[Federal Register Volume 70, Number 10 (Friday, January 14, 2005)]
[Notices]
[Pages 2685-2686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-134]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50971; File No. SR-NASD-2004-180]


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

January 6, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on December 9, 2004, the National Association of Securities 
Dealers, Inc., (``NASD'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III, below, which NASD has prepared. 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.
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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 (``Code''), relating to the 
California waiver program, until September 30, 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''),\3\ 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.\4\
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    \3\ California Rules of Court, Division VI of the Appendix.
    \4\ 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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    In July 2002, NASD and the 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'').\5\ On November 12, 2002, the United States 
District Court for the Northern District of California dismissed the 
case on Eleventh Amendment grounds. In December 2002, NASD and the NYSE 
filed a Notice of Appeal to the United States Court of Appeals for the 
Ninth Circuit. This appeal is currently stayed pending a decision in 
Credit Suisse First Boston Corp. v. Grunwald,\6\ which is discussed 
below.
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    \5\ See Motion for Declaratory Judgment, NASD Dispute 
Resolution, Inc. and NYSE, 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.nasd.com/stellent/groups/med_arb/documents/mediation_arbitration/nasdw_009557.pdf.
    \6\ No. C 02-2051 SBA (N.D. Cal. March 31, 2003).
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    In another case before the United States District Court for the 
Northern District of California regarding the applicability of the 
California Standards to NASD arbitrations, Judge Jeremy Fogel denied 
the plaintiff's motion to vacate an order compelling arbitration.\7\ In 
his April 2003 decision, Judge Fogel concluded that the application of 
the California Standards to the NYSE and other SROs, such as NASD, is 
preempted by the Exchange Act and by the Federal Arbitration Act 
(``FAA''). The Mayo decision was not appealed.
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    \7\ Mayo v. Dean Witter Reynolds, Inc., 258 F. Supp. 2d 1097 
(N.D. Cal. 2003).
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    The applicability of the California Standards to SRO arbitrations 
was again addressed by the United States District Court for the 
Northern District of California in Grunwald. The court found that the 
California Standards could not apply to SRO-appointed arbitrators 
because such arbitrators did not fall within the definition of 
``neutral arbitrators'' that is set forth in the California Code of 
Civil Procedure. Consequently, the court concluded that the Judicial 
Council had exceeded its authority in drafting the California Standards 
and thus declared them void. The Grunwald decision has been appealed to 
the United States Court of Appeals for the Ninth Circuit. Although the 
appeal has been briefed and argued, the Ninth Circuit has not yet 
issued a decision.
    In Jevne v. The Superior Court of Los Angeles County,\8\ the 
California Court of Appeal, Second District found that the Judicial 
Council had not exceeded its authority in drafting the California 
Standards and that the standards are not preempted by the FAA. The 
court did find, however, that the California Standards are preempted by 
the Exchange Act. On March 17, 2004, the California Supreme Court 
granted review in Jevne. Although the case has been fully briefed, oral 
arguments have not yet been scheduled.
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    \8\ 6 Cal. Rptr. 3d 542, 113 Cal. App. 4th 486 (2d Dist. 2003).
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    To allow arbitrations to proceed in California while the litigation 
regarding the applicability of the California Standards to SRO 
arbitrations 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.\9\ In such cases, the 
arbitration

[[Page 2686]]

proceeds under the NASD Code of Arbitration Procedure, which already 
contains extensive disclosure requirements and provisions for 
challenging arbitrators with potential conflicts of interest.\10\
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    \9\ 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).
    \10\ NASD states that the NYSE has a similar rule, NYSE Rule 
600(g).
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    The pilot rule, which was originally approved for six months on 
September 26, 2002,\11\ has been extended and is now due to expire on 
March 31, 2005.\12\ Because NASD believes all the pending litigation 
regarding the California Standards is unlikely to be resolved by March 
31, 2005, NASD requests that the effectiveness of the pilot rule be 
extended through September 30, 2005, in order to prevent NASD from 
having to suspend administration of cases covered by the pilot rule.
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    \11\ See Securities Exchange Act Release No. 46562 (September 
26, 2002), 67 FR 62085 (October 3, 2002) (SR-NASD-2002-126).
    \12\ See Securities Exchange Act Release No. 50447 (September 
24, 2004), 69 FR 58567 (September 30, 2004) (SR-NASD-2004-126).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\13\ 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.
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    \13\ 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 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

    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-2004-180 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-2004-180. 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-2004-180 and should be submitted on or before 
February 4, 2005. 

    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. E5-134 Filed 1-13-05; 8:45 am]
BILLING CODE 8010-01-P