[Federal Register Volume 70, Number 74 (Tuesday, April 19, 2005)]
[Notices]
[Pages 20407-20410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1818]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51526; File No. SR-NASD-2005-045]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to the Delivery of 
Customer Agreements Containing Predispute Arbitration Clauses

April 12, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on April 4, 2005, the National Association of 
Securities Dealers, Inc. (``NASD'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by NASD. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons. For the 
reasons discussed below, the Commission is approving the proposal on an 
accelerated basis.
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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 amend NASD Rule 3110(f) to: (1) Amend NASD 
Rule 3110(f)(2)(B) to conform to the SEC's recordkeeping rules, in 
particular, Exchange Act Rule 17a-3(a)(17)(i)(B)(1),\3\ by extending 
the time period for delivery of a copy of a customer account agreement 
containing a predispute arbitration clause from the time of signing to 
within 30 days of signing; (2) extend the compliance date of the recent 
amendments to NASD Rule

[[Page 20408]]

3110(f)(1) \4\ to June 1, 2005; and (3) make technical corrections to 
the numbering in NASD Rule 3110(f)(4), as recently amended, to conform 
to existing NASD rule format. Below is the text of the proposed rule 
change. Proposed new language is in italics; proposed deletions are in 
brackets.
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    \3\ 17 CFR 240.17a-3(a)(17)(i)(B)(1). This rule requires a 
broker-dealer, among other things, to keep a record indicating that 
the broker-dealer has furnished to each customer within 30 days of 
opening the account a copy of the account record, or alternate 
document, containing the customer's name, address, telephone number, 
date of birth, employment status, annual income, net worth, the 
account's investment objectives, and other information.
    \4\ See Exchange Act Rel. No. 50713 (Nov. 22, 2004), 69 FR 70293 
(Dec. 3, 2004) (Order Granting Approval to Proposed Rule Change as 
Amended and Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 5 by the National Association of Securities 
Dealers, Inc., Regarding NASD Rule 3110(f) Governing Predispute 
Arbitration Agreements With Customers) (SR-NASD-98-74).
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* * * * *

3110. Books and Records

    (a) through (e) No change.
    (f) (1) No change.
    (2) (A) No Change.
    (B) [At the time] Within thirty days of signing, a copy of the 
agreement containing any such clause shall be given to the customer who 
shall acknowledge receipt thereof on the agreement or on a separate 
document.
    (3) (A) A member shall provide a customer with a copy of any 
predispute arbitration clause or customer agreement executed between 
the customer and the member, or inform the customer that the member 
does not have a copy thereof, within ten business days of receipt of 
the customer's request. If a customer requests such a copy before the 
member has provided the customer with a copy pursuant to subparagraph 
(2)(B) of this Rule, the member must provide a copy to the customer by 
the earlier date required by this subparagraph (3)(A) or by 
subparagraph (2)(B).
    (B) No change.
    (4) No predispute arbitration agreement shall include any condition 
that:
    (A) [(i)] limits or contradicts the rules of any self-regulatory 
organization;
    (B) [(ii)] limits the ability of a party to file any claim in 
arbitration;
    (C) [(iii)] limits the ability of a party to file any claim in 
court permitted to be filed in court under the rules of the forums in 
which a claim may be filed under the agreement;
    (D) [(iv)] limits the ability of arbitrators to make any award.
    (5) through (7) No Change.
    (g) through (h) No change.
* * * * *

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

    In its filing with the Commission, NASD 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 III below. NASD 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
(a) Delivery of Customer Agreements
    The purpose of the proposed rule change regarding the delivery of 
customer agreements is to conform the time period for the delivery of 
copies of any customer agreement containing a predispute arbitration 
clause to customers in NASD Rule 3110(f) with the SEC recordkeeping 
rules, in particular, Exchange Act Rule 17a-3(a)(17)(i)(B)(1).
    On November 22, 2004, the Commission approved changes (the ``Rule 
3110 changes'') to NASD Rule 3110(f), which governs the use of 
predispute arbitration agreements with customers. The primary purposes 
of the Rule 3110 changes were to require enhanced disclosure to 
customers about the arbitration process and to clarify the prohibition 
against inserting provisions in predispute arbitration agreements that 
limit rights or remedies that parties have (for example, the ability of 
a party to file any claim in arbitration). The Rule 3110 changes also 
require that firms provide a copy of any customer agreement containing 
a predispute arbitration clause to the customer, who must acknowledge 
receipt thereof on the agreement or on a separate document, at the time 
of signing.\5\ The proposed rule change would amend the time 
requirement for delivery of a copy of the customer agreement from the 
time of signing to within 30 days of signing.\6\ This change would 
conform the delivery requirement in NASD Rule 3110(f)(2)(B) to that in 
the SEC's recordkeeping rules.\7\
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    \5\ Prior to the Rule 3110 changes, firms were required to 
provide copies of predispute arbitration agreements to customers; 
however, the rule did not specify when they must do so.
    \6\ The changes made to NASD Rule 3110(f)(3)(A) by the Rule 3110 
changes require firms to provide customers who request a copy of any 
predispute arbitration clause or client agreement with a copy within 
ten business days of the request. Thus, if the rule changes proposed 
in this release are adopted, customers wishing to have a copy of the 
customer agreement sooner than the specified 30 days can request 
one. For example, if a customer requests a copy of the agreement on 
the date of signing, the firm must provide the copy to the customer 
within ten business days of receiving that request. In addition, 
firms may not extend the 30-day time period for compliance with the 
delivery requirement in NASD Rule 3110(f)(2)(B), even though the 
Rule 3110 changes allow a firm ten business days in which to provide 
a copy of the agreement to a customer upon request. For example, if 
a customer requested a copy of the customer agreement 25 days after 
signing, the firm still would be required to provide the customer 
with the copy within 30 days of the signing date (rather than within 
ten business days of the date the firm received the request). 
Proposed language has been added to NASD Rule 3110(f)(3)(A) to 
address this situation.
    \7\ See Exchange Act Rule 17a-3(a)(17)(i)(B)(1); Exchange Act 
Rel. No. 44992 (Oct. 26, 2001), 66 FR 55817 (Nov. 2, 2001). The Rule 
3110 changes were first filed in 1998, prior to the adoption of the 
Rule 17a-3(a)(17)(i)(B)(1). See 69 FR at 70293.
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(b) Extension of Compliance Date
    The Rule 3110 changes are scheduled to become effective on May 1, 
2005.\8\ To give firms more time to amend their customer agreements to 
comply with the changes to NASD Rule 3110(f)(1), the proposed rule 
change will extend the compliance date by which firms must begin using 
the disclosure required by the changes to NASD Rule 3110(f)(1) from May 
1, 2005 until June 1, 2005.\9\ This will give firms six months (rather 
than five) to implement the changes required by the Rule 3110 changes 
with respect to NASD Rule 3110 (f)(1).\10\ However, the other 
requirements of the Rule 3110 changes (i.e., subparagraphs (f)(2) 
through (f)(7)) as well as the amendments set forth in this proposed 
rule change will apply to all predispute

[[Page 20409]]

arbitration agreements signed on or after May 1, 2005.
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    \8\ The Notice announcing the Commission's approval of the Rule 
3110 changes noted that ``the proposed rule change would take effect 
90 days after NASD publishes a Notice to Members within 60 days of 
publication of the Commission's approval * * *.'' 63 FR at 70295. 
Notice to Members 05-09, which announced the approval, was published 
on January 31, 2005.
    \9\ The effective date of the Rule 3110 changes was originally 
linked to the effective date of amendments to NASD Rule 10304, 
governing time limits on filing claims in arbitration, which will 
also take effect on May 1, 2005. See Exchange Act Rel. No. 50714 
(Nov. 22, 2004), 69 FR 69971 (Dec. 1, 2004) (Order Granting Approval 
to Proposed Rule Change, and Notice of Filing and Order Granting 
Accelerated Approval to Amendments No. 1 and 2 Thereto Relating to 
Time Limits for Submission of Claims in Arbitration) (SR-NASD-2003-
101). The two rule filings are related because both include 
provisions restricting the ability of member firms to bifurcate 
customer claims between court and arbitration, and because the 
enhanced disclosure in NASD Rule 3110(f)(1) states that some firms 
have time limits for the filing of claims in arbitration. Extension 
of the compliance date for NASD Rule 3110(f)(1) would not extend the 
effective date of the bifurcation provision in NASD Rule 3110(f)(5), 
which would remain the same (May 1, 2005) as the amendments to NASD 
Rule 10304, or the applicability of any provision in NASD Rule 
10304.
    \10\ Firms would be permitted to use customer agreements 
containing the new disclosure language required by the Rule 3110 
changes before June 1, 2005.
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(c) Technical Amendments
    The purpose of the proposed rule change renumbering the four 
subparagraphs in NASD Rule 3110(f)(4) is to conform the numbering in 
those subparagraphs to existing NASD rule format.
(d) Effective Dates and Compliance Dates
    The proposed rule change will become effective upon approval by the 
Commission, and the compliance date of the proposed rule change will be 
May 1, 2005, except that firms will not be required to use the 
disclosure required by the changes to NASD Rule 3110(f)(1) until June 
1, 2005. NASD will announce the proposed rule change in a Notice to 
Members to be published no later than 30 days following Commission 
approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act, which requires, among other 
things, that NASD 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 the proposed rule change will 
continue to ensure that customers receive certain information regarding 
arbitration and predispute arbitration agreements in a timely fashion; 
however, the proposed rule change will conform the delivery 
requirements of NASD Rule 3110(f) with the requirements in the SEC's 
recordkeeping rules.

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

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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.

III. 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-2005-045 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-2005-045. 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, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of 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 the File Number SR-NASD-2005-
045 and should be submitted on or before May 10, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission has reviewed carefully the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association and, in particular, the requirements of section 15A(b)(6) 
of the Act and the rules and regulations thereunder. Section 15A(b)(6) 
requires, among other things, that the rules of a national securities 
association be designed in part 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 
securities, and, in general, to protect investors and the public 
interest. The Commission believes that the proposed rule change 
requiring members to provide customers with executed customer 
agreements in a time period consistent with the Commission's 
recordkeeping rules, in particular, Exchange Act Rule 17a-
3(a)(17)(i)(B)(1), fosters cooperation and coordination with persons 
engaged in regulating transactions in securities. The Commission finds 
that the proposed rule change balances the need for protecting 
investors with the need for minimizing the administrative burden on 
members and is consistent with the requirements of the Act. The 
Commission notes that NASD Rule 3110(f)(3)(A) protects investors by 
requiring members to provide customers with a copy of the executed 
customer agreement within 30 days of execution, whether or not the 
customer requests a copy. If a customer requests a copy before the end 
of the 30-day period, the member must provide such copy within ten 
business days or before the end of the 30-day period, whichever date is 
earlier. The Commission notes that under the proposed rule change, 
members also are required to provide customers with additional copies 
of the executed agreement within ten business days if a customer 
requests it.
    The Commission believes that the proposed rule change to extend the 
compliance date for NASD Rule 3110(f)(1) from May 1, 2005, to June 1, 
2005 is designed to foster cooperation and coordination with persons 
engaged in regulating transactions in securities and is consistent with 
the Act. The Commission notes that the compliance date for NASD Rule 
3110(f)(2) through (f)(7) remains May 1, 2005.
    NASD has requested that the Commission find good cause pursuant to 
section 19(b)(2) of the Act for approving the proposed rule change 
prior to the 30th day after publication in the Federal Register. The 
Commission believes that granting accelerated approval for the proposed 
rule change will permit NASD to provide its members with notice of the 
revised customer agreement delivery requirement and staggered 
compliance dates in timely manner. The Commission therefore finds good 
cause for approving the proposed rule change prior to the 30th day 
after the date of

[[Page 20410]]

publication of notice of filing thereof in that accelerated approval 
will benefit NASD members and the investing public.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-2005-045) be, and hereby is, 
approved on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1818 Filed 4-18-05; 8:45 am]
BILLING CODE 8010-01-P