[Federal Register Volume 70, Number 22 (Thursday, February 3, 2005)]
[Notices]
[Pages 5715-5716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-407]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51097; File No. SR-NASD-2005-007]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to a Proposal to Adopt a New IM-10308 on Mediators Serving as 
Arbitrators

January 28, 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 January 19, 2005, the National Association of Securities 
Dealers, Inc. (``NASD''), through its wholly owned subsidiary, NASD 
Regulation, Inc. (``NASD Regulation'') 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 adopt a new Interpretive Material (``IM'')-
10308 to clarify that (1) fees for service as a mediator are not 
included in determining whether an attorney, accountant, or other 
professional derives 10% of his or her annual revenue from industry-
related parties; and (2) service as a mediator is not included in 
determining whether an attorney, accountant, or other professional 
devotes 20% or more of his or her professional work to securities 
industry clients. The text of the proposed rule change is reproduced 
below. Proposed new language is in italics.
* * * * *

IM-10308. Arbitrators Who Also Serve as Mediators \3\
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    \3\ This IM will be renumbered following Commission approval of 
the pending revisions of the Customer and Industry Codes, SR-NASD-
2003-158, filed on October 15, 2003, and SR-NASD-2004-011, filed on 
January 20, 2004.
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    Mediation services performed by mediators who are also arbitrators 
shall not be included in the definition of ``professional work'' for 
purposes of Rule 10308(a)(4)(C), so long as the mediator is acting in 
the capacity of a mediator and is not representing a party in the 
mediation.
    Mediation fees received by mediators who are also arbitrators shall 
not be included in the definition of ``revenue'' for purposes of Rule 
10308(a)(5)(A)(iv), so long as the mediator is acting in the capacity 
of a mediator and is not representing a party in the mediation.
    Arbitrators who also serve as mediators shall disclose that fact on 
their arbitrator disclosure forms.
* * * * *

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

    In its filing with the Commission, NASD Regulation 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 Regulation 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
    Several rule changes relating to arbitrator classification were 
approved by the SEC \4\ on April 16, 2004 and implemented by NASD on 
July 19, 2004. These changes amended the definitions of ``public'' and 
``non-public'' arbitrators (non-public arbitrators have some current or 
recent connection with the securities industry, but do not necessarily 
work in the industry). In the course of implementing the classification 
rule, NASD surveyed its entire roster of arbitrators, asking questions 
that tracked the new definitions. In light of information contained in 
their responses, some arbitrators were reclassified from public to non-
public or from non-public to public, and some arbitrators were dropped 
from the roster for various reasons.
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    \4\ See Exchange Act Release No. 49573 (April 16, 2004), 69 FR 
21871 (April 22, 2004) (SR-NASD-2003-095).
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    One new part of the rule provided that arbitrators who were 
otherwise qualified as public could not continue to serve as public 
arbitrators if their firms derived more than 10% of their revenue from 
industry parties. Specifically, Rule 10308(a)(5)(A)(iv) of

[[Page 5716]]

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the Code of Arbitration Procedure was amended to read as follows:

    The term ``public arbitrator'' means a person who is otherwise 
qualified to serve as an arbitrator and * * * (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 paragraph (a)(4)(A) * * *.

    Some arbitrators who also serve as mediators were of the opinion 
that the rule change encompassed income in the form of mediation fees 
paid by industry parties such that these individuals would no longer 
qualify as public arbitrators under the new rule.
    The NASD Dispute Resolution Board determined that the rule could be 
construed broadly enough to cover revenue derived from serving as a 
mediator, although this was clearly not the intent of the recent rule 
changes, and unanimously voted to issue a clarification in an IM that 
would be printed in the Code following Rule 10308.
    The IM also would make clear that mediation services performed by 
mediators who are also arbitrators is not to be included in the 
definition of ``professional work'' for purposes of the 20% test 
either, so long as the mediator is acting in the capacity of a mediator 
and is not representing a party in the mediation.
    In considering this matter, the NASD Dispute Resolution Board also 
determined that parties may wish to know that an arbitrator on their 
list also serves as a mediator and may be familiar with the industry 
parties or their counsel. NASD staff will add this information to the 
disclosure forms of dual arbitrators/mediators.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\5\ 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 any potential conflict is 
best addressed by ensuring that arbitrators who are mediators disclose 
this fact in the arbitrator disclosure history. NASD will prepare 
materials to inform arbitrators of the need to make this disclosure.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation 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.

II. 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-2005-007 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-2005-007. 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-2005-007 and should be submitted on or before 
February 24, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-407 Filed 2-2-05; 8:45 am]
BILLING CODE 8010-01-P