Proposed Amendment to Article III, Section 21 of the Rules of Fair Practice to Require Predispute Arbitration Agreements to Include a Notice That Class-Action Matters May Not Be Arbitrated; Last Voting Date: August 21, 1992

MAIL VOTE

EXECUTIVE SUMMARY

The NASD invites members to vote on a proposed amendment to Article III. Section 21 of the NASD Rules of Fair Practice to incorporate into predispute arbitration agreements a provision that will make class action disputes ineligible for submission to NASD arbitration. The amendment would take effect one year after Securities and Exchange Commission (SEC) approval. The last voting date is August 21, 1992. The text of the proposed amendment follows this Notice.

BACKGROUND AND DESCRIPTION OF PROPOSAL

The Securities Industry Conference on Arbitration (SICA) recently adopted a change to the Uniform Code of Arbitration to exclude class actions from arbitration proceedings conducted by the self-regulatory organizations that are members of SICA, including the NASD. This change resulted from the SEC's desire, articulated by former SEC Chairman David Ruder, that investors should have access to the courts in appropriate cases. The NASD's Code of Arbitration Procedure (Code) allows arbitrators and the Director of Arbitration to defer certain arbitration proceedings to the court system. However, the NASD determined that the treatment of class actions in the Code should be clarified.

This proposed amendment to Article III, Section 21 of the Rules of Fair Practice set forth below would do that by requiring predispute arbitration agreements to contain a statement to the effect that class actions may not be arbitrated. This provision would take effect one year after SEC approval, so members could have time to redraft and reprint their arbitration agreements. The text of a related amendment to the Code of Arbitration Procedure is included for purposes of information only as this amendment does not require member vote.

REQUEST FOR VOTE

The NASD Board of Governors (Board) believes that the proposal will clarify the existing policy of deferring class-action matters to the court system. The Board considers the proposed amendment necessary and appropriate and recommends that members vote their approval.

Please mark the attached ballot according to your convictions and mail it in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than August 21, 1992.

Direct questions concerning this Notice to Deborah Masucci, Vice President, Arbitration, at (212)480-4881.

PROPOSED AMENDMENT TO ARTICLE III OF THE RULES OF FAIR PRACTICE REQUIRING MEMBER VOTE

(Note: New text is underlined; deleted text is in brackets.)

ARTICLE III

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Books and Records

Sec. 21.

Requirements When Using Predispute Arbitration Agreements With Customers

PROPOSED AMENDMENTS TO THE CODE OF ARBITRATION PROCEDURE NOT REQUIRING MEMBER VOTE

PART III — UNIFORM CODE OF ARBITRATION

Required Submission Sec. 12.