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, 40762-40766 [E6-11325]

Download as PDF 40762 Federal Register / Vol. 71, No. 137 / Tuesday, July 18, 2006 / Notices wwhite on PROD1PC61 with NOTICES proposed rule change (i) does not significantly affect the protection of investors or the public interest; (ii) does not impose any significant burden on competition; and (iii) does not become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6)(iii) thereunder.13 A proposed rule change filed under Rule 19b–4(f)(6) normally does not become operative for 30 days after the date of filing. However, Rule 19b– 4(f)(6)(iii) permits the Commission to waive the operative delay if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the operative delay to permit the Pilot Program extension to become effective prior to the 30th day after filing. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because doing so will allow the benefits of the Pilot Program to continue without interruption.14 Therefore, the Commission designates that the proposal will become operative on July 12, 2006.15 13 Rule 19b–4(f)(6)(iii) requires the Exchange to give written notice to the Commission of its intent to file the proposed rule change five business days prior to filing. The Commission has determined to waive the five-day pre-filing requirement for this proposal. 14 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 15 As set forth in the Exchange’s original filing proposing the Pilot Program, if the Exchange were to propose an extension, expansion, or permanent approval of the Pilot Program, the Exchange would submit, along with any filing proposing such amendments to the program, a report that would provide an analysis of the Pilot Program covering the entire period during which the Pilot Program was in effect. The report would include, at a minimum: (1) Data and written analysis on the open interest and trading volume in the classes for which Short Term Option Series were opened; (2) an assessment of the appropriateness of the options classes selected for the Pilot Program; (3) an assessment of the impact of the Pilot Program on the capacity of Amex, OPRA, and market data vendors (to the extent data from market data vendors is available); (4) any capacity problems or other problems that arose during the operation of the Pilot Program and how Amex addressed such problems; (5) any complaints that Amex received during the operation of the Pilot Program and how Amex addressed them; and (6) any additional information that would assist in assessing the operation of the Pilot Program. The report must be submitted to the Commission at least 60 days prior to the expiration date of the Pilot Program. See Form 19b–4 for File No. SR–Amex–2005–035, filed March 23, 2005. VerDate Aug<31>2005 16:25 Jul 17, 2006 Jkt 208001 At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. be submitted on or before August 8, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.16 Nancy M. Morris, Secretary. [FR Doc. E6–11326 Filed 7–17–06; 8:45 am] BILLING CODE 8010–01–P 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. 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 rulecomments@sec.gov. Please include File No. SR–Amex–2006–66 on the subject line. 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’’ • Send paper comments in triplicate or ‘‘Exchange Act’’) 1 and Rule 19b–4 to Nancy M. Morris, Secretary, thereunder,2 notice is hereby given that Securities and Exchange Commission, on March 29, 2006, May 12, 2006, and 100 F Street, NE., Washington, DC July 7, 2006, the National Association of 20549–1090. Securities Dealers, Inc. (‘‘NASD’’) filed All submissions should refer to File with the Securities and Exchange Number SR–Amex–2006–66. This file Commission (‘‘SEC’’ or ‘‘Commission’’) number should be included on the Amendments Nos. 1, 2, and 3, subject line if e-mail is used. To help the respectively, to the proposed rule Commission process and review your change, as described in Items I, II, and comments more efficiently, please use III below, which Items have been only one method. The Commission will prepared by NASD. On June 17, 2005, post all comments on the Commission’s the NASD filed with the Commission Internet Web site (http://www.sec.gov/ the proposed rule change. On July 13, rules/sro.shtml). Copies of the 2005, the Commission published for submission, all subsequent comment the proposed rule change in amendments, all written statements the Federal Register.3 NASD filed with respect to the proposed rule Amendments Nos. 1, 2, and 3 to change that are filed with the respond to the comments received, after Commission, and all written the publication of the proposed rule communications relating to the change in the Federal Register, and to proposed rule change between the make revisions to the rule change as Commission and any person, other than described herein.4 The Commission is those that may be withheld from the 16 17 CFR 200.30–3(a)(12). public in accordance with the 1 15 U.S.C. 78s(b)(1). provisions of 5 U.S.C. 552, will be 2 17 CFR 240.19b–4. available for inspection and copying in 3 Securities Exchange Act Release No. 51981 (July the Commission’s Public Reference 6, 2005), 70 FR40411 (July 13, 2005). Room. Copies of such filing also will be 4 Amendment No. 1 addresses comment letters available for inspection and copying at received by the Commission in response to the the principal office of the Exchange. All publication of the proposed rule change in the Federal Register (for initial notice of proposed rule comments received will be posted change see Securities Exchange Act Release No. without change; the Commission does 51981 (July 6, 2005), 70 FR 40411 (July 13, 2005)) not edit personal identifying and proposes certain amendments in response to these comments, including requiring that all information from submissions. You subpoenas be issued by an arbitrator. Amendment should submit only information that regulation text and certain sections you wish to make available publicly. All No. 2 revises the in order to clarify the process for of the rule filing submissions should refer to File issuing a subpoena to both parties and non-parties. Number SR–Amex–2006–66 and should Amendment No. 3 revises Amendment No. 2 to Paper Comments PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 E:\FR\FM\18JYN1.SGM 18JYN1 Federal Register / Vol. 71, No. 137 / Tuesday, July 18, 2006 / Notices publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 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. * * * * * wwhite on PROD1PC61 with NOTICES 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 nonparty. 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 nonparty. (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 clarify current practice for deciding discoveryrelated motions. 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). VerDate Aug<31>2005 16:25 Jul 17, 2006 Jkt 208001 party that requested the subpoena may respond to the objections. The arbitrator responsible for deciding discoveryrelated 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 nonparty 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 PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 40763 10322 of the Code to provide for a 10day notice requirement before a party issues a subpoena to a non-party for prehearing 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. 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 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’’). 7 See Lipner, Buchwalter, Van Kampen, Canning, and Shockman Letters. E:\FR\FM\18JYN1.SGM 18JYN1 40764 Federal Register / Vol. 71, No. 137 / Tuesday, July 18, 2006 / Notices wwhite on PROD1PC61 with NOTICES 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 NASD has determined that the proposed rule should be revised to allow only arbitrators to issue subpoenas to both parties and nonparties, 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 discoveryrelated motions typically is the chairperson of the panel. Thus, except in certain intra-industry cases or unless 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. VerDate Aug<31>2005 16:25 Jul 17, 2006 Jkt 208001 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 nonpublic 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 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. 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 NASD Rules 10308(c)(5) and 10321(e). 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). 17 See Skora Letter. 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). PO 00000 11 See 12 See Frm 00079 Fmt 4703 Sfmt 4703 the end of the case if such cooperation is not provided. 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. 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. 19 See Caruso Letter. party would have five calendar days after the receipt ofsubpoenaed documents from a non-party to provide notice to all other parties. 20 A E:\FR\FM\18JYN1.SGM 18JYN1 wwhite on PROD1PC61 with NOTICES Federal Register / Vol. 71, No. 137 / Tuesday, July 18, 2006 / Notices 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. 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 nonparty 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. 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. 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. 21 See Pape Letter. Goodman Letter. See Canning Letter. 22 See 23 VerDate Aug<31>2005 16:25 Jul 17, 2006 Jkt 208001 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 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 10day notice requirement before a party issues a subpoena to a non-party for prehearing 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. 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 24 See Lipner, Caruso, Gross, Canning, and Shockman Letters. 25 See Securities Exchange Act Release No. 51981, supra note 3. 26 See Comment Letters, supra note 6. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 40765 (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 rulecomments@sec.gov. 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. E:\FR\FM\18JYN1.SGM 18JYN1 40766 Federal Register / Vol. 71, No. 137 / Tuesday, July 18, 2006 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.27 Nancy M. Morris, Secretary. [FR Doc. E6–11325 Filed 7–17–06; 8:45 am] BILLING CODE 8010–01–P II. Description of the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54125; File No. SR–NYSE– 2005–93] Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving a Proposed Rule Change to Rule 431 (‘‘Margin Requirements’’) and Rule 726 (‘‘Delivery of Options Disclosure Document and Prospectus’’) To Expand the Products Eligible for Customer Portfolio Margining and Cross-Margining Pilot Program July 11, 2006. I. Introduction On December 29, 2005, the New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 2 thereunder, a proposed rule change seeking to amend NYSE Rules 431 and 726 to expand the scope of products that are eligible for treatment as part of the Commission’s approved portfolio margin pilot program (the ‘‘Pilot’’).3 The NYSE seeks to expand the list of eligible products in the Pilot to include security futures contracts 4 and listed single stock options. The proposed rule change was published in the Federal Register on Monday, January 23, 2006.5 The 27 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Exchange Act Release No. 52031 (July 14, 2005), 70 FR 42130 (July 21, 2005) (SR–NYSE– 2002–19). On July 14, 2005, the Commission approved on a Pilot Basis expiring July 31, 2007, amendments to Exchange Rule 431 to permit the use of a prescribed risk-based margin requirement (‘‘portfolio margin’’) for certain specified products as an alternative to the strategy based margin requirements currently required in section (a) through (f) of the Rule. Amendments to Rule 726 were also approved to require disclosure to, and written acknowledgment from, customers in connection with the use of portfolio margin. See also NYSE Information Memo 05–56, dated August 18, 2005 for additional information. 4 For purposes of the proposed rule change, term ‘‘security futures’’ utilizes the definition at section 3(a)(55) of the Exchange Act, excluding narrowbased security indexes. 5 See Exchange Act Release No. 53126 (Jan. 13, 2006), 71 FR 3586 Jan. 23, 2006). wwhite on PROD1PC61 with NOTICES 1 15 VerDate Aug<31>2005 16:25 Jul 17, 2006 Jkt 208001 Commission received three comment letters in response to the Federal Register notice.6 The comment letters and the Exchange’s responses to the comments 7 are summarized below. This order approves the proposed rule change. a. Summary of Proposed Rule Change The proposed rule change consists of amendments to NYSE Rule 431 to include listed security futures and listed single stock options as eligible products for customer portfolio margining under the Pilot.8 The proposed rule change also includes amendments to NYSE Rule 726 to conform the required customer disclosure to the changes made in the proposed rule change, including the expansion of eligible products. Section 7(a) 9 of the Exchange Act 10 empowers the Board of Governors of the Federal Reserve System (‘‘Federal Reserve Board’’) to prescribe rules and regulations regarding credit that brokerdealers can extend to their customers on securities transactions. Pursuant to this authority, the Federal Reserve Board adopted Regulation T.11 The Federal Reserve Board, in the 1998 amendments, removed from the scope of Regulation T transactions governed by a portfolio margin rule approved by the Commission.12 The Commodity Futures 6 See letter from Gerard J. Quinn, Vice President and Associate General Counsel, Securities Industry Association, to Nancy M. Morris, Secretary, Commission, dated February 13, 2006 (‘‘SIA Letter’’); letter from Barbara Wierzynski, Executive Vice President and General Counsel, Futures Industry Association, to Nancy M. Morris, Secretary, Commission, dated February 13, 2006 (‘‘FIA Letter’’); and letter from Severino Renna, Director, Citigroup Global Markets, Inc., to Nancy M. Morris, Secretary, dated February 13, 2006 (‘‘Citigroup Letter’’). 7 See letter from Mary Yeager, Assistant Secretary, NYSE, to Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Commission, dated June 2, 2006 (‘‘NYSE Response’’). 8 The list of eligible products under the Pilot currently includes listedbroad-based securities index options, warrants, futures, futures options and related exchange-traded funds. The NYSE also has filed an additional rule change to, among other things, further expand the list of eligible products for the Pilot to include equities and unlisted derivatives. See Exchange Act Release No. 53577 (March 30, 2006), 71 FR 17536 (April 6, 2006) (SR– NYSE–2006–13); see also Exchange Act Release No. 53576 (March 30, 2006), 71 FR 17519 (April 6, 2006) (SR–CBOE–2006–14). The comment period for these proposed rule filings ended on May 11, 2006. 9 15 U.S.C. 78g. 10 15 U.S.C. 78a et seq. 11 12 CFR 220.1 et seq. 12 See Federal Reserve System, ‘‘Securities Credit Transactions; Borrowing by Brokers and Dealers’’; Regulations G, T, U and X; Docket Nos. R–0905, R– 0923 and R–0944, 63 FR 2806 (January 16, 1998). PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 Modernization Act of 2000 (‘‘CFMA’’) authorized the trading of futures on individual stocks and narrow-based stock indexes, i.e., securities futures products.13 Under the CFMA, the Federal Reserve Board has authority to either issue margin rules for securities futures or delegate joint authority to the Commission and the Commodity Futures Trading Commission (‘‘CFTC’’) to issue such rules. The Federal Reserve Board delegated authority to the Commission and CFTC, and in 2002 the Commission and the CFTC jointly issued margin requirements for securities futures products.14 The jointly issued rules exempted from their scope transactions in securities futures products subject to SRO portfolio margin rules.15 NYSE Rule 431 prescribes specific margin requirements for customers based on the type of securities products held in their accounts. In April 1996, the Exchange established the Rule 431 Committee (the ‘‘Committee’’) to assess the adequacy of Rule 431 on an ongoing basis, review margin requirements and make recommendations for change. The Exchange’s Board of Directors has approved a number of proposed amendments resulting from the Committee’s recommendations since the Committee was established.16 The NYSE noted in its rule proposal that the Committee endorsed the proposed rule change discussed below. b. Portfolio Margining Portfolio margining is a methodology for calculating a customer’s margin requirement by ‘‘shocking’’ a portfolio of financial instruments at different equidistant points along a range representing a potential percentage increase and decrease in the value of the instrument or underlying instrument in the case of a derivative product. For example, the calculation points could be spread equidistantly along a range bounded on one end by a 15% increase in market value of the instrument and at the other end by a 15% decrease in market value. Gains and losses for each instrument in the portfolio are netted at 13 Public Law 106–554, 114 Stat. 2763 (2000). Act Release 46292 (August 1, 2002), 67 FR 53146 (August14, 2002). 15 17 CFR 242.400(c)(2). 16 The Committee is composed of several member organizations,including Goldman, Sachs & Co., Morgan Stanley & Co., Inc., Merrill Lynch, Pierce, Fenner and Smith, Inc., Bear Stearns Corp. and Credit Suisse First Boston Corp. and several selfregulatory organizations, including: the NYSE, the Chicago Board Options Exchange, the Options Clearing Corporation (‘‘OCC’’), the American Stock Exchange, the Chicago Board of Trade, the Chicago Mercantile Exchange, and the National Association of Securities Dealers. 14 Exchange E:\FR\FM\18JYN1.SGM 18JYN1

Agencies

[Federal Register Volume 71, Number 137 (Tuesday, July 18, 2006)]
[Notices]
[Pages 40762-40766]
From the Federal Register Online via the Government Printing 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \17\ See Skora Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \19\ See Caruso Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \20\ A party would have five calendar days after the receipt 
ofsubpoenaed documents from a non-party to provide notice to all 
other parties.

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

    \21\ See Pape Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \22\ See Goodman Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \23\  See Canning Letter.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \24\ See Lipner, Caruso, Gross, Canning, and Shockman Letters.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \25\ See Securities Exchange Act Release No. 51981, supra note 
3.
    \26\ See Comment Letters, supra note 6.
---------------------------------------------------------------------------

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 rule-comments@sec.gov. 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\
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-11325 Filed 7-17-06; 8:45 am]
BILLING CODE 8010-01-P