Notice To Members 89-58

Amendment Re: Predispute Arbitration Clauses in Customer Agreements

Published Date:

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EXECUTIVE SUMMARY

In conjunction with its approval of various amendments to the NASD Code of Arbitration Procedure, the Securities and Exchange Commission recently approved an amendment to Article III, Section 21, of the NASD Rules of Fair Practice. The amendment will require each member using a predispute arbitration clause in a customer agreement after September 7, 1989, 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 prohibits 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 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 NASD, responding 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, filed with the SEC following approval by membership vote an amendment to Article III, Section 21, of the NASD Rules of Fair Practice.

On May 10, 1989, the SEC approved the NASD's proposed amendment to Article III, Section 21, set forth in NASD Notice to Members 89-21 (March 1989). The amendment applies to any member using a predispute arbitration clause in new agreements signed by an existing or new customer after September 7, 1989, the effective date of the amendment. The amendment will 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 will 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.

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)
(l) 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 highlighted 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 September 7, 1989.