[Federal Register Volume 70, Number 120 (Thursday, June 23, 2005)]
[Notices]
[Pages 36430-36440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3266]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51857; File No. SR-NASD-2004-011]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendments 
Nos. 1, 2, 3, and 4 Thereto to Amend NASD Arbitration Rules for 
Industry Disputes

June 15, 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 January 16, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly owned subsidiary, NASD Dispute 
Resolution, Inc. (``NASD Dispute Resolution'') 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 Dispute Resolution. On February 26, 
2004, NASD filed Amendment No. 1 to the proposed rule change. On 
January 3, 2005, NASD amended the proposed rule change a second time. 
On April 8, 2005, and June 10, 2005, NASD filed Amendments No. 3 and 4, 
respectively, to the proposed rule change. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing amend the NASD Code of Arbitration Procedure 
(``Code'') to reorganize the current rules, simplify the language, 
codify current practices, and implement several substantive changes. 
NASD is proposing to reorganize its current dispute resolution rules 
(Rules 10000 et seq.) into three separate procedural codes: The NASD 
Code of Arbitration Procedure for Customer Disputes (``Customer 
Code''); the NASD Code of Arbitration Procedure for Industry Disputes 
(``Industry Code''); and the NASD Code of Mediation Procedure 
(``Mediation Code''). The three new codes will replace the current NASD 
Code in its entirety. NASD is also proposing to make certain 
substantive amendments to the Code as described herein. This rule 
filing contains the proposed Industry Code, the text of which is 
available on the NASD Web site at http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_009295&ssSourceNodeId=801 NodeId=801.\3\ A chart comparing the current Code and the proposed 
Industry Code, as well as an old-to-new conversion guide, are also 
available at the same URL.\4\
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    \3\ The proposed Customer Code and proposed Mediation Code have 
been filed separately with the Commission as SR-NASD-2003-158 and 
SR-NASD-2004-013, respectively.
    \4\ For purposes of this filing, the version of the current Code 
used in the comparison and conversion charts includes all NASD 
Dispute Resolution rule filings that have been approved by the 
Commission since the proposed rule change was filed on January 16, 
2004.
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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 has 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. 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

(a) Purpose
    This rule filing is part of a comprehensive plan to reorganize and 
simplify the NASD Code of Arbitration Procedure. Specifically, NASD is 
proposing to:
     Reorganize its dispute resolution rules in a more logical, 
user-friendly way, including creating separate Codes

[[Page 36431]]

for customer and industry arbitrations, and for mediations;
     Simplify the language and structure of the rules in each 
of the proposed Codes in a manner consistent with the SEC's plain 
English initiative; and
     Implement several substantive rule changes to the Industry 
and Customer Codes, including codifying several common practices, to 
provide more guidance to parties and arbitrators, and to streamline the 
administration of arbitrations in the NASD forum.

Reorganization

    One of the most frequent criticisms of the current Code is that it 
is poorly organized. Parties, particularly infrequent users of the 
forum, have difficulty finding the rules they are looking for, because 
the rules are not presented in a logical order. The confusion is 
compounded by the fact that certain rules in the Code apply only to 
customer cases, some apply only to industry cases, and still others 
apply to both types of disputes. In addition, the current Code contains 
the NASD mediation rules, despite the fact that many matters are 
submitted directly to mediation, and do not arise out of an arbitration 
proceeding.
    To address these concerns, NASD is proposing to divide the current 
Code into three separate Codes: the Customer Code, the Industry Code, 
and the Mediation Code. This rule filing contains the proposed Industry 
Code. NASD believes that maintaining separate Codes will make it easier 
for parties to find the rules that apply to their disputes, 
particularly for parties to disputes that are submitted directly to 
mediation. NASD will maintain electronic versions of each code on its 
Web site, http://www.nasd.com, and will make paper copies available 
upon request.
    In keeping with the current NASD rule numbering system, each of the 
three codes will be numbered in the thousands, and major sections will 
be numbered in the hundreds. Individual rules within those sections 
will be numbered in the tens (or ones, if necessary). The current 
method for numbering and lettering paragraphs within individual rules 
will remain unchanged. The Customer Code will use the Rule 12000 
series, which is currently unused. The Industry Code will use the Rule 
13000 series, and the Mediation Code will use the Rule 14000 series, 
both of which are also currently unused. NASD will reserve the Rule 
10000 series, which is currently used for NASD's dispute resolution 
rules, for future use.
    The proposed Industry Code is divided into nine parts, which are 
intended to approximate the chronological order of a typical 
arbitration. Specifically, the proposed Industry Code is organized as 
follows:
     Part I (Rule 13100 et seq.) contains definitions, as well 
as other rules relating to the organization and authority of the forum;
     Part II (Rule 13200 et seq.) contains general arbitration 
rules, including what claims are subject to arbitration in the NASD 
forum;
     Part III (Rule 13300 et seq.) contains rules explaining 
how to initiate a claim, how to respond to a claim, how to amend 
claims, and when claims may be combined and separated;
     Part IV (Rule 13400 et seq.) contains rules relating to 
the appointment, authority and removal of arbitrators;
     Part V (Rule 13500 et seq.) contains rules governing the 
prehearing process, including proposed new rules relating to motions 
and discovery;
     Part VI (Rule 13600 et seq.) contains rules relating to 
hearings;
     Part VII (Rule 13700 et seq.) contains rules relating to 
the dismissal, withdrawal, or settlement of claims;
     Part VIII (Rule 13800 et seq.) contains rules relating to 
simplified (small cases) arbitrations; default proceedings; statutory 
employment discrimination claims; and injunctive relief.
     Part IX (Rule 13900 et seq.) contains rules relating to 
fees and awards.

Relationship Between Proposed Customer and Industry Codes

    The proposed Customer Code has been organized in the same manner 
described above, and with only a few exceptions, the Codes have been 
numbered so the same rules have the same last three digits in both 
Codes. For example, proposed Rules 12500 and 13500 govern initial 
prehearing conferences in the Customer and Industry Codes, 
respectively. This parallelism is possible because, in large part, the 
rules governing the organization of the forum, the procedures for 
filing and responding to claims, prehearing and hearing procedures, and 
the settlement or withdrawal of claims, are the same in both Codes.
    There are some differences between the two Codes, which fall into 
two categories. The first category consists of those rules in the 
current Code that contain different provisions for customer and 
industry disputes. For example, current Rule 10308, governing 
arbitrator selection, requires that three-arbitrator panels in customer 
cases consist of a majority of public arbitrators, while the 
composition of the panel in industry disputes depends on the nature of 
the claim. For such rules, the Customer Code version of the panel 
composition rule (proposed Rule 12402) contains only the provisions 
that relate to customer disputes, while the Industry Code counterpart 
(proposed Rule 13402) contains only the provisions that relate to 
industry cases.
    The second category of rules that differ between the proposed 
Customer and Industry Codes consists of those rules in the current Code 
that apply only to industry disputes. These rules, which include 
current Rules 10210 and 10211, governing statutory employment 
discrimination claims, and current Rule 10335, governing injunctive 
relief, are included in the proposed Industry Code (proposed Rules 
13802-13804), but have no counterpart in the proposed Customer Code.
    Although these rules have been rewritten and reorganized in a 
manner consistent with the proposed Codes, NASD is not proposing any 
substantive changes to those parts of the current Code that are unique 
to industry cases.

Plain English

    In 1998, the SEC launched an initiative to encourage issuers and 
self-regulatory organizations (``SROs'') to use ``plain English'' in 
disclosure documents and other materials used by investors. At that 
time, the SEC published a ``Plain English Handbook,'' to provide 
guidance to issuers and SROs in drafting such materials. The Plain 
English Handbook recommended using shorter, more common words; breaking 
long rules into shorter ones; using the active voice whenever possible; 
and using easy-to-read formatting, such as bullet points. In revising 
the Codes, NASD has implemented these guidelines wherever possible.

Description of Other Changes

    NASD is also proposing to make several other changes to the 
Customer and Industry Codes that are intended to make the NASD 
arbitration process as simple, uniform and transparent as possible. 
Some of the proposed changes codify or clarify current NASD practice. 
Others are substantive changes that are intended to provide guidance to 
parties, resolve open questions, or streamline or standardize the 
administration of NASD arbitrations.
    In general, the same substantive changes have been made to both the 
Customer and Industry Codes. Because this rule filing relates to the 
proposed Industry Code, it will refer only to the proposed Industry 
Code rule numbers.

[[Page 36432]]

However, differences between the Customer and Industry Code versions of 
the proposed rule changes will be noted.
    Only proposed substantive changes are discussed in detail below. 
Any proposed changes to the Industry Code that are not discussed are 
intended to be nonsubstantive revisions.
    The proposed changes are discussed below, in the order that they 
appear in the Industry Code.

Agreement of the Parties (Proposed Rule 13105)

    Both the current and proposed Codes permit parties to an 
arbitration to agree to modify certain provisions, such as the number 
of arbitrators on a panel, or the time to respond to a pleading. 
Occasionally, all active parties to an arbitration agree to modify a 
provision, but an inactive party does not respond to notices or 
participate in the decision. Under a literal reading of the current 
Code, the active parties to the arbitration would not be able to agree 
to the modification, even though the inactive party was not 
participating in the arbitration. This can cause unnecessary delay and 
frustration for the active parties.
    NASD believes that the non-appearance of an inactive party should 
not prevent active parties to an arbitration from exercising control 
over the arbitration process. To address this concern, proposed Rule 
13105 would provide that, when the Code allows the parties to an 
arbitration to modify a provision of the Code, or a decision of the 
Director or the panel, the agreement of all named parties is required, 
unless the Director or panel determines that a party is inactive in the 
arbitration or has failed to respond after adequate notice has been 
given.

Use of the Forum (Proposed Rule 13203)

    Currently, Rule 10301(b) provides that the Director of Arbitration, 
upon approval of the National Arbitration and Mediation Committee 
(``NAMC'') or its Executive Committee, may decline the use of the NASD 
arbitration forum if the ``dispute, claim, or controversy is not a 
proper subject matter for arbitration.''
    Occasionally, situations arise in which the Director believes that 
it is in the best interest of the forum to deny use of the forum for 
reasons other than subject matter. For example, the current rule does 
not specifically permit the Director to deny the forum when NASD has 
reason to believe that a party would present a security risk to the 
forum or to other parties. Furthermore, the requirement that the 
Director must first obtain approval of either the NAMC or its Executive 
Committee is burdensome and time-consuming, making it difficult for the 
Director or the forum to respond appropriately in emergency situations.
    To address this concern, proposed Rule 13203(a) would provide that 
the Director may decline to permit the use of the NASD arbitration 
forum if the Director determines that, given the purposes of NASD and 
the intent of the Code, the subject matter of the dispute is 
inappropriate, or that accepting the matter would pose a risk to the 
health or safety of the parties or their representatives, arbitrators, 
or NASD. The provision requiring approval of the NAMC or its Executive 
Committee would be deleted. However, to ensure that the authority to 
deny the forum could not be delegated by the Director, the rule would 
provide that only the Director or the President of NASD Dispute 
Resolution may exercise the Director's authority under the rule. NASD 
believes that this rule change will give the Director limited, but 
crucial, flexibility to protect the integrity and the security of the 
NASD forum.

Shareholder Derivative Actions (Proposed Rule 13205)

    Currently, the Code does not specifically address whether 
shareholder derivative actions may be arbitrated at NASD. Such claims 
are not eligible for arbitration at NASD because, by definition, they 
involve corporate governance disputes that do not arise out of or in 
connection with the business of a member firm or an associated person. 
Nonetheless, the question arises from time to time, occasionally after 
a claimant has filed a statement of claim.
    Proposed Rule 13205, which is consistent with New York Stock 
Exchange Rule 600(e), would clarify that shareholder derivative actions 
are not eligible for arbitration at NASD. NASD believes that the 
inclusion of this rule would help avoid confusion, provide guidance to 
parties, and conserve resources expended when parties seek to arbitrate 
such matters at NASD.

Extensions of Deadlines (Proposed Rule 13207)

    Currently, Rule 10314(b)(5) provides that deadlines established by 
the Code for filing or serving pleadings may be extended by the 
Director, or with the consent of the initial claimant. This provision 
does not provide guidance with respect to the extension of other 
deadlines established by the Code, or by the panel or Director, and can 
also cause confusion with respect to responsive pleadings filed by the 
initial claimant. The current rule also provides that extensions of 
time for filing an answer are disfavored and will only be granted in 
extraordinary circumstances.
    To eliminate confusion, and to provide more comprehensive guidance 
regarding when and under what circumstances deadlines may be extended, 
proposed Rule 13207 would provide that the parties may agree in writing 
to extend or modify any deadline for serving an answer; returning 
arbitrator or chairperson lists; responding to motions; or exchanging 
documents or witness lists. If the parties agree to extend or modify a 
deadline, the proposed rule would require that they notify the Director 
of the new deadline in writing. The proposed rule would also provide 
that the panel may extend or modify any deadline listed above, or any 
other deadline set by the panel, either on its own initiative or upon 
motion of a party.
    Finally the rule would provide that the Director may modify or 
extend any deadline or time period (1) set by the Code for good cause, 
or (2) set by the panel in extraordinary circumstances. Although good 
cause is a lower standard than extraordinary circumstances, which 
refers to unexpected and uncontrollable events such as weather-related 
or security emergencies, good cause is not a negligible standard. In 
the context of the proposed rule, the good cause requirement means that 
extensions of Code deadlines by the Director are generally disfavored, 
and that the Director must take into account the effect of the 
extension on all parties before granting such a request.

Ex Parte Communications (Proposed Rule 13210)

    The current Code does not address ex parte communications. To 
provide additional guidance to arbitrators and parties, and to further 
ensure the integrity of the NASD arbitration process, the revised Code 
would include Proposed Rule 13210 explicitly to prohibit ex parte 
communications between parties and arbitrators, except as provided in 
Proposed Rule 13211.\5\ Proposed Rule 13210 is based on general ex 
parte rules applicable in court proceedings, and reflects current NASD 
practice. The NASD Arbitrators' Manual and NASD arbitrator training 
materials direct arbitrators to avoid ex

[[Page 36433]]

parte communications with parties, and arbitrators receive training on 
how and why to do so. Materials provided to parties also advise parties 
to avoid ex parte communications with arbitrators. For example, NASD's 
``Top Ten'' Standards Of Good Practice At Arbitration Hearings 
(available on NASD's Web site, http://www.nasd.com), state that 
participants in NASD arbitrations ``should not engage in conversation 
with arbitrators in the absence of the other party(ies).''
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    \5\ Proposed Rule 13211 (Rule 10334 in the current Code), allows 
direct communication between parties and arbitrators subject to 
certain conditions. These conditions include the representation of 
parties by counsel, an agreement to use direct communication by all 
arbitrators and parties, an agreement regarding the scope of the 
direct communication, and facsimile or e-mail capability by all 
arbitrators and parties.
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Sanctions (Proposed Rule 13212)

    Currently, Rule 10305(b), governing the dismissal of proceedings, 
provides that the ``arbitrators may dismiss a claim, defense, or 
proceeding with prejudice as a sanction for willful and intentional 
material failure to comply with an order of the arbitrator(s) if lesser 
sanctions have proven ineffective.'' In addition, the NASD Discovery 
Guide states that ``[t]he panel has wide discretion to address 
noncompliance with discovery orders. For example, the panel may make an 
adverse inference against a party or assess adjournment fees, forum 
fees, costs and expenses, and/or attorneys' fees caused by 
noncompliance.''
    Proposed Rule 13212 would codify the sanction options available to 
arbitrators that are described in the Discovery Guide, and extend them 
beyond the discovery context to apply to non-compliance with any 
provision of the Code, or order of the panel or a single arbitrator 
authorized to act on behalf of the panel. The proposed rule would also 
allow the panel to dismiss a claim, defense, or arbitration under the 
same conditions as it may currently, although it would use the term 
``prior'' rather than ``lesser'' sanctions, in order to avoid potential 
confusion regarding whether a prior sanction was ``lesser'' or 
``greater.'' NASD believes that this rule change will encourage parties 
to comply with both the Code and with orders of the panel, and will 
also clarify the authority of arbitrators to ensure the fair and 
efficient administration of arbitration proceedings when parties fail 
to do so.

Hearing Locations (Proposed Rule 13213)

    NASD currently maintains more than 55 designated hearing locations 
for NASD arbitrations and mediations. Generally, in industry cases 
involving an associated person and a member, NASD selects the hearing 
location closest to where the associated person was employed at the 
time the dispute arose. Otherwise, NASD considers a number of factors 
in selecting the hearing location, including: the parties' signed 
agreement to arbitrate, if any; which party initiated the transaction 
or business in issue; and the location of essential witnesses and 
documents.
    To make the arbitration process more transparent, proposed Rule 
13213 would codify this practice.\6\ The proposed rule would also 
clarify that before arbitrator lists are sent to the parties under Rule 
13403, the parties may agree in writing to a different hearing location 
other than the one selected by the Director, and that the Director may 
change the hearing location upon motion of a party. NASD believes that 
the proposed rule will provide useful guidance to parties about where 
their arbitration will take place.
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    \6\ The proposed Customer Code also contains a rule codifying 
NASD's current practice for selecting hearing locations, but that 
rule (proposed Rule 12213) differs slightly, providing that in 
customer cases, NASD will generally select the hearing location 
closest to the customer's residence at the time the dispute arose.
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Time to Answer Counterclaims and Cross Claims (Proposed Rules 13304 and 
13305)

    Currently, Rule 10314 provides that claimants have only 10 days to 
answer a counterclaim, but a respondent answering a cross claim has 45 
days to file an answer to the cross claim, even if the respondent has 
already answered the initial claim. This discrepancy can cause delay in 
the proceedings. NASD believes that parties who have already filed or 
served a pleading should have the same amount of time to respond to 
subsequent pleadings. NASD also believes that 10 days is insufficient, 
while 45 days is too long. NASD believes that 20 calendar days is the 
appropriate amount of time for parties to respond to both counter and 
cross claims.
    Therefore, proposed Rule 13304 would extend the time that a 
claimant has to file a response to a counterclaim from 10 to 20 days 
from receipt of the counterclaim. In addition, proposed Rule 13305 
would shorten the time that a respondent has to respond to a cross 
claim from 45 days to 20 days from the date that the respondent's 
answer to the statement of claim is due, or from the receipt of the 
cross claim.

Deficient Claims (Proposed Rule 13307)

    Under current NASD practice, if a claimant files a deficient, or 
incomplete, claim, NASD will notify the claimant, and the claimant is 
given 30 days to correct the deficiency. If the deficiency is not 
corrected within that time, the claim is dismissed without prejudice. 
Reasons for deficiencies include failure to include required 
information in the statement of claim, failure to pay required fees, 
and failure to properly execute the NASD Uniform Submission Agreement.
    NASD's practice with respect to deficiencies is consistent with the 
Arbitration Procedures published by the Securities Industry Conference 
on Arbitration (``SICA''). However, the current Code does not expressly 
address what constitutes a deficiency, or explain the process for 
identifying and correcting deficiencies. Proposed Rule 13307 would 
codify NASD's deficiency practice. Specifically, it would provide that 
the Director will not serve a deficient, or incomplete, claim, and will 
enumerate the most common types of deficiencies.\7\ The proposed rule 
would also provide that the Director will notify the claimant in 
writing if the claim is deficient. If all deficiencies are not 
corrected within 30 calendar days from the time the claimant receives 
notice, the Director will close the case without serving the claim, and 
will not refund any filing fees paid by the claimant. The proposed rule 
would also make clear that the same standards apply to deficient 
counterclaims, cross claims and third party claims served directly by 
parties, and would prohibit arbitrators from considering such claims 
unless the deficiencies were corrected within the time allowed. NASD 
believes that including the deficiency standards and practice in the 
Code will provide useful guidance to parties, and will reduce delay in 
NASD arbitrations by reducing the number of deficient claims.
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    \7\ Proposed Rule 13307 differs slightly from its Customer Code 
counterpart (Proposed Rule 12307), because the Customer Code version 
includes failure to identify the customer's residence at the time 
the dispute arose as a possible deficiency.
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Amending Pleadings to Add Parties (Proposed Rule 13309)

    Under the current Code, parties may amend their pleadings at any 
time prior to the appointment of the arbitration panel. After panel 
appointment, parties must obtain approval of the arbitrators before 
amending a pleading. If a party is added to an arbitration proceeding 
before the Director has consolidated the other parties' arbitrator 
rankings under current Rule 10308, the Director will send the 
arbitrator lists to the newly-added party, and the newly-added party 
may participate in the arbitrator selection process. However, if a 
party amends a pleading to add a new party to the proceeding between 
the time that the Director consolidates the arbitrator lists and the 
time the panel is appointed, the newly-added party is not able to 
participate in the arbitrator

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selection process, or to object to being added to the arbitration.
    To address this issue, which has been the subject of concern among 
some users of the forum, proposed Rule 13309 would provide that no 
party may amend a pleading to add a party during the time between the 
date that ranked arbitrator lists are due to the Director and the panel 
is appointed. Proposed Rule 13309(c) would provide that the party to be 
added after panel appointment must be given an opportunity to be heard 
before the panel decides the motion to amend. This change will ensure 
that a party added to an arbitration by amendment either will be able 
to participate in the arbitrator selection process, or will have the 
opportunity to object to being added to the proceeding.

Time to Answer Amended Pleadings (Proposed Rule 13310)

    Currently, Rule 10328 provides that parties have 10 business days 
to answer an amended pleading. Other rules in the current Code refer to 
calendar days. In the interest of uniformity, proposed Rule 13100(h) 
defines the term ``day'' to mean calendar day. To reflect this 
definition, proposed Rule 13310 would give parties 20 calendar days, 
rather than 10 business days, to respond to amended pleadings. Although 
this represents a slight extension of time, it is consistent with the 
time to respond to counterclaims and cross claims under proposed Rules 
13304 and 13305. Because standardizing time frames is part of NASD's 
plain English initiative, NASD believes that 20 calendar days is an 
appropriate time period for responding to amended pleadings.

Neutral List Selection System and Arbitrator Rosters (Proposed Rule 
13400)

    Currently, parties to NASD arbitrations select their arbitrators by 
a process of striking and ranking arbitrators from lists generated by 
NASD's Neutral List Selection System (``NLSS''), NASD's computerized 
system for generating lists of arbitrators from NASD's rosters of 
arbitrators for the selected hearing location. Once the panel is 
appointed, the parties jointly select the chairperson from the panel, 
or, if the parties do not agree, the Director appoints the highest-
ranked arbitrator on the panel to serve as chairperson.\8\
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    \8\ NASD estimates that parties agree on a chairperson only 
about 20% of the time.
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    Although NASD provides voluntary chairperson training to its 
arbitrators, arbitrators who serve as chairperson are not currently 
required to have chairperson training, to have any particular 
experience, or to meet any other specific criteria beyond the 
requirements for serving as an arbitrator. Over the years, one of the 
most frequent suggestions for improving the quality and efficiency of 
NASD arbitrations is to ensure that chairpersons, who play a vital role 
in the administration of cases, have some degree of arbitrator 
experience and training.
    NASD agrees that requiring trained and experienced chairpersons 
would significantly enhance the quality of its arbitration forum. 
However, NASD also believes that the criteria or training requirements 
should not prevent arbitrators of any professional or educational 
background from qualifying to serve as chairpersons of panels.
    To address these concerns, the proposed Industry Code would require 
that NASD create and maintain a third roster of arbitrators who are 
qualified to serve as chairpersons. The parties would select the 
chairperson from the chair-qualified list in the same manner and at the 
same time that they select the other members of the panel. In single-
arbitrator cases, the arbitrator would be selected from a list of 
chair-qualified arbitrators, unless the parties agreed otherwise.
    In cases in which the panel consists of a majority of non-public 
arbitrators, the list of chair-qualified arbitrators would consist of 
non-public arbitrators. In cases in which the panel consists of a 
majority of public arbitrators, the chair-qualified list would consist 
of public arbitrators.\9\
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    \9\ The proposed Customer Code would require that chairpersons 
in customer cases be public arbitrators unless the parties agree 
otherwise.
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    Under proposed Rule 13400, arbitrators would be eligible for the 
chairperson roster if they have completed chairperson training provided 
by NASD, or have substantially equivalent training or experience, and 
either:
     Have a law degree and are a member of a bar of at least 
one jurisdiction and have served as an arbitrator through award on at 
least two arbitrations administered by a SRO in which hearings were 
held; or
     Have served as an arbitrator through award on at least 
three arbitrations administered by an SRO in which hearings were held.
    Substantially equivalent training or experience would include 
service as a judge or administrative hearing officer, chairperson 
training offered by another recognized dispute resolution forum, or the 
like. Decisions regarding whether particular training or experience 
other than NASD chairperson training would qualify under this provision 
would be in the sole discretion of the Director. NASD believes that 
these criteria strike the appropriate balance between ensuring that 
arbitrators who serve as chairpersons or single arbitrators have the 
requisite experience to fairly and efficiently administer their cases, 
and allowing arbitrators of all professional backgrounds to qualify as 
chairpersons. Arbitrators who qualify under these criteria will be 
placed on the chairperson roster only if they agree to serve as 
chairpersons; otherwise, they will remain on the general public or non-
public arbitrator roster. To avoid duplication of names on the lists 
sent to parties, arbitrators who are on the chairperson roster will not 
be on the general public or non-public arbitrator roster.

Number of Arbitrators (Proposed Rule 13401)

    Under current Rule 10308(b), if the amount of a claim is $25,000 or 
less, the arbitration panel consists of one arbitrator, unless that 
arbitrator requests a three-arbitrator panel. If the claim is more than 
$25,000 but not more than $50,000, the panel consists of one arbitrator 
unless either that arbitrator, or any party in its initial pleading, 
requests a three-arbitrator panel. Claims of more than $50,000 are 
heard by a three-arbitrator panel.
    To streamline the administration of smaller claims, and minimize 
the cost of pursuing small claims, proposed Rule 13401 would eliminate 
the ability of the single public arbitrator to request a three-
arbitrator panel for any claim of $50,000 or less. Parties in cases 
involving more than $25,000, but not more than $50,000, could still 
request a three-arbitrator panel.

Generating and Sending Lists to the Parties (Proposed Rule 13403)

    Proposed Rule 13403 would implement several changes to the 
operation of NLSS.\10\ In addition, the proposed Code would eliminate 
the ability of parties to unilaterally request arbitrators with 
particular expertise, a

[[Page 36435]]

practice that is an ongoing source of controversy, as well as 
burdensome for the NASD staff to administer.
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    \10\ NLSS would generate arbitrator names from the NASD rosters 
on a random, rather than rotational, basis. Changes to NLSS were 
primarily driven by computer programming requirements. See Exchange 
Act Rel. No. 51339 (Mar. 9, 2005), 70 FR 12763 (Mar. 15, 2005) 
(Order Approving Proposed Rule Change and Amendment No. 1 Thereto by 
NASD Relating to the Random Selection of Arbitrators by NLSS); 
Exchange Act Rel. No. 51083 (Jan. 26, 2005), 70 FR 5497 (Feb. 2, 
2005) (Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Change and Amendment No. 1 Thereto Relating to the 
Random Selection of Arbitrators by NLSS).
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    In addition, proposed Rules 13403 and 13404 would expand the number 
of names of proposed arbitrators provided to the parties to seven names 
for each arbitrator on the panel, but would limit the number of 
arbitrators that each party may strike from each list to five. NASD 
believes that expanding the lists, but limiting the number of strikes 
each party may exercise, will expedite panel appointment and minimize 
the likelihood that the Director will have to appoint an arbitrator who 
was not on the original lists sent to parties. Currently, parties are 
allowed unlimited strikes, which often results in no arbitrators being 
left on the consolidated list. In such cases, the administration of the 
arbitration is delayed, and the Director must appoint arbitrators to 
fill the panel.
    Collectively, NASD believes that these modifications to NLSS would 
streamline and simplify the arbitrator selection process and enhance 
the quality of NASD arbitrations.

Appointment of Arbitrators (Proposed Rule 13406)

    In the past, questions have occasionally arisen regarding when 
appointment of arbitrators occurs. To address these questions, proposed 
Rule 13406 would clarify that appointment of arbitrators occurs when 
the Director sends notice to the parties of the names of the 
arbitrators on the panel. In addition, as part of the chronological 
reorganization of the Code, the arbitrator oath requirement that is 
currently in Rule 10327 has been included in proposed Rule 13406.

Arbitrator Recusal (Proposed Rule 13409)

    Under current NASD practice, parties may request that an arbitrator 
recuse himself or herself from the panel at any time. However, the 
current Code does not address arbitrator recusal. To provide guidance 
to parties, proposed Rule 13409 would provide that any party may ask an 
arbitrator to recuse himself or herself from the panel for good cause. 
The proposed rule would also clarify that requests for arbitrator 
recusal are decided by the arbitrator who is the subject of the 
request. Some users of the forum believe that recusal requests should 
be made to the full panel. Courts have held, however, that recusal 
decisions are within the discretion of the individual arbitrator, and 
therefore, tend to uphold these decisions on appeal.\11\ However, the 
Director may continue to remove arbitrators for cause under proposed 
Rule 13410 on the same grounds as those under current Rules 10308(d), 
10312(d) and 10313.
---------------------------------------------------------------------------

    \11\ See, e.g., Florasynth, Inc. v. Pickholz, 750 F.2d 171, 174 
(2d Cir. 1984); ANR Coal Co. v. Cogentrix of North Carolina, Inc., 
173 F.3d 493, 499-502 (4th Cir. 1999); Consolidation Coal Co. v. 
Local 1643, United Mine Workers of Am., 48 F.3d 125, 127-130 (4th 
Cir. 1995); Jason v. Halliburton Co., 2002 U.S. Dist. LEXIS 19706, 
10-16 (E.D. La. 2002); Jeereddi A. Prasad, M.D., Inc. v. Investors 
Assoc., Inc., 82 F. Supp. 2d 365, 370, n. 9 (D. N.J. 2000); Arial, 
Inc. v. Ryder System, Inc., 913 F. Supp. 826, 834 (S.D.N.Y. 1996).
---------------------------------------------------------------------------

Replacement of Arbitrators (Proposed Rule 13411)

    Under the current Code, the provisions regarding replacement of 
arbitrators are found in Rules 10308(d)(3) and 10313, which contain 
numerous cross-references to other rules. Proposed Rule 13411 would 
consolidate the various current rules. The proposed rule also would 
extend the option of electing to proceed with only the remaining 
arbitrators to all stages of the proceeding, and eliminate the 5-day 
limit on electing that option contained in current Rule 10313. NASD 
believes that parties should have the right to decide jointly to 
proceed with only the remaining arbitrators regardless of when the 
replacement occurs, and that the parties should be able to elect that 
option up until the time the replacement arbitrator is appointed. 
Otherwise, proposed Rule 13411 does not contain any substantive changes 
from the current rules upon which it is based.

Determinations of Arbitration Panel (Proposed Rule 13414)

    Under the current Code, Rule 10325 requires that all rulings and 
determinations of the panel be made by a majority of the arbitrators. 
Proposed Rule 13414 would provide that all rulings and determinations 
of the panel must be made by a majority of the arbitrators, unless the 
parties agree, or the Code or applicable law provides otherwise. The 
proposed rule reflects that under the Code, and applicable law, some 
decisions may be made by a single member of a three-arbitrator panel. 
For example, proposed Rule 13503 provides that some motions may be 
decided by a single arbitrator. Also, applicable law may permit a 
single arbitrator to issue a subpoena.\12\
---------------------------------------------------------------------------

    \12\ See proposed Rule 13512.
---------------------------------------------------------------------------

Initial Prehearing Conferences (Proposed Rule 13500)

    Proposed Rule 13500 would codify the portion of the NASD Discovery 
Guide relating to initial prehearing conferences (``IPHCs''). Since the 
adoption of the Discovery Guide in 1999, IPHCs have been standard 
practice in NASD arbitrations. The IPHC gives the panel and the parties 
an opportunity to organize the management of the case, set a discovery 
cut-off date, identify and establish a schedule for potential motions, 
schedule hearing dates, determine whether mediation is desirable, and 
resolve many other preliminary issues. Users of the forum have found 
the IPHC to be a valuable tool in managing the administration of 
arbitrations. NASD believes that the proposed rule, which provides that 
an IPHC will be held in every case unless the parties jointly agree on 
certain scheduling and other enumerated issues in advance, will provide 
valuable guidance to parties and arbitrators about the role of IPHCs in 
NASD arbitrations.

Recording Prehearing Conferences (Proposed Rule 13502)

    Currently the Code is silent with respect to whether and under what 
circumstances a prehearing conference will be tape-recorded. Proposed 
Rule 13502 would provide that prehearing conferences are generally not 
tape-recorded as a matter of course (with the exception of prehearing 
conferences to decide dispositive motions, discussed below). However, 
the rule would permit the panel to decide to tape-record a prehearing 
conference on its own initiative, or at the request of a party. The 
rule would also provide that, if the prehearing conference is tape-
recorded, the Director will provide a copy of the tape to any party 
upon request, for a nominal fee.
    The rule does not specify the fee because the fee may vary slightly 
depending on the rates charged by NASD's telephone service provider, 
which normally makes the initial recording of telephonic hearing 
sessions. The current fee is $15 per tape. (Because NASD must arrange 
in advance to have telephonic hearing sessions taped, NASD will 
instruct arbitrators that they should notify NASD at least 24 hours in 
advance when they decide that a prehearing conference should be taped.)

Motions (Proposed Rule 13503)

    Although motions are increasingly common in arbitration, the 
current Code does not refer to motions or provide any guidance with 
respect to motions

[[Page 36436]]

practice. As a result, motions practice lacks uniformity, and parties 
and arbitrators alike are often unsure how motions should be made, 
responded to or decided. To provide guidance to parties and 
arbitrators, and to standardize motions practice in the NASD forum, 
proposed Rule 13503 would establish procedures and deadlines for 
making, responding to and deciding motions.
    Some users of the forum have expressed the concern that adopting a 
motions practice rule will encourage more motions. Although NASD 
appreciates this concern, NASD believes that motions have already 
become a routine part of most arbitrations. Therefore, NASD believes 
that the Code should provide as much guidance about motions as possible 
to parties, particularly infrequent users of the forum. However, in an 
effort to deter unnecessary motions, the rule would require that, 
before making a motion, a party must make an effort to resolve the 
matter that is the subject of the motion with the other parties. The 
rule would also require that every motion, whether written or oral, 
include a description of the efforts made by the moving party to 
resolve the matter before making the motion.
    Another common concern about adopting a motions practice rule is 
that it will detract from the informal nature of arbitration. To 
address this concern, the rule would make clear that most motions may 
be made either orally or in writing, and that written motions need not 
take any particular form.
    Paragraph (c) of the proposed rule would outline who decides what 
motions. Paragraph (c)(1) provides that motions relating to the use of 
the forum under proposed Rule 13203 and removal of an arbitrator under 
proposed Rule 13401 are decided by the Director, because these motions 
are filed and decided before a panel has been appointed. Paragraph 
(c)(2) would provide that motions relating to combining or separating 
claims or arbitrations, or changing the hearing location, are decided 
by the Director before a panel is appointed, and by the panel after the 
panel is appointed. Paragraph (c)(3) provides that discovery-related 
motions are decided by one arbitrator, generally the chairperson. This 
provision reflects that while the chairperson is usually the person to 
decide such motions, the chairperson may not always be available, and 
the parties or the Director may decide to refer the matter to one of 
the other arbitrators. The provision also states that the arbitrator 
who initially hears a discovery-related motion may refer such motions 
to the full panel, either at his or her own initiative or at the 
request of a party. The arbitrator must refer motions relating to 
issues of privilege to the full panel at the request of a party. 
Paragraph (c)(4) provides that motions relating to arbitrator recusal 
are decided by the arbitrator who is the subject of the motion, as 
provided by proposed Rule 12409. Finally, the rule provides that all 
other motions not covered in the preceding paragraphs of the rule are 
decided by the full panel, unless the Code provides or the parties 
agree otherwise.

Motions To Decide Claims Before a Hearing on the Merits (Proposed Rule 
13504)

    Another recurring question in NASD arbitrations is whether, and to 
what extent, arbitrators have the authority to decide dispositive 
motions before a hearing on the merits. In its Follow-up Report on 
Matters Relating to Securities Arbitration, the General Accounting 
Office (``GAO'') noted that while NASD's arbitration rules do not 
specifically provide for dispositive motions, case law generally 
supports the authority of arbitrators to grant motions to dismiss 
claims prior to the hearing on the merits.\13\ Because the Code 
provides no guidance with respect to this question, arbitrator 
decisions with respect to it lack uniformity.
---------------------------------------------------------------------------

    \13\ U.S. General Accounting Office, Follow-up Report on Matters 
Relating to Securities Arbitration (April 11, 2003).
---------------------------------------------------------------------------

    Generally, NASD believes that parties have the right to a hearing 
in arbitration. However, NASD also acknowledges that in certain 
extraordinary circumstances, it would be unfair to require a party to 
proceed to a hearing. Specifically, the proposed rule would:
     Provide that, except for motions relating to the 
eligibility of claims under the Code's six year time limit, motions 
that would resolve a claim before a hearing on the merits are 
discouraged, and may only be granted in extraordinary circumstances;
     Require that a prehearing conference before the full panel 
must be held to discuss the motion before the panel could grant it; and
     Allow the panel to issue sanctions against a party for 
making a dispositive motion in bad faith.
    NASD believes that this rule proposal, which was developed over 
several years with input from industry and public members of the NAMC, 
will provide necessary guidance to parties and arbitrators, and make 
the administration of arbitrations more uniform and transparent. NASD 
believes that the rule strikes the appropriate balance between allowing 
the dismissal of claims in limited, extraordinary circumstances and 
reinforcing the general principle that parties are entitled to a 
hearing in arbitration.

Discovery (Proposed Rules 13505-13511)

    One of the most frequent comments made by users of the NASD forum 
is that discovery procedures are routinely ignored, resulting in 
significant delay and the frequent need for arbitrator intervention in 
the discovery process. To address these concerns, proposed Rules 13505-
13511 would expand on the discovery procedures contained in current 
Rule 10321, with certain substantive changes.\14\ The proposed rules 
would provide more specific guidance about how to make and respond to 
discovery requests, and would make clear that either producing or 
objecting to documents requested by parties, is mandatory. The proposed 
rules also would extend the time parties have to respond to document 
requests from 30 to 60 days, but would also provide more serious 
consequences when parties fail to respond, or when parties frivolously 
object to requests to produce documents or information. In addition, 
proposed Rule 13511 would codify the sanctions provisions currently 
contained in the NASD Discovery Guide, clarifying the authority of 
arbitrators to sanction parties for non-compliance with discovery rules 
or orders of the panel. NASD believes that, collectively, these changes 
will significantly minimize the number of discovery disputes in NASD 
arbitrations.
---------------------------------------------------------------------------

    \14\ These rules differ slightly from their counterparts in the 
proposed Customer Code (Proposed Rules 12505-12511), because NASD's 
Document Production Lists do not apply to industry disputes.
---------------------------------------------------------------------------

Subpoenas (Proposed Rule 13512)

    Current Rule 10322 provides that the arbitrators and any counsel of 
record to the proceeding shall have the power of the subpoena process 
as provided by law, and that all parties must be given a copy of a 
subpoena upon its issuance. The rule also provides that parties shall 
produce documents and make witnesses available to each other to the 
fullest extent possible without resort to the subpoena process. 
Proposed Rule 13512 is substantially identical to the current rule 
Code, but would also require that if a subpoena is issued, the issuing 
party must send copies to all other parties at the same time and in the 
same manner as the party issued the subpoena. This modification is 
intended to ensure that

[[Page 36437]]

parties receive notice of the subpoena in a timely manner.

Exchange of Documents and Witness Lists (Proposed Rule 13514)

    Current Rule 10321(d) requires that at least 20 days before a 
hearing on the merits is scheduled to begin, all parties must exchange 
copies of all documents in their possession that they intend to present 
at the hearing, and must identify all witnesses they intend to present 
at the hearing. As a practical matter, many of the documents will 
already have been exchanged through discovery. Users of the forum have 
advised NASD that this rule would be less burdensome, and more useful, 
if it were amended to require only that parties exchange all documents 
they intend to use at the hearing that have not previously been 
exchanged. The proposed rule would make this change and would increase 
the consequences of failing to comply with this requirement. Under the 
current rule, the panel may exclude evidence not exchanged in a timely 
manner. Proposed Rule 13514 would create a presumption that parties 
could not use any documents at the hearing that were not exchanged, or 
call any witnesses at the hearing who were not identified, within the 
time provided by the rule, unless the panel determines that good cause 
exists. The proposed rule specifically provides that good cause 
includes the need to use documents or call witnesses for rebuttal or 
impeachment purposes based on developments at the hearing.

Postponements (Proposed Rule 13601)

    In the proposed Code, hearing adjournments are referred to as 
hearing postponements, for plain English purposes. Paragraph (a) of 
proposed Rule 13601 has been amended to provide that the panel may not 
grant requests to postpone a hearing that are made within 10 days of a 
scheduled hearing session unless the panel determines that good cause 
exists. This provision is intended to reduce the number of last minute 
requests for postponements, a practice that many users of the forum 
believe results in unnecessary delay and unfairness to parties.
    Paragraph (b) of the proposed rule provides that, except as 
otherwise provided, a postponement fee equal to the applicable hearing 
session fee, as set forth in Proposed Rule 13902, will be charged for 
each postponement agreed to by the parties, or granted upon request of 
one or more parties. Therefore, the fee would no longer increase for a 
second or subsequent request by the same party. This change is intended 
to simplify the rule and to avoid confusion when one party requesting a 
postponement has made a previous request, but one or more of the other 
parties requesting the same postponement have not made previous 
requests.
    The proposed rule also gives the panel the authority to allocate 
the postponement fees among non-requesting parties if the panel 
determines that the non-requesting party caused or contributed to the 
need for the postponement.

Withdrawing Claims (Proposed Rule 13702)

    The current Code does not contain any guidance with respect to 
withdrawing claims. This occasionally causes confusion, particularly 
with respect to the consequences of withdrawing a claim at a particular 
stage in an arbitration. To provide guidance to parties, proposed Rule 
13702 would provide that before a claim has been answered by a party, a 
claimant may withdraw the claim against that party with or without 
prejudice. However, after a claim has been answered by a party, a 
claimant may only withdraw its claim against that party with prejudice, 
unless the panel decides, or the claimant and that party agree, 
otherwise. NASD believes that the proposed rule strikes the appropriate 
balance between allowing claimants to withdraw their claims without 
prejudice before a respondent has expended significant resources 
responding to the claim, and protecting the respondent from having to 
respond to the same claim multiple times.

Simplified Arbitration Rule (Proposed Rule 13800)

    The simplified arbitration rule would be significantly shortened. 
Currently, in addition to the procedures that are unique to simplified 
arbitrations, Rule 10302 repeats some, but not all, of the general 
provisions that apply to both regular and simplified cases. The 
proposed rule would include only those provisions that are unique to 
simplified cases.
    The proposed rule would eliminate the current provisions 
establishing special time limits or deadlines for pleadings in 
simplified cases, and the time limits would now be the same as those in 
regular cases. Frequent users of the forum report that the time limits 
in simplified cases are routinely extended under the current rule. To 
provide better guidance to parties, NASD believes that the Code should 
reflect that, in practice, the time to answer in simplified cases is 
typically the same as it is in regular cases.
    Under proposed Rule 13800, the single arbitrator would be selected 
from the chairperson roster, unless the parties agree in writing 
otherwise. The single arbitrator would not be able to request a three-
arbitrator panel, and the arbitrator would no longer have the option of 
dismissing without prejudice a counterclaim or other responsive 
pleading that increased the amount in dispute above the simplified case 
threshold. If a pleading increased the amount in dispute above the 
threshold, the case would be administered under the regular provisions 
of the Code. If an arbitrator has been appointed, that arbitrator will 
remain on the panel. If a three-arbitrator panel is required, the 
remaining arbitrators will be appointed by the Director. The proposed 
rule would also eliminate the ability of the single arbitrator to 
require a hearing.
    NASD believes that these changes will make the simplified 
arbitration rule easier for parties to understand, and will also 
streamline and simplify the administration of small claims in the NASD 
forum.

Fees (Proposed Rules 13900-13903)

    One of the most frequent criticisms of the current Code is that the 
fee schedules are difficult to understand, particularly with respect to 
what claimants must pay at the time of filing. Currently, claimants 
must pay a non-refundable filing fee, and an initial hearing session 
deposit that may be refundable under certain circumstances. In 
addition, parties also must pay hearing session fees for each hearing 
session. Although the filing fee and the initial hearing session 
deposit are both due upon filing, they are presented in the Code as 
separate fees, making it hard for some parties to understand the total 
amount due upon filing. To address this issue, and to make the fee 
schedules easier to read, the fee schedules have been revised in two 
significant ways.
    First, the filing fee and the hearing session deposit have been 
combined into one single fee that is paid when a claim is filed. With 
two exceptions, described below, the amounts paid by claimants would 
not change. Although what is now the refundable hearing session deposit 
would no longer be paid separately, an amount equal to the current 
hearing session deposit or a portion thereof may be refunded if NASD 
receives notice that the case has been settled more than 10 calendar 
days prior to the hearing on the merits. (Under the current Code, the 
initial hearing session deposit may be refunded if NASD receives, prior 
to 8

[[Page 36438]]

days before the hearing on the merits, notice that the case has been 
settled; this has been changed to 10 days as part of the overall effort 
to standardize the time frames used in the Code.) The consolidation of 
the filing fee and the hearing session deposit is intended to make it 
easier for claimants to understand how much they have to pay when they 
file a claim and what, if any, portion of that fee may be refunded.
    Second, several sets of brackets in the filing fee schedule would 
be condensed. Currently, there are 14 separate fee brackets in the 
customer filing fee schedule. Some of the fees for different brackets 
are the same; others are separated by amounts ranging from $25 to $100. 
The result is a schedule that is confusing and difficult to read. To 
simplify the schedule, the fees for claims filed by associated persons 
would be reorganized as follows: the $25,000 to $30,000 bracket ($600) 
and the $30,000 to $50,000 bracket ($625) would be combined, and the 
filing fee for the new bracket would be $600; and the $1 million to $3 
million bracket ($1,700), the $3 million to $5 million bracket 
($1,800), the $5 million to $10 million bracket ($1,800) and the over 
$10 million bracket ($1,800) would be combined, and the filing fee for 
the new bracket would be $1,800.
    The proposed changes would not result in a change in the total 
amount of fees paid by associated persons when filing a claim, except 
that for claims of $30,000 to $50,000, the associated person's overall 
filing fees would decrease by $25; and for claims of $1 million to $3 
million, the associated person's overall filing fees would increase by 
$100. Corresponding changes would be made to the member filing fee 
schedule.
    NASD believes that these changes will greatly simplify the fee 
schedule, eliminate three repetitive high-end brackets, and align the 
brackets in the filing fee schedule with the brackets in the member 
filing fee and surcharge schedules.
(b) 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'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. NASD believes that reorganizing and revising its rules 
relating to industry arbitrations will protect the public interest by 
making the arbitration process more transparent for parties, providing 
useful guidance to parties, arbitrators and staff, and helping to 
standardize and streamline the administration of NASD arbitrations. If 
the proposed Code is approved, NASD will offer training on the new Code 
to arbitrators, users of the forum, and staff.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. 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 Act. In particular, the 
Commission solicits comments on whether the proposed rule change 
provides for arbitration procedures that are fair to associated persons 
for the resolution of their disputes. In addition, the Commission 
solicits comments on the following questions:
    A. Differences from Uniform Code of Arbitration: Generally, where 
provisions in the Proposed Rules differ from their counterparts in the 
Uniform Code of Arbitration (``Uniform Code''), developed by SICA, 
which alternative is preferable? Why? With respect to specific 
provisions:
    1. Appointment of Arbitrators: Section 17(d) of the Uniform Code 
provides that if it becomes necessary for the Director to appoint an 
arbitrator, then each side in the arbitration will be given one 
peremptory strike per case.\15\
---------------------------------------------------------------------------

    \15\ Section 17(d) of the Uniform Code provides as follows:
    (d) Appointment of Arbitrators.
    The Director will appoint one or more arbitrators for the panel 
from the SRO's pool of arbitrators if:
     the parties do not agree on a complete panel;
     acceptable arbitrators are unable to serve; or
     arbitrators cannot be found from the lists for any 
other reason.
    In the event the Director's appointment becomes necessary, then 
each side will be given one peremptory strike per case.
---------------------------------------------------------------------------

    Under Proposed NASD Rules 13406, Appointment of Arbitrators/
Discretion to Appoint Arbitrators Not on List; 13410, Removal of 
Arbitrator by Director; and 13411, Replacement of Arbitrators, each 
side in the arbitration would not be given a peremptory strike 
automatically in the event it becomes necessary for the Director to 
appoint an arbitrator. Rather, a party's request to remove an 
arbitrator would be granted if it is reasonable to infer, based on 
information known at the time of the request, that the arbitrator is 
biased, lacks impartiality, or has a direct or indirect interest in the 
outcome of the arbitration.\16\ The interest or bias must be direct, 
definite, and capable of reasonable demonstration, rather than remote 
or speculative.\17\
---------------------------------------------------------------------------

    \16\ Proposed NASD Rule 12410(a)(1).
    \17\ Id.
---------------------------------------------------------------------------

    Where the Uniform Code differs from the Proposed NASD Rules with 
respect to appointment of arbitrators by the Director, which 
alternative is preferable? Why?
    2. Subpoenas: Section 23(c)(1) of the Uniform Code provides that 
arbitrators and any counsel of record may issue subpoenas as provided 
by law, and that parties will produce witnesses and present proof at 
the hearing whenever possible without using subpoenas.\18\

[[Page 36439]]

Similarly, Proposed NASD Rule 13512, Subpoenas, provides that subpoenas 
for documents or the appearance of witnesses may be issued as provided 
by law, and that parties should produce documents and make witnesses 
available to each other without the use of subpoenas. Proposed NASD 
Rule 13512 requires that a party issuing a subpoena send copies of the 
subpoena to all other parties at the same time and in the same manner 
in which the subpoenas was issued.
---------------------------------------------------------------------------

    \18\ Section 23(c) of the Uniform Code provides as follows:
    (c) Subpoenas.
    (1) Arbitrators and any counsel of record may issue subpoenas as 
provided by law. The party who requests or issues a subpoena must 
send a copy of the request or subpoena to all parties and the entity 
receiving the subpoena in a manner that is reasonably expected to 
cause the request or subpoena to be delivered to all parties and the 
entity receiving the subpoena on the same day. The parties will 
produce witnesses and present proof at the hearing whenever possible 
without using subpoenas.
    (2) No subpoenas seeking discovery shall be issued to or served 
upon non-parties to an arbitration unless, at least 10 days prior to 
the issuance or service of the subpoena, the party seeking to issue 
or serve the subpoena sends notice of intention to serve the 
subpoena, together with a copy of the subpoena, to all parties to 
the arbitration.
    (3) In the event a party receiving such a notice objects to the 
scope or propriety of the subpoena, that party shall, within the 10 
days prior to the issuance or service of the subpoena, file with the 
Director, with copies to all other parties, written objections. The 
party seeking to issue or serve the subpoena may respond thereto. 
The arbitrator appointed pursuant to this Code shall rule promptly 
on the issuance and scope of the subpoena.
    (4) In the event an objection to a subpoena is filed under 
paragraph (c)(3), the subpoena may only be issued or served prior to 
the arbitrator's ruling if the party seeking to issue or serve the 
subpoena advises the subpoenaed party of the existence of the 
objection at the time the subpoena is served, and instructs the 
subpoenaed party that it should preserve the subpoenaed documents, 
but not deliver them until a ruling is made by the arbitrator.
    (5) Rule 23(c)(2) and (3) do not apply to subpoenas addressed to 
parties or non-parties to appear at a hearing before the 
arbitrators.
    (6) The arbitrator(s) shall have the power to quash or limit the 
scope of any subpoena.
---------------------------------------------------------------------------

    Section 23(c)(2) of the Uniform Code further requires, however, 
that parties seeking to issue a subpoena to non-parties send notice and 
a copy of the subpoena to all other parties to the arbitration at least 
10 days before issuing the subpoena. Parties receiving the notice then 
have an opportunity to object, and the issuing party has an opportunity 
to respond.\19\ The arbitrator shall rule on the issuance and scope of 
the subpoena.\20\ The notice and objection procedures do not apply when 
the subpoena is for a non-party's appearance at a hearing before the 
arbitrators.\21\
---------------------------------------------------------------------------

    \19\ Uniform Code, Section 23(c)(3).
    \20\ Id.
    \21\ Uniform Code, Section 23(c)(5).
---------------------------------------------------------------------------

    Where Section 23 of the Uniform Code and Proposed NASD Rule 13512 
differ, which alternative is preferable? Why?
    B. Nonsubstantive Changes: Are any changes that are intended to be 
nonsubstantive actually substantive changes? If so, why are they 
substantive, and how will they affect the arbitration process or the 
rights of the parties? Are these proposed changes preferable to their 
counterparts in the current Code, or vice versa?
    In particular, are any changes in the following proposed rules 
substantive changes from their counterparts in current Code: Proposed 
Rules 13200, Required Arbitration; 13201, Statutory Employment 
Discrimination Claims; 13202, Claims Involving Registered Clearing 
Agencies; 13213, Hearing Locations; 13402, Composition of Arbitration 
Panels Not Involving a Statutory Discrimination Claim; 13403, 
Generating and Sending Lists to the Parties; 13406, Appointment of 
Arbitrators/Discretion to Appoint Arbitrators Not on List; 13802, 
Statutory Employment Discrimination Claims; 13803, Coordination of 
Statutory Employment Discrimination Claims Filed in Court and in 
Arbitration; and 13804, Temporary Injunctive Orders/Requests for 
Permanent Injunctive Relief? If so, why are they substantive, and how 
will they affect the arbitration process or the rights of the parties? 
Are these proposed changes preferable to their counterparts in the 
current Code, or vice versa?
    C. Proposed Rule 13105, Agreement of the Parties: This proposed 
rule provides that if the Code permits the parties to modify a 
provision of the Code, or a decision of the Director or the panel, the 
written agreement of all named parties is required for such a 
modification. If the Director or the panel determines that a named 
party is inactive in the arbitration, or has failed to respond after 
adequate notice has been given, however, the Director or the panel may 
determine that the written agreement of that party to such modification 
is not required while the party is inactive or not responsive.
    Is it sufficiently clear what an inactive party is? If not, how 
could the proposed rule be clarified?
    D. Proposed Rule 13400, Neutral List Selection System and 
Arbitrator Rosters: This proposed rule provides that NASD would 
maintain three separate rosters of arbitrators: one of non-public 
arbitrators, one of public arbitrators, and one of arbitrators who are 
eligible to serve as chairpersons. NASD has stated that arbitrators who 
qualify to be chairpersons will be placed on the chairperson roster 
only if they agree to serve as chairpersons; otherwise, they will 
remain on the general public or non-public arbitrator roster. NASD also 
has stated that to avoid duplication of names on the lists sent to 
parties, arbitrators who are on the chairperson roster will not be on 
the general public or non-public arbitrator roster. Does limiting 
arbitrators on the chairperson roster to service only as chairpersons 
limit the pool of arbitrators available to serve on panels, 
particularly in regions where relatively few arbitrators are available? 
Should chairpersons be permitted to serve in a non-chairperson capacity 
as well?
    E. Proposed Rule 13408, Disclosures of Arbitrators: This proposed 
rule would require arbitrators to disclose any existing or past service 
as a mediator before they are appointed to a panel.\22\ Does the 
proposed rule indicate that arbitrators must disclose only any service 
as a mediator that might preclude the arbitrator from rendering an 
objective and impartial determination in the proceeding? Alternatively, 
do commenters understand from the rule that arbitrators must disclose 
any existing or past service as a mediator, even it has no connection 
with the proceeding? Should the rule be revised to reflect more clearly 
one or the other of these readings? If so, which?
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    \22\ This amendment seeks to incorporate in IM-10308, relating 
to arbitrators who also serve as mediators, which was adopted 
earlier this year. See Exchange Act Rel. No. 51325 (Mar. 7, 2005), 
70 FR 12522 (Mar. 14, 2005) (Order Approving Proposed Rule Change); 
Exchange Act Rel. No. 51097 (Jan. 28, 2005), 70 FR 5715 (Feb. 3, 
2005) (Notice of Proposed Change).
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    F. Proposed Rule 13600(c), Required Hearings: This proposed rule 
would provide that if a hearing will be held, the Director will notify 
the parties of the time and place of the hearing at least 10 days 
before the hearing begins, unless the parties agree to a shorter time. 
Do parties need notice of the hearing earlier than 10 days before the 
hearing, or is 10 days sufficient?
    G. Proposed Rule 13702, Withdrawal of Claims: This proposed rule 
provides that before a claim has been answered by a party, the claimant 
may withdraw the claim against the party with or without prejudice. 
After a claim has been answered by a party, the claimant may only 
withdraw it against that party with prejudice unless the panel decides, 
or the claimant and that party agree, otherwise. Does the proposed rule 
appropriately address the concern of allowing claimants to withdraw 
claims without prejudice, while protecting the respondent from 
expending significant resources to respond to a claim (that is later 
withdrawn) or having to respond to the same claim multiple times? How 
prevalent are the problems of respondents (1) expending significant 
resources to respond to a claim that is later withdrawn, or (2) having 
to respond to the same claim multiple times? Are there other ways to 
address these competing concerns? Would the proposed rule unnecessarily 
deter claimants from filing claims? Would the proposed rule encourage 
respondents to increase the amount in controversy in the arbitration, 
and therefore the fees that the parties may have to bear? Should the 
proposed rule exclude arbitrations involving $25,000 or less, i.e., 
those to which Proposed Rule 13800, Simplified Arbitrations, apply?

[[Page 36440]]

    H. Proposed Rule 13800, Simplified Arbitrations: This proposed rule 
provides that all provisions of the Code apply to simplified 
arbitrations, unless otherwise provided under proposed rule 13800. This 
means that the time within which parties must answer a statement of 
claim in simplified arbitrations is 45 days, as in regular 
arbitrations. Should this time be shortened for simplified 
arbitrations, as they are meant to be more expedient than regular 
arbitrations? If so, what would be an appropriate amount of time?
    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-2004-011 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-2004-011. 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 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-2004-011 and should be 
submitted on or before July 14, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3266 Filed 6-22-05; 8:45 am]
BILLING CODE 8010-01-P