View Whole SectionText only Print Print Manager Link
Previous Next

88-87 Proposed Amendment Re: Predispute Arbitration Clauses in Customer Agreements; Last Date for Comment: December 1, 1988

SUGGESTED ROUTING*

Senior Management
Legal & Compliance
Training

*These are suggested departments only. Others may be appropriate for your firm.

REQUEST FOR COMMENTS

EXECUTIVE SUMMARY

The NASD requests comments on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice. The amendment would require each member using a predispute arbitration clause in a customer agreement to highlight that clause and to include similarly highlighted disclosures concerning the nature of arbitration and the waiver of the customer's right to litigate disputes arising under the agreement.

The amendment also would prohibit the use in any agreement of any language that limits or contradicts the arbitration rules of any self-regulatory organization, limits the ability of a party to file a claim in arbitration, or limits the ability of the arbitrators to make an award under the arbitration rules of a self-regulatory organization and applicable law.

The NASD Board of Governors believes this amendment is appropriate to provide customers with effective disclosure of the meaning and effect of predispute arbitration clauses and to maintain the integrity of the arbitration process.

The text of the proposed amendment follows this notice

BACKGROUND AND ANALYSIS

In keeping with its support for the continued improvement of securities industry arbitration as a fair, expeditious, and economical means for the resolution of disputes, the Board of Governors has responded to suggestions of the Securities and Exchange Commission and others seeking more explicit disclosure of the existence and meaning of Predispute arbitration clauses in customer agreements.

The Board of Governors believes that in order to provide clear and informative disclosure of the existence and meaning of predispute arbitration clauses, investors should be placed on appropriate notice of the fact they are making an important election to which they will be bound.

Therefore, the Board is soliciting comment on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice recommended by the NASD's National Arbitration Committee. The amendment would apply to any member using a predispute arbitration clause in new agreements signed by an existing or new customer on or after the effective date of the proposed amendment. As proposed, the amendment would require each member using a predispute arbitration clause in a customer agreement to highlight that clause and to include similarly highlighted disclosures concerning the nature of arbitration and the waiver of the customer's right to litigate disputes arising under the agreement. The amendment also would prohibit the use in any agreement of any language that limits or contradicts the arbitration rules of any self-regulatory organization, limits the ability of a party to file a claim in arbitration, or limits the ability of arbitrators to make an award under the arbitration rules of a self-regulatory organization and applicable law.

The proposed amendment sets forth five affirmative statements (proposed Section 21(f)(l)(i)-(v)), that generally describe the effect of entering into a binding predispute arbitration agreement. In addition, the proposed amendment would require that, immediately preceding the signature line in a customer agreement, a statement appear that the agreement contains a predispute arbitration clause. This statement would be initialed by the customer, and a copy of the entire agreement containing a predispute arbitration clause would be given to the customer, who would acknowledge receipt.

The Board specifically seeks comment as to whether a customer's refusal or failure to initial this statement or acknowledge receipt would tend to affect the validity of the entire customer agreement or should result in a violation of Article III, Section 21 of the NASD Rules of Fair Practice.

The Board also solicits comments concerning proposed Section 21(f)(4), which would prohibit members from including in customer contracts any condition that purports to limit or contradict the arbitration rules of any self-regulatory organization, limits the ability of a party to file any claim in arbitration, or limits the ability of an arbitrator or arbitrators to make an award under such rules and applicable law. In considering the foregoing

proposed amendment, the Board of Governors determined that members should be permitted to include additional language in their disclosures concerning predispute arbitration agreements pointing out the advantages of arbitration and the fact that arbitration is favored by both federal and state law. The Board seeks comment concerning the most appropriate means for effecting and/or limiting such representations, whether by uniform rule or otherwise.

The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:

Mr. Lynn Nellius, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1506

Comments must be received no later than December 1, 1988. Comments received by this date will be considered by the NASD's National Arbitration Committee and the NASD Board of Governors. If the proposed amendment is approved by the Board, it will be submitted to the membership for a vote. If approved by the membership, the amendment must be filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions concerning this notice may be directed to Norman Sue, Jr., Senior Attorney, NASD Office of General Counsel, at (202) 728-8117.

PROPOSED AMENDMENT TO ARTICLE III, SECTION 21 OF THE NASD RULES OF FAIR PRACTICE

(Note: New language is underlined.)

Books and Records

Section 21

Requirements Concerning Predispute Arbitration Agreements With Customers

(f)
(l) No member shall execute an agreement with a customer containing a predispute arbitration clause unless such clause is highlighted and contains the following disclosure language Which shall also be highlighted:
(i) Arbitration is final and binding on the parties.
(ii) The parties are waiving their right to seek remedies in court, including the right to jury trial.
(iii) Pre-arbitration discovery is generally more limited than and different from court proceedings.
(iv) The arbitrator's award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited.
(v) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.
(2) Immediately preceding the signature line, there shall be a statement initialed by the customer acknowledging that the agreement contains a predispute arbitration clause.
(3) A copy of the agreement containing any such clause shall be given to the customer who shall acknowledge receipt thereof on the agreement or on a separate document.
(4) No agreement shall include any condition which limits or contradicts the arbitration rules of any self-regulatory organization or limits the ability of a party to file any claim in arbitration or limits the ability of the arbitrators to make an award under such rules and applicable law.
(5) The requirements of this subsection (f) shall apply only to new agreements signed by an existing or new customer of a member after (effective date)

Previous Next