[Federal Register Volume 67, Number 230 (Friday, November 29, 2002)]
[Notices]
[Pages 71224-71226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30197]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46881; File No. SR-PCX-2002-71]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. To Require Industry Parties in Arbitration To Waive 
Application of Contested California Arbitrator Disclosure Standards, 
Upon the Request of Customers and Associated Persons With Claims of 
Statutory Employment Discrimination, for a Six-Month Pilot Period

November 21, 2002.
    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 November 7, 2002, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') 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 the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons. For the reasons 
described below, the Commission is granting accelerated approval to the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX and PCX Equities, Inc. (``PCXE'') are proposing a rule change 
to amend their rules to require industry parties in arbitration to 
waive application of contested California arbitrator disclosure 
standards upon the request of customers or, in industry cases, upon the 
request of associated persons with claims of statutory employment 
discrimination, for a six-month pilot period from November 21, 2002 to 
May 22, 2003.\3\ Below is the text of the proposed rule change. 
Proposed new language is italicized, deleted text is in [brackets].
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    \3\ Telephone conversation between Betsy James, Assistant 
General Counsel, PCX, and Andrew Shipe, Special Counsel, Division of 
Market Regulation, SEC, November 21, 2002.
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* * * * *

Rules of the Board of Governors of the Pacific Exchange, Inc.

Rule 12 Arbitration

Matters Subject to Arbitration
    Rule 12.1(a)-(g)--No change.
Commentary:

    .01--No change.
    .02--It may be deemed conduct inconsistent with just and equitable 
principles of trade for a member, a member organization or a person 
associated with a member or member organization to fail to submit to 
arbitration on demand under the provisions of this Rule[,]; or to fail 
to waive the California Rules of Court, Division VI of the Appendix, 
entitled ``Ethics Standards for Neutral Arbitrators in Contractual 
Arbitration'' (the ``California Standards''), if all the parties in the 
case who are customers have waived application of the California 
Standards in that case; or to fail to waive the California Standards if 
all associated persons with a claim alleging employment discrimination, 
including a sexual harassment claim, in violation of a statute have 
waived application of the California Standards in that case; or to fail 
to appear or to provide any document in his or its possession or 
control as directed pursuant to the provisions of this Rule; or to fail 
to honor an award of arbitrators properly rendered pursuant to the 
provisions of this Rule where a timely motion has not been made to 
vacate or modify such award pursuant to applicable law.
    .03--No change.
* * * * *

PCX Equities, Inc.

Rule 12 Arbitration

Matters Subject to Arbitration
    Rule 12.1--No change.
    Rule 12.2 (a)-(g)--No change.
    (h) It may be deemed conduct inconsistent with just and equitable 
principles of trade for an ETP Holder or a person associated with an 
ETP Holder to fail to submit to arbitration on demand under the 
provisions of this Rule[,]; or to fail to waive the California Rules of 
Court, Division VI of the Appendix, entitled ``Ethics Standards for 
Neutral Arbitrators in Contractual Arbitration'' (the ``California 
Standards''), if all the parties in the case who are customers have 
waived application of the California Standards in that case; or to fail 
to waive the California Standards if all associated persons with a 
claim alleging employment discrimination, including a sexual harassment 
claim, in violation of a statute have waived application of the 
California Standards in that case; or to fail to appear or to provide 
any document in his or her or its possession or control as directed 
pursuant to the provisions of this Rule or to fail to honor an award of 
arbitrators properly rendered pursuant to the provisions of this Rule 
where a timely motion has not been made to vacate or modify such award 
pursuant to applicable law.
    (i)-(j)--No change.
* * * * *

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

    In its filing with the Commission, the PCX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change.\4\ The 
text of these statements may be examined at the places specified in 
Item III below. PCX has prepared summaries, set forth in sections A, B 
and C below, of the most significant aspects of such statements.
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    \4\ The discussion in this section represents the Exchange's 
views on the situation in California and does not in any way 
represent a Commission position on this issue.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange states that it makes every effort to provide investors 
who bring their claims to PCX with a fair, efficient, and economical 
arbitration forum. In July 2002, the California Rules of Court, 
Division VI of the Appendix, entitled, ``Ethics Standards of Neutral 
Arbitrations in Contractual Arbitration'' (the ``California 
Standards'') became effective (further described below). Prior to the 
enactment of the California Standards, the Exchange states that it, 
along with the National Association of Securities Dealers, Inc. 
(``NASD'') and the New York Stock Exchange (``NYSE'', and collectively 
with PCX and NASD, the ``Exchanges''), made several efforts to raise 
their concerns about the California Standards with the California 
Judicial Council and Legislative staff. The Exchange states that these 
attempts did not meet with any success, and the California Standards 
became effective without addressing the Exchanges' concerns. Since 
then, PCX has been attempting to develop an appropriate process by 
which it can appoint arbitrators in California.
    NASD and NYSE filed a joint complaint in federal court for 
declaratory relief (the ``Complaint'') in which they contend that the 
California Standards cannot lawfully be applied to NASD and NYSE, 
because the California Standards are preempted by federal law

[[Page 71225]]

and are inapplicable to self-regulatory organizations (``SROs'') under 
state law.\5\ On September 18, 2002, the Commission moved to appear in 
the case as a friend of the court and submitted a brief in which it 
contended that the California Standards conflict with and thus are 
preempted by the Commission's regulation of SRO arbitration under the 
Act and by the Federal Arbitration Act.\6\ On November 12, 2002, the 
district court dismissed the case on the ground that the defendants 
were immune from suit under the Eleventh Amendment of the Constitution.
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    \5\ See Motion for Declaratory Judgment, NASD Dispute 
Resolution, Inc. and New York Stock Exchange, Inc., v. Judicial 
Council of California, filed in the United States District Court for 
the Northern District of California, No. C 02 3486 SBA (July 22, 
2002), available on the NASD Web site at: www.nasdadr.com/pdf-text/072202 --ca--complaint.pdf.
    \6\ See Brief of the Securities and Exchange Commission, Amicus 
Curiae, in Support of Plaintiffs' Motion for Declaratory Judgment, 
NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., v. 
Judicial Council of California. The brief is available on the 
Commission Web site at: www.sec.gov/litigation/briefs/nasddispute.pdf.
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    While waiting for the court's guidance on this issue, NASD and NYSE 
announced that they were temporarily postponing the appointment of 
arbitrators for new arbitrations in California. While PCX has not 
joined in the Complaint to date, PCX concurs with NASD's and NYSE's 
position in this matter, as well as the Commission's as set forth in 
its friend of the court brief, and believes that the court's decision 
could be applicable to PCX also. PCX has therefore been reluctant to 
appoint arbitrators pending the court's decision.
    On September 5, 2002, Harvey L. Pitt, Chairman of the Commission, 
sent a letter to NASD and NYSE requesting them to explore ways to 
expedite processing of arbitration claims involving California 
parties.\7\ In response, NASD proposed the implementation of a six-
month amendment to its rules, requiring all parties that are member 
firms or associated persons to waive the California Standards if all 
the parties in the case who are customers or associated persons with a 
statutory employment discrimination claim have waived the California 
Standards in that case. This Rule Filing was published in the Federal 
Register on October 3, 2002, and the Commission granted accelerated 
approval.\8\ In the interest of continuing to provide investors with an 
arbitral forum in California, and of being responsive to the 
Commission's desire that the Exchanges offer some alternatives to 
parties pending resolution of the applicability of the California 
Standards to the Exchanges, PCX proposes an amendment to its Rules 
substantially similar to NASD's.
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    \7\ See letter from Chairman Pitt to Robert R. Glauber, Chairman 
and CEO of NASD, and Richard Grasso, Chairman and CEO of NYSE, dated 
September 5, 2002.
    \8\ See Securities Exchange Act Release No. 34-46562 (September 
26, 2002), 67 FR 62085 (SR-NASD-2002-126).
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Background Regarding the California Standards

    The California Standards became effective July 1, 2002. They are 
intended to address potential conflicts of interest that could exist in 
private arbitration forums. The Exchanges' arbitration forums, however, 
are part of a federal regulatory system overseen on a uniform basis by 
the Commission. The conflicts that the California Standards are 
designed to address do not exist in the Exchanges' arbitration forums, 
which are highly regulated dispute resolution programs. The Commission 
Staff sent a letter on July 1, 2002, requesting that the arbitration 
programs administered by the SROs be exempted from the California 
Standards.
    The California Standards place excessive and unnecessary disclosure 
burdens on persons who would serve on PCX arbitration panels and who 
already must meet PCX's stringent disclosure requirements. The 
extensive record-keeping requirements, and the potential liability for 
even inadvertent violations of the California Standards, led PCX to 
conclude that if PCX were required to implement the California 
Standards, PCX arbitrations would be more time consuming, more costly, 
and there would be less arbitrators willing to be members of PCX's 
arbitrator pool. The California Standards would permit a party to 
require the removal of an arbitrator for disclosing even an immaterial 
relationship. An arbitrator's inadvertent failure to disclose even an 
immaterial relationship could also result in the removal of the 
arbitrator, or the vacatur of an award. The alternative dispute 
resolution administrator would no longer have the power to decide 
contested challenges to arbitrators under the California Standards. 
Instead, the parties would have unilateral authority to require removal 
of arbitrators based on disclosures under the California Standards, 
whether the disclosures were material or not.
    NASD and NYSE filed extensive comments when the California 
Standards were proposed in February 2002, and followed up with meetings 
with the Judicial Council and Legislative staff, some of which PCX also 
attended. PCX also filed a letter with the Judicial Council concurring 
with the positions taken by NASD and NYSE and objecting to the 
application of the California Standards to PCX's arbitration program. 
Despite this, the California Standards were implemented without 
addressing the basic concerns of the Exchanges. NYSE and NASD formally 
announced in July 2002, that they were postponing appointment of 
arbitrators in California until this matter was resolved. PCX has been 
attempting to determine how it can panel arbitrations in this 
environment. PCX is concerned that any attempt to seat arbitrators 
pursuant to the California Standards would result in: (a) the potential 
for limitless objections to arbitrators based on potentially immaterial 
disclosures required under the California Standards, (b) unacceptable 
risk of liability to arbitrators and PCX, (c) the likelihood that PCX's 
arbitrator pool would decrease dramatically due to the costs associated 
with the required record-keeping and the risk of liability, and (d) an 
overall increase in the cost of arbitrations to the parties due to all 
of these factors.

Proposed Rule Change

    PCX states that it has a strong desire to accommodate parties to 
arbitration in California in this uncertain environment. PCX reviewed 
NASD's proposed rule change that would require industry parties to 
waive the California Standards in all cases in which all the parties in 
the case who are customers (or in industry cases, who are associated 
persons with claims of statutory employment discrimination) agree to 
waive the application of the California Standards. PCX states that 
implementation of a similar rule change would be an acceptable 
temporary way to allow PCX to continue to provide arbitration, pending 
a more permanent solution. Pursuant to the waiver permitted by this 
Rule change, the matter would proceed under the existing PCX 
Arbitration Rules, which already contain extensive disclosure 
requirements and provisions for challenging arbitrators with potential 
conflicts of interest.
    Once the proposed rule filing is effective, PCX will notify 
investors and associated persons with claims of statutory employment 
discrimination, giving them the option of waiving the California 
Standards and providing them with waiver forms. PCX staff will also 
speak with investors and other

[[Page 71226]]

parties to explain this process, and will endeavor to provide 
additional information on its website.
    At the same time, PCX will notify industry parties in all pending 
California cases that they must waive the California Standards if the 
investor agrees to a waiver (or associated person, in the circumstances 
described above). Industry parties in such cases will be required to 
execute waiver agreements. However, their failure to do so will not 
stop the cases from moving forward.\9\ An industry party's failure to 
sign the waiver as required by the proposed rule change will be 
referred for disciplinary action.
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    \9\ In these situations, PCX will treat the industry parties as 
having waived the California standards. Telephone conversation 
between Peter Bloom, Director of Policy Development, PCX, and Andrew 
Shipe, Division of Market Regulation, SEC, November 21, 2002.
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    If all parties waive the California Standards as permitted by the 
proposed Rule change, PCX will immediately commence the arbitrator 
appointment process using the PCX Rules regarding arbitrator 
disclosures, and not the California Standards.
    PCX requests that this Rule change become effective immediately, 
for a six-month pilot period. If the outcome of NASD's and NYSE's 
lawsuit is that the California Standards do not apply to SROs, the 
waivers will no longer be necessary. Cases that had already been 
empanelled pursuant to a waiver would continue to conclusion with the 
existing panel. If the lawsuit has not concluded by the expiration of 
the initial six-month period, PCX may request an extension.
2. Statutory Basis
    PCX believes that this proposal is consistent with section 6(b) 
\10\ of the Act, in general, and furthers the objectives of section 
6(b)(5),\11\ in particular, in that it is designed to facilitate 
transactions in securities; to prevent fraudulent and manipulative acts 
and practices; to promote just and equitable principles of trade; to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and in general, to protect investors and the public interest. 
PCX believes that expediting the appointment of arbitrators under the 
proposed waiver, at the request of customers and associated persons 
with claims of statutory employment discrimination, will allow those 
parties to exercise their contractual rights to proceed in arbitration 
in California, notwithstanding the confusion and uncertainty caused by 
the California Standards.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    PCX does not believe that the proposed rule change will impose 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 on the proposed rule change were neither solicited 
nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 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 PCX. All 
submissions should refer to File No. SR-PCX-2002-71 and should be 
submitted by December 20, 2002.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, the requirements of section 6 of the Act.\12\ 
Specifically, the Commission finds that the proposal is consistent with 
section 6(b)(5) of the Act, which requires that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, as well as to remove impediments to and perfect 
the mechanism of a free and open market, and, in general, to protect 
investors and the public interest.\13\ The Commission further finds 
good cause for approving the proposed rule change prior to the 30th day 
after the date of publication of notice thereof in the Federal 
Register. Accelerated approval is necessary to protect investors in 
that the rules are designed to help address the backlog of cases 
created by the confusion over the new California Standards, are 
designed to provide them with a mechanism to help resolve their 
disputes with broker-dealers in a more expedited manner, and are 
designed to help ensure the certainty and finality of arbitration 
awards. Additionally, the proposed rule change will become effective as 
a pilot program for six months, from November 21, 2002 to May 22, 2003, 
during which time the Commission and the Exchange will monitor the 
status of the previously discussed litigation.
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    \12\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-PCX-2002-71) is hereby 
approved on an accelerated basis through May 22, 2003.
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    \14\ 15 U.S.C. 78s(b)(2).

    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. 02-30197 Filed 11-27-02; 8:45 am]
BILLING CODE 8010-01-P