[Federal Register Volume 66, Number 232 (Monday, December 3, 2001)]
[Notices]
[Pages 60230-60232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29828]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45094; File No. SR-ISE-00-17]


Self Regulatory Organizations; International Securities Exchange 
LLC; Order Granting Approval to Proposed Rule Change and Amendments No. 
1 and No. 2 by the International Securities Exchange LLC Relating to 
Its Arbitration Program

November 21, 2001.

I. Introduction

    On November 20, 2000, the International Securities Exchange LLC 
(``ISE'') filed with 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 make certain changes to its arbitration rules. 
These changes were intended to reflect and facilitate ISE's regulatory 
services agreement with NASD Regulation, Inc. (``NASDR'') pursuant to 
which, among other things, NASDR provides services related to 
arbitration proceedings to involving ISE members.\3\ On March 5, 2001, 
the Exchange filed Amendment

[[Page 60231]]

No. 1 to the proposed rule change,\4\ and on July 16, 2001, the 
Exchange filed Amendment No. 2 to the proposed rule change.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that although the regulatory services 
agreement at issue is between ISE and NASDR, the actual 
administration of arbitrations on behalf of ISE members pursuant to 
the agreement will be performed by a recently-created NASD 
subsidiary, NASD Dispute Resolution, which performs all arbitration 
and mediation services for NASD members.
    \4\ See Letter from Katherine Simmons, Vice President and 
Associate General Counsel, ISE, to Nancy J. Sanow, Assistant 
Director, Division of Market Regulation, Commission, dated March 5, 
2001 (``Amendment No. 1''). In Amendment No. 1, the ISE added 
paragraphs (a) and (b), which are jurisdictional provisions 
currently contained in ISE Rule 1800, to the proposed rule text.
    \5\ See Letter from Jennifer M. Lamie, Assistant General 
Counsel, ISE, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation, Commission, dated July 16, 2001 (``Amendment No. 
2''). Amendment No. 2 replaced the initial filing and Amendment No. 
1 in their entirety. In Amendment No. 2, the ISE made minor changes 
to the order of the subsections under ISE rule 1800, amended the 
language of its proposed jurisdictional provisions, and added 
subsection (c), which governs predispute arbitration agreements.
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    The proposed rule change was published for comment in the Federal 
Register on July 26, 2001.\6\ The Commission received no comments on 
the proposal. This order approves the proposed rule change, as amended.
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    \6\ See Securities Exchange Act Release No. 44572 (July 18, 
2001), 66 FR 39069 (July 26, 2001).
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II. Description of the Proposal

    In its proposed rule change, the ISE proposed amendments to Chapter 
18, Arbitration, of the ISE Rules. Specifically, the ISE proposes to 
repeal Rules 1800 through 1835 and create new Rule 1800, which will 
state that the NASD Code of Arbitration, as the same may be in effect 
from time to time, shall govern Exchange arbitrations. The proposed 
rule also states that the Exchange shall retain jurisdiction over its 
members for failure to honor arbitration awards and any right, action 
or determination by the Exchange which it would otherwise be authorized 
to adopt, administer or enforce is in no way limited or precluded by 
incorporation of the NASD Code of Arbitration.
    The Exchange has contracted with NASDR to perform arbitrations 
under ISE's rules. Accordingly, the Exchange proposes to eliminate all 
of the arbitration rules currently contained in Chapter 18 of the ISE 
Rules and incorporate the NASD Code of Arbitration by reference.\7\ The 
proposed rule also specifies that potential violations of ISE rules 
identified during an arbitration hearing may be referred to the ISE for 
investigation, and that disciplinary action may be brought by the ISE 
as a result thereof. Finally, a member or person associated with a 
member will be subject to discipline by the ISE if it fails to honor an 
award made as a result of an arbitration initiated under ISE Rules.\8\
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    \7\ The ISE represents that, as of this date, no cases have been 
opened under the Exchange's existing arbitration rules.
    \8\ NASDR performs arbitrations for the Philadelphia Stock 
Exchange. See Securities Exchange Act Release No. 40517 (October 1, 
1998), 63 FR 54177 (October 8, 1998). Because there have not been 
any arbitrations initiated under ISE rules, the proposed rule does 
not contain language found in the Phlx rules to address pending 
arbitrations.
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III. Discussion

    After careful review, the Commission finds that implementation of 
the proposed rule change is consistent with the requirements of section 
6 of the Act \9\ and the rules and regulations thereunder applicable to 
a national securities exchange.\10\ Specifically, the Commission 
believes that the proposal is consistent with section 6(b)(5) of the 
Act.\11\ Section 6(b)(5) requires, among other things, that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
facilitate transactions in securities, to remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.\12\ Section 6(b)(5) also requires that those rules not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. In particular, the Commission believes that the 
proposed rule change eliminating the ISE's arbitration program and 
referring cases to NASDR for arbitration will help protect investors 
and the public interest by ensuring that there is a fair arbitration 
forum available for all ISE arbitration claims.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
    \12\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    The proposed rule change submitted by the ISE would eliminate all 
of the arbitration rules currently contained in Chapter 18 of the ISE 
Rules and create new ISE Rule 1800, essentially incorporating the NASD 
Code of Arbitration by reference, by stating that the NASD Code of 
Arbitration, as the same may be in effect from time to time, shall 
govern Exchange arbitrations. The Commission believes that it is 
consistent with the Act to allow NASDR to administer ISE arbitrations, 
as the ISE has made the business decision to enter into an agreement 
with NASDR to provide a forum for its arbitrations for a flat annual 
fee, rather than to absorb the ongoing costs and administrative burden 
of continuing to manage its own arbitrations.
    Procedurally, the Commission believes that the proposed rule change 
should ensure that all arbitration cases otherwise subject to ISE's 
arbitration process will be administered under the NASDR arbitration 
program by virtue of ISE members being deemed ``members'' of the NASD 
for purposes of arbitrating any claims involving the securities 
business of any members of ISE, except for narrowly enumerated 
exceptions. The proposed rule change accomplishes this by subjecting 
ISE members to the NASD Code of Arbitration for ``[a]ny dispute, claim 
or controversy arising out of or in connection with the business of any 
member of the Exchange, or arising out of the employment or termination 
of employment of associated person(s) with any member may be arbitrated 
under this Rule 1800 except that (1) a dispute, claim, or controversy 
alleging employment discrimination (including a sexual harassment 
claim) in violation of a statute may only be arbitrated if the parties 
have agreed to arbitrate it after the dispute arose; and (2) any type 
of dispute, claim, or controversy that is not permitted to be 
arbitrated under the NASD Code of Arbitration, such as class action 
claims, shall not be eligible for arbitration under this Rule 
1800.''\13\ In effect, the proposed rule change requires that ISE 
members abide by the NASD's Code of Arbitration as if they were members 
of the NASD for purposes of arbitration.
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    \13\ See proposed ISE Rule 1800(b) (``Jurisdiction'').
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    In addition, the Commission believes that the proposed rule change 
provides for enforcement of arbitration awards and discipline of 
members, as appropriate, in a manner consistent with the Act, because 
ISE will continue to have ultimate responsibility for the enforcement 
and disciplining of its members regarding arbitration. An ISE member's 
refusal to submit to arbitration pursuant to the NASD Code of 
Arbitration or failure to pay an arbitration award rendered pursuant to 
the NASD Code of Arbitration would constitute a violation of section 
(b) of new ISE Rule 1800, which subjects ISE members to NASD 
jurisdiction, as well as section (e) which reserves ISE's right to 
discipline its members.
    As stated above, by virtue of ISE's agreement with NASDR to perform 
arbitrations for ISE members, as well as the proposed amendments to 
ISE's arbitration rules contained herein, the ISE proposes to 
incorporate by reference the NASD Code of Arbitration. Accordingly, the 
ISE has submitted to the Commission a letter requesting an

[[Page 60232]]

exemption pursuant to Section 36 of the Act from the rule filing 
procedures of Section 19(b) of the Act and Rule 19b-4 thereunder,\14\ 
with respect to the arbitration and margin rules of other self-
regulatory organizations it has incorporated by reference, in 
accordance with the section 36 exemptive request filing procedures 
published by the Commission.\15\ According to the ISE, the purpose of 
this request is to avoid having to file duplicative proposed rule 
changes with the Commission pursuant to section 19(b) and Rule 19b-4 
each time the NASD changes its Code of Arbitration. In its letter, the 
ISE also represents that its proposed incorporations by reference are 
regulatory in nature and are intended to be a comprehensive integration 
of the relevant rules of the other exchange into the ISE rules, and 
that the ISE agrees to provide written notice to its members whenever 
the Commission publishes for comment a proposed rule change to the NASD 
Code of Arbitration.
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    \14\ See Letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Jonathan G. Katz, Secretary, Commission, 
dated October 29, 2001.
    \15\ See Securities Exchange Act Release No. 39624 (February 5, 
1998), 63 FR 8101 (February 18, 1998).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-ISE-00-17), as amended, is 
hereby approved.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-29828 Filed 11-30-01; 8:45 am]
BILLING CODE 8010-01-M