MSRB NOTICE 2005-21 (APRIL 1, 2005)

AMENDMENT NO. 1 FILED TO PROPOSAL TO ADD REQUIREMENTS FOR PREDISPUTE ARBITRATION AGREEMENTS WITH CUSTOMERS

On April 1, 2005, the Municipal Securities Rulemaking Board (“MSRB”) filed with the Securities and Exchange Commission (“SEC”) Amendment No. 1 to File No. SR-MSRB-2005-05 regarding technical amendments to Rule G-8, on recordkeeping, to add requirements governing the use of predispute arbitration agreements with customers.[1]

Amendment No. 1 replaces, in its entirety, the previously filed proposed rule language, relating to predispute arbitration agreements with customers, in order to conform that language to that of NASD Rule 3110(f), as recently amended.[2]  The MSRB has set an effective date of May 1, 2005 for the proposed rule change and Amendment No. 1 thereto to coincide with the effective date of NASD’s recent amendments. 

SUMMARY OF AMENDMENT NO. 1

As noted previously in MSRB Notice 2005-18, there currently is no requirement specifically governing the way bank dealers or municipal-only dealers use predispute arbitration agreements with customers.  To remedy this situation, the MSRB filed on March 21, 2005 a technical amendment to Rule G-8, on recordkeeping, to add such a requirement.  The language of the proposed amendment was intended to track the language of NASD Rule 3110(f), on predispute arbitration agreements with customers, as recently amended.[3]  Amendment No. 1 accomplishes this by conforming the language of the amendment to Rule G-8 to NASD’s Rule 3110(f), as amended.[4]  The MSRB has set an effective date of May 1, 2005, to coincide with the recent NASD amendments.

Questions concerning this notice should be directed to Jill C. Finder, Assistant General Counsel.

April 1, 2005

TEXT OF AMENDMENT NO. 1 [5]

Rule G-8 – Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a) Description of Books and Records Required to be Made.  Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

(i) - (x)  No change.

(xi) Customer Account Information.  A record for each customer, other than an institutional account, setting forth the following information to the extent applicable to such customer:

(A) - (L) No change

(M) Predispute Arbitration Agreements with Customers.

[(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:

(a)    Arbitration is final and binding on the parties.

(b)   The parties are waiving their right to seek remedies in court, including the right to a jury trial.

(c)    Pre-arbitration discovery is generally more limited than and different from court proceedings.

(d)   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.

(e)    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 also shall 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) All agreements shall include a statement that “No person shall bring a putative or certified class action to arbitration, nor seek to enforce any predispute arbitration agreement against any person who has initiated in court a putative class action; 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.”]

(1) Any predispute arbitration clause shall be highlighted and shall be immediately preceded by the following language in outline form:

This agreement contains a predispute arbitration clause.  By signing an arbitration agreement the parties agree as follows:

(a) All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.

(b) Arbitration awards are generally final and binding; a party’s ability to have a court reverse or modify an arbitration award is very limited.

(c) The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.

(d) The arbitrators do not have to explain the reason(s) for their award.

(e) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.

(f) The rules of some arbitration forums may impose time limits for bringing a claim in arbitration.  In some cases, a claim that is ineligible for arbitration may be brought in court.

(g) The rules of the arbitration forum in which the claim is filed, and any amendments thereto, shall be incorporated into this agreement.

(2)(a) In any agreement containing a predispute arbitration agreement, there shall be a highlighted statement immediately preceding any signature line or other place for indicating agreement that states that the agreement contains a predispute arbitration clause.  The statement shall also indicate at what page and paragraph the arbitration clause is located.

(b) At the time of signing, 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.

(3)(a) A broker, dealer or municipal securities dealer shall provide a customer with a copy of any predispute arbitration clause or customer agreement executed between the customer and the broker, dealer or municipal securities dealer, or inform the customer that the broker, dealer or municipal securities dealer does not have a copy thereof, within ten business days of receipt of the customer’s request.

(b) Upon request by a customer, a broker, dealer or municipal securities dealer shall provide the customer with the names of, and information on how to contact or obtain the rules of, all arbitration forums in which a claim may be filed under the agreement.

(4) No predispute arbitration agreement shall include any condition that: (i) limits or contradicts the rules of any self-regulatory organization; (ii) limits the ability of a party to file any claim in arbitration; (iii) limits the ability of a party to file any claim in court permitted to be filed in court under the rules of the forums in which a claim may be filed under the agreement; (iv) limits the ability of arbitrators to make any award.

(5) If a customer files a complaint in court against a broker, dealer or municipal securities dealer that contains claims that are subject to arbitration pursuant to a predispute arbitration agreement between the broker, dealer or municipal securities dealer and the customer, the broker, dealer or municipal securities dealer may seek to compel arbitration of the claims that are subject to arbitration.  If the broker, dealer or municipal securities dealer seeks to compel arbitration of such claims, the broker, dealer or municipal securities dealer must agree to arbitrate all of the claims contained in the complaint if the customer so requests.

(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 predispute arbitration agreement against any person who has initiated in court a putative class action; 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) These provisions of Rule G-8(a)(xi)M) are effective as of May 1, 2005.


[1] SR-MSRB-2005-05.  Comments on the proposed rule change should be submitted to the SEC and should reference this file number. 
See also MSRB Notice 2005-18 (March 21, 2005)

[2] Release No. 34-50713 (November 22, 2004).

[3] In November 2004, the SEC approved amendments to NASD Rule 3110(f) that require NASD member firms to modify their predispute arbitration agreements with customers to provide enhanced disclosure about the arbitration process.  The amendments also require NASD members to provide copies of predispute arbitration agreements and relevant arbitration forum rules to customers upon request; clarify the use of certain limiting provisions; and require firms seeking to compel arbitration of claims initiated in court to arbitrate all of the claims contained in the complaint if the customer so requests.  See Release No. 34-50713 (November 22, 2004), effective May 1, 2005.

[4] Id.

[5] Underlining indicates new language.; brackets indicate deletions.