58564 Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Notices 

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 ISE Rule 100(a)(32) defines ‘‘Public Customer’’

as ‘‘a person that is not a broker-dealer in 

securities.’’ ISE Rule 100(a)(33) defines ‘‘Public 

Customer Order’’ as ‘‘an order for the account of a 

Public Customer.’’

4On August 6, 2004, the ISE filed a Form 19b4, which replaced the original filing in its entirety 

(‘‘Amendment No. 1’’).

5On August 13, 2004, the ISE filed a Form 19b4, which replaced the original filing and 

Amendment No. 1 in their entirety (‘‘Amendment 

No. 2’’).

6See Securities Exchange Act Release No. 50197 

(August 13, 2004), 69 FR 51735.

7 In approving the proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. 15 U.S.C. 78c(f).

8 15 U.S.C. 78f(b)(5).

9The Commission notes that this section of the 

proposal is similar to Pacific Exchange, Inc. Rule 

7.26. See Securities Exchange Act Release No. 

49264 (February 17, 2004), 69 FR 8510 (February 

24, 2004)(SR–PCX–2003–49).

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 17 CFR 240.19b–4(f)(6).

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 ISE Rule 810 by 

replacing the term ‘‘Chinese Wall’’ with 

the term, ‘‘Information Barrier;’’ and 

eliminating the requirement that a 

market maker maintain an Information 

Barrier in the limited circumstances 

where the sole extent to which such 

market maker or affiliated broker-dealer 

handles listed options orders as agent 

on behalf of Public Customers 3 or 

broker-dealers consists of handling such 

orders pursuant to an exchange 

sponsored Directed Order Program. The 

proposal would also exempt a market 

maker from the Information Barrier 

requirements of ISE Rule 810 to the 

extent that the market maker or 

affiliated broker-dealer engages solely in 

proprietary trading and does not, under 

any circumstances, maintain customer 

accounts or solicit orders or funds from 

or on behalf of Public Customers or 

broker-dealers. The ISE also proposed a 

non-substantive clarification and certain 

non-substantive technical changes to 

ISE Rule 810(a). The ISE amended the 

proposal on August 6, 20044 and August 

13, 2004.5 The proposed rule change, as 

amended, was published for comment 

in the Federal Register on August 20, 

2004.6 The Commission received no 

comments on the proposed rule change, 

as amended. This order approves the 

proposed rule change, as amended.

The Commission finds that the 

proposed rule change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder 

applicable to a national securities 

exchange.7 In particular, the 

Commission believes that the proposed 

rule change is consistent with Section 

6(b)(5) of the Act,8 which requires, 

among other things, that the ISE’s rules 

be designed to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system. 

Specifically, the Commission believes 

that the ISE’s proposal to provide two 

additional exceptions from the 

Information Barrier requirements of ISE 

Rule 810 is consistent with the Act.

One exception would eliminate the 

requirement that a market maker 

maintain an Information Barrier in the 

limited circumstances where a market 

maker or affiliated broker-dealer engages 

solely in proprietary trading.9 The 

Commission believes it is reasonable to 

remove this requirement, since the 

market maker, or its affiliated brokerdealer, is not engaged in activities that 

would inappropriately benefit other 

business activities within the firm. 

However, the Commission notes that if 

in the future these market makers, or 

their affiliated broker-dealers, engage in 

other business activities, such as 

investment banking or market making in 

the stocks underlying the options in 

which it makes markets, or maintain 

customer accounts, or solicit or accept 

Public Customer orders, the 

Commission expects that the ISE will 

require compliance with the 

Information Barrier requirements of ISE 

Rule 810.

The second exception from ISE Rule 

810 would not require an Information 

Barrier between an ISE Member’s ISE 

market making operations and options 

market making operations on other 

exchanges where that Member handles 

orders as agent only for the accounts of 

affiliated entities or solely in an eligible 

Directed Order Program. Eligible 

Directed Order Programs must contain 

rules designed to ensure that market 

makers do not gain an advantage in 

handling Directed Orders because the 

information they possess may be used 

inappropriately for the benefit of the 

market maker receiving the Directed 

Order. For example, a market maker that 

chooses to accept Directed Orders must 

accept all orders directed to it, may not 

accept orders directly, other than 

through an exchange system, and the 

market maker may not handle such 

orders on a disclosed or discretionary 

basis. Therefore, the Commission 

believes that it is reasonable to not 

require an Information Barrier in such 

cases, since the rules of such Directed 

Order Programs should provide 

safeguards that should limit the misuse 

of information with regard to the terms 

of orders that affiliates of ISE members 

are handling as agent. 

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act,10 that the 

proposed rule change (SR–ISE–2004–

18), as amended, is approved.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.11

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–21885 Filed 9–29–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50434; File No. SR–NASD–

2004–134] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by the 

National Association of Securities 

Dealers, Inc., Relating to Multiple 

Market Participant Identifiers 

September 23, 2004. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on 

September 1, 2004, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’), through its subsidiary, The 

Nasdaq Stock Market, Inc. (‘‘Nasdaq’’), 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been prepared by Nasdaq. The 

proposed rule change has been filed by 

Nasdaq as a ‘‘non-controversial’’ rule 

change pursuant to Rule 19b–4(f)(6) 

under the Act.3 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 

Nasdaq proposes to continue two 

pilot programs that provide market 

participants who execute transactions in 

Nasdaq and exchange-listed securities 

through its systems the ability to display 

trading interests using up to 10 

individual Market Participant Identifiers 

(‘‘MPIDs’’). The text of the proposed 

rule change is below. Proposed new 

Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Notices 58565

4The proposed rule change is marked to show 

changes from the rule as it appears in the electronic 

NASD Manual available at http://www.nasdr.com,

as amended by File No. SR–NASD–2004–097. See

Securities Exchange Act Release No. 50140 (August 

3, 2004), 69 FR 48535 (August 10, 2004).

5The Commission corrected the proposed rule 

text to italicize the comma after ‘‘September 1, 

2004.’’ Voicemail message from Jeffrey Davis, 

Associate Vice President and Associate General 

Counsel, Nasdaq, to Marc McKayle, Special 

Counsel, Division of Market Regulation, 

Commission, on September 17, 2004.

6See Securities Exchange Act Release No. 49471 

(March 25, 2004), 69 FR 17006 (March 31, 2004).

7See Securities Exchange Act Release No. 50140 

(August 3, 2004), 69 FR 48535 (August 10, 2004).

8Under those procedures, rankings used to 

allocate display privileges are based only on the 

volume associated with a member’s Supplemental 

MPID. Primary MPIDs will be excluded from the 

calculation. The member with lowest volume using 

a Supplemental MPID will continue to be the first 

to lose the display privilege, but only with respect 

to the Supplemental MPID that caused them to have 

the lowest ranking; the member will not lose its 

authority to use the Supplemental MPID in that 

security to submit quotes and orders to SIZE or the 

display privileges associated with that 

Supplemental MPID with respect to other securities 

in which it is permitted to use the identifier. When 

re-allocating the display privileges, requests for 

Primary MPIDs will continue to receive precedence 

over requests for Supplemental MPIDs.

9Nasdaq assesses no fees for the issuance or use 

of a Supplemental MPIDs other than the 

Commission-approved transaction fees set forth in 

NASD Rule 7010.

10Clarification made pursuant to telephone 

conversation between Jeffrey Davis, Associate Vice 

President and Associate General Counsel, Nasdaq, 

and Marc McKayle, Special Counsel, and Ted 

Venuti, Law Clerk, Division of Market Regulation, 

Commission, on September 13, 2004.

language is in italics; proposed 

deletions are in brackets.4

* * * * *

4613. Character of Quotations 

(a) Quotation Requirements and 

Obligations 

(1) No Change. 

(2) The first MPID issued to a member 

pursuant to subparagraph (1) of this 

rule, or Rule 4623, shall be referred to 

as the member’s ‘‘Primary MPID.’’ For a 

six-month pilot period beginning 

[March 1,] September 1, 2004, market 

makers and ECNs may request the use 

of additional MPIDs that shall be 

referred to as ‘‘Supplemental MPIDs.’’

Market makers and ECNs may be issued 

up to nine Supplemental MPIDs. A 

market maker may request the use of 

Supplemental MPIDs for displaying 

Attributable Quotes/Orders in the 

Nasdaq Quotation Montage for any 

security in which it is registered and 

meets the obligations set forth in 

subparagraph (1) of this rule. An ECN 

may request the use of Supplemental 

MPIDs for displaying Attributable 

Quotes/Orders in the Nasdaq Quotation 

Montage for any security in which it 

meets the obligations set forth in Rule 

4623. A market maker or ECN that 

ceases to meet the obligations 

appurtenant to its Primary MPID in any 

security shall not be permitted to use a 

Supplemental MPID for any purpose in 

that security. 

(3) No Change. 

(b)–(e) No Change

* * * * *

5266. Market Participant Identifiers

(a) No Change. 

(b) For a six-month pilot period 

commencing [June 24, 2004 and 

terminating September 31, 2004,] 

September 1, 2004,5 ITS/CAES market 

makers may request the use of 

additional MPIDs that shall be referred 

to as ‘‘Supplemental MPIDs.’’ ITS/CAES 

market makers may be issued up to nine 

Supplemental MPIDs. An ITS/CAES 

market maker may request the use of 

Supplemental MPIDs for displaying 

two-sided Attributable Quotes/Orders in 

Nasdaq for any security in which it is 

registered and meets the obligations set 

forth in Rule 5220; an ITS/CAES market 

maker may not use a Supplemental 

MPID for displaying one-sided 

Attributable Quotes/Orders. An ITS/

CAES market maker that fails to meet 

the obligations appurtenant to its 

Primary MPID in any security shall not 

be permitted to use a Supplemental 

MPID for any purpose in that security.

(c) No Change.

* * * * *

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

Nasdaq 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. Nasdaq 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 

Nasdaq is proposing to extend 

through March 1, 2005, its current pilot 

programs that enable market makers and 

electronic communication networks 

(‘‘ECNs’’) in Nasdaq stocks and ITS/CAS 

Market Makers in exchange-listed stocks 

to use Supplemental MPIDs for 

displaying Attributable Quotes/Orders 

in the Nasdaq Market Center. On March 

1, 2004, Nasdaq submitted to the 

Commission File No. SR–NASD–2004–

037 6 which established the ability of 

ECNs and market makers in Nasdaq 

securities to use up to 10 individual 

MPIDs to display attributable quotes 

and orders in the Nasdaq Quotation 

Montage. On July 29, 2004, Nasdaq 

submitted to the Commission File No. 

SR–NASD–2004–097,7 which created 

the same capability for ECNs and market 

makers using Nasdaq systems to quote 

and trade exchange-listed securities. 

Pursuant to these programs, which will 

be extended under the proposed rule 

change, MPIDs for Nasdaq and 

exchange-listed securities are allocated 

and, when Nasdaq is reaching 

technological limits for displayed, 

attributable MPIDs, re-allocated using 

the same procedures.8 Additional 

MPIDs are known as ‘‘Supplemental 

MPIDs’’ with a market maker’s or ECN’s 

first MPID being known as the ‘‘Primary 

MPID.’’

The purpose of providing 

Supplemental MPIDs is to provide 

quoting market participants a better 

ability to organize and manage diverse 

order flows from their customers and to 

route orders and quotes to Nasdaq’s 

listed trading facilities from different 

units/desks. Nasdaq believes that to the 

extent that this flexibility provides 

increased incentives to provide liquidity 

to Nasdaq systems, all market 

participants can be expected to benefit.9

The restrictions on the use of any 

Supplemental MPID are the same as 

those applicable to a Primary MPID. 

Regardless of the number of MPIDs 

used, NASD members will trade 

exchange-listed securities using Nasdaq 

systems in compliance with all preexisting NASD and Commission rules 

governing the trading of these securities. 

There are only two exceptions to this 

general principle. First, the continuous 

quote requirement and the need to 

obtain an excused withdrawal, or 

functional excused withdrawal, as 

described in Rule 4613(a) and Rule 

5220(e), as well as the procedures 

described in Rule 4710(b)(2)(B) and 

(b)(5), do not apply to Supplemental 

MPIDs. Second, only one MPID, its 

Primary MPID,10 may be used to engage 

in passive market making or to enter 

stabilizing bids pursuant to NASD Rules 

4614 and 4619. In all other respects, 

market makers and ECNs will continue 

to have the same rights and obligations 

in using a Supplemental MPID to enter 

quotes and orders and to display 

58566 Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Notices 

11Telephone conversation between Jeffrey Davis, 

Associate Vice President and Associate General 

Counsel, Nasdaq, and Ira Brandriss, Assistant 

Director, and Ted Venuti, Law Clerk, Division of 

Market Regulation, Commission, on September 21, 

2004.

12 15 U.S.C. 78s(b)(3)(A).

13 15 U.S.C. 78o–3(b)(6).

14 15 U.S.C. 78s(b)(1).

15 17 CFR 240.19b–4(f)(6).

16 15 U.S.C. 78s(b)(1).

17 17 CFR 240.19b–4(f)(6).

18 17 CFR 240.19b–4(f)(6)(iii).

19For the purposes only of waiving the 30-day 

operative delay, the Commission has considered the 

proposed rule’s impact on efficiency, competition, 

and capital formation. 15 U.S.C. 78c(f).

quotations, as they have using their 

Primary MPIDs.11

The granting of Supplemental MPIDs 

is secondary to the integrity of the 

Nasdaq system trading those issues. As 

such, ECNs and market makers may not 

use a Supplemental MPID(s) to 

accomplish indirectly what they would 

be prohibited from doing directly 

through a single MPID. For example, 

members will not be permitted to use a 

Supplemental MPID to avoid their 

Manning or best execution obligations 

or their obligations under the 

Commission’s Order Handling Rules, 

the firm quote rule, the OATS rules, and 

the Commission’s order routing and 

execution quality disclosure rules. To 

the extent that the allocation of 

Supplemental MPIDs creates regulatory 

confusion or ambiguity, every inference 

will be drawn against the use of 

Supplemental MPIDs in a manner that 

would diminish the quality or rigor of 

the regulation of the Nasdaq market. 

Accordingly, if it is determined that a 

Supplemental MPID is being used 

improperly, Nasdaq will withdraw its 

grant of the Supplemental MPID for all 

purposes for all securities. 

2. Statutory Basis 

Nasdaq believes that the proposed 

rule change is consistent with the 

provisions of Section 15A of the Act,12

in general and with Section 15A(b)(6) of 

the Act,13 in particular, in that it is 

designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, remove impediments to a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. In 

particular, the use of multiple MPIDs in 

listed securities can be expected to 

provide greater flexibility in the 

processing of diverse order flows, 

thereby improving overall system 

liquidity for the benefit of all market 

participants.

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

Nasdaq 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, as amended. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments on the proposed 

rule change were neither solicited nor 

received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The proposed rule change has been 

designated by Nasdaq as a ‘‘noncontroversial’’ rule change pursuant to 

Section 19(b)(3)(A) of the Act 14 and 

subparagraph (f)(6) of Rule 19b–4 

thereunder.15

The foregoing rule change: (1) Does 

not significantly affect the protection of 

investors or the public interest, (2) does 

not impose any significant burden on 

competition, and (3) by its terms does 

not become operative for 30 days after 

the date of this filing, or such shorter 

time as the Commission may designate, 

if consistent with the protection of 

investors and the public interest, and 

the NASD gave the Commission written 

notice of its intent to file the proposed 

rule change, along with a brief 

description and text of the proposed 

rule change, at least five business days 

prior to the date of filing of the 

proposed rule change. Consequently, 

the proposed rule change has become 

effective pursuant to Section 19(b)(3)(A) 

of the Act 16 and Rule 19b–4(f)(6) 

thereunder.17

Pursuant to Rule 19b–4(f)(6)(iii),18 a 

proposed ‘‘non-controversial’’ rule 

change does not become operative for 30 

days after the date of filing, or such 

shorter time as the Commission may 

designate if consistent with the 

protection of investors and the public 

interest. Nasdaq has requested that the 

Commission waive the 30-day operative 

delay. The Commission has determined 

that good cause exists to waive the 30-

day period to permit the pilot program 

to continue on an uninterrupted basis.19

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission may summarily abrogate 

such rule change if it appears to the 

Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act.

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

No. SR–NASD–2004–134 on the subject 

line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

No. SR–NASD–2004–134. 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, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing will also be available for 

inspection and copying at the principal 

office of the 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 

No. SR–NASD–2004–134 and should be 

submitted on or before October 21, 

2004.

Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Notices 58567

20 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 17 CFR 240.19b–4.

4California Rules of Court, Division VI of the 

Appendix.

5These measures included providing venue 

changes for arbitration cases, using non-California 

arbitrators when appropriate, and waiving 

administrative fees for NASD-sponsored 

mediations.

6See Motion for Declaratory Judgment, NASD 

Dispute Resolution, Inc. and New York Stock 

Exchange, Inc. v. Judicial Council of California, 

filed in the United States District Court for the 

Northern District of California, No. C 02 3486 SBA 

(July 22, 2002), available on the NASD Web site at: 

http://www.nasdadr.com/pdf-text/

072202_ca_complaint.pdf. The Commission notes 

that a more thorough discussion of the litigation 

history of this issue can be found in SR–NYSE–

2004–50.

7Originally, the pilot rule applied only to claims 

by customers, or by associated persons asserting a 

statutory employment discrimination claim against 

a member, and required a written waiver by the 

industry respondents. In July 2003, NASD 

expanded the scope of the pilot rule to include all 

claims by associated persons against another 

associated person or a member. At the same time, 

the rule was amended to provide that when a 

customer, or an associated person with a claim 

against a member or another associated person, 

agrees to waive the application of the California 

Standards, all respondents that are members or 

associated persons will be deemed to have waived 

the application of the standards as well. The July 

2003 amendment also clarified that the pilot rule 

applies to terminated members and associated 

persons. See Securities Exchange Act Release No. 

48187 (July 16, 2003), 68 FR 43553 (July 23, 2003) 

(SR–NASD–2003–106). In October 2003, NASD 

again expanded the scope of the pilot rule to 

include claims filed by members against other 

members and to claims filed by members against 

associated persons that relate exclusively to 

promissory notes. See Securities Exchange Act 

Release No. 48711 (October 29, 2003), 68 FR 62490 

(November 4, 2003) (SR–NASD–2003–153).

8NASD states that the NYSE has a similar rule, 

NYSE Rule 600(g).

9See Securities Exchange Act Release No. 46562 

(September 26, 2002), 67 FR 62085 (October 3, 

2002) (SR–NASD–2002–126).

10See Securities Exchange Act Release No. 49452 

(March 19, 2004), 69 FR 17010 (March 31, 2004) 

(SR–NASD–2004–040).

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.20

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–21882 Filed 9–29–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50447; File No. SR–NASD–

2004–126] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by the 

National Association of Securities 

Dealers, Inc. Regarding Waiver of 

California Arbitrator Disclosure 

Standards 

September 24, 2004. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on August 

19, 2004, the National Association of 

Securities Dealers, Inc. (‘‘NASD’’), 

through its wholly-owned subsidiary, 

NASD Dispute Resolution, Inc. (‘‘NASD 

Dispute Resolution’’), filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III, below, which NASD has prepared. 

NASD has designated the proposed rule 

change as constituting a ‘‘noncontroversial’’ rule change under 

paragraph (f)(6) of Rule 19b–4 under the 

Act,3 which renders the proposal 

effective upon receipt of this filing by 

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 

NASD is proposing to extend the pilot 

rule in IM–10100(f) of the NASD Code 

of Arbitration Procedure (‘‘Code’’), 

relating to the California waiver 

program, until March 31, 2005. NASD is 

not proposing any textual changes to the 

By-Laws or Rules of NASD. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASD included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. NASD has prepared 

summaries, set forth in Sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Effective July 1, 2002, the California 

Judicial Council adopted a set of rules, 

‘‘Ethics Standards for Neutral 

Arbitrators in Contractual Arbitration’’

(‘‘California Standards’’),4 which 

contain extensive disclosure 

requirements for arbitrators. According 

to NASD, the rules were designed to 

address conflicts of interest in private 

arbitration forums that are not part of a 

federal regulatory system overseen on a 

uniform, national basis by the SEC. 

NASD states that the California 

Standards impose disclosure 

requirements on arbitrators that conflict 

with the disclosure rules of NASD and 

the New York Stock Exchange 

(‘‘NYSE’’). Because NASD could not 

both administer its arbitration program 

in accordance with its own rules and 

comply with the new California 

Standards at the same time, NASD 

initially suspended the appointment of 

arbitrators in cases in California, but 

offered parties several options for 

pursuing their cases.5

NASD and NYSE filed a lawsuit in 

federal district court seeking a 

declaratory judgment that the California 

Standards are inapplicable to arbitration 

forums sponsored by self-regulatory 

organizations (‘‘SROs’’).6 That litigation 

is currently pending on appeal. Since 

then, other lawsuits relating to the 

application of the California Standards 

to SRO-sponsored arbitration have been 

filed, some of which are still pending.

To allow arbitrations to proceed in 

California while the litigation is 

pending, NASD implemented a pilot 

rule to require all industry parties 

(member firms and associated persons) 

to waive application of the California 

Standards to the case, if all the parties 

in the case who are customers, 

associated persons with claims against 

industry parties, member firms with 

claims against other member firms, or 

member firms with claims against 

associated persons that relate 

exclusively to promissory notes, have 

done so.7 In such cases, the arbitration 

proceeds under the NASD Code of 

Arbitration Procedure, which already 

contains extensive disclosure 

requirements and provisions for 

challenging arbitrators with potential 

conflicts of interest.8

The pilot rule, which was originally 

approved for six months on September 

26, 2002,9 has been extended and is 

now due to expire on September 30, 

2004.10 Because NASD believes the 

pending litigation regarding the 

California Standards is unlikely to be 

resolved by September 30, 2004, NASD 

requests that the effectiveness of the 

pilot rule be extended through March 

31, 2005, in order to prevent NASD from 

having to suspend administration of 

cases covered by the pilot rule.

2. Statutory Basis 

NASD believes that the proposed rule 

change is consistent with the provisions