[Federal Register Volume 63, Number 229 (Monday, November 30, 1998)]
[Notices]
[Pages 65834-65837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31818]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40695; File No. SR-NYSE-98-27]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to Arbitration
Rules
November 19, 1998.
I. Introduction
On September 8, 1998, the New York Stock Exchange, Inc. (``NYSE''
or ``Exchange'') filed with the Securities and Exchange Commission
[[Page 65835]]
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Rule 600 to exclude shareholder
derivative actions from arbitration; to amend Rules 604 and 621 to
allow arbitrators to dismiss pleadings, with or without prejudice, as a
sanction for a willful failure to comply with their orders; to amend
Rules 608 and 613 to increase the minimum notice of the appointment of
arbitrators and the initial hearing date from eight to fifteen business
days; to amend Rule 608 to reflect the proposed change to Rule 609 to
extend the time within which to exercise a peremptory challenge, with
regard to replacement arbitrators; to amend Rules 609 and 611 to extend
the time to exercise a peremptory challenge from five to ten business
days; and to amend Rule 627 to require the award to be served
contemporaneously on all parties and to allow the Exchange to serve
awards via facsimile or other electronic means. The proposed rule
change also adds new Rule 638 to require, on a two year pilot basis, a
single mediation session in non-customer cases, where the amount of the
claim is $500,000 or more. Rule 638 will also provide mediation, with
the parties' consent, in cases involving public customers where the
amount of the claim is $500,000 or more, and provide for mediation in
all other cases upon the consent of the parties and at their expense.
Finally, the proposed rule change adds new Rule 639 which will require,
on a two year pilot basis, an administrative conference between the
parties and arbitrators in all cases where the amount of the claim is
$500,000 or more. The NYSE states that the proposed rule change, with
the exception of amendments to Rule 600 and new Rules 638 and 639, is
based on proposals developed by the Securities Industry Conference on
Arbitration.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
Notice of the proposed rule change, together with the substance of
the proposal, was published for comment in Securities Exchange Act
Release No. 40524 (October 6, 1998), 63 FR 55170 (October 14, 1998).
One comment was received on the proposal.\3\ This order approves the
proposed rule change as proposed.
---------------------------------------------------------------------------
\3\ See letter from Stephen G. Sneeringer, Chairman, Securities
Industry Association (``SIA'') Arbitration Committee, to Margaret H.
McFarland, Deputy Secretary, Commission, dated November 3, 1998
(``SIA Letter'').
---------------------------------------------------------------------------
II. Description
The Exchange proposes to amend Rule 600 to exclude shareholder
derivative actions from arbitration. The Exchange also proposes
amendments to Rules 604 and 612 to provide that arbitrators may dismiss
claims or defenses, with or without prejudice, as a sanction for a
willful failure to comply with their orders. The Exchange will keep
records of any dismissals under the amended rules. The proposed rule
change amends Rules 608 and 613 to provide that the minimum notice of
the appointment of arbitrators and the initial hearing date be extended
from eight to 15 business days. Additionally, the proposed rule change
amends Rules 609 and 611 to extend the parties' time to exercise a
peremptory challenge from five to ten business days after notification
of the identity of the arbitrators. The proposed rule change also
amends Rule 627 to provide that the Exchange may serve awards via
facsimile or other electronic means, and that the Director of
Arbitration (``Director'') shall try to serve a copy of the award
contemporaneously on all parties.
The proposed rule change adds Rule 638 which requires, on a pilot
basis for two years from the date of Commission approval, a single
mediation session, in non-customer cases where the amount of the claim
is $500,000 or more. The mediator's fee for this first session will be
borne by the Exchange. The pilot will also provide for mediation, with
the parties' consent, in cases involving public customers where the
amount of the claim is $500,000 or more. The mediator's fee for this
first session also will be borne by the Exchange. Moreover, mediation
will be available upon the consent of the parties and at their expense
in all other cases. Where the parties have not selected a mediator on
their own, the Exchange will provide the names and profiles of five
mediators.\4\ The parties have ten days to agree on a mediator from the
list, or choose their own mediator. If the parties cannot agree, the
Director will select a mediator from the list, unless the parties
object to all the names on the list, in which case the Director will
appoint a mediator from outside the list.
---------------------------------------------------------------------------
\4\ If the parties select their own mediator from outside the
list of mediators proposed by the NYSE, the parties are responsible
for any difference in the mediator's fee.
---------------------------------------------------------------------------
The NYSE states that the current ``Arbitrator Profile'' form will
be used to provide the parties with biographical and disclosure data
regarding the proposed mediators. The profile form includes the
employment histories of the mediators for the past ten years and any
information disclosed regarding conflicts of interest. The profile also
includes information about the mediator's education, business and
professional background, mediation experience and training and
membership in professional associations.
Finally, the proposed rule change adds Rule 639, which requires, on
a pilot basis for two years from the date of Commission approval, an
administrative conference between the parties and arbitrators in all
cases where the amount of the claim is $500,000 or more. The Director
shall schedule the conference within thirty days after the answer is
filed. At the hearing, the arbitrators can establish a schedule for
discovery and the hearing, issue subpoenas and direct the appearance of
witnesses, and resolve or narrow any other issue which may expedite the
arbitration.
III. Summary of Comments
The Commission received one comment letter on the proposal, which
supports the proposed amendments and, subject to certain qualifications
and clarifications, supports the new rules pertaining to mediation and
administrative conferences.\5\
---------------------------------------------------------------------------
\5\ See supra note 3.
---------------------------------------------------------------------------
The SIA supports proposed Rule 638 to the extent it would encourage
litigants in non-customer cases of $500,000 or more to participate in a
mediation session, but opposes the portion of Rule 638 which would make
a mediation session mandatory with respect to these cases. The SIA
believes that mediation should always be a voluntary process. In
addition, the SIA requests that the final rules, adopting release, or
accompanying Information Circular clarify that the mediation sessions
or administrative conference provided for in Rules 638 and 639,
respectively, be conducted via telephone at the request of any party.
The NYSE, in its response to the SIA Letter,\6\ agrees that
mediation by its very nature is a voluntary process, but that the
proposed rule change does not alter that. The NYSE states that while
the rule requires participation in a mediation session, it does not
mandate that the mediation be successful, nor does it require the
parties to compromise their positions. The NYSE developed the mediation
program based upon its experience in non-customer disputes involving
large damage claims;
[[Page 65836]]
these cases often contain multiple allegations that can be quickly
resolved or eliminated through mediation. In addition, early resolution
of some issues can minimize time and expense of resolving core issues.
The NYSE states that the mediation program is intended to encourage
parties to sit down early in the process and try to find an agreeable
resolution before each side incurs the expense of preparing for a
hearing.
---------------------------------------------------------------------------
\6\ See letter from Robert S. Clemente, Director, Arbitration,
to Jonathan G. Katz, Secretary, Commission, dated November 11, 1998
(``NYSE Response'').
---------------------------------------------------------------------------
The NYSE also states that, with regard to conducting mediation and
administrative conferences by telephone, the decision on how to proceed
should be left to the arbitrators, and that the rule leaves open the
possibility that a mediator may decide that a telephone session is
sufficient. However, the NYSE states that experience shows that
telephone conferences with all three arbitrators become counter-
productive, and that while it may be technically possible to conduct a
mediation over the telephone, it would be impractical in most
circumstances. The Exchange believes that to be successful, a mediation
should be conducted in person.
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of section 6(b).\7\ Specifically, the
Commission believes the proposal is consistent with the section 6(b)(5)
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the public
interest.\8\ In particular, the Commission believes that the proposed
rule change will help ensure that NYSE members and member organizations
and the public have a fair and impartial forum for the resolution of
their disputes.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78f(b).
\8\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The Commission believes it is reasonable for the Exchange to
exclude derivative actions from arbitration. The Exchange's Arbitration
rules already exclude class actions. The Exchange believes that
shareholder derivative actions, like class actions, are representative
in nature,\9\ and that the court system is better equipped to manage
shareholder derivative actions which involve parties in different
jurisdictions and issues such as the notification of shareholders, the
appointment of counsel and the awarding of attorneys' fees. The
Commission also notes that the Exchange has previously declined the use
of its arbitration facilities for shareholder derivative actions
pursuant to Article XI, section 3 of the Exchange Constitution, which
grants the Exchange discretion to ``decline in any case to permit the
use of the arbitration facilities of the Exchange.''
---------------------------------------------------------------------------
\9\ ``Shareholder controversies are not appropriately within the
mandatory arbitration provisions of the Exchange's Constitution.''
In re Salomon Inc. Shareholders' Derivative Litigation, 68 F.3d 554,
556 (1995) (Judge McLaughlin of the Second Circuit quoting from the
Exchange's decision denying jurisdiction in a shareholder derivative
action).
---------------------------------------------------------------------------
The Commission believes that the portion of the proposed rule
change to Rules 604 and 612, relating to dismissal of arbitration
proceedings with and without prejudice, is consistent with the Act.
This portion of the proposed rule change will help provide for a fair,
efficient and cost-effective arbitration process by clarifying that the
arbitrators can dismiss the proceeding either with or without
prejudice; currently, Rule 604 does not distinguish between these two
choices. Also, the proposed rule change amends Rule 604 to add that the
arbitrators, when dismissing without prejudice, can refer the parties
to any dispute resolution forum agreed to by the parties, in addition
to their judicial remedies.
The Commission believes that the proposed change to Rule 604
allowing for dismissal with prejudice, which is intended to encourage
compliance with the arbitrators' orders on discovery issues and other
pre-hearing matters, should help establish clearly that arbitrators
have the power to issue orders in aid of the arbitration process and to
enforce those orders by use of the sanction of dismissal with
prejudice. Such a sanction could be used, for example, where a party
refused to produce documents that the arbitrators already have ordered
them to produce as necessary for another party's claim or defense. In
such instances, after the arbitrators have imposed lesser sanctions
that have not induced compliance with their order, the arbitrators may
dismiss a claim, defense, or the entire arbitration proceeding, with
prejudice. The Commission also believes that this proposed rule change
would provide for a more efficient arbitration process because it will
allow the arbitrators to assert greater control over the proceedings
and will provide parties with clear notice of the possible consequences
of non-compliance with an order of the arbitrators. It also would help
to protect all parties to an arbitration, and ensure that one party to
the proceeding does not take advantage of the other.\10\
---------------------------------------------------------------------------
\10\ The Commission notes that the NYSE has stated its intention
to keep records of any dismissals under the amended rules. The
Commission believes the NYSE should maintain records of any
dismissals so it can monitor the use of this sanction.
---------------------------------------------------------------------------
The Commission believes that the proposed changes to Rules 608,
609, 611, and 613 providing for an extension of time limitations
relating to the notice of the appointment of arbitrators and the
initial hearing date, peremptory challenges, and arbitrator disclosures
are consistent with the Act because they allow the parties additional
time to prepare for the arbitration proceedings. Specifically, the
amendments will allow parties more time to research and gather
information on the arbitrators, in order to evaluate the arbitrators
and decide whether to issue a peremptory challenge.\11\
---------------------------------------------------------------------------
\11\ The proposed changes extend the time limitations for a
party to (1) seek additional information under Rules 608 and 611
about initial and replacement arbitrators, by extending the time
that the Director shall inform the parties of the names of the
arbitrators, as well as any information on the arbitrators, from
eight to fifteen days prior to the initial hearing session, and
extending the time within which a party can exercise the right to
challenge a replacement arbitrator; and (2) exercise a peremptory
challenge under Rules 609 and 611, from 5 days to 10 business days
after notification of the identity of the person(s) proposed as
arbitrators. In addition, the proposed rule change amends Rule 608
to change the Director's obligation to provide the parties with the
names and histories of the arbitrators from eight to fifteen days
before the date of the first hearing. Also, the proposed rule change
amends Rule 613 to extend the time when the Director must give
notice of the time and place of the initial hearing from eight to
fifteen business days prior to the date fixed for the hearing.
---------------------------------------------------------------------------
The Commission believes that the proposed change to Rule 627 that
allows for service by means other than registered mail or personal
service, such as facsimile or other electronic transmission, is
reasonable under the Act because it will help to provide for more
efficient service. The Commission notes that the proposed rule change
provides adequate safeguards to allow for all parties to receive notice
of the awards contemporaneously, for purposes of time limitations on
post-award motions. The amendment is intended to enable the Exchange to
deliver the award in the fastest and most reliable way. The amendment
is intended to adapt Exchange arbitration practices to technological
changes.
The Commission believes that it is consistent with the Act to allow
for mediation of arbitration because it may result in savings of time
and money for
[[Page 65837]]
the parties. Mediation is a method of dispute resolution where a
mediator attempts to facilitate a settlement of the dispute. The NYSE
states that when mediation is successful, cases are settled earlier,
often with significant cost savings. The Commission recognizes the
SIA's concern that mediation should be a voluntary process and that the
proposed new rule requires a single mediation session in certain
instances. However, the Commission believes that in this instance,
where the requirement is limited to non-customer cases, is only for
large cases, and is required for a two year period the possible
benefits outweigh any perceived inequity.\12\ In addition, the
Commission notes it is only the first session that is mandatory, that
the NYSE is paying the mediator's fee, and that any settlement reached
must be with the participation and consent of each party.
---------------------------------------------------------------------------
\12\ The Commission expects the NYSE to review the effectiveness
of the requirement over the two year pilot period.
---------------------------------------------------------------------------
Finally, the Commission believes it is reasonable under the Act to
require an administrative conference between the parties and the
arbitrator in all large cases, in order to attempt to expedite the
arbitration process and reduce costs of the arbitration. An
administrative conference early in the process will allow the
arbitrators to intervene to establish discovery schedules, resolve
discovery disputes and other preliminary matters, and to attempt to
narrow the issues in dispute and avoid costly contests over procedural
matters.\13\
---------------------------------------------------------------------------
\13\ In responses to SIA's comment, the Commission notes that
the rules do not restrict arbitrators from conducting mediation
sessions and administrative conferences by telephone, and that the
decision whether or not to do so is best left to the arbitrators.
---------------------------------------------------------------------------
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-NYSE-98-27) is approved. The
mediation program, Rule 638, and the administrative conference rule,
Rule 639, are each approved on a two-year pilot basis through November
20, 2000.
\14\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
---------------------------------------------------------------------------
\15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31818 Filed 11-27-98; 8:45 am]
BILLING CODE 8010-01-M