[Federal Register Volume 69, Number 189 (Thursday, September 30, 2004)]
[Notices]
[Pages 58567-58568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2417]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50447; File No. SR-NASD-2004-126]


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

September 24, 2004.
    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 August 19, 2004, 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 (``Commission'') the proposed rule 
change as described in Items I, II, and III, below, which NASD has 
prepared. NASD has designated the proposed rule change as constituting 
a ``non-controversial'' rule change under paragraph (f)(6) of Rule 19b-
4 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 (``Code''), relating to the 
California waiver program, until March 31, 2005. NASD is not proposing 
any textual changes to the By-Laws or Rules of NASD.

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. 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. According to NASD, 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. NASD states that the California 
Standards impose 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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. The Commission notes that a more 
thorough discussion of the litigation history of this issue can be 
found in SR-NYSE-2004-50.
---------------------------------------------------------------------------

    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, associated persons with claims against industry 
parties, member firms with claims against other member firms, or member 
firms with claims against associated persons that relate exclusively to 
promissory notes, 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\
---------------------------------------------------------------------------

    \7\ Originally, the pilot rule applied only 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 Release 
No. 48187 (July 16, 2003), 68 FR 43553 (July 23, 2003) (SR-NASD-
2003-106). In October 2003, NASD again expanded the scope of the 
pilot rule to include claims filed by members against other members 
and to claims filed by members against associated persons that 
relate exclusively to promissory notes. See Securities Exchange Act 
Release No. 48711 (October 29, 2003), 68 FR 62490 (November 4, 2003) 
(SR-NASD-2003-153).
    \8\ NASD states that the NYSE has a similar rule, NYSE Rule 
600(g).
---------------------------------------------------------------------------

    The pilot rule, which was originally approved for six months on 
September 26, 2002,\9\ has been extended and is now due to expire on 
September 30, 2004.\10\ Because NASD believes the pending litigation 
regarding the California Standards is unlikely to be resolved by 
September 30, 2004, NASD requests that the effectiveness of the pilot 
rule be extended through March 31, 2005, in order to prevent NASD from 
having to suspend administration of cases covered by the pilot rule.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 46562 (September 26, 
2002), 67 FR 62085 (October 3, 2002) (SR-NASD-2002-126).
    \10\ See Securities Exchange Act Release No. 49452 (March 19, 
2004), 69 FR 17010 (March 31, 2004) (SR-NASD-2004-040).
---------------------------------------------------------------------------

2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions

[[Page 58568]]

of Section 15A(b)(6) of the Act,\11\ which requires, among other 
things, that the 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 proposed waiver, at the request of customers, 
associated persons with claims against industry parties, member firms 
with claims against other member firms, or member firms with claims 
against associated persons that relate exclusively to promissory notes, 
will allow those parties to exercise their contractual rights to 
proceed in arbitration in California, notwithstanding the conflict 
between the disputed California Standards and the NASD rules.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the Act.

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. 
NASD provided the Commission with written notice of its intent to file 
the proposed rule change at least five days prior to the filing date. 
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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    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 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 30-day operative delay so that 
the proposed rule change will become immediately effective upon 
filing.\15\
---------------------------------------------------------------------------

    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ Telephone Conversation between John Nachmann, Counsel, NASD 
Dispute Resolution, Inc. and Elizabeth MacDonald, Attorney Adviser, 
Division of Market Regulation, September 23, 2004
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\16\ 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, 2004.
---------------------------------------------------------------------------

    \16\ 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).
---------------------------------------------------------------------------

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-2004-126 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-2004-126. 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 Room. 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-2004-126 and should be submitted on or before 
October 21, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2417 Filed 9-29-04; 8:45 am]
BILLING CODE 8010-01-P