Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Extension of Time to Answer Arbitration Complaints

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39664; File No. SR-NASD-98-07]

Self-Regulatory Organizations; Notice of Filing and Immediate

Effectiveness of Proposed Rule Change by the National Association of

Securities Dealers, Inc. Relating to Extension of Time to Answer

Arbitration Complaints

February 13, 1998.

Pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of

1934 (``Act''),\1\ notice is hereby given that on February 2, 1998,\2\

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 Association has designated the proposed rule change as constituting

a ``non-controversial'' rule change under paragraph (e)(6) of Rule 19b-

4 under the Act \3\ which renders the proposal effective upon receipt

of this filing by the Commission.\4\ The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

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\1\ 15 U.S.C. 78s(b)(3)(A).

\2\ The NASD filed a technical amendment on February 11, 1998 to

change the operative date of the proposed rule filing from March 1,

1998 to March 16, 1998. See letter from Jean I. Feeney, Assistant

General Counsel, NASD Regulation, to Katherine A. England, Assistant

Director, Market Regulation, Commission, dated February 6, 1998.

\3\ 17 CFR 240.19b-4(e)(6).

\4\ The Association has represented that this proposed rule

change: (1) Will not significantly affect the protection of

investors or the public interest; (ii) will not impose any

significant burden on competition, and (iii) will not become

operative for 30 days after the date of this filing, unless

otherwise accelerated by the Commission. The Association also has

provided at least five business days notice to the Commission of its

intent to file this proposed rule change, as required by Rule 19b-

4(e)(6) under the Act. Id.

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

of the Proposed Rule Change

NASD Regulation is proposing to amend Rule 10314 of the NASD's Code

of Arbitration Procedure (``Code'') to recognize and conform to current

practice and to reduce the administrative burden on NASD Regulation

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

language is in italics; proposed deletions are in brackets.

* * * * *

10314. Initiation of Proceedings

Except as otherwise provided herein, an arbitration proceeding

under this Code shall be instituted as follows:

(a) Unchanged.

(b) Answer-Defenses, Counterclaims, and/or Cross-Claims

(1) Within twenty (20) business 45 calendar days from receipt of

the Statement of Claim, Respondent(s) shall serve each party with an

executed Submission Agreement and a copy of the Respondent's Answer.

Respondent's executed Submission Agreement and Answer shall also be

filed with the Director of Arbitration with sufficient additional

copies for the arbitrator(s) along with any deposit required under the

schedule of fees. The Answer shall specify all available defenses and

relevant facts thereto that will be relied upon at the hearing and may

set forth any related Counterclaim the Respondent(s) may have against

the Claimant, any Cross-Claim the Respondents(s) may have against any

other named Respondents(s) and any Third-Party Claim against any other

party or person based upon any existing dispute, claim, or controversy

subject to arbitration under this Code.

(2)(A)--(B) Unchanged.

(c) A Respondent, Responding Claimant, Cross-Claimant, Cross-

Respondent, or Third-Party Respondent who fails to file an [a] Answer

within [twenty (20) business] 45 calendar days from receipt of service

of a Claim, unless the time to answer has been

[[Page 8728]]

extended pursuant to subparagraph (5) below, may, in the discretion of

the arbitrators, be barred from presenting any matter, arguments, or

defenses at the hearing.

(3)--(4) Unchanged.

(5) The time period to file any pleading, whether such be

denominated as a Claim, Answer, Counterclaim, Cross-Claim, Reply, or

Third-Party Pleading, may be extended for such further period as may be

granted by the Director of Arbitration or with the consent of the

initial claimant. Extensions of the time period to file an Answer are

disfavored and will not be granted by the Director except in

extraordinary circumstances.

(c)--(d) Unchanged.

* * * * *

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 Association 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 test of these statements may be examined at the places

specified in Item IV below. The Association 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

1. Purpose of Rule Change

NASD Regulation is proposing to amend Rule 10314 of the Code to

recognize and conform to current practice and to reduce the

administrative burden on NASD Regulation staff. Currently, Rule 10314

requires respondents to answer an arbitration claim within twenty

business days of receiving it. NASD Regulation's Office of Dispute

Resolution (``Office'') routinely grants requests for extension of the

time to answer for two weeks. Requests for extension generally arise

because respondents need additional time to develop a complete answer

to the claim. Complete answers are encouraged. In fact, under Rule

10314(b)(2)(A), to party who pleads only a general denial as an answer

may, upon objection by a party, be barred by the arbitrators from

presenting any facts of defenses at the hearing. In addition, under

Rule 10314(b)(2)(B), a party who fails to specify all available

defenses and relevant facts in the answer may, upon objection by a

party, be barred by arbitrators from presenting such facts or defenses

at the hearing.

The practice of granting extensions of time to answer, burdens the

staff with processing requests and responses, and it undermines the

certainty of the deadlines specified in the Rule. The NASD believes the

Code should reflect the current reality that most claims are not

answered within the 20 business day period that currently is specified.

Accordingly, the NASD has determined that Rule 10314 of the Code

should be amended to extend the time to answer a claim to 45 calendar

days and to eliminate routine extensions.\5\ Under the proposed

amendment, extensions are disfavored and will be granted only in

extraordinary circumstances or with the consent of the initial

claimant. The term ``extraordinary circumstances'' is not defined;

however, the NASD intends that the circumstances that would qualify for

an extension would be limited to unusual and unforeseeable personal or

professional conflicts that would make filing on time extremely

difficult or burdensome. Extending the time period to 45 calendar days

provides approximately the same amount of time to answer as is

currently the case, since 20 business days equal 28 calendar days, and

a two-week routine extension (14 calendar days) would bring the total

to 42 calendar days.

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\5\ The proposed rule change will not apply to simplified

arbitration claims filed under Rule 10302 of the Code. Answers to

claims involving less than $10,000 will continue to be due within 20

days of receipt of the Statement of Claim.

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The Securities Industry Conference on Arbitration (``SICA'') \6\

considered the proposed rule change at its October 16, 1997 meeting,

but declined to adopt it as part of the Uniform Code of Arbitration.

The other self-regulatory organization (``SRO'') members of SICA noted

that, because of the small number of claims they process, they do not

experience significant burdens related to administering extensions of

time to answer. SICA members also believe that the proposed change

would not reduce the number of extension requests and that it may

result in additional delays. Notwithstanding their reluctance to adopt

the proposed change, the members of SICA understood NASD Regulation's

position that the proposed amendment will eliminate the administrative

costs associated with granting extension in the time to answer claims.

Accordingly, SICA recommended that NASD Regulation adopt the change on

a pilot basis. The NASD has determined to adopt the rule without a

sunset provision, but the NASD will monitor the impact of the proposed

rule change.

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\6\ SICA is a group composed of representatives of the self-

regulatory organizations that provide dispute resolution forums,

public investors, and the securities industry. Staff of the SEC

attend as non-voting invitees. SICA was established with the

encouragement of the SEC to develop uniform rules for securities

arbitration (the ``Uniform Code of Arbitration'') and to provide a

forum for the various dispute resolution forums and users of those

forums to communicate about issues relating to securities industry

dispute resolution SICA member forums are encouraged to adopt the

provisions of the SICA Uniform Code of Arbitration, but are not

required to do so.

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2. Statutory Basis of Rule Change

NASD Regulation believes that the proposed rule change is

consistent with the provisions of Section 15A(b)(6) of the Act,\7\

which requires, among other things, that the Association's rules must

be designed to prevent fraudulent and manipulative acts and practices,

to promote just and equitable principles of trade, and, in general , to

protect investors and the public interest. The NASD believes that the

proposed rule change protects the public interest by making the time

period within which to answer uniform for all parties, whether or not

they are knowledgeable enough to seek an extension of time, and by

eliminating further extensions of time, absent extraordinary

circumstances, in order to make the arbitration process move more

expeditiously.

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\7\15 U.S.C. 78o-3(b)(6).

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B. Self-Regulatory Organization's Statement on Burden on Competition

The Association 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

The proposed rule change has been filed by the Association as a

``non-controversial'' rule change under Rule 19b-4(e)(6) under the

Act.\8\ Consequently, because the foregoing proposed rule change: (1)

Does not significantly affect the protection of investors or the public

interest; (2) does not impose any significant burden on competition;

and (3) does not become

[[Page 8729]]

operative until March 16, 1998, more than 30 days from February 2,

1998, the date on which it was filed, and the NASD provided the

Commission with written notice of its intent to file the proposed rule

change at least five days prior to the filing date, it has become

effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-

4(e)(6) thereunder.

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\8\ 17 CFR 240.19b-4(e)(6).

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At any time within 60 days of this filing, the Commission may

summarily abrogate this proposal if it appears to the Commission that

such action is necessary or appropriate in the public interest, for the

protection of investors, or otherwise in furtherance of the purposes of

the Act.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing, including whether the proposed rule

change is consistent with the Act. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, 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 (SR-NASD-98-07) and should be submitted by March 13, 1998.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\9\

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\9\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-4342 Filed 2-19-98; 8:45 am]

BILLING CODE 8010-01-M