[Federal Register Volume 69, Number 130 (Thursday, July 8, 2004)]
[Notices]
[Pages 41321-41322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15490]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49950; File No. SR-NASD-2003-163]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 2 Thereto, by the National Association of Securities 
Dealers, Inc., Relating to Voluntary Direct Communication Between 
Parties and Arbitrators

June 30, 2004.

I. Introduction

    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'') a proposed rule change pursuant to the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder.\2\ On February 23, 2004, NASD filed Amendment No. 1 to the 
proposed rule change.\3\ Notice of the proposed rule change was 
published for comment in the Federal Register on May 19, 2004.\4\ The 
Commission received two comments regarding the proposal.\5\ On June 29, 
2004, NASD filed Amendment No. 2 to the proposed rule change.\6\ This 
order approves the proposed rule change, grants accelerated approval of 
Amendment No. 2, and solicits comment from interested persons on 
Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 140.19b-4.
    \3\ See letter from Jean Feeney, Vice President and Chief 
Counsel, Dispute Resolution, NASD, to Katherine England, Assistant 
Director, Division of Market Regulation, SEC (Feb. 20, 2004).
    \4\ See Securities Exchange Act Release No. 49688 (May 12, 
2004), 69 FR 28966.
    \5\ See letter from Rosemary J. Shockman, Vice-President/
President Elect, Public Investors Arbitration Bar Association, to 
Jonathan G. Katz, Secretary, SEC (June 7, 2004) (``PIABA Letter''). 
See also E-mail from Joel E. Davidson, Davidson and Grannum, LLP, to 
Jonathan G. Katz, Secretary, SEC (May 21, 2004) (``Davidson E-
mail'').
    \6\ See letter from Jean Feeney, Vice President and Chief 
Counsel, Dispute Resolution, NASD, to Katherine England, Assistant 
Director, Division of Market Regulation, SEC (June 29, 2004).
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II. Description of the Proposed Rule Change

    NASD Dispute Resolution has proposed new Rule 10334 (the ``Proposed 
Rule'') 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. Only parties that 
are represented by counsel may use direct communication with the 
arbitrators under the Proposed Rule. If, during the proceeding, a party 
chooses to appear pro se (without councel), the Proposed Rule would no 
longer apply. Before it can be used, all arbitrators and all parties 
must agree to the use of direct communication during the Initial 
Prehearing Conference or during a later conference or hearing. 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. Parties may not orally communicate with any of the 
arbitrators outside the presence of all parties.
    The Proposed Rule provides that either an arbitrator or a party may 
rescind his or her agreement at any time after giving written notice to 
the other arbitrators and the parties. Materials must be sent at the 
same time and in the same manner to all parties and the Director of 
Arbitration (through the assigned NASD staff member), and NASD staff 
must receive copies of any orders and decisions made as a result of 
direct communications among the parties and the arbitrators.\7\
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    \7\ Parties may send materials by regular mail, overnight 
courier, facsimile or e-mail. All the arbritrators and parties must 
have facsimile or e-mail capability before such a delivery method 
may be used. The Proposed Rule contains a provision stating that 
materials more than fifteen 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.
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III. Summary of Comments

    The Commission received two comments regarding the proposed rule 
change.\8\ Both comments were supportive.\9\ One commenter, which

[[Page 41322]]

states that its member attorneys represent public investors in disputes 
with broker-dealers, supports the proposal, noting that its members 
have generally found direct communication with arbitrators to be 
helpful.\10\ The other commenter observed that the Proposed Rule would 
expedite and simplify the [arbitration] process.\11\
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    \8\ As was discussed in the Notice of Proposed Rule Change 
published in the Federal Register on May 19, 2004, the Proposed Rule 
is modeled on a pilot project conducted by the Chicago Office of 
NASD Dispute Resolution. See Securities Exchange Act Release No. 
49688 (May 12, 2004), 69 FR 28966.
    \9\ See supra note 5.
    \10\ PIABA Letter (``PIABA supports the proposed rule 
change.'').
    \11\ Davidson E-mail (``I am in favor of the proposed rule. I 
believe it will expedite and simply the process.'').
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities association.\12\ The 
Commission finds that the proposal is consistent with the requirements 
of section 15A(b)(6) of the Act,\13\ which requires that the rules of a 
registered national securities association be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principals of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \12\ In approving the proposal, the Commission has considered 
the Proposed Rule's impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3(b)(6).
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    Specifically, the Commission believes that the Proposed Rule will 
protect investors and the public interest by expediting the arbitration 
process and giving parties more control over their arbitration cases. 
In addition, the proposal will help promote just and equitable 
principals of trade by permitting parties to more quickly and easily 
resolve their disputes.
    Significantly, the Proposed Rule has a number of safeguards that 
will prevent its abuse and protect the rights of both parties and 
arbitrators. First, all parties and arbitrators must agree to the use 
of direct communications during the Initial Prehearing Conference or at 
a later hearing or conference before direct communications can be used. 
Second, any party or arbitrator may terminate the use of direct 
communications under the Proposed Rule after giving written notice to 
the other arbitrators and the other parties. Third, only parties that 
are represented by counsel may use direct communication with the 
arbitrators under the Proposed Rule. Fourth, if, during the proceeding, 
a party chooses to appear pro se, the Proposed Rule would no longer 
apply. Fifth, copies of all materials sent to arbitrators must also be 
sent at the same time and in the same manner to all parties and to the 
Director of Arbitration. Sixth, if material are sent via facsimile or 
e-mail, all arbitrators and parties must have facsimile or e-mail 
capacity before such a delivery method may be used. Finally, parties 
may not communicate orally with any of the arbitrators outside of the 
presence of all parties.

V. Amendment No. 2

    In Amendment No. 2 to Proposed Rule, NASD added language to the 
text of paragraph (h) of Proposed Rule 10334 in order to clarify that 
parties in an arbitration may not communicate orally with any of the 
arbitrators outside of the presence of all the parties.\14\ The 
Commission finds good cause to approve Amendment No. 2 to the proposed 
rule change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission believes that 
Amendment No. 2 effects a technical change that does not raise 
substantive issues. Accordingly, the Commission believes that there is 
good cause, consistent with section 19(b) of the Act,\15\ to approve 
Amendment No. 2 on an accelerated basis.
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    \14\ See supra note 6.
    \15\ 15 U.S.C. 78s(b).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 2 
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 on the subject line.

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 Amendment No. 2 that are filed 
with the Commission, and all written communications relating to 
Amendment No. 2 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 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-2003-163 and should be 
submitted on or before July 29, 2004.

VII. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-NASD-2003-163) is approved.
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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. 04-15490 Filed 7-7-04; 8:45 am]
BILLING CODE 8010-01-M