[Federal Register Volume 64, Number 234 (Tuesday, December 7, 1999)]
[Notices]
[Pages 68400-68404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31639]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42185; File No. SR-NASD-99-54]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Creating 
a Voluntary Single Arbitrator Pilot Program

November 30, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 5, 1999, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly owned subsidiary 
NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities 
and Exchange Commission (``Commission'' or ``SEC'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD Regulation. On November 26, 1999, NASD Regulation 
submitted Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice of the rule change, as amended, to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Alden S. Adkins, Senior Vice President and 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated November 24, 1999. In Amendment No. 1, NASD Regulation made 
changes to clarify certain aspects of the proposal (``Amendment No. 
1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to amend the Code of Arbitration Procedure 
of the NASD to implement a voluntary single arbitrator pilot program. 
Below is the text of the proposed rule change. Proposed Rule 10337 
contains all new language.
* * * * *

Rules of the Association

1000. Code of Arbitration Procedure

* * * * *

10337. Single Arbitrator Pilot Program

    This Rule allows parties with claims of $50,000.01 to $200,000 to 
select a single arbitrator to hear their cases, rather than the panel 
of three arbitrators they would otherwise select. This Pilot Program is 
voluntary, and includes provisions that allow the parties to 
communicate directly with the arbitrators under certain conditions. The 
Pilot Program should result in lower arbitration fees and quicker 
resolution of arbitration claims for participants.
(a) Claims Eligible for Single Arbitrator Pilot Program
    (1) Claims arising between a customer and an associated person or a 
member for amounts from $50,000.01 to $200,000, including damages, 
interest, costs, and attorneys' fees, will be eligible to be heard by a 
single arbitrator pursuant to this Rule (``Pilot Program''), except as 
provided in paragraph (a)(2) or (b)(3) below.
    (2) Claims that include a request for punitive damages will not be 
eligible for the Pilot Program unless all parties agree.
(b) Arbitrator Selection Procedure
    (1) After parties receive notice that a panel of three arbitrators 
has been selected for their case, as provided in Rule 10308, the 
parties may agree to have one of the arbitrators serve as the single 
arbitrator who will hear their case.
    (2) The parties shall have 15 days from the date the Director sends 
notice of the names of the arbitrators to agree on a single arbitrator. 
This 15-day period will run concurrently with the time period to select 
a chairperson under Rule 10308(c)(5).
    (3) If the parties do not agree to have one of the arbitrators 
serve as the single arbitrator, then the claim will not be eligible for 
the Pilot Program and will proceed instead under the usual procedures 
of Rule 10308.

[[Page 68401]]

(c) Communications With Arbitrators
    (1) Parties may send written materials, including information 
requests and motions, directly to the single arbitrator, provided that 
copies of such materials are sent simultaneously and in the same manner 
to all parties and to the Director. Parties shall send the Director, 
arbitrator, and all parties proof of service of such written materials, 
indicating the time, date, and manner of service upon the artibtrator 
and all parties. Service by mail is complete upon mailing. If the 
arbitrator and all parties agree, written materials may be served 
electronically.
    (2) If the arbitrator agrees, parties may initiate conference calls 
with the arbitrator, provided that all parties are on the line before 
the arbitrator joins the call. At the discretion of the arbitrator, 
such conference calls may be tape recorded.
    (3) The arbitrator may initiate conference calls with the parties, 
provided all parties are on the line before the conference begins. At 
the discretion of the arbitrator, such conference calls may be tape 
recorded.
    (4) Parties may not communicate orally with the arbitrator unless 
all parties are present.
(d) Fees
    (1) Filing fees, member surcharges, and process fees for the Pilot 
Program will be the same as in Rules 10332 and 10333.
    (2) Hearing session deposits for the Pilot Program are as follows:
    (A) Hearing session deposits for claims of $50,000.01 to $100,000 
will be $550 per session.
    (B) Hearing session deposits for claims of $100,000.01 to $200,000 
will be $750 per session.
    (C) The forum fee for a telephone pre-hearing conference call with 
the arbitrator will be $450.
(e) Awards
    The single arbitrator may not award the parties more than a total 
of $200,000, including damages, interest, costs, and attorneys' fees, 
unless all parties agree that the arbitrator may award a larger amount. 
In addition, the arbitrator shall allocate forum fees to the parties as 
provided in Rule 10332(c).
(f) Applicability of Code
    Except as provided in this Rule, the remaining provisions of the 
Code will apply to the Pilot Program.
(g) Temporary Effectiveness
    This Rule shall remain in effect until [two years after effective 
date].
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation included 
statements concerning the purpose of, and basis for, the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. NASD Regulation has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD Regulation proposes to implement a two-year voluntary pilot 
arbitration program in which parties may choose to use a single 
arbitrator for cases involving claims of $50,000.01 to $200,000, which 
would otherwise require three arbitrators.

Background

    In developing a proposal to provide parties in a public customer 
case with the alternative of a single arbitrator at a reduced cost, 
NASD Regulation sought feedback from the Public Investors Arbitration 
Bar Association, the Securities Industry Association and the NASD's 
Small Firm Advisory Board to determine if investors and the industry 
would support such a program. After evaluating the feedback provided, 
NASD Regulation decided to offer, on a trial basis, an optional 
modification of current Neutral List Selection System (``NLSS'') 
procedures. NLSS is a computerized program developed to generate lists 
of arbitrators (``neutrals'') for selection by the parties. The program 
is the foundation for the NASD's recently adopted list selection rule, 
Rule 10308, which was approved by the SEC effective November 17, 
1998.\4\
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    \4\ See Exchange Act Release No. 40555 (Oct. 14, 1998), 62 FR 
56670 (Oct. 22, 1998) (File No. SR-NASD-98-48); Exchange Act Release 
No. 40556 (Oct. 14, 1998), 63 FR 56957 (Oct. 23, 1998) (File No. SR-
NASD-98-64).
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Description of Proposed Amendments

    The proposed rule change adds a new Rule, proposed to be numbered 
as Rule 10337, entitled Single Arbitrator Pilot Program (``Pilot 
Program''), which will be effective for a two-year period. The 
introductory language explains in simple terms that the rule will allow 
parties with claims of $50,000.01 to $200,000 to select a single 
arbitrator to hear their cases, rather than the panel of three 
arbitrators they would otherwise select. The introductory language also 
indicates that the program is voluntary and that it will allow the 
parties to communicate directly with the arbitrators under certain 
conditions. Finally, the introductory language states that the program 
should result in lower arbitration fees and quicker resolution of 
arbitration claims for participants.

Amount in Controversy/Punitive Damages

    Proposed paragraph (a)(1) describes the types of claims that are 
eligible for the Program. It sates that claims arising between a 
customer and an associated person or a member are eligible for the 
Program. The Program will not be available for the resolution of 
employment disputes or other intra-industry disputes. The Pilot Program 
will be limited to claims seeking between $50,000.01 and $200,000. The 
minimum number was chosen because a single arbitrator is already 
generally prescribed by Rule 10308(b)(1)(A) for claims of up to 
$500,000. Interest, attorneys' fees, and other costs will be included 
within the Pilot's $200,000 claim limitation. All types of claims by 
all parties, including any counterclaims, third-party claims, and 
cross-claims, would be counted in the $200,000 limitation, although 
NASD Regulation anticipates that most cases handled by the Pilot 
Program will be relatively straight forward. The arbitrator will 
allocate forum fees to the parties, as already provided in the Code, in 
addition to the amount of the award. This means that forum fees will 
not be counted in the $200,000 limitation.
    Paragraph (a)(2) provides that the Pilot Program will exclude any 
case seeking punitive damages unless all of the parties in such a case 
request a single arbitrator.

Arbitrator Selection Process

    In the normal arbitrator selection process, parties are given lists 
of possible arbitrators as provided in Rule 10308. Parties then may 
strike one or more of the arbitrators and rank any remaining 
arbitrators. Using NLSS, NASD Regulation then consolidates the parties' 
lists and prepares a list of three arbitrators who have been selected 
for the case.\5\ After parties receive notice

[[Page 68402]]

that a panel of three arbitrators has been selected, rule 10308(b)(5) 
provides that they have 15 days in which to select a chairperson. At 
this point, NASD Regulation proposes that its staff will inform the 
parties of the terms of the voluntary Pilot Program if their case 
appears to fit the criteria for the Pilot Program.\6\ As provided in 
proposed paragraph (b)(1), parties then can determine whether they want 
to choose one of their three selected arbitrators to serve as the 
single arbitrator in the Pilot Program.
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    \5\ If the number of arbitrators available to serve from the 
consolidated list is not sufficient to fill a panel, NASD Regulation 
staff will select one or more arbitrators to complete the panel. 
Rule 10308(c)(4)(B). Information about such arbitrators will be sent 
to the parties, who may object as provided in rule 10308(d)(1).
    \6\ parties may have received information about the Pilot 
Program earlier in the process, and if so, they will be reminded 
that this option is available. If approved, the proposal provides 
for a delay in the effective date of the pilot so that parties can 
become familiar with the program.
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    This method was chosen because, based on user feedback, it appeared 
that parties would not be willing to use the Pilot Program unless they 
knew in advance who the single arbitrator would be. Under the proposed 
rule change, the parties will have background information on the 
potential panel members and will be able to make an informed decision 
as to whether to proceed with a single arbitrator. Because the parties 
may choose any one of the three arbitrators, it is possible that the 
single arbitrator will not be a public arbitrator. That person will, 
however, be a person agreed to by all parties.
    Paragraph (b)(2) provides that parties will have 15 days from the 
date the director sends notice of the names of the arbitrators to agree 
on a single arbitrator. This 15-day period will run concurrently with 
the time period to select a chairperson under Rule 10308(c)(5). It is 
expected that the arbitrator who would have been chosen as the 
chairperson is most likely the same person who will be chosen as the 
single arbitrator. Thus, if the parties decide not to proceed in the 
Pilot Program, they can proceed under normal procedures without delay.
    If the parties do not agree on a single arbitrator, paragraph 
(b)(3) provides that the case will proceed under normal NLSS procedures 
with three arbitrators.

Communication With Arbitrators

    Unlike the procedures normally used, the Pilot Program will allow 
parties to communicate directly without NASD Regulation staff 
involvement. To expedite case resolution, proposed paragraph (c)(1) 
provides that the parties will be permitted to send written materials, 
including information (discovery) requests and motions, directly to the 
selected arbitrator. Copies of such materials must be sent 
simultaneously and in the same manner to all parties \7\ and to the 
Director. Parties also must send the Director, arbitrator, and all 
parties proof of service of such written materials, indicating the 
time, date, and manner of service upon the arbitrator and all parties. 
No particular format is prescribed; parties may use the same type of 
Certificate of Service used in state or federal courts or another 
format that includes the necessary information (including the address 
to which the materials were sent). As is true under the Federal Rules 
of Civil Procedure,\8\ service by mail is complete upon mailing.
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    \7\ Since parties may be represented by counsel at any stage of 
an NASD arbitration proceeding (see Rule 10316), service upon a 
party's counsel of record will be considered to be service on the 
party.
    \8\ See Fed. R. Civ. P. 5(b).
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    For purposes of the proposed rule, ``mailing'' might include 
depositing the materials in a facility of the United States Postal 
Service or sending them by means of a messenger or overnight delivery 
service. If the arbitrator and all parties agree, written materials may 
be served by facsimile (fax) or other electronic means. Such agreement 
might be given at the point of entry into the Pilot Program or at any 
time thereafter by providing an electronic mail (E-mail) address or a 
facsimile number. Once such agreement is given, it will be presumed to 
continue unless the arbitrator and parties are notified otherwise. If 
the arbitrator or any party does not have access to an electronic means 
of communication, then such means may not be used.
    Proposed paragraph (c)(2) provides that, if the arbitrator agrees, 
parties may initiate conference calls with the arbitrator, provided 
that all parties are on the line before the arbitrator joins the 
call.\9\ Similarly, paragraph (c)(3) provides that the arbitrator may 
initiate conference calls with the parties, provided all parties are on 
the line before the conference begins.
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    \9\ Under paragraph (d)(2)(C), fees for pre-hearing telephone 
conference calls will be capped at $450 as they are in Rule 
10332(k). To the extent that such calls resolve issues relating to 
timing, motions, witnesses, or discovery, they ultimately may save 
the parties time and expense by expediting the hearing process.
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    At the discretion of the arbitrator, conference calls may be tape 
recorded. The current practice for taping pre-hearing conference calls 
will be followed for taping conference calls under the Pilot Program. 
That practice is that the person wishing to tape record the call 
notifies NASD Regulations staff in advance, and arrangements are made 
either to (i) use tape recording equipment operated by the arbitrator 
or an NASD Regulation staff member, or (ii) have the conference 
operator tape record the call. The cost of tape recording the 
conference call may be allocated to one or more parties by the 
arbitrator at the conclusion of the case, as provided in Rule 10332(c). 
Alternatively, the arbitrator may direct one of the parties to prepare 
a written summary of the decisions reached during the call, and send 
the summary by facsimile to the arbitrator and all parties within a 
short period of time (normally 24 hours) while memories are still 
fresh.
    Paragraph (c)(4) states that parties may not communicate orally 
with the arbitrator unless all parties are present.
    Paragraph (c) thus provides for flexibility and yet ensures that 
there are no improper ex parte contacts between the arbitrator and the 
parties.

Filing Fees, Member surcharges, and Hearing Session Deposits

    Filing fees, member surcharges, and member processing fees will not 
change under the Pilot Program. Rather, proposed paragraph (d)(1) 
provides that such fees will be the same as in Rules 10332 and 10333. 
However, hearing session fees will be reduced in the Pilot Program to 
reflect lower arbitrator honoraria (payments) and other costs. The fee 
for a pre-hearing conference call with an arbitrator will be the same 
as at present, $450. Specifically:
     Paragraph (d)(2)(A) provides that, for claims of 
$50,000.01 to $100,000.00, hearing session fees under the Pilot Program 
will be $550 per session or $1,100 per typical two session day. The new 
fee structure represents a reduction of $200 per session for the 
parties as compared with normal case procedures (or a $400 reduction 
per typical two session day).
     Paragraph (d)(2)(B) provides that, for claims of 
$100,000.01 to $200,000.00, hearing session fees under the Pilot 
Program will be $750 per session or $1,500 per typical two session day. 
The new fee structure represents a reduction of $375 per session for 
the parties as compared with normal case procedures (or a $750 
reduction per typical two session day).
     Paragraph (d)(2)(C) provides that the fee for a pre-
hearing conference call with the arbitrator will be $450. This fee does 
not vary with the amount of the claim.
    NASD Regulation can afford to pass on to parties the above savings 
in hearing session fees because the use of a single arbitrator rather 
than three arbitrators will result in savings in the

[[Page 68403]]

honoraria paid to arbitrators.\10\ Some costs are fixed, however, 
regardless of the size of the panel. since a tentative panel of three 
arbitrators will be selected before parties decide on a single 
arbitrator, the cost of the arbitrator selection process will remain 
the same as if a three-arbitrator panel were to be used. Such costs 
include: production of a list of up to 15 possible arbitrators 
(referred to herein as ``potential arbitrators'') from which the 
parties may select the initial panel of three arbitrators, preparation 
and mailing of additional information concerning potential arbitrators 
(if requested), gathering and mailing of the five most recent awards 
rendered by each of the potential arbitrators, staff review of 
potential arbitrators for conflicts of interest specific to the pending 
case, Central Registration Depository (CRD) background checks on any 
potential arbitrators who have worked in the securities industry, 
consolidation and ranking of potential arbitrators, contacting the 
potential arbitrators to determine their availability, and, if a single 
arbitrator is chosen under the Pilot Program, notifying two of the 
final three arbitrators that they will not be needed.
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    \10\ For each hearing session, NASD Regulation will save $400 in 
arbitrator honoraria. Conversation between Linda Fienberg, Executive 
Vice President, NASD Regulation, and Joseph P. Corcoran, Attorney, 
Division, Commission on November 29, 1999.
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    In addition, many fixed costs of holding hearings will also be the 
same, regardless of whether the panel consists of three arbitrators or 
one. These costs include hearing room usage costs (which may include 
rental fees for commercial facilities or reimbursement to the NASD for 
use of NASD office space), and staff time and travel expenses (if staff 
attend the hearing). For these reasons, NASD Regulation believes the 
proposed fees for the single arbitrator program are fair and 
reasonable.

Limitations on the Amount of the Award

    Proposed paragraph (e) provides that the single arbitrator may not 
award the parties more than a total of $200,000, including damages, 
interest, costs, and attorneys' fees, unless all parties agree that the 
arbitrator may award a larger amount. In addition, the arbitrator will 
allocate forum fees to the parties as provided in rule 10332(c). 
Therefore, parties will want to evaluate their claims carefully to 
ensure that they fit within the parameters of the Pilot Program.
    In the unlikely event that, during the course of the arbitration, a 
claimant learns of information that leads the claimant to believe there 
are additional claims, or higher claims than originally made, which 
would raise the total amount in controversy over the $200,000 maximum, 
the claimant has the option of (i) asking the arbitrator to dismiss the 
case without prejudice under rule 10305 and, if that request is 
granted, re-filing the revised claim as a regular, three-arbitrator 
case.\11\ or (ii) asking the other parties to stipulate that the single 
arbitrator may award more than $200,000. NASD Regulation does not 
anticipate that such issues will arise with any frequency.
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    \11\ rule 10305(a) provides that arbitrators may dismiss a 
proceeding at the request of a party or on the arbitrators' own 
initiative. Therefore, the single arbitrator has the discretion to 
determine whether or not to grant a request for dismissal. Rule 
10305(c) provides that arbitrators shall dismiss a proceeding at the 
joint request of all the parties.
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    To assist parties in understanding the proposed rule change, NADS 
Regulation staff is preparing informational material that will be given 
to parties, most likely when the claim is served and again when the 
list of appointed arbitrators is mailed, so that parties can make an 
informed decision as to whether their case is appropriate for the Pilot 
Program. In addition, training material regarding the Pilot Program 
will be given to arbitrators who are selected to serve as single 
arbitrators under the Pilot Program.

Applicability of Code

    Proposed paragraph (f) of the Rule provides that, except as 
provided in this rule, the remaining provisions of the Code will apply 
to the Pilot Program. This means that the normal arbitration rules and 
procedures will apply unless they are specifically superseded in the 
proposed rule.

Duration of Pilot Program

    Paragraph (g) provides that the proposed rule will remain in effect 
until two years after the effective date. Prior to the expiration of 
the Pilot Program, NASD Regulation may decide to extend the Program, 
and would then request SEC approval for an extension. NASD Regulation 
staff will develop an evaluation form to solicit feedback from Pilot 
participants. This feedback will be used to consider whether to 
continue or terminate the Pilot, or whether additional refinements to 
the Pilot are necessary.

Benefits to Customers and the Securities Industry

    Under the Pilot Program, the parties have full control over the 
single arbitrator selection process. They may agree to select either a 
public arbitrator or an industry arbitrator to preside as the single 
arbitrator. In addition, the parties' hearing session costs will be 
reduced. Scheduling of pre-hearing conferences and hearing dates will 
be easier with a single arbitrator. Parties may file discovery requests 
and motions directly with the assigned arbitrator, which will eliminate 
delay. Parties also will be permitted to contact the arbitrators for 
conference calls at the convenience of the parties and arbitrator 
without the involvement of NASD Regulation staff.

Effective Date

    The NASD will announce the effective date of the proposed rule 
change in a Notice to Members to be published no later than 60 days 
following Commission approval. The effective date will be 30 days 
following publication of the Notice to Members announcing Commission 
approval.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) \12\ of the Act, 
which requires, among other things, that the Association's rules must 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. NASD Regulation believes 
that the proposed rule change will protect investors and the public 
interest by providing a streamlined and less expensive voluntary 
alternative for arbitration claims that meet the Pilot Program 
criteria.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90

[[Page 68404]]

days of such date if it finds such longer period to be appropriate and 
publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-99-54 and should 
be submitted by December 28, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-31639 Filed 12-6-99; 8:45 am]
BILLING CODE 8010-01-M