[Federal Register Volume 68, Number 192 (Friday, October 3, 2003)]
[Notices]
[Pages 57494-57496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-25116]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48553; File No. SR-NASD-2003-144]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. To Extend, for an Additional Six-Month Period, 
a Pilot Rule Regarding Waiver of California Arbitrator Disclosure 
Standards

September 26, 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 September 24, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by NASD. NASD has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change pursuant to Rule 19b-4(f)(6) under the 
Act,\3\ 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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to extend the pilot rule in IM-10100(f) of the 
NASD Code of Arbitration Procedure, which requires industry parties in 
arbitration to waive application of contested California arbitrator 
disclosure standards, upon the request of customers, and associated 
persons with claims against other industry parties, for a six-month 
period.

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. The 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
    In July 2002, the California Judicial Commission adopted a set of 
rules, ``Ethics Standards for Neutral Arbitrators in Contractual 
Arbitration'' (``California Standards''),\4\ governing ethical 
standards for arbitrators. 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 imposed disclosure requirements on 
arbitrators that conflict with the disclosure rules of NASD and the New 
York Stock Exchange (``NYSE''). 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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    \4\ California Rules of Court, Division VI of the Appendix, 
entitled, ``Ethics Standards for Neutral Arbitrators in Contractual 
Arbitration.''
    \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 November 2002, NASD and NYSE filed a lawsuit in federal district 
court

[[Page 57495]]

seeking a declaratory judgment that the California Standards are 
inapplicable to arbitration forums sponsored by self-regulatory 
organizations (``SROs'').\6\ That litigation is currently pending on 
appeal. Since then, other lawsuits relating to the application of the 
California Standards to SRO-sponsored arbitration have been filed, 
several of which are also still pending.
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    \6\ 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 http://www.nasdadr.com/pdf-text/072202_ca_complaint.pdf.
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    To allow arbitrations to proceed in California while the litigation 
was pending, NASD implemented a pilot rule to require all industry 
parties (member firms and associated persons) to waive application of 
the California Standards to the case, if all the parties in the case 
who are customers, or associated persons with claims against industry 
parties, have done so.\7\ In such cases, the arbitration proceeds under 
the NASD Code of Arbitration Procedure, which already contains 
extensive disclosure requirements and provisions for challenging 
arbitrators with potential conflicts of interest.\8\
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    \7\ Originally, the pilot rule only applied to claims by 
customers, or by associated persons asserting a statutory employment 
discrimination claim against a member, and required a written waiver 
by the industry respondents. In July 2003, NASD expanded the scope 
of the pilot rule to include all claims by associated persons 
against another associated person or a member. At the same time, the 
rule was amended to provide that when a customer, or an associated 
person with a claim against a member or another associated person, 
agrees to waive the application of the California Standards, all 
respondents that are members or associated persons will be deemed to 
have waived the application of the standards as well. The July 2003 
amendment also clarified that the pilot rule applies to terminated 
members and associated persons. See Securities Exchange Act Rel. No. 
48187 (July 16, 2003), 68 FR 43553 (July 23, 2003) (File No. SR-
NASD-2003-106).
    \8\ The NYSE has a similar rule; Rule 600(g).
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    The pilot rule, which was originally approved for six months on 
September 26, 2002, was extended in March 2003, and is now due to 
expire on September 30, 2003. Because the pending litigation regarding 
the California Standards is unlikely to be resolved by September 30, 
2003, NASD requests that the effectiveness of the pilot rule be 
extended through March 31, 2004, in order to prevent NASD from having 
to suspend administration of cases covered by the pilot rule.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ which requires, among 
other things, that 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 expediting the appointment of 
arbitrators under the waiver rule, at the request of customers and 
associated persons with claims against industry respondents will allow 
those parties to exercise their contractual rights to proceed in 
arbitration in California, notwithstanding the confusion caused by the 
disputed California Standards.
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    \9\ 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. 
Therefore, the foregoing rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) 
thereunder.\11\ 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.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii) under the Act,\12\ 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, and the self-
regulatory organization must file notice of its intent to file the 
proposed rule change at least five business days beforehand. NASD has 
requested that the Commission waive the five-day pre-filing requirement 
and the 30-day operative delay so that the proposed rule change will 
become immediately effective upon filing.
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    \12\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the five-day pre-filing 
provision and the 30-day operative delay is consistent with the 
protection of investors and the public interest.\13\ Waiving the pre-
filing requirement and accelerating the operative date will merely 
extend a pilot program that is designed to provide investors, and 
associated persons with claims against industry respondents, with a 
mechanism to resolve their disputes. During the period of this 
extension, the Commission and NASD will continue to monitor the status 
of the previously discussed litigation. For these reasons, the 
Commission designates the proposed rule change as effective and 
operative on September 30, 2003.
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    \13\ For purposes of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-2003-144 and 
should be submitted by October 24, 2003.


[[Page 57496]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-25116 Filed 10-2-03; 8:45 am]
BILLING CODE 8010-01-P