[Federal Register Volume 62, Number 234 (Friday, December 5, 1997)]
[Notices]
[Pages 64417-64419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31874]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39378; File No. SR-MSRB-97-04]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board, Inc.; Order Granting Approval to Proposed Rule Change and Notice 
of Filing and Order Granting Accelerated Approval to Amendment No. 2 to 
Proposed Rule Change Relating to Its Arbitration Code

December 1, 1997.

I. Introduction

    On May 22, 1997, the Municipal Securities Rulemaking Board, Inc. 
(``MSRB'' or ``Board'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Rule G-35, the Board's 
Arbitration Code. The proposed rule change would create two new 
sections: Section 37 would state that the Board will not accept any new 
arbitration claims filed on or after January 1, 1998; and Section 38 
would provide that, as of January 1, 1998, every bank dealer (as 
defined in Rule D-8) shall be subject to

[[Page 64418]]

the Code of Arbitration Procedure of the National Association of 
Securities Dealers, Inc. (``NASD'') for every claim, dispute or 
controversy arising out of or in connection with the municipal 
securities activities of the bank dealer acting in its capacity as 
such. New Section 38 would further provide that each bank dealer shall 
be subject to, and shall abide by, the NASD's Code of Arbitration 
Procedure as if the bank dealer were a ``member'' of the NASD.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 38935 (August 14, 1997), 62 FR 44501 (August 21, 1997). One 
comment letter was received on the proposal.\3\ The Exchange submitted 
Amendment No. 2 to the proposed rule filing on November 13, 1997.\4\ 
This order approves the proposed rule change, as amended.
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    \3\ See letter from Richard P. Ryder, Editor, Securities 
Arbitration Commentator, to Margaret H. McFarland, Deputy Secretary, 
Commission, dated September 10, 1997.
    \4\ Amendment No. 2 was submitted in response to the comment 
letter received on the proposed rule filing. Amendment No. 2 states 
that the Board has reviewed the comment letter and has determined to 
amend its arbitration code to make publicly available the names of 
arbitrators for all customer awards rendered after May 10, 1989. The 
Board believes that this amendment will facilitate the NASD's 
administration of those arbitration claims received after January 1, 
1998 involving the municipal securities activities of brokers, 
dealers and municipal securities dealers where an arbitrator 
appointed to such a case previously served as an arbitrator in the 
Board's program but has never served as an NASD arbitrator. See 
letter from Jill C. Finder, Assistant General Counsel, MSRB, to 
Katherine A. England, Assistant Director, Market Regulation, 
Commission, dated November 12, 1997.
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II. Description

    The Board's arbitration program, which is limited to the resolution 
of disputes involving municipal securities, has been in effect since 
December, 1978. The Board has determined that, effective January 1, 
1998, it will no longer accept any new claims filed with its 
arbitration program. The Board will, however, continue to operate its 
program in order to administer its current, open cases and any new 
claims received prior to January 1, 1998, but will discontinue its 
arbitration program when all such cases have been closed.\5\
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    \5\ At such time, the Board will submit a filing to the 
Commission to delete sections 1 through 36 of Rule G-35, as well as 
new Section 37, and to rescind Rule A-16 on arbitration fees and 
deposits.
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    Currently, any customer or securities dealer with a claim, dispute, 
or controversy against a dealer involving its municipal securities 
activities may submit that claim to the arbitration forum of any SRO of 
which the dealer is a member, including the NASD. Bank dealers, 
however, are unique in that they are subject to the Board's rules but 
are not members of any other SRO. In light of the Board's decision not 
to accept any new arbitration claims on or after January 1, 1998, the 
proposed rule change amends Rule G-35 to state this and to provide an 
alternative forum for claims involving the municipal securities 
activities of bank dealers. The proposed rule change accomplishes this 
by subjecting every bank dealer, as of January 1, 1998, to the NASD's 
Code of Arbitration Procedure for every claim, dispute or controversy 
arising out of or in connection with the municipal securities 
activities of the bank dealer acting in its capacity as such. In 
addition, the proposed rule change requires that bank dealers abide by 
the NASD's Code just as if they were members of the NASD for purposes 
of arbitration.
    Pursuant to the proposed rule change, the bank regulatory agencies 
(i.e., the Office of Comptroller of the Currency, the Federal Reserve 
Board, and the Federal Deposit Insurance Corporation) would continue to 
be responsible for the inspection and enforcement of bank dealers' 
municipal securities activities, including arbitration. Thus, for 
example, a bank dealer's failure to pay an arbitration award rendered 
pursuant to the NASD's Code of Arbitration Procedure would constitute a 
violation of Board Rule G-35, since it is that rule, as amended, that 
subjects bank dealers to the NASD's Code. Similarly, a bank dealer's 
refusal to submit to arbitration pursuant to the NASD's Code of 
Arbitration Procedure would constitute a violation of Board Rule G-35. 
The NASD would notify the Board of any such violations and the Board, 
in turn, would contact the appropriate bank regulatory agency.
    In addition, the proposed rule change will amend Rule G-35, Section 
31(h), to make publicly available the names of arbitrators on all 
customer awards rendered through the Board's arbitration program after 
May 10, 1989.\6\
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    \6\ See Amendment No. 2, supra note 4.
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III. Summary of Comments

    The Commission received one comment letter relating to the proposed 
rule change.\7\ The commenter states that his company collects 
arbitration awards and that they obtain information on these awards 
through the Public Awards Program of the various arbitration forums, 
which they can then make available to people who seek information about 
past arbitration awards. The commenter states that parties and counsel 
seek the past history of arbitrators that are appointed to hear their 
cases; therefore, they need to know the names of the arbitrators who 
decided particular awards. The commenter states that the NASD currently 
makes arbitrator names for public arbitration awards publicly available 
(and do so retroactively to May 10, 1989), and that the MSRB is the 
only SRO that does not make arbitrator names publicly available.
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    \7\ See supra note 3.
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    The commenter wants to know whether MSRB cases that will be 
arbitrated by the NASD will be made public, along with the names of the 
arbitrators. The commenter requests that the MSRB make publicly 
available its public arbitration awards, including the arbitrator 
names, retroactively to May 10, 1989 and prospectively in the future, 
so that the NASD will be able to continue its practice of making a list 
of arbitrators' past awards to parties when they appoint arbitrators.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with Sections 15B(b)(2) (C) and (D) of the Act, which provide, 
respectively, that the Board's rules be designed, in general, to 
protect investors and the public interest, and, if the Board deems 
appropriate, provide for the arbitration of claims, disputes, and 
controversies relating to transactions in municipal securities because 
the proposed rule change ensures that there is a fair arbitration forum 
available for all MSRB arbitration claims.\8\
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    \8\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes that it is consistent with the Act to allow 
the MSRB to send its arbitration cases to the NASD for arbitration, in 
part because the Board believes its declining caseload makes it 
difficult to justify the cost of continuing to operate its own 
arbitration program.\9\ The Commission also

[[Page 64419]]

believes that procedurally the proposed rule change should adequately 
ensure that all arbitration cases that would be subject to the MSRB 
arbitration process will be provided for under the NASD's arbitration 
program. Those MSRB members who are also NASD members, or members of 
another SRO with an arbitration forum, will be able to use that SRO's 
arbitration forum.\10\ Those MSRB members who are not also members of 
another SRO (the bank dealers) will now be deemed ``members'' of the 
NASD for purposes of arbitrating claims involving the municipal 
securities activities of bank dealers. The proposed rule change 
accomplishes this by subjecting every bank dealer, as of January 1, 
1998, to the NASD's Code of Arbitration Procedure for every claim, 
dispute or controversy arising out of or in connection with the 
municipal securities activities of the bank dealer acting in its 
capacity as such. In addition, the proposed rule change requires that 
bank dealers abide by the NASD's Code just as if they were members of 
the NASD for purposes of arbitration.
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    \9\ According to the Board, its caseload grew steadily for a 
time; for example, 21 cases were received in 1980, 82 in 1986, and 
115 in 1988. Between 1978 and 1993, the NASD automatically 
transferred to the Board's arbitration program any claims received 
involving municipal securities, and until approximately 1993 the 
majority of the Board's cases were received in this manner. The NASD 
also transferred cases (other than those involving municipal 
securities) to other self-regulatory organizations (``SROs''), such 
as the New York Stock Exchange and the American Stock Exchange, if 
the particular claim arose out of a transaction in that SRO's 
market. In 1993, the NASD amended its arbitration code to require a 
customer's consent before it could transfer a case to another SRO. 
The practical effect of this amendment has been to virtually halt 
the transfer of municipal cases to the Board's arbitration program 
because customers choose to remain at the NASD. Consequently, the 
Board's caseload has declined dramatically from 115 cases received 
in 1988 to 10 cases received in 1996. As of the time of the filing 
of the proposed rule change, the Board had received two cases in 
1997.
    \10\ The Commission notes that if another SRO wanted to 
eliminate its arbitration program and send its cases to the NASD, it 
would be required to file a rule filing under Section 19(b) of the 
Act, and the Commission would independently consider any such 
filing.
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    In addition, the Commission believes that the proposed rule change 
adequately provides for the enforcement of amended Board Rule G-35 
because the enforcement mechanism for bank dealers would not be 
altered. The bank regulatory agencies \11\ would continue to be 
responsible for the inspection and enforcement of bank dealers' 
municipal securities activities, including arbitration. A bank dealer's 
failure to pay an arbitration award rendered pursuant to the NASD's 
Code of Arbitration Procedure would constitute a violation of Board 
Rule G-35, since it is that rule, as amended, that subjects bank 
dealers to the NASD's Code. Similarly, a bank dealer's refusal to 
submit to arbitration pursuant to the NASD's Code of Arbitration 
Procedure would constitute a violation of Board Rule G-35. The NASD 
would notify the Board of any such violations and the Board, in turn, 
would contact the appropriate bank regulatory agency.
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    \11\ The Office of Comptroller of the Currency, the Federal 
Reserve Board, and the Federal Deposit Insurance Corporation.
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    Finally, the Board provides adequate measures for the transition 
from the MSRB arbitration forum to the NASD arbitration forum. Even 
though the Board will no longer accept any new claims filed with its 
arbitration program after January 1, 1998, it will continue to operate 
its program in order to administer its current, open cases and any new 
claims received prior to January 1, 1998. The Board will then 
discontinue its arbitration program when all such cases have been 
closed.\12\
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    \12\ The Commission notes that the Board has stated that at that 
time it will submit a filing to the Commission to delete sections 1 
through 36 of Rule G-35, as well as new Section 37, and to rescind 
Rule A-16 on arbitration fees and deposits.
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    The Commission notes that the MSRB stated that the Board will cover 
any costs associated with the NASD arbitrating cases involving the bank 
dealers that are not covered by the fees bank dealers will pay as 
parties to an arbitration proceeding, until such time as the NASD 
receives approval to amend its fees to cover such costs. As members of 
the NASD for arbitration purposes, bank dealers will pay the same 
arbitration fees as NASD members. The NASD has also stated that if the 
number of cases received from the MSRB were to increase substantially, 
the NASD would want to revisit the fee issue.\13\
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    \13\ The Commission notes that if the NASD were to file a 
proposed rule change to amend fees that apply to its members, and 
that also apply to the bank dealers, it would be able to file that 
change under Section 19(b)(3)(A) of the Act, if it otherwise met the 
criteria. However, if the NASD were to file a proposed rule change 
that only affected fees for the bank dealers, that change would have 
to be filed under Section 19(b)(2) of the Act so that the bank 
dealers would have adequate notice and time to comment on the 
proposal.
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    The Commission finds good cause to approve Amendment No. 2 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 2 is responsive to the commenter's request 
that the Board publicly disclose the names of arbitrators on all 
customer-related awards rendered after May 10, 1989 by amending Rule G-
35 to make those names publicly available. This amendment should help 
facilitate the NASD's administration of municipal securities 
arbitration claims, and will allow the public to receive more accurate 
and complete information on an arbitrator's past arbitration 
activities, where an arbitrator appointed in a case has previously 
served as an arbitrator in the Board's program but has never served as 
an NASD arbitrator. Accordingly, the Commission believes that it is 
consistent with Section 15B of the Act to approve Amendment No. 2 to 
the proposal on an accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2 to the rule proposal. Persons 
making written submissions should file six copies thereof with the 
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. Sec. 552, will 
be available for inspection and copying at the Commission's Public 
Reference Room. Copies of such filing also will be available for 
inspection and copying at the principal office of the MSRB. All 
submissions should refer to File No. SR-MSRB-97-4 and should be 
submitted by December 29, 1997.

V. Conclusion

    It is therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-MSRB-97-04), as amended, is 
approved.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31874 Filed 12-4-97; 8:45 am]
BILLING CODE 8010-01-M