[Federal Register Volume 70, Number 35 (Wednesday, February 23, 2005)]
[Notices]
[Pages 8862-8863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-734]



[[Page 8862]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51213; File No. SR-NASD-2004-180]


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

February 16, 2005.

I. Introduction

    On December 9, 2004, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the waiver of 
California Arbitrator Disclosure Standards. The proposed rule change 
was published for comment in the Federal Register on January 14, 
2005.\3\ For the reasons discussed below, the Commission is approving 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 50971 (January 6, 2005), 
70 FR 2685 (January 14, 2005) (the ``Notice'').
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II. Description of the Proposed Rule Change

A. Description of the Proposal

    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\ In response to the 
adoption of the California Standards and the conflict between the 
California Standards and the NASD Rules, NASD, the NYSE, and other 
claimants filed various actions in both the federal court system and 
the California state court system. These cases are presently proceeding 
through both the California and the federal court systems.\6\
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    \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.
    \6\ For a more complete discussion of the various pending cases, 
please see the Notice, supra note 3.
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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.\7\
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    \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).
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    The pilot rule, which was originally approved for six months on 
September 26, 2002,\8\ has been extended and is now due to expire on 
March 31, 2005.\9\ NASD believes all the pending litigation regarding 
the California Standards is unlikely to be resolved by March 31, 2005. 
The Commission is approving NASD's request to extend the effectiveness 
of the pilot rule through September 30, 2005, in order to permit NASD 
to avoid disrupting the administration of cases covered by the pilot 
rule under the NASD Code of Arbitration Procedure.
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    \8\ See Securities Exchange Act Release No. 46562 (September 26, 
2002), 67 FR 62085 (October 3, 2002) (SR-NASD-2002-126).
    \9\ See Securities Exchange Act Release No. 50447 (September 24, 
2004), 69 FR 58567 (September 30, 2004) (SR-NASD-2004-126).
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B. Comment Summary

    The proposal was published for comment in the Federal Register on 
January 14, 2005.\10\ We received no comments on the proposal.
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    \10\ See note 3, supra.
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III. Discussion and Findings

    The Commission finds the proposed rule change is consistent with 
the Act, and in particular with section 15A(b)(6) of the Act, which 
requires, among other things, that NASD's rules 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.\11\ The Commission believes that the proposed 
rule change is consistent with the provisions of the Act noted above 
because, in the event that the pending litigation regarding the 
California Standards is not resolved by March 31, 2005, the current 
pilot expiration date, the extension of the effectiveness of the pilot 
rule through September 30, 2005, will permit NASD to avoid disrupting 
the administration of cases covered by the pilot rule under the NASD 
Code of Arbitration Procedure. The Commission believes that NASD's 
current system provides an appropriate forum for the resolutions of 
cases covered by the pilot rule. Under the pilot rule, 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.\12\ The 
Commission believes that the extension of the pilot rule will provide 
claimants with a continuing, consistent, and appropriate forum in which 
to arbitrate their claims, allowing claimants to proceed rather than 
requiring them to suspend their claims until the litigation is 
completed. The Commission believes that providing claimants with such a 
forum is consistent with the protection of investors and the public 
interest.
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    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ NASD notes that the NYSE has a similar rule, NYSE Rule 
600(g).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\13\ that the proposed rule change (SR-NASD-2004-

[[Page 8863]]

180) be, and hereby is, approved through September 30, 2005.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
Jill M. Peterson,
Assistant Secretary.
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    \15\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E5-734 Filed 2-22-05; 8:45 am]
BILLING CODE 8010-01-P