[Federal Register Volume 70, Number 120 (Thursday, June 23, 2005)]
[Notices]
[Pages 36442-36451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3268]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51856; File No. SR-NASD-2003-158]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
Nos. 1, 2, 3, and 4 Thereto To Amend NASD Arbitration Rules for 
Customer 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 
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'') on October 15, 2003, and amended 
on January 3, 2005, January 19, 2005, April 8, 2005, and June 10, 2005, 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by NASD Dispute Resolution. 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 to 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 Customer 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_009306&ssSourceNodeId=802 ssSourceNodeId=802.\3\ A chart comparing the current Code and the 
proposed Customer 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 Industry Code and proposed Mediation Code have 
been filed separately with the Commission as SR-NASD-2004-011 and 
SR-NASD-2004-013, respectively.
    \4\ For purposes of this filing, the version of the current and 
proposed Codes used in the comparison and conversion charts reflects 
all Dispute Resolution rule filings approved by the Commission since 
the proposed rule change was filed on October 15, 2003.
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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
    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. Because the 
Code is used by investors, including investors who appear pro se in the 
NASD forum, NASD undertook to rewrite the current Code in ``plain 
English.'' Over time, the goals of the plain English initiative 
expanded beyond simplifying the language and sentence structure of the 
rules in the Code to include:
     Reorganizing the Code in a more logical, user-friendly 
way, including creating separate Codes for customer and industry 
arbitrations, and for mediations; and
     Implementing several substantive rule changes, including 
codifying several common practices, to provide more guidance to parties 
and arbitrators, and to streamline the administration of arbitrations 
in the NASD forum.

Plain English

    When it launched its ``plain English'' initiative in 1998, the SEC 
published a ``Plain English Handbook,'' to provide guidance to issuers 
and SROs in drafting materials intended to be used by investors. The 
SEC's Plain English Handbook recommended using shorter, more common 
words; breaking long rules into shorter ones; using the active voice 
whenever possible; and putting lists into easy-to-read formatting, such 
as bullet points.
    In revising the Code, NASD has implemented these guidelines 
wherever possible. Throughout the proposed Code, NASD has simplified 
language and eliminated unnecessarily legalistic or arcane terminology. 
Long rules, such as current Rule 10308, governing arbitrator selection, 
and current Rule 10321, governing filing and responding to an 
arbitration claim, have been broken into several shorter rules. (See 
proposed Rules 12400-12406, and proposed Rules 12300-12313, 
respectively.) Where appropriate, lists are presented in bullet point 
format, and active verbs are used.
    The proposed Code also contains a new definitions rule (proposed 
Rule 12100) that defines commonly used terms applicable throughout the 
Code. In the current Code, some rules, such as Rule 10308, contain 
definitions applicable to that rule only, but there is not a general 
definitions rule that applies to the entire Code. NASD believes that a 
comprehensive definitions rule will make the Code easier to understand 
and to use, and will help eliminate confusion about the meaning and 
scope of frequently used terms. It will also allow NASD to use shorter 
phrases, or single words, in place of longer phrases. For example, the 
phrase ``dispute, claim, or controversy'' has been replaced by the word 
``dispute,'' which has been defined in Rule 12100 to mean the longer 
phrase. This makes rules easier to read and understand, without 
changing the meaning of the Code.

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

[[Page 36443]]

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. Although many of the rules in the Customer and 
Industry Codes will be identical, NASD believes that maintaining 
separate arbitration codes will eliminate confusion regarding which 
rules are applicable to which disputes. NASD also believes that 
maintaining a separate Mediation Code will be particularly useful to 
parties submitting matters 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 code 
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. For example, 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.
    To make it easier to find specific rules, the Customer Code will be 
divided into the following nine parts, which are intended to 
approximate the chronological order of a typical arbitration:
     Part I (Rule 12100 et seq.) contains definitions, as well 
as other rules relating to the organization and authority of the forum;
     Part II (Rule 12200 et seq.) contains general arbitration 
rules, including what claims are subject to arbitration in the NASD 
forum;
     Part III (Rule 12300 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 (12400 et seq.) contains rules relating to the 
appointment, authority and removal of arbitrators;
     Part V (Rules 12500 et seq.) contains rules governing the 
prehearing process, including proposed new rules relating to motions 
and discovery;
     Part VI (Rules 12600 et seq.) contains rules relating to 
hearings;
     Part VII (Rules 12700 et seq.) contains rules relating to 
the dismissal, withdrawal, or settlement of claims;
     Part VIII (Rules 12800 et seq.) contains rules relating to 
simplified (small cases) arbitrations and default proceedings; and
     Part IX (Rules 12900 et seq.) contains rules relating to 
fees and awards.

Description of Other Changes

    In addition to simplifying and reorganizing the Code, the proposed 
rule change includes several other changes to the Customer Code 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. Only 
proposed substantive changes are discussed in detail below. Any 
proposed changes to the 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 Customer Code.

Agreement of the Parties (Proposed Rule 12105)

    Both the current Code and proposed Customer Code 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 
12105 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 12203)

    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 12203(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 parties or their representatives, arbitrators or 
NASD staff. In addition, 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 12205)

    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,

[[Page 36444]]

occasionally after a claimant has filed a statement of claim.
    Proposed Rule 12205, 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 12207)

    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 12207 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 12210)

    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 12210 expressly to prohibit ex parte 
communications between parties and arbitrators, except as provided in 
proposed Rule 12211.\5\ The proposed rule 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 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), states 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 12211 (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 12212)

    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 12212 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 they 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 12213)

    NASD currently maintains more than 55 designated hearing locations 
for NASD arbitrations and mediations. Generally, when a claim is filed 
in a case involving a customer, NASD selects the hearing location that 
is closest to where the customer lived at the time the events giving 
rise to the dispute arose. To make the arbitration process more 
transparent, proposed Rule 12213 would codify this practice. (The use 
of the term ``generally'' reflects that fact that while the default 
location is the one closest to where the customer lived at the time the 
dispute arose, the Director does have discretion to select another 
location that would be more appropriate or less burdensome to the 
parties given the specific facts of the case. For example, if the 
customer lived in California at the time the dispute arose, but has 
since moved to New York, and the firm does business in New York, the 
Director could select New York as the hearing location.)
    The proposed rule would also clarify that before arbitrator lists 
are sent to the parties under Rule 12403, 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, which may be particularly helpful to investors who may be 
considering filing a claim in arbitration.

Time to Answer Counterclaims and Cross Claims (Proposed Rules 12304 and 
12305)

    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

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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 12304 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 12305 
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 12307)

    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 12307 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. 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.

Amending Pleadings to Add Parties (Proposed Rule 12309)

    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 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 12309 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 12309(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 12310)

    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 12100(h) 
defines the term ``day'' to mean calendar day. To reflect this 
definition, proposed Rule 12310 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 
12304 and 12305. 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 
12400)

    Currently, NASD maintains a roster of public and non-public 
arbitrators. Depending on the amount in dispute, an arbitration panel 
in a customer dispute will consist either of one public arbitrator, or 
two public arbitrators and one non-public arbitrator. Parties in three-
arbitrator cases receive two lists: one of non-public arbitrators and 
one of public arbitrators. The lists are generated by the 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. By a process of striking and ranking the 
listed arbitrators, the parties select one non-public and two public 
arbitrators from the lists generated by NLSS. 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 public arbitrator on the panel to serve as chairperson.\6\
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    \6\ 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 public arbitrators of any professional or 
educational background from qualifying to serve as chairpersons of 
panels in customer cases.
    To address these concerns, the proposed Customer Code would require 
that NASD create and maintain a third roster of public arbitrators who 
are qualified to serve as chairpersons. In three-arbitrator cases, 
parties would receive three lists of arbitrators: A non-public list, a 
public list and a public chair-qualified list. 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-

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arbitrator cases, the arbitrator would be selected from a list of 
public chair-qualified arbitrators, unless the parties agreed 
otherwise.
    Under proposed Rule 12400, public 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. Public 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 
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 arbitrator roster.

Number of Arbitrators (Proposed Rule 12401)

    Under current Rule 10308(b), if the amount of a claim is $25,000 or 
less, the arbitration panel consists of one public 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 
public 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 12401 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 12403)

    Proposed Rule 12403 would implement several changes to the 
operation of NLSS.\7\ In addition, the proposed Code would eliminate 
the ability of parties to unilaterally request arbitrators with 
particular expertise, a practice that is an ongoing source of 
controversy, as well as burdensome for the NASD staff to administer.
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    \7\ 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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    Finally, proposed Rule 12403 would expand the number of names of 
proposed arbitrators provided to the parties to seven, 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 12406)

    In the past, questions have occasionally arisen regarding when 
appointment of arbitrators occurs. To address these questions, 
paragraph (d) of proposed Rule 12406 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 12406.

Arbitrator Recusal (Proposed Rule 12409)

    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 12409 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.\8\ However, the 
Director may continue to remove arbitrators for cause under proposed 
Rule 12410 on the same grounds as those under current Rules 10308(d), 
10312(d) and 10313.
---------------------------------------------------------------------------

    \8\ 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 12411)

    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 12411 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 12411 does not contain any substantive changes 
from the current rules upon which it is based.

[[Page 36447]]

Determinations of Arbitration Panel (Proposed Rule 12414)

    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 12414 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 of the panel may be made by a single member of a three-
arbitrator panel. For example, Proposed Rule 12503 provides that some 
motions may be decided by a single arbitrator. Also, applicable law may 
permit a single arbitrator to issue a subpoena.

Initial Prehearing Conferences (Proposed Rule 12500)

    Proposed Rule 12500 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 12502)

    Currently the Code is silent with respect to whether and under what 
circumstances a prehearing conference will be tape-recorded. Proposed 
Rule 12502 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 12503)

    Although motions are increasingly common in arbitration, the 
current Code does not refer to motions or provide any guidance with 
respect to motions 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 12503 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 
understands this concern, NASD believes that motions have already 
become an inescapable 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 12203 and removal of an arbitrator under 
proposed Rule 12410 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 
12504)

    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.\9\ Because the Code provides 
no guidance with respect to this question, arbitrator decisions with 
respect to it lack uniformity.
---------------------------------------------------------------------------

    \9\ 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

[[Page 36448]]

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 12505--12511)

    One of the most frequent comments made by users of the NASD forum 
is that the discovery procedures outlined in NASD's Discovery Guide are 
routinely ignored, resulting in significant delay and the frequent need 
for arbitrator intervention in the discovery process. This is partly 
due to the fact that the Discovery Guide establishes guidelines rather 
than mandatory procedures.
    To address these concerns, proposed Rules 12505-12511 would codify 
the discovery procedures currently outlined in the NASD Discovery 
Guide, with certain substantive changes. The proposed Code would not 
contain the actual Document Production Lists, which would remain in the 
Discovery Guide, but it would make clear that either producing or 
objecting to documents on applicable lists, as well as other documents 
requested by parties, is mandatory. The proposed rules also would 
extend the time parties have to respond to Document Production Lists 
and other discovery 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 12512 would codify the sanctions provisions of 
the 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.
    Because much of what is currently contained in the Discovery Guide 
would be incorporated into the Code, the Discovery Guide would be 
amended to include only the remaining information, including the 
Document Production Lists themselves. The proposed amended Discovery 
Guide is available at http://www.nasd.com/web/idcplg?IdcService=SS_GETlowbar lowbar;PAGE&ssDocName=NASDW-- 009306&ssSourceNodeId=802.

Subpoenas (Proposed Rule 12512)

    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 12512 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 that issued the subpoena. This modification is 
intended to ensure that parties receive notice of the subpoena in a 
timely manner.

Exchange of Documents and Witness Lists (Proposed Rule 12514)

    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 12514 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 12601)

    In the proposed Code, hearing adjournments are referred to as 
hearing postponements, for plain English purposes. Paragraph (a) of 
proposed Rule 12601 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 12902, 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 12702)

    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 
12702 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

[[Page 36449]]

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 12800)

    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 the 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 12800, 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. However, a hearing would still be held upon the 
customer's request.
    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 12900--12903)

    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 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-$100. 
The result is a schedule that is confusing and difficult to read. To 
simplify the schedule, the customer filing fee brackets would be 
reorganized as follows: The $25,000-$30,000 bracket ($600) and the 
$30,000-50,000 bracket ($625) would be combined, and the filing fee for 
the new bracket would be $600; and the $1 million-$3 million bracket 
($1,700), the $3 million-$5 million bracket ($1,800), the $5 million--
$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 an increase in the total 
amount of fees paid by customers or associated persons when filing a 
claim, except that for claims of $30,000 to $50,000, the customer's 
overall filing fees would decrease by $50, and for claims of $1 million 
to $3 million, the customer'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 the proposed Customer Code will 
protect investors and 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

[[Page 36450]]

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, as 
amended, provides for arbitration procedures that are fair to and 
consistent with the protection of investors 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.\10\
---------------------------------------------------------------------------

    \10\ 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 12406, Appointment of Arbitrators/
Discretion to Appoint Arbitrators Not on List; 12410, Removal of 
Arbitrator by Director; and 12411, 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.\11\ The interest or bias must be direct, 
definite, and capable of reasonable demonstration, rather than remote 
or speculative, and close questions regarding challenges to an 
arbitrator by a customer would be resolved in favor of the 
customer.\12\
---------------------------------------------------------------------------

    \11\ Proposed NASD Rule 12410(a)(1).
    \12\ 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.\13\ Similarly, 
Proposed NASD Rule 12512, 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 12512 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.
---------------------------------------------------------------------------

    \13\ 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.\14\ The arbitrator shall rule on the issuance and scope of 
the subpoena.\15\ The notice and objection procedures do not apply when 
the subpoena is for a non-party's appearance at a hearing before the 
arbitrators.\16\
---------------------------------------------------------------------------

    \14\ Uniform Code, Section 23(c)(3).
    \15\ Id.
    \16\ Uniform Code, Section 23(c)(5).
---------------------------------------------------------------------------

    Where Section 23 of the Uniform Code and Proposed NASD Rule 12512 
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?
    C. Proposed Rule 12105, 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 12400, 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. Under Proposed Rule 12400(c), 
chairpersons must be public arbitrators in customer disputes. NASD has 
stated that public 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

[[Page 36451]]

general 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 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 12408, 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.\17\ Does the 
proposed rule suggest 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?
---------------------------------------------------------------------------

    \17\ This amendment seeks to incorporate 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 12600(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 12702, 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 12800, Simplified Arbitrations, apply?
    H. Proposed Rule 12800, Simplified Arbitrations: This proposed rule 
provides that all provisions of the Code apply to simplified 
arbitrations, unless otherwise provided under proposed rule 12800. 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-2003-158 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-2003-158. The 
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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing will also 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 SR-NASD-2003-158 and should be submitted on 
or before July 14, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3268 Filed 6-22-05; 8:45 am]
BILLING CODE 8010-01-P