[Federal Register Volume 70, Number 73 (Monday, April 18, 2005)]
[Notices]
[Pages 20194-20196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-7650]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51534; File No. SR-MSRB-2005-05]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Amendment to Rule G-8, on Recordkeeping, to Add 
Requirement for Predispute Arbitration Agreements With Customers, and 
Amendment to Rule A-11, on Indemnification, to Delete Obsolete 
References to Arbitrators

April 12, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 21, 2005, the Municipal Securities Rulemaking Board (``MSRB'' 
or ``Board''), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the MSRB. The 
MSRB filed an amendment to the proposed rule change on April 1, 
2005.\3\ The MSRB has filed the proposal as a ``non-controversial'' 
rule change pursuant to Section 19(b)(3)(A)(iii) of the Act,\4\ and 
Rule 19b-4(f)(6) thereunder,\5\ which renders the proposal effective 
upon filing with the Commission. However, the MSRB has set an effective 
date of May 1, 2005, to coincide with recent amendments to NASD Rule 
3110(f), on predispute arbitration agreements with customers.\6\ 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.
    \3\ The amendment replaces, in its entirety, the previously 
filed proposed rule language to MSRB Rule G-8 with new language to 
conform with the language of NASD Rule 3110(f) that is set to become 
effective on May 1, 2005 (``Amendment No. 1'').
    \4\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ In November 2004, the SEC approved amendments to NASD Rule 
3110(f) that require NASD member firms to modify their predispute 
arbitration agreements with customers to provide enhanced disclosure 
about the arbitration process. The amendments also require NASD 
members to provide copies of predispute arbitration agreements and 
relevant arbitration forum rules to customers upon request; clarify 
the use of certain limiting provisions; and require firms seeking to 
compel arbitration of claims initiated in court to arbitrate all of 
the claims contained in the complaint if the customer so requests. 
See Release No. 34-50713 (November 22, 2004), effective May 1, 2005.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the Commission a proposed rule change 
consisting of technical amendments to Rule G-8, on recordkeeping, and 
Rule A-11, on indemnification. The MSRB has set an effective date for 
the amendments of May 1, 2005. The text of the proposed rule change is 
available on the MSRB's Web site (http://www.msrb.org), at the MSRB's 
principal office, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the MSRB 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. The MSRB has prepared summaries, set forth in

[[Page 20195]]

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
    In 1997, the MSRB determined that it was no longer cost-effective 
to continue operating an arbitration program since so few cases were 
being filed with its program. Accordingly, the MSRB amended Rule G-35, 
on arbitration, to provide that it would not accept any new arbitration 
claims filed on or after January 1, 1998 (the ``1997 Amendments'').\7\ 
The MSRB noted that any customer or securities dealer with a claim, 
dispute or controversy against a dealer involving its municipal 
securities activities may submit that claim to the arbitration forum of 
any self-regulatory organization (``SRO'') of which the dealer is a 
member, including NASD. Bank dealers, however, are unique in that they 
are subject to MSRB rules but are not members of any other SRO. Thus, 
it was necessary to provide an alternative arbitration forum for claims 
involving the municipal securities activities of bank dealers. The 1997 
Amendments accomplished this by providing that as of January 1, 1998 
every bank dealer, as defined in Rule D-8,\8\ shall be subject to 
NASD's Code of Arbitration Procedure for every claim, dispute or 
controversy arising out of or in connection with the municipal 
securities activities of the bank dealer acting in its capacity as 
such, and that bank dealers shall abide by NASD's Code as if they were 
``members'' of NASD for purposes of arbitration. The enforcement 
mechanism for bank dealers was not altered by the amendments; the bank 
regulatory agencies continue to be responsible for the inspection and 
enforcement of bank dealers' municipal securities activities, including 
arbitration.
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    \7\ File No. SR-MSRB-97-04, approved in Release No. 34-39378 
(December 1, 1997).
    \8\ Rule D-8 defines ``bank dealer'' to mean a municipal 
securities dealer which is a bank or a separately identifiable 
department or division of a bank as defined in Rule G-1.
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    At the time of the 1997 Amendments, the MSRB agreed to continue 
operating its arbitration program in order to administer its current, 
open cases and any new claims received prior to January 1, 1998, but 
stated that it would discontinue administering its program when all 
such cases were closed. On May 14, 2002, the MSRB transferred its 
final, open case to NASD. Accordingly, in August 2002, the MSRB 
submitted a filing to the SEC to delete Sections 1 through 37 of Rule 
G-35, on arbitration, thereby effectively discontinuing the operation 
of its arbitration program.\9\ The filing also incorporated by 
reference into Rule G-35 the NASD Code of Arbitration Procedure and all 
future amendments thereto.\10\
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    \9\ File No. SR-MSRB-2002-09 (August 19, 2002), approved in 
Release No. 34-46666 (October 16, 2002).
    \10\ At the request of the SEC's Division of Market Regulation, 
the MSRB requested that, pursuant to section 36 of the Act and Rule 
0-12 thereunder, the SEC grant an exemption from the requirements of 
section 19(b) of the Act and Rule 19b-4 thereunder to allow the MSRB 
to incorporate by reference into Rule G-35 any changes to the NASD's 
Code without requiring that the MSRB submit a separate filing for 
each such change. See letter from Diane G. Klinke, General Counsel, 
MSRB, to Jonathan G. Katz, Secretary, SEC, dated April 4, 2002. The 
SEC granted this exemption in Release No. 34-49260 (February 17, 
2004).
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    When the MSRB deleted Sections 1 through 37 of its arbitration code 
in 2002, the requirements governing predispute arbitration agreements 
(previously in Section 36 of Rule G-35) were also deleted. While Rule 
G-35 currently provides that bank dealers shall abide by the NASD Code 
of Arbitration Procedure, NASD's requirement for predispute arbitration 
agreements is not contained in that Code. Instead, the NASD requirement 
is set forth in its Rule 3110, on books and records, and IM-3110(f), on 
customer account information. NASD Rule 0116, on application of NASD 
rules to exempted securities, provides that NASD Rule 3110 and the 
related interpretive materials (among other rules and interpretive 
materials) do not apply to municipal securities. Thus, there currently 
is no requirement specifically governing the way bank dealers or 
municipal-only dealers use predispute arbitration agreements with 
customers. To remedy this situation, the MSRB is filing a technical 
amendment to Rule G-8, on recordkeeping, to add such a requirement. The 
language of the proposed amendment tracks the language of NASD Rule 
3110(f), on predispute arbitration agreements with customers, as 
recently amended.\11\ The proposed amendment to Rule G-8 will become 
effective on May 1, 2005, to coincide with the effective date of NASD's 
recent amendments to its Rule 3110(f). In addition, the MSRB is filing 
a technical amendment to Rule A-11, on indemnification, to delete its 
obsolete references to arbitrator indemnification.
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    \11\ See note 6, above.
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2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
sections 15B(b)(2)(C) and (D) of the Act,\12\ which provide that MSRB 
rules shall:
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    \12\ 15 U.S.C. 78o-4(b)(2)(C), (D).

Be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities, to remove 
impediments to and perfect the mechanism of a free and open market 
in municipal securities, and, in general, to protect investors and 
the public interest * * * [and] if the Board deems appropriate, 
provide for the arbitration of claims, disputes, and controversies 
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relating to transactions in municipal securities. * * *

The MSRB believes that the proposed rule change is consistent with 
these provisions in that it would provide for the protection of 
investors and the public interest by ensuring that there is a 
requirement governing the use of predispute arbitration agreements with 
customers by brokers, dealers and municipal securities dealers, 
including bank dealers and municipal-only dealers. The proposed rule 
change also would ensure consistent treatment across the securities 
markets regarding the use of such agreements.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change will result 
in any burden on competition not necessary or appropriate in 
furtherance of the purposes 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 on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative for 30 days from the date on which it was filed, and the MSRB 
provided the Commission with written notice of its intent to file the 
proposed rule change at least five business days prior to the filing 
date, the proposed rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).

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[[Page 20196]]

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\15\
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    \15\ See section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C). 
For purposes of calculating the 60-day abrogation period, the 
Commission considers the period to commence on April 1, 2005, the 
date that the MSRB filed Amendment No. 1.
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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-MSRB-2005-05 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-MSRB-2005-05. 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 MSRB. 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-MSRB-2005-05 and should be submitted on or before May 9, 
2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jill M.Peterson,
Assistant Secretary.
[FR Doc. 05-7650 Filed 4-15-05; 8:45 am]
BILLING CODE 8010-01-U