[Federal Register Volume 69, Number 97 (Wednesday, May 19, 2004)]
[Notices]
[Pages 28966-28969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11258]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49688; File No. SR-NASD-2003-163]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Voluntary Direct Communication Between Parties and Arbitrators

May 12, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 28967]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 31, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), 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. On February 23, 2004, NASD filed Amendment No. 1 to the 
proposed rule change.\3\ 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\ See letter from Jean Feeney, Vice President and Chief 
Counsel, Dispute Resolution, NASD to Katherine England, Assistant 
Director, Division of Market Regulation, Commission, dated February 
20, 2004.
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* * * * *

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Dispute Resolution is proposing a new rule of the NASD to 
permit parties in an arbitration to communicate directly with the 
arbitrators if all parties and arbitrators agree, and to establish 
guidelines for such direct communication. Below is the text of the 
proposed rule change. Proposed new language is in italics.

10334. Direct Communication Between Parties and Arbitrators

    (a) This rule provides procedures under which parties and 
arbitrators may communicate directly.
    (b) Only parties that are represented by counsel may use direct 
communication under this Rule. If, during the proceeding, a party 
chooses to appear pro se (without counsel), this Rule shall no longer 
apply.
    (c) All arbitrators and all parties must agree to the use of direct 
communication during the Initial Prehearing Conference or a later 
conference or hearing before it can be used.
    (d) Parties may send the arbitrators only items that are listed in 
an order.
    (e) Parties may send items by regular mail, overnight courier, 
facsimile, or email. All the arbitrators and parties must have 
facsimile or email capability before such a delivery method may be 
used.
    (f) Copies of all materials sent to arbitrators must also be sent 
at the same time and in the same manner to all parties and the 
Director. Materials that exceed 15 pages, however, shall be sent to the 
Director only by regular mail or overnight courier.
    (g) The Director must receive copies of any orders and decisions 
made as a result of direct communications among the parties and the 
arbitrators.
    (h) Parties may not communicate orally with the arbitrators outside 
the presence of all parties.
    (i) Any party or arbitrator may terminate the direct communication 
order at any time, after giving written notice to the other arbitrators 
and the parties.

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 Dispute Resolution 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 Dispute Resolution 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 proposes a rule that would permit direct communication with 
the arbitrators where all parties and arbitrators agree. The rule also 
would establish guidelines for direct communication.
    Background. Under normal procedures, parties may exchange certain 
documents among themselves (such as those relating to discovery), but 
must address all communications intended for the arbitrators to NASD 
staff, who then forward the communications to the arbitrators. If the 
communication includes a motion or similar request, staff members 
customarily solicit a response from the other parties before forwarding 
the motion or request. Similarly, the arbitrators transmit their orders 
and any other communications through the staff.
    In response to a recommendation of the NASD National Arbitration 
and Mediation Committee, the Chicago Office of NASD Dispute Resolution 
began a pilot project in June 2001 to determine whether direct 
communication between parties and arbitrators would enhance the 
arbitration process. The Chicago Office developed the parameters 
governing whether a case would be eligible for inclusion in the pilot 
and changed the script used by the panel chairperson at the Initial 
Prehearing Conference (``IPHC'') on those cases. A modified IPHC Order 
also was given to the panel chairperson to memorialize all direct 
communication matters agreed to by the parties and the arbitrators.
    In total, 839 cases were eligible for inclusion in the project. Of 
these cases, parties and arbitrators in 255 cases (30%) participated in 
the program. At the end of the one-year pilot period, staff formulated 
a survey for those arbitrators and party representatives who 
participated in the pilot project. NASD Dispute Resolution sent out 850 
surveys and obtained 268 responses (32%). Although attempts were made 
to limit duplication, certain arbitrators and party representatives who 
participated in more than one eligible case in the pilot might have 
sent in multiple survey responses.
    Of the responses NASD received, 193 came from arbitrators and 75 
from party representatives. Overall, 73% of party representatives and 
69% of the arbitrators who responded to the survey favored continuing 
direct communication with the arbitrators. Favorable comments reflected 
the opinion that direct communication expedited the arbitration process 
and was more convenient than the normal method of communicating through 
staff.
    In light of the success of the Chicago pilot, NASD has developed a 
nationwide rule that would permit direct communication with the 
arbitrators where all parties and arbitrators agree. The rule also 
would establish guidelines for direct communication.
    On October 2, 2002, the Securities Industry Conference on 
Arbitration (``SICA'') \4\ adopted an amendment to Rule 23 of the 
Uniform Code of Arbitration that provides for joint administration of 
arbitrations by the arbitrators and the parties.\5\ Like the

[[Page 28968]]

NASD proposal, the SICA rule would apply only to matters in which all 
parties are represented by counsel, and in which the arbitrators and 
all parties agree to proceed under the rule; terminates if a party 
chooses to appear without counsel; prohibits oral communication between 
parties and arbitrators unless all parties are present; and requires 
parties to send written materials to the arbitrators and the director 
at the same time and in the same manner. Unlike the NASD proposal, the 
SICA rule would allow the arbitrators, without the assistance of the 
sponsoring self-regulatory organization, to ``schedule all pre-hearing 
and hearing dates, the timing of the service and filing of appropriate 
papers, all discovery matters and all other matters relevant to the 
expeditious handling of the case.'' The SICA rule allows the parties or 
the arbitrators to initiate conference calls under certain conditions; 
requires that parties send the director proof of service of written 
materials; and provides that the arbitrators may terminate or modify 
any joint administration order. The NASD rule, unlike the SICA rule, 
provides that parties may send the arbitrators only items that are 
listed in an arbitrator order; that materials that exceed 15 pages may 
only be sent to the director by regular mail or overnight courier; and 
that any party or any arbitrator may terminate the direct communication 
order. NASD understands that the SICA rule change has not been adopted 
by any self-regulatory organization. The National Arbitration and 
Mediation Committee and the Board were apprised of the SICA amendment, 
but determined to model the NASD proposal on the successful Chicago 
pilot described above.
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    \4\ SICA's voting members include representatives of the self-
regulatory organizations that administer arbitration forums, the 
Securities Industry Association, and three members of the public. In 
addition, staff of the SEC, the Commodity Futures Trading 
Commission, the American Arbitration Association, the North American 
Securities Administrators Association, and the former public members 
of SICA are invited to attend meetings.
    \5\ The joint administration amendment is found in section 23(e) 
of the Uniform Code, which is included in the Twelfth Report of the 
Securities Industry Conference on Arbitration (October 2003), 
available on the NASD Dispute Resolution Web site, under both 
Resources for Parties and Resources for Neutrals.
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    Proposed Rule Change. The proposed rule is based largely on 
procedures used in the Chicago pilot, with a few changes to reflect 
staff's experience with the pilot and to provide for possible issues 
that might occur in a larger-scale application of the rule. Only 
parties that are represented by counsel may use direct communication 
under the proposed rule. If, during the proceeding, a party chooses to 
appear pro se (without counsel), the rule will no longer apply. All 
arbitrators and all parties must agree to the use of direct 
communication before it can be used. The scope of direct communication 
will be set forth in an arbitrator order, and parties may send the 
arbitrators only the types of items that are listed in the order.
    The proposed rule provides that either an arbitrator or a party may 
rescind his or her agreement at any time if direct communication is no 
longer working well. Materials must be sent at the same time and in the 
same manner to all parties and the Director (through the assigned staff 
member), and staff must receive copies of any orders and decisions made 
as a result of direct communications among the parties and the 
arbitrators. As requested by staff of NASD Dispute Resolution, however, 
the rule contains a provision stating that materials more than 15 pages 
long shall be sent to the Director only by mail or courier, to avoid 
tying up busy fax machines and printers. Arbitrators (or parties) with 
similar concerns could include a similar provision as to themselves in 
the direct communication order. NASD will prepare a template for direct 
communication orders to guide the arbitrators and parties in 
considering these issues.
2. Statutory Basis
    NASD Dispute Resolution believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\6\ 
which requires, among other things, that the Association's rules 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 
permitting direct communication with the arbitrators where all parties 
and arbitrators agree, and where specific guidelines are followed, will 
protect investors and the public interest by expediting the arbitration 
process and giving parties more control over their arbitration cases.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Dispute Resolution 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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. Comments may be submitted by any of 
the following methods:
    Electronic comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2003-163
    Paper comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2003-163. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASD-

[[Page 28969]]

2003-163 and should be submitted on or before June 9, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12)
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11258 Filed 5-18-04; 8:45 am]
BILLING CODE 8010-01-P