[Federal Register Volume 68, Number 213 (Tuesday, November 4, 2003)]
[Notices]
[Pages 62490-62492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27662]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48711; File No. SR-NASD-2003-153]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to the Waiver of California 
Arbitrator Disclosure Standards

October 29, 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 October 6, 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 and II 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 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 amend 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, to include claims by members against other 
members or associated person that relate exclusively to promissory 
notes. 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.] application of 
the California Standards has been waived by all parties to the dispute 
who are:
    (1) Customers with a claim against a member or an associated 
person;
    (2) associated persons with a claim against a member or an 
associated person;
    (3) members with a claim against another member; or
    (4) members with a claim against an associated person that relates 
exclusively to a promissory note.
    [The w]Written waiver by [the customer or the associated person 
asserting the claim against a member or associated person under the 
Code] such parties 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. 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. 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
    NASD is proposing to amend the pilot rule in IM-10100(f) that 
requires industry parties in arbitration to waive application of 
contested California arbitrator disclosure standards to

[[Page 62491]]

include claims by members against other members or associated person 
that relate exclusively to promissory notes.

Background

    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\
    In November 2002, NASD and NYSE filed a lawsuit in federal district 
court 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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    \4\ California Rules of Court, Division VI of the Appendix, 
entitled, ``Ethics Standards for Neutral Arbitrators in Contractual 
Arbitration'' (the ``California Standards'').
    \5\ These measures included providing venue changes for 
arbitration cases, using non-California arbitrators when 
appropriate, and waiving administrative fees for NASD-sponsored 
mediations.
    \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 
is 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, has been extended, and is now due to expire on 
March 31, 2004.\9\
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    \9\ See Securities Exchange Act Rel. No. 48553 (September 26, 
2003), 68 FR 57494 (October 3, 3003) (File No. SR-NASD-2003-144).
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Description of Proposed Rule Change

    The pilot rule currently applies to all claims filed by customers, 
and to claims filed by associated persons against members or other 
associated persons. The proposed rule change would extend the pilot 
rule to apply to claims filed by members against other members, and to 
claims filed by members against associated persons that relate 
exclusively to promissory notes.
    Specifically, the proposed rule change would amend IM-10100(f) to 
provide that if a member bringing a claim against another member, or a 
claim against an associated person that relates exclusively to 
promissory notes, waives application of the California Standards to the 
dispute, then the industry respondents will also be deemed to have 
waived the application of the Standards.\10\ This rule change will 
allow to proceed the majority of the remaining intra-industry cases 
that are currently stalled due to the confusion surrounding the 
California Standards. It will also prevent delay in such cases that are 
filed in the future, and will facilitate the administration of cases 
against such parties in California while the rule is in effect. NASD 
proposes to make the proposed rule change, which will apply to pending 
and future arbitrations, operative immediately upon filing.
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    \10\ The proposed rule change would include disputes that relate 
exclusively to promissory notes. It would not apply in cases that 
involve both promissory notes and other types of claims that do not 
already fall within the scope of the rule.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\11\ 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 by expediting the appointment of 
arbitrators under the waiver, the proposed rule change will allow 
affected parties to pursue their contractual rights to proceed in 
arbitration in California, notwithstanding the confusion caused by the 
disputed California Standards.
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    \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. 
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\ 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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    \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

[[Page 62492]]

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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    \14\ 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.\15\ The Commission 
believes that waiving the pre-filing requirement and accelerating the 
operative date should have no negative effect on the protection of 
investors, and should further the public interest by immediately 
providing members that have claims against other members, or claims 
against associated persons that relate exclusively to promissory notes, 
with a mechanism to resolve their disputes. During the period of this 
pilot program, the Commission and NASD will continue to monitor the 
status of the previously discussed litigation. For these reasons, the 
Commission designates that the proposed rule change as effective and 
operative immediately.
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    \15\ 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-2003-153 and 
should be submitted by November 25, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27662 Filed 11-3-03; 8:45 am]
BILLING CODE 8010-01-P