[Federal Register Volume 68, Number 84 (Thursday, May 1, 2003)]
[Notices]
[Pages 23351-23353]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10788]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47734; File No. SR-PCX-2003-13]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to its Arbitration Program

April 24, 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 April 11, 2003, 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 
has received two comment letters regarding the proposed rule change.\3\ 
On April 17, 2003, the Exchange filed Amendment No. 1 to the proposed 
rule change.\4\ 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.
    \3\ See e-mails dated April 14 and 18, 2003 from Tim Canning, 
Esq.
    \4\ See letter dated April 17, 2003 from Kathryn Beck, Senior 
Vice President, PCX, to Florence Harmon, Senior Special Counsel, 
Division of Market Regulation, Commission.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX is proposing to amend its arbitration rules by amending 
Commentary .02 to PCX Rule 12.1 and adding new PCX Rule 12.35(b). PCX 
Rule 12.35(b) would require that pending arbitrations filed prior to 
the date the SEC approves the proposed rule changes set forth herein 
(the ``Approval Date'') be administered in accordance with PCX Rules 
12.1 through 12.34 if an arbitrator has been appointed prior to the 
Approval Date and all parties to the arbitration have waived 
application of the California Rules of Court, Division VI of the 
Appendix, entitled ``Ethics Standards of Neutral Arbitrations in 
Contractual Arbitration'' (the ``California Standards''), and waived 
any claims against the PCX that the conduct of the arbitration violates 
the California Code of Civil Procedure Section 1281.92 (``CCCP 
Claims'').\5\ Both waivers must be made without condition and in the 
form required by PCX. A copy of the proposed waiver form for the CCCP 
Claims was filed with the Commission as Exhibit A to the proposed rule 
change. The waiver for the California Standards must be made pursuant 
to the rules previously approved by the Commission.\6\ Additionally, 
this rule change will require industry parties in arbitration to waive 
the CCCP Claims upon the execution of a waiver by a customer or, in 
industry cases, upon the execution of a waiver by an associated person 
with claims of statutory discrimination.
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    \5\ The Exchange has filed a separate proposal (SR-PCX-2002-77) 
to address the administration of all other arbitrations.
    \6\ See Securities Exchange Act Release No. 46881 (Nov. 21, 
2002), 67 FR 71224 (November 29, 2002).
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    Below is the text of the proposed rule change. Proposed new 
language is italicized, deleted text is in [brackets].
* * * * *

PCX 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:
    (a) fail to submit to arbitration on demand under the provisions of 
this Rule[,];
    (b) 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;
    (c) fail to waive any claims against the Exchange that the conduct 
of the arbitration violates the California Code of Civil Procedure 
Section 1281.92 (``CCCP Claims''), if all the parties in the case who 
are customers have waived the CCCP Claims in that case; or to fail to 
waive the CCCP Claims if all associated persons with a claim alleging 
employment discrimination, including a sexual harassment claim, in 
violation of a statute have waived the CCCP Claims in that case;[or]
    (d) 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
    (e) 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.
* * * * *

Rule 12.35 Applicability of Arbitration Rules

    (a) Reserved.
    (b) Arbitrations Filed Prior to [insert Approval Date]. Arbitration 
claims that were filed prior to [insert Approval Date] and remain 
pending will be administered as follows:
    (i) The arbitration claim will be administered in accordance with 
Rules 12.1 through 12.34 if:
    (A) arbitrator(s) have been appointed as of [insert Approval Date]; 
and
    (B) all parties to the arbitration have waived, without condition 
and in the form required by the Exchange, the application of the 
California Standards and the CCCP Claims (as defined in Commentary .02 
of Rule 12.1).]
* * * * *

[[Page 23352]]

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.\7\ 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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    \7\ 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
    PCX states that it makes every effort to serve investors who bring 
their claims to PCX by providing a fair, efficient, and economical 
arbitration forum. Recent changes in California law and the attendant 
litigation, however, have caused PCX to reevaluate the continuance of 
its arbitration program. Specifically, California recently adopted (1) 
Section 1281.92 of the California Code of Civil Procedure (``CCCP 
1281.92''), which prohibits private arbitration providers from 
administering arbitrations, or providing any other services related to 
arbitration, if any party or attorney for a party has, or has had 
within the preceding year, any type of financial interest in the 
arbitration provider, and (2) the California Standards, which require 
arbitration providers to implement and maintain substantial new 
recordkeeping and disclosure requirements. CCCP 1281.92 became 
effective on January 1, 2003. Since their adoption, CCCP 1281.92 and 
the California Standards have become the subject of controversy or, in 
some cases, litigation regarding their interpretation and application 
to arbitration programs administered by self-regulatory 
organizations.\8\ To minimize any potential financial and litigation 
risk associated with these new provisions, PCX has decided to implement 
certain changes to its arbitration rules. In this regard, PCX has 
developed a plan for the future handling of pending arbitration claims 
as well as any new arbitration claims raised under PCX rules.
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    \8\ See, e.g., 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 (arguing that the California 
Standards conflict with, and thus are preempted by, the Commission's 
regulation of SRO arbitration under the Exchange Act and by the 
Federal Arbitration Act). The brief is available on the Commission 
Web site at: www.sec.gov/litigation/briefs/nasddispute.pdf. See also 
Securities Exchange Act Release No. 46881 (Nov. 21, 2002) 
(describing the controversy regarding new California arbitration 
provisions).
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    As one part of this plan, the PCX intends to expeditiously proceed 
with the administration of pending arbitrations in which arbitrators 
have been appointed as of the Approval Date. Because PCX has a strong 
desire to accommodate the parties to these arbitrations, these matters 
will be permitted to continue under the existing PCX arbitration rules. 
However, given the uncertain legal environment in California, PCX would 
require the parties to these arbitrations to waive the California 
Standards and CCCP Claims in order for the arbitrations to continue 
pursuant to PCX Rules 12.1-12.34.\9\
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    \9\ PCX will defer action on those pending arbitrations in which 
the parties did not sign waivers as set forth in Rule 
12.35(b)(i)(B). Another PCX rule filing, SR-PCX-2002-77, will 
address how such arbitrations will be administered, if and when the 
rule filing is approved by the SEC.
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    Once this proposed rule filing is effective, PCX will notify 
parties to this subset of pending arbitrations of the rule change and 
provide them with the option of waiving the California Standards and 
the CCCP Claims. PCX will provide them with the waiver forms and the 
opportunity to speak with PCX staff if they desire more information 
regarding this option.
    At the same time, PCX will notify industry parties in this same 
subset of cases that they must waive the California Standards and the 
CCCP Claims if the investor, or the associated person with a claim of 
statutory employment discrimination, agrees to a waiver. Industry 
parties in such cases will be required to execute waiver agreements. An 
industry party's failure to sign the waiver as required by the proposed 
rule change will be referred for disciplinary action.
2. Statutory Basis
    PCX believes that this proposal is consistent with Section 6(b) of 
the Act,\10\ in general, and furthers the objectives of Section 
6(b)(5),\11\ which requires that an exchange have rules that are 
designed 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, and, in general, to protect investors and 
the public interest.
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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-2003-13 and should be 
submitted by May 22, 2003.

IV. Summary of Comments

    As noted above, this proposal is one of two filed by PCX relating 
to the administration of its arbitration program. The Commission 
received two letters from one commenter addressing the proposals.\12\ 
The commenter, an attorney representing clients with pending 
arbitration claims at the Exchange, opposed accelerated approval of the 
proposals, and requested that they be subject to a full comment period. 
The commenter further expressed the concern that if any party to an 
arbitration proceeding did not execute the waivers required by PCX, the 
matter

[[Page 23353]]

could be dismissed, exposing the claimant to additional costs, loss of 
fees, time and effort, and the risk of a lapsed statute of 
limitations.\13\ The commenter further expressed concern that such 
waivers might be vulnerable to a legal challenge, thereby impairing the 
finality of any award. The commenter asserted that the PCX faced little 
or no harm if it continued its arbitration program.
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    \12\ See n. 3, supra.
    \13\ The commenter noted that although an arbitration generally 
tolls the statute of limitations, this does not apply when an 
arbitration is dismissed.
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    In response, the PCX noted that SR-PCX-2003-13 applies only to 
cases where arbitrators have been appointed.\14\ The PCX stated that 
none of the commenter's pending cases had arbitrators appointed, and 
that thus, approval of this proposal would not affect them. The PCX 
asserted that approval of this proposed rule change would permit other 
arbitrations to move forward in an expeditious manner. Finally, as 
noted above,\15\ PCX has stated that it will defer action on 
arbitrations where the parties do not sign waivers, but will address 
their administration in the companion rule filing, SR-PCX-2002-77, 
subject to approval by the SEC.
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    \14\ See letters dated April 17 and 23, 2003 from Kathryn Beck, 
Senior Vice President, PCX, to Florence Harmon, Senior Special 
Counsel, Division of Market Regulation, Commission.
    \15\ See n. 9, supra.
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V. 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.\16\ 
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.\17\ The Commission believes that the 
proposed rules are designed to provide investors with a mechanism to 
help resolve their disputes with broker-dealers in an expeditious 
manner, and are designed to help ensure the certainty and finality of 
arbitration awards.
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    \16\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    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. The Commission notes that this 
proposal would apply only to a defined set of arbitrations currently 
pending at the PCX--those where arbitrators have been appointed. 
Accelerated approval is appropriate in that it will allow these cases 
to move forward in an expeditious manner. The Commission further notes 
that PCX will defer action on any case where a party refuses to execute 
the required waivers, and that the administration of such cases will be 
addressed in another PCX rule filing, as stated above.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-PCX-2003-13) is hereby 
approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-10788 Filed 4-30-03; 8:45 am]
BILLING CODE 8010-01-P