Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 1, 2, and 3 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 4 to Revise Rule 10322 of the NASD Code of Arbitration Procedure Pertaining to Subpoenas and the Power to Direct Appearances, 1353-1356 [E7-207]

Download as PDF Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / Notices 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 the 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: cprice-sewell on PROD1PC66 with NOTICES 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–CBOE–2006–112 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–CBOE–2006–112. 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. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. 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 VerDate Aug<31>2005 15:52 Jan 10, 2007 Jkt 211001 Number SR–CBOE–2006–112 and should be submitted on or before February 1, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–208 Filed 1–10–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55038; File No. SR–NASD– 2005–079] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 1, 2, and 3 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 4 to Revise Rule 10322 of the NASD Code of Arbitration Procedure Pertaining to Subpoenas and the Power to Direct Appearances January 3, 2007. I. Introduction On June 17, 2005, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to revise Rule 10322 of the NASD Code of Arbitration Procedure (the ‘‘Code’’), which pertains to subpoenas and the power to direct appearances. On July 13, 2005, the Commission published for comment the proposed rule change in the Federal Register.3 The Commission received twelve comments on the proposal.4 On 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 51981 (July 6, 2005), 70 FR 40411 (July 13, 2005). 4 Comment letters were submitted by Richard Skora, dated July 12, 2005; Seth E. Lipner, Deutsch & Lipner, dated July 13, 2005; Steve Buchwalter, Law Offices of Steve A. Buchwalter, P.C., dated July 13, 2005; Steven B. Caruso, Maddox Hargett & Caruso, P.C., dated July 19, 2005; Dennis M. Pape, dated July 20, 2005; Al Van Kampen, Rohde & Van Kampen PLLC, dated July 25, 2005; Phil Cutler, Cutler Nylander & Hayton, dated August 1, 2005; Avery B. Goodman, A.B. Goodman Law Firm, Ltd., dated August 1, 2005 and August 2, 2005; Jill Gross, Director, Barbara Black, Director, and Richard Downey, Student Intern, Pace Investor Rights Project, dated August 2, 2005; Tim Canning, dated August 3, 2005; and Rosemary J. Shockman, President, Public Investors Arbitration Bar Association, dated August 4, 2005. 1 15 PO 00000 Frm 00045 Fmt 4703 Sfmt 4703 1353 March 29, 2006, May 12, 2006, and July 7, 2006, NASD submitted Amendment Nos. 1, 2, and 3, respectively, to the proposed rule change. The Commission published the proposed rule change, as amended, for comment in the Federal Register on July 18, 2006.5 The Commission received twenty-six comment letters on the proposal, as amended.6 On November 30, 2006, NASD submitted Amendment No. 4 to the proposed rule change.7 This notice and order solicits comments from interested persons on Amendment No. 4 and approves the proposal, as amended, on an accelerated basis. The text of the proposed rule change is available at www.nasd.com, at the principal offices of NASD, and at the Commission’s Public Reference Room. 5 See Securities Exchange Act Release No. 54134 (July 12, 2006), 71 FR 40762 (July 18, 2006). 6 Comment letters were submitted by Gary M. Berne, Stoll Stoll Berne Lokting & Shlachter P.C., dated April 13, 2006 (‘‘Berne’’); Robert S. Banks, Jr., President, Public Investors Arbitration Bar Association, dated April 28, 2006 (‘‘PIABA 1’’); Bryan Lantagne, Chair, Broker-Dealer Arbitration Project Group, North American Securities Administrators Association, Inc., dated May 1, 2006 (‘‘NASAA’’); Martin L. Feinberg, dated May 5, 2006 (‘‘Feinberg 1’’); Seth E. Lipner, Deutsch Lipner, dated July 17, 2006 (‘‘Lipner 1’’); Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari, dated July 19, 2006 (‘‘Aidikoff’’); Martin L. Feinberg, dated July 19, 2006 (‘‘Feinberg 2’’); Thomas C. Wagner, VanDeusen & Wagner LLC, dated July 19, 2006 (‘‘Wagner 1’’); Steven B. Caruso, Maddox Hargett Caruso, P.C., dated July 21, 2006 (‘‘Caruso’’); Joseph C. Korsak, dated July 21, 2006 (‘‘Korsak’’); Herbert E. Pounds, Jr., dated July 21, 2006 (‘‘Pounds’’); John Miller, dated July 21, 2006 (‘‘Miller’’); Richard M. Layne, Layne Lewis LLP, dated July 21, 2006 (‘‘Layne’’); Sarah G. Anderson, dated July 21, 2006 (‘‘Anderson’’); Jay Salamon, dated July 21, 2006 (‘‘Salamon’’); Steph D. M [sic], dated July 21, 2006 (‘‘Steph M’’); Thomas C. Wagner, VanDeusen Wagner LLC, dated July 21, 2006 (‘‘Wagner 2’’); W. Scott Greco, Greco & Greco, P.C., dated July 21, 2006 (‘‘Greco’’); Carl J. Carlson, Carlson & Dennett, P.S., dated July 24, 2006 (‘‘Carlson’’); Laurence S. Schultz, Driggers, Schultz & Herbst, P.C., dated July 28, 2006 (‘‘Schultz’’); Ryan P. Smith, Vice President, Wachovia Securities, dated August 7, 2006 (‘‘Wachovia’’); Robert S. Banks, Jr., President, Public Investors Arbitration Bar Association, dated August 14, 2006 (‘‘PIABA 2’’); Jim Parker, Johnson, Rial & Parker, P.C., dated September 7, 2006 (‘‘Parker’’); Alan S. Brodherson, Law Offices of Alan S. Brodherson, dated November 20, 2006 (‘‘Brodherson’’); Seth E. Lipner, Deutsch Lipner, dated December 6, 2006 (‘‘Lipner 2’’); and Steven B. Caruso, President, Public Investors Arbitration Bar Association, dated December 7, 2006 (‘‘PIABA 3’’). 7 The PIABA 3 and Lipner 2 letters were received by the Commission after the submission of Amendment No. 4 by NASD. Both commenters noted NASD’s submission of Amendment No. 4 and recommended expedited approval of the proposal, with one commenter stating ‘‘the proposed revisions will both protect public investors and represent a significant step toward reducing the discovery abuses that permeate the arbitration process.’’ (PIABA 3). E:\FR\FM\11JAN1.SGM 11JAN1 1354 Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / Notices II. Description of the Proposed Rule Change In the initial 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.8 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. In Amendment No. 1, NASD proposed to allow only arbitrators to issue subpoenas for both parties and nonparties, whether for discovery or for appearance at a hearing. In Amendment No. 2, NASD clarified the process for issuing a subpoena to both parties and non-parties. In Amendment No. 3, NASD clarified that, in most cases, a public arbitrator will rule on all motions requesting a subpoena.9 In Amendment No. 4, NASD responded to comments on Amendment Nos. 1, 2, and 3 and amended the proposed rule change to authorize the arbitration panel to determine the amount of costs incurred as a result of subpoenaed documents and by whom such costs should be borne. NASD also amended the proposed rule change to provide that the party requesting the subpoena may respond to objections within 10 calendar days of receipt of the objections. In addition, NASD clarified that certain references to days are references to calendar days. cprice-sewell on PROD1PC66 with NOTICES III. Summary of Comments Received and NASD Response In Amendment No. 4, NASD responded to comments on the amended proposal. Who Should Pay for Subpoenaed Documents NASD noted that more than half of the comments discussed which party should be responsible for the costs associated with the production of documents obtained in response to a subpoena.10 Specifically, NASD stated that commenters: (1) Expressed the view that the proposal would inappropriately require a party requesting documents from another party to be responsible for the costs associated with the document production, (2) argued that the costs associated with the production of any documents, including subpoenaed 8 See infra note 3. infra note 5. 10 See Anderson, Carlson, Caruso, Feinberg 1 and 2, Greco, Korsak, Layne, Miller, PIABA 2, Pounds, Salamon, Schultz, Steph M, and Wagner 2. 9 See VerDate Aug<31>2005 15:52 Jan 10, 2007 Jkt 211001 documents, should be determined and assessed by the panel in its award, (3) stated that treating subpoenaed documents differently from other discovery-related documents could lead to gamesmanship, confusion, and delay in the discovery process, and (4) indicated that this aspect of the proposal would pose a considerable burden on public customers and could prevent them from adequately preparing their cases if they are unable to reimburse the other party for copies of subpoenaed documents. NASD agreed that the panel should have the authority to determine the amount of costs incurred as a result of subpoenaed documents and by whom such costs should be borne. Therefore, NASD proposed in Amendment No. 4 to delete the following sentence from proposed Rule 10322(e): ‘‘The party requesting the documents shall be responsible for the reasonable costs associated with the production of the copies.’’ NASD noted that because Rules 10205(c) and 10332(c) of the Code already provide arbitrators with authority to make cost determinations, it is NASD’s belief that this issue does not need to be further addressed by the proposal. Whether Counsel Should be Able to Issue Subpoenas NASD noted that four commenters objected to the proposal to limit the power to issue subpoenas to arbitrators.11 Specifically, NASD stated commenters: (1) Noted that they had not experienced any significant problems with the current rule (which also allows counsel of record to issue subpoenas as provided by law), and stated that there was no reason to revise the rule, (2) expressed the view that limiting to arbitrators the authority to issue subpoenas would result in additional delays, costs, and gamesmanship in the discovery process, and (3) speculated that arbitrators who tire of counsel making numerous requests for subpoenas may capriciously deny the issuance of a subpoena merely to limit the amount of time spent on discovery issues. NASD disagreed with these comments, stating it 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. NASD also stated that the establishment of a uniform, nationwide rule will reduce potential confusion for parties and their counsel regarding whether they have the ability 11 See PO 00000 Berne, Brodherson, Parker, and Wachovia. Frm 00046 Fmt 4703 Sfmt 4703 to issue subpoenas, minimize gamesmanship in the subpoena process, and make the rule easier to administer. Which Arbitrators Should Have Authority to Decide Subpoena Requests NASD noted that two commenters (1) stated that only public arbitrators should have the authority to decide subpoena requests and that non-public arbitrators should not be involved in resolving discovery issues in those cases where one of the parties is a public customer, and (2) suggested that, at the very least, a non-public arbitrator should be able to decide a subpoena request only if all parties agree.12 NASD stated that the rule, as proposed, is in accordance with the suggestions made by these commenters and affirmed that the arbitrator ruling on a motion requesting a subpoena will be a public arbitrator unless a customer previously consented to a non-standard panel composition.13 Necessity of Motions for Subpoenas NASD noted that two commenters asserted that parties should not be required to include a motion as part of a subpoena request, and indicated that this would add unnecessary complexity and delay to the discovery process.14 NASD disagreed, stating it believes that requiring a motion would not place a significant burden on parties and may provide a benefit to the panel. Automatic Exchange of Subpoenaed Documents NASD noted that two commenters suggested revising the proposal to require or allow for the automatic exchange of documents received in response to all subpoenas.15 NASD disagreed, stating that another party may not want such documents or may not wish to be potentially responsible for the costs associated with the production of such documents. NASD also noted that the proposal does not limit the ability of the parties to agree to automatically exchange all documents received in response to subpoenas. Time Frame for Ruling on Subpoena Requests NASD noted that one commenter suggested revising the proposal to require the panel to rule on all subpoena motions within 10 days to ensure that parties are able to conduct discovery in a timely and orderly manner.16 NASD 12 See NASAA and PIABA 1. See Rule 10308(b)(1). 14 See Berne and PIABA 1. 15 See Feinberg 1 and 2, and Salamon. 16 See Wachovia letter. 13 E:\FR\FM\11JAN1.SGM 11JAN1 Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / Notices disagreed, stating that the proposal would require the panel to rule promptly on a motion for a subpoena. NASD also indicated it does not believe that it is appropriate to establish a specific time frame within which the panel must rule on a subpoena request, particularly because there may be occasions when a panel will need to consider several complex motions at the same time. Clarifications to the Proposed Rule Change NASD noted that two commenters suggested clarifying revisions to proposed Rule 10322(c).17 One commenter stated that the rule is potentially ambiguous regarding the time frame during which an arbitrator should rule on the issuance and scope of a subpoena.18 In this commenter’s view the proposal could be read to mean that an arbitrator is required to rule promptly and not consider any objections that have been raised to a subpoena. The other commenter suggested that, to avoid confusion, the rule should contain a time period within which a party must respond to any objections to its proposed subpoena.19 This commenter also suggested amending paragraphs (c) and (e) of proposed Rule 10322 to clarify whether the time periods in those paragraphs are based on calendar or business days. To reduce any potential ambiguities in the rule, NASD proposed in Amendment No. 4 to amend the proposed rule change to provide that the party that requested the subpoena may respond to objections within 10 calendar days of receipt of the objections and to clarify certain references to days are references to calendar days.20 Conforming the Proposal with the Federal Arbitration Act NASD noted that one commenter stated that the proposed rule should be revised to conform to the Federal Arbitration Act (FAA), which the commenter states requires a majority of the arbitrators to sign a subpoena.21 17 See Caruso and Feinberg 2. Feinberg 2. 19 See Caruso. 20 NASD also noted that the pending revisions to the NASD Code of Arbitration Procedure for Customer Disputes and the NASD Code of Arbitration Procedure for Industry Disputes would clarify that the term ‘‘day’’ means calendar day, except as otherwise provided. See Securities Exchange Act Release Nos. 51856 (June 15, 2005) (SR–NASD–2003–158), 70 FR 36442 (June 23, 2005) and 51857 (June 15, 2005) (SR–NASD–2004–011), 70 FR 36430 (June 23, 2005). 21 See Feinberg 1 and 2. cprice-sewell on PROD1PC66 with NOTICES 18 See VerDate Aug<31>2005 15:52 Jan 10, 2007 Jkt 211001 NASD responded that because the proposal would allow only arbitrators to issue subpoenas, it would provide nonparties with more protection than current Rule 103222. NASD also stated it believes that subpoenas issued by a single arbitrator are valid and noted that it has received few, if any, complaints regarding the validity of such subpoenas from participants in the NASD forum. NASD also noted that commenter expressed the view that the proposal, under the FAA, is unwieldy with respect to the service of subpoenas. The commenter stated that the FAA provides that an arbitration subpoena ‘‘shall be served in the same manner as subpoenas to appear and testify before the court.’’ The commenter asserted that federal courts have interpreted this provision to require the personal service of an arbitral subpoena. Consequently, the commenter contended that, under the FAA, the proposal would require personal service of all subpoenas issued in NASD’s forum. In response, NASD pointed out that before a party may participate in NASD’s arbitral forum, it must submit a Uniform Submission Agreement in which the party agrees to abide by the Code.22 NASD stated that under the Code, service can be effectuated by a variety of methods, including mail, overnight mail service, hand delivery, and facsimile.23 Citing Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468 (1989), NASD also noted that the Supreme Court has found that the FAA does not prevent the enforcement of arbitration agreements that contain different rules than those set forth in the FAA. NASD indicated it believes that service under the proposal can be accomplished by any of the various methods provided for in the Code rather than personal service exclusively. Issues Beyond the Scope of the Proposed Rule Change Finally, NASD noted that two commenters raised issues that are beyond the scope of the proposed rule change. One commenter expressed views related to the composition of arbitration panels and the definition of public arbitrator.24 The other commenter suggested revisions to the 22 The Uniform Submission Agreement provides, ‘‘The undersigned parties hereby submit the present matter in controversy, as set forth in the attached statement of claim, answers, and all related counterclaims and/or third-party claims which may be asserted, to arbitration in accordance with the Constitution, By-Laws, Rules, Regulations, and/or Code of Arbitration Procedure of the sponsoring organization.’’ 23 See NASD Rule 10314(c). 24 See NASAA. PO 00000 Frm 00047 Fmt 4703 Sfmt 4703 1355 Code regarding the time period within which a panel must be appointed.25 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 4, including whether Amendment No. 4 is consistent with the Exchange 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 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. Copies of such filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NASD–2005–079 and should be submitted on or before February 1, 2007. V. Discussion and Findings After careful review, the Commission finds that the proposed rule change is 25 See E:\FR\FM\11JAN1.SGM Wachovia. 11JAN1 1356 Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / Notices consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to NASD, and in particular, with the requirements of Section 15A(b)(6) 26 of the Exchange Act.27 Section 15A(b)(6) 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. The Commission believes that the proposed rule change is designed to accomplish these ends by permitting only arbitrators to issues subpoenas and by making the arbitration subpoena process more orderly and efficient. Accelerated Approval of Amendment No. 4 The Commission finds good cause for approving Amendment No. 4 to the proposed rule change prior to the thirtieth day after the amendment is published for comment in the Federal Register pursuant to Section 19(b)(2) of the Act. Amendment No. 4 amends the proposed rule change to authorize the arbitration panel to determine the amount of costs incurred as a result of subpoenaed documents and by whom such costs should be borne. Amendment No. 4 also provides that the party that requested the subpoena may respond to objections within 10 calendar days of receipt of the objections. In addition, Amendment No. 4 amends the proposed rule change to clarify that certain references to days are references to calendar days. The Commission anticipates that these changes will provide for greater clarity with respect to the subpoena process and will provide for a more equitable allocation of costs concerning subpoena documents. Accordingly, the Commission finds that accelerated approval of Amendment No. 4 is appropriate. VI. Conclusions cprice-sewell on PROD1PC66 with NOTICES It is therefore ordered, pursuant to Section 19(b)(2) of the Act,28 that the proposed rule change, as amended (SR– NASD–2005–079), be, and hereby is, approved. 26 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). 28 15 U.S.C. 78s(b)(2). 27 In VerDate Aug<31>2005 15:52 Jan 10, 2007 Jkt 211001 For the Commission, by the Division of Market Regulation, pursuant to delegated authority.29 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–207 Filed 1–10–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55041; File No. SR–NSX– 2006–17] Self-Regulatory Organizations; National Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify a Fee Schedule for Transactions Executed Through NSX BLADESM and To Modify a Fee Schedule for ITS Transactions January 4, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’)1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 13, 2006, National Stock Exchange, Inc. (‘‘NSX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared substantially by the Exchange. The Exchange filed the proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to implement a liquidity provider rebate and liquidity taker fee for transactions executed in Tape A and Tape B securities through NSX BLADESM (‘‘NSX BLADE’’), the Exchange’s new trading system, and to modify its Fee Schedule applicable to transactions executed in Tape C securities through NSX BLADE.5 The 29 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(2). 5 Securities are being transitioned from the Exchange’s legacy system, National Securities Trading System (‘‘NSTS’’) to NSX BLADE. Securities will only be traded on one system; once transitioned, that security will only be traded on NSX BLADE. As of December 22, 2006, all Tape C securities have been transitioned to NSX BLADE, and the Exchange anticipates that all Tape A and 1 15 PO 00000 Frm 00048 Fmt 4703 Sfmt 4703 Exchange also proposes corresponding changes to the Exchange’s ITS Transactions Fee Schedule. The text of the proposed rule change is is available at www.nsx.com/RulesFilings.asp, NSX, and the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NSX included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange has created NSX BLADE, a new trading platform that utilizes a strict price/time priority system as the ultimate replacement for the Exchange’s current system, NSTS.6 In connection with the new trading platform, the Exchange filed a rule change proposing new trading rules for NSX BLADE.7 The Exchange also amended its rules to add a Chapter XVI to set forth, in its own chapter, rules relating to fees, dues, assessments and a tape rebate program. The rule change adding Chapter XVI was filed pursuant to Section 19(b)(3)(A) of the Act, which rendered it effective upon filing.8 In the instant rule filing, the Exchange is filing a proposed Fee Schedule under Rule 16.1(a) and 16.1(c) of Chapter XVI for executions in Tape A, B and C Tape B securities will be transitioned to NSX BLADE in mid-January 2007. Until transitioned, Tape A and Tape B securities will continue to be traded on NSTS exclusively. See e-mail from Lori A. Ragus, Senior Regulatory Counsel, NSX, to Joseph P. Morra, Special Counsel, SEC, dated December 22, 2006. 6 See footnote 5, supra. 7 See Securities Exchange Act Release No. 54391 (August 31, 2006), 71 FR 52836 (September 7, 2006) (SR–NSX–2006–08) (approval order). 8 See Securities Exchange Act Release No. 54194 (July 24, 2006), 71 FR 43258 (July 31, 2006)(SR– NSX–2006–10). SR–NSX–2006–10 was effective upon filing on July 13, 2006. Rule 16.3 provides that the new Chapter XVI would become effective upon written notice by the Exchange to the ETP Holders. Notice was provided declaring Chapter XVI effective on October 2 and 19, 2006 respecting ITS transactions and transactions in NSX BLADE, respectively. E:\FR\FM\11JAN1.SGM 11JAN1

Agencies

[Federal Register Volume 72, Number 7 (Thursday, January 11, 2007)]
[Notices]
[Pages 1353-1356]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-207]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55038; File No. SR-NASD-2005-079]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 
1, 2, and 3 Thereto and Notice of Filing and Order Granting Accelerated 
Approval to Amendment No. 4 to Revise Rule 10322 of the NASD Code of 
Arbitration Procedure Pertaining to Subpoenas and the Power to Direct 
Appearances

January 3, 2007.

I. Introduction

    On June 17, 2005, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to revise Rule 10322 of the 
NASD Code of Arbitration Procedure (the ``Code''), which pertains to 
subpoenas and the power to direct appearances. On July 13, 2005, the 
Commission published for comment the proposed rule change in the 
Federal Register.\3\ The Commission received twelve comments on the 
proposal.\4\ On March 29, 2006, May 12, 2006, and July 7, 2006, NASD 
submitted Amendment Nos. 1, 2, and 3, respectively, to the proposed 
rule change. The Commission published the proposed rule change, as 
amended, for comment in the Federal Register on July 18, 2006.\5\ The 
Commission received twenty-six comment letters on the proposal, as 
amended.\6\ On November 30, 2006, NASD submitted Amendment No. 4 to the 
proposed rule change.\7\ This notice and order solicits comments from 
interested persons on Amendment No. 4 and approves the proposal, as 
amended, on an accelerated basis. The text of the proposed rule change 
is available at www.nasd.com, at the principal offices of NASD, and at 
the Commission's Public Reference Room.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51981 (July 6, 
2005), 70 FR 40411 (July 13, 2005).
    \4\ Comment letters were submitted by Richard Skora, dated July 
12, 2005; Seth E. Lipner, Deutsch & Lipner, dated July 13, 2005; 
Steve Buchwalter, Law Offices of Steve A. Buchwalter, P.C., dated 
July 13, 2005; Steven B. Caruso, Maddox Hargett & Caruso, P.C., 
dated July 19, 2005; Dennis M. Pape, dated July 20, 2005; Al Van 
Kampen, Rohde & Van Kampen PLLC, dated July 25, 2005; Phil Cutler, 
Cutler Nylander & Hayton, dated August 1, 2005; Avery B. Goodman, 
A.B. Goodman Law Firm, Ltd., dated August 1, 2005 and August 2, 
2005; Jill Gross, Director, Barbara Black, Director, and Richard 
Downey, Student Intern, Pace Investor Rights Project, dated August 
2, 2005; Tim Canning, dated August 3, 2005; and Rosemary J. 
Shockman, President, Public Investors Arbitration Bar Association, 
dated August 4, 2005.
    \5\ See Securities Exchange Act Release No. 54134 (July 12, 
2006), 71 FR 40762 (July 18, 2006).
    \6\ Comment letters were submitted by Gary M. Berne, Stoll Stoll 
Berne Lokting & Shlachter P.C., dated April 13, 2006 (``Berne''); 
Robert S. Banks, Jr., President, Public Investors Arbitration Bar 
Association, dated April 28, 2006 (``PIABA 1''); Bryan Lantagne, 
Chair, Broker-Dealer Arbitration Project Group, North American 
Securities Administrators Association, Inc., dated May 1, 2006 
(``NASAA''); Martin L. Feinberg, dated May 5, 2006 (``Feinberg 1''); 
Seth E. Lipner, Deutsch Lipner, dated July 17, 2006 (``Lipner 1''); 
Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari, dated July 19, 2006 
(``Aidikoff''); Martin L. Feinberg, dated July 19, 2006 (``Feinberg 
2''); Thomas C. Wagner, VanDeusen & Wagner LLC, dated July 19, 2006 
(``Wagner 1''); Steven B. Caruso, Maddox Hargett Caruso, P.C., dated 
July 21, 2006 (``Caruso''); Joseph C. Korsak, dated July 21, 2006 
(``Korsak''); Herbert E. Pounds, Jr., dated July 21, 2006 
(``Pounds''); John Miller, dated July 21, 2006 (``Miller''); Richard 
M. Layne, Layne Lewis LLP, dated July 21, 2006 (``Layne''); Sarah G. 
Anderson, dated July 21, 2006 (``Anderson''); Jay Salamon, dated 
July 21, 2006 (``Salamon''); Steph D. M [sic], dated July 21, 2006 
(``Steph M''); Thomas C. Wagner, VanDeusen Wagner LLC, dated July 
21, 2006 (``Wagner 2''); W. Scott Greco, Greco & Greco, P.C., dated 
July 21, 2006 (``Greco''); Carl J. Carlson, Carlson & Dennett, P.S., 
dated July 24, 2006 (``Carlson''); Laurence S. Schultz, Driggers, 
Schultz & Herbst, P.C., dated July 28, 2006 (``Schultz''); Ryan P. 
Smith, Vice President, Wachovia Securities, dated August 7, 2006 
(``Wachovia''); Robert S. Banks, Jr., President, Public Investors 
Arbitration Bar Association, dated August 14, 2006 (``PIABA 2''); 
Jim Parker, Johnson, Rial & Parker, P.C., dated September 7, 2006 
(``Parker''); Alan S. Brodherson, Law Offices of Alan S. Brodherson, 
dated November 20, 2006 (``Brodherson''); Seth E. Lipner, Deutsch 
Lipner, dated December 6, 2006 (``Lipner 2''); and Steven B. Caruso, 
President, Public Investors Arbitration Bar Association, dated 
December 7, 2006 (``PIABA 3'').
    \7\ The PIABA 3 and Lipner 2 letters were received by the 
Commission after the submission of Amendment No. 4 by NASD. Both 
commenters noted NASD's submission of Amendment No. 4 and 
recommended expedited approval of the proposal, with one commenter 
stating ``the proposed revisions will both protect public investors 
and represent a significant step toward reducing the discovery 
abuses that permeate the arbitration process.'' (PIABA 3).

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[[Page 1354]]

II. Description of the Proposed Rule Change

    In the initial 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.\8\ 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.
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    \8\ See infra note 3.
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    In Amendment No. 1, NASD proposed to allow only arbitrators to 
issue subpoenas for both parties and non-parties, whether for discovery 
or for appearance at a hearing. In Amendment No. 2, NASD clarified the 
process for issuing a subpoena to both parties and non-parties. In 
Amendment No. 3, NASD clarified that, in most cases, a public 
arbitrator will rule on all motions requesting a subpoena.\9\
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    \9\ See infra note 5.
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    In Amendment No. 4, NASD responded to comments on Amendment Nos. 1, 
2, and 3 and amended the proposed rule change to authorize the 
arbitration panel to determine the amount of costs incurred as a result 
of subpoenaed documents and by whom such costs should be borne. NASD 
also amended the proposed rule change to provide that the party 
requesting the subpoena may respond to objections within 10 calendar 
days of receipt of the objections. In addition, NASD clarified that 
certain references to days are references to calendar days.

III. Summary of Comments Received and NASD Response

    In Amendment No. 4, NASD responded to comments on the amended 
proposal.

Who Should Pay for Subpoenaed Documents

    NASD noted that more than half of the comments discussed which 
party should be responsible for the costs associated with the 
production of documents obtained in response to a subpoena.\10\ 
Specifically, NASD stated that commenters: (1) Expressed the view that 
the proposal would inappropriately require a party requesting documents 
from another party to be responsible for the costs associated with the 
document production, (2) argued that the costs associated with the 
production of any documents, including subpoenaed documents, should be 
determined and assessed by the panel in its award, (3) stated that 
treating subpoenaed documents differently from other discovery-related 
documents could lead to gamesmanship, confusion, and delay in the 
discovery process, and (4) indicated that this aspect of the proposal 
would pose a considerable burden on public customers and could prevent 
them from adequately preparing their cases if they are unable to 
reimburse the other party for copies of subpoenaed documents.
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    \10\ See Anderson, Carlson, Caruso, Feinberg 1 and 2, Greco, 
Korsak, Layne, Miller, PIABA 2, Pounds, Salamon, Schultz, Steph M, 
and Wagner 2.
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    NASD agreed that the panel should have the authority to determine 
the amount of costs incurred as a result of subpoenaed documents and by 
whom such costs should be borne. Therefore, NASD proposed in Amendment 
No. 4 to delete the following sentence from proposed Rule 10322(e): 
``The party requesting the documents shall be responsible for the 
reasonable costs associated with the production of the copies.'' NASD 
noted that because Rules 10205(c) and 10332(c) of the Code already 
provide arbitrators with authority to make cost determinations, it is 
NASD's belief that this issue does not need to be further addressed by 
the proposal.

Whether Counsel Should be Able to Issue Subpoenas

    NASD noted that four commenters objected to the proposal to limit 
the power to issue subpoenas to arbitrators.\11\ Specifically, NASD 
stated commenters: (1) Noted that they had not experienced any 
significant problems with the current rule (which also allows counsel 
of record to issue subpoenas as provided by law), and stated that there 
was no reason to revise the rule, (2) expressed the view that limiting 
to arbitrators the authority to issue subpoenas would result in 
additional delays, costs, and gamesmanship in the discovery process, 
and (3) speculated that arbitrators who tire of counsel making numerous 
requests for subpoenas may capriciously deny the issuance of a subpoena 
merely to limit the amount of time spent on discovery issues.
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    \11\ See Berne, Brodherson, Parker, and Wachovia.
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    NASD disagreed with these comments, stating it 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. NASD also stated that 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.

Which Arbitrators Should Have Authority to Decide Subpoena Requests

    NASD noted that two commenters (1) stated that only public 
arbitrators should have the authority to decide subpoena requests and 
that non-public arbitrators should not be involved in resolving 
discovery issues in those cases where one of the parties is a public 
customer, and (2) suggested that, at the very least, a non-public 
arbitrator should be able to decide a subpoena request only if all 
parties agree.\12\
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    \12\ See NASAA and PIABA 1.
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    NASD stated that the rule, as proposed, is in accordance with the 
suggestions made by these commenters and affirmed that the arbitrator 
ruling on a motion requesting a subpoena will be a public arbitrator 
unless a customer previously consented to a non-standard panel 
composition.\13\
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    \13\  See Rule 10308(b)(1).
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Necessity of Motions for Subpoenas

    NASD noted that two commenters asserted that parties should not be 
required to include a motion as part of a subpoena request, and 
indicated that this would add unnecessary complexity and delay to the 
discovery process.\14\ NASD disagreed, stating it believes that 
requiring a motion would not place a significant burden on parties and 
may provide a benefit to the panel.
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    \14\ See Berne and PIABA 1.
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Automatic Exchange of Subpoenaed Documents

    NASD noted that two commenters suggested revising the proposal to 
require or allow for the automatic exchange of documents received in 
response to all subpoenas.\15\ NASD disagreed, stating that another 
party may not want such documents or may not wish to be potentially 
responsible for the costs associated with the production of such 
documents. NASD also noted that the proposal does not limit the ability 
of the parties to agree to automatically exchange all documents 
received in response to subpoenas.
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    \15\ See Feinberg 1 and 2, and Salamon.
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Time Frame for Ruling on Subpoena Requests

    NASD noted that one commenter suggested revising the proposal to 
require the panel to rule on all subpoena motions within 10 days to 
ensure that parties are able to conduct discovery in a timely and 
orderly manner.\16\ NASD

[[Page 1355]]

disagreed, stating that the proposal would require the panel to rule 
promptly on a motion for a subpoena. NASD also indicated it does not 
believe that it is appropriate to establish a specific time frame 
within which the panel must rule on a subpoena request, particularly 
because there may be occasions when a panel will need to consider 
several complex motions at the same time.
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    \16\ See Wachovia letter.
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Clarifications to the Proposed Rule Change
    NASD noted that two commenters suggested clarifying revisions to 
proposed Rule 10322(c).\17\ One commenter stated that the rule is 
potentially ambiguous regarding the time frame during which an 
arbitrator should rule on the issuance and scope of a subpoena.\18\ In 
this commenter's view the proposal could be read to mean that an 
arbitrator is required to rule promptly and not consider any objections 
that have been raised to a subpoena. The other commenter suggested 
that, to avoid confusion, the rule should contain a time period within 
which a party must respond to any objections to its proposed 
subpoena.\19\ This commenter also suggested amending paragraphs (c) and 
(e) of proposed Rule 10322 to clarify whether the time periods in those 
paragraphs are based on calendar or business days.
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    \17\ See Caruso and Feinberg 2.
    \18\ See Feinberg 2.
    \19\ See Caruso.
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    To reduce any potential ambiguities in the rule, NASD proposed in 
Amendment No. 4 to amend the proposed rule change to provide that the 
party that requested the subpoena may respond to objections within 10 
calendar days of receipt of the objections and to clarify certain 
references to days are references to calendar days.\20\
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    \20\ NASD also noted that the pending revisions to the NASD Code 
of Arbitration Procedure for Customer Disputes and the NASD Code of 
Arbitration Procedure for Industry Disputes would clarify that the 
term ``day'' means calendar day, except as otherwise provided. See 
Securities Exchange Act Release Nos. 51856 (June 15, 2005) (SR-NASD-
2003-158), 70 FR 36442 (June 23, 2005) and 51857 (June 15, 2005) 
(SR-NASD-2004-011), 70 FR 36430 (June 23, 2005).
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Conforming the Proposal with the Federal Arbitration Act

    NASD noted that one commenter stated that the proposed rule should 
be revised to conform to the Federal Arbitration Act (FAA), which the 
commenter states requires a majority of the arbitrators to sign a 
subpoena.\21\ NASD responded that because the proposal would allow only 
arbitrators to issue subpoenas, it would provide non-parties with more 
protection than current Rule 103222. NASD also stated it believes that 
subpoenas issued by a single arbitrator are valid and noted that it has 
received few, if any, complaints regarding the validity of such 
subpoenas from participants in the NASD forum.
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    \21\ See Feinberg 1 and 2.
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    NASD also noted that commenter expressed the view that the 
proposal, under the FAA, is unwieldy with respect to the service of 
subpoenas. The commenter stated that the FAA provides that an 
arbitration subpoena ``shall be served in the same manner as subpoenas 
to appear and testify before the court.'' The commenter asserted that 
federal courts have interpreted this provision to require the personal 
service of an arbitral subpoena. Consequently, the commenter contended 
that, under the FAA, the proposal would require personal service of all 
subpoenas issued in NASD's forum.
    In response, NASD pointed out that before a party may participate 
in NASD's arbitral forum, it must submit a Uniform Submission Agreement 
in which the party agrees to abide by the Code.\22\ NASD stated that 
under the Code, service can be effectuated by a variety of methods, 
including mail, overnight mail service, hand delivery, and 
facsimile.\23\ Citing Volt Information Sciences, Inc. v. Board of 
Trustees of Leland Stanford Junior University, 489 U.S. 468 (1989), 
NASD also noted that the Supreme Court has found that the FAA does not 
prevent the enforcement of arbitration agreements that contain 
different rules than those set forth in the FAA. NASD indicated it 
believes that service under the proposal can be accomplished by any of 
the various methods provided for in the Code rather than personal 
service exclusively.
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    \22\ The Uniform Submission Agreement provides, ``The 
undersigned parties hereby submit the present matter in controversy, 
as set forth in the attached statement of claim, answers, and all 
related counterclaims and/or third-party claims which may be 
asserted, to arbitration in accordance with the Constitution, By-
Laws, Rules, Regulations, and/or Code of Arbitration Procedure of 
the sponsoring organization.''
    \23\ See NASD Rule 10314(c).
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Issues Beyond the Scope of the Proposed Rule Change

    Finally, NASD noted that two commenters raised issues that are 
beyond the scope of the proposed rule change. One commenter expressed 
views related to the composition of arbitration panels and the 
definition of public arbitrator.\24\ The other commenter suggested 
revisions to the Code regarding the time period within which a panel 
must be appointed.\25\
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    \24\ See NASAA.
    \25\ See Wachovia.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
is consistent with the Exchange 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 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-NASD-2005-079 and should be submitted on or before February 1, 2007.

V. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is

[[Page 1356]]

consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to NASD, and in particular, with the 
requirements of Section 15A(b)(6) \26\ of the Exchange Act.\27\ Section 
15A(b)(6) 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. The Commission believes that the 
proposed rule change is designed to accomplish these ends by permitting 
only arbitrators to issues subpoenas and by making the arbitration 
subpoena process more orderly and efficient.
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    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ 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).
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Accelerated Approval of Amendment No. 4

    The Commission finds good cause for approving Amendment No. 4 to 
the proposed rule change prior to the thirtieth day after the amendment 
is published for comment in the Federal Register pursuant to Section 
19(b)(2) of the Act. Amendment No. 4 amends the proposed rule change to 
authorize the arbitration panel to determine the amount of costs 
incurred as a result of subpoenaed documents and by whom such costs 
should be borne. Amendment No. 4 also provides that the party that 
requested the subpoena may respond to objections within 10 calendar 
days of receipt of the objections. In addition, Amendment No. 4 amends 
the proposed rule change to clarify that certain references to days are 
references to calendar days. The Commission anticipates that these 
changes will provide for greater clarity with respect to the subpoena 
process and will provide for a more equitable allocation of costs 
concerning subpoena documents. Accordingly, the Commission finds that 
accelerated approval of Amendment No. 4 is appropriate.

VI. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change, as amended (SR-NASD-2005-079), 
be, and hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-207 Filed 1-10-07; 8:45 am]
BILLING CODE 8011-01-P