Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 Thereto Relating to Amendments to the Classification of Arbitrators Pursuant To Rule 10308 of the NASD Code of Arbitration Procedure, 62026-62029 [E6-17563]

Download as PDF 62026 Federal Register / Vol. 71, No. 203 / Friday, October 20, 2006 / Notices B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments on the proposed rule change 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 Exchange 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. Comments may be submitted by any of the following methods: jlentini on PROD1PC65 with NOTICES Electronic Comments • Use the Commission’s Internet comment form https://www.sec.gov/ rules/sro.shtml; or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–ISE–2006–62 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–ISE–2006–62. 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 VerDate Aug<31>2005 15:52 Oct 19, 2006 Jkt 211001 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. Copies of such filing also will be available for inspection and copying at the principal office of the ISE. 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 File Number SR–ISE–2006–62 and should be submitted on or before November 13, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 9 Jill M. Peterson, Assistant Secretary. [FR Doc. E6–17564 Filed 10–19–06; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54607; File No. SR–NASD– 2005–094] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 Thereto Relating to Amendments to the Classification of Arbitrators Pursuant To Rule 10308 of the NASD Code of Arbitration Procedure October 16, 2006. I. Introduction On June 17, 2005, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend NASD Rule 10308 relating to the classification of arbitrators as nonpublic or public.3 On August 5, 2005, 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 On September 6, 2006, the Commission approved similar amendments to NYSE Rule 607 1 15 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 NASD filed amendment No. 1 to the proposed rule.4 The proposed rule change, as amended, was published for comment in the Federal Register on August 30, 2005,5 and the Commission received 65 comments on the proposal.6 (SR–NYSE–2005–43) (the ‘‘NYSE Rule Change’’), which also governs securities industry and public arbitrators. The NYSE Rule Change will become effective on Dec. 13, 2006, which is 90 days after the Commission’s approval order was published in the Federal Register. See Exchange Act Release No. 54407 (Sept. 6, 2006), 71 FR 54102 (Sept. 13, 2006). 4 The amendment clarified the rule’s text and purpose, and revised the effective date of the rule. NASD will announce the effective date of the proposed rule change in a Notice to Members to be published no later than 30 days following Commission approval. The effective date will be no later than 60 days following publication of the Notice to Members announcing Commission approval. 5 See Exchange Act Release No. 52332 (Aug. 24, 2005), 70 FR 51395 (Aug. 30, 2005) (the ‘‘Notice’’). 6 Richard H. Levenstein, Kramer, Sopko & Levenstein, P.A., Feb. 1, 2006 (‘‘Levenstein’’); Les Greenberg, Law Offices of Les Greenberg, Oct. 9 2005 (‘‘Greenberg’’); Bradford D. Kaufman, Greenberg Traurig, Oct. 7, 2005 (‘‘Kaufman’’); Jonathan L. Hochman, Schindler Cohen & Hochman LLP, Sept. 30, 2005 (‘‘Hochman’’); Jonathan W. Evans, Jonathan W. Evans and Associates, Sept. 21, 2005 (‘‘Evans’’); Scot Bernstein, Sept. 21, 2005 (‘‘Bernstein’’); John W. Barnes, Sept. 21, 2005 (‘‘Barnes’’); L. Jerome Stanley, Sept. 20, 2005 (‘‘Stanley’’); Dale Ledbetter, Ardorno & Yoss, Sept. 20, 2005 (‘‘Ledbetter’’); Randall R. Heiner, Sept. 20, 2005 (‘‘Heiner’’); Sam T. Brannan, Page Perry, LLC, Sept. 20, 2005 (‘‘Brannan’’); Jason R. Doss, Page Perry, LLC, Sept. 20, 2005 (‘‘Doss’’); William B. Langenbacher, Sept. 20, 2005 (‘‘Langenbacher’’); Steve Parker, Page Perry, LLC, Sept. 20, 2005 (‘‘Parker’’); Jeffrey D. Pederson, Sept. 20, 2005 (‘‘Pederson’’); Martin Seiler, Sept. 20, 2005 (‘‘Seiler’’); Brian Greenman, Sept. 20, 2005 (‘‘Greenman’’); Teresa M. Gillis, Shustak Jalil & Heller, Sept. 20, 2005 (‘‘Gillis’’); William F. Davis, Sept. 20, 2005 (‘‘Davis’’); David Harrison, Spivak & Harrison, Sept. 20, 2005 (‘‘Harrison’’); Susan N. Perkins, Sept. 20, 2005 (‘‘Perkins’’); Mitchell S. Ostwald, Law Offices of Mitchell S. Ostwald, Sept. 20, 2005 (‘‘Ostwald’’); Scot D. Bernstein, Law Offices of Scot D. Bernstein, Sept. 20, 2005 (‘‘Bernstein’’); William F. Galvin, Commonwealth of Massachusetts, Sept. 20, 2005 (‘‘Galvin’’); William P. Torngren, Law Offices of William P. Torngren, Sept. 20, 2005 (‘‘Torngren’’); Charles C. Mihalek and Steven M. McCauley, Charles C. Mihalek, P.S.C., Sept. 20, 2005 (‘‘Mihalek’’); Timothy A. Canning, Sept. 20, 2005 (‘‘Canning’’); Laurance M. Landsman, Block & Landsman, Sept. 20, 2005 (‘‘Landsman’’); Steven J. Gard, Gard Smiley Bishop & Dovin LLP, Sept. 20, 2005 (‘‘Gard’’); Scott L. Silver, Blum & Silver, P.A., Sept. 20, 2005 (‘‘Silver’’); G. Mark Brewer, Brewer Carlson, LLP, Sept. 20, 2005 (‘‘Brewer’’); John D. Hudson, Sept. 20, 2005 (‘‘Hudson’’); Joel A. Goodman, Kalju Nekvasil, Steven Krosschell, and Jennifer Newsom, Goodman & Nekvasil, P.A., Sept. 20, 2005 (‘‘Goodman’’); Jill I. Gross, Barbara Black, and Per Jebsen, Pace Investor Rights Project, Sept. 20, 2005 (‘‘Gross’’); Royal B. Lea, III, Bingham & Lea, and Randall A. Pulman, Pulman, Bresnahan & Pullen, LLP, Sept. 19, 2005 (‘‘Lea’’); Richard P. Ryder, Securities Arbitration Commentator, Inc., Sept. 19, 2005 (‘‘Ryder’’); Alan C. Friedberg, Pendelton, Friedberg, Wilson & Hennessey, P.C., Sept. 19, 2005 (‘‘Friedberg’’); Robert K. Savage, Savage Law Firm, P.A., Sept. 19, 2005 (‘‘Savage’’); Michael Chasen, Sept. 19, 2005 (‘‘Chasen’’); Adam S. Doner, Sept. 19, 2005 (‘‘Doner’’); Jan Graham, Graham Law Offices, Sept. 19, 2005 (‘‘Graham’’); Frederick W. Rosenberg, E:\FR\FM\20OCN1.SGM 20OCN1 Federal Register / Vol. 71, No. 203 / Friday, October 20, 2006 / Notices The majority of commenters are lawyers that represent investors in arbitrations. This order approves the proposed rule change as amended. jlentini on PROD1PC65 with NOTICES II. Description of the Proposal The purpose of the proposed rule change is to amend the arbitrator classification criteria in Rule 10308 of the NASD Code of Arbitration Procedure (‘‘Code’’) to ensure that individuals with significant ties to the securities industry may not serve as public arbitrators in NASD arbitrations. The Code classifies arbitrators as public or non-public. When investors have a dispute with member firms or associated persons in NASD arbitration that involves claims of no more than $50,000, they are entitled to have their cases heard by a panel consisting of one public arbitrator or, if the dispute involves a claim of more than $50,000, a panel consisting of two public arbitrators and one non-public arbitrator.7 Under current NASD Rule 10308(a)(4), a person is classified as a non-public arbitrator if he or she: (A) Is, or within the past 5 years, was: (i) Associated with a broker or a dealer (including a government securities broker or dealer or a municipal securities dealer); Sept. 19, 2005 (‘‘Rosenberg’’); Debra G. Speyer, Law Offices of Debra G. Speyer, Sept. 19, 2005 (‘‘Speyer’’); Andrew Stoltmann, Stoltmann Law Offices, P.C., Sept. 19, 2005 (‘‘Stoltmann’’); Al Van Kampen, Rohde & Van Kampen PLLC, Sept. 19, 2005 (‘‘Van Kampen’’); Elliott Goldstein, Sept. 19, 2005 (‘‘Goldstein’’); W. Scott Greco, Greco & Greco, P.C., Sept. 18, 2005 (‘‘Greco’’); Barry D. Estell, Sept. 18, 2005 (‘‘Estell’’); Charles W. Austin, Jr., C. W. Austin, Jr. P.C., Sept. 17, 2005 (‘‘Austin’’); Robert C. Port, Cohen Goldstein Port & Gottlieb, LLP, Sept. 16, 2005 (‘‘Port’’); Kurt Arbuckle, Sept. 16, 2005 (‘‘Arbuckle’’); Bill Fynes, Sept. 15, 2005 (‘‘Fynes’’); Jeffrey A. Feldman, Sept. 15, 2005 (‘‘Feldman’’); Jay H. Salamon, Hermann, Cahn & Schneider LLP, Sept. 14, 2005 (‘‘Salamon’’); Steven B. Caruso, Maddox Hargett & Caruso, P.C., Sept. 14, 2005 (‘‘Caruso’’); Jorge A. Lopez, Law Offices of Jorge A. Lopez, P.A., Sept. 14, 2005 (‘‘Lopez’’); Michael J. Willner, Miller Faucher And Cafferty LLP, Sept. 13, 2005 (‘‘Willner’’); Jeffrey S. Kruske, Law Offices of Jeffrey S. Kruske, P.A., Sept. 13, 2005 (‘‘Kruske’’); Richard M. Layne, Layne Lewis, LLP, Sept. 13, 2005 (‘‘Layne’’); John Miller, Law Offices of John J. Miller, P.C., Sept. 13, 2005 (‘‘Miller’’), Herb Pounds, Sept. 13, 2005 (‘‘Pounds’’); Laurence S. Schultz, Driggers, Schultz & Herbst, Sept. 12, 2005 (‘‘Schultz’’); Rosemary J. Shockman, Public Investors Arbitration Bar Association, Sept. 9, 2005 (‘‘PIABA’’); Seth E. Lipner, Baruch College and Deutsch & Lipner, Sept. 8, 2005 (‘‘Lipner’’); and Scott I. Batterman, Clay Chapman Crumpton Iwamura and Pulice, Aug. 30, 2005 (‘‘Batterman’’). 7 NASD Rule 10308(b)(1). The panel composition for intra-industry disputes (not involving any parties who are investors) is governed by NASD Rule 10202. Depending on the nature of the dispute, intra-industry panels may consist of all public arbitrators, all non-public arbitrators, or a majority of public arbitrators. The arbitrator classification provisions of NASD Rule 10308 apply to all such panels. VerDate Aug<31>2005 15:52 Oct 19, 2006 Jkt 211001 (ii) Registered under the Commodity Exchange Act; (iii) A member of a commodities exchange or a registered futures association; or (iv) Associated with a person or firm registered under the Commodity Exchange Act; (B) Is retired from, or spent a substantial part of a career, engaging in any of the business activities listed in subparagraph (4)(A); (C) Is an attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last two years, to clients who are engaged in any of the business activities listed in subparagraph (4)(A); or (D) Is an employee of a bank or other financial institution and effects transactions in securities, including government or municipal securities, and commodities futures or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities. Current NASD Rule 10308(a)(5) sets forth the criteria for public arbitrators. In particular, a person is allowed to serve as a public arbitrator if he or she is not engaged in the conduct described in paragraphs (A) through (D) of NASD Rule 10308(a)(4), was not engaged in that conduct for 20 or more years, is not an investment adviser, and is not ‘‘an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past 2 years from any persons or entities listed in paragraph (a)(4)(A).’’ 8 The current rule also excludes the spouse or an immediate family member of a person engaged in the conduct described in paragraphs (A) through (D) of NASD Rule 10308(a)(4) from serving as a public arbitrator.9 In order to ensure that individuals with significant ties to the securities industry may not serve as public arbitrators in NASD arbitrations, NASD proposed to amend the definition of public arbitrator to exclude individuals who work for, or are officers or directors of, an entity that controls, is controlled by, or is under common control with a partnership, corporation, or other organization that is engaged in the securities business.10 The amendment 8 NASD Rule 10308(a)(5)(A)(i)–(iv). Rule 10308(a)(5)(A)(v). 10 For purposes of this rule, the term ‘‘control’’ has the same meaning that it has for purposes of Form BD, which broker-dealers use to register with NASD and to make periodic updates. Specifically, control is defined as: The power, directly or indirectly, to direct the management or policies of a company, whether 9 NASD PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 62027 also applies to individuals who have a spouse or immediate family member who works for, or is an officer or director of, an entity that is in such a control relationship with a partnership, corporation, or other organization that is engaged in the securities business, such as a broker-dealer. Under the current rule, such individuals may be considered public arbitrators. For example, a person who works for a real estate firm that is under common control with, and perhaps shares the same corporate name of, a broker-dealer may be classified as a public arbitrator under current rules. Because investors may view such an arbitrator as not truly ‘‘public,’’ NASD proposed to revise the definition of public arbitrator as described above. In addition, NASD proposed to revise the definition of non-public arbitrator to clarify that persons who are registered with a broker-dealer may not be classified as public arbitrators. Under current rules, arbitrators who are associated with a broker or dealer are considered non-public. In the financial services industry, it is not uncommon for a person to be employed by one company (such as a bank or insurance company) and to be registered to sell securities through another company (such as an affiliated broker-dealer). NASD believes that there may be some uncertainty among arbitrators who work for entities in a control relationship with a broker-dealer as to whether they are associated with a broker-dealer for purposes of NASD Rule 10308, even though they are registered with the broker-dealer. Because the definition of ‘‘person associated with a member’’ in the NASD By-Laws includes persons who are registered with a broker-dealer, regardless of their status as employees, such persons are considered non-public arbitrators. Therefore, NASD proposes to amend the definition of non-public arbitrator to specifically include anyone registered with a broker-dealer.11 through ownership of securities, by contract, or otherwise. Any person that (i) is a director, general partner or officer exercising executive responsibility (or having similar status or functions); (ii) directly or indirectly has the right to vote 25% or more of a class of a voting security or has the power to sell or direct the sale of 25% or more of a class of voting securities; or (iii) in the case of a partnership, has the right to receive upon dissolution, or has contributed, 25% or more of the capital, is presumed to control that company. See Uniform Application for Broker-Dealer Registration (Form BD). 11 For purposes of NASD Rule 10308(a)(4)(A)(i), the term ‘‘including’’ is expanding or illustrative, not exclusive or limiting. The use of the term ‘‘including but not limited to’’ in NASD Rule 10321(d) of the Code is not intended to create a negative implication regarding the use of E:\FR\FM\20OCN1.SGM Continued 20OCN1 62028 Federal Register / Vol. 71, No. 203 / Friday, October 20, 2006 / Notices III. Summary of Comments The Commission received 65 comments on the proposal.12 Several commenters believed that the changes proposed were laudatory.13 Many viewed the proposed amendments as insufficient to address what they considered to be an arbitration process that is unfair to investors. Their concerns generally centered in three areas: (1) The inclusion of any nonpublic arbitrators on arbitration panels; (2) the criteria for qualifying as a nonpublic or public arbitrator; and (3) the desire to harmonize NASD and NYSE rules on this issue.14 jlentini on PROD1PC65 with NOTICES Inclusion of Non-Public Arbitrators The majority of commenters expressed the view that the mandatory inclusion of arbitrators who are involved in the securities industry on arbitration panels creates an unfair burden for investors seeking redress, and stated that arbitration panels should be comprised only of individuals with no ties to the securities industry.15 A number of commenters maintained that the mandatory inclusion of non-public arbitrators creates a perception that the process is unfair and biased against investors,16 and some suggested eliminating the non-public arbitrator.17 Two commenters stated that any required securities industry expertise should come from expert testimony, thereby negating the need for a nonpublic arbitrator on a panel.18 Another commenter opined that non-public arbitrators face pressure from their firms to prevent or to reduce damage awards against the securities industry.19 One commenter stated that overturning the ‘‘including’’ without the term ‘‘but not limited to’’ in NASD Rule 10308(a)(4)(A)(i) or other provisions of the Code. 12 See footnote 6. 13 See, e.g., Barnes, Chasen, Gross, Kaufman, Lipner, PIABA, Pounds, and Rosenberg. 14 Many of these comments also applied to the NYSE Rule Change and were also addressed by the NYSE. See Letter from Mary Yeager, Assistant Secretary, NYSE, to Katherine A. England, Assistant Director, SEC, dated June 5, 2006, available at: https://www.sec.gov/rules/sro/nyse/nyse200543/ myeager060506.pdf. 15 See, e.g., Arbuckle, Austin, Barnes, Bernstein, Brewer, Canning, Caruso, Chasen, Davis, Doner, Doss, Estell, Evans, Feldman, Friedberg, Fynes, Gard, Gillis, Goldstein, Goodman, Graham, Greco, Greenman, Harrison, Heiner, Hudson, Kampen, Kruske, Landsman, Langenbacher, Layne, Lea, Ledbetter, Levenstein, Lipner, Lopez, Mihalek, Miller, Ostwald, Parker, Pederson, Perkins, PIABA, Port, Pounds, Salamon, Savage, Schultz, Seiler, Silver, Stoltmann, Torngren, and Willner. 16 See, e.g., Galvin, Gillis, Greco, Greenberg, Harrison, Heiner, Lopez, Salamon, Torngren, and Willner. 17 See, e.g., Davis, Harrison, Ostwald, and Torngren. 18 Brannan and Lopez. 19 Feldman. VerDate Aug<31>2005 15:52 Oct 19, 2006 Jkt 211001 factual findings of an arbitration panel on appeal is significantly more difficult than overturning the factual findings of a jury, and thus it is critical to establish the objectivity of panel members by removing the non-public arbitrator.20 Another commenter stated that arbitration should be voluntary because, in his view, non-public arbitrators are inherently biased.21 Criteria for Non-Public and Public Arbitrators Several commenters also stated that the proposed rule change would neither adequately preclude persons with ties, either directly or through their firms, to the securities industry from meeting the definition of public arbitrator, nor would it thoroughly include such people within the definition of nonpublic arbitrator.22 In particular, commenters criticized two existing provisions in the current Rule. First, they commented that current NASD Rule 10308(a)(4)(C) defines a non-public arbitrator to include any attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last two years, to brokerage or commodity firms or their associated persons. Second, they noted that current NASD Rule 10308(a)(5)(A)(iv) provides that an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past two years from brokerage or commodity firms or their associated persons is precluded from being a public arbitrator. One commenter stated that the definition of non-public arbitrator should be amended to remove the 20 percent threshold and instead include all attorneys, accountants or other professionals who have devoted ‘‘any’’ work to the securities industry.23 Another opined that both the 20 percent and 10 percent limitations are too liberal and they fail to address the conflicts these professionals are subject to.24 In this commenter’s view, public arbitrators should have no role in representing securities or commodities firms. One commenter stated that the 10 percent threshold ‘‘is arbitrary and has 20 Pederson. 21 Mihalek. 22 See, e.g., Caruso, Evans, Galvin, Lipner, Lopez, and PIABA. 23 Caruso. The commenter noted that the preclusion should apply to individuals that have represented clients in the securities industry for the last 5 years. NASD Rule 10308(a)(4)(C) currently applies only to activities in the last two years. 24 Galvin. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 no practical or legal significance.’’ 25 The commenter stated that large law firms may represent securities industry clients that generate millions of dollars in fees, but still may not exceed 10 percent of the firm’s revenues. It further stated that ‘‘an attorney who represents industry clients which comprise less than 10 percent of the firm’s annual revenue in the past two years, has the same obligation, commitment and duty of loyalty to the client as does the attorney with clients who equal or exceed the 10 percent limit.’’ 26 Another commenter stated that ‘‘an attorney whose firm represents any securities industry clients is inescapably subject to the securities industry influence regardless of the percentage of industry business.’’ 27 This commenter remarked that even firms with a small percentage of securities industry business would like to have more. Some commenters recommended eliminating the 10 percent threshold and, as a result, excluding from the definition of public arbitrator all attorneys, accountants or other professionals whose firms have derived any revenue from the securities industry in the last two years.28 Two commenters opined that, at a minimum, NASD should remove all defense lawyers who represent the securities industry from the pool of public arbitrators.29 Harmonizing NYSE and NASD Rules One commenter expressed concern that the proposed rule change would ‘‘differ significantly’’ from the Uniform Code of Arbitration (‘‘UCA’’) classification rule, and stated that NASD’s proposed rule change and the NYSE Rule Change should have been ‘‘brought to the Commission with the same text after being vetted by SICA’’ (the Securities Industry Conference on Arbitration).30 In this commenter’s view, the Commission should compel NASD and the NYSE to develop ‘‘identical solutions’’ to this issue.31 25 PIABA. 26 Id. 27 Bernstein. 28 Evans, Bernstein, PIABA, and Schultz. and Lipner. 29 Feldman 30 Ryder. 31 Id. In particular, this commenter highlighted the differences in relatives who would be considered an ‘‘immediate family member’’ under each rule. The NASD proposal would exclude immediate family members of all control-related parties from serving as public arbitrators, while the NYSE Rule Change excluded only immediate family members of associated persons. The NASD proposal also would include step-relatives, while the NYSE Rule Change did not. Finally, the NASD proposal does not include in-laws within the definition of control-related parties, while the NYSE Rule Change did not. E:\FR\FM\20OCN1.SGM 20OCN1 Federal Register / Vol. 71, No. 203 / Friday, October 20, 2006 / Notices 62029 V. Discussion and Commission Findings VI. Conclusion As a preliminary matter, NASD stated that suggestions that non-public arbitrators should be eliminated from arbitration panels were beyond the scope of the rule filing, which applies to the classification of arbitrators and not the composition of arbitration panels.32 NASD also stated that the current definitions of non-public arbitrator and public arbitrator, in conjunction with the proposed rule change, will properly exclude individuals with significant ties to the securities industry from being classified as public arbitrators.33 It stressed that the proposed rule change eliminates from the definition of public arbitrator both persons with ‘‘actual bias’’ and those ‘‘perceived as being biased.’’ NASD noted that its rules already prohibit professionals from serving as public arbitrators if they have devoted 20 percent or more of their work in the last two years to securities industry clients. It also stated that it has taken the additional step in the current rule to exclude from the definition of public arbitrator professionals whose firm derived 10 percent or more of its annual revenue in the past two years from securities industry clients.34 NASD further commented that it is not necessary for its rules with respect to the classification of arbitrators to be identical to those of the NYSE, and noted existing differences, such as the 10 percent threshold for certain professionals, between its rules and the NYSE rule.35 Regarding the proposed amendment to prohibit certain family members or relatives of certain family members who work for a controlled entity from serving as public arbitrators, NASD stated that it drafted this proposal to ensure that individuals with significant ties to the securities industry do not serve as public arbitrators.36 jlentini on PROD1PC65 with NOTICES IV. NASD Response to Comments After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the provisions of Section 15A(b)(6) 37 of the Act, which require, among other things, NASD’s rules to 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.38 The Commission believes that the proposed rule change will promote the public interest by limiting certain people who have ties to the securities industry from serving as public arbitrators. In particular, by expanding the list of entities controlled by companies engaged in the securities business, the rule will further limit the industry ties the public arbitrator may have. The inclusion of immediate family members within the list of controlled parties who may not be public arbitrators should have a similar result.39 In addition, reminding persons registered with broker-dealers that they are associated persons of a broker-dealer should further assist in the correct classification of these persons as nonpublic arbitrators.40 The Commission appreciates the comments suggesting the elimination of non-public arbitrators, and the further restriction on persons who have any ties to the securities industry from serving as public arbitrators. While these comments are beyond the scope of this rule filing, they raise important questions regarding the arbitration process. We understand that SICA is actively considering proposals from its membership regarding these issues. We note that NASD has stated that it will review any rule regarding panel composition that SICA adopts to the UCA, and that it is considering further amendments to the definitions of public arbitrator and non-public arbitrator.41 It is therefore ordered, pursuant to Section 19(b)(2) of the Act 42 that the proposed rule change, as amended (SR– NASD–2005–094), be, and hereby is, approved. 32 See letter from John D. Nachmann, Counsel, NASD, to Lourdes Gonzalez, Assistant Chief Counsel—Sales Practices, SEC, dated Aug. 23, 2006, available at: https://www.sec.gov/rules/sro/nasd/ nasd2005094/nasd2005094–65.pdf. 33 Id. 34 Id. NASD noted that its rules already prohibit the following individuals from serving as public arbitrators: (1) Anyone associated with securities industry during the past five years, (2) anyone who has spent 20 or more years in the securities industry, and (3) anyone who is the spouse or immediate family member of a person who is associated with the securities industry. NASD Rules 10308(a)(4)–(5). 35 Similar to the current NASD Rule 10308(a)(4)(C), NYSE Rule 607(A)(2)(iv) defines an industry arbitrator to include any attorney, accountant or other professional who has devoted 20 percent or more of his or her work to securities industry clients within the last two years. 36 Id. VerDate Aug<31>2005 15:52 Oct 19, 2006 Jkt 211001 37 15 U.S.C. 78o–3(b)(6). approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 39 Section 19(b)(2) of the Act requires the Commission to approve a proposed rule change if it finds that the proposed rule change is consistent with the requirements of the Act, and the applicable rules and regulations thereunder. This standard does not require NASD rules to be identical to rules adopted by the NYSE or by SICA. 40 The Commission notes that persons employed by a broker-dealer (other than in a clerical or ministerial capacity) are associated persons of a broker-dealer as defined in Section 3(a)(18) of the Act. 41 Telephone conversation between John D. Nachmann, Counsel, NASD, and Michael Hershaft, Special Counsel, SEC (Oct. 3, 2006). 38 In PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Market Regulation, pursuant to delegated authority.43 Jill M. Peterson, Assistant Secretary. [FR Doc. E6–17563 Filed 10–19–06; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54597; File No. SR– NYSEArca–2006–21] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving Proposed Rule Change Relating to NYSE Arca Data October 12, 2006. I. Introduction On May 23, 2006, the NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to establish fees for the receipt and use of certain market data that the Exchange makes available. The proposal was published for comment in the Federal Register on June 9, 2006.3 The Commission received four comment letters regarding the proposal.4 On July 25, 2006, and August 25, 2006, the Exchange filed letters responding to the issues raised in the 42 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 53952 (June 7, 2006), 71 FR 33496. 4 See letters from Gregory Babyak, Chair, Market Data Subcommittee, the Securities Industry Association (‘‘SIA’’), and Christopher Gilkerson, Chair, Technology and Regulation Committee, SIA, to Nancy M. Morris, Secretary, SEC, dated June 30, 2006 (‘‘SIA Letter I’’), and August 18, 2006 (‘‘SIA Letter II’’); web comment from Steven C. Spencer, Esq., dated June 18, 2006 (‘‘Spencer Letter’’); and letter from Markham C. Erickson, Executive Director and General Counsel, Netcoalition, to the Honorable Christopher Cox, Chairman, SEC, dated August 9, 2006 (‘‘Netcoalition Letter’’). SIA Letters I and II also provide comments concerning File No. SR–NYSE Arca–2006–23, NYSE Arca’s proposal to establish a pilot program setting fees for the receipt and use of market data relating to NYSE Arca’s best bids and offers. The Netcoalition Letter’s comments also apply to File Nos. SR–NYSE Arca–2006–23; SR–NASD–2005–056; and SR–NASD–2006–072. 43 17 E:\FR\FM\20OCN1.SGM 20OCN1

Agencies

[Federal Register Volume 71, Number 203 (Friday, October 20, 2006)]
[Notices]
[Pages 62026-62029]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-17563]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54607; File No. SR-NASD-2005-094]


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

October 16, 2006.

I. Introduction

    On June 17, 2005, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NASD Rule 10308 relating 
to the classification of arbitrators as non-public or public.\3\ On 
August 5, 2005, NASD filed amendment No. 1 to the proposed rule.\4\ The 
proposed rule change, as amended, was published for comment in the 
Federal Register on August 30, 2005,\5\ and the Commission received 65 
comments on the proposal.\6\

[[Page 62027]]

The majority of commenters are lawyers that represent investors in 
arbitrations. This order approves the proposed rule change as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On September 6, 2006, the Commission approved similar 
amendments to NYSE Rule 607 (SR-NYSE-2005-43) (the ``NYSE Rule 
Change''), which also governs securities industry and public 
arbitrators. The NYSE Rule Change will become effective on Dec. 13, 
2006, which is 90 days after the Commission's approval order was 
published in the Federal Register. See Exchange Act Release No. 
54407 (Sept. 6, 2006), 71 FR 54102 (Sept. 13, 2006).
    \4\ The amendment clarified the rule's text and purpose, and 
revised the effective date of the rule. NASD will announce the 
effective date of the proposed rule change in a Notice to Members to 
be published no later than 30 days following Commission approval. 
The effective date will be no later than 60 days following 
publication of the Notice to Members announcing Commission approval.
    \5\ See Exchange Act Release No. 52332 (Aug. 24, 2005), 70 FR 
51395 (Aug. 30, 2005) (the ``Notice'').
    \6\ Richard H. Levenstein, Kramer, Sopko & Levenstein, P.A., 
Feb. 1, 2006 (``Levenstein''); Les Greenberg, Law Offices of Les 
Greenberg, Oct. 9 2005 (``Greenberg''); Bradford D. Kaufman, 
Greenberg Traurig, Oct. 7, 2005 (``Kaufman''); Jonathan L. Hochman, 
Schindler Cohen & Hochman LLP, Sept. 30, 2005 (``Hochman''); 
Jonathan W. Evans, Jonathan W. Evans and Associates, Sept. 21, 2005 
(``Evans''); Scot Bernstein, Sept. 21, 2005 (``Bernstein''); John W. 
Barnes, Sept. 21, 2005 (``Barnes''); L. Jerome Stanley, Sept. 20, 
2005 (``Stanley''); Dale Ledbetter, Ardorno & Yoss, Sept. 20, 2005 
(``Ledbetter''); Randall R. Heiner, Sept. 20, 2005 (``Heiner''); Sam 
T. Brannan, Page Perry, LLC, Sept. 20, 2005 (``Brannan''); Jason R. 
Doss, Page Perry, LLC, Sept. 20, 2005 (``Doss''); William B. 
Langenbacher, Sept. 20, 2005 (``Langenbacher''); Steve Parker, Page 
Perry, LLC, Sept. 20, 2005 (``Parker''); Jeffrey D. Pederson, Sept. 
20, 2005 (``Pederson''); Martin Seiler, Sept. 20, 2005 (``Seiler''); 
Brian Greenman, Sept. 20, 2005 (``Greenman''); Teresa M. Gillis, 
Shustak Jalil & Heller, Sept. 20, 2005 (``Gillis''); William F. 
Davis, Sept. 20, 2005 (``Davis''); David Harrison, Spivak & 
Harrison, Sept. 20, 2005 (``Harrison''); Susan N. Perkins, Sept. 20, 
2005 (``Perkins''); Mitchell S. Ostwald, Law Offices of Mitchell S. 
Ostwald, Sept. 20, 2005 (``Ostwald''); Scot D. Bernstein, Law 
Offices of Scot D. Bernstein, Sept. 20, 2005 (``Bernstein''); 
William F. Galvin, Commonwealth of Massachusetts, Sept. 20, 2005 
(``Galvin''); William P. Torngren, Law Offices of William P. 
Torngren, Sept. 20, 2005 (``Torngren''); Charles C. Mihalek and 
Steven M. McCauley, Charles C. Mihalek, P.S.C., Sept. 20, 2005 
(``Mihalek''); Timothy A. Canning, Sept. 20, 2005 (``Canning''); 
Laurance M. Landsman, Block & Landsman, Sept. 20, 2005 
(``Landsman''); Steven J. Gard, Gard Smiley Bishop & Dovin LLP, 
Sept. 20, 2005 (``Gard''); Scott L. Silver, Blum & Silver, P.A., 
Sept. 20, 2005 (``Silver''); G. Mark Brewer, Brewer Carlson, LLP, 
Sept. 20, 2005 (``Brewer''); John D. Hudson, Sept. 20, 2005 
(``Hudson''); Joel A. Goodman, Kalju Nekvasil, Steven Krosschell, 
and Jennifer Newsom, Goodman & Nekvasil, P.A., Sept. 20, 2005 
(``Goodman''); Jill I. Gross, Barbara Black, and Per Jebsen, Pace 
Investor Rights Project, Sept. 20, 2005 (``Gross''); Royal B. Lea, 
III, Bingham & Lea, and Randall A. Pulman, Pulman, Bresnahan & 
Pullen, LLP, Sept. 19, 2005 (``Lea''); Richard P. Ryder, Securities 
Arbitration Commentator, Inc., Sept. 19, 2005 (``Ryder''); Alan C. 
Friedberg, Pendelton, Friedberg, Wilson & Hennessey, P.C., Sept. 19, 
2005 (``Friedberg''); Robert K. Savage, Savage Law Firm, P.A., Sept. 
19, 2005 (``Savage''); Michael Chasen, Sept. 19, 2005 (``Chasen''); 
Adam S. Doner, Sept. 19, 2005 (``Doner''); Jan Graham, Graham Law 
Offices, Sept. 19, 2005 (``Graham''); Frederick W. Rosenberg, Sept. 
19, 2005 (``Rosenberg''); Debra G. Speyer, Law Offices of Debra G. 
Speyer, Sept. 19, 2005 (``Speyer''); Andrew Stoltmann, Stoltmann Law 
Offices, P.C., Sept. 19, 2005 (``Stoltmann''); Al Van Kampen, Rohde 
& Van Kampen PLLC, Sept. 19, 2005 (``Van Kampen''); Elliott 
Goldstein, Sept. 19, 2005 (``Goldstein''); W. Scott Greco, Greco & 
Greco, P.C., Sept. 18, 2005 (``Greco''); Barry D. Estell, Sept. 18, 
2005 (``Estell''); Charles W. Austin, Jr., C. W. Austin, Jr. P.C., 
Sept. 17, 2005 (``Austin''); Robert C. Port, Cohen Goldstein Port & 
Gottlieb, LLP, Sept. 16, 2005 (``Port''); Kurt Arbuckle, Sept. 16, 
2005 (``Arbuckle''); Bill Fynes, Sept. 15, 2005 (``Fynes''); Jeffrey 
A. Feldman, Sept. 15, 2005 (``Feldman''); Jay H. Salamon, Hermann, 
Cahn & Schneider LLP, Sept. 14, 2005 (``Salamon''); Steven B. 
Caruso, Maddox Hargett & Caruso, P.C., Sept. 14, 2005 (``Caruso''); 
Jorge A. Lopez, Law Offices of Jorge A. Lopez, P.A., Sept. 14, 2005 
(``Lopez''); Michael J. Willner, Miller Faucher And Cafferty LLP, 
Sept. 13, 2005 (``Willner''); Jeffrey S. Kruske, Law Offices of 
Jeffrey S. Kruske, P.A., Sept. 13, 2005 (``Kruske''); Richard M. 
Layne, Layne Lewis, LLP, Sept. 13, 2005 (``Layne''); John Miller, 
Law Offices of John J. Miller, P.C., Sept. 13, 2005 (``Miller''), 
Herb Pounds, Sept. 13, 2005 (``Pounds''); Laurence S. Schultz, 
Driggers, Schultz & Herbst, Sept. 12, 2005 (``Schultz''); Rosemary 
J. Shockman, Public Investors Arbitration Bar Association, Sept. 9, 
2005 (``PIABA''); Seth E. Lipner, Baruch College and Deutsch & 
Lipner, Sept. 8, 2005 (``Lipner''); and Scott I. Batterman, Clay 
Chapman Crumpton Iwamura and Pulice, Aug. 30, 2005 (``Batterman'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The purpose of the proposed rule change is to amend the arbitrator 
classification criteria in Rule 10308 of the NASD Code of Arbitration 
Procedure (``Code'') to ensure that individuals with significant ties 
to the securities industry may not serve as public arbitrators in NASD 
arbitrations.
    The Code classifies arbitrators as public or non-public. When 
investors have a dispute with member firms or associated persons in 
NASD arbitration that involves claims of no more than $50,000, they are 
entitled to have their cases heard by a panel consisting of one public 
arbitrator or, if the dispute involves a claim of more than $50,000, a 
panel consisting of two public arbitrators and one non-public 
arbitrator.\7\
---------------------------------------------------------------------------

    \7\ NASD Rule 10308(b)(1). The panel composition for intra-
industry disputes (not involving any parties who are investors) is 
governed by NASD Rule 10202. Depending on the nature of the dispute, 
intra-industry panels may consist of all public arbitrators, all 
non-public arbitrators, or a majority of public arbitrators. The 
arbitrator classification provisions of NASD Rule 10308 apply to all 
such panels.
---------------------------------------------------------------------------

    Under current NASD Rule 10308(a)(4), a person is classified as a 
non-public arbitrator if he or she:
    (A) Is, or within the past 5 years, was:
    (i) Associated with a broker or a dealer (including a government 
securities broker or dealer or a municipal securities dealer);
    (ii) Registered under the Commodity Exchange Act;
    (iii) A member of a commodities exchange or a registered futures 
association; or
    (iv) Associated with a person or firm registered under the 
Commodity Exchange Act;
    (B) Is retired from, or spent a substantial part of a career, 
engaging in any of the business activities listed in subparagraph 
(4)(A);
    (C) Is an attorney, accountant, or other professional who has 
devoted 20 percent or more of his or her professional work, in the last 
two years, to clients who are engaged in any of the business activities 
listed in subparagraph (4)(A); or
    (D) Is an employee of a bank or other financial institution and 
effects transactions in securities, including government or municipal 
securities, and commodities futures or options or supervises or 
monitors the compliance with the securities and commodities laws of 
employees who engage in such activities.
    Current NASD Rule 10308(a)(5) sets forth the criteria for public 
arbitrators. In particular, a person is allowed to serve as a public 
arbitrator if he or she is not engaged in the conduct described in 
paragraphs (A) through (D) of NASD Rule 10308(a)(4), was not engaged in 
that conduct for 20 or more years, is not an investment adviser, and is 
not ``an attorney, accountant, or other professional whose firm derived 
10 percent or more of its annual revenue in the past 2 years from any 
persons or entities listed in paragraph (a)(4)(A).'' \8\ The current 
rule also excludes the spouse or an immediate family member of a person 
engaged in the conduct described in paragraphs (A) through (D) of NASD 
Rule 10308(a)(4) from serving as a public arbitrator.\9\
---------------------------------------------------------------------------

    \8\ NASD Rule 10308(a)(5)(A)(i)-(iv).
    \9\ NASD Rule 10308(a)(5)(A)(v).
---------------------------------------------------------------------------

    In order to ensure that individuals with significant ties to the 
securities industry may not serve as public arbitrators in NASD 
arbitrations, NASD proposed to amend the definition of public 
arbitrator to exclude individuals who work for, or are officers or 
directors of, an entity that controls, is controlled by, or is under 
common control with a partnership, corporation, or other organization 
that is engaged in the securities business.\10\ The amendment also 
applies to individuals who have a spouse or immediate family member who 
works for, or is an officer or director of, an entity that is in such a 
control relationship with a partnership, corporation, or other 
organization that is engaged in the securities business, such as a 
broker-dealer. Under the current rule, such individuals may be 
considered public arbitrators. For example, a person who works for a 
real estate firm that is under common control with, and perhaps shares 
the same corporate name of, a broker-dealer may be classified as a 
public arbitrator under current rules. Because investors may view such 
an arbitrator as not truly ``public,'' NASD proposed to revise the 
definition of public arbitrator as described above.
---------------------------------------------------------------------------

    \10\ For purposes of this rule, the term ``control'' has the 
same meaning that it has for purposes of Form BD, which broker-
dealers use to register with NASD and to make periodic updates. 
Specifically, control is defined as:
    The power, directly or indirectly, to direct the management or 
policies of a company, whether through ownership of securities, by 
contract, or otherwise. Any person that (i) is a director, general 
partner or officer exercising executive responsibility (or having 
similar status or functions); (ii) directly or indirectly has the 
right to vote 25% or more of a class of a voting security or has the 
power to sell or direct the sale of 25% or more of a class of voting 
securities; or (iii) in the case of a partnership, has the right to 
receive upon dissolution, or has contributed, 25% or more of the 
capital, is presumed to control that company.
    See Uniform Application for Broker-Dealer Registration (Form 
BD).
---------------------------------------------------------------------------

    In addition, NASD proposed to revise the definition of non-public 
arbitrator to clarify that persons who are registered with a broker-
dealer may not be classified as public arbitrators. Under current 
rules, arbitrators who are associated with a broker or dealer are 
considered non-public. In the financial services industry, it is not 
uncommon for a person to be employed by one company (such as a bank or 
insurance company) and to be registered to sell securities through 
another company (such as an affiliated broker-dealer). NASD believes 
that there may be some uncertainty among arbitrators who work for 
entities in a control relationship with a broker-dealer as to whether 
they are associated with a broker-dealer for purposes of NASD Rule 
10308, even though they are registered with the broker-dealer. Because 
the definition of ``person associated with a member'' in the NASD By-
Laws includes persons who are registered with a broker-dealer, 
regardless of their status as employees, such persons are considered 
non-public arbitrators. Therefore, NASD proposes to amend the 
definition of non-public arbitrator to specifically include anyone 
registered with a broker-dealer.\11\
---------------------------------------------------------------------------

    \11\ For purposes of NASD Rule 10308(a)(4)(A)(i), the term 
``including'' is expanding or illustrative, not exclusive or 
limiting. The use of the term ``including but not limited to'' in 
NASD Rule 10321(d) of the Code is not intended to create a negative 
implication regarding the use of ``including'' without the term 
``but not limited to'' in NASD Rule 10308(a)(4)(A)(i) or other 
provisions of the Code.

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

[[Page 62028]]

III. Summary of Comments

    The Commission received 65 comments on the proposal.\12\ Several 
commenters believed that the changes proposed were laudatory.\13\ Many 
viewed the proposed amendments as insufficient to address what they 
considered to be an arbitration process that is unfair to investors. 
Their concerns generally centered in three areas: (1) The inclusion of 
any non-public arbitrators on arbitration panels; (2) the criteria for 
qualifying as a non-public or public arbitrator; and (3) the desire to 
harmonize NASD and NYSE rules on this issue.\14\
---------------------------------------------------------------------------

    \12\ See footnote 6.
    \13\ See, e.g., Barnes, Chasen, Gross, Kaufman, Lipner, PIABA, 
Pounds, and Rosenberg.
    \14\ Many of these comments also applied to the NYSE Rule Change 
and were also addressed by the NYSE. See Letter from Mary Yeager, 
Assistant Secretary, NYSE, to Katherine A. England, Assistant 
Director, SEC, dated June 5, 2006, available at: https://www.sec.gov/
rules/sro/nyse/nyse200543/myeager060506.pdf.
---------------------------------------------------------------------------

Inclusion of Non-Public Arbitrators

    The majority of commenters expressed the view that the mandatory 
inclusion of arbitrators who are involved in the securities industry on 
arbitration panels creates an unfair burden for investors seeking 
redress, and stated that arbitration panels should be comprised only of 
individuals with no ties to the securities industry.\15\ A number of 
commenters maintained that the mandatory inclusion of non-public 
arbitrators creates a perception that the process is unfair and biased 
against investors,\16\ and some suggested eliminating the non-public 
arbitrator.\17\
---------------------------------------------------------------------------

    \15\ See, e.g., Arbuckle, Austin, Barnes, Bernstein, Brewer, 
Canning, Caruso, Chasen, Davis, Doner, Doss, Estell, Evans, Feldman, 
Friedberg, Fynes, Gard, Gillis, Goldstein, Goodman, Graham, Greco, 
Greenman, Harrison, Heiner, Hudson, Kampen, Kruske, Landsman, 
Langenbacher, Layne, Lea, Ledbetter, Levenstein, Lipner, Lopez, 
Mihalek, Miller, Ostwald, Parker, Pederson, Perkins, PIABA, Port, 
Pounds, Salamon, Savage, Schultz, Seiler, Silver, Stoltmann, 
Torngren, and Willner.
    \16\  See, e.g., Galvin, Gillis, Greco, Greenberg, Harrison, 
Heiner, Lopez, Salamon, Torngren, and Willner.
    \17\ See, e.g., Davis, Harrison, Ostwald, and Torngren.
---------------------------------------------------------------------------

    Two commenters stated that any required securities industry 
expertise should come from expert testimony, thereby negating the need 
for a non-public arbitrator on a panel.\18\ Another commenter opined 
that non-public arbitrators face pressure from their firms to prevent 
or to reduce damage awards against the securities industry.\19\ One 
commenter stated that overturning the factual findings of an 
arbitration panel on appeal is significantly more difficult than 
overturning the factual findings of a jury, and thus it is critical to 
establish the objectivity of panel members by removing the non-public 
arbitrator.\20\ Another commenter stated that arbitration should be 
voluntary because, in his view, non-public arbitrators are inherently 
biased.\21\
---------------------------------------------------------------------------

    \18\ Brannan and Lopez.
    \19\ Feldman.
    \20\ Pederson.
    \21\ Mihalek.
---------------------------------------------------------------------------

Criteria for Non-Public and Public Arbitrators

    Several commenters also stated that the proposed rule change would 
neither adequately preclude persons with ties, either directly or 
through their firms, to the securities industry from meeting the 
definition of public arbitrator, nor would it thoroughly include such 
people within the definition of non-public arbitrator.\22\ In 
particular, commenters criticized two existing provisions in the 
current Rule. First, they commented that current NASD Rule 
10308(a)(4)(C) defines a non-public arbitrator to include any attorney, 
accountant, or other professional who has devoted 20 percent or more of 
his or her professional work, in the last two years, to brokerage or 
commodity firms or their associated persons. Second, they noted that 
current NASD Rule 10308(a)(5)(A)(iv) provides that an attorney, 
accountant, or other professional whose firm derived 10 percent or more 
of its annual revenue in the past two years from brokerage or commodity 
firms or their associated persons is precluded from being a public 
arbitrator.
---------------------------------------------------------------------------

    \22\ See, e.g., Caruso, Evans, Galvin, Lipner, Lopez, and PIABA.
---------------------------------------------------------------------------

    One commenter stated that the definition of non-public arbitrator 
should be amended to remove the 20 percent threshold and instead 
include all attorneys, accountants or other professionals who have 
devoted ``any'' work to the securities industry.\23\ Another opined 
that both the 20 percent and 10 percent limitations are too liberal and 
they fail to address the conflicts these professionals are subject 
to.\24\ In this commenter's view, public arbitrators should have no 
role in representing securities or commodities firms.
---------------------------------------------------------------------------

    \23\ Caruso. The commenter noted that the preclusion should 
apply to individuals that have represented clients in the securities 
industry for the last 5 years. NASD Rule 10308(a)(4)(C) currently 
applies only to activities in the last two years.
    \24\ Galvin.
---------------------------------------------------------------------------

    One commenter stated that the 10 percent threshold ``is arbitrary 
and has no practical or legal significance.'' \25\ The commenter stated 
that large law firms may represent securities industry clients that 
generate millions of dollars in fees, but still may not exceed 10 
percent of the firm's revenues. It further stated that ``an attorney 
who represents industry clients which comprise less than 10 percent of 
the firm's annual revenue in the past two years, has the same 
obligation, commitment and duty of loyalty to the client as does the 
attorney with clients who equal or exceed the 10 percent limit.'' \26\ 
Another commenter stated that ``an attorney whose firm represents any 
securities industry clients is inescapably subject to the securities 
industry influence regardless of the percentage of industry business.'' 
\27\ This commenter remarked that even firms with a small percentage of 
securities industry business would like to have more.
---------------------------------------------------------------------------

    \25\ PIABA.
    \26\ Id.
    \27\ Bernstein.
---------------------------------------------------------------------------

    Some commenters recommended eliminating the 10 percent threshold 
and, as a result, excluding from the definition of public arbitrator 
all attorneys, accountants or other professionals whose firms have 
derived any revenue from the securities industry in the last two 
years.\28\ Two commenters opined that, at a minimum, NASD should remove 
all defense lawyers who represent the securities industry from the pool 
of public arbitrators.\29\
---------------------------------------------------------------------------

    \28\ Evans, Bernstein, PIABA, and Schultz.
    \29\ Feldman and Lipner.
---------------------------------------------------------------------------

Harmonizing NYSE and NASD Rules

    One commenter expressed concern that the proposed rule change would 
``differ significantly'' from the Uniform Code of Arbitration (``UCA'') 
classification rule, and stated that NASD's proposed rule change and 
the NYSE Rule Change should have been ``brought to the Commission with 
the same text after being vetted by SICA'' (the Securities Industry 
Conference on Arbitration).\30\ In this commenter's view, the 
Commission should compel NASD and the NYSE to develop ``identical 
solutions'' to this issue.\31\
---------------------------------------------------------------------------

    \30\ Ryder.
    \31\ Id. In particular, this commenter highlighted the 
differences in relatives who would be considered an ``immediate 
family member'' under each rule. The NASD proposal would exclude 
immediate family members of all control-related parties from serving 
as public arbitrators, while the NYSE Rule Change excluded only 
immediate family members of associated persons. The NASD proposal 
also would include step-relatives, while the NYSE Rule Change did 
not. Finally, the NASD proposal does not include in-laws within the 
definition of control-related parties, while the NYSE Rule Change 
did not.

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

[[Page 62029]]

IV. NASD Response to Comments

    As a preliminary matter, NASD stated that suggestions that non-
public arbitrators should be eliminated from arbitration panels were 
beyond the scope of the rule filing, which applies to the 
classification of arbitrators and not the composition of arbitration 
panels.\32\
---------------------------------------------------------------------------

    \32\ See letter from John D. Nachmann, Counsel, NASD, to Lourdes 
Gonzalez, Assistant Chief Counsel--Sales Practices, SEC, dated Aug. 
23, 2006, available at: https://www.sec.gov/rules/sro/nasd/
nasd2005094/nasd2005094-65.pdf.
---------------------------------------------------------------------------

    NASD also stated that the current definitions of non-public 
arbitrator and public arbitrator, in conjunction with the proposed rule 
change, will properly exclude individuals with significant ties to the 
securities industry from being classified as public arbitrators.\33\ It 
stressed that the proposed rule change eliminates from the definition 
of public arbitrator both persons with ``actual bias'' and those 
``perceived as being biased.'' NASD noted that its rules already 
prohibit professionals from serving as public arbitrators if they have 
devoted 20 percent or more of their work in the last two years to 
securities industry clients. It also stated that it has taken the 
additional step in the current rule to exclude from the definition of 
public arbitrator professionals whose firm derived 10 percent or more 
of its annual revenue in the past two years from securities industry 
clients.\34\
---------------------------------------------------------------------------

    \33\ Id.
    \34\ Id. NASD noted that its rules already prohibit the 
following individuals from serving as public arbitrators: (1) Anyone 
associated with securities industry during the past five years, (2) 
anyone who has spent 20 or more years in the securities industry, 
and (3) anyone who is the spouse or immediate family member of a 
person who is associated with the securities industry. NASD Rules 
10308(a)(4)-(5).
---------------------------------------------------------------------------

    NASD further commented that it is not necessary for its rules with 
respect to the classification of arbitrators to be identical to those 
of the NYSE, and noted existing differences, such as the 10 percent 
threshold for certain professionals, between its rules and the NYSE 
rule.\35\ Regarding the proposed amendment to prohibit certain family 
members or relatives of certain family members who work for a 
controlled entity from serving as public arbitrators, NASD stated that 
it drafted this proposal to ensure that individuals with significant 
ties to the securities industry do not serve as public arbitrators.\36\
---------------------------------------------------------------------------

    \35\ Similar to the current NASD Rule 10308(a)(4)(C), NYSE Rule 
607(A)(2)(iv) defines an industry arbitrator to include any 
attorney, accountant or other professional who has devoted 20 
percent or more of his or her work to securities industry clients 
within the last two years.
    \36\ Id.
---------------------------------------------------------------------------

V. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the provisions of Section 
15A(b)(6) \37\ of the Act, which require, among other things, NASD's 
rules to 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.\38\
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78o-3(b)(6).
    \38\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change will promote 
the public interest by limiting certain people who have ties to the 
securities industry from serving as public arbitrators. In particular, 
by expanding the list of entities controlled by companies engaged in 
the securities business, the rule will further limit the industry ties 
the public arbitrator may have. The inclusion of immediate family 
members within the list of controlled parties who may not be public 
arbitrators should have a similar result.\39\ In addition, reminding 
persons registered with broker-dealers that they are associated persons 
of a broker-dealer should further assist in the correct classification 
of these persons as non-public arbitrators.\40\
---------------------------------------------------------------------------

    \39\ Section 19(b)(2) of the Act requires the Commission to 
approve a proposed rule change if it finds that the proposed rule 
change is consistent with the requirements of the Act, and the 
applicable rules and regulations thereunder. This standard does not 
require NASD rules to be identical to rules adopted by the NYSE or 
by SICA.
    \40\ The Commission notes that persons employed by a broker-
dealer (other than in a clerical or ministerial capacity) are 
associated persons of a broker-dealer as defined in Section 3(a)(18) 
of the Act.
---------------------------------------------------------------------------

    The Commission appreciates the comments suggesting the elimination 
of non-public arbitrators, and the further restriction on persons who 
have any ties to the securities industry from serving as public 
arbitrators. While these comments are beyond the scope of this rule 
filing, they raise important questions regarding the arbitration 
process. We understand that SICA is actively considering proposals from 
its membership regarding these issues. We note that NASD has stated 
that it will review any rule regarding panel composition that SICA 
adopts to the UCA, and that it is considering further amendments to the 
definitions of public arbitrator and non-public arbitrator.\41\
---------------------------------------------------------------------------

    \41\ Telephone conversation between John D. Nachmann, Counsel, 
NASD, and Michael Hershaft, Special Counsel, SEC (Oct. 3, 2006).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\42\ that the proposed rule change, as amended (SR-NASD-2005-094), be, 
and hereby is, approved.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-17563 Filed 10-19-06; 8:45 am]
BILLING CODE 8011-01-P