Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Notices 20227

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

2 17 CFR 240.19b–4.

3On January 23, 1998, the CBOE filed a technical

amendment to the filing, clarifying that the

Exchange’s Board of Directors had approved the

proposed rule change in February 1997

(Amendment No. 1).

On February 12, 1998, the CBOE filed

Amendment No. 2 to the proposal. Amendment No.

2 deletes CBOE Rules 8.80(a) and 8.80(b)(7) and

inserts an inadvertently omitted part of the Federal

Register notice. See Letter from Arthur Reinstein,

Assistant General Counsel, CBOE, to Joshua Kans,

Attorney, Division of Market Regulation

(‘‘Division’’), Commission, dated February 12, 1998

(Amendment No. 2).

On March 4, 1998, the CBOE filed Amendment

No. 3 to the proposal. Amendment No.3 clarifies the

basis for deleting CBOE Rule 8.80(b)(7).

Amendment No. 3 also notes that the CBOE is in

the process of comprehensively amending CBOE

Rule 8.80. See Letter from Arthur Reinstein, CBOE,

to Joshua Kans, Division, Commission, dated March

4, 1998 (Amendment No. 3).

4Securities Exchange Act Release No. 39725

(March 5, 1998), 63 FR 12119.

5As part of this rule change, the Exchange is

deleting existing CBOE Rules 8.80(a) and 8.80(b)(7).

See Amendment Nos. 2 and 3, supra note 3.

6The Exchange has three committees that

perform market performance functions, including

the evaluation of market performance. The

Exchange’s Market Performance Committee

performs market performance functions with

respect to all trading crowds, market-makers (other

than DPMs), and floor brokers that trade in

securities other than DJX, NDX, OEX, and SPX

index options; the Index Market Performance

Committee performs market performance functions

with respect to the trading crowds, market-makers

(other than DPMs), and floor brokers that trade DJX,

NDX, OEX, and SPX index options; and the MTS

Appointments Committee performs market

performance functions with respect to all DPMs.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39879; File No. SR–CBOE–

98–03]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the Chicago Board Options Exchange,

Inc., Relating to Allocation Procedures

April 16, 1998.

I. Introduction

On January 22, 1998, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’),1 and Rule 19b–4 2

thereunder, a proposed rule change to

codify the Exchange’s process for

allocating securities to market-maker

trading crowds and designated primary

market-makers (‘‘DPMs’’).

The proposed rule change, as

modified by amendments,3 was

published for comment in the Federal

Register on March 12, 1998.4 No

comments were received on the

proposal. This order approves the

proposed rule change, as amended.

II. Description

The Exchange’s Board of Directors has

delegated to the Exchange’s Allocation

Committee and Special Product

Assignment Committee the authority to

allocate the securities traded on the

Exchange. Each security traded on the

Exchange is allocated either to a marketmaker trading crowd or to a DPM.5 To

codify the process the Exchange uses to

make those allocations, the CBOE

proposes to adopt new CBOE Rule 8.95,

‘‘Allocation of Securities and Location

of Trading Crowds and DPMs.’’ CBOE

Rule 8.95 will consist of seven

subparagraphs, (a) through (g), and

contain two interpretations.

Proposed CBOE Rule 8.95(a) provides

that the Allocation Committee shall be

responsible for determining for each

equity option class traded on the

Exchange (i) whether the option class

should be allocated to a trading crowd

or to a DPM and (ii) to which trading

crowd or DPM the option class should

be allocated. Similarly, proposed CBOE

Rule 8.95(a) provides that the Special

Product Assignment Committee shall be

responsible for determining for each

security traded on the Exchange other

than an equity option (i) whether the

security should be allocated to a trading

crowd or to a DPM and (ii) to which

trading crowd or DPM the security

should be allocated. Securities other

than equity options that are traded on

the Exchange include index options and

securities traded pursuant to Chapter

XXX, ‘‘Stocks, Warrants and Other

Securities,’’ of the Exchange’s Rules,

such as structured products.

Proposed CBOE Rule 8.95(a) further

provides that the Allocation Committee

shall be responsible for determining the

location on the Exchange’s trading floor

of each trading crowd, each DPM, and

each security traded on the Exchange.

For example, this provision permits the

Allocation Committee to place a large

trading crowd or DPM operation in a

trading floor location that is large

enough to accommodate the crowd or

DPM. As another example, if a DPM

operate as a DPM at more than one

trading station, this provision permits

the Allocation Committee to determine

the station, and the location within each

station, at which the securities allocated

to the DPM will trade.

Proposed CBOE Rule 8.95(b) describes

the criteria that may be considered by

the Allocation Committee and Special

Product Assignment Committee in

making security allocation

determinations and by the Allocation

Committee in making location

determinations. The factors to be

considered may include, but are not

limited to, any one or more of the

following: performance, volume,

capacity, market performance

commitments, operational factors,

efficiency, competitiveness,

environment in which the security will

be traded, expressed preferences of

issuers, and recommendations of other

Exchange committees.

The following are some examples of

the many ways in which these criteria

may be applied. For example, in

considering performance, the

appropriate Allocation Committee (i.e.,

the Allocation Committee or Special

Product Assignment Committee, as

applicable) might look at the market

performance ranking of the applicable

trading crowds or DPMs, as established

by market performance reviews that are

conducted by the Exchange’s Market

Performance Committees and Modified

Trading System (‘‘MTS’’) Appointments

Committee.6 In considering volume, the

appropriate Allocation Committee might

look at the anticipated trading volume

of the security and the trading volume

attributable to the applicable trading

crowds or DPMs in determining which

trading crowds or DPMs would be best

able to handle the additional volume.

Similarly, in considering capacity,

operational factors, and efficiency, the

appropriate Allocation Committee might

look to criteria such as the number of

market-makers or DPM personnel, the

ability to process order flow, and the

amount of trading crowd or DPM capital

in determining which trading crowds or

DPMs would be best able to handle

additional securities. In considering

market performance commitments, the

appropriate Allocation Committee might

look at the pledges a trading crowd or

DPM has made with respect to how

narrow its bid-ask spreads will be and

the number of contracts for which it will

honor its disseminated market

quotations beyond what is required by

the Exchange’s Rules. In considering

competitiveness, the appropriate

Allocation Committee might look at

percentage of volume attributable to a

trading crowd or DPM in allocated

securities that are traded on more than

one exchange. In considering the

environment in which the security will

be traded, the appropriate Allocation

Committee might seek a proportionate

distribution of securities between the

market-maker system and the DPM

system and across individual trading

crowds and DPMs. Also, in considering

expressed preferences of issuers, the

appropriate Allocation Committee might

give consideration to the views of the

issuer of a security traded pursuant to
20228 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Notices

7Under the proposal, when CBOE Rule 8.95(c)

becomes effective, the CBOE would delete existing

CBOE Rule 8.80(b)(7).

CBOE Rule 8.80(b)(7)(i) states that the MTS

Appointments Committee may discontinue the use

of a DPM in an option class if the trading activity

in that class exceeds a predetermined volume. That

provision is not superfluous because the CBOE

membership voted in December 1993 to advise the

MTS Appointments Committee not to exercise that

authority. See Amendment 2, supra note 3.

Existing CBOE Rule 8.80(b)(7)(ii) permits the

MTS Appointments Committee to discontinue use

of a DPM in an option class if it determines that

trading would be better accommodated by using a

market-maker system without a DPM. Proposed

CBOE Rule 8.95(c) would give similar authority to

the appropriate Allocation Committee. See

Amendment Nos. 2 and 3, supra note 3.

8Proposed CBOE Rule 8.95(f) supersedes CBOE

Rule 8.80(a). Accordingly, the CBOE proposes to

delete CBOE Rule 8.80(a). See Amendment No. 2,

supra note 3.

Chapter XXX with respect to the

allocation of that security or to the

licenser of an index on which an index

option is based with respect to the

allocation of that index option.

Similarly, the appropriate Allocation

Committee might consider the

recommendations of other Exchange

committees, particularly those that

evaluate trading crowd and DPM market

performance.

Proposed CBOE Rule 8.95(c) provides

that the appropriate Allocation

Committee may remove an allocation

and reallocate the applicable security

during the first six months following its

allocation to a trading crowd or DPM if

the trading crowd or DPM fails to

adhere to any market performance

commitments made by the trading

crowd or DPM in connection with

receiving the allocation. The Allocation

Committees typically request that

trading crowds and DPMs make market

performance commitments as part of

their applications to receive allocations

of particular securities. As described

above, these commitments may relate to

pledges to keep bid-ask spreads within

a particular width or to make

disseminated quotations firm for a

designated number of contracts beyond

what is required by Exchange Rules.

Proposed CBOE Rule 8.95(c) permits the

appropriate Allocation Committee to

remove an allocation if these

commitments are not met and gives

trading crowds and DPMs incentive to

abide by these commitments. Following

the initial six month period after an

allocation is made, all the responsibility

for monitoring market performance with

respect to that security is vested in the

appropriate Market Performance

Committee or MTS Appointments

Committee, which continually evaluate

trading crowd and DPM market

performance, as applicable, and are

authorized pursuant to CBOE Rule 8.60,

CBOE Rule 8.80, and other Exchange

rules to take remedial action for failure

to satisfy minimum market performance

standards.

Proposed CBOE Rule 8.95(c) also

provides that the appropriate Allocation

Committee may change an allocation

determination or change a location

determination, if in concludes that

doing so is in the best interest of the

Exchange based on operational factors

or efficiency. For example, if, due to

market conditions, the trading volume

in a security greatly increased over a

short time frame and the trading crowd

or DPM allocated the security could not

handle the order flow, it may become

necessary for the appropriate Allocation

Committee to reallocate the security to

a trading crowd of DPM with the

capacity to do so. Similarly, if the

trading volume at a trading crowd or

DPM post greatly increased and the

number of crowd members or DPM

personnel grew along with the increase

in volume, it may become necessary for

the appropriate Allocation Committee to

relocate the trading crowd of DPM to a

larger trading post.7

Proposed CBOE Rule 8.95(d) provides

that prior to taking any action to remove

an allocation or to change a location, the

appropriate Allocation Committee shall

generally give the affected trading

crowd or DPM prior notice of the

contemplated action and an opportunity

to be heard concerning the action. The

only exception to this requirement

would be in those unusual situations

when expeditious action is required due

to extreme market volatility or some

other situation requiring emergency

action. Specifically, except when

expeditious action is required, proposed

CBOE Rule 8.95(d) requires that prior to

taking any action to remove an

allocation or to change a location, the

appropriate Allocation Committee shall

notify the trading crowd or DPM

involved of the reasons the committee is

considering taking the contemplated

action, and shall either convene or more

informal meetings of the committee (or

a committee panel) with the trading

crowd or DPM to discuss the matter, or

provide the trading crowd or DPM with

the opportunity to submit a written

statement to the committee concerning

the matter. Due to the informal nature

of the meetings provided for under

proposed CBOE Rule 8.95(d) and to

encourage constructive communication

between the committee and the affected

trading crowd or DPM at those meeting,

ordinarily neither counsel for the

committee nor counsel for the trading

crowd or DPM shall be invited to attend

these meetings and no verbatim record

of the meetings shall be kept.

As with any decision made by the

Allocation Committee and the Special

Product Assignment Committee, any

person adversely affected by a decision

made by the appropriate Allocation

Committee to remove an allocation or

change a location may appeal the

decision to the Exchange’s Appeals

Committee under Chapter XIX, ‘‘Hearing

and Review,’’ of the Exchange’s Rules.

The appeal procedures in Chapter XIX

provide for the right to a formal hearing

concerning any such decision and for

the right to be accompanied,

represented, and advised by counsel at

the stages of the proceeding. In addition,

any decision of the Appeals Committee

may be appealed to the Exchange’s

Board of Directors pursuant to CBOE

Rule 19.5, ‘‘Review.’’

Proposed CBOE Rule 8.95(e) provides

that the allocation of a security to a

trading crowd or DPM and the location

of a trading crowd or DPM on the

Exchange’s trading floor does not

convey ownership rights in the

allocation or in the order flow

associated with the allocation or

location. Proposed CBOE Rule 8.95(e) is

intended to make clear the trading

crowds and DPMs may not buy, sell, or

otherwise transfer an allocation or

location to another party, and that

instead, it is the Exchange that has the

sole authority to determine allocations

and locations on the Exchange’s trading

floor. Notwithstanding proposed CBOE

Rule 8.95(e), Exchange rules will

continue to permit the transfer of DPM

appointments pursuant to CBOE Rule

8.80(b)(3), which provides for the

transfer of appointments with the

approval of the MTS Appointments

Committee.

Proposed CBOE Rule 8.95(f) is

intended to reflect the current

restrictions that are in place with

respect to the allocation of securities to

DPMs. Proposed CBOE Rule 8.95(f)

reiterates the provision currently

contained in CBOE Rule 8.80(a) that no

option classes opened for trading prior

to May 1, 1987, shall be allocated to a

DPM, except to the extent authorized by

a membership vote.8 In addition,

proposed CBOE Rule 8.95(f) modifies

the foregoing provision, which was

approved pursuant to an Exchange

membership vote taken in November

1989. Under this modification, if a

trading crowd indicates that it no longer

wishes to trade an option class opened

for trading prior to May 1, 1987, the

option class may be reallocated to

another trading crowd or to a DPM

giving priority to trading crowd

applications over DPM applications,
Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Notices 20229

9 15 U.S.C. 78f(b).

10 15 U.S.C. 78f(b)(5).

11Teleconference between Arthur Reinstein,

CBOE, Yvonne Fraticelli, Attorney, Commission

and Joshua Kans, Commission, January 29, 1998.

provided that the trading crowd’s

commitment to market quality is

competitive and that operational

considerations are satisfied.

Proposed CBOE Rule 8.95(g) provides

that in allocating and reallocating

securities to trading crowds and DPMs,

the appropriate Allocation Committee

shall act in accordance with any

limitation or restriction on the

allocation of securities that is

established pursuant to another

Exchange rule. For example, the

appropriate Market Performance

Committee or the MTS Appointments

Committee may take remedial action

against a trading crowd or DPM

pursuant to CBOE Rule 8.60,

‘‘Evaluation of Trading Crowd

Performance,’’ and CBOE Rule

8.80(b)(10) for failing to satisfy

minimum market performance

standards, and such action may involve

a restriction related to the allocation of

securities to that trading crowd or DPM.

Similarly, the MTS Appointments

Committee may restrict a DPM’s ability

to receive or retain allocations of

securities pursuant to various

provisions of CBOE Rule 8.80,

‘‘Modified Trading System,’’ including

as a condition of appointment as a DPM

(CBOE Rule 8.80(b)(3)), due to failure to

perform DPM functions (CBOE Rule

8.80(b)(4)(i)), or due to a material,

financial, operational, or personnel

change (CBOE Rule 8.80(b)(4)(ii)).

Proposed CBOE Rule 8.95(g) is intended

to clarify that the appropriate Allocation

Committee must act in accordance with

any such restrictions in making

allocation and location determinations.

Proposed CBOE Rule 8.95,

Interpretation .01 generally provides

that it shall be the responsibility of the

appropriate Allocation Committee to

reallocate a security if it is removed

from a trading crowd or DPM pursuant

to another Exchange rule or if for some

other reason the trading crowd or DPM

to which the security has been allocated

no longer retains the allocation. For

example, as described above, CBOE

Rules 8.60 and 8.80 authorize the

Market Performance Committees and

the MTS Appointments Committee to

take remedial actions against trading

crowds and DPMs in specified

circumstances, including the removal of

an allocation. Proposed CBOE Rule 8.95,

Interpretation .01 is intended to clarify

that if the appropriate Market

Performance Committee or the MTS

Appointments Committee removes an

allocation pursuant to CBOE Rule 8.60

or CBOE Rule 8.80, it is the

responsibility of the appropriate

Allocation Committee (and not the

committee that took the action to

remove the allocation) to reallocate the

security pursuant to proposed CBOE

Rule 8.95. The only exception to this

provision is that the MTS Appointments

Committee is authorized, pursuant to

CBOE Rule 8.80(b)(6), to allocate to an

interim DPM on a temporary basis a

security that is removed from another

DPM, until the appropriate Allocation

Committee makes a final allocation of

the security.

Finally, proposed CBOE Rule 8.95,

Interpretation. 02 provides that it shall

be the responsibility of the Allocation

Committee to relocate a trading crowd

or DPM in the event that the trading

crowd or DPM is required to be

relocated pursuant to another Exchange

rule. As has been discussed, CBOE Rule

8.60 and CBOE Rule 8.80(b)(10) permit

the Market Performance Committees

and the MTS Appointments Committee

to take remedial actions against trading

crowds and DPMs in specified

circumstances, including requiring that

a trading crowd or DPM be relocated.

Like proposed Interpretation .01,

proposed Interpretation .02 is intended

to clarify that if the appropriate Market

Performance Committee or the MTS

Appointments Committee requires the

relocation of a trading crowd or DPM

pursuant to CBOE Rule 8.60 or CBOE

Rule 8.80(b)(10), it is the responsibility

of the Allocation Committee (and not

the Committee that took the action to

require the relocation) to relocate the

trading crowd or DPM.

III. Discussion

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, and, in particular, with the

requirements of Section 6(b) of the Act.9

Specifically, The Commission believes

that the proposal is consistent with the

Section 6(b)(5) 10 requirements that the

rules of an exchange be designed to

remove impediments to and perfect the

mechanism of a free and open market

and to protect investors and the public

interest. Moreover, the proposal is

consistent with the requirement of

section 6(b)(5) of the Act that the rules

of an exchange not be designed to

permit unfair discrimination between

brokers or dealers or issuers.

The Commission believes that the

proposed rule change is appropriate

because it codifies the Exchange’s

procedures for allocating securities

between trading crowds and DPMs and

determining where those trading crowds

or DPMs should be located.11 Moreover,

the Commission believes that the

proposed provisions should help to

ensure that securities traded by the

Exchange are allocated in an equitable

and fair manner, giving all trading

crowds and DPMs a fair opportunity to

obtain allocations.

Specifically, the Commission believes

that the CBOE’s proposed Rule 8.95(a)—

which provides that the Exchange’s

Allocation Committee and the Special

Product Assignment Committee are

responsible for allocating option classes

among trading crowds and DPMs, and

which provides that the Allocation

Committee is responsible for

determining the location on the

Exchange floor of each trading crowd,

DPM and security—sets forth a fair and

reasonable method of apportioning the

responsibility for allocating securities

and assigning space on the Exchange

floor.

The Commission further believes that

the OBOE’s proposed Rule 8.95(b),

which describes the information that the

Allocation Committee and Special

Product Assignment Committee may

consider when making determinations

under Rule 8.95(a), will give those

committees the flexibility to consider all

appropriate factors while putting the

Exchange membership on notice of

several of the important factors that may

be considered in making such a

determination.

The Commission also believes that the

CBOE’s proposed Rule 8.95(c), regarding

removing allocations made under

proposed Rule 8.95(a), provide a

reasonable means of ensuring that the

Allocation Committee and the Special

Product Assignment Committee retain

the ability to take actions to promote fair

and efficient trading of the securities at

issue. This provision also appropriately

allocates responsibility between those

two committees and the appropriate

Market Performance Committee of MTS

Appointments Committee.

The Commission believes that the

CBOE’s proposed Rule 8.95(d), which

provides that, unless expeditious action

is required, the affected trading crowd

or DPM will receive notice of a potential

action under proposed Rule 8.95(c), and

will have the opportunity to participate

in an informal meeting with the

appropriate committee or submit a

written statement concerning the matter,

provides a fair and reasonable means of

making expeditious decisions regarding

allocation and location while protecting

the interest of the affected trading crowd
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