[Federal Register Volume 69, Number 62 (Wednesday, March 31, 2004)]
[Notices]
[Pages 17010-17011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7208]



[[Page 17010]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49452; File No. SR-NASD-2004-040]


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

March 19, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19-4 thereunder,\2\ notice is hereby given that 
on March 5, 2004, 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
    Effective July 1, 2002, the California Judicial Council adopted a 
set of rules, ``Ethics Standards for Neutral Arbitrators in Contractual 
Arbitration'' (``California Standards''),\4\ which contain extensive 
disclosure requirements 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.
    \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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    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, some of which 
are 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, has been extended and is now due to expire on March 
31, 2004. Because the pending litigation regarding the California 
Standards is unlikely to be resolved by March 31, 2004, NASD requests 
that the effectiveness of the pilot rule be extended through September 
30, 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.

[[Page 17011]]

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 March 31, 2004.
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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. 
Comments should be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-2004-040. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in hard 
copy or by e-mail but not by both methods. 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 be submitted by April 21, 2004.

    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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Jill M. Peterson,
Assistant Secretary.
FR Doc. 04-7208 Filed 3-30-04; 8:45 am]
BILLING CODE 8010-01-P