[Federal Register Volume 70, Number 48 (Monday, March 14, 2005)]
[Notices]
[Pages 12522-12523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1056]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51325; File No. SR-NASD-2005-007]


Self-Regulatory Organizations; Order Approving 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

March 7, 2005.

I. Introduction

    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 (``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 to adopt a new Interpretive 
Manual (``IM'')-10308 on mediators serving as arbitrators. The proposed 
rule

[[Page 12523]]

change was published for comment in the Federal Register on February 3, 
2005.\3\ The Commission received one comment letter on the proposed 
rule change.\4\ 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. 51097 (Jan. 28, 2005), 
70 FR 5715 (Feb. 3, 2005) (the ``Notice'').
    \4\ See Letter to Jonathan Katz, Secretary, Commission, from 
George R. Kramer, Deputy General Counsel, Securities Industry 
Association (``SIA''), dated February 25, 2005 (``SIA Letter'').
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II. Description of the Proposed Rule Change

A. Description of the Proposal

    NASD proposed to adopt a new 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. Recent changes to 
NASD's arbitrator classification rules 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).\5\ The changes led, among other 
things, to reclassifying some arbitrators from public to non-public or 
from non-public to public, and to dropping some arbitrators from the 
NASD's roster. 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.\6\
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    \5\ See Exchange Act Release No. 49573 (Apr. 16, 2004), 69 FR 
21871 (Apr. 22, 2004) (SR-NASD-2003-095).
    \6\ For further detail, see the Notice, note 3, supra.
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    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 but that 
such a broad interpretation was not intended. The proposed rule change 
would adopt a clarifying IM that would be printed in the Code following 
Rule 10308. The IM provides, in part, that mediation fees received by 
mediators who are also arbitrators are not to be included in the 
definition of ``revenue;'' that mediation services performed by 
mediators who are also arbitrators are not to be included in the 
definition of ``professional work;'' and that arbitrators who also 
serve as mediators must disclose that information.

B. Comment Summary

    The proposal was published for comment in the Federal Register on 
February 3, 2005.\7\ We received one comment on the proposal,\8\ which 
was supportive. Citing confusion arising from the implementation of the 
NASD's 2004 changes to the arbitrator classification rules, the 
commenter agreed with the NASD Dispute Resolution Board that the rules 
should not be construed to cover revenues or work deriving from service 
as a mediator. The commenter accordingly called the proposed rule 
change appropriate.
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    \7\ See note 3, supra.
    \8\ See note 4, 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.\9\ The Commission believes that the proposed 
rule change is consistent with the provisions of the Act noted above 
because it provides clarity to the operation of the rules regarding 
arbitrator classification and addresses an ambiguity in the 
interpretation of the arbitrator classification rules. The Commission 
believes that this clarification of the arbitrator rules will increase 
efficiency in the operation of the arbitrator selection process, as 
well as provide additional useful disclosure to claimants regarding an 
arbitrator's service as a mediator.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\10\ that the proposed rule change (SR-NASD-2005-007) be, and hereby 
is, approved.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 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).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1056 Filed 3-11-05; 8:45 am]
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