[Federal Register Volume 70, Number 49 (Tuesday, March 15, 2005)]
[Notices]
[Pages 12763-12764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1103]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51339; File No. SR-NASD-2004-164]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto by National Association of 
Securities Dealers, Inc. Relating to the Random Selection of 
Arbitrators by the Neutral List Selection System

March 9, 2005.
    On October 28, 2004, the National Association of Securities 
Dealers, Inc. (``NASD''), through its subsidiary, NASD Dispute 
Resolution, Inc. (``NASD Dispute Resolution''), submitted to 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 
NASD Rule 10308 of the NASD Code of Arbitration Procedure (``Code''). 
On January 5, 2005, NASD filed Amendment No. 1 to the proposed rule 
change.\3\ The Federal Register published the proposed rule change, as 
amended, for comment on February 2, 2005.\4\ The Commission received 
four comment letters in response to the proposed rule change.\5\ This 
order approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mignon McLemore, NASD, to Catherine McGuire, 
SEC, dated January 5, 2005. In this letter, NASD stated that it will 
hire an outside consultant to audit the random selection system 
after it has been operational for one year and independently verify 
that the random selection system is operating as described in the 
proposed rule change. NASD also stated that it will keep statistics 
on the arbitrators selected by the random selection system who 
appear on an arbitrator list in order to monitor the effectiveness 
of the random selection system.
    \4\ Securities Exchange Act Release No. 51083, 70 FR 5497 
(``Notice'').
    \5\ See letters to Jonathan Katz, Secretary, Commission, from 
Les Greenberg, dated February 10, 2005 (``Greenberg letter''); 
Arnold Levine, dated February 19, 2005 (``Levine letter''); Philip 
Zimmerman, dated February 21, 2005 (``Zimmerman letter''); and Irwin 
Sugerman, dated February 21, 2005 (``Sugerman letter'').
---------------------------------------------------------------------------

    The proposed amendment to NASD Rule 10308 would change the method 
used by the Neutral List Selection System (``NLSS'') to select 
arbitrators from a rotational to a random selection function by 
incorporating the random selection provision of the proposed Customer 
and Industry Code revisions.\6\
---------------------------------------------------------------------------

    \6\ NASD Dispute Resolution has filed with the SEC a proposed 
rule change to the Code to reorganize the current rules, simplify 
the language, codify current practices, and implement several 
substantive changes. The rule filing was submitted in three parts: 
Customer Code, Industry Code, and Mediation Code. The Customer Code 
was filed on October 15, 2003, and amended on January 3, 2005 and 
January 19, 2005 (SR-NASD-2003-158); the Industry Code was filed on 
January 16, 2004, and amended on February 26, 2004 and January 3, 
2005 (SR-NASD-2004-011). The Mediation Code was filed on January 23, 
2004, and amended on January 3, 2005 (SR-NASD-2004-013). It does not 
contain any provisions concerning the NLSS. The three new codes will 
replace the current Code in its entirety. The Code revision is 
undergoing SEC staff review and has not yet been published for 
comment.
---------------------------------------------------------------------------

    The Greenberg letter supported the change to a random selection 
system. The Sugerman letter commented that a rotational system is more 
fair, asserting that under such a system an arbitrator's name is 
presented for possible selection with the same frequency as every other 
arbitrator. The Zimmerman letter suggested that NASD also use a random 
selection function for selecting mediators. The Levine letter, while 
addressing issues relating to arbitrators, did not specifically address 
the change from a rotational to a random arbitrator selection 
system.\7\
---------------------------------------------------------------------------

    \7\ The Levine letter commented that NASD should only use 
professional arbitrators and suggested qualifications that should be 
required of such arbitrators.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national

[[Page 12764]]

securities association.\8\ In particular, the Commission believes that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\9\ 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. The Commission believes that 
a random selection function incorporated into the NASD Dispute 
Resolution arbitration forum provides a fair and equitable system for 
parties to select arbitrators.
---------------------------------------------------------------------------

    \8\ 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. 78(c)(f).
    \9\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-NASD-2004-164), as amended, 
is approved.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Petersen,
Assistant Secretary.
[FR Doc. E5-1103 Filed 3-14-05; 8:45 am]
BILLING CODE 8010-01-P