[Federal Register Volume 70, Number 139 (Thursday, July 21, 2005)]
[Notices]
[Pages 42123-42126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-14444]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52045; File No. SR-NASD-2005-023]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to Representation in Arbitration and Mediation

July 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 February 9, 2005 and on July 
8, 2005 (Amendment No. 1), 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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1. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Dispute Resolution is proposing to amend Rule 10316 and to 
adopt Rule 10408 of the NASD Code of Arbitration Procedure (``Code''), 
to address attorney representation in arbitration and mediation.\3\ 
Below is the text of the proposed rule change. Proposed new language is 
in italics; proposed deletions are in brackets.
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    \3\ These provisions will be renumbered as appropriate following 
Commission approval of the following proposed rule changes published 
on June 23, 2005: Revision of Customer Portion of Code of 
Arbitration Procedure, Exchange Act Rel. No. 51856 (June 15, 2005), 
70 FR 36442 (June 23, 2005) (SR-NASD-2003-1580); Revision of 
Industry Portion of Code of Arbitration Procedure, Exchange Act Rel. 
No. 51857 (June 15, 2005), 70 FR 36430 (June 23, 2005) (SR-NASD-
2004-011); and the NASD Arbitration Rules for Mediation Proceedings, 
Exchange Act Rel. No. 51855 (June 15, 2005), 70 FR 36440 (June 23, 
2005) (SR-NASD-2004-013).
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* * * * *
10316. Representation in Arbitration [by Counsel]

(a) Representation by a Party

    Parties may represent themselves in an arbitration held in a United 
States hearing location. A member of a partnership may represent the

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partnership; and a bona fide officer of a corporation, trust, or 
association may represent the corporation, trust, or association.

(b) Representation by an Attorney

    At any stage of an arbitration proceeding held in a United States 
hearing location, [A]all parties shall have the right to 
[representation by counsel at any stage of the proceedings.] be 
represented by an attorney at law admitted to practice before the 
Supreme Court of the United States or the highest court of any state of 
the United States, the District of Columbia, or any commonwealth, 
territory, or possession of the United States.

(c) Qualification of Representative

    Issues regarding the qualifications of a person to represent a 
party in arbitration are governed by applicable law and may be 
determined by an appropriate court or other regulatory agency. In the 
absence of a court order, the arbitration proceeding shall not be 
stayed or otherwise delayed pending resolution of such issues.
* * * * *

10408. Representative in Mediation

(a) Representation by Party

    Parties may represent themselves in mediation held in a United 
States hearing location. A member of a partnership may represent the 
partnership; and a bona fide officer of a corporation, trust, or 
association may represent the corporation, trust, or association.

(b) Representation by an Attorney

    At any stage of a mediation proceeding held in a United States 
hearing location, all parties shall have the right to be represented by 
an attorney at law admitted to practice before the Supreme Court of the 
United States or the highest court of any state of the United States, 
the District of Columbia, or any commonwealth, territory, or possession 
of the United States.

(c) Qualifications of Representatives

    Issues regarding the qualifications of a person to represent a 
party in mediation are governed by applicable law and may be determined 
by an appropriate court or other regulatory agency. In the absence of a 
court order, the mediation proceeding shall not be delayed pending 
resolution of such issues.
* * * * *

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item 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
    Background. NASD Dispute Resolution believes a rule is needed to 
address the issue of multi-jurisdictional practice of law in 
arbitration and mediation.\4\ The multi-jurisdictional practice of law 
occurs when attorneys, licensed in one United States jurisdiction, 
practice law in a jurisdiction in which they are not licensed. In the 
area of arbitration, for example, it is common for an attorney licensed 
to practice law in one state to represent a client in an arbitration 
proceeding in another state in which the attorney is not licensed. 
Although this practice is common, it can be a violation of state 
unauthorized practice of law provisions. Until recently, most states 
had taken no action against this practice. However, recent case law 
developments suggest that some states may be reconsidering this 
position. For example, three state court rulings have found that an 
out-of-state attorney providing representation in an arbitration 
proceeding is engaging in the practice of law in the state in which the 
proceeding occurs, and that it is a violation of the state's 
unauthorized practice of law statute to participate in such a 
proceeding without being licensed in that jurisdiction.\5\
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    \4\ The proposed rule change is intended to address the issue of 
multi-jurisdictional practice of law by attorneys. The proposed rule 
change does not address the issue of representation by non-attorneys 
in arbitration and medication cases.
    \5\ See Birbrower, Montalbano, Condo & Frank v. Superior Court, 
949 P.2d 1 (Cal. 1998); see also Florida Bar v. Rapoport, 845 
S[alpha]. 2d 874, 2003 Fla. LEXIS 250 (Fla. 2003) and Disciplinary 
Council v. Alexicole, Inc., et al., 2004 Ohio LEXIS 3032 (Ohio 
2004).
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    In light of these developments and the trend toward multi-
jurisdictional practice, the American Bar Association (ABA) amended its 
Model Rule of Professional Conduct 5.5 (Model Rule 5.5) to permit an 
attorney to represent a client in a United States jurisdiction in which 
he or she is not licensed without violating the jurisdiction's 
unauthorized practice of law rules, so long as the representation is 
related to an arbitration or medication.\6\ While Model Rule 5.5 
establishes a new standard for certain types of legal activity, it can 
be enforced only if a state adopts it into law. Fourteen states have 
either adopted Model Rule 5.5 or a similar version of the rule.\7\ 
Other states have adopted a temporary practice rule, similar to Model 
5.5, which allows an attorney not licensed in a state to provide 
certain types of legal services in the state on a limited basis.\8\ In 
those states where a temporary practice rule has yet to be adopted, the 
state bar associations appear willing to grant requests from attorney 
not licensed in those states to represent clients in an arbitration in 
those states.\9\
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    \6\ Model Rule 5.5, as amended, would allow a United States 
lawyer, admitted in one United States jurisdiction, to engage in 
certain types of legal activity in another United States 
jurisdiction where he is not licensed to practice, without being 
deemed to be engaging in the unauthorized practice of law. As 
amended, Model Rule 5.5 states that a lawyer may provide legal 
services on a temporary basis in an out-of-state jurisdiction that: 
(1) Are undertaken in association with a lawyer who is admitted to 
practice in the jurisdiction and who actively participates in the 
matter; (2) are in or reasonably related to a pending or potential 
proceeding before a tribunal in the jurisdiction or another 
jurisdiction, if the lawyer, or a person the lawyer is assisting, is 
authorized by law or order to appear in such proceeding or 
reasonably expects to be so authorized; (3) are in or reasonably 
related to a pending or potential arbitration, mediation, or other 
alternative dispute resolution proceeding in the jurisdiction or 
another jurisdiction, if the services arise out of or are reasonably 
related to the lawyer's practice in a jurisdiction in which the 
lawyer is admitted to practice and are not services for which the 
forum requires pro hac vice admission; or (4) are not within 
paragraphs 2 or 3, and arise out of or are reasonably related to the 
lawyer's practice in a jurisdiction in which the lawyer is admitted 
to practice. This rule is sometimes referred to as the temporary 
practice rule.
    \7\ Seven additional states have recommendations pending in 
their states' highest courts to adopt a rule identical or similar to 
Rule 5.5. American Bar Association, Commission on 
Multijurisdictional Practice, State Implementation of ABA Model Rule 
5.5 (visited Jan. 31, 2005) http://www.abanet.org/cpr/mjp-home.html.
    \8\ The laws of Michigan and Virginia specifically authorize 
occasional or incidental practice of out-of-state lawyers. See Mich. 
Comp. Law Ann. sec. 600.916 and Va. State Bar Rule, Pt. 6, sec. 
1(C).
    \9\ See Philadelphia Bar Association, Ethics Opinions, Opinion 
2003-13 (December 2003) (advising an attorney not licensed in 
Pennsylvania that he could conduct an arbitration in Philadelphia).
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    Representation by an Attorney in NASD Arbitration Forum. The 
proposed rule change would clarify that a party may be represented by 
an attorney admitted to practice by the United States Court, the 
highest court of any

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state of the United States, the District of Columbia, or any 
commonwealth, territory, or possession of the United States.\10\ The 
proposed rule change also explicitly states that, as is currently 
permitted, parties may represent themselves in NASD arbitration 
proceedings.
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    \10\ The proposed rule change would apply only to hearing 
locations in the United States, which include any commonwealth, 
territory, or possession of the United States.
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    The proposed rule change states that a party has the right to be 
represented by an attorney at law admitted to practice before the 
United States Supreme Court, the highest court of any state of the 
United States, the District of Columbia, or any commonwealth, 
territory, or possession of the United States. Representation by an 
attorney is not required under this proposal. However, NASD believes 
that representation by an attorney will protect the public and benefit 
investors by ensuring that a party's representative has a minimum level 
of skill, training, and character to provide effective representation 
in arbitration.\11\
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    \11\ While not addressed in the proposed rule change, the NASD 
continues to be concerned about the on-going problems that are 
caused by the practice of non-attorney representatives in the forum. 
These problems, which have been well documented, may have negative 
implications for parties in arbitration. See Securities Arbitration 
Reform, Report of the Arbitration Policy Task Force to the Board of 
Governors, National Association of Securities Dealers, Inc. (January 
1996); see also Report of the Securities Industry Conference on 
Arbitration on Representation of Parties in Arbitration by Non-
Attorneys, 22 Fordham Urb. L. J. 507 (1995).
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    Under the proposed rule change, attorneys could represent a client 
in an NASD arbitration or mediation, held in any United States hearing 
location, regardless of the jurisdiction in which the attorneys are 
licensed. The attorney's qualifications to participate as 
representatives in a jurisdiction in which they are not licensed would 
be subject to the applicable law of that jurisdiction. NASD believes 
the proposed rule change would assist attorneys in addressing the issue 
of multi-jurisdictional practice without encroaching on the states' 
rights to determine what activities violate the states' unauthorized 
practice of law provisions. The proposed rule change is not intended to 
prevent a state from deciding that an out-of-state attorney may have 
violated a state's unauthorized practice of law provision by 
representing a party in an NASD arbitration or mediation. It is 
intended, however, to reflect current practice in the forum, which, 
based on experience, shows that the level of knowledge, training and 
skill of an attorney affects the outcome of an arbitration or 
medication proceeding more than the jurisdiction from which the 
attorney received his license to practice.
    Further, NASD believes that the proposed rule change sets a 
standard of practice for the arbitration forum that is consistent with 
the other rules and proceedings of NASD. Rule 9141(b) of the NASD Code 
of Procedure states, in relevant part, that a person may be represented 
in any disciplinary proceeding by an attorney at law admitted to 
practice before the highest court of any state of the United States, 
the District of Columbia, or any commonwealth, territory, or possession 
of the United States.\12\
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    \12\ This rule has been enforced in NASD Enforcement 
proceedings. In two similar cases, a respondent's answer was 
stricken from the record because the respondent's representative had 
not indicated that he was a licensed attorney. See NASDR Office of 
the Hearing Officers, OHO Order 97-15 (C01970032); see also OHO 
Order 98-10 (C10970176).
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    Moreover, the SEC (as well as other federal agencies) also has a 
similar practice rule. Rule 102(b) of the SEC Rules of Practice states 
that, in any proceeding, a person may be represented by an attorney at 
law admitted to practice before the Supreme Court of the United States 
or the highest court of any State.\13\
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    \13\ See SEC Rules of Practice, 17 CFR Sec.  201.102(b) (2004).
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(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 the Association'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 rule change 
clarifies a standard of practice in its arbitration forum, which will 
foster uniformity and consistency in arbitration proceedings. As a 
result, NASD believes that the proposed rule change will enhance the 
administration and operation of the arbitration process, thereby 
protecting investors and the public interest.

(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. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2005-023 on the subject line.

Paper Comments

    Send paper comments in triplicate to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-9303.
    All submissions should refer to File Number SR-NASD-2005-023. 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

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public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to the File 
Number SR-NASD-2005-023 and should be submitted on or before August 11, 
2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 05-14444 7-20-05; 8:45 am]
BILLING CODE 8010-01-M