[Federal Register Volume 67, Number 6 (Wednesday, January 9, 2002)]
[Notices]
[Pages 1256-1259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-530]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45225; File No. SR-NASD-2001-55]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to Service of Process for Arbitration

January 3, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

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(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 28, 2001, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly owned subsidiary, NASD Dispute 
Resolution, Inc. (``NASD Dispute Resolution'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD Dispute Resolution. NASD Dispute Resolution 
submitted Amendment No. 1 to the proposed rule change on December 7, 
2001.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Jean I. Feeney, Chief Counsel, NASD Dispute 
Resolution, to Florence Harmon, Assistant Director, Division of 
Market Regulation, Commission, dated December 7, 2001 (``Amendment 
No. 1''). Amendment No. 1 makes certain technical changes to the 
proposed rule language. Amendment No. 1 also clarifies that the 
phrase ``the law of the jurisdiction in which the Respondent is 
being served'' in paragraph (b) of the proposed Rule 103xx refers to 
state rather than federal law, and could encompass the laws of the 
District of Columbia. Finally, Amendment No. 1 states that NASD 
Dispute Resolution will provide NASD Form XYZ to the Commission 
prior to the Commission's approval of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Dispute Resolution is proposing to add a new rule to the NASD 
Code of Arbitration Procedure to give claimants who are represented by 
counsel the option of serving initial arbitration claims on respondents 
directly, rather than having NASD Dispute Resolution staff serve those 
respondents. Below is the text of the proposed rule change. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *

103xx.\4\ Optional Direct Service by Claimant
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    \4\ A rule number will be assigned prior to implementation of 
the proposed rule change.
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    (a) General
    A Claimant who is represented by counsel may serve a Respondent 
directly instead of initiating the Claim in the manner provided by Rule 
10314(a). Claimant shall serve the following documents upon any 
Respondent that Claimant chooses to serve directly: a Statement of 
Claim specifying the relevant facts and the remedies sought, together 
with the documents in support of the Claim, the Uniform Submission 
Agreement, and a copy of NASD Form XYZ.\5\
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    \5\ This form will explain the direct service process. It will 
be drafted and assigned an official number prior to implementation 
of the proposed rule change.
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    (b) Manner of Service
    Service may be made under this Rule in the manner provided for 
service of demands for arbitration under the law of the jurisdiction in 
which the Respondent is being served.
    (c) Additional Mailing
    (1) No later than one business day following service on the first 
Respondent to be served under this Rule, Claimant shall mail a copy of 
the Statement of Claim to all Respondents together with information 
stating which Respondents were served in accordance with this Rule.
    (2) If any Respondent is a member, the mailing shall be addressed 
``Attention Legal and Compliance Department'' and sent to the main 
office of the member. The outside of the envelope shall state: 
``Important Legal Documents Enclosed.''
    (d) Filing with the Association
    Within twenty (20) days of service on the last Respondent whom 
Claimant serves under this Rule, Claimant must file with the Director 
of Arbitration;
    (1) An affidavit of service on each Respondent served;
    (2) The names of any additional Respondents whom Claimant wants the 
Association to serve;
    (3) An affidavit of mailing in accordance with paragraph (c);
    (4) An executed Submission Agreement;
    (5) A Statement of Claim of the controversy in dispute, together 
with the documents in support of the Claim, in the form in which it was 
served on Respondent(s);
    (6) The required deposit; and
    (7) Sufficient additional copies of the Submission Agreement, the 
Statement of Claim and supporting documents for each party that has not 
been served directly and for each arbitrator.
    (e) Time to Answer
    When filing under paragraph (d) is complete and any deficiencies 
have been resolved, the Association shall acknowledge that fact in 
writing to all parties. All time periods that are measured from receipt 
of the Statement of Claim or service of a Claim under Rule 10314(b) 
shall commence upon receipt of such written notification from the 
Association.
* * * * *

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 Dispute Resolution 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 Dispute Resolution 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 Dispute Resolution proposes an optional procedure to allow 
arbitration claimants who are represented by counsel the choice of 
serving respondents directly. The proposed rule could be used to serve 
some respondents and not other respondents in a given case, as claimant 
chooses. NASD Dispute Resolution staff would serve any remaining 
respondents as usual. The National Arbitration and Mediation Committee 
of NASD Dispute Resolution recommended adoption of the proposed rule in 
response to suggestions from some frequent users of the NASD Dispute 
Resolution arbitration forum who normally represent claimants and 
requested an optional direct service process.
    As background, the current procedure is for all initial claims to 
be served by NASD Dispute Resolution.\6\ After resolving any 
deficiencies, such as missing or unsigned documents or improper fees, 
NASD Dispute Resolution serves all respondents at the same time. 
Respondents then have 45 calendar days from receipt of the claim in 
which to answer.
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    \6\ NASD 10314(a) sets forth the process for initiating a 
proceeding. Under NASD Rules 10314(b) and (c), and 10328(a), the 
parties already serve directly any counterclaims, cross-claims, 
third-party claims, or amended pleadings.
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    NASD Dispute Resolution believes that the proposed rule contains 
several safeguards to ensure that the direct service option would 
result in proper service. For the protection of claimants whose awards 
might later be challenged because of improper service, use of the 
proposed rule is limited to parties that are represented by counsel, 
who would be familiar with applicable law concerning service of demands 
for arbitration. To avoid any detriment

[[Page 1258]]

where there is a delay in serving all respondents, the proposed rule 
requires a notice to all respondents immediately after the first 
respondent has been served directly. To forestall the possibility that 
a member firm may not be aware of service on a remote branch office, 
the proposed rule requires the claimant, no later than one business day 
following service on the first respondent to be served under the 
proposed rule, to provide all respondents with the Statement of Claim 
and information indicating which respondents were served in accordance 
with this rule. Such information is to be sent to the main office of a 
member firm, addressed to the Legal and Compliance Department, in an 
envelope marked on the outside to indicate its importance. Finally, to 
avoid having different or uncertain due dates for answers, the time to 
answer would not begin to run until NASD Dispute Resolution notified 
all parties of the due date, as described below.
    Following direct service on all respondents to be served directly, 
claimants must file the claim and submission agreement, affidavits of 
service and mailing, other related documents, and the proper fees with 
NASD Dispute Resolution. If claimants wish NASD Dispute Resolution to 
serve any remaining respondents, they must provide that information as 
well. The NASD Dispute Resolution staff would review such submissions 
for any deficiencies, as at present. Once any deficiencies have been 
resolved, NASD Dispute Resolution would notify the parties and the time 
to answer would begin to run. Details of the proposed rule are set 
forth below.

Highlights of Proposed Rule

    Proposed paragraph (a) states that claimants who are represented by 
counsel may elect to serve any respondent directly. Claimants are not 
required to use this rule, nor are they required to use the rule for 
all respondents in a particular case. For example, claimants may be 
willing to serve an active member firm respondent directly, but may be 
unsure of how to find and serve a particular associated person 
respondent. In such a case, NASD Dispute Resolution would serve the 
associated person as it does now.
    Along with the Statement of Claim specifying the relevant facts and 
the remedies sought, claimants must serve any documents in support of 
the claim, the Uniform Submission Agreement, and a copy of a standard 
cover letter explaining the process in simple terms (temporarily 
referred to as ``NASD Form XYZ'' in the proposed rule). That cover 
letter would indicate to the respondent being directly that: (i) the 
respondent need to file an answer to the claim at this time, and (ii) 
the arbitration claim is not reportable to the Central Registration 
Depository (CRD) by respondents who are associated persons until NASD 
Dispute Resolution notifies the respondent in writing as provided in 
paragraph (e) of the proposed rule. The proposed cover letter would be 
made available to claimants and would be posted on the NASD Dispute 
Resolution Web site.
    Proposed paragraph (b) provides that claimants exercising the 
option of directly serving respondents must serve the claim in the 
manner provided for service of demands for arbitration under the law of 
the state or other jurisdiction in which the respondent is being 
served. NASD Dispute Resolution would not be providing advice to 
claimants on such legal requirements; as noted above, this procedure is 
only available to parties who are represented by counsel.
    Proposed paragraph (c)(1) requires the claimant to mail a copy of 
the Statement of Claim to all respondents together with information 
stating which respondents were served in accordance with the proposed 
rule, and to do this no later than one business day following service 
on the first respondent to be served under the rule.
    Paragraph (c)(2) requires that mailings addressed to respondents 
who are members must be addressed to the Legal and Compliance 
Department of the firm, sent to the main office, and state on the 
envelope: ``Important Legal Documents Enclosed.'' This would alert the 
member firm immediately, and will reduce the chance that service would 
be made on the wrong office.
    Proposed paragraph (d) provides that claimant must file the 
enumerated documents, including affidavits of service, with the 
Director of Arbitration within 20 days of service on the last 
respondent whom claimant serves under the proposed rule. Proposed 
paragraph (e) provides that time periods measured from receipt of the 
Statement of Claim or service of a claim under Rule 10314(b) would 
commence upon receipt of written notification from the Association. The 
claim would not be considered officially filed until deficiencies have 
been resolved, as in the current procedure. When the filing is 
complete, the staff would acknowledge that fact in writing, and the 
time to answer would begin for all respondents. This prevents the 
confusion that would occur if the time to answer began to run when each 
respondent was served.
b. Statutory Basis
    NASD Dispute Resolution believes that the proposed rule change, as 
amended, is consistent with the provisions of Section 15A(b)(6) of the 
Act,\7\ which requires, among other things, that the Association's 
rules 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 Dispute 
Resolution believes that the proposed rule change will protect 
investors and the public interest by giving claimants the option of 
serving claims directly and by providing specific procedures to ensure 
that service is accomplished properly.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were not solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 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 NASD Dispute Resolution 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 proposal, as 
amended, is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent

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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 the filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to the File No. SR-NASD-2001-55 and should be 
submitted by January 30, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
Margaret H. McFarland,
Deputy Secretary.
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    \8\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 02-530 Filed 1-8-02; 8:45 am]
BILLING CODE 8010-01-M