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92-65 SEC Approval of Amendments Concerning the Exclusion of Class-Action Matters From Arbitration Proceedings and Requiring That Predispute Arbitration Agreements Include a Notice That Class-Action Matters May Not Be Arbitrated

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EXECUTIVE SUMMARY

On October 28, 1992, the Securities and Exchange Commission (SEC) approved amendments to Section 12 of the NASD Code of Arbitration Procedure and Article III, Section 21 of the NASD Rules of Fair Practice. The amendments to Section 12 took effect on October 28, 1992, but the change to Article III, Section 21 will not take effect until October 28, 1993, one year after Commission approval. The text of the amendments follows the discussion below.

BACKGROUND AND DESCRIPTION OF AMENDMENTS

On October 28, 1992, the SEC approved amendments to Section 12 of the NASD Code of Arbitration Procedure (Code) and Article III, Section 21 of the NASD Rules of Fair Practice to exclude class-action matters from arbitration proceedings conducted by the NASD and to require that predispute arbitration agreements contain a notice that class-action matters may not be arbitrated.

The Securities Industry Conference on Arbitration (SICA) developed the rule change in response to the SEC's directive, articulated by former SEC Chairman David Ruder, that investors have access to the courts in appropriate cases. SICA determined to clarify the treatment of class actions in its rules and, since 1990, has been developing such rules for the Uniform Code of Arbitration. On January 7, 1992, SICA unanimously adopted a final version of its rule language, which has been modified to conform to the NASD's Code provisions.

The amendment to Section 12 of the Code adds a new subsection (d). Under subsection (d)(1) claims filed in arbitration as class actions are not eligible for submission under the Code. Subsection (d)(2) provides that claims filed by members of a putative or certified class action (class action) filed in another forum are ineligible for submission if the claim is part of the class action. A panel of one or three arbitrators or the court with jurisdiction over the class action will settle disputes over whether the claim is part of a class action.

Under subsection (d)(3) no member or associated person can compel arbitration against a customer who is a member of a class action unless class certification is denied, the class is decertified, the customer is excluded from the class, the customer either elects not to participate in the class action, or the customer has complied with court-imposed conditions for withdrawing from the class.

Accordingly, neither members nor their associated persons may use an existing arbitration agreement to compel a customer to arbitrate a claim included in a class action. Subsection (d)(4) provides that members and associated persons do not waive their rights under the Code or any agreement to arbitrate, except to the extent stated in Subsection (d).

The rule change also amends Article III, Section 21(f) of the NASD Rules of Fair Practice, which governs the content of predispute arbitration agreements with customers, to make it consistent with Subsection 12(d) of the Code. All new agreements signed by customers must contain a statement prohibiting persons from bringing class actions to arbitration and from attempting to enforce an agreement to arbitrate against a member of a class action. To provide NASD members sufficient time to redraft and reprint their arbitration agreements, the amendment to Section 21(f) will take effect October 28, 1993.

Questions regarding this Notice may be directed to Deborah Masucci, Vice President, Arbitration, at (212) 480-4881.

PART III OF THE CODE OF ARBITRATION PROCEDURE

Required Submission

Sec. 12.

(a), (b) and (c) Unchanged,
(d) Class Action Claims.
(1) A claim submitted as a class action shall not be eligible for arbitration under this Code at the Association.
(2) Any claim filed by a member or members of a putative or certified class action is also ineligible for arbitration at the Association if the claim is encompassed by a putative or certified class action filed in federal or state court, or is ordered by a court to an arbitral forum not sponsored by a self-regulatory organization for classwide arbitration. However, such claims shall be eligible for arbitration in accordance with Section 12(a) or pursuant to the parties' contractual agreement, if any, if a claimant demonstrates that it has elected 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- Disputes concerning whether a particular claim is encompassed by a putative or certified class action shall be referred by the Director of Arbitration to a panel of arbitrators in accordance with Section 13 or Section 19 of the Code, as applicable. Either party may elect instead to petition the court with jurisdiction over the putative or certified class action to resolve such disputes. Any such petition to the court must be filed within ten business days of receipt of notice that the Director of Arbitration is referring the dispute to a panel of arbitrators.
(3) No member or associated person shall seek to enforce any agreement to arbitrate against a customer 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 is excluded from the class by the court; or (D) the customer 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.
(4) No member or associated person shall be deemed to have waived any of its rights under this Code or under any agreement to arbitrate to which it is party except to the extent stated in this paragraph.

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TEXT OF AMENDMENTS TO ARTICLE III OF THE RULES OF FAIR PRACTICE

Books and Records

Sec. 21.

Requirements When Using Predispute Arbitration Agreements with Customers

(f)(5) The requirements of [this subsection] subparagraphs (f)(1) through (4) shall apply only to new agreements signed by an existing or new customer of a member after September 7, 1989.
(6) All agreements shall include a statement that "No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; or who is a member of a putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; or (ii) the class is decertified; or (iii) the customer is excluded from the class by the court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under this agreement except to the extent stated herein."
(7) The requirements of subparagraph (6) shall apply only to new agreements signed by an existing or new customer of a member after October 28, 1993.

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