subsection (a) of the proposed rule change specifies that the

procedures for large and complex cases will be applicable to disputes,

claims or controversies (referred to in the proposed rules as an

``eligible matter'') where the claim or counterclaim is at least $1

million, including punitive or exemplary damages, but exclusive of

interest costs or fees, or where the parties agree that the matter

should be subject to the procedures. This provision permits parties

with claims of less than $1 million to have their matter heard pursuant

to these procedures if, in their judgment, it would be advantageous to

do so.

An eligible matter is required to be set over for an Administrative

Conference and, unless the parties agree, the matter may not continue

under the large and complex case procedures following the

Administrative Conference. The procedures for an Administrative

Conference, discussed in detail below, bring the parties to an eligible

matter together to consider the various issues involved in managing the

matter and to determine if any agreement can be reached on such issues.

If the parties fail to agree on procedures, they are not forced to

continue under the large and complex case rules; this reflects the

intent of the NASD not to force the structure of the large and complex

case rules on an unwilling party.

Where, however, the parties have agreed to continue the proceedings

under the large and complex case rules, Subsection (a) provides that

the agreement becomes binding on the parties once the last arbitrator

is named. The NASD believes that once the parties have come to an

agreement on the procedures to be employed on an eligible matter, and

the effort and commitment necessary to the naming of the arbitrators

has been expended, the parties should be compelled to follow through on

the arbitration of the matter under the large and complex case rules.

In this regard, if, at any point after such an agreement becomes

binding, a member of the NASD or an associated person refuses to go

forward with the arbitration of the matter and, instead seeks to

dismiss the action and refile it in court, another arbitration forum,

or with the NASD as an ordinary arbitration action, the NASD would

regard such a failure to go forward as a violation of the member's

obligation to arbitrate such matters under the Code subjecting the

member or associated person to potential disciplinary action. Further,

any failure by any party to go forward after the agreement becomes

binding may be addressed under various provisions of the Code which

permit the arbitrators to issue orders, penalize parties and make

awards without the attendance or participation of a party.\5\

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

\5\See Sections 29, 32, 33, and 35 of the Code of Arbitration

Procedure.

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

Administrative Conference

Subsection (b) of the proposed rule change provides for the

convening of an Administrative Conference of the parties to an eligible

matter to discuss, among other things, the claim and amount in dispute,

arbitrator preferences, procedures, discovery, scheduling and

settlement. The intent of this provision is to bring the parties

together to air and discuss all issues related to the arbitration, to

exchange information on procedural and scheduling matters, and to agree

on as many such procedural and scheduling issues as possible in order

to facilitate the orderly and expeditious resolution of the matter. If

it becomes apparent that one or more parties are not amenable to

proceeding under the large and complex case rules, the Administrative

Conference will have served its purpose and the matter may proceed

under the other provisions of the Code.

Appointment of Arbitrators

Subsection (c) of the proposed rules provides for the appointment

of a panel of three arbitrators to hear eligible matters. At least one

of the arbitrators must be an attorney.

The NASD will establish and maintain a pool of arbitrators to

preside over large and complex cases. The NASD intends to identify

arbitrators qualified to preside over such cases on the basis of

training, varied knowledge and expertise. The qualifications of an

arbitrator for inclusion in the pool will be based on, among others,

the following factors: (1) attendance and successful completion of

course(s) relating to large and complex cases; (2) experience and

regular service as an arbitrator; (3) knowledge or expertise in the

subject matter or technical aspects of the dispute; (4) length of

service as an Association arbitrator; and (5) professional and business

expertise.

While the NASD intends to establish pools of specially qualified

arbitrators, the NASD will also draw from its regular pool of

arbitrators as necessary to fill panels for eligible matters. Moreover,

in order to attract arbitrators to serve on panels hearing eligible

matters, the NASD is proposing to provide a mechanism to provide

additional compensation for such arbitrators. Paragraph (c)(4) of the

proposed rule change provides that the parties may agree to pay, or the

Director of Arbitration has discretion to assess, additional

compensation to be paid to the arbitrators by the parties in addition

to the honorarium specified by the Board of Governors in the

consideration of the magnitude and complexity of an eligible matter.

The amount of any such additional compensation must be decided by the

Director of Arbitration and agreed to by the parties prior to the

selection of the arbitrators and, pursuant to Subsection (a)(4), must

be paid prior to the first hearing or the next scheduled hearing, as

applicable.

The NASD intends that the staff member assigned to conduct the

Administrative Conference will discuss the availability of arbitrators

with the parties at the Administrative Conference and obtain the

agreement of the parties on how to proceed if availability is a

problem. The parties may, for instance, make further proceedings under

the large and complex case rule contingent upon the availability of

specially qualified arbitrators.

Finally, while the rules contemplate that eligible matters will be

heard by panels of three arbitrators, at least one or whom is an

attorney, paragraph (c)(1) of the proposed rule change permits the

parties to agree to submit an eligible matter to a single mutually

acceptable arbitrator.

The appointment of a panel may be accomplished in one of three

ways: (1) pursuant to the usual procedures in Section 19 of the Code,

if the parties cannot agree on another method; (2) pursuant to a

procedure set forth in paragraph (c)(3) of the proposed rules; or (3)

pursuant to a procedure agreed to by the parties.

The procedure set forth in paragraph (c)(3) of the proposed rules

provides that each party will be simultaneously provided with two lists

of arbitrators: the first list will be securities industry arbitrators

and the second list will be public arbitrators. The lists will include

certain biographical information, with other information available on

request. Following receipt of the list each party must challenge

peremptorily or for cause any or all arbitrators on the lists. Then

each party must rank the remaining arbitrators on their lists in order

of preference with one (1) being most preferred. Any party failing to

challenge, rank and return the lists will be deemed to have accepted

all listed arbitrators.

After receiving the lists from the parties the Director of

Arbitration will prepare two consolidated lists (one of public

arbitrators and one of industry arbitrators) of the arbitrators by

combing the lists of acceptable arbitrators and consolidating the

rankings. This is accomplished by preparing a combined list of only

those arbitrators acceptable to all parties and then adding the number

rankings assigned by each party together to achieve a consolidated

rank.

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

Consolidated

Party A Party B rank

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

Arbitrator #1........................... 1 3 4

Arbitrator #2........................... 3 2 5

Arbitrator #3........................... 4 1 5

Arbitrator #4........................... 2 5 7

Arbitrator #5........................... 5 4 9

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

In order to ensure that the panel has at least one attorney, the

Director will extend the first invitations to the highest ranking

attorneys on either list, giving preference to acceptances in the order

of the ranking. Once an attorney has been named to the panel, the

Director will continue to extend invitations to arbitrators in the

order of their consolidated rank until the panel has been filled by the

required number of public and industry arbitrators. Paragraph (c)(3)

also provides for repeating and finalizing the process in an

abbreviated manner if the first attempt at appointing a panel from the

lists does not succeed in completing a panel.

Finally, pursuant to proposed subparagraph (c)(3)(E), if a

challenge for cause is successful after the appointment of the panel is

complete, subparagraph (c)(3)(E) permits the Director of Arbitration to

reopen the selection process at the point where the last arbitrator was

appointed and continue the process as though the challenged arbitrator

had never been appointed.

Preliminary Hearing

Subsection (d) of the proposed rule change provides that promptly

following the appointment of the panel the arbitrators will convene a

preliminary hearing. The preliminary hearing will be held by one of the

arbitrators, appointed by the panel, and the presiding arbitrator will

have the power to act on behalf of the panel on any matter arising

before the hearing. The presiding arbitrator will also have unlimited

discretion to refer any such matter to the full panel for

consideration. The matters which may be brought to the presiding

arbitrator for resolution include: stipulations as to uncontested

facts, exchanging and premarking exhibits to be offered at the hearing,

and the schedule, form, scope and use of sworn statements and

depositions. In addition, the presiding arbitrator may consider any

other matter ripe for resolution at the prehearing stage, including

encouraging mediation or other non-adjudicative resolution of the

matter.

Settlement of Eligible Matters

Subsection (e) of the proposed rule change provides that if an

eligible matter is not settled prior to the first hearing date, the

parties must submit either a joint statement or individual statements

to the arbitrators summarizing any settlement discussions that

occurred. The statement must include a record of the dates of any

discussions and the issues discussed by the parties, but must not

include any statement disclosing the dollar value of any settlement

offer or proposal discussed by the parties. The intent of this proposed

subsection is to provide the arbitrators with additional information

concerning the issues in dispute. The prohibition against disclosing

dollar amounts discussed is intended to avoid suggesting dollar values

for any award ultimately made by the arbitrators.

Management of Proceedings

Subsection (f) of the proposed rule change sets forth the general

and specific powers granted to the arbitrators to permit them to manage

the proceedings. The goal of the arbitrators under the general powers

granted in paragraph (f)(1) is to act and rule on matters before them

in a manner consistent with the just, speedy and cost-effective

resolution of the matter. Further, the arbitrators may, without

limitation, delegate their powers under subsection (f) to a single

arbitrator to be exercised either in the preliminary hearing or at any

other time prior to the hearing. Among the specific issues on which the

arbitrators may act or rule are dispositive motions, including motions

to dismiss on any grounds, including the applicability of a statute of

limitations, or motions for summary judgment on specific issues such as

liability or damages, or on the whole matter.

Depositions and interrogatories are intended to be limited to

determining and preserving testimony and facts relevant to the

determination of the matter, not for conducting unlimited discovery.

Further, interrogatories are limited to twenty questions, including

parts and subparts. These limitations may be modified upon the

agreement of the parties.

Finally, the arbitrators are authorized to conduct special

proceedings as necessary to resolve any such matters before them. Such

special proceedings may take any form specified by the arbitrators, and

may be conducted in person, via teleconference or on written

submissions alone, or by any other method.

Form of Award

Subsection (g) of the proposed rule change specifies that the award

in an eligible proceeding shall be in the form prescribed in Section 41

of the Code. Arbitrators may, at their own initiative, issue an award

that is accompanied by a statement of reasons or basis of the award.

Although not specifically addressed by Section 41, it has been the

position of the NASD that arbitrators are permitted under that Section

to issue a statement of reasons or basis for the award and arbitrators

have issued such statements in many cases.

In addition, arbitrators must issue such a statement if the parties

specifically so require. Thus, in situations where the arbitrators

would not otherwise issue a statement accompanying the award, the

arbitrators would nonetheless do so where all of the parties have

specifically agreed that a statement of the reasons or basis of the

award accompanying the award itself.

Sunset Provision

Subsection (b) of the proposed rule change specifies that the large

and complex case rules will remain in effect for one year following the

effective date, unless modified or extended by the Board of Governors.

The NASD believes that the proposed rule change is consistent with

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

procedures in the Code for large and complex cases will serve the

public interest by enhancing the satisfaction and perceived fairness of

such proceedings by the parties to such proceedings. To the extent the

parties to such proceedings express increased satisfaction with the

resolution of eligible matters, the goal of providing the investing

public with a fair, efficient and cost-effective forum for the

resolution of disputes will have been advanced.

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

\6\15 U.S.C. Sec. 78o-3.

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

(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. The Commission requests that, in

addition to any general comments concerning whether the proposed rule

change is consistent with Section 15A(b)(6) of the Act, commentators

address the following:

Commenters are requested to focus attention on the fact that the

proposed rule change would alter basic responsibilities of the parties

in arbitrations administered under the proposed rule for large and

complex cases. Commenters are requested to consider whether the

proposed rule change is clear and whether it strikes an appropriate

balance in responsibilities for claimants and respondents. Commenters

should also consider that the NASD has determined to produce prior to

the effective date of the rules an educational pamphlet that would be

provided to all parties considering the use of these alternative

rules.\7\ The proposed pamphlet would address the issues that parties

should address in a written document prior to submitting a matter for

resolution under the alternative rules, including: (1) arbitrator

selection; (2) additional fees for arbitrator compensation; (3) whether

the parties will use the prehearing discovery rules included in these

alternative rules, whether they will use the prehearing discovery rules

in the regular rules, or some other prehearing procedures; and (4)

whether the parties are contracting for the arbitrators to provide a

written statement of reasons. The pamphlet also will disclose that if

the parties fail to address any of these issues, the issues may need to

be resolved by the arbitration department or the arbitrators, as

appropriate under the assignment of responsibilities under the large

and complex case rules and other Code provisions. The pamphlet will

also highlight the fact that under the alternative rules arbitrators

may dismiss the case, or any part of it, on the written submissions of

the parties without any oral hearing.

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

\7\See letter dated October 12, 1994 to Mark Barracca, Esq.,

Branch Chief, SEC, from Suzanne E. Rothwell, Associate General

Counsel, NASD (``NASD Letter'').

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

Comment is solicited on whether the provisions for prehearing

discovery contained in Subsection (f)(2), which provides for discovery

only upon the agreement of the parties would be likely to have a

balanced effect on claimants and respondents. Do the rules clearly

advise the parties that unless they reach agreement on the scope of

desired discovery before submitting to the rules for large and complex

cases, they are restricted to depositions and interrogatories taken for

the preservation of evidence, rather than to the use of such techniques

for conducting discovery? Is the scope of discovery proposed in the

proposed rule change appropriate for the large and complex matters to

which these proposed rules apply?

Commenters should note that under the proposed rule change,

arbitrators are authorized to order depositions of, or interrogatories

to:

Persons who may possess information relevant to the disposition

of an eligible matter and who may not be available to testify at the

hearings. Unless otherwise agreed to by the parties, depositions or

interrogatories shall be limited to determining and preserving

testimony and fact relevant to the determination of the matter, not

for conducting discovery.

Section 32 of the NASD's current arbitration rules provides that an

arbitrator may ``issue subpoenas, direct appearances of witness and

production of documents, set deadlines for compliance, and issue any

other ruling which will expedite the arbitration proceedings.''

The NASD Letter stated that ``[w]hile the standards under Section

32 and proposed Subsection (f)(2) for the ordering of depositions and

interrogatories by arbitrators are different, one is not necessarily

more restrictive than the other particularly in view of the fact that

Subsection (f)(2) allows the parties the flexibility to decide the

scope of their own discovery.'' Comment is specifically solicited on

whether the parties' ability to bargain for an agreed upon scope of

discovery before consenting to arbitrate under the large and complex

rules provides sufficient safeguards to assure that the proposed

amendment will operate in a balanced manner? Can reliance on agreement

by the parties, who may have different bargaining strengths and

different needs for the discovery of documents and information provide

for a balanced administration of these procedures?

Persons making written submissions should file six copies thereof

with the Secretary, Securities and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549. Copies of the submission, all

subsequent amendments, all written statements with respect to the

proposed rule change that are filed with the Commission, and all

written communications relating to the proposed rule change between the

Commission and any person, other than those that may be withheld from

the public in accordance with the provisions of 5 U.S.C. 552, will be

available for inspection and copying 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 December 22, 1994.

For the Commission, by the Division of Market Regulation,

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

Jonathan G. Katz,

Secretary.

[FR Doc. 94-29355 Filed 11-28-94; 8:45 am]

BILLING CODE 8010-01-M