[Federal Register Volume 62, Number 162 (Thursday, August 21, 1997)]
[Notices]
[Pages 44501-44503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-22182]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38935; File No. SR-MSRB-97-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to Its 
Arbitration Code

August 14, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on May 22, 
1997,\1\ the Municipal Securities Rulemaking Board (``Board'' or 
``MSRB'') 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 the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ The MSRB filed Amendment No. 1 to the proposed rule change 
on August 14, 1997, the substance of which has been incorporated 
into the notice. See letter from Jill C. Finder, Assistant General 
Counsel, MSRB, to Katherine A. England, Assistant Director, Market 
Regulation, Commission, dated August 14, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Board is filing a proposed rule change to amend Rule G-35, the 
Board's Arbitration Code. The proposed rule change would create two 
sections: Section 37 would state that the Board will not accept any new 
arbitration claims filed on or after January 1, 1998; and Section 38 
would provide that, as of January 1, 1998, every bank dealer (as 
defined in Rule D-8) shall be subject to the Code of Arbitration 
Procedure of the National Association of Securities Dealers, Inc. 
(``NASD'') for every claim, dispute or controversy arising out of or in 
connection with the municipal securities activities of the bank dealer 
acting in its capacity as such. New Section 38 would further provide 
that each bank dealer shall be subject to, and shall abide by, the 
NASD's Code of Arbitration Procedure as if the bank dealer were a 
``member'' of the NASD.

[[Page 44502]]

The text of the proposed rule change is as follows, with additions in 
italics:
Arbitration
    Rule G-35. Every broker, dealer and municipal securities dealer 
shall be subject to the Arbitration Code set forth herein.
Arbitration Code
    Section 1 through Section 36. No change.
    Section 37. Arbitration Claims Filed On or After January 1, 1998. 
The Board will not accept any new arbitration claims filed on or after 
January 1, 1998.
    Section 38. Arbitration Involving Bank Dealers. As of January 1, 
1998, every bank dealer (as defined in rule D-8) shall be subject to 
the Code of Arbitration Procedure of the National Association of 
Securities Dealers, Inc. (``NASD'') for every claim, dispute or 
controversy arising out of or in connection with the municipal 
securities activities of the bank dealer acting in its capacity as 
such. For purposes of this rule, each bank dealer shall be subject to, 
and shall abide by, the NASD's Code of Arbitration Procedure as if the 
bank dealer were a ``member'' of the 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, the Board 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 Board 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 Board's arbitration program, which is limited to the resolution 
of disputes involving municipal securities, has been in effect since 
December 1978. The Board's caseload grew steadily for a time; for 
example, 21 cases were received in 1980, 82 in 1986, and 115 in 1988. 
Between 1978 and 1993, the NASD automatically transferred to the 
Board's arbitration program any claims received involving municipal 
securities, and until approximately 1993 the majority of the Board's 
cases were received in this manner.\2\ In 1993, the NASD amended its 
arbitration code to require a customer's consent before it could 
transfer a case to another self-regulatory organization (``SRO''). The 
practical effect of this amendment has been to virtually halt the 
transfer of municipal cases to the Board's arbitration program because 
customers choose to remain at the NASD. Consequently, the Board's 
caseload has declined dramatically from 115 cases received in 1988 to 
10 cases received in 1996. For 1997, the Board has thus far received 
two cases.
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    \2\ The NASD also transferred cases (other than those involving 
municipal securities) to other self-regulatory organizations 
(``SROs''), such as the New York Stock Exchange and the American 
Stock Exchange, if the particular claim arose out of a transaction 
in that SRO's market.
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    The Board believes that its declining caseload makes it difficult 
to justify the cost of continuing to operate the arbitration program. 
Accordingly, the Board has determined that, effective January 1, 1998, 
it will no longer accept any new claims filed with its arbitration 
program. The Board will, however, continue to operate its program in 
order to administer its current, open cases and any new claims received 
prior to January 1, 1998, but will discontinue its arbitration program 
when all such cases have been closed.\3\
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    \3\ At such time, the Board will submit a filing to the 
Commission to delete sections 1 through 36 of Rule G-35, as well as 
new Section 37, and to rescind Rule A-16 on arbitration fees and 
deposits.
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    The Board notes that, currently, any customer or securities dealer 
with a claim, dispute, or controversy against a dealer involving its 
municipal securities activities may submit that claim to the 
arbitration forum of any SRO of which the dealer is a member, including 
the NASD. Bank dealers, however, are unique in that they are subject to 
the Board's rules but are not members of any other SRO. In light of the 
Board's decision not to accept any new arbitration claims on or after 
January 1, 1998, it is necessary to amend Rule G-35 to state this and 
to provide an alternative forum for claims involving the municipal 
securities activities of bank dealers. The proposed rule change 
accomplishes this by subjecting every bank dealer, as of January 1, 
1998, to the NASD's Code of Arbitration Procedure for every claim, 
dispute or controversy arising out of or in connection with the 
municipal securities activities of the bank dealer acting in its 
capacity as such. In addition, the proposed rule change requires that 
bank dealers abide by the NASD's Code just as if they were ``members'' 
of the NASD for purposes of arbitration.
    The Board notes that, pursuant to the proposed rule change, the 
enforcement mechanism for bank dealers would not be altered; the bank 
regulatory agencies (e.e., the Office of Comptroller of the Currency, 
the Federal Reserve Board, and the Federal Deposit Insurance 
Corporation) would continue to be responsible for the inspection and 
enforcement of bank dealers' municipal securities activities, including 
arbitration. Thus, for example, a bank dealer's failure to pay an 
arbitration award rendered pursuant to the NASD's Code of Arbitration 
Procedure would constitute a violation of Board Rule G-35; since it is 
that rule, as amended, that subjects bank dealers to the NASD's Code. 
Similarly, a bank dealer's refusal to submit to arbitration pursuant to 
the NASD's Code of Arbitration Procedure would constitute a violation 
of Board Rule G-35. The NASD would notify the Board Of any such 
violations and the Board, in turn, would contact the appropriate bank 
regulatory agency.
2. Statutory Basis
    The Board believes that the proposed rule change is consistent with 
Sections 15B(b)(2) (C) and (D) of the Act, which provide, respectively, 
that the Board's rules shall:

be designed* * *, in general, to protect investors and the public 
interest * * *. [and if the Board deems appropriate, provide for the 
arbitration of claims, disputes, and controversies relating to 
transactions in municipal securities * * *.

    As discussed above, the Board deems it no longer appropriate to 
operate an arbitration program. The Board believes that the proposed 
rule change provides for the protection of investors and the public 
interest, particularly those public investors who wish to pursue 
arbitration claims against bank dealers in connection with their 
municipal securities activities. The proposed rule change ensures that 
there is an arbitration forum available for those claims.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act since the proposed rule change 
would make all bank dealers subject to the NASD's Code of Arbitration 
Procedure in connection with their municipal securities activities. 
Non-bank dealers already are subject to this Code by virtue of being 
NASD members.

[[Page 44503]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In September 1996, the Board published a notice expressing its 
concern over the costs of operating the arbitration program in light of 
the decreasing number of cases filed with the Board.\4\ The Board 
stated that the decline in its caseload makes it difficult to justify 
the cost of continuing to operate the arbitration program, and that it 
was considering discontinuing its arbitration program. The Board 
requested comment on the impact that such action would have on the 
public and the industry, and specifically requested comment on what 
effect, if any, the elimination of its arbitration program would have 
on bank dealers who are not NASD members.
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    \4\ MSRB Reports, Vol. 16, No. 3 (Sept. 1996) at 25.
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    In response to its request, the Board received comment letters from 
a dealer and from an individual who serves as an arbitrator for the 
Board. The dealer expressed its concern that arbitrators serving in 
other SRO arbitration programs do not have sufficient knowledge of the 
municipal securities industry. In an attempt to address this concern, 
the Board, in the next few months, plans to forward its list of 
arbitrators to the NASD.
    With regard to bank dealers, the dealer stated that the Board's 
program should not be eliminated until an arbitration forum is 
established for these dealers, and suggested that the Board require 
bank dealers to use the NASD's arbitration program for resolving 
disputes involving municipal securities. The proposed rule change 
accomplishes this.
    The other commentator expressed his belief that elimination of the 
Board's program will not impair the industry's arbitration process.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Board. All submissions should refer to File No. SR-MSRB-97-04 and 
should be submitted by September 11, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-22182 Filed 8-20-97; 8:45 am]
BILLING CODE 8010-01-M