[Federal Register Volume 69, Number 228 (Monday, November 29, 2004)]
[Notices]
[Pages 69441-69444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3354]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50717; File No. SR-PCX-2004-80]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 by the Pacific Exchange, Inc. Relating to Arbitrator 
Classification, Challenges and Disclosure

November 22, 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 16, 2004, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. The Exchange filed Amendment No. 1 to the 
proposed rule change on October 1, 2004.\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. Sec.  78s(b)(1).
    \2\ CFR 240.19b-4.
    \3\ See letter from Tania Blanford, Regulatory Policy, PCX, to 
Nancy J. Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated September 30, 2004, and accompanying Form 19b-4 
(``Amendment No. 1''). Amendment No. 1 replaced the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX is proposing this Amendment No. 1, which replaces the 
original filing in its entirety, to amend the PCX Options and PCX 
Equities, Inc. (``PCXE'') arbitration rules relating to arbitrator 
classification, challenges, and disclosure. The text of the proposed 
rule change appears below; proposed deletions appear in [brackets], and 
proposed additions are italicized. Because the proposed changes to PCX 
Rule 12.8 through 12.11 are identical to the proposed changes to PCXE 
Rules 12.9 through 12.12, only the PCX rules appear below (the PCXE 
rules have not been included).
* * * * *
Rules of the Pacific Exchange, Inc.
Rule 12
Arbitration
* * * * *

Designation of Number of Arbitrators

    Rule 12.8(a)-(b)--No change.
    (c) An arbitrator will be deemed as a non-public arbitrator, or 
being from the securities industry, if he or she:
    (i)[1.] is a person associated with an OTP Firm, OTP Holder, [or] 
broker/dealer, government securities broker, government securities 
dealer, municipal securities dealer or registered investment advisor, 
is registered under the Commodity Exchange Act, a member of a 
commodities exchange or a registered futures association; or associated 
with a person or firm registered under the Commodity Exchange Act; or
    (ii)[2.] has been associated with any of the above within the past 
five [three (3)] years, or
    (iii)[3.] is retired from, or spent a substantial part of a career, 
engaging in any of the business activities listed [any of the above] in 
subsection (i), or
    (iv)[4.] is an attorney, accountant or other professional who 
devoted twenty (20) percent or more of his or her professional work 
effort to securities industry clients within the last two (2) years.
    (d) An arbitrator will be deemed as a public arbitrator if he or 
she: [An arbitrator who is not from the securities industry shall be 
deemed a public arbitrator. A person will not be classified as a public 
arbitrator if he or she has a spouse or other member of the household 
who is a person associated with a registered broker, dealer, municipal 
securities dealer, government securities broker, government securities 
dealer or investment advisor]
    (i) is not engaged in the conduct or activities described in 
subsection (c)(i)-(iv);
    (ii) was not engaged in the conduct or activities described in 
subsections (c)(i)-(iv) for a total of 20 years or more;
    (iii) is not an investment adviser;
    (iv) is not an attorney, accountant, or other professional whose 
firm derived 10 percent or more of its annual revenue in the past 2 
years from any persons or entities listed in subsections (c)(i)-(iv);
    (v) is not the spouse, parent, stepparent, child, or stepchild, or 
a member of the household of a person who is engaged in the conduct or 
activities described in subsections (c)(i)-(iv);
    (vi) is not a person who receives financial support of more than 50 
percent of his or her annual income from a person engaged in the 
conduct or activities described in subsections (c)(i)-(iv);
    (vii) and is not a person who is claimed as a dependent for federal 
income tax purposes by a person engaged in the conduct or activities 
described in subsections (c)(i)-(iv).
    (e)-(g)--No change.

Notice of Selection of Arbitrators

    Rule 12.9. The Director of Arbitration shall inform the parties of 
the arbitrators' names and employment histories for the past ten (10) 
years, as well as information disclosed pursuant to Section 11 of this 
Rule at least eight (8) business days prior to the date fixed for the 
first hearing session. A party may make further inquiry of the Director 
of Arbitration concerning an arbitrator's background. In the event that 
any arbitrator after appointment and prior to the first hearing 
session, should resign, die, withdraw, be disqualified or otherwise be 
unable to perform as an arbitrator, the Director of Arbitration shall 
appoint a replacement arbitrator to fill any vacancy. The Director of 
Arbitration will grant a party's request to disqualify an arbitrator if 
it is reasonable to infer, based on information known at the time of 
request, that the arbitrator is biased, lacks impartiality, or has an 
interest in the outcome of the arbitration. The

[[Page 69442]]

interest or bias must be direct, definite, and capable of reasonable 
demonstration, rather than remote or speculative. The Director of 
Arbitration shall inform the parties of the name and employment history 
of the arbitrator for the past ten (10) years, as well as information 
disclosed pursuant to Section 11, as soon as possible. A party may make 
further inquiry of the Director of Arbitration concerning the 
background of the replacement arbitrator and, within the time remaining 
prior to the first hearing session, or the five (5) day period provided 
under Section 10, whichever is shorter, may exercise its right to 
challenge the replacement arbitrator as provided under Section 10.

Peremptory Challenge

    Rule 12.10. In any arbitration proceeding, each party shall have 
the right to one peremptory challenge. In arbitrations where there are 
multiple Claimants, Respondents and/or Third Party Respondents, the 
Claimants shall have one peremptory challenge, the Respondents shall 
have one peremptory challenge and the Third Party Respondents shall 
have one peremptory challenge, unless the Director of Arbitration 
determines that the interests of justice would best be served by 
awarding additional peremptory challenges. Unless extended by the 
Director of Arbitration, a party wishing to exercise a peremptory 
challenge must do so by notifying the Director of Arbitration in 
writing within five (5) business days of notification of the identity 
of the persons named to the panel. There shall be unlimited challenges 
for cause.
    In cases involving public customers, any close questions regarding 
arbitrator classification or challenges for cause brought by a customer 
will be resolved in favor of the customer.

Disclosures Required of Arbitrators

    Rule 12.11(a). Each arbitrator shall be required to disclose to the 
Director of Arbitration any circumstances which might preclude such 
arbitrator from rendering any objective and impartial determination. 
Each arbitrator shall disclose:
    (i)[(1)] any direct or indirect financial or personal interest in 
the outcome of the arbitration;
    (ii)[(2)] any existing or past financial, business, professional, 
family or social relationships that are likely to affect impartiality 
or that might reasonably create an appearance of partiality or bias. 
Persons requested to serve as arbitrators must [should] disclose any 
such relationships which they personally have with any party or its 
counsel, or with any individual whom they have been told will be a 
witness. They must [should] also disclose any such relationship 
involving members of their families or their current employers, 
partners, or business associates.
    (b) persons who are requested to accept appointment as arbitrators 
must [should] make a reasonable effort to inform themselves of any 
interests or relationships described in subsection (a) above.
    (c)-(d)--No change.
    (e) The Director of Arbitration will grant a party's request to 
disqualify an arbitrator if it is reasonable to infer, based on 
information known at the time of request, that the arbitrator is 
biased, lacks impartiality, or has an interest in the outcome of the 
arbitration. The interest or bias must be direct, definite, and capable 
of reasonable demonstration, rather than remote or speculative.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
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 self-regulatory organization 
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
    The Exchange is proposing to amend the PCX and PCXE arbitration 
rules relating to arbitrator classification and disclosure. The 
Exchange proposes to amend PCX Rule 12 and PCXE Rule 12 to: (1) Modify 
the classification of public and non-public arbitrators; (2) provide 
specific standards for deciding challenges to arbitrators for cause; 
and (3) clarify that compliance with arbitrator disclosure requirements 
is mandatory. This rule proposal is based on the National Association 
of Securities Dealers, Inc.'s (``NASD'') rule proposal related to 
arbitrator classification, challenges and disclosure, which was 
recently approved by the Commission.\4\
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    \4\ See Securities Exchange Act Release No. 49573 (April 16, 
2004), 69 FR 21871 (April 22, 2004) (File No. SR-NASD-2003-095). In 
November 2002, at the Commission's request, Professor Michael Perino 
issued a report assessing the adequacy of NASD's and New York Stock 
Exchange, Inc.'s (``NYSE'') arbitrator disclosure requirements and 
evaluating the impact of the recently adopted California Ethics 
Standards on the current conflict disclosure rules of the self-
regulatory organizations (``SROs''). See Michael A. Perino, Report 
to the Securities and Exchange Commission Regarding Arbitrator 
Conflict Disclosure Requirements in NASD and NYSE Securities 
Arbitrations, November 4, 2002 (``Perino Report''). The Perino 
Report recommended several amendments to SRO arbitrator 
classification and disclosure rules that, according to the Perino 
Report, might ``provide additional assurance to investors that 
arbitrations are in fact neutral and fair.'' The Commission found 
the NASD's proposed rule changes implemented those recommendations, 
as well as several other related changes to the definition of public 
and non-public arbitrators that are consistent with the Perino 
Report recommendations. See Securities Exchange Act Release No. 
49573 (April 16, 2004), 69 FR 21871 (April 22, 2004) (File No. SR-
NASD-2003-095). Hence, the PCX proposes to make the same amendments 
to the PCX and PCXE arbitration rules.
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    Specifically, the Exchange proposes to amend the classification of 
a non-public arbitrator (i.e., deemed as being from the securities 
industry) in PCX Rule 12.8(c) and PCXE Rule 12.9(c) to increase from 
three years to five years the period for transitioning from a public to 
non-public arbitrator. The Exchange also proposes to add the 
classification of those arbitrators that are registered under the 
Commodity Exchange Act, members of a commodities exchange or a 
registered futures association; or associated with a person or firm 
registered under the Commodity Exchange Act as a classification of a 
non-public arbitrator. Such classifications are similar to those found 
in the NASD's rules. The Exchange also proposes to clarify, under the 
same rules, that the term ``retired'' from the securities industry 
includes anyone who spent a substantial part of his or her career in 
the industry.
    In addition, the Exchange proposes to amend the classification of a 
public arbitrator as set forth in PCX Rule 12.8(d) and PCXE Rule 
12.9(d) in order to: prohibit anyone who has been associated with the 
industry for at least 20 years from ever becoming a public arbitrator, 
regardless of how many years ago the association ended; exclude 
attorneys, accountants, and other professionals whose firms have 
derived 10 percent or more of their annual revenue, in the last two 
years, from clients involved in the activities stated in the 
classification of an industry arbitrator; and provide that investment 
advisers may not serve as public arbitrators and may only serve as non-

[[Page 69443]]

public arbitrators if they otherwise qualify under PCX Rule 12.8(c) or 
PCXE Rule 12.9(c). The Exchange also proposes to amend the restriction 
for arbitrators with spouses or other members of the household 
associated with the securities industry as set forth in PCX Rule 
12.8(d) and PCXE Rule 12.9(d). Such criteria would be expanded in PCX 
Rule 12.8(d)(v) and PCXE Rule 12.9(d)(v) to now exclude from the 
definition of public arbitrator (in addition to spouses and any member 
of the arbitrator's household, who are currently excluded), an 
arbitrator's parents, stepparents, children, and stepchildren.
    Moreover, the Exchange proposes to amend PCX Rules 12.9 and 12.11, 
and PCXE Rules 12.10 and 12.12, to provide that a challenge for cause 
will be granted where it is reasonable to infer an absence of 
impartiality, the presence of bias, or the existence of some interest 
on the part of the arbitrator in the outcome of the arbitration as it 
affects one of the parties. The interest or bias must be direct, 
definite, and capable of reasonable demonstration, rather than remote 
or speculative. In addition, PCX Rule 12.10 and PCXE Rule 12.11 would 
also be amended to add a new paragraph, which would provide that close 
questions regarding arbitrator classification or challenges for cause 
brought by a public customer would be resolved in favor of the 
customer.
    Finally, the Exchange proposes to amend PCX Rule 12.11 and PCXE 
Rule 12.12 to clarify that arbitrators must disclose the required 
information and must make reasonable efforts to inform themselves of 
potential conflicts and update their disclosures as necessary. The 
Exchange believes that these amendments to the PCX and PCXE arbitration 
rules are necessary to provide consistency with respect to arbitration 
rules and procedures to the public and ensure that arbitrations are 
fair and neutral.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) \5\ of the Act, in general, and furthers the objectives of Section 
6(b)(5),\6\ in particular, in that it will promote just and equitable 
principles of trade; facilitate transactions in securities, remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system; and protect investors and the public 
interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. 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-PCX-2004-80 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-PCX-2004-80. 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 PCX. 
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-SR-PCX-2004-80 
and should be submitted on or before December 20, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange \7\ and, in particular, the requirements of Section 6(b) \8\ 
of the Act and the rules and regulations thereunder. Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\9\ which, among other things, requires that 
the rules of an exchange 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.
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    \7\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    At the Commission's request, Professor Michael Perino issued a 
report assessing the adequacy of NASD's and New York Stock Exchange, 
Inc.'s (``NYSE'') arbitrator disclosure requirements and evaluating the 
impact of the recently adopted California Ethics Standards \10\ on the 
current conflict disclosure rules of the NASD and the NYSE.\11\ The 
Perino Report recommended several amendments to the NASD's and NYSE's 
arbitrator classification and disclosure rules that, according to the 
report, might ``provide additional assurance to investors that 
arbitrations are in fact neutral and fair.'' The Commission believes 
that the PCX's proposed rule change implements those same 
recommendations, as well as several other related changes to the 
definition of public and non-public arbitrators that are consistent 
with the recommendations made in the Perino Report with regard to the 
arbitration rules of the NASD and NYSE.
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    \10\ See California Rules of Court, Division VI of the Appendix, 
entitled, ``Ethics Standards for Neutral Arbitrators in Contractual 
Arbitration.''
    \11\ See Perino Report, supra note 4.
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    Specifically, the Commission finds that PCX's proposal to amend the 
definition of non-public arbitrator in PCX Rule 12.8(c) and PCXE Rule 
12.9(c) is consistent with the Act. The

[[Page 69444]]

Exchange's proposal, among other things, to exclude from the definition 
of public arbitrator attorneys, accountants, and other professionals 
whose firms have derived 10 percent or more of their annual revenue, in 
the last two years, from clients involved in the activities defined as 
non-public is reasonably designed to reduce a perception of bias by 
Exchange arbitration panel members. The Exchange's proposal to expand 
the definition of ``immediate family member'' in PCX Rule 12.8(d) and 
PCXE Rule 12.9(d) to include parents, stepparents, children, or 
stepchildren, as well as any member of the arbitrator's household is 
also consistent with the Act.
    The Commission believes that the Exchange's proposal to exclude 
from the definition of public arbitrator attorneys, accountants, and 
other professionals whose firms derived 10 percent or more of their 
annual revenue, in the last two years, from clients involved in the 
activities defined in the definition of non-public arbitrator is 
reasonably designed to reduce a perception of bias by Exchange 
arbitration panel members. The Perino Report recommended that the NASD 
and NYSE consider an expansion of the definition of ``immediate family 
member'' to include parents and children, even if the parent or child 
do not share the same home or receive substantial support from a non-
public arbitrator.\12\ The PCX has considered this same issue and has 
determined to expand the term as was recommended in the Perino Report 
with regard to the arbitration rules of the NASD and the NYSE. The 
Commission believes it is reasonable for the PCX to further expand the 
definition of non-public arbitrator by including stepparents and step 
children as well as parents, children, and any household member in the 
definition of immediate family member. The Perino Report noted, 
generally, that ``no classification rule could ever precisely define 
public and non-public arbitrators; there will always be classification 
questions at the margins about which reasonable people will differ.'' 
\13\ Thus, the Commission believes that the PCX's amendments to the 
definition of public arbitrator, including the 10 percent threshold and 
definition of ``immediate family member'' are consistent with the Act.
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    \12\ See Id.
    \13\ See Id.
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    The PCX has represented that the proposed amendments to PCX Rule 12 
and PCXE Rule 12 would substantially conform its arbitration rules 
relating to arbitrator classification, challenges, and disclosure to 
the existing arbitration rules of the NASD, which the Commission has 
already approved. As such, the Commission believes that the proposed 
amendments to PCX Rule 12 and PCXE Rule 12 are necessary and 
appropriate to provide consistency with respect to arbitration rules 
and procedures to the public and ensure that arbitrations are fair and 
neutral. The Commission believes that granting accelerated approval of 
the proposed rule changes would facilitate the accomplishment of these 
objectives. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\14\ for approving the proposed rule change 
prior to the thirtieth day of publication of notice thereof in the 
Federal Register.
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    \14\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-PCX-2004-80) as amended, is 
hereby approved on an accelerated basis.
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    \15\ Id.

    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. E4-3354 Filed 11-26-04; 8:45 am]
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