20230 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Notices

12See Amendment No. 3, supra note 3.

13 17 CFR 200.30–3(a)(12).

1The NASD filed amendments to the proposed

rule change on February 11, and March 31, 1998,

the substance of which is incorporated into this

notice. See letters from Elliott R. Curzon, Assistant

General Counsel, NASD Regulation, to Katherine A.

England, Assistant Director, Market Regulation,

Commission, dated February 6, 1998 (‘‘Amendment

No. 1’’) and March 30, 1998 (‘‘Amendment No. 2’’).

2 ‘‘Mandatory’’ arbitration is when one party to a

dispute is compelled to submit the claim to

arbitration by rule or contract. For example, Rule

10201 of the Code requires members and associated

persons to arbitrate claims at the request of another

member or associated person, and Rule 10301

requires members and associated persons to

arbitrate claims at the request of a customer.

3The term ‘‘exempted securities’’ is defined in

Section 3(a)(12) of the Act, 15 U.S.C. 78c(a)(12), to

mean government securities, municipal securities,

and several other types of securities classified as

exempted for specific purposes under the Act.

or DPM. In making this determination,

the Commission notes that any person

adversely affected by a decision made

under proposed Rule 8.95(c) has the

right to a formal hearing, with the

assistance of counsel, before the

Exchange’s Appeals Committee.

Moreover, decisions of the Appeals

Committee may be appealed to the

Exchange’s Board of Directors.

The Commission believes that the

CBOE’s proposed Rule 8.95(e)—which

provides that the allocation of security

to a trading crowd or a DPM, or the

assignment of a trading crowd’s or a

DPM’s location on the Exchange’s floor,

does not convey ownership rights in the

allocation or location or associated

order flow—merely reiterates the

limited nature of those allocations, and

highlights that the Exchange retains the

authority to determine allocations and

locations.

The Commission believes that the

CBOE’s proposed Rule 8.95(f), which

provides special rules for option classes

opened for trading prior to May 1, 1987,

merely reflects existing practices that

are consistent with the will of the

Exchange’s membership.

The Commission believes that the

CBOE’s proposed Rule 8.95(g), which

states that in allocating and reallocating

securities the Allocation Committee and

the Special Products Assignment

Committee shall act in accordance with

restrictions and limitations established

pursuant to other Exchange rules,

ensures that proposed Rule 8.95 does

not cause any inconsistencies with

existing Exchange rules, and that other

Exchange committees are not hindered

in the exercise of their own

responsibilities.

The Commission believes that the

CBOE’s proposed Rule 8.95,

Interpretation .01, which provides that

the Allocation Committee and the

Special Products Assignment

Committee are responsible for

reallocating securities that are removed

from a trading crowd or DPM pursuant

to another rule, or when the trading

crowd or DPM for some other reason no

longer retains the allocation, subject to

Rule 8.80(b)(6), clarifies in a reasonable

and efficient way the respective

responsibilities of those two committees

and other Exchange committees such as

the MTS Appointments Committee.

The Commission believes that the

CBOE’s proposed Rule 8.95,

Interpretation .02, which provides that

the Allocation Committee is responsible

for relocating a trading crowd or DPM

which is required to be relocated

pursuant to another Exchange rule,

clarifies the respective responsibilities

of the Allocation Committee and other

Exchange committees.

Finally, the Commission believes that

eliminating CBOE Rules 8.80(a) and

8.80(b)(7) current with the effectiveness

of proposed CBOE Rule 8.95 will help

avoid redundancies that may otherwise

cause confusion. The Commission notes

that Rule 8.80(b)(8) is made redundant

by the elimination of Rule 8.80(b)(7),

but the Exchange has stated that it is in

the process of proposing to update and

reorganize CBOE Rule 8.80, a process

which will include the deletion of

CBOE Rule 8.80(b)(8).12

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (SR–CBOE–98–

03), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–10752 Filed 4–22–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39880; File No. SR–NASD–

98–04]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc., Relating to Mandatory

Arbitration of Claims Involving

Exempted Securities

April 16, 1998.

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 January 27, 1998,1

the National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

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 selfregulatory organization. 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 Regulation is proposing to

change the interpretation of the NASD’s

Code of Arbitration Procedure (‘‘Code’’)

such that claims relating to transactions

in exempted securities, including

government and municipal securities,

may be submitted to the Office of

Dispute Resolution (‘‘Office’’) for

arbitration under the Code without

limitation. Accordingly, when such

claims arise involving public customers,

Rule 10301 of the Code will require

member firms and associated persons to

arbitrate them at the request of the

customer. In addition, when such

claims arise between members and other

members or associated persons, Rule

10201 (which governs intra-industry

disputes) will require them to be

arbitrated at the request of one of the

parties. Finally, when such claims arise

between a member firm and a customer,

customers may be required under the

terms of a predispute arbitration

agreement to arbitrate the claims.

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

self-regulatory organization 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 self-regulatory organization 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

Background. Since at least 1989, the

Office has declined to accept claims for

mandatory 2 arbitration involving

transactions in exempted securities 3

naming member firms that were
Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Notices 20231

4Section 15C of the Act, 15 U.S.C. 78o–5, governs

the registration of government securities broker/

dealers. Since 1986, when Section 15C was adopted

under the Government Securities Act, government

securities broker/dealers have been required to

become members of an exchange or the NASD.

5Section 15B of the Act, 15 U.S.C. 78o–4, governs

the registration of municipal securities dealers.

Municipal securities dealers are not required to

become members of an exchange or the NASD.

Nevertheless, some NASD members which are

engaged in a general securities business are

registered as municipal securities dealers, and some

firms which are exclusively municipal securities

dealers have become members of the NASD.

6Rule 10301(c) of the Code permits claims

‘‘which arise out of a readily identifiable market’’

to be referred to the arbitration forum for that

market if the claimant consents. Since this

provision was adopted, the Office will ask the

claimants in a case involving municipal securities

if they want their case referred to the MSRB. No

cases have been referred, and the Commission

recently approved an MSRB proposed rule change

that terminates the MSRB’s arbitration program and

requires the financial institutions that are subject to

its rules to submit to arbitration in the NASD’s

forum as if they were NASD members. See

Securities Exchange Act Release No. 39378

(December 1, 1997), 62 FR 64417 (December 5,

1997).

7 In Notice to Members 96–66, published in

October 1996, the NASD announced the

consolidation of its Government Securities Rules

into the Conduct Rules, ending the regulatory

distinction between the activities of general

securities broker/dealers and government securities

broker/dealers.

8The NASD is still barred from establishing

regulations covering the municipal securities

activities of broker/dealers; that authority is

reserved to the MSRB.

9See footnote 6, supra.

10NASD Regulation notes that few government

securities claims involving public customers have

been filed or attempted to be filed with the Office.

Most of the claims involving government securities

have involved member-to-member claims.

registered solely under Section 15C of

the Act.4 The Office will, however,

accept claims where both parties agree

to submit the claim to arbitration. If the

claim involves a municipal securities

transaction by a member firm,5 the

Office will accept the claim for

arbitration, but will ask the claimants if

they want the claim referred to the

Municipal Securities Rulemaking Board

(‘‘MSRB’’) for arbitration.6 Finally, if a

claim involves a government securities

transaction by a general securities

broker/dealer member firm, the Office

will accept the claim for mandatory

arbitration.

Until recently, NASD Regulation had

limited regulatory jurisdiction over

member firm activities in connection

with government securities and no

jurisdiction over firms that engaged only

in exempted securities activities. The

policy with respect to accepting or

rejecting claims for mandatory

arbitration was based on the view that

the subject matter jurisdiction of NASD

Regulation’s arbitration forum should

not be significantly different from the

regulatory jurisdiction of the NASD.

With the broadening of NASD

Regulations’s regulatory jurisdiction

over government securities as a result of

the Government Securities Act

Amendments of 1993, and the recent

adoption of amendments of the NASD’s

rules in recognition of the broader

jurisdiction,7 NASD Regulation has

revisited the policy. NASD Regulation

believes it would be appropriate to

include claims involving exempted

securities by members engaged

exclusively in exempted securities

activities within the scope of those

claims that are subject to mandatory

arbitration under the Code.

Discussion. Rule 10101 of the Code

provides that disputes ‘‘arising out of or

in connection with the business of any

member’’ are eligible for submission to

arbitration under the Code. The

definition of ‘‘investment banking or

securities business’’ in Article I,

paragraph (l) of the By-Laws means ‘‘the

business carried on by a broker, dealer,

or municipal securities dealer * * *, or

government securities broker or

dealer * * *.’’ Rule 10301(a) provides

that eligible disputes ‘‘arising in

connection with the business of [a]

member or in connection with the

activities of [an] associated person’’

must be arbitrated pursuant to any

enforceable arbitration agreement or

upon the demand of a customer. While

these rules (and the definition) sweep in

a very broad range of disputes, Rule

10301(b) permits the Office to decline to

arbitrate certain matters.

In reliance on Rule 10301(b), and the

NASD’s limited regulatory jurisdiction

over government securities-only

member firms, the Office has for many

years declined to accept for arbitration

claims that involved transactions in

government securities by member firms

engaged only in activities involving

government securities unless both

parties voluntarily agreed to submit the

claim. The Office’s position means that

these claims cannot be compelled into

arbitration under either a demand for

arbitration or a predispute arbitration

agreement. Members engaged in

municipal securities transactions have

been required to arbitrate their claims

because they are either general

securities broker/dealers that are

otherwise required to arbitrate all of

their other claims, or because they

voluntarily became NASD members.

The Office’s decision to decline to

mandate arbitration of government

securities claims was based on the

following rationale: (1) The NASD only

regulated the exempted securities

activities of member firms to the limited

extent permitted in Section 15A(f)(2) of

the Act; and, (2) the subject matter

jurisdiction of the arbitration forum

should not be significantly different

from the NASD’s regulatory jurisdiction

over its members and associated

persons.

In response to the passage of the

Government Securities Act

Amendments of 1993, which amended

Section 15A(f)(2) of the Act and granted

the NASD the authority to regulate

broadly the business practices of

members with respect to government

securities,8 NASD Regulation amended

its rules to consolidate the Government

Securities Rules it had adopted

pursuant to Section 15A(f)(2) of the Act

with its more generally applicable

Conduct Rules. NASD Regulation now

regulates the activities of members

engaged in government securities

activities that are both general securities

broker/dealers and limited purpose

government securities broker/dealers.

NASD Regulation believes that with

its broad new authority to regulate the

government securities business of its

members, it is appropriate to open its

arbitration forum to disputes involving

transactions in all kinds of securities,

including exempted securities,

consistent with the plain language of the

Code and the By-Laws. While the

subject matter jurisdiction of the

arbitration forum now extends to

municipal securities activities that are

not strictly within the regulatory scope

of NASD Regulation, such activities are

‘‘business’’ within the definitions of the

By-Laws and the meaning of the Code.

Moreover, NASD Regulation does not

believe that there should be

unreasonable barriers to customers

seeking relief in arbitration for claims

relating to the business of members.

Therefore, compelling NASD members

to arbitrate municipal securities claims

would be consistent with the intent of

the MSRB’s rule filing.9

Under this policy, a member that is

registered solely as a government

securities broker/dealer and that has a

dispute with a customer over a

transaction in exempted securities shall

be required to submit the dispute to

arbitration upon the demand of the

customer.10 Such disputes also may be

compelled to arbitration pursuant to a

valid predispute arbitration agreement.

Intra-industry disputes involving

exempted securities also will be subject

to mandatory arbitration upon the

request of one of the parties.

NASD Regulation also believes the

policy should permit any claim

involving exempted securities to be

submitted for arbitration without regard

to when the transaction occurred;
20232 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Notices

11NASD Regulation notes that it has a proposed

amendment to Rule 10304, rule filing SR–NASD–

97–44, pending approval with the SEC. Under the

proposed rule change all claims are presumed to be

eligible; however, the presumption can be overcome

if the respondent challenges the claim on the basis

that more than six years have elapsed since the act

or occurrence giving rise to the claim.

12 15 U.S.C. 78–-3.

13 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 39361

(November 26, 1997), 62 FR 64422 (File No. SR–

NASD–97–69). Amendment No. 1 to the proposed

rule filing was filed on November 12, 1997. The

changes contained in this amendment were

included in the Notice. See Letter from Mary N.

Revell, Associate General Counsel, NASD

Regulation, to Katherine A. England, Assistant

Director, Division of Market Regulation,

Commission (November 17, 1997).

4See Letter from R. Gerald Baker, Securities

Industry Association (‘‘SIA’’), to Jonathan G. Katz,

Secretary, Commission, dated February 11, 1998.

5See letter from Mary N. Revell, Associate

General Counsel, NASD Regulation, to Katherine A.

England, Assistant Director, Office of Market

Supervision, Division of Market Regulation (March

9, 1998). In Amendment No. 2, NASD Regulation:

(1) Applies the proposal to firms that have a work

force comprised of a specified number of registered

persons who were employed by a ‘‘disciplined

firm’’ within the last three years instead of two

years; (2) requires firms to establish special

procedures to supervise the telemarketing activities

of registered persons instead of registered

representatives; (3) amends the definition of

registered persons to include those persons who

register as municipal securities principals or

representatives pursuant to Municipal Securities

Rulemaking Board Rule G–3; and (4) provides

guidance on what would constitute ‘‘reasonable

procedures for reviewing the tape recordings made

pursuant to the requirements of’’ the taping rule in

a Notice to Members announcing approval of the

rule.

6Staffs of the NASD, New York Stock Exchange

(‘‘NYSE’’), North American Securities

Administrators Association (‘‘NASAA’’), and the

Office of Compliance Inspections and

however, if more than six years have

elapsed from the transaction,

occurrence, or event giving rise to the

claim, under Rule 10304 of the Code,

the claim will not be eligible for

submission to arbitration.11 All claims

involving general securities broker/

dealers will continue to be accepted for

arbitration consistent with past practice.

Claims previously submitted that the

Office has already declined to arbitrate

under the old policy cannot be

resubmitted under the policy being

announced herein.

2. Statutory Basis

NASD Regulation believes that the

proposed rule change is consistent with

the provisions of Section 15A(b)(6) of

the Act 12 in that eliminating a barrier to

the arbitration of disputes involving

exempted securities, public customers

and members will have access to a fair,

efficient, and cost-effective forum for

the resolution of such disputes.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

No written comments were either

solicited or received.

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,

including whether the proposed rule

change is consistent with the Act.

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 NASD. All

submissions should refer to File No.

SR–NASD–98–04 and should be

submitted by May 14, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–10754 Filed 4–22–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39883; File No. SR–NASD–

97–69]

Self-Regulatory Organizations; Order

Granting Approval of Proposed Rule

Change, as Amended, and Notice of

Filing and Order Granting Accelerated

Approval of Amendment No. 2 to the

Proposed Rule Change by the National

Association of Securities Dealers, Inc.

Relating to the Tape Recording of

Conversations

April 17, 1998.

I. Introduction

On September 12, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’), through its regulatory

subsidiary NASD Regulation, Inc.

(‘‘NASD Regulation’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) a proposed

rule change pursuant to Section 19(b)(1)

of the Securities Exchange Act of 1934

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

In this filing, NASD Regulation

proposed amendments to Rule 3010 to

require the tape recording of

conversations where members hire more

than a specified percentage of registered

persons from certain firms that have

been expelled or that have had their

broker/dealer registration revoked for

violations of sales practices rules. The

proposed rule change also includes a

conforming rule change to Rule 9610.

Notice of this proposed rule change was

published in the Federal Register on

December 5, 1997 (as amended, the

‘‘Notice’’).3 The Commission received

one comment letter, which expressed

concerns about using tape recording as

a method of supervision, in response to

the Notice.4 On March 9, 1998, NASD

Regulation filed Amendment No. 2 with

the Commission.5 This order approves

the rule change, as amended, and grants

accelerated approval of Amendment No.

2 to the rule change.

II. Background

At its meeting in July 1996, the NASD

Regulation Board of Directors

authorized the staff to issue a Notice to

Members soliciting comment on

proposed changes to NASD supervisory

Rule 3010 to require the tape recording

of telephone conversations of registered

representatives in certain

circumstances. The Rule was developed

both to respond to concerns expressed

in the Joint Regulatory Sales Practice

Sweep (‘‘Sweep’’) Report 6 regarding the