Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change to Provide for a 10-Day Notice Requirement Before a Party Issues a Subpoena to a Non-Party for Pre-Hearing Discovery, 40411-40412 [E5-3711]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 133 (Wednesday, July 13, 2005)]
[Notices]
[Pages 40411-40412]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3711]



[[Page 40411]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51981; File No. SR-NASD-2005-079]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change to Provide for 
a 10-Day Notice Requirement Before a Party Issues a Subpoena to a Non-
Party for Pre-Hearing Discovery

July 6, 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 17, 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. 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'') primarily to provide for a 10-day notice requirement before 
a party issues a subpoena to a non-party for pre-hearing discovery.
    Below is the text of the proposed rule change.\3\ Proposed new 
language is in italics; proposed deletions are in brackets.
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    \3\ 3 The rules proposed in this filing will be renumbered as 
appropriate following Commission approval of the proposed revisions 
to the NASD Code of Arbitration Procedure for Customer Disputes 
published for comment on June 23, 2005 (SEC Rel. No. 34-51856, 70 FR 
36442); and the NASD Code of Arbitration Procedure for Industry 
Disputes published for comment on June 23, 2005 (SEC Rel. No. 34-
51857, 70 FR 36430).
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* * * * *

10322. Subpoenas and Power to Direct Appearances

(a) [Subpoenas]
    The 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.] To the extent possible, 
parties should produce documents and make witnesses available to each 
other without the use of subpoenas. Arbitrators and any counsel of 
record may issue subpoenas as provided by law.
    (b) 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.
    (c) If a subpoena is issued, the issuing party must cause a copy of 
the request or subpoena to be served on the same day to all parties and 
the entity receiving the subpoena.
    (d) In the event a party receiving such a notice objects to the 
scope or propriety of the subpoena, that party shall, within 10 days of 
service of the notice, 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.
    (e) In the event an objection to a subpoena is filed under 
paragraph (d), 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.
    (f) Paragraphs (b) and (d) above do not apply to subpoenas 
addressed to parties or non-parties to appear at a hearing before the 
arbitrators.
    (g) The arbitrator(s) shall have the power to quash or limit the 
scope of any subpoena.
(b) [Power to Direct Appearances and Production of Documents]
    (h) The arbitrator(s) shall be empowered without resort to the 
subpoena process to direct the appearance of any person employed 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 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 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 primary purpose of the proposed rule change is to provide for a 
10-day notice requirement before a party issues a subpoena to a non-
party for pre-hearing discovery.
    Under Rule 10322(a) of the Code of Arbitration Procedure 
(``Code''), an arbitrator and any counsel of record to the arbitration 
has the power to issue a subpoena, as provided by law. In the course of 
preparing their cases, attorneys sometimes issue subpoenas to non-
parties requesting the production of documents in advance of an 
arbitration hearing. For example, an investor's attorney might subpoena 
account records for other investors at a broker's firm, or a brokerage 
firm's attorney might subpoena records from the investor's cell phone 
company. Disputes regarding the propriety or scope of these subpoenas 
to non-parties occasionally arise, raising the issue of whether the 
subpoenaed materials should be produced. Currently, the Code does not 
contain any rules that specifically address the issuance of subpoenas 
to non-parties or the resolution of disputes involving such subpoenas.
    In order to make the pre-hearing discovery process more orderly and 
efficient, NASD is proposing to revise the Code to provide for a 10-day 
notice requirement before a party issues a subpoena to a non-party for 
pre-hearing discovery.\4\ Specifically, the rule will require parties 
seeking to subpoena discovery-related documents from a non-party to 
send, at least 10 days prior to the issuance or service of the 
subpoena, notice of their intention to serve the subpoena, along with a 
copy of the subpoena, to all parties to the

[[Page 40412]]

arbitration. If any party receiving the notice objects to the scope or 
propriety of the subpoena, that party may, within 10 days of service of 
the notice, file a written objection with the Director of Arbitration 
and provide copies of the written objection to all other parties at the 
same time. Thereafter, the arbitrator responsible for deciding 
discovery-related motions will rule promptly on the issuance and scope 
of the subpoena. The arbitrator will have the authority to approve the 
issuance of a subpoena as well as to quash or limit the scope of any 
subpoena. In those situations where a panel has not yet been appointed, 
the rule will allow parties to issue a subpoena only if they advise a 
subpoenaed party of the existence of the objection at the time the 
subpoena is served and instruct the subpoenaed party to preserve, but 
not deliver, the subpoenaed documents until directed to do so by an 
arbitrator.
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    \4\ The subpoena notice and objections provisions of the 
proposed rule will apply only to pre-hearing discovery and not to 
subpoenas pertaining to appearances before the panel.
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    Lastly, the proposed rule will clarify the requirements regarding 
the service of subpoenas. Currently, Rule 10322(a) provides only that 
all parties are to be given a copy of a subpoena upon its issuance. The 
proposed rule will require a party that issues a subpoena to serve a 
copy of the subpoena to all parties and the entity receiving the 
subpoena on the same day.\5\
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    \5\ Rule 10314(c) describes how service may be effected.
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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 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 will make the 
arbitration pre-hearing discovery 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 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 proposed rule change is based 
upon, but not identical to, Rule 23(c) of the Uniform Code of 
Arbitration adopted by the Securities Industry Conference on 
Arbitration (the ``SICA Rule''). The Commission particularly urges 
commenters to consider the proposed rule change in light of the SICA 
Rule.
    Specifically, the NASD proposal and the SICA Rule differ in whether 
service or delivery of a subpoena is required to be provided to all 
parties and the entity receiving the subpoena on the same day. As 
discussed above, the NASD proposal would require that a subpoena be 
served on the same day to all parties and the entity receiving the 
subpoena. Under existing NASD rules, service is accomplished on the 
date of mailing either by first-class mail or by means of overnight 
mail service or, in the case of other means of service, on the date of 
delivery.\6\ The SICA Rule, however, requires that upon issuance of a 
subpoena, the subpoena must be sent in a ``manner that is reasonably 
expected to cause'' the subpoena to be delivered to all parties and the 
entity receiving the subpoena on the same day. What advantages or 
disadvantages, if any, are associated with the service requirement 
under NASD proposal versus the delivery requirement under the SICA 
Rule?
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    \6\ NASD Rule 10314(c).
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2005-079 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-2005-079. 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 (https://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 3, 2005. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-3711 Filed 7-12-05; 8:45 am]
BILLING CODE 8010-01-P