[Federal Register Volume 59, Number 135 (Friday, July 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17257]
[[Page Unknown]]
[Federal Register: July 15, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34348; File No. SR-NASD-93-75]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change Relating to the
Referral of Matters by Arbitrators for Disciplinary Investigation
July 11, 1994.
On May 25, 1994, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'')\1\ a proposed rule
change pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposed rule
change amends Section 5 of the Code of Arbitration Procedure
(``Code'')\4\ to specify that arbitrators, at the conclusion of a
proceeding, may refer matters arising or discovered during the course
of an arbitration proceeding for disciplinary investigation.
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\1\The NASD initially submitted the proposed rule change on
December 16, 1993. However, on May 25, 1994, the NASD filed
Amendment No. 1, which amended and superseded the original rule
filing.
\2\15 U.S.C. 78s(b)(1)(1988).
\3\17 CFR 240.19b-4 (1993).
\4\NASD Manual, Code of Arbitration Procedure, Part I, Section
5, (CCH) 3705.
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Notice of the proposed rule change, together with the substance of
the proposal, was provided by issuance of a Commission release
(Securities Exchange Act Release No. 34146, June 2, 1994) and by
publication in the Federal Register (59 FR 29647, June 8, 1994). One
comment letter was received.\5\ This order approves the proposed rule
change.
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\5\See letter from James F. Fotenos, Esq., Fotenos & Suttle,
P.C. to Jonathan G. Katz, Secretary, SEC, dated July 1, 1994
(``Fotenos Letter'').
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In its filing, the NASD stated that potential violations uncovered
during arbitration hearings should be investigated by the NASD as part
of its comprehensive regulatory program. While customers who suffer a
financial loss as a result of misconduct by their registered
representative may bring arbitration actions, they often do not pursue
formal complaints with a self-regulatory organization (``SRO'')
necessary to trigger an investigation of the potential violation.
Further, while the filing of an arbitration complaint will alert an SRO
to the existence of a potential violation,\6\ because customer
complaints in arbitration often do not allege or disclose sufficient
information to indicate obvious misconduct on the part of a respondent,
they may not trigger a disciplinary investigation. Indeed, in such
cases, violations of the securities laws or the NASD's rules may not be
apparent until an arbitration hearing occurs and the parties testify
and introduce evidence about the relevant events. The NASD stated in
its filing that in some cases, it never is made aware of securities law
violations or violations of the NASD's rules, notwithstanding the fact
that the financial injury to the customer resulting from the violations
is the subject of an arbitration proceeding.
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\6\The filing of a customer-initiated arbitration complaint
against an associated person alleging damages of $10,000 or more
triggers a requirement of the member or associated person to amend
the associated person's Form U-4 or U-5, as appropriate. Information
supplied pursuant to such an amendment will be entered into the
Central Registration Depository and will also be forwarded to the
appropriate NASD District office for preliminary investigation.
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The NASD also stated in its filing that it has observed that
arbitrators seldom refer for disciplinary investigation matters which
come to their attention during the course of an arbitration proceeding.
Because the NASD believes that arbitration matters, and the evidentiary
material related to or produced in such matters, constitute a valuable
source of information concerning potential violations of the NASD's
rules and the federal securities laws, it believes that bringing such
information to the attention of the Association's regulatory staff
should improve the efficacy of the NASD's regulatory function. The NASD
stated in its filing that it believes that specifying a mechanism in
the Code for arbitrators to bring such information to the attention of
the NASD's regulatory staff for investigation will serve the public
interest by ensuring that potential violations of the NASD's rules and
the federal securities laws are not overlooked.
In addition, the NASD believes that it is important for arbitrators
to understand that the arbitration process is for the resolution of
disputes between the securities industry and others, and that there is
also a regulatory apparatus separate from the arbitration process which
is designed to address misconduct which affects the public interest and
the integrity of the financial markets. Thus, to the extent arbitrators
are aware that they may refer matters, in addition to or in lieu of
awarding punitive damages as part of awards,\7\ the fairness of the
arbitration process will be enhanced.
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\7\The NASD, in connection with this rule filing, is not
expressing any official position with respect to the ability of
arbitrators to award punitive damages.
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The proposed amendment to Section 5 specifies that if any matter
comes to the attention of an arbitrator during the course of a
proceeding the arbitrator may initiate a referral of the matter to the
Association for disciplinary investigation. The proposed amendment also
specifies, however, that any such referral should be initiated by an
arbitrator only after final disposition of the matter through
settlement or award. Although the NASD is not setting forth a specific
procedure for such referrals, the NASD stated in its filing that it
contemplates that arbitrators will direct referrals to the Association
through the Arbitration Department Staff and the Director of
Arbitration.
One commenter objected to the proposed rule change on the grounds
that it would cause arbitrators to believe that they must make
disciplinary referrals in all instances in which they find for
claimants alleging that a member firm or associated person has violated
the NASD's rules or securities laws.\8\ This commenter stated that the
effect of the proposed rule change would be to compromise the
independence of arbitrators. The Commission disagrees. The Commission
notes that the amendment provides that referral of any matter by an
arbitrator is permissive rather than mandatory. Futher, the Commission
believes that, because the disciplinary process is intended to address
misconduct which affects the public interest and the integrity of the
financial markets, the process is enhanced when the NASD receives
notice of violations from an important and reliable source of
information.
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\8\See Fotenos Letter, supra n. 5.
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The Commission finds that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act\9\ because it will
encourage arbitrators to bring information concerning potential
violations of the Association's rules and the federal securities laws
to the attention of the NASD's regulatory staff for investigation.
This, in turn, will serve the public interest by enhancing the ability
of the NASD's regulatory staff to take disciplinary action against
perpetrators of conduct adversely affecting the public interest and the
integrity of financial markets.
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\9\15 U.S.C. 78o-3.
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It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,
that File No. SR-NASD-93-75 be, and hereby is, approved.
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. 94-17257 Filed 7-14-94; 8:45 am]
BILLING CODE 8010-01-M