Notice To Members 89-21

Proposed Amendment Re: Predispute Arbitration Clauses in Customer Agreements; Last Voting Date: April 3, 1989

Published Date:
Last Voting Date: April 3, 1989

SUGGESTED ROUTING*

Senior Management
Legal & Compliance
Trading
Training

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

IMPORTANT MAIL VOTE

EXECUTIVE SUMMARY

Members are invited to vote on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice to adopt a new Subsection (f). The new subsection would require each member using a predispute arbitration clause in a customer agreement to highlight that clause and to provide disclosures concerning the nature of arbitration and the waiver of the customer's right to litigate disputes arising under the agreement.

The new subsection also would prohibit the use in any agreement of any language that limits or contradicts the 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 any award.

The NASD Board of Governors believes that approval of the new subsection is necessary in order to provide customers with effective disclosure of the meaning and effect of predispute arbitration clauses and in order to maintain the integrity of the arbitration process.

The text of the proposed amendment follows this notice.

BACKGROUND AND EXPLANATION

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.

Following the solicitation of comments concerning proposed new Subsection (f) of Article III, Section 21 of the NASD Rules of Fair Practice in Notice to Members 88-87 (November 1, 1988), the National Arbitration Committee and the Board of Governors determined that, in the interest of uniformity, the proposed subsection should be modified to substantially parallel proposals of other self-regulatory organizations. The modified proposed subsection would apply to any member using a predispute arbitration clause in new agreements signed by an existing or new customer after the proposed subsection's effective date, which will be 120 days after the date of Securities and Exchange Commission approval.

As proposed, the subsection would require each member using a predispute arbitration clause in a customer agreement to highlight that clause and to include disclosures concerning the nature of arbitration and the waiver of the customer's right to litigate disputes arising under the agreement. The new subsection also would prohibit the use in any agreement of language that limits or contradicts the 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 rules of a self-regulatory organization.

The Board of Governors believes that proposed new Subsection (f) provides to investors clear and informative disclosure of the fact that, by their assent to a predispute arbitration agreement, they are making an important election to which they will be bound. The NASD Board of Governors also thinks that the proposed subsection will serve the public interest by preserving the rights of contracting parties under the rules of any self-regulatory organization. For these reasons, the Board believes that the proposed subsection is necessary and appropriate and recommends that members vote their approval. Prior to becoming effective, the proposed subsection also must be approved by the Securities and Exchange Commission.

Please mark the attached ballot according to your convictions and return it in the enclosed stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than April 3, 1989.

Questions concerning this notice may be directed to Norman Sue, Jr., Assistant General Counsel, 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

Sec. 21.

Requirements When Using Predispute Arbitration Agreements With Customers

(f)
(1) Any predispute arbitration clause shall be highlighted and shall be immediately preceded by the following disclosure language (printed in outline form as set forth herein) 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 arbitrators' 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 which shall be high-lighted that the agreement contains a predispute arbitration clause. The statement shall also indicate at what page and paragraph the arbitration clause is located.
(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 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 any award.
(5) The requirements of this subsection (f) shall apply only to new agreements signed by an existing or new customer of a member after 120 days have elapsed from the date of Commission approval of this rule.