[Federal Register Volume 68, Number 163 (Friday, August 22, 2003)]
[Notices]
[Pages 50822-50825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21541]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48351; File No. SR-PCX-2003-34]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc., and Amendment No. 1 Thereto, Relating to its 
Arbitration Program

August 15, 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 9,

[[Page 50823]]

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. On August 13, 2003, the 
Exchange filed Amendment No.1 to the proposed rule change.\3\ The 
Commission received one comment letter regarding the proposed rule 
change in anticipation of its filing.\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 letter from Kathryn Beck, Senior Vice President, General 
Counsel, Chief Regulatory Officer and Corporate Secretary, PCX, to 
Florence Harmon, Senior Special Counsel, Division of Market 
Regulation, Commission, dated August 12, 2003. In Amendment No. 1, 
PCX altered its description of the proposed rule change to reflect 
that a failure to execute required waivers by an industry party to 
arbitration would be referred for disciplinary action.
    \4\ See letter to the Secretary, SEC, from Raghavan 
Sathianathan, dated July 2, 2003. The commenter expressed concerns 
regarding PCX's administration of an arbitration in which he was a 
co-respondent, alleging that PCX did not follow its arbitration 
rules. The commenter asserted that the PCX had lost its right to 
make rule changes based on its administration of his arbitration. 
PCX submitted a letter in response in which it asserted that the 
commenter's case had been administered properly and in accordance 
with its rules. PCX also asserted that the proposed rule change 
reflects PCX's desire to provide an arbitration forum with a reduced 
risk of subsequent legal exposure to the organization. See letter 
dated July 30, 2003 from Kathryn Beck, Senior Vice President, PCX, 
to Florence Harmon, Senior Special Counsel, Division of Market 
Regulation, SEC.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX, on its own behalf and through its wholly-owned subsidiary PCX 
Equities, Inc. (``PCXE), pursuant to delegated authority, is proposing 
to amend the PCX and PCXE arbitration rules. The proposed rule change 
will expand the applicability of the waiver requirements imposed in SR-
PCX-2003-13 \5\ from certain pending PCX arbitrations to all PCX and 
PCXE arbitrations. Specifically, the proposed rule changes would 
require all parties to an arbitration filed pursuant to PCX or PCXE 
Rule 12 (other than those described below) to waive (1) the 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 (2) any claims against the PCX or 
PCXE that the conduct of the arbitration violates the California Code 
of Civil Procedure Section 1281.92 (``CCCP Claims''). However, the 
parties would not be required to waive the CCCP claims in arbitrations 
solely between or among members, member organizations and persons 
associated therewith (or, as the case may be, solely between ETP 
Holders and persons associated therewith) that do not involve consumer-
related or employment-related claims.\6\ Both waivers (where required) 
must be made without condition and in the form required by the PCX and 
PCXE.\7\ If any party to an arbitration fails to the sign the required 
waivers, the PCX will decline jurisdiction over, dismiss and refund 
fees paid to PCX or PCXE by the parties for, that arbitration. 
Furthermore, it will be considered conduct inconsistent with just and 
equitable principles of trade for any member, member organization, ETP 
Holder or associated person therewith who is a party to a PCX or PCXE 
arbitration to fail to waive the California Standards and the CCCP 
Claims, where required.
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    \5\ See Securities Exchange Act Release No. 47734 (April 24, 
2003), 68 FR 23351 (May 1, 2003).
    \6\ PCX and PCXE believe that such arbitrations would not be 
considered ``consumer arbitrations'' as that term is used in the 
California Code of Civil Procedure.
    \7\ Copies of the prescribed waiver forms were filed as Exhibits 
A and B to the proposed rule change. These are the same as the 
waiver forms that were attached to rule filings previously approved 
by the Commission. See Securities Exchange Act Release No. 46881 
(November 21, 2002), 67 FR 71224 (November 29, 2002) (waiver of 
California Standards); Securities Exchange Act Release No. 47734 
(April 24, 2003), 68 FR 23351 (May 1, 2003) (waiver of CCCP Claims).
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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) No change.
    (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 the 
member, member organization or person associated with a member or 
member organization is a party to an arbitration filed pursuant to this 
Rule 12 [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 the member, member organization 
or person associated with a member or member organization is a party to 
an arbitration filed pursuant to this Rule 12 (other than arbitrations 
solely between or among members, member organizations and/or persons 
associated with a member or member organization that do not involve 
consumer-related or employment-related 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];
    (d) No change.
    (e) No change.
    .03 No change.
* * * * *

Rule 12.35 [Applicability of Arbitration Rules] Waivers

    [(a) Reserved.]
    [(b) Arbitrations Filed Prior to May 1, 2003. Arbitration claims 
that were filed prior to May 1, 2003 and remain pending will be 
administered as follows:]
    [(i) The arbitration] Arbitration claims will be administered in 
accordance with this Rule[s] 12[.1 through 12.34] only [if]:
    [(A) arbitrator(s) have been appointed as of May 1, 2003; 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); provided, however, that the parties are not required to 
waive the CCCP claims in arbitrations solely between or among members, 
member organizations and/or persons associated with a member or member 
organization that do not involve consumer-related or employment-related 
claims. PCX will decline jurisdiction over, dismiss and

[[Page 50824]]

refund fees paid to PCX by the parties for, any arbitration claims in 
which any of the parties to arbitration fail to sign both waivers, 
where required.
* * * * *

PCXE Rule 12

Arbitration

* * * * *
    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:
    (i) fail to submit to arbitration on demand under the provisions of 
this Rule[, or];
    (ii) 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 the ETP 
Holder or person associated with an ETP Holder is a party to an 
arbitration filed pursuant to this Rule 12 [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]
    (iii) fail to waive any claims against the PCXE that the conduct of 
the arbitration violates the California Code of Civil Procedure Section 
1281.92 (``CCCP Claims''), if the ETP Holder or person associated with 
an ETP Holder is a party to an arbitration filed pursuant to this Rule 
12 (other than arbitrations solely between or among ETP Holders and/or 
persons associated with an ETP Holder that do not involve consumer-
related or employment-related claims);
    (iv) 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
    (v) 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.
* * * * *

Rule 12.35 Waivers

    Arbitration claims will be administered in accordance with this 
Rule 12 provided all parties to the arbitration have waived, without 
condition and in the form required by the PCXE, the application of the 
California Standards and the CCCP Claims (as defined in Rule 12.1(h)); 
provided, however, that the parties are not required to waive the CCCP 
claims in arbitrations solely between or among ETP Holders and/or 
persons associated with an ETP Holder that do not involve consumer-
related or employment-related claims. PCXE will decline jurisdiction 
over, dismiss and refund fees paid to PCXE by the parties for, any 
arbitration claims in which any of the parties to arbitration fail to 
sign both waivers, where required.
* * * * *

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.\8\ 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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    \8\ 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 how it administers 
its arbitration programs. 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. 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.\9\ To minimize any potential financial 
and litigation risk associated with these new provisions, PCX and PCXE 
have decided to require parties to PCX and PCXE arbitrations to waive 
the California Standards and CCCP Claims in order for the arbitrations 
to continue pursuant to PCX and PCXE Rule 12.
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    \9\ 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, C023486 (No. District of 
California, September 18, 2002) (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), 67 FR 
71224 (Nov. 29, 2002) (describing the controversy regarding new 
California arbitration provisions).
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    Once this proposed rule filing is effective, PCX and PCXE will 
notify parties to PCX and PCXE arbitrations of the rule change and 
provide them with the waiver forms and the opportunity to speak with 
PCX staff if they desire more information regarding the waivers. 
Industry parties to the arbitrations will be required to execute the 
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.

[[Page 50825]]

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 by PCX. However, the SEC received one comment letter on 
the proposed rule change.\12\
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    \12\ See n. 4, supra.
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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-2003-34 and should be 
submitted by September 12, 2003.

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

    The PCX requests that the Commission find good cause to accelerate 
effectiveness of this proposed rule change, as amended, pursuant to 
Section 19(b)(2) of the Act.\13\ 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.\14\ 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.\15\ 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. Additionally, the 
Commission 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 appropriate in that it 
will permit the PCX to make its forum for the resolution of such 
disputes available immediately.
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
    \15\ 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,\16\ that the proposed rule change (SR-PCX-2003-34), as amended, is 
hereby approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-21541 Filed 8-21-03; 8:45 am]
BILLING CODE 8010-01-P