[Federal Register Volume 71, Number 137 (Tuesday, July 18, 2006)]
[Notices]
[Pages 40762-40766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11325]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54134; File No. SR-NASD-2005-079]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Amendments Nos. 1, 2 and 3 to 
Proposed Rule Change To Revise Rule 10322 of the NASD Code of 
Arbitration Procedure Which Pertains to Subpoenas and the Power To 
Direct Appearances

July 12, 2006.
    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 March 29, 2006, May 12, 2006, and July 7, 2006, 
the National Association of Securities Dealers, Inc. (``NASD'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
Amendments Nos. 1, 2, and 3, respectively, to the proposed rule change, 
as described in Items I, II, and III below, which Items have been 
prepared by NASD. On June 17, 2005, the NASD filed with the Commission 
the proposed rule change. On July 13, 2005, the Commission published 
for comment the proposed rule change in the Federal Register.\3\ NASD 
filed Amendments Nos. 1, 2, and 3 to respond to the comments received, 
after the publication of the proposed rule change in the Federal 
Register, and to make revisions to the rule change as described 
herein.\4\ The Commission is

[[Page 40763]]

publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 51981 (July 6, 2005), 70 
FR40411 (July 13, 2005).
    \4\ Amendment No. 1 addresses comment letters received by the 
Commission in response to the publication of the proposed rule 
change in the Federal Register (for initial notice of proposed rule 
change see Securities Exchange Act Release No. 51981 (July 6, 2005), 
70 FR 40411 (July 13, 2005)) and proposes certain amendments in 
response to these comments, including requiring that all subpoenas 
be issued by an arbitrator. Amendment No. 2 revises the regulation 
text and certain sections of the rule filing in order to clarify the 
process for issuing a subpoena to both parties and non-parties. 
Amendment No. 3 revises Amendment No. 2 to clarify current practice 
for deciding discovery-related motions.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to revise Rule 10322 of the NASD Code of 
Arbitration Procedure (``Code''), which pertains to subpoenas and the 
power to direct appearances. Below is the text of the proposed rule 
change.\5\ Proposed new language is Italic and proposed deletions are 
in brackets.
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    \5\ The rules proposed in this filing will be renumbered as 
appropriatefollowing 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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* * * * *

10322. Subpoenas and Power to Direct Appearances

    (a) [Subpoenas]
    To the fullest extent possible, parties should produce documents 
and make witnesses available to each other without the use of 
subpoenas. [The] [a]Arbitrators [and any counsel of record to the 
proceeding] shall have the [power of the subpoena process as provided 
by law. All parties shall be given a copy of a subpoena upon its 
issuance. Parties shall produce witnesses and present proofs to the 
fullest extent possible without resort to the subpoena process.] 
authority to issue subpoenas for the production of documents or the 
appearance of witnesses.
    (b) A party may make a written motion requesting that an arbitrator 
issue a subpoena to a party or a non-party. The motion must include a 
draft subpoena and must be filed with the Director, with an additional 
copy for the arbitrator. The requesting party must serve the motion and 
draft subpoena on each other party, at the same time and in the same 
manner as on the Director. The requesting party may not serve the 
motion or draft subpoena on a non-party.
    (c) If a party receiving a motion and draft subpoena objects to the 
scope or propriety of the subpoena, that party shall, within 10 days of 
service of the motion, file written objections with the Director, with 
an additional copy for the arbitrator, and shall serve copies on all 
other parties at the same time and in the same manner as on the 
Director. The party that requested the subpoena may respond to the 
objections. The arbitrator responsible for deciding discovery-related 
motions shall rule promptly on the issuance and scope of the subpoena 
regardless of whether any objections are made.
    (d) If the arbitrator issues a subpoena, the party that requested 
the subpoena must serve the subpoena at the same time and in the same 
manner on all parties and, if applicable, on any non-party receiving 
the subpoena.
    (e) Any party that receives documents in response to a subpoena 
served on a non-party shall provide notice to all other parties within 
five days of receipt of the documents. Thereafter, any party may 
request copies of such documents and, if such a request is made, the 
documents must be provided within 10 days following receipt of the 
request. The party requesting the documents shall be responsible for 
the reasonable costs associated with the production of the copies.
    [(b) Power to Direct Appearances and Production of Documents]
    (f) [The] An arbitrator[(s)] shall be empowered without resort to 
the subpoena process to direct the appearance of any person employed by 
or associated with any member of the Association and/or the production 
of any records in the possession or control of such persons or members. 
Unless [the] an arbitrator[(s)] directs otherwise, the party requesting 
the appearance of a person or the production of documents under this 
Rule shall bear all reasonable costs of such appearance and/or 
production.
* * * * *

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. NASD has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose

Proposal

    As described in the original rule filing, NASD proposed to revise 
Rule 10322 of the Code to provide for a 10-day notice requirement 
before a party issues a subpoena to a non-party for pre-hearing 
discovery. In addition, NASD proposed clarifying the requirements 
regarding the service of subpoenas by specifying that a party that 
issues a subpoena must serve a copy of the subpoena to all parties and 
the entity receiving the subpoena on the same day.
    NASD is amending the proposal set forth in the original rule filing 
to allow only arbitrators to issue subpoenas for both parties and non-
parties, whether for discovery or for the appearance at a hearing 
before the arbitrators. In addition, NASD is proposing to require a 
party to provide notice to all other parties that it has received 
documents in response to a non-party subpoena and to provide copies of 
those documents at the request of another party. NASD is also 
clarifying that, in most cases, a public arbitrator will rule on all 
motions requesting a subpoena. Lastly, NASD is proposing some minor 
changes to the original proposal, including rewriting certain portions 
of the rule text in plain English.

Comments on the Proposed Rule Change

    The Commission received 12 comment letters in response to the 
publication of the proposed rule in the Federal Register.\6\ NASD's 
response to the issues raised in these letters is set forth below.
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    \6\ Comment letters (``Comment Letters'') were submittedby 
Richard Skora, dated July 12, 2005 (``Skora Letter''); Seth E. 
Lipner, Deutsch & Lipner, dated July 13, 2005 (``Lipner Letter''); 
Steve Buchwalter, Law Offices of Steve A. Buchwalter, P.C., dated 
July 13, 2005 (``Buchwalter Letter''); Steven B. Caruso, Maddox 
Hargett & Caruso, P.C., dated July 19, 2005 (``Caruso Letter''); 
Dennis M. Pape, dated July 20, 2005 (``Pape Letter''); Al Van 
Kampen, Rohde & Van Kampen PLLC, dated July 25, 2005 (``Van Kampen 
Letter''); Phil Cutler, Cutler Nylander & Hayton, dated August 1, 
2005 (``Cutler Letter''); Avery B. Goodman, A.B. Goodman Law Firm, 
Ltd., dated August 1, 2005 and August 2, 2005 (``Goodman Letters''); 
Jill Gross, Director, Barbara Black, Director, and Richard Downey, 
Student Intern, Pace Investor Rights Project, dated August 2, 2005 
(``Gross Letter''); Tim Canning, dated August 3, 2005 (``Canning 
Letter''); and Rosemary J. Shockman, President, Public Investors 
Arbitration Bar Association, dated August 4, 2005 (``Shockman 
Letter'').
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    Several commenters to NASD's proposal stated that only arbitrators 
should have the authority to issue subpoenas in arbitration.\7\ Some of 
these commenters believed that this limitation should apply only to 
discovery subpoenas while other commenters suggested that it apply to 
all subpoenas. In support of their position, a number of these 
commenters noted that the Federal

[[Page 40764]]

Arbitration Act (``FAA'') provides only arbitrators, and not attorneys, 
with the authority to issue subpoenas.\8\ Furthermore, one commenter 
noted that only arbitrators have the authority to issue subpoenas under 
the Uniform Arbitration Act and the Revised Uniform Arbitration Act.\9\ 
Lastly, two commenters noted that, under the laws of several states, 
attorneys do not have the authority to issue subpoenas.\10\
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    \7\ See Lipner, Buchwalter, Van Kampen, Canning, and Shockman 
Letters.
    \8\ There is a split of opinion among the federal appellate 
courts as towhether arbitrators may issue discovery subpoenas or 
only subpoenas for attendance or production of documents at a 
hearing. Compare In re Matter of Arbitration Between Security Life 
Ins. Co. of America, 228 F.3d 865, 870-871 (8th Cir. 2000) 
(``Although the efficient resolution of disputes through arbitration 
necessarily entails a limited discovery process, we believe this 
interest in efficiency is furthered by permitting a party to review 
and digest relevant documentary evidence prior to the arbitration 
hearing. We thus hold that implicit in an arbitration panel's power 
to subpoena relevant documents for production at a hearing is the 
power to order the production of relevant documents for review by a 
party prior to the hearing.'') with Hay Group, Inc. v. E.B.S. 
Acquisition Corp., 360 F.3d 404, 407 (3rd Cir. 2004) (``The power to 
require a non-party `to bring' items `with him' clearly applies only 
to situations in which the non-party accompanies the items to the 
arbitration proceeding, not to situations in which the items are 
simply sent or brought by a courier. In addition * * * a non-party 
may be compelled `to bring' items `with him' only when the non-party 
is summoned `to attend before [the arbitrator] as a witness.' ''). 
Furthermore, while the Fourth Circuit, like the Third Circuit, found 
that the FAA does not grant an arbitrator the authority to subpoena 
a non-party for purposes of pre-hearing discovery, it did establish 
the possibility that a party might, ``under unusual circumstances,'' 
petition the district court to compel pre-arbitration discovery upon 
a showing of ``special need or hardship.'' Comsat Corp. v. Nat'l 
Science Found., 190 F.3d 269 (4th Cir. 1999).
    \9\ See Lipner Letter.
    \10\ See Lipner Letter and Van Kampen Letter.
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    NASD has determined that the proposed rule should be revised to 
allow only arbitrators to issue subpoenas to both parties and non-
parties, whether for discovery or for the appearance at a hearing 
before the arbitrators, but for reasons other than those suggested by 
the commenters. NASD believes that providing arbitrators with greater 
control over the issuance of subpoenas will help to protect investors, 
associated persons, and other parties from abuse in the discovery 
process. In addition, the establishment of a uniform, nationwide rule 
will reduce potential confusion for parties and their counsel regarding 
whether they have the ability to issue subpoenas, minimize gamesmanship 
in the subpoena process, and make the rule easier to administer.
    Under current practice, the arbitrator responsible for deciding 
discovery-related motions typically is the chairperson of the panel. 
Thus, except in certain intra-industry cases or unless the public 
customer agrees otherwise, the arbitrator ruling on a motion requesting 
a subpoena will be a public arbitrator.\11\ In those situations where 
the chairperson is unable to rule promptly on the motion for a 
subpoena, another public arbitrator on the panel shall decide the 
motion except when the public customer agrees otherwise.\12\ A non-
public arbitrator will rule on a motion requesting a subpoena only in 
those intra-industry cases where the panel is composed exclusively of 
non-public arbitrators or where the public customer agrees 
otherwise.\13\ Additionally, the arbitrator responsible for deciding 
discovery-related motions may elect to refer any discovery-related 
issue to the full panel.\14\ NASD has proposed to codify the current 
practice described above in the pending revisions to the NASD Code of 
Arbitration Procedure for Customer Disputes \15\ and the NASD Code of 
Arbitration Procedure for Industry Disputes.\16\
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    \11\ See NASD Rules 10308(c)(5) and 10321(e).
    \12\ See NASD Rule 10321(e).
    \13\ See NASD Rule 10321(e).
    \14\ See NASD Rule 10321(e).
    \15\ See Securities Exchange Act Release No. 51856 (June 15, 
2005), 70 FR 36442 (June 23, 2005) (SR-NASD-2003-158).
    \16\ See Securities Exchange Act Release No. 51857 (June 15, 
2005), 70 FR 36430 (June 23, 2005) (SR-NASD-2004-011).
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    One commenter who does not support the proposed rule change stated 
that arbitrators should be required to give written explanations of all 
discovery decisions.\17\ In addition, this commenter indicated that 
NASD should enforce current Rule 10322 with respect to the requirement 
that parties produce witnesses and present documents to the fullest 
extent possible without resort to the subpoena process.
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    \17\ See Skora Letter.
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    NASD disagrees that arbitrators should be required to give written 
explanations of all discovery decisions, because such a requirement 
would significantly increase the time and costs associated with the 
discovery process. Furthermore, NASD believes that this issue is 
outside the scope of this rulemaking.\18\ With respect to the 
commenter's assertion regarding the enforcement of Rule 10322, NASD 
does expect all parties to cooperate to the fullest extent possible 
without the use of subpoenas, and arbitrators may sanction parties for 
discovery abuse or make a disciplinary referral, as appropriate, at the 
end of the case if such cooperation is not provided.
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    \18\ Telephone conversation between Jean I. Feeney, Vice 
President and Chief Counsel, Dispute Resolution, NASD, and Lourdes 
Gonzalez, Assistant Chief Counsel, Division of Market Regulation, 
Commission, (May 1, 2005).
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    One commenter suggested several changes to the proposed rule.\19\ 
First, the commenter stated that the term ``fullest'' (which is in 
current Rule 10322) should be included in paragraph (a) of the proposed 
rule to ensure that parties do not avoid their discovery 
responsibilities in arbitration. Second, the commenter asserted that 
the proposal should specify that service of a subpoena must be made in 
precisely the same manner on everyone. Third, the commenter indicated 
that a party that receives documents in response to a non-party 
subpoena should be required to provide copies of the documents to 
opposing counsel within five calendar days of receipt of the documents.
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    \19\ See Caruso Letter.
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    NASD agrees with this commenter that the term ``fullest'' should be 
added in paragraph (a) of the rule to emphasize that, to the fullest 
extent possible, parties should produce documents and make witnesses 
available to each other without the use of subpoenas. NASD also agrees 
that the method of service of a subpoena should be the same on all 
parties and the non-party receiving the subpoena and proposes to amend 
paragraph (d) of the rule to reflect this requirement. Lastly, NASD 
agrees that documents received in response to a non-party subpoena 
should be made available to other parties. NASD does not believe, 
however, that a party that receives documents in response to a non-
party subpoena should be required automatically to provide copies to 
another party, which may have no interest in them or may not want to 
incur potentially significant copying costs. Therefore, NASD proposes 
to require a party to provide notice to all other parties that it has 
received documents in response to a non-party subpoena and to provide 
copies of those documents at the request of another party.\20\ Once a 
party receives a request for copies of documents that were received in 
response to a non-party subpoena, that party will have ten calendar 
days to provide the copies to the requesting party. NASD believes that 
a ten calendar day time frame is more appropriate than the one 
suggested by the commenter because it will allow enough time to copy a 
potentially voluminous amount of records, and it is also a time frame 
that is frequently used in the proposed Code revision.
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    \20\ A party would have five calendar days after the receipt 
ofsubpoenaed documents from a non-party to provide notice to all 
other parties.

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[[Page 40765]]

    One commenter who does not support the rule proposal indicated that 
it would, in effect, only impact member firms since customers rarely 
need documents from non-parties in arbitration.\21\ In addition, this 
commenter expressed concern that arbitrators will not review subpoenas 
promptly.
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    \21\ See Pape Letter.
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    NASD disagrees with this commenter. The proposed rule will apply 
equally to all parties that use NASD's forum. Even though broker-
dealers may use non-party subpoenas more often than do customers or 
associated persons, the proposed rule will be applied to all parties 
equally, thereby ensuring that NASD's forum is fair for everyone. NASD 
does not believe that the proposal will significantly delay the 
discovery process, as arbitrators will receive training specifically 
addressing subpoenas in the event that the SEC approves the proposed 
rule change. Furthermore, parties that volunteer to use NASD's 
discovery arbitrator pilot program may recognize a further reduction in 
the time needed for the review of subpoenas, especially in complex 
cases that involve numerous subpoenas.
    One commenter, who supports the proposal, raised an issue that was 
not addressed in the original rule filing.\22\ This commenter stated 
that NASD should revise Rule 10322 to establish a witness fee for non-
parties and to prevent employees of a party from being reimbursed by an 
opposing party for testifying.
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    \22\ See Goodman Letter.
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    NASD disagrees with this commenter because the reimbursement of 
witnesses for testifying at a hearing historically has not been a 
significant issue in NASD's forum. Consequently, NASD is only proposing 
non-substantive changes to the paragraph of the rule addressing costs 
involving the appearance of witnesses or the production of documents.
    One commenter supports the rule, but indicates that parties should 
be given at least ten days to oppose the issuance of a subpoena.\23\ 
This commenter also stated that a non-party subpoena should be issued 
only if the documents relate to the matter in controversy and are not 
available from the parties.
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    \23\  See Canning Letter.
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    NASD notes that a provision giving ten days to object to the 
issuance of a subpoena is contained in the amended rule proposal. 
Arbitrators will use their discretion to determine whether to issue a 
subpoena, or whether to limit the scope of a subpoena before it is 
issued.
    Lastly, NASD notes that some issues raised by several commenters, 
such as the issuance of a subpoena by an attorney before a panel has 
ruled on an objection to the subpoena, are not addressed herein as they 
became moot as a result of the revisions to the amended rule proposal 
discussed above.\24\
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    \24\ See Lipner, Caruso, Gross, Canning, and Shockman Letters.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which requires, among other 
things, that NASD's rules 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 will make the 
arbitration subpoena process more orderly and efficient, thereby 
improving the forum for all parties.

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 on the proposed changes in the initial rule filing 
were solicited by the Commission in response to the publication of SR-
NASD-2005-079, which proposed to amend Rule 10322 of the NASD Code of 
Arbitration Procedure primarily to provide for a 10-day notice 
requirement before a party issues a subpoena to a non-party for pre-
hearing discovery.\25\ The Commission received 12 comment letters in 
response to the Federal Register publication of SR-NASD-2005-079.\26\ 
The comments are summarized above.
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    \25\ See Securities Exchange Act Release No. 51981, supra note 
3.
    \26\ See Comment Letters, supra note 6.
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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 NASD 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-2005-079 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2005-079. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549. Copies of such 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 the File Number SR-NASD-2005-079 and should 
be submitted on or before August 8, 2006.


[[Page 40766]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-11325 Filed 7-17-06; 8:45 am]
BILLING CODE 8010-01-P