[Federal Register Volume 70, Number 117 (Monday, June 20, 2005)]
[Notices]
[Pages 35482-35484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3151]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51825; File No. SR-NASD-2005-070]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change and Amendment No. 1 Thereto Relating to 
Rescinding the Pilot Rule in IM-10100(f) of the NASD Code of 
Arbitration Procedure Relating to the Waiver of the California Ethics 
Standards for Neutral Arbitrators in Contractual Arbitration

June 13, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on May 31, 2005 and on June 8, 2005 (Amendment No. 1), the 
National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III 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 and 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 rescind the pilot rule in IM-10100(f) of the 
NASD Code of Arbitration Procedure relating to the waiver of the 
California Ethics Standards for Neutral Arbitrators in Contractual 
Arbitration.
    Below is the text of the proposed rule change.\3\ Proposed new 
language is italicized; proposed deletions are in brackets.
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    \3\ Corresponding changes reflecting the proposed rule change 
will be made to the NASD Code of Arbitration Procedure for Customer 
Disputes filed on October 15, 2003, and amended on January 3, 2005, 
January 19, 2005, and April 8, 2005 (SR-NASD-2003-158); and the NASD 
Code of Arbitration Procedure for Industry Disputes filed on January 
16, 2004, and amended on February 26, 2004, January 3, 2005, and 
April 8, 2005 (SR-NASD-2004-011).
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* * * * *

IM-10100. Failure To Act Under Provisions of Code of Arbitration 
Procedure

    It may be deemed conduct inconsistent with just and equitable 
principles of trade and a violation of Rule 2110 for a member or a 
person associated with a member to:
    (a) Through (c) No change
    (d) Fail to honor an award, or comply with a written and executed 
settlement agreement, obtained in connection with an arbitration 
submitted for disposition pursuant to the procedures specified by the 
National Association of Securities Dealers, Inc., the New York, 
American, Boston, Cincinnati, Chicago, or Philadelphia Stock Exchanges, 
the Pacific Exchange, Inc., the Chicago Board Options Exchange, the 
Municipal Securities Rulemaking Board, or pursuant to the rules 
applicable to the arbitration of disputes before the American 
Arbitration Association or other dispute resolution forum selected by 
the parties where timely motion has not been made to vacate or modify 
such award pursuant to applicable law; or
    (e) Fail to comply with a written and executed settlement 
agreement, obtained in connection with a mediation submitted for 
disposition pursuant to the procedures specified by the National 
Association of Securities Dealers, Inc.[; or]
    [(f) Fail to waive the California Rules of Court, Division VI of 
the Appendix, entitled, ``Ethics Standards for Neutral Arbitrators in 
Contractual Arbitration'' (the ``California Standards''), if 
application of the California Standards has been waived by all parties 
to the dispute who are:
    (1) Customers with a claim against a member or an associated 
person;
    (2) Associated persons with a claim against a member or an 
associated person;
    (3) Members with a claim against another member; or
    (4) Members with a claim against an associated person that relates 
exclusively to a promissory note.
    Written waiver by such parties shall constitute and operate as a 
waiver for all member firms or associated persons against whom the 
claim has been filed. This rule applies to claims brought in California 
against all member firms and associated persons, including terminated 
or otherwise inactive member firms or associated persons.] Remainder 
unchanged
* * * * *

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
    The purpose of the proposed rule change is to rescind the pilot 
rule in IM-10100(f) of the NASD Code of Arbitration Procedure 
(``Code'') relating to the waiver of the California Ethics Standards 
for Neutral Arbitrators in Contractual Arbitration (``Pilot Rule'').
    Effective July 1, 2002, the California Judicial Council (``Judicial 
Council'') adopted a set of rules, ``Ethics Standards for Neutral 
Arbitrators in Contractual Arbitration'' (``California Standards''),\4\ 
which contain extensive disclosure and disqualification requirements 
for arbitrators. The California Standards imposed disclosure and 
disqualification requirements on arbitrators that conflict with the 
disclosure and disqualification 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\
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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.

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[[Page 35483]]

    In September 2002, NASD implemented a pilot rule providing that if 
parties to an arbitration who are customers (or, in certain 
circumstances, associated persons) waived application of the California 
Standards to their arbitration proceeding, then the firm would be 
required to waive the application of the California Standards.\6\ Under 
such a waiver, the arbitration proceeds under the existing NASD Code, 
which already contains extensive disclosure requirements and provisions 
for challenging arbitrators with potential conflicts of interest. In 
those cases where a waiver of the California Standards is not received, 
the appointment of arbitrators is temporarily postponed unless the 
parties agree to proceed in a non-California venue.
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    \6\ This rule has been expanded on several occasions. 
Originally, the pilot rule only applied 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. Exchange Act Release No. 48187 (July 
16, 2003), 68 FR 43553 (July 23, 2003). In October 2003, the rule 
was further amended to include claims by members against other 
members, and claims by members against associated persons that 
relate exclusively to promissory notes. Exchange Act Release No. 
48711 (October 29, 2003), 68 FR 62490 (November 4, 2003).
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    NASD also commenced litigation or became involved in a number of 
suits challenging the California Standards. On March 1, 2005, the 
United States Court of Appeals for the Ninth Circuit issued its 
decision in Credit Suisse First Boston Corp. v. Grunwald.\7\ The Ninth 
Circuit held that the Exchange Act preempts application of the 
California Standards to NASD arbitrations. On May 23, 2005, the Supreme 
Court of California also held that the Exchange Act preempts 
application of the California Standards to NASD-administered 
arbitrations.\8\
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    \7\ 400 F.3d 1119 (9th Cir. 2005).
    \8\ Jevne v. The Superior Court of Los Angeles County, S121532 
(CA Sup. Ct. May 23, 2005).
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    The Pilot Rule was originally approved for six months in September 
2002.\9\ It was subsequently extended on several occasions and is now 
due to expire on September 30, 2005.\10\ NASD has determined that the 
Pilot Rule should be rescinded prior to September 30, 2005, as it is no 
longer necessary. Specifically, with the recent decisions in Grunwald 
and Jevne, both the Ninth Circuit Court of Appeals and the California 
Supreme Court have found that the Exchange Act preempts the application 
of the California Standards to arbitrators in the NASD forum. 
Consequently, NASD believes that it can once again appoint arbitrators 
in California cases without requiring a waiver of the California 
Standards.
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    \9\ See Exchange Act Release No. 46562 (September 26, 2002), 67 
FR 62085 (October 3, 2002).
    \10\ See Exchange Act Release No. 51213 (February 16, 2005), 70 
FR 8862 (February 23, 2005).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Exchange Act,\11\ which 
requires, among other things, that NASD's 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. Specifically, rescinding the Pilot 
Rule will benefit all users of the forum as it will allow NASD to 
process those arbitration cases that have not been paneled because the 
necessary waivers of the California Standards have not been received.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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(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 Exchange Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change 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, as amended, is consistent with the Exchange 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-2005-070 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-070. 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filings also will be 
available for inspection and copying at the principal offices of the 
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-2005-070 and should be submitted on or before July 11, 2005.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder, applicable to a self-regulatory organization.\12\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 15A(b)(6) of the Exchange Act,\13\ which 
requires, among other things, that NASD's rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in

[[Page 35484]]

general, to protect investors and the public interest. The Commission 
notes that rescinding the Pilot Rule will benefit all users of the 
forum as it will allow NASD to process those arbitration cases that 
have not proceeded because the necessary waivers of the California 
Standards have not been received.
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    \12\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3(b)(6).
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    After careful consideration, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Exchange Act,\14\ for approving the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice in the Federal Register. In recent decisions in 
Grunwald and Jevne, both the Ninth Circuit Court of Appeals and the 
California Supreme Court have found that the Exchange Act preempts the 
application of the California Standards to arbitrations in the NASD 
forum. Consequently, the Commission believes that the NASD can once 
again appoint arbitrators in California cases without requiring a 
waiver of the California Standards. Accordingly, the Commission 
believes that there is good cause, consistent with Section 15A(b)(6) of 
the Exchange Act,\15\ to approve the proposal on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 15 U.S.C. 78o-3(b)(6).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\16\ that the proposed rule change (SR-NASD-2005-070) is 
hereby approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3151 Filed 6-17-05; 8:45 am]
BILLING CODE 8010-01-P