[Federal Register Volume 68, Number 12 (Friday, January 17, 2003)]
[Notices]
[Pages 2601-2603]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1111]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47176; File No. SR-NASD-2003-01]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc., Relating to Refunds of Member Surcharges in 
Arbitration

January 13, 2003.
    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 January 2, 2003 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. The Commission is publishing this notice 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend rule 10333(a) of the NASD Code of 
Arbitration Procedure to provide that, in certain circumstances, NASD 
will refund the member surcharge paid by a member firm named as a party 
to an arbitration proceeding (or where its employee/former employee has 
been named as a party). Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
[brackets].
* * * * *

Code of Arbitration Procedure

* * * * *

10333. Member Surcharge and Process Fees

(a) Member Surcharge
    (1) Each member that is named as a party to an arbitration 
proceeding, whether in a Claim, Counterclaim, Cross-Claim or Third-
Party Claim, shall be assessed a [non-refundable] surcharge pursuant to 
the schedule below when the Director of Arbitration perfects service of 
the claim naming the member on any party to the proceeding.
    (2) For each associated person who is named, the surcharge shall be 
assessed

[[Page 2602]]

against the member or members that employed the associated person at 
the time of the events which gave rise to the dispute, claim or 
controversy. No member shall be assessed more than a single surcharge 
in any arbitration proceeding.
    (3) The surcharge shall not be chargeable to any other party under 
Rules 10332(c) and 10205(c) of the Code. The Director will refund the 
surcharge paid by a member in an arbitration filed by a customer if the 
arbitration panel: (A) denies all of the customer's claims against the 
member or associated person; and (B) allocates all forum fees assessed 
pursuant to Rule 10332(c) against the customer. The Director may also 
refund or cancel the member surcharge in extraordinary circumstances.
    (Remainder of rule unchanged.)
* * * * *

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 included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
item IV below. NASD 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
    Rule 10332(c) of the Code requires that the arbitrators, in their 
awards, shall determine the amount chargeable to the parties as forum 
fees and shall determine who shall pay such forum fees. Generally such 
fees are divided among the parties, but the arbitrators may, in their 
discretion, allocate all forum fees against the claimant or the 
respondent.
    Rule 10333(a) of the Code requires that each member that is named 
as a party in an arbitration, or that employed an associated person who 
is named as a party at the time of the events that gave rise to the 
dispute, must pay a surcharge. The amount of the surcharge is based on 
the amount asserted by the claimant to be in dispute. The member 
surcharge is non-refundable and, unlike forum fees, may not be 
allocated among the other parties, regardless of the outcome of the 
arbitration. As a result, member firms must pay the surcharge, which is 
typically higher than filing fees or forum fees, even when the 
arbitrators deny a customer's claim and allocate all forum fees against 
the customer.
    To mitigate the impact of arbitration fees on member firms in such 
cases, NASD is amending rule 10333(a) to provide that it will refund 
the member surcharge paid by each member firm named as a party (or 
where its employee/former employee has been named as a party) in an 
arbitration filed by a customer in which the arbitration panel: (1) 
Denies all of the customer's claims; and (2) allocates all of the forum 
fees against the customer. In cases with more than one customer 
claimant, NASD will not refund the surcharge unless the arbitration 
panel denies all of the customers' claims and allocates all of the 
forum fees against one or more of the customer claimants.
    In addition, from time to time, the NASD states that a refund of 
the member surcharge may be warranted in extraordinary circumstances 
that do not meet the criteria described above. As an example, the NASD 
states that occasionally a customer mistakenly names a member firm as a 
respondent, and later withdraws the claim as to that particular member 
firm. The Code as currently written would prohibit any refund or 
cancellation of the surcharge in such a case. To give NASD more 
flexibility in addressing such cases, NASD is further amending rule 
10333(a) to provide that the Director of Dispute Resolution, in his or 
her discretion, may cancel or refund member surcharges in extraordinary 
circumstances when he or she determines that retention of the surcharge 
would be inappropriate.\3\
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    \3\ NASD has represented to Commission staff that they will 
monitor the effect of the refund of the member surcharge on NASD 
Dispute Resolution's operating budget. Also, if NASD raises customer 
arbitration fees in the future, NASD will reinstate this member 
surcharge. Telephone conversation between Laura Gansler, Counsel, 
NASD Dispute Resolution, and Florence Harmon, Senior Special 
Counsel, Division of Market Regulation, Commission, January 10, 
2003.
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    This rule change applies only to member surcharges under rule 
10333(a) and does not affect any other fee required under the Code. The 
rule change will apply to all claims filed on or after January 13, 
2003.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\4\ 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 believes that the rule change will 
enhance the fairness of the NASD arbitration forum for member firms, 
particularly small member firms.
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    \4\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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 were neither solicited nor received.

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

    The proposed rule change has been filed by NASD as establishing or 
changing a due, fee, or other charge imposed by the self-regulatory 
organization. Consequently, it has become effective pursuant to section 
19(b)(3)(A) of the Act \5\ and paragraph (f)(2) of rule 19b-4 
thereunder.\6\ At any time within 60 days of this filing, the 
Commission may summarily abrogate this proposal if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \5\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \6\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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

[[Page 2603]]

available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-2003-01 and 
should be submitted by February 7, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1111 Filed 1-16-03; 8:45 am]
BILLING CODE 8010-01-P