[Federal Register Volume 70, Number 167 (Tuesday, August 30, 2005)]
[Notices]
[Pages 51395-51398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4726]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52332; File No. SR-NASD-2005-094]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to Amendments to the Classification of 
Arbitrators Pursuant to Rule 10308 of the NASD Code of Arbitration

August 24, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on June 22, 2005, the National Association of 
Securities Dealers, Inc. (``NASD'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD. On August 5, 2005, NASD filed amendment No. 1 to 
the

[[Page 51396]]

proposed rule.\3\ 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.
    \3\ The amendment clarified the rule's text and purpose, and 
revised the effective date of the rule.
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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 Rule 10308 of the NASD Code of 
Arbitration Procedure (``Code'') relating to the classification of 
arbitrators to further ensure that individuals with significant ties to 
the securities industry do not serve as public arbitrators. Below is 
the text of the proposed rule change.\4\ Proposed new language is 
italics; proposed deletions are in brackets.
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    \4\ The rules proposed in this filing will be renumbered as 
appropriate following Commission approval of the pending revisions 
to the NASD Code of Arbitration Procedure for Customer Disputes; see 
Securities Exchange Act Release No. 51856 (June 15, 2005), 70 FR 
36442 (June 23, 2005) (SR-NASD-2003-158); and the NASD Code of 
Arbitration Procedure for Industry Disputes; see Securities Exchange 
Act Release No. 51857 (June 15, 2005), 70 FR 36430 (June 23, 2005) 
(SR-NASD-2004-011).
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* * * * *

10308. Selection of Arbitrators

    (a) Definitions
    (1) through (3) No change
    (4) ``non-public arbitrator''
    The term ``non-public arbitrator'' means a person who is otherwise 
qualified to serve as an arbitrator and:
    (A) is, or within the past 5 years, was:
    (i) associated with, including registered through, a broker or a 
dealer (including a government securities broker or dealer or a 
municipal securities dealer);
    (ii) registered under the Commodity Exchange Act;
    (iii) a member of a commodities exchange or a registered futures 
association; or
    (iv) associated with a person or firm registered under the 
Commodity Exchange Act;
    (B) is retired from, or spent a substantial part of a career, 
engaging in any of the business activities listed in subparagraph 
(4)(A);
    (C) is an attorney, accountant, or other professional who has 
devoted 20 percent or more of his or her professional work, in the last 
two years, to clients who are engaged in any of the business activities 
listed in subparagraph (4)(A); or
    (D) is an employee of a bank or other financial institution and 
effects transactions in securities, including government or municipal 
securities, and commodities futures or options or supervises or 
monitors the compliance with the securities and commodities laws of 
employees who engage in such activities.
    (5) ``public arbitrator''
    (A) The term ``public arbitrator'' means a person who is otherwise 
qualified to serve as an arbitrator and:
    (i) is not engaged in the conduct or activities described in 
paragraphs (a)(4)(A) through (D);
    (ii) was not engaged in the conduct or activities described in 
paragraphs (a)(4)(A) through (D) for a total of 20 years or more;
    (iii) is not an investment adviser;
    (iv) is not an attorney, accountant, or other professional whose 
firm derived 10 percent or more of its annual revenue in the past 2 
years from any persons or entities listed in paragraph (a)(4)(A); [and]
    (v) is not employed by, and is not the spouse or an immediate 
family member of a person who is employed by, an entity that directly 
or indirectly controls, is controlled by, or is under common control 
with, any partnership, corporation, or other organization that is 
engaged in the securities business;
    (vi) is not a director or officer of, and is not the spouse or an 
immediate family member of a person who is a director or officer of, an 
entity that directly or indirectly controls, is controlled by, or is 
under common control with, any partnership, corporation, or other 
organization that is engaged in the securities business; and
    (vii) is not the spouse or an immediate family member of a person 
who is engaged in the conduct or activities described in paragraphs 
(a)(4)(A) through (D).
    (B) No change
    (6) through (7) No change
    (b) through (f) No change
* * * * *

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item 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

1. Purpose
    The purpose of the proposed rule change is to amend the arbitrator 
classification criteria in Rule 10308 of the Code to ensure that 
individuals with significant ties to the securities industry may not 
serve as public arbitrators in NASD arbitrations.
    The Code classifies arbitrators as public or non-public. When 
investors have a dispute with member firms or associated persons in 
NASD arbitration, they are entitled to have their cases heard by a 
panel consisting of either a single public arbitrator, or a majority 
public panel consisting of two public arbitrators and one non-public 
arbitrator, depending on the amount of the claim.\5\
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    \5\ The panel composition for intra-industry disputes (not 
involving any parties who are investors) is governed by Rule 10202. 
Depending on the nature of the dispute, intra-industry panels may 
consists of all public arbitrators, all non-public arbitrators, or a 
majority of public arbitrators. The arbitrator classification 
provisions of Rule 10308 apply to all such panels.
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    Under Rule 10308(a)(4) of the Code, a person is classified as a 
non-public arbitrator if he or she:
    (A) Is, or within the past 5 years, was:
    (i) Associated with a broker or a dealer (including a government 
securities broker or dealer or a municipal securities dealer);
    (ii) Registered under the Commodity Exchange Act;
    (iii) A member of a commodities exchange or a registered futures 
association; or
    (iv) Associated with a person or firm registered under the 
Commodity Exchange Act;
    (B) Is retired from, or spent a substantial part of a career, 
engaging in any of the business activities listed in subparagraph 
(4)(A);
    (C) Is an attorney, accountant, or other professional who has 
devoted 20 percent or more of his or her professional work, in the last 
two years, to clients who are engaged in any of the business activities 
listed in subparagraph (4)(A); or
    (D) Is an employee of a bank or other financial institution and 
effects transactions in securities, including government or municipal 
securities, and commodities futures or options or supervises or 
monitors the compliance with the securities and commodities laws of 
employees who engage in such activities.
    The criteria for public arbitrators are set forth in Rule 
10308(a)(5) of the Code.

[[Page 51397]]

In general, an individual will be classified as a public arbitrator if 
he or she is qualified to serve as an arbitrator and is not either 
personally engaged in certain activities that would make him or her 
non-public, or the immediate family member of a person engaged in such 
activities.
    In order to ensure that individuals with significant ties to the 
securities industry may not serve as public arbitrators in NASD 
arbitrations, NASD believes that revisions to the definitions of public 
and non-public arbitrators are warranted.
    NASD is proposing to amend the definition of public arbitrator to 
exclude individuals who work for, or are officers or directors of, an 
entity that controls, is controlled by, or is under common control 
with, a broker/dealer, or who have a spouse or immediate family member 
who works for, or is an officer or director of, an entity that is in 
such a control relationship with a broker/dealer. Currently, such 
individuals are not covered by the rule. For example, a person who 
works for a real estate firm that is under common control with a 
broker/dealer and perhaps shares the same corporate name may be 
classified as a public arbitrator under current rules. Since investors 
may feel that an arbitrator who is employed by a firm in such a control 
relationship with a broker/dealer is not truly ``public,'' NASD is 
proposing to revise the definition of public arbitrator to exclude any 
person who is employed by, or who has a spouse or an immediate family 
member who is employed by, an entity that directly or indirectly 
controls, is controlled by, or is under common control with, any 
partnership, corporation, or other organization that is engaged in the 
securities business.\6\ Similarly, NASD also proposes to exclude from 
the definition of public arbitrator persons who are officers or 
directors of, or who have a spouse or an immediate family member who is 
an officer or director of, an entity in a control relationship with a 
broker/dealer.
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    \6\ For purposes of this rule, the term ``control'' has the same 
meaning that it has for purposes of Form BD, which broker/dealers 
use to register with NASD and to make periodic updates. 
Specifically, control is defined as ``The power, directly or 
indirectly, to direct the management or policies of a company, 
whether through ownership of securities, by contract, or otherwise. 
Any person that (i) is a director, general partner or officer 
exercising executive responsibility (or having similar status or 
functions); (ii) directly or indirectly has the right to vote 25% or 
more of a class of a voting security or has the power to sell or 
direct the sale of 25% or more of a class of voting securities; or 
(iii) in the case of a partnership, has the right to receive upon 
dissolution, or has contributed, 25% or more of the capital, is 
presumed to control that company.'' See Uniform Application for 
Broker-Dealer Registration (Form BD).
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    In addition, NASD is proposing to revise the definition of non-
public arbitrator to clarify that persons who are registered with a 
broker/dealer may not be classified as public arbitrators. Under 
current rules, arbitrators who are associated with a broker or dealer 
are considered non-public. In the financial services industry, it is 
not uncommon for a person to be employed by one company (such as a bank 
or insurance company) and to be registered to sell securities through 
another company (such as an affiliated broker/dealer). NASD believes 
that there may be some uncertainty among arbitrators who work for 
entities in a control relationship with a broker/dealer as to whether 
they are associated with a broker/dealer for purposes of Rule 10308, 
even though they hold licenses through the broker/dealer. Since the 
definition of ``person associated with a member'' in the NASD By-Laws 
includes persons who are registered with a broker/dealer, regardless of 
their status as employees, such persons should be considered non-public 
arbitrators. Therefore, NASD proposes to amend the definition of non-
public arbitrator to specifically include anyone registered through a 
broker/dealer.\7\
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    \7\ For purposes of Rule 10308(a)(4)(A)(i), the term 
``including'' is expanding or illustrative, not exclusive or 
limiting. The use of the term ``including but not limited to'' in 
Rule 10321(d) of the Code is not intended to create a negative 
implication regarding the use of ``including'' without the term 
``but not limited to'' in Rule 10308(a)(4)(A)(i) or other provisions 
of the Code.
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    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 30 days following 
Commission approval. The effective date will be no later than 60 days 
following publication of the Notice to Members announcing Commission 
approval.\8\
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    \8\ If an arbitrator's classification changes solely because of 
an amendment to the definitions in Rule 10308, the arbitrator's 
classification will be changed prospectively, that is, for future 
appointments only. In ongoing cases, staff will notify the parties 
of the prospective change in the arbitrator's classification. In 
such situations, because the arbitrator's classification was correct 
when the arbitrator was appointed, NASD normally will not grant 
challenges for cause based on a prospective change in 
classification. This provides continuity and avoids unnecessary 
disruption to ongoing cases. Challenges for cause still may be made 
based upon the disqualification and removal criteria in Rules 
10308(d) and 10312(d).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act,\9\ in general, and with Section 
15A(b)(6) of the Act,\10\ in particular, 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, by providing further assurance to 
parties that individuals with significant ties to the securities 
industry are not able to serve as public arbitrators in NASD 
arbitrations, the proposed rule change will enhance investor confidence 
in the fairness and neutrality of NASD's arbitration forum.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 15 U.S.C. 78o-3(b)(6).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the 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 is consistent with the Act. The Commission particularly urges 
commenters to consider the proposed amendment to the definition of 
``non-public arbitrator.'' Specifically, the NASD has proposed to amend 
Rule 10308(4)(A)(i) to clarify that persons ``associated'' with a 
broker or a dealer include persons ``registered through'' a broker or a 
dealer because there has been some uncertainty among certain

[[Page 51398]]

arbitrators. Although it is clear under NASD rules that persons who are 
registered through a broker or a dealer are associated persons of that 
broker-dealer, is this amendment helpful?
    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-2005-094 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 20549-2001.
    All submissions should refer to File Number SR-NASD-2005-094. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying at the Commission's Public Reference Room. 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-2005-094 and should be submitted on or before September 
20, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4726 Filed 8-29-05; 8:45 am]
BILLING CODE 8010-01-P