[Federal Register Volume 68, Number 141 (Wednesday, July 23, 2003)]
[Notices]
[Pages 43553-43555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18653]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48187; File No. SR-NASD-2003-106]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Relating to Amendments to Pilot Rule in IM-
10100(f) and (g) of the Code of Arbitration Procedure To Require 
Industry Parties in Arbitration To Waive Application of Contested 
California Arbitrator Disclosure Standards upon the Request of 
Customers or Associated Persons

July 16, 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 July 8, 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 (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NASD Dispute Resolution. NASD has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act 
\3\ and Rule

[[Page 43554]]

19b-4(f)(6) thereunder,\4\ which renders the proposal effective upon 
receipt of this filing by the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4. In its filing, NASD requested that the 
Commission waive the rule's requirements of a five-day pre-filing 
notice and a 30-day operative delay.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD proposes to amend the pilot rule in IM-10100(f) and (g) of the 
NASD Code of Arbitration Procedure to expand and clarify the scope of 
the requirement that industry parties waive application of the 
contested California Arbitrator Disclosure Standards upon the request 
of customers or associated persons. Below is the text of the proposed 
rule change. Proposed new language is in italics; proposed deletions 
are in brackets.
* * * * *

10000. Code of Arbitration Procedure

IM-10100. Failure To Act Under Provisions of Code of Arbitration 
Procedure

    It may be deemed conduct inconsistent with just and equitable 
principles of trade and a violation of Rule 2110 for a member or a 
person associated with a member to:
    (a)-(e) No change.
    (f) 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, or associated persons with a 
claim against a member firm or another associated person, have waived 
application of the California Standards in that case. The written 
waiver by the customer or the associated person asserting the claim 
against a member or associated person under the Code shall constitute 
and operate as a waiver for all member firms or associated persons 
against whom the claim has been filed. This rule applies to claims 
brought in California against all member firms and associated persons, 
including terminated or otherwise inactive member firms or associated 
persons. [; or
    (g) fail to waive the California Standards, if all the parties in 
the case who are 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.] Remainder 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 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 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

Background

    On July 1, 2002, California introduced new rules governing the 
arbitration process in that state. The rules were designed to address 
conflicts of interest in private arbitration forums that are not part 
of a federal regulatory system overseen on a uniform, national basis by 
the SEC. The California Standards conflict with NASD's current 
arbitrator disclosure rules. Because NASD could not both administer its 
arbitration program in accordance with its own rules and comply with 
the new California Standards at the same time, NASD initially suspended 
the appointment of arbitrators in cases in California, but offered 
parties several options for pursuing their cases.\5\
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    \5\ These measures included providing venue changes for 
arbitration cases, using non-California arbitrators when 
appropriate, and waiving administrative fees for NASD-sponsored 
mediations.
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    In September 2002, NASD proposed implementation on an accelerated 
basis of a six-month pilot amendment to IM-10100 that would require 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 application of the California Standards in that case. Under 
such a waiver, the case would proceed in California. The Commission 
approved the proposed rule change for a six-month period ending March 
30, 2003,\6\ and recently extended the pilot rule for an additional 
six-month period.\7\ The pilot rule will expire on September 30, 2003.
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    \6\ See Securities Exchange Act Release No. 46562 (September 26, 
2002), 67 FR 62085 (October 3, 2002).
    \7\ See Securities Exchange Act Release No. 47631 (April 3, 
2002) 68 FR 17713 (April 10, 2003).
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Description of Proposed Rule Change

    The proposed rule change would amend the pilot rule in several 
respects. First, it would extend the rule to apply to all claims by an 
associated person against a member firm or another associated person, 
as well as to all customer claims. Currently, the pilot rule only 
applies to customer claims and to statutory discrimination claims 
brought by an associated person against a member firm. As a result, 
cases involving other claims by associated persons against member firms 
or other associated persons (``industry respondents'') cannot proceed 
if the industry respondents do not agree to waive the California 
Standards. To permit these cases to move forward, the proposed rule 
change would expand the current pilot rule to require that if an 
associated person with a claim against an industry respondent waives 
the application of the California Standards, all other industry 
respondents must also waive the application of the California Standards 
in that case. This change is consistent with New York Stock Exchange 
Rule 600(g), and would permit claims by associated persons against 
industry respondents in California to go forward.
    The proposed rule change would also provide that, if a customer, or 
an associated person with a claim against an industry respondent, 
agrees to waive the application of the California Standards, and an 
industry respondent has not signed and returned a waiver form, the 
industry respondent will be deemed to have waived the application of 
the standards in that case. Currently, NASD requires member firms and 
associated persons covered by the rule to sign and return the waiver 
agreement. NASD staff often must call industry respondents to remind 
them to send in their waiver forms. When execution of the agreement by 
the respondent member or associated person is mandatory under the rule, 
this requirement adds an unnecessary administrative step to the 
arbitration process. Therefore, NASD is proposing to amend the pilot 
rule to provide, as NYSE Rule 600(g) currently does, that a written 
waiver by a customer or an associated person who is asserting a claim 
against a member or associated person under the Code will constitute a 
waiver for all member firms or

[[Page 43555]]

associated persons against whom the claim has been filed.\8\
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    \8\ The NASD amended this paragraph as it was originally filed 
to delete a phrase it inadvertently included. Telephone call between 
Laura Gansler, Counsel, NASD Dispute Resolution, and Andrew Shipe, 
Special Counsel, Division of Market Regulation, Commission, dated 
July 14, 2003.
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    Finally, NASD is proposing to amend the pilot rule to clarify that 
it applies to respondents who are terminated members and associated 
persons.\9\ As of June 5, 2003, there were 33 cases in which all 
customers and active industry parties had signed waivers, but the 
terminated members or associated persons had not signed. Another 51 
pending cases involved both active and terminated industry parties that 
had not yet signed waivers; these cases could not proceed even if the 
active industry parties were deemed to have waived, unless the rule 
covered terminated parties. The proposed rule change will eliminate any 
confusion regarding the scope of the rule and will facilitate the 
administration of cases against such parties in California while the 
rule is in effect.
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    \9\ An associated person or member firm's obligation to 
arbitrate under the NASD Code of Arbitration Procedure survives 
resignation or termination from membership. See O'Neel v. NASD, 667 
F. 2d 804 (9th Cir. 1982); Muh v. Newburger, Loeb & Co., Inc., 540 
F.2d 970 (9th Cir. 1976).
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2. Statutory Basis
    NASD Dispute Resolution believes that the proposed rule change as 
amended is consistent with the provisions of section 15A(b) of the 
Exchange Act,\10\ in general, and furthers the objectives of section 
15A(b)(6),\11\ in particular, which requires, among other things, that 
the NASD'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 proposed rule change will allow 
customers and associated persons with claims against a member firm or 
another associated person to exercise their contractual rights to 
proceed in arbitration in California, notwithstanding the confusion 
caused by the disputed California Standards.
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    \10\ 15 U.S.C. 78o-3(b).
    \11\ 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 result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    NASD has designated the proposed rule change as one that: (i) Does 
not significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not become operative for 30 days from the date on which 
it was filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest. A 
proposed rule change filed under Rule 19b-4(f)(6) normally requires 
that a self-regulatory organization give the Commission written notice 
of its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time. NASD seeks to have the five-business-day pre-filing 
requirement waived with respect to the proposed rule change. The 
Commission has determined to waive the five-business-day pre-filing 
requirement with respect to this proposal. Therefore, the foregoing 
rule change has become effective pursuant to section 19(b)(3)(A) of the 
Act \12\ and Rule 19b-4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii) under the Act,\14\ the proposal 
may not become operative for 30 days after the date of its filing, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest. NASD has requested 
that the Commission waive the 30-day operative delay so that the 
proposed rule change will become immediately effective upon filing. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest to 
waive the 30-day period and to designate that the proposed rule change 
has become operative as of July 14, 2003.
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    \14\ 17 CFR 240.19b-4(f)(6)(iii).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that the action is necessary or appropriate 
in the public interest, for the protection of investors, or would 
otherwise further the purposes of the Act.

IV. 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 NASD. All 
submissions should refer to File No. SR-NASD-2003-106 and should be 
submitted by August 13, 2003.

    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. 03-18653 Filed 7-22-03; 8:45 am]
BILLING CODE 8010-01-P