Document ID: SEC-2007-0140-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-01-31T05:00Z

[Federal Register: January 31, 2007 (Volume 72, Number 20)]
[Notices]               
[Page 4573-4609]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31ja07-124]                         

[[Page 4573]]

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Part III

Securities and Exchange Commission

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Self-Regulatory Organizations--Proposed Rule Changes: National 
Association of Securities Dealers, Inc.; Notice

[[Page 4574]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55158 ; File Nos. SR-NASD-2003-158; SR-NASD-2004-011]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Amendments 1, 
2, 3, and 4 To Amend NASD Arbitration Rules for Customer Disputes and 
Notice of Filing and Order Granting Accelerated Approval of Amendments 
5, 6, and 7 Thereto; Order Approving Proposed Rule Change and 
Amendments 1, 2, 3, and 4 To Amend NASD Arbitration Rules for Industry 
Disputes and Notice of Filing and Order Granting Accelerated Approval 
of Amendments 5, 6, and 7 Thereto

January 24, 2007.

I. Introduction

    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 (``SEC'' or ``Commission'') proposed rule changes to amend 
the NASD Code of Arbitration Procedure in connection with rules 
applicable to customer disputes (``Customer Code'') and to industry 
disputes (``Industry Code'') on October 15, 2003 and January 16, 2004, 
respectively, pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ Amendments 1, 
2, 3, and 4 to the Customer Code were filed with the Commission on 
January 3, January 19, April 8, and June 10, 2005, respectively. 
Amendments 1, 2, 3, and 4 to the Industry Code were filed with the 
Commission on January 3, February 26, April 8, and June 10, 2005, 
respectively. The Customer Code and Amendments 1, 2, 3, and 4 thereto 
(``Customer Code Notice'') and the Industry Code and Amendments 1, 2, 
3, and 4 thereto (``Industry Code Notice'') were published for comment 
on June 23, 2005.\3\ The Commission received 51 comments \4\ in 
response to the Customer Code Notice and one comment \5\ in response to 
the Industry Code Notice, all of which are available on the 
Commission's Internet Web site at (http://www.sec.gov/rules/sro.shtml). 

On May 4, 2006, NASD filed Amendments 5 to the Customer Code and to the 
Industry Code. The Commission received 125 comments following NASD's 
posting of Amendment 5 to the Customer Code on its Web site.\6\ The 
Commission did not

[[Page 4575]]

receive any comments in connection with Amendment 5 to the Industry 
Code. NASD filed Amendments 6 to the Customer Code and Industry Code on 
July 21, 2006 and Amendments 7 to Customer Code and Industry Code on 
August 15, 2006. NASD requested accelerated approval in connection with 
Amendments 5, 6, and 7.\7\ This Order approves the Customer Code and 
Industry Code, as amended, accelerating approval of Amendments 5, 6, 
and 7 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing of Proposed Rule Change and Amendment 
Nos. 1, 2, 3, and 4 Thereto to Amend NASD Arbitration Rules for 
Customer Disputes, Securities Exchange Act Rel. No. 51856 (Jun. 15, 
2005), 70 FR 36442 (Jun. 23, 2005); Notice of Filing of Proposed 
Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto to Amend NASD 
Arbitration Rules for Industry Disputes, Securities Exchange Act 
Rel. No. 51857 (Jun. 15, 2005), 70 FR 36430 (Jun. 23, 2005).
    \4\ See Letter from Norman B. Arnoff, Esq., dated Aug. 12, 2004 
(``Arnoff''); Letter from Daniel A. Ball, Esq., Selzer Gurvitch 
Rabin & Obecny, Chtd., dated Jul. 14, 2005; Letter from Gail E. 
Boliver, Esq., Boliver Law Firm, dated Jul. 13, 2005 (``Boliver''); 
Letter from Timothy A. Canning, Esq., Law Offices of Timothy A. 
Canning, dated Jul. 14, 2005 (``Canning''); Letter from Steven B. 
Caruso, Esq., Maddox Hargett & Caruso, P.C., dated Jul. 13, 2005 
(``Caruso''); Letter from Rebecca C. Davis, Esq., Tate, Lazarini & 
Beall, PLC, dated Jul. 14, 2005 (``R. Davis''); Letter from James J. 
Eccleston, Esq., Shaheen, Novoselsky, Staat, Filipowski & Eccleston, 
P.C., dated Jul. 14, 2005 (``Eccleston''); Letter from Barry D. 
Estell, Esq., dated Jul. 14, 2005 (``Estell''); Letter from Jonathan 
W. Evans, Esq., Jonathan W. Evans & Associates, dated Jul. 14, 2005 
(``Evans''); Letter from Martin L. Feinberg, Esq., dated Jul. 13, 
2005 (``Feinberg''); Letter from Jeffrey A. Feldman, Esq., dated 
Jul. 11, 2005 (``Feldman''); Letter from Stuart Finer, Esq., dated 
Jul. 15, 2005 (``Finer''); Letter from William A. Fynes, dated Jul. 
13, 2005 (``Fynes''); Letter from W. Scott Greco, Esq., Greco and 
Greco, P.C., dated Jun. 24, 2005 (``Greco''); Letter from Scott C. 
Ilgenfritz, Esq., Johnson, Pope, Bokor, Ruppel, and Burns, LLP, 
dated Jul. 14, 2005 (``Ilgenfritz''); Letter from James S. Jones, 
Esq., dated Mar. 30, 2006 (``Jones''); Letter from Wayne M. Josel, 
Esq., Kaufmann, Feiner, Yamin, Gilden, & Robbins LLP, dated Jul. 13, 
2005 (``Josel''); Letter from Spiro T. Komninos, Esq., Komninos, 
Fowkes & Farrugia Law Group, LLC, dated Jul. 14, 2005 
(``Komninos''); Letter from Stephen Krosschell, Goodman & Nekvasil, 
dated Jul. 14, 2005 (``Krosschell''); Letter from Cary S. Lapidus, 
Esq., Law Offices of Cary S. Lapidus, dated Jul. 14, 2005 
(``Lapidus''); Letter from Richard M. Layne, Esq., Layne & Lewis 
LLP, dated Jul. 12, 2005 (``Layne''); Letter from Royal Lea, Esq., 
Bingham & Lea, P.C., dated Jul. 14, 2005 (``Lea''); Letter from Dale 
Ledbetter, Adorno & Yoss, dated Jul. 14, 2005 (``Ledbetter''); 
Letter from Prof. Seth E. Lipner, Zicklin School of Business, 
Member/Deutsch & Lipner, dated Jul. 13, 2005 (``Lipner''); Letter 
from Jorge A. Lopez, Esq., dated Jul. 21, 2005 (``Lopez''); Letter 
from Angela H. Magary, Brickley, Sears & Sorett, dated Jul. 14, 2005 
(``Magary''); Letter from Stuart D. Meissner, Esq., Law Offices of 
Stuart D. Meissner LLC., dated Jul. 12, 2005 (``Meissner''); Letter 
from John J. Miller, Esq., Law Office of John J. Miller, P.C., dated 
Jul. 12, 2005 (``Miller''); Letter from Jill I. Gross and Barbara 
Black, Directors, Pace Investor Rights Project, dated Jul. 14, 2005 
(``PACE''); Letter from J. Boyd Page, Esq. and Samuel T. Brannan, 
Esq., Page Perry, LLC, dated Jul. 14, 2005 (``Page''); Letter from 
Rosemary J. Shockman, President, and Robert S. Banks, Jr., Executive 
Vice President, President Elect, Public Investors Arbitration Bar 
Association, dated Jul. 13, 2005 (``PIABA''); Letter from Rosemary 
Shockman, President, Public Investors Arbitration Bar Association, 
dated Aug. 2, 2005 (``PIABA 2''); Letter from Herbert E. 
Pounds, Herbert E. Pounds, Jr., P.C., dated Jul. 14, 2005 
(``Pounds''); Letter from M. Clay Ragsdale, Esq., Ragsdale LLC, 
dated Jul. 14, 2005 (``Ragsdale''); Letter from Howard M. 
Rosenfield, Esq., dated Jul. 14, 2005 (``Rosenfield''); Letter from 
Richard P. Ryder, President, Securities Arbitration Commentator, 
Inc., dated Jul. 21, 2005 (``Ryder''); Letter from J. Pat Sadler, 
dated Jul. 13, 2005 (``Sadler''); Letter from Laurence S. Schultz, 
Esq., Driggers, Schultz & Herbst PC, dated Jun. 8, 2005 
(``Schultz''); Letter from Laurence S. Schultz, Esq., Driggers, 
Schultz & Herbst, dated Jul. 14, 2005 (``Schultz 2''); 
Letter from Scott R. Shewan, Esq., Born, Pape & Shewan LLP, dated 
Jul. 14, 2005 (``Shewan''); Letter from Edward G. Turan, Esq., 
Chair, Arbitration and Litigation Committee, Securities Industry 
Association, dated Jul. 13, 2005 (``SIA''); Letter from Jeff Sonn, 
Esq., Sonn & Erez, dated Jul. 14, 2005 (``Sonn''); Letter from Debra 
G. Speyer, Esq., Law Offices of Debra G. Speyer, dated Jul. 14, 2005 
(``Speyer''); Letter from Arnold Y. Steinberg, P.C., dated Jul. 14, 
2005 (``Steinberg''); Letter from Steven A. Stolle, Esq., Rohde & 
Van Kampen PLLC, dated Jul. 8, 2005 (``Stolle''); Letter from Andrew 
Stoltmann, Stoltmann Law Offices, P.C., dated Jul. 14, 2005 
(``Stoltmann''); Letter from Mark A. Tepper, Esq., Mark A. Tepper, 
P.A., dated Jul. 14, 2005 (``Tepper''); Letter from Richard A. 
Karoly, Vice President and Senior Corporate Counsel, Schwab & Co., 
Inc., dated Jul. 14, 2005 (``Schwab''); Letter from John E. 
Sutherland, Esq., Brickley, Sears & Sorett, dated Jul. 14, 2005 
(``Sutherland''); Letter from Steele T. Williams, P.A., dated Jul. 
15, 2005 (``Williams''); Letter from Michael J. Willner, Esq., 
Miller Faucher and Cafferty LLP, dated Jul. 16, 2005 (``Willner''); 
Letter from A. Daniel Woska, Woska & Hayes, LLP, dated Jun. 15, 2005 
(``Woska'').
    \5\ Letter from Marvin Elster, dated Jun. 30, 2005 (``Elster'').
    \6\ Letter from Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari, 
dated May 16, 2006 (``Aidikoff''); Letter from Ronald M. Amato, 
Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C., dated May 
30, 2006 (``Amato''); Letter from Sarah G. Anderson, dated May 15, 
2006 (``Anderson''); Letter from Anonymous, dated May 15, 2006 
(``Anonymous''); Letter from Robert W. Anthony, dated May 16, 2006 
(``Anthony''); Letter from John G. Appel, Jr., dated May 18, 2006 
(``Appel''); Letter from Kurt Arbuckle, Kurt Arbuckle, P.C., dated 
May 22, 2006 (``Arbuckle''); Letter from C.W. Austin, Jr., dated May 
15, 2006 (``Austin''); Letter from Daniel E. Bacine, Barrack, Rodos 
& Bacine, dated May 15, 2006 (``Bacine''); Letter from Bruce E. 
Baldinger, Levine & Baldinger, LLC, dated May 16, 2006 
(``Baldinger''); Letter from Scott I. Batterman, Esq., Clay Chapman 
Crumpton Iwamura & Pulice, dated May 15, 2006 (``Batterman''); 
Letter from Scot Bernstein, Law Offices of Scot Bernstein, dated May 
26, 2006 (``Bernstein''); Letter from Brian P. Biggins, Esq., Brian 
P. Biggins & Associates Co., L.P.A., dated May 15, 2006 
(``Biggins''); Letter from Rob Bleecher, Esq., dated May 15, 2006 
(``Bleecher''); Letter from Gail E. Boliver, Boliver Law Firm, dated 
May 15, 2006 (``Boliver 2''); Letter from Sam Brannan, Page 
Perry LLC, dated May 16, 2006 (``Brannan''); Letter from Steve 
Buchwalter, Law Offices of Steve A. Buchwalter, P.C, dated May 15, 
2006 (``Buchwalter''); Letter from John S. Burke, Higgins & Burke, 
P.C, dated May 15, 2006 (``J. Burke''); Letter from Thomas F. Burke, 
May 22, 2006 (``T. Burke''); Letter from Tim Canning, dated May 15, 
2006 (``Canning 2''); Letter from Carl J. Carlson, Carlson 
& Dennett, P.S., dated May 12, 2006 (``Carlson''); Letter from 
Jeremy B. Chalmers, Mars, Mars and Chalmers, dated May 16, 2006 
(``Chalmers''); Letter from Roger F. Claxton, Claxton & Hill, dated 
May 15, 2006 (``Claxton''); Letter from Erwin Cohn, Cohn & Cohn, 
dated May 16, 2006 (``Cohn''); Letter from Patrick A. Davis, P.A, 
dated May 16, 2006 (``P. Davis''); Letter from William F. Davis, 
dated May 15, 2006 (``W. Davis''); Letter from Adam Doner, dated May 
16, 2006 (``Doner''); Letter from James J. Eccleston, Shaheen, 
Novoselsky, Staat, Filipowski & Eccleston, dated May 16, 2006 
(``Eccleston 2''); Letter from Richard Elliott, dated May 
16, 2006 (``Elliot''); Letter from Barry D. Estell, dated May 15, 
2006 (``Estell 2''); Letter from Barry D. Estell, Esq., 
dated May 16, 2006 (``Estell 3''); Letter from Jonathan W. 
Evans, Esq., Jonathan W. Evans & Associates, dated May 15, 2006 
(``Evans 2''); Letter from Allan J. Fedor, Esq., dated May 
22, 2006 (``Fedor''); Letter from Martin L. Feinberg, dated May 15, 
2006 (``Feinberg 2''); Letter from Teresa M. Gillis, Esq., 
Shustak & Partners, dated May 16, 2006 (``Gillis''); Letter from 
Robert W. Goehring, Esq., dated May 15, 2006 (``Goehring''); Letter 
from Eliot Goldstein, Esq., Law Offices of Eliot Goldstein LLP, 
dated May 16, 2006 (``Goldstein''); Letter from Jan Graham, Graham 
Law Offices, dated May 15, 2006 (``Graham''); Letter from W. Scott 
Greco, Greco & Greco, P.C., dated May 15, 2006 (``Greco 
2''); Letter from Brian M. Greenman, Esq., dated May 15, 
2006 (``Greenman''); Letter from Randall R. Heiner, Heiner Law 
Offices, dated May 15, 2006 (``Heiner''); Letter from Eric Hewko, 
dated May 20, 2006 (``Hewko''); Letter from Charles C. Hunter, Esq., 
Woska & Hayes, LLP, dated May 23, 2006 (``Hunter''); Letter from 
Scott C. Ilgenfritz, dated May 15, 2006 (``Ilgenfritz 2''); 
Letter from Wayne M. Josel, Kaufmann, Feiner, Yamin, Gildin & 
Robbins, LLP, dated May 15, 2006 (``Josel 2''); Letter from 
Jeffrey B. Kaplan, Dimond Kaplan Rothstein, P.A., dated May 16, 2006 
(``Kaplan''); Letter from James D. Keeney, dated May 15, 2006 
(``Keeney''); Letter from T. Michael Kennedy, dated May 15, 2006 
(``Kennedy''); Letter from Joseph C. Korsak, Esq., Law Office of 
Joseph C. Korsak, dated May 15, 2006 (``Korsak''); Letter from 
Richard M. Layne, Layne & Lewis LLP, dated May 13, 2006 (``Layne 
2''); Letter from Royal Lea, Bingham & Lea, P.C., dated May 
16, 2006 (``Lea 2''); Letter from Dale Ledbetter, Adorno & 
Yoss, dated May 15, 2006 (``Ledbetter 2''); Letter from 
Prof. Seth E. Lipner, Zicklin School of Business, Member/Deutsch & 
Lipner, dated May 15, 2006 (``Lipner 2''); Letter from 
Jorge A. Lopez, Esq., Jorge A. Lopez, P.A., dated May 15, 2006 
(``Lopez 2''); Letter from Michael B. Lynch, Esq., Law 
Offices of James Richard Hooper, PA, dated May 16, 2006 (``Lynch''); 
Letter from Daniel I. MacIntyre, Esq., Shapiro Fussell, dated May 
16, 2006 (``MacIntyre''); Letter from Angela H. Magary, Brickley, 
Sears & Sorett, dated May 31, 2006 (``Magary 2''); Letter from 
Jenice L. Malecki, Esq., Malecki Law, dated May 16, 2006 
(``Malecki''); Letter from Emerson R. Marks, Jr., Emerson R. Marks, 
Jr., P.L.C., dated May 15, 2006 (``Marks''); Letter from Thomas D. 
Mauriello, Law Offices of Thomas D. Mauriello, dated May 15, 2006 
(``Mauriello''); Letter from Steven M. McCauley, Esq., Charles C. 
Mihalek, P.S.C, dated May 16, 2006 (``McCauley''); Letter from C. 
David Mee, Esq., Ajamie LLP, dated May 15, 2006 (``Mee''); Letter 
from Stuart Meissner, Esq., The Law Offices of Stuart D. Meissner 
LLC., dated May 15, 2006 (``Meissner 2''); Letter from 
David P. Meyer, Esq., David P. Meyer Associates, Co. LPA, dated May 
16, 2006 (``D. Meyer''); Letter from Stephen P. Meyer, Esq., Meyer & 
Ford, dated May 16, 2006 (``S. Meyer''); Letter from John Miller, 
Law Office of John J. Miller, P.C., dated May 15, 2006 (``Miller 
2''); Letter from Stephen David Murakami, Esq., Hooper & 
Weiss, LLC, dated May 16, 2006 (``Murakami''); Letter from Bryan 
Lantagne, Director, Massachusetts Securities Division, Chair, NASAA 
Broker-Dealer Arbitration Project Group, dated Jul. 19, 2006 
(``NASAA''); Letter from Mitchell Ostwald, Law Office of Mitchell 
Ostwald, dated May 16, 2006 (``Ostwald''); Letter from Jill Gross 
and Barbara Black, Directors, Pace Investor Rights Project, Jun. 6, 
2006 (``PACE 2''); Letter from Boyd Page, Page Perry LLC, dated May 
16, 2006 (``Page 2''); Steve Parker, Page Perry, LLC, dated 
May 16, 2006 (``Parker''); Letter from Henry I. Pass, Esq., The Law 
Offices of Henry Ian Pass, dated May 15, 2006 (``Pass''); Letter 
from Joseph C. Peiffer, Correro Fishman Haygood Phelps, dated May 
15, 2006 (``Peiffer''); Letter from Susan N. Perkins, dated May 16, 
2006 (``Perkins''); Letter from Steven B. Caruso, President-Elect, 
Public Investors Arbitration Bar Association, dated May 16, 2006 
(``PIABA 3''); Letter from Robert S. Banks, Jr., President, 
Public Investors Arbitration Bar Association, dated May 26, 2006 
(``PIABA 4''); Letter from Robert C. Port, Esq., Cohen Goldstein 
Port & Gottlieb, LLP, dated May 20, 2006 (``Port''); Letter from 
Herbert Pounds, Herbert E. Pounds, Jr., P.C., dated May 15, 2006 
(``Pounds 2''); Letter from Thomas Quarles, Jr., Esq., 
Devine, Millimet & Branch, P.A., dated May 16, 2006 (``Quarles''); 
Letter from Adam T. Rabin, Esq., Dimond Kaplan & Rothstein, P.A, 
dated May 16, 2006 (``Rabin''); Letter from Kirk Reasonover, Esq., 
Smith & Fawer, L.L.C., dated May 16, 2006 (``Reasonover''); Letter 
from Robert H. Rex, Esq., Dickenson Murphy Rex & Sloan, dated May 
15, 2006 (``Rex''); Letter from David E. Robbins, Kaufmann, Feiner, 
Yamin, Gildin & Robbins LLP, dated May 29, 2006 (``Robbins''); 
Letter from J. Pat Sadler, dated May 16, 2006 (``Sadler 
2''); Letter from Jay H. Salamon, Hermann Cahn & Schneider 
LLP, dated May 15, 2006 (``Salamon''); Letter from Robert K. Savage, 
Esq., The Savage Law Firm, P.A., dated May 16, 2006 (``Savage''); 
Letter from Martin Seiler, dated May 15, 2006 (``Seiler''); Letter 
from Steven Sherman, Law Offices of Steven M. Sherman, dated May 15, 
2006 (``Sherman''); Letter from Scott R. Shewan, Born, Pape & Shewan 
LLP, dated May 15, 2006 (``Shewan 2''); Letter from 
Rosemary J. Shockman, Shockman Law Office, dated May 16, 2006 
(``Shockman''); Letter from Brian N. Smiley, Gard Smiley & Bishop 
LLP, dated May 15, 2006 (``Smiley''); Letter from James A. Sigler, 
dated May 15, 2006 (``Sigler''); Letter from Scott Silver, Esq., 
Blum & Silver, LLP, dated May 17, 2006 (``Silver''); Letter from 
Donald A.W. Smith, Esq., dated May 17, 2006 (``Smith''); Letter from 
Jeff Sonn, dated May 22, 2006 (``Sonn 2''); Letter from Ben 
Stewart, dated May 16, 2006 (``Stewart''); Letter from Tracy Pride 
Stoneman, Tracy Pride Stoneman, P.C., dated May 16, 2006 
(``Stoneman''); Letter from Mark A. Tepper, Mark A. Tepper P.A., 
dated May 15, 2006 (``Tepper 2''); Letter from William P. 
Torngren, dated May 15, 2006 (``Torngren''); Letter from Al Van 
Kampen, Rohde & Van Kampen PLLC, dated May 15, 2006 (``Van 
Kampen''); Letter from James V. Weixel, Jr., Weixel Law Office, 
dated May 15, 2006 (``Weixel''); Letter from Michael J. Willner, 
Esq., Miller Faucher and Cafferty LLP, dated May 15, 2006 (``Willner 
2''); Letter from A. Daniel Woska, Esq., Woska & Hayes, 
LLP, dated May 12, 2006 (``Woska 2''); Letter from Todd 
Young, dated May 15, 2006 (``T. Young''); Letter from William B. 
Young, Jr., Hooper Weiss, LLC, dated Florida, May 18, 2006 (``W. 
Young''); Letter from Elizabeth Zeck, Esq., Willoughby & Hoefer, 
P.A., dated May 16, 2006 (``Zeck''). In addition, the Commission 
received 15 form letters from individuals that were substantially 
similar (``Letter Type A'') and three other form letters (``Letter 
Type B'').
    \7\ Because the Customer Code and Industry Code, as amended by 
Amendments 1, 2, 3, and 4 to each code, already have been published 
for comment, the request for accelerated approval applies only to 
Amendments 5, 6, and 7 to each code.
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II. Purpose for and Description of the Proposal

A. Background

    NASD proposed to amend the NASD Code of Arbitration Procedure 
(``current Code'') to simplify the rule language into plain English, 
reorganize the rules, codify certain practices, and implement several 
substantive changes. The current Code would be reorganized into three 
separate procedural codes: The NASD Code of Arbitration Procedure for 
Customer Disputes; the NASD Code of Arbitration Procedure for Industry 
Disputes; and the NASD Code of Mediation Procedure.\8\ The three new 
codes are intended to replace the current Code in its entirety.
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    \8\ The Mediation Code was filed separately with the Commission 
as SR-NASD-2004-013. The Commission approved the Mediation Code on 
October 31, 2005, and it became effective on January 30, 2006. See 
Order Granting Approval to Proposed Rule Change and Amendments Nos. 
1 and 2 Thereto, and Notice of Filing and Order Granting Accelerated 
Approval to Amendment No. 3, to Amend NASD Rules for Mediation 
Proceedings, Securities Exchange Act Rel. No. 52705 (Oct. 31, 2005), 
70 FR 67525 (Nov. 7, 2005) (SR-NASD-2004-013).
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    This approval order pertains to the Customer Code and Industry 
Code, the final texts of which are available on the NASD Web site at  
http://www.nasd.com/web/[fxsp0]groups/med--arb/[fxsp0]documents/

mediation--arbitration/[fxsp0]nasdw--018335.pdf. Charts comparing the 
current Code to the Customer Code and Industry Code are also available 
at the URL above. Descriptions of the proposed rule changes, as amended 
by Amendments 1, 2, 3, and 4, are contained in the Customer Code Notice 
and Industry Code Notice \9\ and are also available at NASD's principal 
office and at the Commission's Public Reference Room.
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    \9\ See supra n. 3.
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B. Purpose and Description

    In 1998, the SEC launched an initiative to encourage issuers and 
self-regulatory organizations (``SROs'') to use ``plain English'' in 
disclosure documents and other materials used by investors. Because the 
current Code is used by investors, including investors who appear pro 
se in the NASD forum, NASD undertook to rewrite the current Code in 
``plain English.'' Over time, the goals of the plain English initiative 
expanded beyond simplifying the language and sentence structure of the 
rules in the Code to include:
     Reorganizing the current Code in a more logical, user-
friendly way, including creating separate codes for

[[Page 4576]]

customer and industry arbitrations, and for mediations; and
     Implementing several substantive rule changes, including 
codifying several common practices, to provide more guidance to parties 
and arbitrators, and to streamline the administration of arbitrations 
in the NASD forum.
1. Plain English
    When it launched its ``plain English'' initiative in 1998, the SEC 
published a ``Plain English Handbook'' to provide guidance to issuers 
and SROs in drafting materials intended to be used by investors. The 
SEC's Plain English Handbook recommended using shorter, more common 
words; breaking long rules into shorter ones; using the active voice 
whenever possible; and putting lists into easy-to-read formatting, such 
as bullet points.
    NASD stated that, in revising the current Code, it implemented 
these guidelines wherever possible. Throughout the Customer and 
Industry Codes, NASD simplified language and eliminated unnecessarily 
legalistic or arcane terminology. Long rules, such as current Rule 
10308 (Selection of Arbitrators) and current Rule 10321 (General 
Provisions Governing Pre-Hearing Proceedings), have been broken into 
several shorter rules.\10\ Where appropriate, NASD has presented lists 
in bullet point format and used active verbs.
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    \10\ For example, Rule 10308 of the current Code is contained in 
Proposed Rules 12400-12406 for the Customer Code and 13400-13406 for 
the Industry Code.
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    The Customer and Industry Codes also contain new definitions rules 
(Proposed Rules 12100 and 13100, respectively) that define commonly 
used terms applicable throughout the current Code.\11\ NASD believes 
that a comprehensive definitions rule will make the Customer and 
Industry Codes easier to understand and to use and will help eliminate 
confusion about the meaning and scope of frequently used terms. It will 
also allow NASD to use shorter phrases, or single words, in place of 
longer phrases in its rules.\12\ This makes rules easier to read and 
understand, without changing the meaning of the current Code.
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    \11\ Some rules in the current Code, such as Rule 10308, contain 
definitions applicable to that rule only. However, there is no 
general definitions rule that applies to the entire current Code.
    \12\ For example, the phrase ``dispute, claim, or controversy'' 
has been replaced by the word ``dispute,'' which has been defined in 
Proposed Rules 12100 and 13100, respectively, to mean the longer 
phrase.
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2. Reorganization
    One of the most frequent criticisms of the current Code is that it 
is poorly organized. Parties, particularly infrequent users of the 
forum, have difficulty finding the rules they are looking for, because 
the organization of the rules is not clear. The confusion is compounded 
because certain rules in the current Code apply only to customer cases, 
some apply only to industry cases, and others apply to both types of 
disputes. In addition, the current Code contains the NASD mediation 
rules, even though many matters are submitted directly to mediation, 
and do not arise out of an arbitration proceeding.
    To address these concerns, NASD proposed to divide the current Code 
into three separate Codes: The Customer Code, the Industry Code, and 
the Mediation Code.\13\ Although many of the rules in the Customer and 
Industry Codes will be identical, NASD believes that maintaining 
separate arbitration codes will eliminate confusion regarding which 
rules are applicable to which types of disputes. NASD intends to 
maintain electronic versions of each code on its Web site, http://www.nasd.com
, and will make paper copies available upon request.

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    \13\ As noted above, the Commission approved the Mediation Code 
in October 2005. See supra note 8.
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    In keeping with the current NASD rule numbering system, each code 
will be numbered in the thousands, and major sections will be numbered 
in the hundreds. Individual rules within those sections will be 
numbered in the tens (or ones, if necessary). The current method for 
numbering and lettering paragraphs within individual rules will remain 
unchanged. In particular, the Customer Code will use the Rule 12000 
series, and the Industry Code will use the Rule 13000 series.\14\
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    \14\ Both of these series are currently unused. The Mediation 
Code uses the Rule 14000 series. NASD will reserve the Rule 10000 
series, which is currently used for NASD's dispute resolution rules, 
for future use.
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    To make it easier to find specific rules, the Customer Code will be 
divided into the following nine parts, which are intended to 
approximate the chronological order of a typical arbitration:
     Part I (Rule 12100 et seq.) contains definitions, as well 
as other rules relating to the organization and authority of the forum;
     Part II (Rule 12200 et seq.) contains general arbitration 
rules, including what claims are subject to arbitration in the NASD 
forum;
     Part III (Rule 12300 et seq.) contains rules explaining 
how to initiate a claim, how to respond to a claim, how to amend 
claims, and when claims may be combined and separated;
     Part IV (12400 et seq.) contains rules relating to the 
appointment, authority and removal of arbitrators;
     Part V (Rules 12500 et seq.) contains rules governing the 
prehearing process, including proposed new rules relating to motions 
and discovery;
     Part VI (Rules 12600 et seq.) contains rules relating to 
hearings;
     Part VII (Rules 12700 et seq.) contains rules relating to 
the dismissal, withdrawal, or settlement of claims;
     Part VIII (Rules 12800 et seq.) contains rules relating to 
simplified (small cases) arbitrations and default proceedings; and
     Part IX (Rules 12900 et seq.) contains rules relating to 
fees and awards. The Industry Code will use the same divisions, 
numbered under the 13000 series.
3. Description of Other Changes
    In addition to simplifying and reorganizing the current Code, the 
Customer and Industry Codes include other changes that NASD states are 
intended to make the NASD arbitration process as simple, uniform, and 
transparent as possible. Some of these changes codify or clarify 
current NASD practice. Others are intended to provide guidance to 
parties, resolve open questions, or streamline or standardize the 
administration of NASD arbitrations.
4. Relationship Between Proposed Customer Code and Industry Codes
    Although the Customer Code and Industry Code are similarly 
organized and numbered, there are two main differences. First, some 
rules in the current Code contain different provisions for customer and 
industry disputes.\15\ For such rules, the Customer Code contains only 
the provisions that relate to customer disputes, and the Industry Code 
contains only the provisions that relate to industry cases.
---------------------------------------------------------------------------

    \15\ E.g., current Rule 10308 (Selection of Arbitrators) 
requires that three-arbitrator panels in customer cases consist of a 
majority of public arbitrators but provides that the composition of 
the panel in industry disputes depends on the nature of the claim.
---------------------------------------------------------------------------

    Second, some rules in the current Code apply only to industry 
disputes. These rules are included in the Industry Code but have no 
counterpart in the Customer Code.\16\ NASD has not proposed any 
substantive changes to

[[Page 4577]]

those parts of the current Code that are unique to industry cases.
---------------------------------------------------------------------------

    \16\ See, e.g., Rules 10210 and 10211 of the current Code, 
governing statutory employment discrimination claims, and Rule 10335 
of the current Code, governing injunctive relief.
---------------------------------------------------------------------------

III. Summary of Comments on the Customer Code as Amended by Amendments 
1, 2, 3, and 4 Thereto and Description of Amendments 5, 6, and 7 to the 
Customer Code \17\
---------------------------------------------------------------------------

    \17\ Section III discusses Amendments 5, 6, and 7 to the 
Customer Code. Section IV, below, discusses Amendments 5, 6, and 7 
to the Industry Code.
---------------------------------------------------------------------------

    As noted above, in Amendment 5 to the Customer Code, NASD responded 
to comments on the Customer Code Notice,\18\ proposed additional rule 
changes, most of which were in response to comments, and requested 
accelerated approval of the Customer Code.\19\ After NASD filed 
Amendment 5 with the Commission, the Commission received 125 additional 
comments. Many of the comments centered on: (1) NASD's request for 
accelerated approval; \20\ (2) provisions of Proposed Rules 12506 
(Document Production Lists) and 12514 (Exchange of Documents and 
Witness Lists Before Hearing), as published in the Customer Code 
Notice, that concern the production during discovery of documents 
within a party's ``control''; \21\ and (3) Proposed Rule 12504 (Motions 
to Decide Claims Before a Hearing on the Merits), as amended by 
Amendment 5.\22\ In response to these comments, NASD filed Amendment 6 
to the Customer Code with the Commission on July 21, 2006, in which it 
withdrew Proposed Rule 12504 (Motions to Decide Claims Before a Hearing 
on the Merits) and all references thereto from the Customer Code.\23\
---------------------------------------------------------------------------

    \18\ See supra note 3.
    \19\ The request for accelerated approval applies to all 
amendments filed after the Customer Code Notice, which are 
Amendments 5, 6, and 7.
    \20\ See, e.g., Aidikoff, Appel, Arbuckle, Austin, Baldinger, 
Baccine, Batterman, Bernstein, Biggins, Bleecher, Brannan, 
Buchwalter, T. Burke, Canning 2, Chalmers, Claxton, Cohn, 
P. Davis, Doner, Elliott, Evans 2, Feinberg 2, 
Gillis, Goldstein, Graham, Greco 2, Greenman, Hewko, 
Hunter, Kaplan, Keeney, Korsak, Lea 2, Levine, Lopez 
2, Lynch, MacIntyre, Magary 2, Malecki, Marks, 
McCauley, Mee, Meissner 2, Meyer, S. Meyer, Miller 
2, Murakami, Ostwald, Page 2, Parker, Pass, 
Peiffer, Perkins, PIABA 3, Port, Pounds 2, 
Quarles, Rabin, Reasonver, Robbins, Sadler, Salamon, Savage, Seiler, 
Sherman, Shewan 2, Shockman, Sigler, Silver, Smiley, Smith, 
Sonn 2, Stewart, Stoneman, Van Kampen, W. Young.
    \21\ See, e.g., Eccleston 2, Fedor, Kaplan, Lipner 
2, Page 2, Perkins, PIABA 4, Shockman, 
Smiley.
    \22\ See e.g., Aidikoff, Brannan, Boliver 2, Carlson, 
Fedor, Kaufman, Lantagne, Lipner, PACE 2, Page 2, 
PIABA 3, PIABA 4, Robbins, Rothstein, Shockman, 
Smiley, Sonn 2, Tepper 2.
    \23\ Proposed Rule 12504 has been re-filed as a separate 
proposed rule change and published for public comment. See 
Securities Exchange Act Rel. No. 54360 (Aug. 24, 2006), 71 FR 51879 
(Aug. 31, 2006) (SR-NASD-2006-088).
---------------------------------------------------------------------------

    NASD filed Amendment 7 to the Customer Code with the Commission on 
August 15, 2006. In this amendment, NASD further responded to comments 
concerning Proposed Rules 12506 (Document Production Lists) and 12514 
(Exchange of Documents and Witness Lists Before Hearing) by amending 
Proposed Rule 12508 (Objecting to Discovery; Waiver of Objection). In 
addition, NASD amended other proposed rules, provided additional 
clarification concerning certain NASD practices and rules, and 
responded to one comment submitted in response to Amendment 5 to the 
Customer Code.
    A summary of comments received in connection with the Customer Code 
Notice and NASD's responses, as well as a description of the amendments 
to proposed rule text made in Amendments 5, 6, and 7 are included 
below. References to Amendments 5, 6, or 7 in this Section 0 refer to 
Amendments 5, 6, or 7 to the Customer Code only, unless otherwise 
specified. For the text of Amendments 5, 6, and 7, please see the NASD 
Web site at http://www.nasd.com/web/[fxsp0
]idcplg?IdcService=[fxsp0]SS--GET--[fxsp0]PAGE&ssDocName=NASDW--

[fxsp0]009306&=802.

A. General Comments

    In the Customer Code Notice, the Commission solicited comment on 
the differences between provisions in the Customer Code and their 
counterparts in the Uniform Code of Arbitration (``Uniform Code'') 
developed by the Securities Industry Conference on Arbitration 
(``SICA'').\24\ One commenter favored the Uniform Code provisions over 
those of the Customer Code, stating that because NASD's arbitration 
program operates from a position of dominance, it has abandoned the 
premise of uniformity under which SICA operates.\25\
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    \24\ SICA is a cooperative organization that is composed of 
public members, as well as representatives of the SROs and the 
Securities Industry Association. SICA works toward improving the 
dispute resolution process by considering current issues, case law, 
and policy in connection with arbitration, and amending the Uniform 
Code in light of those considerations when appropriate. SROs have 
often revised their own arbitration rules in accordance with changes 
in the Uniform Code.
    \25\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it participates actively in 
SICA and values the input of SICA participants. In some instances, 
however, the nature and volume of NASD's caseload require NASD to adopt 
rules either in advance of other SROs or that differ from other SROs'. 
NASD also stated that to gather a wide range of ideas and information, 
it regularly discusses rule proposals with the same constituencies 
represented at SICA: Representatives of the investor and industry 
communities, as well as arbitrators and mediators.

B. Proposed Rule 12100--Definitions

1. Definitions Added in Amendment 5
    As noted above, the Customer Code includes a comprehensive 
definitions section. Two commenters suggested defining the term 
``customer'' to help clarify jurisdictional and standing issues related 
to arbitration.\26\ One commenter also suggested defining the term 
``pleadings'' to assist pro se claimants to understand which documents 
are required for their arbitration claims.\27\ Another commenter 
suggested defining the term ``award'' to minimize the confusion 
concerning what type of ruling by the panel constitutes an award.\28\ 
NASD proposed to define these terms in the Customer Code in Amendment 
5.\29\ As amended, Proposed Rule 12100 would define an ``award'' in 
paragraph (b) as ``a document stating the disposition of a case.'' 
Paragraph (i) would define a ``customer'' as not including a broker or 
dealer. NASD noted that the definition of ``customer'' would be the 
same as that found in the general definitions for NASD rules, Rule 
0129(g). Paragraph (s) of the rule would define a ``pleading'' as ``a 
statement describing a party's causes of action or defenses. Documents 
that are considered pleadings are: a statement of claim, an answer, a 
counterclaim, a cross claim, a third party claim, and any replies.''
---------------------------------------------------------------------------

    \26\ PACE and Ryder.
    \27\ PACE.
    \28\ Ryder.
    \29\ As a result of these new definitions, the remaining 
definitions would be re-designated in alphabetical order.
---------------------------------------------------------------------------

2. Proposed Rule 12100(a)--Definition of Associated Person; Proposed 
Rule 12100(r)--Definition of Person Associated With a Member
    Proposed Rules 12100(a) and 12100(r) provide that, for purposes of 
the Customer Code, an associated person includes a person formerly 
associated with a member. One commenter suggested that, consistent with 
NASD By-Laws,\30\ the concept of a formerly associated person should be 
limited to persons who have been associated within two years.\31\ This 
commenter asserted that when read in conjunction with Proposed Rule 
12200 (concerning mandatory arbitration), these definitions would 
subject formerly associated persons to NASD Dispute Resolution's 
jurisdiction in perpetuity. In the

[[Page 4578]]

commenter's view, no NASD by-laws or NASD Dispute Resolution rules 
permit lifelong jurisdiction.
---------------------------------------------------------------------------

    \30\ See NASD By-Laws, Art. V, Sec. 4.
    \31\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that the two-year retention of 
jurisdiction in Article V, Section 4 of NASD's By-Laws is for NASD 
regulatory purposes and does not apply to arbitrations. In the 
arbitration context, NASD maintains jurisdiction over a formerly 
associated person for events that occurred while the person was 
associated with a member firm (or related to the person's termination 
of employment with a member firm, in the case of industry disputes). 
NASD noted that such arbitrations would be subject to any applicable 
statutes of limitation, as well as the six-year eligibility rule under 
Proposed Rule 12206. NASD thus is not proposing to amend Proposed Rules 
12100(a) and 12100(r).
3. Proposed Rule 12100(u)--Definition of Public Arbitrator; Proposed 
Rule 12100(p)--Definition of Non-Public Arbitrator
    NASD proposed to define ``public arbitrator'' and ``non-public 
arbitrator'' in the Customer Code the same way as in Rules 10308(a)(5) 
and (a)(4), respectively, of the current Code. Twenty-three commenters 
expressed concern with the definitions of public arbitrator and non-
public arbitrator.\32\ As a preliminary matter, they urged NASD to 
change the term ``non-public arbitrator'' to ``industry arbitrator.'' 
In their view, the current terminology is not consistent with the goal 
of rewriting the Customer Code in plain English. They suggested that 
the term ``industry arbitrator'' would assist pro se parties or 
inexperienced attorneys with no background in arbitration.
---------------------------------------------------------------------------

    \32\ Boliver, Canning, Caruso, Estell, Evans, Ilgenfritz, Josel, 
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PIABA, 
Pounds, Rosenfield, Sadler, Schultz 2, Shewan, Stoltmann, 
Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that it has used the term ``non-public 
arbitrator'' since the Commission approved the Neutral List Selection 
System (``NLSS'') in 1998.\33\ NASD expressed the belief that users of 
its forum understand the term, and thus did not agree that the term 
should be changed.
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Rel. No. 40555, 63 FR 56670 
(Oct. 22, 1998) (SR-NASD-1998-48).
---------------------------------------------------------------------------

    Commenters also suggested several changes to the definition of 
``public arbitrator'' and objected to the inclusion of a non-public 
arbitrator on three-person panels.\34\ In Amendment 5, NASD responded 
that because it did not propose substantive amendments to these 
provisions in the Customer Code, those suggestions are outside the 
scope of the rule filing. The Commission notes that changes to the 
definition of ``public arbitrator'' are addressed in a separate rule 
filing.\35\
---------------------------------------------------------------------------

    \34\ Boliver, Canning, Caruso, Estell, Evans, Ilgenfritz, Josel, 
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PIABA, 
Pounds, Rosenfield, Sadler, Schultz 2, Shewan, Stoltmann, 
Sutherland, and Willner.
    \35\ The Commission recently approved the rule changes proposed 
in the rule filing. See Order Approving Proposed Rule Change and 
Amendment No. 1 Thereto Relating to Amendments to the Classification 
of Arbitrators Pursuant to Rule 10308 of the NASD Code of 
Arbitration Procedure, Securities Exchange Act Rel. No. 54607 (Oct. 
16, 2006), 71 FR 62026 (Oct. 20, 2006) (SR-NASD-2005-094); Notice of 
Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating 
to Amendments to the Classification of Arbitrators Pursuant to Rule 
10308 of the NASD Code of Arbitration, Securities Exchange Act Rel. 
No. 52332 (Aug. 24, 2005), 70 FR 51365 (Aug. 30, 2005) (SR-NASD-
2005-094).
---------------------------------------------------------------------------

C. Proposed Rule 12102--National Arbitration and Mediation Committee

    Proposed Rule 12102 includes the size and composition requirements 
of the National Arbitration and Mediation Committee (``NAMC''). One 
commenter noted that these requirements are not in the current 
Code.\36\ NASD responded in Amendment 5 that Proposed Rule 12102 would 
codify the requirements of the Plan of Allocation and Delegation of 
Functions by NASD to Subsidiaries.\37\
---------------------------------------------------------------------------

    \36\ Ryder.
    \37\ See NASD Manual, Plan of Allocation and Delegation of 
Functions by NASD to Subsidiaries, Part V(c)(1)(b); Securities 
Exchange Act Rel. No. 37107 (Apr. 11, 1996) (SR-NASD-96-16).
---------------------------------------------------------------------------

D. Proposed Rule 12103--Director of Dispute Resolution

    Proposed Rule 12103 includes a delineation of the duties and 
responsibilities of the Director of Dispute Resolution with respect to 
the NAMC. One commenter noted that the proposed rule would change the 
Director's relationship with the NAMC.\38\ Specifically, the current 
Code provides that the Director ``shall be directly responsible to the 
NAMC and shall report to it at periodic intervals established by the 
Committee and at such other times as called upon by the Committee to do 
so.'' The Customer Code provides that the Director ``shall consult with 
the NAMC upon the NAMC's request.''
---------------------------------------------------------------------------

    \38\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that the proposed rule reflects current 
practice. Pursuant to Article V, Section 5.1 of the NASD Dispute 
Resolution By-Laws, the Director reports to the President of NASD 
Dispute Resolution and, ultimately as an officer, to the NASD Dispute 
Resolution Board. The Director meets with the NAMC, usually every 
quarter, and updates the Committee on the state of the arbitration 
forum. At this time, the Director receives feedback and suggestions on 
arbitration rules and procedures from NAMC.
    Another commenter expressed concern regarding provisions in 
Proposed Rule 12103 that would give the Director the authority to 
delegate certain functions.\39\ In this commenter's experience, 
arbitrators seek out the advice of NASD staff on certain issues, such 
as subpoenas, discovery matters, and motions. This commenter believes 
NASD staff should not provide opinions on such issues, but rather they 
should be addressed to the panel and, if necessary, argued by the 
parties.
---------------------------------------------------------------------------

    \39\ Magary.
---------------------------------------------------------------------------

    NASD responded in Amendment 5 that its current policy is for staff 
to advise arbitrators on procedural matters, but not to provide 
opinions on substantive issues. If arbitrators ask staff about 
substantive matters, NASD staff suggest that the arbitrators ask the 
parties to brief the issue so that the arbitrators can make a decision. 
NASD stated that it would emphasize this policy when it trains its 
staff on the Customer Code.

E. Proposed Rule 12104--Effect of Arbitration on NASD Regulatory 
Activities

    Proposed Rule 12104 provides that submitting a dispute to 
arbitration does not prevent NASD from taking additional regulatory 
action, if warranted. The rule would allow any arbitrator to make 
disciplinary referrals at the conclusion of an arbitration.
    One commenter suggested that the proposed rule also should 
authorize regulatory sanctions for breaches of the procedural 
requirements of the arbitration rules.\40\ In Amendment 5, NASD 
responded that because Proposed Rule 12104 is substantially the same as 
Rule 10105 of the current Code, the comment is outside the scope of the 
rule filing.
---------------------------------------------------------------------------

    \40\ Ryder.
---------------------------------------------------------------------------

F. Proposed Rule 12105--Agreement of the Parties

    As published in the Customer Code Notice, Proposed Rule 12105(a) 
would allow parties to modify a provision of the Code or a decision of 
the Director or the panel by written agreement. Proposed Rule 12105(b) 
provides that if the Director or the panel determines that a named 
party is inactive in the arbitration or has failed to respond after 
adequate notice has been given, the

[[Page 4579]]

Director or the panel may determine that the written agreement of that 
party is not required while the party is inactive or not responsive. In 
the Customer Code Notice, the Commission requested comment on whether 
the term ``inactive'' is defined sufficiently.
    While one commenter thought the concept of an ``inactive'' party is 
sufficiently clear,\41\ others suggested specifying that an 
``inactive'' party is a party in default for failure to file a response 
to a claim, counter-claim, or cross claim.\42\
---------------------------------------------------------------------------

    \41\ PACE.
    \42\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD stated that based on current practices in its 
forum, the term ``inactive'' could apply to: (1) A party who answers 
and then fails to respond to administrative matters or correspondence; 
(2) a claimant who cannot be found, after the claimant's attorney 
withdraws; or (3) a party who does not answer. In Amendment 7, NASD 
proposed to include a non-exhaustive list inactive parties. Proposed 
Rule 12105 is amended in Amendment 7 as follows (new language in 
italics):
12105. Agreement of the Parties
    (a) No change.
    (b) If the Director or the panel determines that a named party is 
inactive in the arbitration, or has failed to respond after adequate 
notice has been given, the Director or the panel may determine that the 
written agreement of that party is not required while the party is 
inactive or not responsive. For purposes of this rule, an inactive 
party could be, but is not limited to: (1) A party that does not 
answer; (2) a party that answers and then fails to respond to 
correspondence sent by the Director; (3) a party that answers and then 
fails to respond to correspondence sent by the panel in cases involving 
direct communication under Rule 12211; or (4) a party that does not 
attend pre-hearing conferences.

G. Proposed Rule 12200--Arbitration Under an Arbitration Agreement or 
the Rules of NASD

1. Insurance Business Exception
    Proposed Rule 12200 provides that parties must arbitrate a dispute 
under the Customer Code if (1) A written agreement requires it or the 
customer requests it; (2) the dispute is between a customer and a 
member or associated person of a member; and (3) the dispute arises in 
connection with the business activities of a member or associated 
person, unless the claims involve the insurance business activities of 
a member that is also an insurance company. Eighteen commenters argued 
that the rule could be read to exclude variable annuity claims from 
arbitration because some state statutes treat these products solely as 
insurance products, not securities.\43\ In their view, the choice of 
whether to arbitrate variable annuity claims against NASD members 
should belong to the investor.
---------------------------------------------------------------------------

    \43\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that variable annuities are securities 
and are not excluded from arbitration under the exception for disputes 
involving the insurance business of a member that is also an insurance 
company in current Rule 10101 (concerning matters eligible for 
submission). According to NASD, no substantive change is intended in 
Proposed Rule 12200.
2. Requests by the Customer to Arbitrate
    Under Proposed Rule 12200, parties must arbitrate if ``requested by 
the customer,'' and if the other requirements of the rule are 
satisfied. One commenter suggested inserting the words ``of the 
member'' after the word ``customer'' in the proposed rule text.\44\ 
This commenter asserted that this change would eliminate attempts by 
customers to demand arbitration of disputes against firms with which 
the customer does not have an account or other relationship. Another 
commenter opposed this suggestion because it could preclude ``selling 
away'' claims (allegations that an associated person engaged in 
securities activities outside his or her firm).\45\ This commenter 
stated that substantial judicial precedent supports the right of a 
customer to file a selling away claim against the brokerage firm that 
employed such an associated person, even if the customer has no account 
with that firm.
---------------------------------------------------------------------------

    \44\ SIA.
    \45\ Eccleston.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that adding the words ``of the 
member'' after the word ``customer'' would inappropriately narrow the 
scope of claims that are required to be arbitrated under the Customer 
Code. Further, NASD noted that because Proposed Rule 12200 is 
substantially the same as Rule 10301 of the current Code, the comment 
is outside the scope of the rule filing.
3. ``Business Activities''
    Rule 10301(a) of the current Code provides that a dispute, claim, 
or controversy arising in connection with the ``business of'' a member 
or the ``activities of'' an associated person is eligible for 
arbitration. In comparison, Proposed Rule 12200 would provide that 
disputes arising from the ``business activities of the member or the 
associated person'' must be arbitrated if the other conditions of the 
rule are satisfied. One commenter suggested that this change could 
alter the scope of disputes that members must arbitrate with customers, 
as well as the scope of the exception for disputes involving 
``insurance business activities'' of a member.\46\
---------------------------------------------------------------------------

    \46\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that Proposed Rule 12200 is 
substantively the same as Rule 10301 of the current Code and is not 
intended to change the scope of arbitrable disputes. NASD also proposed 
deleting the insurance company exception from Proposed Rule 12200, 
noting that it is included in Proposed Rule 12201.
    NASD reconsidered this decision in Amendment 7, and again proposed 
to include the insurance business exception in Proposed Rule 12200. 
Rule 10101 of the current Code provides that insurance disputes are not 
eligible for arbitration,\47\ and Rules 10201 and 10301 of the current 
Code delineate the eligible disputes that parties are required to 
arbitrate. According to NASD, the proposed rules in the Customer Code 
were rearranged to place the mandatory arbitration provision before the 
elective arbitration provision in the Customer Code. Because of this 
organization, NASD believes that clarity requires the insurance 
exception to be included in both provisions.
---------------------------------------------------------------------------

    \47\ Rule 10101 provides, ``This Code of Arbitration Procedure 
is prescribed and adopted pursuant to Article VII, Section 1(a)(iv) 
of the By-Laws of the Association for the arbitration of any 
dispute, claim, or controversy arising out of or in connection with 
the business of any member of the Association, or arising out of the 
employment or termination of employment of associated person(s) with 
any member, with the exception of disputes involving the insurance 
business of any member which is also an insurance company.''
---------------------------------------------------------------------------

    NASD also proposed to clarify in Amendment 7 that the term 
``business activities of a member'' in Proposed Rule 12200 would 
include ``selling away'' claims. Under the current Code, NASD accepts 
cases brought by customers against associated persons in selling away 
cases, and cases by customers against the associated person's member 
firm if there is any allegation that the member was or

[[Page 4580]]

should have been involved in the events, such as an alleged failure to 
supervise the associated person. As stated in Amendment 5, Proposed 
Rule 12200 is not intended to change the scope of arbitrable disputes. 
NASD reiterated in Amendment 7 that it would continue to accept these 
types of cases under the Customer Code.

H. Proposed Rule 12201--Elective Arbitration

1. Business Activities
    The elective arbitration provision of Proposed Rule 12201, like the 
mandatory arbitration provision of Proposed Rule 12200, describes the 
scope of disputes that parties may choose to arbitrate, if the other 
conditions of the rule are satisfied, as relating to the ``business 
activities of a member or an associated person, except disputes 
involving the insurance business activities of a member that is also an 
insurance company.'' One commenter suggested that this phrasing, and in 
particular the term ``business activities,'' could alter the scope of 
disputes that parties could elect to arbitrate.\48\ This commenter 
viewed the reference to ``business activities'' of an associated person 
as a substantive change to the types of cases that parties may agree to 
arbitrate, stating that the phrase implies a ``scope of employment'' 
construction. This commenter also noted that including the ``insurance 
company'' exception in the elective arbitration rule implies that NASD 
cannot entertain the arbitration of such disputes, even if all the 
parties agree.
---------------------------------------------------------------------------

    \48\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD disagreed with the commenter, stating that 
Proposed Rule 12201 is not intended to alter the scope of claims that 
currently are eligible for voluntary arbitration under Rule 10101 of 
the current Code. Thus, NASD did not propose to amend Proposed Rule 
12201. (See also Section 0, regarding selling away claims.)
2. Disclosures Regarding Insurance
    Three commenters suggested that respondents should be required to 
disclose ``the presence and amount of insurance, if applicable.'' \49\ 
These commenters stated that small brokerage firms that have insurance 
are able to coerce small settlements by falsely claiming an inability 
to pay. Two commenters also stated, ``[c]laimants, who are selecting 
arbitrators (some of whom have insurance affilations) need to know 
whether an insurance company lawyer is defending.'' \50\ In Amendment 
5, NASD stated that because Proposed Rule 12201 is substantively the 
same as Rule 10101 of the current Code, these comments are outside the 
scope of the rule filing.
---------------------------------------------------------------------------

    \49\ Canning, Lipner, and Sutherland.
    \50\ Canning, Lipner.
---------------------------------------------------------------------------

I. Proposed Rule 12203--Denial of NASD Forum

    Rule 10301(b) of the current Code provides that the Director of 
Arbitration, upon approval of the NAMC or its Executive Committee, may 
decline to permit the use of the NASD arbitration forum if the 
``dispute, claim, or controversy is not a proper subject matter for 
arbitration.'' Proposed Rule 12203(a) would provide that the Director 
``may decline to permit the use of the NASD arbitration forum if the 
Director determines that, given the purposes of NASD and the intent of 
the Code, the subject matter of the dispute is inappropriate, or that 
accepting the matter would pose a risk to the health or safety of 
arbitrators, staff, or parties or their representatives.'' To ensure 
that the authority to deny the forum could not be delegated by the 
Director, the rule would provide that only the Director or the 
President of NASD Dispute Resolution may exercise the Director's 
authority under the rule.
    One commenter suggested that the proposed rule should clarify that 
if the Director or President denies the use of the forum, and if there 
is no alternative forum specified in the arbitration agreement, a 
customer can pursue his or her remedies in court.\51\ In Amendment 5, 
NASD responded that it does not believe it is appropriate for NASD to 
offer an opinion as to any other remedies that a party might be able to 
pursue. Accordingly, NASD amended the title of the proposed rule to 
read ``Denial of NASD Forum'' to avoid the suggestion that it is under 
an obligation to refer a party to another forum.
---------------------------------------------------------------------------

    \51\ PACE.
---------------------------------------------------------------------------

    Another commenter expressed concern that the proposed rule would no 
longer require the Director to obtain the approval of the NAMC or the 
Executive Committee to deny access to the arbitration forum.\52\ In 
Amendment 5, NASD stated that the proposed rule is intended to address 
circumstances that may require immediate resolution, such as security 
concerns and other unusual but serious situations, and in which the 
Director needs flexibility. Noting that the proposed rule provides that 
this authority may only be exercised by the Director or the President 
of NASD Dispute Resolution, NASD did not propose an amendment to 
Proposed Rule 12203 in connection with this comment.
---------------------------------------------------------------------------

    \52\ Ryder.
---------------------------------------------------------------------------

J. Proposed Rule 12204--Class Actions

    Rule 10301 of the current Code provides that a claim is not 
eligible for arbitration at NASD if it is (1) submitted as a class 
action, or (2) filed by a member or members of a putative or certified 
class action, if the claim is encompassed by a putative or certified 
class action filed in federal or state court, or is ordered by a court 
for class-wide arbitration at an arbitral forum not sponsored by an 
SRO. Such claims, however, may become eligible for arbitration at NASD 
if a claimant demonstrates that he or she has elected not to 
participate in the putative or certified class action or, if 
applicable, has complied with any conditions for withdrawing from the 
class prescribed by the court. Rule 10301 of the current Code also 
provides that a panel of arbitrators may hear disputes concerning 
whether a particular claim is encompassed by a putative or certified 
class action. Alternatively, either party may elect to petition the 
court with jurisdiction over the putative or certified class action to 
resolve such disputes. As published in the Customer Code Notice, 
Proposed Rule 12204 is intended to be substantively the same as Rule 
10301.
    Eighteen commenters raised two interpretive issues with respect to 
the class action rule under the current Code.\53\ First, they indicated 
that respondents may argue that any claim involving a security that is 
also the subject of a pending class action lawsuit is ineligible for 
arbitration. In their experience, respondents have offered this 
argument even though claims in the arbitration case are factually and 
legally distinguishable from those in the class action. They also 
stated that respondents that are not defendants in the class action may 
make motions to dismiss, citing this argument.
---------------------------------------------------------------------------

    \53\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    Second, the commenters argued that, although the current Code 
allows a party to opt out of the class action, it does not explain how 
a party can demonstrate to NASD that he or she is not participating in 
the class action, either before or after a class has been certified.
    In Amendment 5, NASD proposed to clarify in Proposed Rule 12204(b) 
that only claims based on the same facts and law and that involve the 
same

[[Page 4581]]

defendants as in a class action are not arbitrable. NASD also proposed 
to clarify in Proposed Rule 12204(b) the procedure a party would use to 
demonstrate to NASD that he or she is opting or has opted out of a 
class action. In particular, NASD proposed to amend Proposed Rule 12204 
as follows (new language in italics; deleted language in [brackets]):
12204. Class Action Claims
    (a) No change.
    (b) [No claim that is included] Any claim that is based upon the 
same facts and law, and involves the same defendants as in a court-
certified class action or a putative class action, or that is ordered 
by a court for class-wide arbitration at a forum not sponsored by a 
self-regulatory organization, [will] shall not be arbitrated under the 
Code, unless the party bringing the claim [shows] files with NASD one 
of the following:
    (1) A copy of a notice filed with the court in which the class 
action is pending that [it is not participating] the party will not 
participate in the class action[,] or in any recovery that may result 
from the class action, or has withdrawn from the class according to any 
conditions set by the court[, if any]; or
    (2) a notice that the party will not participate in the class 
action or in any recovery that may result from the class action.
    (c) No change.
    (d) No change.
* * * * *

K. Proposed Rule 12206--Time Limits

    Proposed Rule 12206 provides, in pertinent part, that claims are 
not eligible for arbitration under the Customer Code when six years 
have elapsed from the occurrence or event giving rise to the claim, and 
that the panel will resolve any questions regarding the eligibility of 
a claim. One commenter suggested eliminating the proposed rule.\54\ In 
this commenter's view, the Customer Code should authorize the 
arbitration panel to apply relevant statutes of limitation instead. In 
Amendment 5, NASD responded that because Proposed Rule 12206 is 
substantively the same as Rule 10304 of the current Code, this comment 
is outside the scope of the rule filing.
---------------------------------------------------------------------------

    \54\ PACE.
---------------------------------------------------------------------------

    One commenter suggested that NASD amend the proposed rule to state 
that it is not a statute of repose.\55\ In Amendment 5, NASD responded 
that it believed the suggestion could make the proposed rule confusing 
and therefore declined to amend the rule on this issue.
---------------------------------------------------------------------------

    \55\ Magary.
---------------------------------------------------------------------------

L. Proposed Rule 12207--Extension of Deadlines

    In relevant part, Proposed Rule 12207(c) provides that the Director 
may extend or modify any deadline set by the Code for good cause, or by 
the panel in extraordinary circumstances. Two commenters suggested that 
the standard for extending deadlines for answering the statement of 
claim should remain the same as under Rule 10314 of the current Code, 
which provides that extensions of the time to answer are disfavored and 
will not be granted by the Director except in extraordinary 
circumstances.\56\ In their view, Proposed Rule 12207, when read 
together with Proposed Rule 12303, would be less stringent than the 
current standard.
---------------------------------------------------------------------------

    \56\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it believes that having a 
single, uniform standard for extensions of deadlines by the Director 
simplifies the Customer Code and is in the public interest. Such 
extensions would not be automatic upon request but would require 
respondents to demonstrate that they have good cause for seeking an 
extension of time to answer the statement of claim.
    One commenter noted that the proposed rule would give the Director 
authority to override a panel deadline.\57\ Even though this rule would 
expressly limit this authority to extraordinary circumstances, the 
commenter questioned the Director's need for this authority and for 
overriding a case-specific ruling made by a panel.
---------------------------------------------------------------------------

    \57\ Ryder.
---------------------------------------------------------------------------

    NASD responded that the phrase ``extraordinary circumstances'' 
would encompass such unexpected and uncontrollable events as a weather-
related or security emergency. NASD noted that there have been 
instances, such as hurricanes and terrorist attacks, when NASD Dispute 
Resolution offices had to be evacuated, the offices of parties and 
counsel were damaged, and hearings could not be held safely. NASD 
believes that in such situations, the Director needs the authority to 
postpone deadlines until order is restored. For the above reasons, NASD 
is not proposing to amend Proposed Rule 12207 at this time.

M. Proposed Rule 12212--Sanctions

    Rule 10305(b) of the current Code (Dismissal of Proceedings) 
provides that the ``arbitrators may dismiss a claim, defense, or 
proceeding with prejudice as a sanction for willful and intentional 
material failure to comply with an order of the arbitrator(s) if lesser 
sanctions have proven ineffective.'' In addition, the NASD Discovery 
Guide (``Discovery Guide'') states that ``[t]he panel has wide 
discretion to address noncompliance with discovery orders.'' Proposed 
Rule 12212 would incorporate and codify these current sanctions 
provisions and extend them beyond the discovery context to apply to 
non-compliance with any provision of the Code, or order of the panel or 
a single arbitrator authorized to act on behalf of the panel. NASD 
stated that this rule change would encourage parties to comply with 
both the Customer Code and orders of the panel, and would also clarify 
the authority of arbitrators to ensure the fair and efficient 
administration of arbitration proceedings when parties do not comply.
1. Procedural Guidance
    Two commenters stated that Proposed Rule 12212 grants broad 
authority to the panel to impose sanctions without providing guidance 
on how and when sanctions should be applied.\58\ One of these 
commenters suggested that the lack of procedural and substantive 
standards creates the risk that sanctions will become a routine part of 
arbitration practice.\59\ This commenter urged NASD to, among other 
things, require notice and an opportunity to be heard and eliminate the 
panel's authority to sanction a party for failing to comply with any 
provision of the Customer Code.
---------------------------------------------------------------------------

    \58\ Ragsdale and SIA.
    \59\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD explained that the panel has the authority to 
control all aspects of an arbitration, and, therefore, must have the 
ability to enforce the rules of the forum as well as its orders. 
Therefore, the proposed rule specifically provides that the panel has 
the authority to impose sanctions for violations of any provision of 
the Customer Code. NASD believes that underscoring the panel's 
authority will deter parties from violating the Customer Code and from 
employing abusive tactics, which require considerable time and effort 
to address. In turn, NASD believes reducing the incidence of violations 
and abusive tactics will expedite arbitrations. NASD also stated that 
it intends to provide guidance in arbitrator training materials on the 
Customer Code on how and when this proposed rule should be applied.

[[Page 4582]]

2. Sanctions Between the Time a Claim Is Filed and the Time a Panel Is 
Selected
    One commenter expressed support for Proposed Rule 12212 but noted 
that no panel is available to enforce compliance with the provisions of 
the Customer Code between the time a claim is filed and the time a 
panel is selected.\60\ This commenter suggested amending the proposed 
rule to provide explicit authority to a single arbitrator appointed 
during this time, or the panel, once appointed, to sanction parties for 
abusive or violative conduct that may occur during this time.
---------------------------------------------------------------------------

    \60\ PACE.
---------------------------------------------------------------------------

    In Amendment 5, NASD stated that Proposed Rule 12212 would give the 
panel discretion to impose sanctions for any violations of the Customer 
Code, regardless of when they occurred. For this reason, NASD is not 
proposing to amend the proposed rule at this time.
3. Disciplinary Referrals
    One commenter suggested that Proposed Rule 12212 should emphasize 
that a panel can make a disciplinary referral for a violation of NASD 
rules that either occurred during an arbitration or is related to 
conduct addressed as a claim in arbitration.\61\ In Amendment 5, NASD 
explained that it intends to address the use of disciplinary referrals 
in NASD arbitrator training materials on the Customer Code.
---------------------------------------------------------------------------

    \61\ Magary.
---------------------------------------------------------------------------

4. Other Comments
    One commenter noted that a party cannot appeal an abusive or 
excessive ruling, and that arbitrators are not required to explain 
their decision to impose sanctions.\62\ This commenter suggested 
amending Proposed Rule 12212 to require forum fees to be assessed 
against respondents, except when a claim is brought in bad faith. This 
commenter also suggested requiring the panel to explain its findings if 
it assesses fees against a party.
---------------------------------------------------------------------------

    \62\ Ragsdale.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that a panel's rulings cannot be 
appealed under the Customer Code, and NASD is not proposing to create 
an appellate process. NASD stated that parties may ask the arbitrators 
to explain their imposition of sanctions in the award. It also noted 
that, as under the Customer Code, parties may seek to vacate or modify 
an award under the Customer Code on grounds provided by applicable 
federal or state arbitration laws. Although sanctions are rarely 
imposed, NASD intends to recommend in arbitrator training that 
arbitrators provide a written explanation for any sanctions in the 
award. Thus, NASD is not proposing to amend Proposed Rule 12212 at this 
time.

N. Proposed Rule 12213--Hearing Locations

    Proposed Rule 12213 provides that the Director generally will 
select the hearing location closest to the customer's residence at the 
time of the events giving rise to the dispute. The proposed rule also 
would clarify that before arbitrator lists are sent to the parties 
under Rule 12403, the parties may agree in writing to a different 
hearing location other than the one selected by the Director, and that 
the Director may change the hearing location upon motion of a party.
    One commenter supported the proposed rule but expressed concerned 
that a pro se customer might be discouraged from submitting an 
arbitration claim because the customer could not afford to travel to a 
distant hearing location.\63\ This commenter suggested that NASD amend 
the proposed rule to clarify that a customer may request a more 
convenient hearing location upon filing a claim.
---------------------------------------------------------------------------

    \63\ PACE.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that Proposed Rule 12213 is 
substantively the same as Rule 10315 of the current Code and stated 
that the commenter's suggested change may provide customers with the 
false impression that their request will be the only factor used to 
determine where the hearing is held. Currently, parties may request a 
hearing location, and this request is considered along with other 
factors in determining the hearing location for an arbitration. This 
practice would not change under the Customer Code.
    NASD also noted that the panel, once appointed, would have the 
authority to change the hearing location. Although this authority is 
already included in Proposed Rule 12503(c)(2), NASD stated that it 
would be logical to include this authority in Proposed Rule 12213, as 
well. Therefore, NASD proposed to amend Proposed Rule 12213 as follows 
(new language in italics):
12213. Hearing Locations
    (a) U.S. Hearing Location
    (1) No change.
    (2) No change.
    (3) No change.
    (4) After the panel is appointed, the panel may decide a motion 
relating to changing the hearing location.
    (b) Foreign Hearing Location
    No change.
* * * * *

O. Proposed Rule 12300--Filing and Serving Documents; Proposed Rule 
12302--Filing an Initial Statement of Claim

    Under the current Code, initial statements of claim are filed with 
the Director and served on the other parties by the Director. This 
procedure would be the same under Proposed Rules 12300 and 12302. Two 
commenters suggested that the proposed rules should allow a claimant to 
directly serve the respondent with the statement of claim and the 
uniform submission agreement.\64\ In their view, this would be 
especially helpful to a claimant when time is of the essence.
---------------------------------------------------------------------------

    \64\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that Proposed Rules 12300 and 12302 do 
not change the current process for serving claims. It also explained 
that it currently tries to serve claims as quickly as possible, and if 
its staff is notified that a party is elderly or infirm, NASD will try 
to expedite the process even further.\65\
---------------------------------------------------------------------------

    \65\ See Press Release, NASD, NASD Implements Expedited Dispute 
Resolution Proceedings for Elderly or Seriously Ill Parties (Jun. 
18, 2004), available at http://www.nasd.com/PressRoom/NewsReleases/2004NewsReleases/NASDW_002820
.

---------------------------------------------------------------------------

    One commenter suggested that NASD amend Proposed Rule 12302 to 
state that the statement of claim is not required to plead legal causes 
of action or legal theories.\66\ In Amendment 5, NASD responded that 
because Proposed Rule 12302 is substantially the same as paragraphs (1) 
and (2) of Rule 10314(a) of the current Code, the comment is outside 
the scope of the rule filing.
---------------------------------------------------------------------------

    \66\ PACE.
---------------------------------------------------------------------------

P. Proposed Rule 12301--Service on Persons Currently Associated With a 
Member

    Proposed Rule 12301 provides that service on an associated person 
may be made either on the member or directly on the associated person. 
If service is made on the member, the member would be required to serve 
the associated person, even if the member would not be representing the 
associated person in the arbitration. One commenter noted that the 
proposed rule is not limited to use by the Director or to initial 
pleadings.\67\ The commenter noted that Proposed Rule 12301 would allow 
a claimant to serve all documents only on the member, which could cause 
confusion if the member and associated person are separately 
represented. It also would delay service on the

[[Page 4583]]

associated person. Thus, the commenter suggested amending the proposed 
rule to apply only to service of initial pleadings, or only to the 
Director for service of statements of claim.
---------------------------------------------------------------------------

    \67\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it did not intend to make any 
substantive changes from the current Code, which permits (but does not 
require) the Director to serve statements of claim on currently 
employed associated persons through their firms when the associated 
person and the firm are both respondents. NASD stated that in practice, 
it rarely uses this form of service. NASD nonetheless proposed to 
clarify the proposed rule to reflect current procedure and to specify 
that only the Director may serve associated persons by serving the 
member, and that this method of service may only be used for initial 
statements of claim. Proposed Rule 12301, as amended in Amendment 5, 
provides (new language in italics; deleted language in [brackets]):
12301. Service on Associated Persons [Currently Associated With a 
Member]
    (a) [If a member and a person currently associated with the member 
are named as respondents to the same arbitration,] The Director will 
serve the initial statement of claim on [service on the person] an 
associated person [with the member] directly at the person's 
residential address or usual place of abode [may be made on the member 
or directly on the associated person]. If service cannot be completed 
at the person's residential address or usual place of abode, the 
Director will serve the initial statement of claim on the associated 
person at the person's business address.
    (b) If a member and a person currently associated with the member 
are named as respondents to the same arbitration, and the Director 
cannot complete service as provided in paragraph (a), then the Director 
may serve the member with the initial statement of claim on behalf of 
the associated person. If service is made on the member, the member 
must serve the associated person, even if the member will not be 
representing the associated person in the arbitration. If the member is 
not representing the associated person in the arbitration, the member 
must notify, and provide the associated person's current address to, 
all parties and the Director.
* * * * *

Q. Proposed Rule 12307--Deficient Claims

    Proposed Rule 12307 provides that the Director will not serve any 
claim that is deficient and lists the reasons that a claim may be 
deficient. In the Customer Code Notice, the Commission specifically 
asked for comment on whether any changes intended to be nonsubstantive 
were actually substantive. In the event commenters identified 
substantive changes, the Commission asked why they are substantive, how 
they will affect the arbitration process or the rights of the parties, 
and whether they are an improvement over the current Code.
    Several commenters stated that Proposed Rule 12307 represents a 
substantive change and is biased in favor of respondents.\68\ They 
explained that if claimants file a deficient claim, the arbitration 
would be delayed until all deficiencies are corrected, and if the 
respondent files a deficient answer the claims also would be delayed. 
They suggested amending the rule to provide that deficient filings by 
respondents shall not delay the service of the arbitrator list 
selection materials, so as not to delay the case. Similarly, some 
commenters suggested that NASD should not transmit a deficient answer 
and gave as examples respondents' failure to submit a uniform 
submission agreement, or filing of a one-page denial as an initial 
answer, and subsequent submission of an amended answer.\69\ These 
commenters also argued that there should be uniformity in application 
of the proposed rule.
---------------------------------------------------------------------------

    \68\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
    \69\ Meissner.
---------------------------------------------------------------------------

    Two commenters expressed concern that the sanctions imposed on 
respondents under Proposed Rule 12308 (Loss of Defenses Due to Untimely 
or Incomplete Answer) are not the same as those imposed on claimants 
for similar conduct.\70\ They noted that if a claimant fails to file a 
uniform submission agreement, then NASD would consider the claim to be 
deficient under Proposed Rule 12307, but if the respondent fails to 
file a uniform submission agreement, the arbitration would proceed. 
These commenters suggested that NASD amend Proposed Rule 12308 to 
require respondents to submit a uniform submission agreement in a 
timely manner. They also suggested that NASD not transmit the answer to 
arbitrators unless the respondent files a uniform submission agreement, 
and that respondents should be precluded from engaging in any 
arbitration-related activity until they file the uniform submission 
agreement.
---------------------------------------------------------------------------

    \70\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD confirmed that a deficient claim would not be 
processed until the deficiencies are corrected, and that the same is 
not true if a respondent's answer is deficient. NASD explained that it 
does not have a mechanism to delay or prevent service of answers 
because while it serves initial statements of claim, it does not serve 
answers. NASD further responded that the proposed rule codifies current 
deficiency practice. NASD noted that, nonetheless, a respondent could 
lose the ability to assert any claims or defenses at the hearing under 
Proposed Rule 12308 for an untimely or deficient answer and also could 
be subject to sanctions under Proposed Rule 12212. Therefore, NASD is 
not proposing to amend the proposed rule at this time based on these 
comments but stated that it would consider them when determining 
whether future amendments are warranted.

R. Proposed Rule 12308--Loss of Defenses Due to Untimely or Incomplete 
Answer

    One commenter, citing the proposed definition of ``claim,'' stated 
that Proposed Rule 12308(a) could impose a severe penalty, including 
default proceedings under Proposed Rule 12801, for failure to answer 
any allegation regardless of materiality, a party's ability to 
investigate by the time the answer is due, or the ``boilerplate'' 
nature of the allegation.\71\
---------------------------------------------------------------------------

    \71\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that Proposed Rule 12308 is 
substantially the same as Rule 10314(b)(2) of the current Code and that 
the comments made on this issue are outside the scope of the rule 
filing. In Amendment 7 NASD further explained that Rule 10314(b)(2)(C) 
of the current Code, which is the basis for Proposed Rule 12308(a), is 
meant to address the timeliness of the answer, rather than its 
completeness. It stated that the other provisions of Rule 
10314(b)(2)(C), addressing completeness, were included in Proposed Rule 
12308(b). NASD also proposed in Amendment 7 to clarify that: (1) The 
listed sanctions apply only if a party does not file an answer within 
the time period specified in the Code; and (2) default proceedings 
apply only if the other conditions of Proposed Rule 12801, such as a 
member's expulsion from NASD, for example, are met. The proposed rule 
is amended as follows (new language in italics; deleted language in 
[brackets]):
12308. Loss of Defenses Due to Untimely or Incomplete Answer
    (a) If a party [fails to] does not answer [any claim] within the 
time period

[[Page 4584]]

specified in the Code, the panel may, upon motion, bar that party from 
presenting any defenses or facts at the hearing, unless the time to 
answer was extended in accordance with the Code. The party may also be 
subject to default proceedings under Rule 12801, if the conditions of 
Rule 12801(a) apply.
    (b) No change.
* * * * *

S. Proposed Rule 12309--Amending Pleadings; Proposed Rule 12310--
Answering Amended Claims

    Rule 10314 of the current Code establishes the general procedures 
for filing initial pleadings and answers. Rule 10328 of the current 
Code pertains to amended pleadings and their responses. Two commenters 
reported that under the current Code, respondents attempt to prevent 
claimants from submitting a response to amended pleadings by alleging 
that Rule 10314 only allows the claimant to reply to a counterclaim, 
even though Rule 10328 of the current Code permits any party to submit 
a response to any amended pleading, in accordance with Rule 
10314(b).\72\ They suggested that NASD amend Proposed Rule 12310, which 
pertains to answering amended claims, to clarify that all parties have 
a right to file a response to any amended pleading, as currently 
permitted by Rule 10328.
---------------------------------------------------------------------------

    \72\ Canning and Meissner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it did not intend to change 
current practice in the Customer Code. NASD explained that Rule 10314 
neither prohibits nor permits the practice of responding to amended 
pleadings.\73\ NASD proposed to revise Proposed Rule 12309 to clarify 
that all parties have a right to file a response to any amended 
pleading. The proposed rule would allow 20 days from the receipt of the 
amended pleading for the service of the response, unless the panel 
determines otherwise. NASD also proposed to clarify in Proposed Rule 
12309(a)(1) that the service requirements of Proposed Rule 12300 
(Filing and Serving Documents) also apply to Proposed Rule 12309. The 
proposed rule change is amended as follows (new language in italics):
---------------------------------------------------------------------------

    \73\ Telephone conversation among Jean Feeney, Vice President, 
NASD; Mignon McLemore, Assistant Chief Counsel, NASD Dispute 
Resolution; Lourdes Gonzalez, Assistant Chief Counsel--Sales 
Practices, Division of Market Regulation, SEC; and Gena Lai, Special 
Counsel, Division of Market Regulation, SEC (Dec. 1, 2006).
---------------------------------------------------------------------------

12309. Amending Pleadings
    (a) Before Panel Appointment.
    Except as provided in paragraph (c), a party may amend a pleading 
at any time before the panel has been appointed.
    (1) To amend a statement of claim that has been filed but not yet 
served by the Director, the claimant must file the amended claim with 
the Director, with additional copies for each arbitrator and each other 
party. The Director will then serve the amended claim in accordance 
with Rules 12300 and 12301.
    (2) No change.
    (b) No change.
    (c) No change.
    (d) Responding to an Amended Pleading.
    Any party may file a response to an amended pleading, provided the 
response is filed and served within 20 days of receipt of the amended 
pleading, unless the panel determines otherwise.
* * * * *

T. Proposed Rule 12310--Answering Amended Claims

    Proposed Rule 12310 establishes the procedural requirements for 
answering amended claims. One commenter noted that the proposed rule 
would give a respondent 20 days to answer an amended statement of claim 
and suggested that NASD amend the proposed rule so that the 20-day 
period would be calculated from the respondent's receipt of the amended 
statement of claim.\74\
---------------------------------------------------------------------------

    \74\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that, as part of the initiative to 
standardize time limits in the Customer Code, the time to answer an 
amended claim was extended from 10 business days to 20 calendar days. 
Thus, a respondent would have more time to respond to an amended claim 
under the Customer Code than under the current Code. Therefore, NASD is 
not proposing to amend the proposed rule at this time.

U. Proposed Rule 12312--Multiple Claimants; Proposed Rule 12313--
Multiple Respondents

    Proposed Rules 12312 and 12313 set forth standards by which parties 
or claims may be joined in the same arbitration case. Proposed Rule 
12312 provides that one or more parties may join multiple claims in the 
same arbitration if the claims contain common questions of law and fact 
and the claims: (1) Assert any right to relief jointly and severally; 
or (2) arise out of the same transaction or occurrence, or series of 
transactions or occurrences. Proposed Rule 12313 provides that one or 
more parties may name one or more respondents in the same arbitration 
if the claims contain any questions of law or fact common to all 
respondents and the claims: (1) assert any right to relief jointly and 
severally; or (2) arise out of the same transaction or occurrence, or 
series of transactions or occurrences. Both proposed rules also provide 
that the Director may separate claims into two or more cases and 
establish procedures for parties to appeal the Director's action.
1. ``Joint and Several Relief''
    Two commenters compared Rule 10314(d) of the current Code and 
Proposed Rules 12312 and 12313 to Rule 20 of the Federal Rules of Civil 
Procedure (Permissive Joinder of Parties) (``FRCP Rule 20'').\75\ In 
their view, Proposed Rules 12312 and 12313 do not track FRCP Rule 20 
correctly. They explained that parties seeking to join claims or 
respondents under FRCP Rule 20 must satisfy two criteria: (1) The 
parties' claims must have arisen out of the same transaction or 
occurrence or series of transactions or occurrences; and (2) the claims 
must contain common questions of law or fact. Both commenters argued 
that joint and several relief should not be an alternative to the 
``same transaction or occurrence or series of transactions or 
occurrences'' requirement, and therefore should be deleted from the 
rule. They also stated that Proposed Rules 12312 and 12313 
substantively change the joinder requirements for multiple parties 
contained in Rule 10314(d).
---------------------------------------------------------------------------

    \75\ Krosschell and SIA. FRCP Rule 20 provides ``All persons may 
join in one action as plaintiffs if they assert any right to relief 
jointly, severally, or in the alternative in respect of or arising 
out of the same transaction, occurrence, or series of transactions 
or occurrences and if any question of law or fact common to all 
these persons will arise in the action.''
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that the joinder requirements in 
Proposed Rules 12312 and 12313 were not intended to differ in substance 
from those in Rule 10314(d). In NASD's view, the reference to joint and 
several relief in FRCP Rule 20 and Rule 10314(d) of the current Code is 
an alternative requirement to the ``same transactions or occurrences'' 
requirement and is appropriately written in the alternative in the 
proposed rules. Therefore, NASD did not propose changes to the proposed 
rules on this issue.
2. Standards for Severing Claims
    Proposed Rule 12312(b) provides that after all responsive pleadings 
have been served, claims joined together under paragraph (a) of the 
rule may be separated into two or more arbitrations

[[Page 4585]]

by the Director before a panel is appointed, or by the panel after the 
panel is appointed. One commenter argued that Proposed Rule 12312(b) 
would give the Director unfettered discretion to sever claims, without 
providing any standards for doing so.\76\ This commenter also contended 
that severing claims could impose a financial hardship on some parties. 
The commenter suggested that NASD amend the proposed rule to 
incorporate the standards used to determine when to sever a claim.
---------------------------------------------------------------------------

    \76\ Magary.
---------------------------------------------------------------------------

    In Amendment 5, NASD explained that Proposed Rules 12312 and 12313 
provide the standard for when cases may be joined. Conversely, cases 
involving multiple claimants or multiple respondents that do not meet 
these criteria may be severed. NASD explained that it did not intend to 
change the current policy that the Director's decision to consolidate 
claims is preliminary and may be reconsidered by the panel. The 
Director's decision to sever claims also is preliminary. Accordingly, 
in Amendment 5, NASD proposed to clarify the current procedure for 
appealing the Director's decision to sever claims. Because there are at 
least two surviving panels when the Director severs claims, multiple 
panels could review the Director's decision, with potentially 
conflicting results. To avoid inconsistent results and to expedite the 
arbitration process, NASD currently forwards any motion to rejoin 
severed claims to the panel on the lowest numbered case (i.e., the 
panel from the first-filed claim in the matter that was severed) to 
decide a motion to re-join the claims. In Amendment 5, NASD amended 
Proposed Rules 12312(b) and 12313(b) as follows to codify current 
practice (new language in italics):
12312. Multiple Claimants
    (a) No change.
    (b) After all responsive pleadings have been served, claims joined 
together under paragraph (a) of this rule may be separated into two or 
more arbitrations by the Director before a panel is appointed, or by 
the panel after the panel is appointed. A party whose claims were 
separated by the Director may make a motion to the panel in the lowest 
numbered case to reconsider the Director's decision.
* * * * *
12313. Multiple Respondents
    (a) No change.
    (b) After all responsive pleadings have been served, claims joined 
together under paragraph (a) of this rule may be separated into two or 
more arbitrations by the Director before a panel is appointed, or by 
the panel after the panel is appointed. A party whose claims were 
separated by the Director may make a motion to the panel in the lowest 
numbered case to reconsider the Director's decision.
* * * * *
3. Greater Panel Discretion to Join Claims
    One commenter expressed concern that the changes to Proposed Rule 
12312 would prevent the joinder of claimants in certain situations, 
which would result in added expense and repetitious hearings for the 
parties.\77\ The commenter argued that the proposed rule should be 
revised to give a panel more discretion to join claims if it would save 
time and money and not be unreasonably prejudicial to the parties. In 
Amendment 5, NASD responded that the joinder requirements in Proposed 
Rules 12312 and 12313 were not intended to differ in substance from 
those in Rule 10314(d), and that therefore this comment is outside the 
scope of the rule filing.
---------------------------------------------------------------------------

    \77\ Greco.
---------------------------------------------------------------------------

V. Proposed Rule 12314--Combining Claims

    Proposed Rule 12314 provides that before ranked arbitrator lists 
are due to the Director under Proposed Rule 12404(c), the Director may 
combine separate but related claims into one arbitration. Once a panel 
has been appointed, the panel may reconsider the Director's decision 
upon motion of a party. One commenter expressed concern that the panel 
would no longer have the authority to review the Director's decision to 
sever or consolidate claims sua sponte.\78\ In this commenter's view, 
the Director has preliminary authority to make rulings on these issues, 
but the panel has plenary authority to review any such rulings.
---------------------------------------------------------------------------

    \78\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD disagreed with the commenter and stated that, 
under Rule 10314(d) of the current Code and current practice, panels 
review these rulings upon a motion of a party.

W. Proposed Rule 12400--Neutral List Selection System and Arbitrator 
Rosters

1. Proposed Rule 12400(a)--Neutral List Selection System
    Nineteen commenters suggested that NASD hire a neutral third-party, 
not connected to NASD or the securities industry, to conduct an annual 
audit of NLSS \79\ and make the results of the audit publicly available 
on NASD's Web site.\80\
---------------------------------------------------------------------------

    \79\ NLSS is the computer program NASD Dispute Resolution uses 
to appoint arbitrators. NASD Dispute Resolution is upgrading its 
computer technology platform, in what is known as the MATRICS 
Computer Project. MATRICS stands for Mediation and Arbitration 
Tracking and Retrieval Interactive Case System. MATRICS will replace 
two legacy case management systems, NLSS and CRAFTIS, the software 
application that NASD Dispute Resolution uses to support its case 
administration functions.
    \80\ Boliver, Canning, Estell, Evans, Ilgenfritz, Josel, 
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, 
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it is committed to ensuring 
that its list selection system operates as described in the Customer 
Code. Thus, NASD stated that it plans to hire an independent auditor to 
conduct an initial audit of the system and will make public the results 
of the audit. NASD stated that thereafter, it will conduct audits on an 
as-needed basis.
2. Proposed Rule 12400(b)--Arbitrator Rosters
    As published in the Customer Code Notice, Proposed Rule 12400(b) 
provides that NASD will maintain three separate arbitrator rosters: One 
of public arbitrators who may serve as a chairperson of a panel 
(``chair-qualified''), one of public arbitrators not eligible to serve 
as a chairperson (``non-chair public''), and one of non-public 
arbitrators. Lists would be generated from these rosters and sent to 
the parties so that the parties may select their arbitrators. Chair-
qualified public arbitrators would not be included in the non-chair 
public roster. The Commission solicited comment on whether this 
approach would limit the pool of arbitrators available to serve on 
panels, particularly in regions where relatively few arbitrators are 
available, and whether chair-qualified arbitrators should be permitted 
to serve in a non-chair capacity, as well.
    Twenty-three commenters stated that excluding chair-qualified 
arbitrators from the non-chair public arbitrator roster would decrease 
the pool of experienced, knowledgeable public arbitrators, particularly 
in regions of the country where the size of the arbitrator pool is 
already limited.\81\ Many of these commenters also asserted that 
arbitration panels selected under this approach would have less overall

[[Page 4586]]

experience and expertise than current panels, which would be bad for 
all parties.
---------------------------------------------------------------------------

    \81\ Boliver, Canning, Evans, Feldman, Ilgenfritz, Josel, 
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PACE, PIABA, 
Pounds, Rosenfield, Schwab, Shewan, Stolle, Stoltmann, Sutherland, 
and Willner.
---------------------------------------------------------------------------

    Eighteen commenters stated that the proposed rule would create a 
class of ``professional'' arbitrators who would strive for the 
appearance of fairness to both sides by issuing more compromise 
awards.\82\ In Amendment 5, NASD disagreed, stating that the random 
selection function of the list selection system would allow the full 
use of the entire arbitrator pool. NASD also noted that all arbitrators 
take an oath in which they affirm their neutrality and ability to 
decide a matter fairly, and that NASD expects all arbitrators to adhere 
to these basic principles, regardless of their classification.
---------------------------------------------------------------------------

    \82\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    NASD further stated in Amendment 5 that it believes chair-qualified 
arbitrators should be included in the non-chair public roster, as well 
as in the chair-qualified roster. Therefore, it proposed to amend 
Proposed Rule 12400(b) to adopt this approach.\83\ NASD also clarified 
that its list selection software would be programmed so that no 
arbitrator's name would appear on both the chair-qualified and non-
chair public lists sent to the parties for arbitrator selection in a 
particular case. NASD believes this approach would provide users of the 
forum with access to the most experienced public arbitrators.
---------------------------------------------------------------------------

    \83\ NASD also proposed to amend the title of Proposed Rule 
12400(b) to correct a typographical error.
---------------------------------------------------------------------------

    The proposed rule, as amended in Amendment 5, is as follows (new 
language in italics; deleted language in [brackets]):
12400. Neutral List Selection System and Arbitrator Rosters
    (a) Neutral List Selection System
    No change.
    (b) Arbitrator[s] Rosters
    NASD maintains the following roster of arbitrators:
     A roster of non-public arbitrators as defined in Rule 
12100(n);
     A roster of public arbitrators as defined in Rule 
12100(r); and
     A roster of arbitrators who are eligible to serve as 
chairperson of a panel as described in paragraph (c). Arbitrators who 
are eligible to serve as chairperson will also be included in the 
roster of public arbitrators, but will only appear on one list in a 
case.
* * * * *
    Subsequent to the filing of Amendment 5 with the Commission, one 
commenter expressed opposition to NASD's proposal to include chair-
qualified arbitrators with non-chair public arbitrators on the non-
chair public roster.\84\ This commenter included statistical models in 
support of his position that chair-qualified arbitrators would be 
selected more frequently than non-chair public arbitrators. This 
commenter also asserted that chair-qualified arbitrators would become 
``professional'' arbitrators.
---------------------------------------------------------------------------

    \84\ See Bernstein.
---------------------------------------------------------------------------

    In Amendment 7, NASD declined to comment on the statistical 
analysis provided by the commenter, stating that the hypothesized 
outcome was speculative. NASD explained that it believes having 
arbitrators with the most experience serving more frequently on panels 
would be in the public interest. Moreover, NASD stated that the 
proposed standards to become eligible to serve as chair-qualified 
arbitrators are reasonable and necessary to provide investors with 
access to well-qualified arbitrators. NASD believes this proposal will 
enhance the efficiency of the arbitration process. Therefore, NASD 
declined to amend the proposed rule on this issue.
    Subsequent to Amendment 7, this commenter submitted a second letter 
reiterating his arguments and providing additional information.\85\ The 
Commission staff obtained data from NASD relating to the number of 
arbitrators at each NASD hearing location, including the number of 
arbitrators who are classified as ``public'' under the definition found 
in rule 10308(a)(5) of the current Code, and who would be classified as 
chair-qualified under Proposed Rule 12100(u) of the Customer Code.\86\ 
Applying the formulas provided in the letter, the Commission staff 
determined that NASD's proposal to include chair-qualified arbitrators 
with non-chair public arbitrators in the non-chair public roster would 
not in all circumstances increase the frequency of chair-qualified 
arbitrators being appointed to panels. Moreover, even assuming that the 
odds would increase in certain circumstances, the staff could not find 
empirical evidence to indicate that the increased odds would result in 
bias in the NASD arbitration forum or otherwise outweigh the benefit of 
the increased training and experience among arbitrators.
---------------------------------------------------------------------------

    \85\ See Letter from Scot D. Bernstein, Esq. and C. Thomas Mason 
III, Esq., dated Oct. 20, 2006.
    \86\ See Letter from Linda D. Fienberg, President, NASD Dispute 
Resolution, to Catherine McGuire, Chief Counsel, Division of Market 
Regulation, SEC, dated Nov. 9, 2006.
---------------------------------------------------------------------------

3. Proposed Rule 12400(c)--Eligibility for Chairperson Roster
    To be chair-qualified, Proposed Rule 12400(c) would require an 
arbitrator to complete the NASD training program or have 
``substantially equivalent training or experience,'' and be either: (1) 
An attorney who has sat through two SRO arbitration cases through the 
award stage; or (2) a non-attorney who has sat through at least three 
such cases. Twenty-five commenters opposed the creation of the chair-
qualified roster and questioned the eligibility requirements.\87\ One 
commenter supported the concept of the chair-qualified roster but 
criticized the eligibility requirements.\88\ Commenters' key concerns 
were that: (1) The term ``substantially equivalent training or 
experience'' is not defined and allows for subjective interpretation, 
which could lead to inexperienced persons serving as chairs; (2) the 
chair roster would create a class of ``professional arbitrators'' who 
would strive for the appearance of fairness to both sides by issuing 
more compromise awards; \89\ and (3) a law degree and litigation 
experience are better predictors of chair qualification than serving as 
an arbitrator on two or three cases.
---------------------------------------------------------------------------

    \87\ Boliver, Canning, Caruso, Estell, Evans, Greco, Ilgenfritz, 
Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary, 
Meissner, Miller, PIABA, Pounds, Rosenfield, Sadler, Shewan, 
Stoltmann, Sutherland, and Willner.
    \88\ PACE.
    \89\ See NASD's response to comments regarding professional 
arbitrators in Section 0, Proposed Rule 12400(b) (Arbitrator 
Rosters), above.
---------------------------------------------------------------------------

    In Amendment 5, NASD stated that it believes that the term 
``substantially equivalent training or experience'' was defined 
sufficiently in the narrative portion of its rule filing. In 
particular, the rule filing states that ``substantially equivalent 
training or experience would include service as a judge or 
administrative hearing officer, chairperson training offered by another 
recognized dispute resolution forum, or the like.'' NASD also noted 
that other factors, such as peer, party, and staff evaluations and a 
willingness to serve as chair, would be used in determining whether an 
arbitrator should be added to the chair roster. It stated that while 
these standards would require the use of judgment, the Commission 
oversees NASD for its compliance with its own rules. NASD also stated 
that it does not plan to grandfather any current arbitrators solely 
because they may have served as chairs on previous panels.

[[Page 4587]]

    In addition, NASD stated that it believes the requirement that an 
arbitrator serve on at least three arbitrations through award to be 
eligible for the chair roster is an objective standard that is easily 
measured,\90\ though not easy to meet. NASD stated that of the 
arbitration cases filed in the past four years, approximately 22% went 
to hearing.\91\ NASD believes that the experience and training gained 
in the time it takes to serve on three hearings through award should 
qualify an arbitrator to serve as a chair, even without legal training 
or experience.
---------------------------------------------------------------------------

    \90\ Similarly, the requirements that the chair have a law 
degree and be a member of the Bar are also objective standards, 
subject only to verification.
    \91\ NASD stated that this average is based on data on NASD's 
Web site under Dispute Resolution Statistics, How Arbitration Cases 
Close (visited Apr. 13, 2006) at http://www.nasd.com/web/[fxsp0
]idcplg?IdcService=SS--[fxsp0]GET--

PAGE&nodeId=516&[fxsp0]ssSourceNodeId=12.
---------------------------------------------------------------------------

    For the reasons stated above, NASD is not proposing to amend the 
proposed rule change in connection with these issues.

X. Proposed Rule 12401--Number of Arbitrators

    As published in the Customer Code Notice, Proposed Rule 12401 
provides that in cases involving claims of more than $25,000 but not 
more than $50,000, the panel will consist of one arbitrator, unless any 
party requests a panel of three arbitrators. One commenter suggested 
that NASD amend the proposed rule to increase the limit for a single 
arbitrator panel to $150,000 or more.\92\ In this commenter's view, the 
current limitation of $25,000 is antiquated, and there is no empirical 
evidence to suggest that a single arbitrator cannot decide a claim 
involving a larger amount in dispute. In Amendment 5, NASD responded 
that, although this comment is beyond the scope of the rule filing, it 
would consider it when determining whether future amendments are 
warranted.
---------------------------------------------------------------------------

    \92\ Caruso.
---------------------------------------------------------------------------

    In Amendment 7, NASD amended Proposed Rule 12401(b) to require that 
the request for a three-arbitrator panel be made in a party's initial 
pleading. NASD stated that proposed change would codify current 
practice in the forum.\93\ The proposed rule is amended as follows (new 
language in italics):
---------------------------------------------------------------------------

    \93\ See Rule 10308(b)(1)(A)(ii) of the current Code.
---------------------------------------------------------------------------

12401. Number of Arbitrators
    (a) Claims of $25,000 or Less
    No change.
    (b) Claims of More Than $25,000 Up To $50,000
    If the amount of a claim is more than $25,000 but not more than 
$50,000, exclusive of interest and expenses, the panel will consist of 
one arbitrator unless any party requests a panel of three arbitrators 
in its initial pleading.
    (c) Claims of More Than $50,000; Unspecified or Non-Monetary Claims
    No change.
* * * * *

Y. Proposed Rule 12403--Generating and Sending Lists to Parties; 
Proposed Rule 12404--Striking and Ranking Arbitrators

    Under the current Code, NLSS provides the parties with a list of 
five names for a single arbitrator customer case, and one list of ten 
public arbitrators and one list of five non-public arbitrators for a 
three-arbitrator case.\94\ Once the parties receive the lists, they 
begin the process of selecting the members of their panel by striking 
arbitrators from each list and ranking the remaining ones.
---------------------------------------------------------------------------

    \94\ The Commission approved NASD's generating lists of only 
three names per arbitrator slot in the smaller hearing locations. 
See Order Granting Approval to Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval to Amendment Nos. 3 
and 4 to Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to the Selection of Arbitrators in 
Arbitrations Involving Public Customers, Securities Exchange Act 
Rel. No. 40555, 63 FR 56670, 56673 (Oct. 22, 1998) (SR-NASD-98-48).
---------------------------------------------------------------------------

1. Reducing Need for Extended Lists
    Currently, the parties have an unlimited number of strikes, which 
they may exercise for any reason. This often results in so many strikes 
by both sides that an insufficient number of names remain on the list 
to fill a panel. When this happens, NLSS must generate additional names 
in the appropriate public/non-public categories and ``extend'' the list 
to fill the panel. Parties have often expressed concern with extended 
lists because the parties may not exercise additional strikes and can 
only challenge the inclusion of ``extended list'' arbitrators for 
cause.
    As published in the Customer Code Notice, Proposed Rule 12403 
increases the number of arbitrators on each list and limits the number 
of strikes that the parties may exercise. NASD intended this change to 
increase the likelihood that more names from the initial lists would 
remain after the striking process. In cases involving three-member 
panels, NASD proposed that seven arbitrators from each arbitrator 
roster (chair-qualified, non-chair public, and non-public) would be 
selected at random to generate the lists to be sent to the parties. 
Each separately represented party could strike up to five of the seven 
arbitrators on each list for any reason, but two names would remain on 
each list.
    Some commenters found the proposed procedures to be an improvement 
over the current system, but noted that entire lists could still be 
stricken.\95\ For example, if a claimant strikes arbitrators one 
through five from a seven-name list and a respondent strikes 
arbitrators three through seven, then the parties collectively will 
have stricken the entire list. Thus, these commenters believed the 
likelihood that NASD would need to extend lists would remain high. 
Commenters suggested amending the rule to provide that if all the 
arbitrators are stricken from a list, a subsequent list would be 
generated, accompanied by a limited number of strikes. Commenters also 
noted that if each party only ranks two arbitrators from the list, 
there is a likelihood for ties in the rankings by claimants and 
respondents.\96\
---------------------------------------------------------------------------

    \95\ Boliver, Canning, Caruso, Estell, Evans, Greco, Ilgenfritz, 
Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary, 
Meissner, Miller, Pounds, Rosenfield, Sadler, Shewan, Stoltmann, 
Sutherland, and Willner.
    \96\ Id.
---------------------------------------------------------------------------

    In Amendment 5, NASD proposed to increase the number of arbitrators 
on each list to eight, and to allow each separately represented party 
to exercise only four strikes. By increasing the number of arbitrators 
and reducing the number of strikes per list, NASD believes there is a 
greater likelihood that arbitrators from each initial list would remain 
on the list after the parties exercise their strikes and the lists are 
consolidated.\97\ This, in turn, should reduce the likelihood that 
extended lists would be necessary, thus providing parties with more 
control in the arbitrator selection process. In addition, in light of 
the comments concerning Proposed Rule 12400(b), NASD is proposing to 
amend Proposed Rule 12403 to clarify that chair-qualified arbitrators 
also would be included in the roster of non-chair public arbitrators, 
but would only appear on one list in a particular case. The proposed 
rule change is amended as

[[Page 4588]]

follows (new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \97\ NLSS will select randomly one name at a time for each list 
(i.e., chair-qualified, non-chair public, non-public), and list the 
names in the order in which they were selected. The first arbitrator 
selected would be Arbitrator 1; the second would be 
Arbitrator 2, etc. After the parties have made their 
selections and the lists have been consolidated, in the unlikely 
event of a tie among arbitrators, NLSS will break the tie based on 
the order in which the arbitrators were initially placed on the 
list. So, for example, if Arbitrators 3 and 5 are ``tied'' after the 
non-chair public lists are consolidated, NLSS will select Arbitrator 
3 for the non-chair public position.
---------------------------------------------------------------------------

12403. Generating and Sending Lists to the Parties
    (a) Generating Lists
    (1) If the panel consists of one arbitrator, the Neutral List 
Selection System will generate a list of [seven] eight public 
arbitrators from the NASD's chairperson roster.
    (2) If the panel consists of three arbitrators, the Neutral List 
Selection System will generate:
     A list of [seven] eight arbitrators from the NASD's non-
public arbitrator roster;
     A list of [seven] eight arbitrators from the NASD's public 
arbitrator roster; and
     A list of [seven] eight public arbitrators from the NASD's 
chairperson roster.
    (3) If the panel consists of three arbitrators, the Neutral List 
Selection System will generate the chairperson list first. Chair-
qualified arbitrators who were not selected for the chairperson list 
will be eligible for selection on the public list. An individual 
arbitrator cannot appear on both the chairperson list and the public 
list for the same case.
    (4) No change.
    (b) Sending Lists to Parties
    No change.
* * * * *
12404. Striking and Ranking Arbitrators
    (a) Each separately represented party may strike up to [five] four 
of the arbitrators from each list for any reason by crossing through 
the names of the arbitrators. [Two] At least four names must remain on 
each list.
    (b) No change.
    (c) No change.
* * * * *
2. Pre-Screening for Conflicts
    One commenter suggested that Proposed Rule 12404 should include a 
procedure for replacing arbitrators who have disqualifying conflicts 
before the parties are required to submit their rankings.\98\
---------------------------------------------------------------------------

    \98\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it intends to implement a new 
computer platform, MATRICS,\99\ which would be programmed to check for 
certain conflicts before the lists are sent to the parties. For 
example, MATRICS would eliminate from a list any arbitrator who is 
currently employed by a firm that is a party to the case. MATRICS would 
also eliminate any arbitrator with a securities account at a firm that 
is a party to the case. In these instances, parties would not have to 
use a strike to eliminate an arbitrator with such conflicts.
---------------------------------------------------------------------------

    \99\ See supra note 79.
---------------------------------------------------------------------------

Z. Proposed Rule 12406--Appointment of Arbitrators; Discretion to 
Appoint Arbitrators Not on List

    Proposed Rule 12406 provides that each three-arbitrator panel will 
consist of a non-public arbitrator, a chair-qualified public 
arbitrator, and a non-chair public arbitrator. Many commenters opposed 
the inclusion of a non-public arbitrator on three-person panels.\100\ 
In Amendment 5, NASD noted that because Proposed Rule 12406 would not 
change the substantive requirements in Rule 10308(c)(4) of the current 
Code concerning arbitrator appointments, the comments are outside the 
scope of the rule filing. NASD also noted that it proposed changes to 
the definition of ``public arbitrator'' in a separate rule filing.\101\ 
In addition, NASD stated that in approving the NLSS, the Commission 
found that NASD had created reasonable procedures for implementing the 
list selection process, which it determined should give investors and 
other parties more input into the selection of the arbitration panel, 
and were consistent with the Exchange Act.\102\ Finally, NASD indicated 
that independent studies performed on the NASD arbitration forum do not 
show bias on the part of industry arbitrators.\103\ For these reasons, 
NASD is not proposing to amend the proposed rule at this time.
---------------------------------------------------------------------------

    \100\ See, e.g., Boliver, Canning, Caruso, Estell, Evans, Fynes, 
Greco, Ilgenfritz, Jones, Josel, Komninos, Lapidus, Layne, Lea, 
Lipner, Lopez, Magary, Meissner, Miller, PIABA, Pounds, Rosenfield, 
Sadler, Shewan, Stoltmann, Sutherland, and Willner.
    \101\ These proposed rule changes were recently approved by the 
Commission. See supra note 35.
    \102\ See Order Granting Approval to Proposed Rule Change and 
Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 3 and 4 to Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to the Selection of 
Arbitrators in Arbitrations Involving Public Customers, supra note 
94.
    \103\ See Industry Arbitration Award Survey, Securities 
Arbitration Commentator, Volume 2005, No. 4 (May 2005); U.S. General 
Accounting Office, Securities Arbitration: How Investors Fare, GAO/
GGD 92-74 (May 11, 1992); E-mail from Mignon McLemore, Assistant 
Chief Counsel, NASD Dispute Resolution, to Gena Lai, Special 
Counsel, Division of Market Regulation, SEC, dated Dec. 1, 2006.
---------------------------------------------------------------------------

    In the Customer Code Notice, the Commission noted that under 
Proposed Rules 12406 (Appointment of Arbitrators; Discretion to Appoint 
Arbitrators Not on List), 12410 (Removal of Arbitrator by Director), 
and 12411 (Replacement of Arbitrators), parties to an arbitration would 
not be given a peremptory strike for arbitrators appointed from an 
extended list. The Commission specifically asked for commenters' views 
on which is the better alternative when the Uniform Code differs from 
the proposed NASD rules with respect to appointment of arbitrators by 
the Director.
    Many commenters stated that allowing a peremptory strike when an 
arbitrator is appointed from an extended list would be preferable.\104\ 
In their view, the proposed requirements for the removal of an 
arbitrator would be overly restrictive and unlikely to provide 
assurances of impartiality to an investor regarding an arbitrator whom 
he or she had no voice in selecting.
---------------------------------------------------------------------------

    \104\ Boliver, Canning, Caruso, Evans, Greco, Ilgenfritz, Josel, 
Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary, Meissner, 
Miller, PACE, PIABA, Pounds, Rosenfield, Shewan, Stoltmann, 
Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that because Proposed Rule 12410 has not 
changed the substantive requirements concerning arbitrator removal in 
Rules 10308(d)(1)-(3) and (f), and Rule 10312(d) of the current Code, 
the comments are outside the scope of the rule filing. NASD also 
believes that the changes proposed to Proposed Rules 12403 and 12404 in 
Amendment 5 would minimize the need for extended lists. Therefore, NASD 
is not proposing to allow peremptory strikes when the list is extended.

AA. Proposed Rule 12408--Disclosures Required of Arbitrators

    As published in the Customer Code Notice, Proposed Rule 12408(a) 
provides, in relevant part, that arbitrators must disclose ``any 
existing or past service as a mediator.'' In the Customer Code Notice, 
the Commission indicated that Proposed Rule 12408(a)(4) could be 
interpreted as either requiring arbitrators to disclose (1) only any 
service as a mediator that might preclude the arbitrator from rendering 
an objective and impartial determination in the proceeding, or (2) any 
existing or past service as a mediator, even if it has no connection 
with the proceeding. The Commission asked whether the proposed rule 
should be amended to reflect one or the other interpretation.
    Many commenters thought the proposed rule should require disclosure 
of service as a mediator on any case, not just service that the 
arbitrator thinks would affect his/her impartiality in a particular 
proceeding.\105\ One commenter asserted an arbitrator's

[[Page 4589]]

ethical obligations would preclude a more constrained reading of the 
rule.\106\
    In Amendment 5, NASD responded that it believes interpreting 
Proposed Rule 12408(a)(4) to require disclosure of all existing or past 
service as a mediator is too broad. NASD stated that some of the 
arbitrators in NASD's forum have served as mediators for a significant 
number of cases, and the list of cases could change frequently. NASD 
believes that it would be unduly burdensome and of little value to 
parties, and may result in a significant reduction in the arbitrator 
roster, to require these arbitrators to disclose all of their existing 
or past service as a mediator on any case. In Amendment 5, NASD stated 
that it believes that arbitrators who serve as mediators should 
disclose whether they have served as a mediator for any of the parties 
in the case for which they have been selected. NASD also stated that it 
plans to update its arbitrator disclosure forms to include a question 
that will require arbitrators to provide this information.
---------------------------------------------------------------------------

    \105\ Boliver, Canning, Caruso, Estell, Evans, Greco, 
Ilgenfritz, Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez, 
Magary, Meissner, Miller, PACE, PIABA, Pounds, Rosenfield, Sadler, 
Shewan, Stoltmann, Sutherland, and Willner.
    \106\ PACE.
---------------------------------------------------------------------------

    In Amendment 7, NASD determined to include the requirement to make 
this disclosure in the proposed rule. NASD amended the proposed rule as 
follows (new language in italics):
12408. Disclosures Required of Arbitrators
    (a) Before appointing arbitrators to a panel, the Director will 
notify the arbitrators of the nature of the dispute and the identity of 
the parties. Each potential arbitrator must make a reasonable effort to 
learn of, and must disclose to the Director, any circumstances which 
might preclude the arbitrator from rendering an objective and impartial 
determination in the proceeding, including:
    (1) No change;
    (2) No change;
    (3) No change; and
    (4) Any existing or past service as a mediator for any of the 
parties in the case for which the arbitrator has been selected.
    (b) No change.
    (c) No change.
* * * * *
    One commenter suggested that NASD's arbitrator disclosure 
obligations should parallel those established by the California 
Judicial Council, which require a prospective arbitrator to disclose, 
among other things, all arbitrations in which he or she was a panelist, 
which forums conducted the arbitrations, and whether any of the parties 
or their counsel in the current proceeding were involved in any 
proceeding in which the arbitrator was a panelist.\107\
---------------------------------------------------------------------------

    \107\ Canning.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that, apart from subparagraph (a)(4) of 
Proposed Rule 12408, which was added to reflect approval of a proposed 
rule change by the SEC on March 7, 2005,\108\ Proposed Rule 12408 does 
not contain any substantive changes from Rules 10312(a), (b), (c), and 
(e) of the current Code, and that therefore, this comment is outside 
the scope of the rule filing.
---------------------------------------------------------------------------

    \108\ See Order Approving Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to a Proposal to 
Adopt a New IM-10308 on Mediators Serving as Arbitrators, Securities 
Exchange Act Rel. No. 51325 (Mar. 7, 2005), 70 FR 12522 (Mar. 14, 
2005) (SR-NASD-2005-007).
---------------------------------------------------------------------------

BB. Proposed Rule 12409--Arbitrator Recusal

    Proposed Rule 12409 provides that any party may ask an arbitrator 
to recuse himself or herself from the panel for good cause, and that 
such requests are decided by the arbitrator who is the subject of the 
recusal. One commenter asserted that parties have attempted to engage 
in ``panel shopping'' by requesting the recusal of an arbitrator on the 
grounds that an adverse ruling prior to the hearing on the merits 
constituted good cause.\109\ This commenter suggested that NASD should 
amend the rule to provide that a prior ruling adverse to the party 
requesting recusal does not constitute good cause.
---------------------------------------------------------------------------

    \109\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that arbitrators are aware that some 
parties may use recusal requests as a way to obtain a more favorable 
panel. NASD believes that arbitrators have the discretion to determine 
whether the party making the request has demonstrated good cause for 
its request and does not believe it is appropriate to limit this 
discretion. Therefore, NASD is not proposing to amend the rule at this 
time.

CC. Proposed Rule 12410--Removal of Arbitrator by Director

    In pertinent part, Proposed Rule 12410 provides that the Director 
will grant a party's request to remove an arbitrator if the arbitrator 
``is biased, lacks impartiality, or has a direct or indirect interest 
in the outcome of the arbitration,'' and that close questions regarding 
challenges to an arbitrator by a customer will be resolved in favor of 
the customer. One commenter asserted that the term ``indirect'' is 
vague and should not be used in the rule.\110\ This commenter also 
stated that the rule would create a ``double standard'' that lacks 
justification and suggested revising the proposed rule to provide that 
arbitrator challenges will be resolved in favor of the party making the 
challenge.
---------------------------------------------------------------------------

    \110\ Id.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that because Proposed Rule 12410 
does not change the substantive requirements of current Rules 
10308(d)(1)-(3) and (f), and Rule 10312(d) of the current Code, 
concerning arbitrator removal, these comments are outside the scope of 
the rule filing.

DD. Proposed Rule 12411--Replacement of Arbitrators

    In pertinent part, Proposed Rule 12411 provides that, if an 
arbitrator is removed or becomes otherwise unable or unwilling to 
serve, the Director will appoint a replacement arbitrator, unless the 
parties agree in writing to proceed with the two remaining arbitrators. 
Rule 10308(d) of the current Code, on the other hand, provides that the 
director ``shall provide the parties information'' concerning the 
proposed replacement arbitrator, and the parties ``shall have the right 
to object.'' One commenter, noting that Proposed Rule 12411 lacks the 
notice requirement, expressed concern that the Director could replace 
an arbitrator before the parties become aware of the vacancy.\111\
---------------------------------------------------------------------------

    \111\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD stated that Proposed Rule 12411 codifies 
current practice in the forum, which NASD has determined is the most 
efficient method for addressing arbitrator replacements. Currently, if 
an arbitrator becomes unavailable and must be replaced, the parties 
rarely agree to proceed with only the two remaining arbitrators. To 
expedite the replacement process, NASD selects the replacement 
arbitrator and notifies the parties of the replacement simultaneously. 
NASD currently gives the parties five business days from the date of 
the notice to accept the replacement or agree to proceed with the two 
remaining arbitrators. This procedure would continue under Proposed 
Rule 12411, except that the parties have an unlimited time to elect to 
proceed with only the remaining arbitrators.\112\
---------------------------------------------------------------------------

    \112\ Parties may at any time stipulate to the removal of an 
arbitrator, including a replacement arbitrator. Telephone 
conversation among Jean Feeney, Vice President, NASD; Mignon 
McLemore, Assistant Chief Counsel, NASD Dispute Resolution; and Gena 
Lai, Special Counsel, Division of Market Regulation, SEC (Dec. 19, 
2006).

---------------------------------------------------------------------------

[[Page 4590]]

EE. Proposed Rule 12500--Initial Prehearing Conferences; Proposed Rule 
12501--Other Prehearing Conferences

    Proposed Rules 12500 and 12501 establish procedures for scheduling 
initial and other prehearing conferences. Two commenters expressed 
concern that, in contrast to the current Code, Proposed Rules 12500 and 
12501 would not give the Director the authority to hold an initial 
prehearing conference (``IPHC'') with the parties before the panel is 
selected.\113\
---------------------------------------------------------------------------

    \113\ Canning and Feinberg.
---------------------------------------------------------------------------

     In Amendment 5, NASD agreed that the proposed rules would not 
grant the Director the explicit authority to hold an IPHC before the 
panel is selected. It also agreed that on rare occasions, parties may 
need to request a prehearing conference before the panel is appointed 
to resolve discovery disputes or to discuss jurisdictional issues. 
Thus, NASD proposed to revise Proposed Rule 12501 to make this 
authority explicit. Proposed Rule 12501 is amended as follows (new 
language in italics):
12501. Other Prehearing Conferences
    (a) A prehearing conference may be scheduled upon the joint request 
of the parties or at the discretion of the Director. The Director will 
set the time and place of the prehearing conference and appoint a 
person to preside.
    (b) No change.
    (c) No change.
* * * * *

FF. Proposed Rule 12503--Motions

    Proposed Rule 12503 establishes procedures to make and decide 
motions or responses to motions.
1. Oral Motions
    One commenter contended that Proposed Rule 12503(a)(1) would allow 
a party to make an oral motion on short notice and would allow the 
panel to decide on motions without giving the opposing party an 
adequate opportunity to respond.\114\ The commenter suggested that oral 
motions should be limited to matters that could not have been 
anticipated and that require immediate consideration. The commenter 
also suggested that the party opposing the oral motion should be given 
10 days to respond, unless there is good cause for deciding the motion 
on a shorter timeframe.
---------------------------------------------------------------------------

    \114\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12503(a)(1) 
requires a party to make an effort to resolve a matter with the other 
parties before making a motion, and that both oral and written motions 
must describe that effort. Therefore, the panel would be able to 
consider these factors, and any objections, in ruling on a motion or in 
deferring a decision to allow more time to respond.
2. Service Methods
    One commenter suggested that Proposed Rule 12503(a)(2) should allow 
for some variation in service methods, rather than requiring all 
parties to be served at the same time and in the same manner.\115\ NASD 
responded that, based on current practice in the forum, NASD believes 
the service requirements in Proposed Rule 12503(a)(2) are reasonable 
because they would prevent a party from attempting to gain an advantage 
in the proceeding by delaying service of a motion on some parties.
---------------------------------------------------------------------------

    \115\ Krosschell.
---------------------------------------------------------------------------

3. Panel Approval of Motions on Short Notice
    Two commenters opposed requiring panel approval in Proposed Rule 
12503(a)(3) for motions filed within 20 days before the hearing.\116\ 
In their experience, motions are usually filed because of an emergency, 
and requiring a panel to grant advance permission would reduce the time 
for the panel to decide a motion. They suggested that parties should 
not need permission to file a motion in arbitration, and that Proposed 
Rule 12503(a)(4) should be amended to allow a party to submit 
additional documents with a motion to amend a pleading to add a party.
---------------------------------------------------------------------------

    \116\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that, in order to prevent any 
unnecessary delays to the start of a hearing, it believes the panel 
should control events and procedures that occur close to that time. In 
addition, NASD noted that Proposed Rule 12300 (Filing and Serving 
Documents) allows for additional information to be submitted in 
connection with amended pleadings.
4. Deadlines for Responses
    One commenter urged NASD to delete the provision in Proposed Rule 
12503(b) requiring responses to written motions within 10 calendar days 
of receipt.\117\ The commenter suggested that NASD continue with 
current procedure, in which responses to motions are due after the 
first IPHC. The commenter suggested that thereafter, deadlines to 
respond to motions should be set by the panel at the prehearing 
conference or otherwise.
---------------------------------------------------------------------------

    \117\ Krosschell.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that, if a party submits a motion 
before the IPHC, NASD staff forwards it to the panel, along with any 
responses that were voluntarily submitted by other parties. Based on 
current practice in the forum, NASD believes Proposed Rule 12503(b) 
would provide parties with adequate time to respond to written motions. 
In addition, the parties and the panel have the ability to extend the 
10-day timeframe under Proposed Rule 12207.
5. Motions Regarding Hearing Location
    Two commenters opposed giving the Director authority to decide 
motions regarding hearing location, under Proposed Rule 
12503(c)(2).\118\ In their view, the hearing location should always be 
set where it would be most convenient for the customer, as indicated on 
the customer's statement of claim. In Amendment 5, NASD responded that, 
under the Customer Code, a party may request a convenient hearing 
location, but there may be reasons that a party's request is not 
granted. NASD believes the Director should have the authority to change 
the hearing location before a panel is appointed.\119\
---------------------------------------------------------------------------

    \118\ Canning and Stolle.
    \119\ See also discussion concerning hearing locations in 
Section 0, above.
---------------------------------------------------------------------------

6. Number of Arbitrators to Hear Motions
    One commenter, noting that Proposed Rule 12503(c)(3) would allow 
the full panel to hear discovery motions only under certain 
circumstances (e.g., at the request of a party or on the arbitrator's 
initiative), contended that the full panel should be required to hear 
and decide any discovery-related motion.\120\ In Amendment 5, NASD 
responded that Proposed Rule 12503(c)(3) is based on current practice 
in the forum and allows the parties or designated arbitrator to 
determine which motions require consideration by the full panel. 
Further, NASD believes the commenter's suggestion would increase the 
costs of arbitration, since the parties would have to pay the 
honorarium for two additional arbitrators.
---------------------------------------------------------------------------

    \120\ SIA.
---------------------------------------------------------------------------

    For the reasons stated above, NASD is not proposing to amend 
Proposed Rule 12503 at this time.

GG. Proposed Rule 12504--Motions to Decide Claims Before a Hearing on 
the Merits

    As published in the Customer Code Notice, Proposed Rule 12504 
provided that, except in connection with time limits under arbitration, 
motions to decide a claim before a hearing

[[Page 4591]]

(``dispositive motions'') ``are discouraged and may only be granted in 
extraordinary circumstances.'' Most commenters criticized the proposed 
rule. Some industry commenters argued that it would improperly 
discourage dispositive motions and improperly impose an ``extraordinary 
circumstances'' requirement.\121\ In their view, dispositive motions 
could be appropriate in circumstances that are not extraordinary. One 
industry commenter also contended that NASD should continue to allow 
arbitrators to decide whether to grant dispositive motions on a case-
by-case basis, instead of codifying a limit on dispositive 
motions.\122\ Moreover, this commenter argued that the lack of guidance 
on the meaning of ``extraordinary circumstances'' would have a chilling 
effect on the filing of dispositive motions and may expose respondents' 
counsel to sanctions.\123\
---------------------------------------------------------------------------

    \121\ R. Davis, Schwab, and SIA.
    \122\ Schwab.
    \123\ Id.
---------------------------------------------------------------------------

    Investor representatives also criticized the proposed rule, but for 
different reasons.\124\ Most of these commenters asserted that a party 
has a fundamental right to a hearing in arbitration and that Proposed 
Rule 12504 would eliminate this right. They also predicted that the 
proposed rule would be a tool for abuse by defense counsel to delay the 
arbitration process and would hinder claimants' attempts to have their 
claims heard by an arbitration panel. In addition, they believed that 
the proposed rule would cause claimants, who have already suffered 
losses, to incur additional expense and delay in responding to these 
motions. In their view, Proposed Rule 12504 would cause the use of 
these motions to become more prevalent.
---------------------------------------------------------------------------

    \124\ Ball, Boliver, Brannan, Canning, Estell, Finer, 
Ilgenfritz, Krosschell, Layne, Ledbetter, Lopez, Miller, Page, 
Pounds, Schultz, Schultz 2, Shewan, Sonn, Speyer, 
Steinberg, Stolle, Sutherland, Tepper, Williams, and Woska.
---------------------------------------------------------------------------

    Some commenters believed the proposed rule should be amended to 
expressly safeguard the rights of the non-moving party, particularly an 
investor who has suffered harm or loss.\125\ Another commenter also 
supported the safeguards, while also stating that the rule should not 
be included in the Customer Code.\126\
---------------------------------------------------------------------------

    \125\ PACE, PIABA, Lea, Josel, Evans, Komninos, Stoltmann, 
Willner, Rosenfield, Lapidus, Lipner, Magary, and Eccleston. In 
particular, they suggested that:
     All factual allegations made by the non-moving party 
are to be taken as true for the purposes of the motion.
     The motion must be denied whenever credibility is at 
issue, there are any facts in dispute, or the panel must make 
factual findings against the non-moving party.
     If the non-moving party asserted that it can cure any 
defect by filing an amended statement of claim, that party should be 
given an opportunity to do so.
     The rule should clarify that arbitrators should not 
apply a ``failure to state a claim'' standard, since claimants are 
not required to plead legally cognizable claims.
    \126\ Schultz 2.
---------------------------------------------------------------------------

    Two commenters suggested that Proposed Rule 12504 should be amended 
to require the costs incurred in opposing a dispositive motion to be 
awarded against the firm immediately and automatically upon the denial 
of a motion.\127\ In their view, the panel should not wait to include 
costs in the final award, as the deterrent effect would be lost with a 
delay in assessing penalties. NASD responded that Proposed Rule 12504 
is not intended to change the current practice of assessing costs and 
expenses of a hearing at the end of a case, in the award. Thus, NASD 
stated that these comments are outside the scope of the rule filing.
---------------------------------------------------------------------------

    \127\ Canning and Lipner.
---------------------------------------------------------------------------

    Finally, another commenter suggested that a claimant should not 
have to respond to a dispositive motion if it is frivolous or without 
merit.\128\ This commenter also noted that the proposed rule does not 
expressly state that the panel can deny leave to make such a motion, 
and contended that by setting forth timeframes for briefing and 
consideration, it implies that all motions will be considered. In 
Amendment 5, NASD responded that it would revisit this issue when the 
forum has some experience with the new motions practice rules.
---------------------------------------------------------------------------

    \128\ Ryder.
---------------------------------------------------------------------------

    Acknowledging the commenters' concerns, NASD stated that it had 
considered the effects the proposed rule would have on public and 
industry users of the forum. NASD noted, however, that the current Code 
does not provide any guidance with respect to motions to dismiss, and 
that arbitrator decisions in this area may lack uniformity. NASD stated 
that, as motions to dismiss are filed more frequently, the proposed 
rule is necessary to provide some uniform guidelines to arbitrators and 
users of the forum concerning this practice. NASD believes that the 
proposed rule would provide valuable guidance to parties and 
arbitrators and make the administration of arbitrations more uniform 
and transparent.
    NASD also agreed with commenters that the term ``extraordinary 
circumstances'' should be explained to clarify when Proposed Rule 12504 
would apply and that more guidance should be provided on the standards 
to use when deciding a motion to dismiss. NASD stated that, in meeting 
with various constituent groups of the arbitration forum, including 
investor and industry representatives, it suggested amending the 
proposed rule to provide that a panel may grant a motion to dismiss 
before a hearing only if it determines that there are no material facts 
in dispute or that there are no credibility determinations to be made. 
NASD stated that none of the constituencies indicated that they would 
support the suggested amendments, and that they were unable to reach a 
consensus on any amendments to the proposed rule. As a compromise, NASD 
suggested amending the narrative portion of the rule filing to explain 
under what circumstances a motion to dismiss might be granted. NASD 
stated that it believed the various constituencies supported this 
compromise.
    Therefore, in Amendment 5, NASD proposed the following guidance:

    For purposes of this rule, if a party demonstrates affirmatively 
the legal defenses of, for example, accord and satisfaction, 
arbitration and award, settlement and release, or the running of an 
applicable statute of repose, the panel may consider these defenses 
to be extraordinary circumstances. In such cases, the panel may 
dismiss the arbitration claim before a hearing on the merits if the 
panel finds that there are no material facts in dispute concerning 
the defense raised, and there are no determinations of credibility 
to be made concerning the evidence presented.

    The Commission received 125 comment letters on Amendment 5. Most of 
the commenters objected to NASD's proposed guidance. As a result, NASD 
filed Amendment 6 to the proposed rule change, withdrawing Proposed 
12504 and all references to the rule from the Customer Code.\129\ The 
text of Amendment 6 is available on NASD's Web site: http://www.nasd.com/RulesRegulation/RuleFilings/2003RuleFilings/NASDW_009306?=802
.

---------------------------------------------------------------------------

    \129\ Proposed Rule 12504 has been re-filed as a separate 
proposed rule change and published for public comment. See supra 
note 23.
---------------------------------------------------------------------------

HH. Proposed Rule 12505--Cooperation of Parties in Discovery

    As published in the Customer Code Notice, Proposed Rule 12505 
provides that the parties must cooperate to the fullest extent 
practicable in the voluntary exchange of documents and information to 
expedite the arbitration. One commenter contended that the proposed 
rules should explicitly provide that the discovery procedures

[[Page 4592]]

are mandatory and suggested eliminating the word ``voluntary'' from 
Proposed Rule 12505.\130\
    NASD agreed with this comment, stating that this change would help 
to ensure that the parties understand the importance of complying with 
the discovery process. The proposed rule change is amended as follows 
(new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \130\ PACE.
---------------------------------------------------------------------------

12505. Cooperation of Parties in Discovery
    The parties must cooperate to the fullest extent practicable in the 
[voluntary] exchange of documents and information to expedite the 
arbitration.
* * * * *

II. Proposed Rule 12506--Document Production Lists

    Proposed Rule 12506 establishes procedures for producing or 
objecting to document production requirements under the Discovery Guide 
and the document production lists it contains (``Document Production 
Lists''), as amended in the Customer Code.
1. ``Control''
    As published in the Customer Code Notice, Proposed Rule 12506(b) 
provides that parties must produce to all other parties all documents 
in their ``possession or control'' that are described in the applicable 
Document Production Lists. Similarly, Proposed Rule 12514(a) (Exchange 
of Documents and Witness Lists Before Hearing) provides that parties 
must exchange certain materials in their ``possession or control'' that 
they intend to use at the hearing that have not already been produced. 
Several commenters argued that the term ``control'' should be deleted 
from Proposed Rules 12506(b) and 12514(a), noting that the concept of 
``control'' in the discovery context has been defined, through case 
law, to include not only possession of the requested documents, but 
also the legal right to obtain those documents.\131\ As a result, these 
commenters contended that customers could incur increased costs to 
comply with these proposed rules, or face sanctions if they are unable 
to gain access to documents from third-parties or unable to do so in a 
timely manner.
---------------------------------------------------------------------------

    \131\ Boliver, Canning, Estell, Evans, Feinberg, Ilgenfritz, 
Josel, Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, 
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that the addition of the term 
``control'' to Proposed Rules 12506(b) and 12514(a) is intended to 
expand, not narrow, the range of documents that are to be produced in 
discovery. NASD believes that under these proposed rules, it should be 
easier for customers to gain access to documents held by third-parties 
on behalf of respondents, because respondents would be required to 
produce documents, regardless of where the documents are stored or 
maintained. NASD believes that, under these proposed rules, the 
customer would have more control in the discovery process. For these 
reasons, NASD did not propose to amend Proposed Rules 12506(b) and 
12514(a) in response to this issue. In Amendment 7, however, noting 
additional comments submitted on this issue,\132\ NASD stated that it 
is sensitive to customers' concerns regarding the costs they could 
incur under the discovery process and amended Proposed Rule 12508 to 
address this issue.\133\
---------------------------------------------------------------------------

    \132\ See supra note 21 and accompanying text.
    \133\ See Section 0, Proposed Rule 12508 (Objecting to 
Discovery; Waiver of Objection), below.
---------------------------------------------------------------------------

2. Good Faith Standard
    Proposed Rules 12506(b)(1) and 12507(b)(1) provide that, in 
response to a Document Production List requirement or a discovery 
request, a party has the option of identifying and explaining the 
reason that a particular document or piece of information cannot be 
produced within the required time, and stating when the documents would 
be produced (``delay provisions''). Several commenters asserted that 
parties would abuse the delay provisions by setting a self-imposed 
deadline with the purpose of impeding and delaying discovery.\134\ They 
also noted that the proposed rules would not subject a party to 
sanctions for using the delay provisions in bad faith, including 
Proposed Rule 12511 (Discovery Sanctions).
---------------------------------------------------------------------------

    \134\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel, 
Komninos, Lapidus, Lipner, Lea, Lopez, Magary, PIABA, Pounds, 
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    NASD responded that it believes the expectation for parties to act 
in good faith is implied in the discovery provisions of both the 
current Code and the Customer Code. NASD agreed, however, that Proposed 
Rules 12506(a) and 12507(b) of the Customer Code should be amended to 
eliminate any ambiguity concerning the applicability of a ``good 
faith'' standard. Therefore, NASD proposed in Amendment 5 to include an 
explicit ``good faith'' standard so that frivolous delays, unreasonable 
timeframes, or bad faith objections would be subject to sanctions. 
Proposed Rule 12506 is amended as follows (new language in italics):
12506. Document Production Lists
    (a) No change.
    (b) Time for Responding to Document Production Lists
    (1) Unless the parties agree otherwise, within 60 days of the date 
that the answer to the statement of claim is due, or, for parties added 
by amendment or third-party claim, within 60 days of the date that 
their answer is due, parties must either:
* * * * *
    (2) A party must act in good faith when complying with subparagraph 
(1) of this rule. ``Good faith'' means that a party must use its best 
efforts to produce all documents required or agreed to be produced. If 
a document cannot be produced in the required time, a party must 
establish a reasonable timeframe to produce the document.
    (c) No change.
* * * * *
3. Discovery Deadlines
    Proposed Rules 12506(b) and 12507(b) would extend the time to 
produce documents from 30 days under the current Code to 60 days. Some 
commenters viewed this as authorizing a delay of another month before 
parties may initiate the process to compel discovery and suggested that 
the standard timeframe for document exchange should remain 30 
days.\135\ In Amendment 5, NASD responded that this extension of time 
is intended to address concerns of many frequent users of the forum 
that the current time frame is unrealistic and sometimes leads to 
unnecessary disputes.
---------------------------------------------------------------------------

    \135\ Canning, Estell, Feinberg, Feldman, Komninos, and Stolle.
---------------------------------------------------------------------------

    Several commenters observed that because Proposed Rule 12506 would 
require parties to produce documents required by the Document 
Production Lists within 60 days of the date the answer to the statement 
of claim is due, and Proposed Rule 12303 would provide that an answer 
is due 45 days from the receipt of the statement of claim, respondents 
would have 105 days to produce documents required by the Document 
Production Lists.\136\ They argued that Proposed Rule 12506 should be 
amended to require a party to provide substantial justification for the 
failure to produce documents within 105 days, or face sanctions.
---------------------------------------------------------------------------

    \136\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that a party would face sanctions 
for

[[Page 4593]]

failing to comply with the discovery provisions of the Customer Code 
under Proposed Rule 12511, unless the panel determines that there is 
substantial justification for the failure to comply. A party would have 
to provide evidence of substantial justification for the panel to make 
this determination. For the above reasons, NASD is not proposing to 
amend these proposed rules at this time in response to these issues.
4. Discovery of Insurance Coverage
    Several commenters contended that the Document Production Lists 
should be revised to require the production of information and 
documents regarding insurance policies that might provide coverage on 
the dispute.\137\ They stated that courts uniformly require production 
of this information because it assists the parties in evaluating 
settlement possibilities and aids in screening for conflicts. In 
Amendment 5, NASD responded that Proposed Rule 12506(a) has not changed 
the documents or information required under the current Document 
Production Lists, and that therefore these comments are outside the 
scope of the rule filing.
---------------------------------------------------------------------------

    \137\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltman, Sutherland, and Willner.
---------------------------------------------------------------------------

5. Standard by Which Documents are Discoverable
    One commenter believes that the documents on the Document 
Production Lists should be automatically, not presumptively, 
discoverable.\138\ This commenter also expressed the view that 
brokerage firms do not have grounds to assert confidentiality of 
compliance manuals and recommended amending the Customer Code to state 
that the party asserting confidentiality has the burden of establishing 
that the documents in question legitimately require confidential 
treatment. In Amendment 5, NASD responded that, although this comment 
is outside the scope of the rule filing, it would be considered when 
NASD determines whether future amendments are warranted.
---------------------------------------------------------------------------

    \138\ PACE.
---------------------------------------------------------------------------

JJ. Proposed Rule 12507--Other Discovery Requests

    Proposed Rule 12507 establishes procedures for making and 
responding to discovery requests for items that are not included in the 
Document Production Lists. This and certain other discovery provisions 
of the Customer Code would codify provisions of the current Discovery 
Guide. Three commenters recommended also incorporating into the 
Customer Code the provisions of the Discovery Guide concerning the 
limited purpose of information requests, to discourage the use of 
overly broad information requests that are the equivalent of 
interrogatories.\139\
---------------------------------------------------------------------------

    \139\ PACE, PIABA, SIA.
---------------------------------------------------------------------------

    In light of these comments, NASD incorporated Section V of the 
Discovery Guide into Proposed Rule 12507(a). In addition, as discussed 
under Proposed Rule 12506, NASD included an express ``good faith'' 
standard in 12507(b).\140\ Proposed Rule 12507 is amended as follows 
(new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \140\ See Section 0, above.
---------------------------------------------------------------------------

12507. Other Discovery Requests
    (a) Making Other Discovery Requests
    (1) Parties may also request additional documents or information 
from any party by serving a written request directly on the party. 
Requests for information are generally limited to identification of 
individuals, entities, and time periods related to the dispute; such 
requests should be reasonable in number and not require narrative 
answers or fact finding. Standard interrogatories are generally not 
permitted in arbitration.
    (2) [Such] Other discovery requests may be served:
    Remainder of subparagraph (2)--No change.
    (b) Responding to Other Discovery Requests
    (1) Unless the parties agree otherwise, within 60 days from the 
date a discovery request other than the Document Production Lists is 
received, the party receiving the request must either:
    Remainder of subparagraph (1)--No change.
    (2) A party must act in good faith when complying with subparagraph 
(1) of this rule. ``Good faith'' means that a party must use its best 
efforts to produce all documents or information required or agreed to 
be produced. If a document or information cannot be produced in the 
required time, a party must establish a reasonable timeframe to produce 
the document or information.
* * * * *

KK. Proposed Rule 12508--Objecting to Discovery; Waiver of Objection

    Proposed Rule 12508(a) describes how a party may object to 
producing a document required by the proposed Document Production Lists 
or requested by a party. Proposed Rule 12508 requires a party to 
specifically identify which documents or requested information the 
party is objecting to and why. One commenter contended that the 
proposed rule would impose a burden on the parties to locate and 
identify the specific documents and information to which they are 
objecting.\141\ This commenter suggested amending the proposed rule to 
require an objecting party to specify only the request for documents or 
information that it is objecting to and the reasons for its objection.
---------------------------------------------------------------------------

    \141\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it believes the provisions of 
Proposed Rule 12508(a) are appropriate, and that allowing parties to 
object to an entire document or information request would undermine the 
purpose of the proposed rule, which is to require more specificity in 
objections.
    Proposed Rule 12508(b) provides that any objection not made within 
the required time is waived unless the panel determines that the party 
had substantial justification for failing to make the objection within 
the required time. One commenter contended that this provision would 
unnecessarily require the parties to anticipate every possible 
objection or face the penalty of waiver.\142\ In this commenter's view, 
the proposed rule would encourage objections as a protective measure, 
even though a party may be sanctioned under Proposed Rule 12511 for 
frivolous objections. Stating that parties would need to balance the 
risk of waiver against the risk of sanctions, this commenter suggested 
deleting Proposed Rule 12508(b). In Amendment 5, NASD responded that 
Proposed Rule 12508 is based on current practice in the forum, and that 
it believes the provisions and intent of Proposed Rule 12508(b) are 
clear.
---------------------------------------------------------------------------

    \142\ Id.
---------------------------------------------------------------------------

    For the above reasons, NASD is not proposing to amend the proposed 
rule in connection with these issues at this time.
    In connection with commenters' concerns regarding the term 
``control'' in Proposed Rules 12506 and 12514, discussed above,\143\ 
NASD amended Proposed Rule 12508 as follows (new language in italics):
---------------------------------------------------------------------------

    \143\ See Section 0, Proposed Rule 12506 (Document Production 
Lists), above, and Section 0, Proposed Rule 12514 (Exchange of 
Documents and Witness Lists Before Hearing), below.
---------------------------------------------------------------------------

12508. Objecting to Discovery; Waiver of Objection
    (a) No change.
    (b) No change.
    (c) In making any rulings on objections, arbitrators may consider 
the relevance of documents or discovery

[[Page 4594]]

requests and the relevant costs and burdens to parties to produce this 
information.

LL. Proposed Rule 12509--Motions to Compel Discovery

    Proposed Rule 12509 provides that a party may make a motion asking 
the panel to order another party to produce documents or information if 
the other party has: (1) Failed to comply with Proposed Rules 12506 or 
12507; or (2) objected to the production of documents or information 
under Proposed Rule 12508. Two commenters contended that the proposed 
rule should include other reasons that a motion to compel may be filed, 
such as a bad faith use of the delay provisions of Proposed Rules 
12506(b) and 12507(b), which would allow parties to name self-imposed 
deadlines for producing specified documents.\144\ These commenters 
argued that a motion to compel may be warranted if the parties' reason 
for using the delay provisions is in bad faith or the self-imposed 
deadline is unreasonably long and expressed concern that this conduct 
would not be subject to sanctions under Proposed Rule 12511.
---------------------------------------------------------------------------

    \144\ Feinberg and Canning. See Section 0, Proposed Rule 12506 
(Document Production Lists), above, concerning delay provisions.
---------------------------------------------------------------------------

    As discussed in connection with Proposed 12506 and 12507, above, 
NASD stated in Amendment 5 that the concept of ``good faith'' is 
implied in the discovery provisions of the current Code and the 
Customer Code, and proposed to amend those rules to explicitly include 
a ``good faith'' standard for compliance. NASD believes the issues 
raised concerning Proposed Rule 12509 would be addressed with these 
proposed changes.
    Several commenters suggested that costs and attorneys fees be 
assessed immediately against the losing party in a discovery motion 
seeking the production of documents and information required by 
Document Production Lists 1 and 2, absent a finding by the panel of 
substantial justification.\145\ In Amendment 5, NASD responded that 
motions to compel are issued to enforce compliance with the discovery 
rules and are not meant to be punitive. It noted, however, that 
arbitrators may impose a range of sanctions, as provided in Proposed 
Rules 12212 and 12511, in appropriate circumstances.
---------------------------------------------------------------------------

    \145\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    For the reasons stated above, NASD is not proposing to amend 
Proposed Rule 12509 at this time.

MM. Proposed Rule 12510--Depositions

    Proposed Rule 12510 provides that depositions are discouraged but 
may be approved by the panel in very limited circumstances. Some 
commenters contended that, when time is of the essence, the requirement 
to receive arbitrator approval in advance could result in the loss of 
testimony or evidence.\146\ They suggested that the proposed rule 
should include a procedure that permits a deposition to be taken before 
a panel is selected.
---------------------------------------------------------------------------

    \146\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it is sensitive to the 
commenters' concerns and noted that the proposed rule would not prevent 
parties from mutually agreeing to take the testimony of an ill or dying 
witness before a panel has been selected. For this reason, NASD is not 
proposing to amend Proposed Rule 12510 at this time.

NN. Proposed Rule 12511--Discovery Sanctions

    Under Proposed Rule 12511, a party would face sanctions for failing 
to cooperate in the exchange of documents and information as required 
under the Customer Code. Several commenters suggested that the proposed 
rule also should permit sanctions if parties do not timely produce the 
requisite documents from Document Production Lists 1 and 2 without good 
cause.\147\ In Amendment 5, NASD responded that Proposed Rule 12511 
specifically states that the panel may issue sanctions against any 
party in accordance with Proposed Rule 12212(a) for failure to comply 
with the discovery provisions of the Customer Code. It thus believes 
the commenters' concern is sufficiently addressed under Proposed Rule 
12511.
---------------------------------------------------------------------------

    \147\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    One commenter noted that Proposed Rule 12511 expands the scope of a 
panel's authority beyond current practice by permitting arbitrators to 
impose sanctions for violations of the Customer Code, rather than for 
violations of panel orders only.\148\ In Amendment 5, NASD explained 
that the purpose of this provision is to specify that the panel has the 
authority to control all aspects of an arbitration, not just discovery, 
and therefore must have the ability to enforce the rules of the forum 
as well as its orders.
---------------------------------------------------------------------------

    \148\ SIA.
---------------------------------------------------------------------------

    Two commenters noted that a bad faith use of the delay provisions 
in Proposed Rules 12506 and 12507 is not subject to sanctions under 
Proposed Rule 12511 and suggested amending Proposed Rule 12511 to 
address this issue.\149\ As previously discussed, NASD proposed in 
Amendment 5 to amend Proposed Rules 12506 and 12507 to include 
expressly a ``good faith'' standard for compliance. NASD believes the 
issues raised concerning Proposed Rule 12511 will be addressed with the 
proposed changes in Proposed Rules 12506 and 12507.
---------------------------------------------------------------------------

    \149\ Canning and Feinberg.
---------------------------------------------------------------------------

    For these reasons stated above, NASD is not proposing to amend 
Proposed Rule 12511 at this time.

OO. Proposed Rule 12512--Subpoenas

    Proposed Rule 12512 provides that subpoenas may be issued ``as 
provided by law.'' Similarly, Rule 10322 of the current Code provides, 
``The arbitrators and any counsel of record to the proceeding shall 
have the power of the subpoena process as provided by law.'' Seven 
commenters contended that brokerage firms abusively issue overly broad 
subpoenas to non-parties, while failing to provide notice of the 
subpoena to claimants in a timely manner.\150\ These commenters stated 
that claimants usually receive a copy of the subpoena only after the 
subpoenaed party has produced the requested documents, thereby 
eliminating the opportunity to make a meaningful objection. They argued 
that parties should be allowed to object to the subpoena before it is 
issued. Several commenters also suggested that the proposed rule should 
state clearly that only arbitrators may issue subpoenas.\151\
---------------------------------------------------------------------------

    \150\ Canning, Feinberg, Greco, Layne, Miller, Stolle, and 
Stoltmann.
    \151\ Canning, Feinberg, Greco, Layne, Stolle, Stoltman.
---------------------------------------------------------------------------

    In Amendment 5, NASD agreed that changes to the subpoena process 
were needed and noted that it had separately filed proposed rule 
changes relating to subpoenas.\152\ NASD stated that it intends to 
incorporate any approved changes into the Customer Code.
---------------------------------------------------------------------------

    \152\ The Commission recently approved these proposed rule 
changes. See Order Approving Proposed Rule Change and Amendment Nos. 
1, 2, and 3 Thereto and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 4 to Revise Rule 10322 of the 
NASD Code of Arbitration Procedure Pertaining to Subpoenas and the 
Power to Direct Appearances, Securities Exchange Act Rel. No. 55038 
(Jan. 3, 2007), 72 FR 1353 (Jan. 11, 2007) (SR-NASD-2005-079).
---------------------------------------------------------------------------

PP. Proposed Rule 12513--Authority of Panel to Direct Appearances of 
Associated Person Witnesses and Production of Documents Without 
Subpoenas

    Proposed Rule 12513 allows the panel to order the appearance of any 
employee

[[Page 4595]]

or associated person of an NASD member without the use of subpoenas. 
One commenter noted that Proposed Rules 12100(a) and (r) consider 
former associated persons to be associated persons.\153\ In this 
commenter's view, while Proposed Rule 12513 would permit a panel to 
order a former associated person to attend an arbitration hearing, this 
would be impractical because the panel would have no means to enforce 
an order compelling that person's attendance. This commenter suggested 
limiting the proposed rule to current associated persons and stated 
that the attendance of former associated persons should be compelled by 
subpoena only.
---------------------------------------------------------------------------

    \153\ SIA. See also Section 0, Proposed Rule 12100(a) 
(Definition of Associated Person) and Proposed Rule 12100(r) 
(Definition of Person Associated with a Member), above.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12100(r) is a 
codification of current policy, under which, in the arbitration 
context, NASD maintains jurisdiction over a former associated person 
for events that occurred while the person was associated with a member 
firm (or are related to the person's termination of employment with a 
member firm). It also noted that such arbitrations would be subject to 
any applicable statute of limitations and the six-year eligibility rule 
under both the current Code and Proposed Rule 12206. With regard to 
Proposed Rule 12513, NASD acknowledged that arbitrators have limited 
means of requiring former associated persons to appear or produce 
documents. Nevertheless, some former associated persons may cooperate 
with these orders to facilitate resolution of the matter. If they do 
not, they may be subject to a subpoena. Because Proposed Rule 12513 is 
substantively the same as current policy, NASD is not proposing to 
amend this proposed rule at this time.

QQ. Proposed Rule 12514--Exchange of Documents and Witness Lists Before 
Hearing

    As published in the Customer Code Notice, Proposed Rule 12514(c) 
provides that parties may not present at the hearing any documents or 
other materials not already produced or any witnesses not already 
identified at an earlier stage in the arbitration, unless the panel 
determines that good cause exists for the earlier failure. Proposed 
Rule 12514(c) also specifically states that the need to use documents 
or call witnesses for rebuttal or impeachment purposes based on 
developments during the hearing constitutes good cause.
1. ``Control''
    Proposed Rule 12514(a) (Documents and Other Materials) provides 
that at least 20 days before the first scheduled hearing date, all 
parties must provide all other parties with copies of all documents and 
other materials in their possession or control that they intend to use 
at the hearing that have not already been produced. Several commenters 
objected to the use of the term ``control'' in Proposed Rule 12514(a) 
and Proposed Rule 12506.\154\ NASD responded in Amendment 5 that it 
believed the use of the term ``control'' would make it easier for 
customers to gain access to documents held by third-parties on behalf 
of respondents, because respondents would be required to produce 
documents regardless of where the documents are stored or maintained. 
In Amendment 7, NASD proposed to amend Proposed Rule 12508 to address 
this issue.\155\
---------------------------------------------------------------------------

    \154\ Boliver, Canning, Estell, Evans, Feinberg, Ilgenfritz, 
Josel, Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, 
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
    \155\ See Sections 0, Proposed Rule 12506 (Document Production 
Lists), and 0, Proposed Rule 12508 (Objecting to Discovery; Waiver 
of Objection), above.
---------------------------------------------------------------------------

2. Scope of ``Rebuttal''
    Several commenters suggested that, to avoid any misunderstanding of 
what constitutes rebuttal, Proposed Rule 12514(c) should include 
information currently contained in a form letter that NASD sends to the 
parties advising them of the hearing date and location.\156\ This 
information instructs parties that documents and lists of witnesses in 
defense of a claim are not considered rebuttal and, therefore, must be 
exchanged by the parties. In response to this comment, NASD agreed in 
Amendment 5 to include this provision, noting that it would be 
codifying current practice.\157\ The proposed rule is amended as 
follows (new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \156\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel, 
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, 
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
    \157\ NASD also proposed to amend Proposed Rule 12514(b) to 
correct a grammatical error.
---------------------------------------------------------------------------

12514. Exchange of Documents and Witness Lists Before Hearing
    (a) Documents and Other Materials
    No change.
    (b) Witness Lists
    At least 20 days before the first scheduled hearing date, all 
parties must provide each other party with the names and business 
affiliations of all witnesses they intend to present at the hearing. At 
the same time, [each party] all parties must file their witness lists 
with the Director, with enough copies for each arbitrator.
    (c) Exclusion of Documents or Witnesses
    Parties may not present any documents or other materials not 
produced and or any witnesses not identified in accordance with this 
rule at the hearing, unless the panel determines that good cause exists 
for the failure to produce the document or identify the witness. Good 
cause includes the need to use documents or call witnesses for rebuttal 
or impeachment purposes based on developments during the hearing. 
Documents and lists of witnesses in defense of a claim are not 
considered rebuttal or impeachment information and, therefore, must be 
exchanged by the parties.
* * * * *
3. ``Good Cause''
    One commenter expressed concern that the exception allowing 
documents not exchanged to be admitted for ``good cause'' would create 
uncertainty that a panel would accept documents or witnesses not 
produced or identified during the 20-day exchange during the 
hearing.\158\ Similarly, two commenters expressed concern that the 
phrase ``impeachment purposes based on developments during the 
hearing'' is ambiguous, would create more uncertainty in the hearing 
preparation process, and would be difficult for arbitrators to 
apply.\159\ These commenters recommended retaining the ``good cause'' 
requirement, but replacing the standard of ``rebuttal or impeachment 
purposes'' with the cross-examination standard from Rule 10321 of the 
current Code.\160\ Another commenter objected to the provision in 
Proposed Rule 12514(c) that would require parties to exchange documents 
contemplated for use on cross-examination, stating that this disclosure 
is antithetical to the concept of cross-examination because it would 
give each party time to formulate responses.\161\ This commenter 
suggested that the proposed rule should specifically except cross-
examination documents from the

[[Page 4596]]

20-day exchange, as under the current Code.
---------------------------------------------------------------------------

    \158\ Ryder.
    \159\ Canning and Feinberg.
    \160\ Canning and Feinberg. Current Rule 10321 (General 
Provisions Governing Pre-Hearing Proceedings) provides in relevant 
part that parties do not need to exchange documents or identify 
witnesses ``which parties may use for cross-examination or 
rebuttal.''
    \161\ Schwab.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that the proposed rule creates a 
presumption that, at the hearing, parties may not present any documents 
that were not exchanged or witnesses who were not identified within the 
time provided by the proposed rule. NASD stated, however, that the 
``good cause'' exception is intended to allow for the need to use 
documents or call witnesses for rebuttal or impeachment purposes based 
on developments at the hearing. NASD also stated that in developing 
Proposed Rule 12514(c), it learned from some of its constituents that 
parties have been abusing the ``cross examination'' exception of Rule 
10321 of the current Code by inappropriately designating certain 
documents as cross-examination documents. Subsequently, at the hearing, 
parties allegedly ``surprised'' their opponents with these documents, 
which limited the opponents' ability to effectively rebut their 
significance. NASD stated that Proposed Rule 12514(c) is intended to 
prevent this practice. For these reasons, NASD is not proposing to 
amend the proposed rule at this time.
4. Other Comments
    Under the current and proposed Discovery Guides, if a party states 
that no responsive information or documents exist in connection with a 
discovery request, that party must make certain affirmations at the 
request of the party seeking the discovery request. Specifically, the 
responding party must: (1) State in writing that he/she conducted a 
good faith search for the requested information or documents; (2) 
describe the extent of the search; and (3) state that, based on the 
search, no such information or documents exist. Two commenters asserted 
that these affirmations are inadequate and suggested that they be 
amended.\162\ NASD responded that the Customer Code is not changing the 
affirmation provision in the Discovery Guide, and thus that this 
comment is outside the scope of this rule filing.
---------------------------------------------------------------------------

    \162\ Canning and Feinberg.
---------------------------------------------------------------------------

    Two commenters asserted that Proposed Rule 12514 would cause 
parties to provide more documents than they intend to use at the 
hearing, thus limiting any meaningful analysis of the evidence that the 
opposing parties actually intend to offer at the hearing.\163\ They 
suggested that Proposed Rule 12514 should require parties to provide 
notebooks of numbered exhibits with an index to opposing parties 20 
days before hearing, and to the panel at the hearing.
---------------------------------------------------------------------------

    \163\ Canning and Layne.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12514 is meant to 
provide general guidance on the exchange or documents and witness lists 
before a hearing, and is substantively the same as Rule 10321(a) of the 
current Code. Thus, it stated that these comments are outside the scope 
of the rule filing.

RR. Proposed Rule 12600--Required Hearings

    As published in the Customer Code Notice, Proposed Rule 12600(c) 
provides that if a hearing will be held, the Director will notify the 
parties of the time and place of the hearing at least 10 days before 
the hearing begins, unless the parties agree to a shorter time. The 
Commission specifically solicited comment on whether parties need 
notice of the hearing earlier than 10 days in advance. Several 
commenters indicated that the proposed 10-day notice could be 
insufficient.\164\ One commenter stated that such short notice might 
cause a small investor to lose his or her counsel, as that counsel's 
schedule might not allow an appearance for a hearing on 10 days' 
notice, which in turn could mean that the investor could be forced to 
proceed at the hearing without counsel.\165\ Other commenters suggested 
that it would be difficult for parties and witnesses who are traveling 
from out of town to make travel arrangements on 10 days' notice.\166\ 
In Amendment 5, NASD explained that the term ``place'' in Proposed Rule 
12600(c) refers to the specific facility where the hearings will be 
held, and that under current practice, parties normally are notified of 
the city in which the hearing will take place prior to the IPHC. 
Parties also generally agree to hearing dates at the IPHC. NASD stated 
that it does not expect this practice to change under Proposed Rule 
12600(c). In response to the comments and to ensure consistent 
timeframes under the Customer Code, however, NASD is proposing to amend 
Proposed Rule 12600(c) to increase the notice period from 10 to 20 
days. The proposed rule change is amended as follows (new language in 
italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \164\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PACE, PIABA, Pounds, 
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
    \165\ PACE.
    \166\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

12600. Required Hearings
    (a) No change.
    (b) No change.
    (c) The Director will notify the parties of the time and place at 
least [10] 20 days before the hearing begins, unless the parties agree 
to a shorter time.
* * * * *
    In addition, Proposed Rule 12600 provides that hearings will be 
held, unless the arbitration is administered under the provisions under 
the Customer Code applicable to simplified arbitrations or default 
proceedings, the parties agree otherwise in writing, or the arbitration 
has been settled, withdrawn, or dismissed. One commenter noted that 
Proposed Rule 12600(a) would not include cases dismissed without a 
hearing under Proposed Rule 12504 and suggested amending the proposed 
rule to include this additional exception.\167\
---------------------------------------------------------------------------

    \167\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it believes the language and 
intent of Proposed Rule 12600(a) are clear, and as a result, did not 
propose to amend this rule. In Amendment 6, NASD withdrew Proposed Rule 
12504 and all references to that rule from the Customer Code.\168\ 
Therefore, this comment is no longer applicable to this rule filing.
---------------------------------------------------------------------------

    \168\ Proposed Rule 12504 has since been re-filed as a separate 
proposed rule change. See supra note 23.
---------------------------------------------------------------------------

SS. Proposed Rule 12601--Postponement of Hearings

    Proposed Rule 12601 governs the postponement of hearings and 
provides, in relevant part, that a panel may not grant a motion to 
postpone a hearing made within 10 days of the date that the hearing is 
scheduled to begin, unless the panel determines that good cause exists.
    One commenter asserted that, at times, arbitrators have attempted 
to ignore the agreement of the parties to postpone an arbitration and 
compel parties to proceed.\169\ To eliminate this possibility, this 
commenter suggested that the proposed rule should provide that a 
hearing must be postponed by agreement of the parties and may be 
postponed under the other listed circumstances. Another commenter noted 
that Proposed Rule 12601(a) appears to give the parties the unfettered 
right to postpone the hearing whenever they agree to do so, which would 
contradict an arbitrator's duty to keep cases moving toward 
resolution.\170\ This commenter suggested

[[Page 4597]]

incorporating some provisions from Rule 10319(c) of the current Code to 
give the panel express control over the number of times a case may be 
postponed and to eliminate repeat postponements.
---------------------------------------------------------------------------

    \169\ SIA.
    \170\ Elster. While this commenter's views pertained to Proposed 
Rule 13601(a) of the Industry Code, his comments are relevant to the 
Customer Code as well. See supra note 5.
---------------------------------------------------------------------------

    NASD responded that it believes the parties should have the 
discretion to postpone a hearing if they mutually agree, to facilitate 
settlement negotiations among the parties. NASD believes, however, that 
the proposed postponement fees in the rule, which are non-refundable, 
should serve as a deterrent to multiple postponements.\171\ Moreover, 
Proposed Rule 12601(c) would allow a panel to dismiss an arbitration 
without prejudice if the parties request or agree to more than two 
postponements. In this situation, a party could re-file the claim, 
subject to all applicable fees and costs under the Customer Code.
---------------------------------------------------------------------------

    \171\ Both Rule 10319(b) of the current Code and Proposed Rule 
12601(b) require parties to pay a postponement fee equal to the 
applicable hearing session fee if the party's postponement request 
is granted. Under Rule 10319(b), a party would pay twice the hearing 
session fee for each subsequent postponement, whereas under Proposed 
Rule 12601(b), the fee would not increase for subsequent requests. 
See Section 0, below.
---------------------------------------------------------------------------

    In light of these comments, however, NASD also amended Proposed 
Rule 12601 to expressly distinguish between when a hearing may be 
postponed and when a hearing must be postponed. NASD also added 
paragraph (b)(2) to the rule, which includes provisions of a proposed 
rule change that had been approved by the Commission, but were 
inadvertently omitted from the last amendment to the Customer 
Code.\172\ The proposed rule change is amended as follows (new language 
in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \172\ See Order Approving Proposed Rule Change and Amendment 
Nos. 1 and 2 Relating to the Adjournment of an Arbitration Hearing 
Within Three Business Days of the First Scheduled Hearing Session, 
Securities Exchange Act Rel. No. 49716 (May 17, 2004), 69 FR 29342 
(May 21, 2004) (SR-NASD-2003-164).
---------------------------------------------------------------------------

12601. Postponement of Hearings
    (a) [When a Hearing May Be Postponed] Postponement of Hearings
    (1) When a Hearing Shall Be Postponed
    A hearing shall be postponed by agreement of the parties.
    (2) When a Hearing May Be Postponed
    A hearing may be postponed [only]:
     [By agreement of the parties;]
     By the Director, in extraordinary circumstances;
     By the panel, in its own discretion; or
     By the panel, upon motion of a party. The panel may not 
grant a motion to postpone a hearing made within 10 days of the date 
that the hearing is scheduled to begin, unless the panel determines 
that good cause exists.
    (b) Postponement Fees
    (1) No change.
    (2) If a postponement request is made by one or more parties and 
granted within three business days before a scheduled hearing session, 
the party or parties making the request shall pay an additional fee of 
$100 per arbitrator. If more than one party requests the postponement, 
the arbitrators shall allocate the $100 per arbitrator fee among the 
requesting parties. The arbitrators may allocate all or a portion of 
the $100 per arbitrator fee to the non-requesting party or parties, if 
the arbitrators determine that the non-requesting party or parties 
caused or contributed to the need for the postponement. In the event 
that a request results in the postponement of consecutively scheduled 
hearing sessions, the additional fee will be assessed only for the 
first of the consecutively scheduled hearing sessions. In the event 
that an extraordinary circumstance prevents a party or parties from 
making a timely postponement request, the arbitrators may use their 
discretion to waive the fee, provided verification of such circumstance 
is received.
    (3) No change.
    (c) No change.
* * * * *
    One commenter asked whether a motion for postponement outside of 
the 10-day window under Proposed Rule 12601(a) would require a ``good 
cause'' explanation.\173\ In Amendment 5, NASD explained that if a 
party requests to postpone a hearing more than 10 days from the date 
the hearing is scheduled to begin, it would not need to demonstrate 
good cause. Rather, a panel may grant a party's request based solely on 
the request, and the party would be required to pay any applicable 
fees.
---------------------------------------------------------------------------

    \173\ Ryder.
---------------------------------------------------------------------------

TT. Proposed Rule 12602--Attendance at Hearings

    Proposed Rule 12602 provides that the parties and their 
representatives are entitled to attend all hearings, and the panel will 
decide who else may attend any or all of the hearings. Several 
commenters viewed Proposed Rule 12602 as inconsistent with directions 
given in the Securities Industry Conference on Arbitration Manual, 
which creates a presumption for the attendance of expert witnesses and 
an investor's representative.\174\ They suggested that the proposed 
rule should expressly allow expert and other fact witnesses to attend 
hearings.
---------------------------------------------------------------------------

    \174\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds, 
Rosenfield, Shewan, Stoltmann, and Sutherland.
---------------------------------------------------------------------------

    In Amendment 5, NASD agreed that expert witnesses should be allowed 
to attend all hearings, but stated that the panel should have the 
discretion to allow other persons to attend hearings (e.g., an 
individual assisting an elderly or disabled party) or to bar someone 
who may be disruptive to the proceeding.
    In response to comments, the proposed rule change is amended as 
follows (new language in italics):
12602. Attendance at Hearings
    The parties and their representatives are entitled to attend all 
hearings. Absent persuasive reasons to the contrary, expert witnesses 
should be permitted to attend all hearings. The panel will decide who 
else may attend any or all of the hearings.
* * * * *

UU. Proposed Rule 12607--Order of Presentation of Evidence and 
Arguments

    Proposed Rule 12607 provides that while the claimant generally will 
present its case, followed by the respondent's defense, the panel may 
vary the order in which the hearing is conducted, as long as each party 
is given a fair opportunity to present its case. Three commenters noted 
that no other proposed rule addresses the order of the presentation of 
evidence.\175\ They recommended that Proposed Rule 12607 should 
expressly address opening statements and closing arguments, and clarify 
that rebuttal testimony is allowed. Several commenters suggested that 
Proposed Rule 12607 should give claimants the right to reserve any or 
all of their closing argument for rebuttal, some noting that this would 
be consistent with current practice and IM-10317 under the current 
Code.\176\
---------------------------------------------------------------------------

    \175\ Canning, Feinberg, and Stoltmann.
    \176\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel, 
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds, 
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    NASD responded that it believes the panel has the authority to 
control a hearing, which includes determining the order in which the 
hearing is conducted. Consistent with that principle, Proposed Rule 
12607 is intended to provide the panel with discretion to vary the 
order in which the hearing is conducted, provided each

[[Page 4598]]

party is given a fair opportunity to present its case. For these 
reasons, NASD is not proposing to amend this rule at this time.

VV. Proposed Rule 12700--Dismissal of Proceedings Prior to Award

    Proposed Rule 12700 lists the circumstances in which a panel may or 
must dismiss an arbitration or claim prior to award. One commenter 
stated that dismissals under Proposed Rule 12700(b) should be 
classified as an award and put into writing pursuant to Proposed Rule 
12904 (Awards).\177\ In this commenter's opinion, because dismissal 
orders require a dispositive determination of the arbitrators and are 
subject to vacatur challenges in court, they are legally ``awards.''
---------------------------------------------------------------------------

    \177\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it believes its proposed 
definition of ``award'' under Proposed Rule 12100 addresses this 
commenter's concern.\178\ Moreover, NASD explained that panels issue 
awards under current practice if they determine that cases should be 
dismissed, with or without prejudice. For these reasons, NASD is not 
proposing to amend Proposed Rule 12700(b) at this time.
---------------------------------------------------------------------------

    \178\ See discussion in Section 0, Proposed Rule 12100(b) 
(Definition of Award), above.
---------------------------------------------------------------------------

WW. Proposed Rule 12702--Withdrawal of Claims

    Proposed Rule 12702(a) provides that before a claim has been 
answered by a party, the claimant may withdraw the claim against that 
party with or without prejudice. Proposed Rule 12702(b) provides that 
after a claim has been answered by a party, the claimant may only 
withdraw the claim against that party with prejudice unless the panel 
decides, or the parties agree, otherwise. In the Customer Code Notice, 
the Commission asked whether Proposed Rule 12702(b) appropriately 
addresses the concern of allowing claimants to withdraw claims without 
prejudice, while protecting respondents from expending significant 
resources to respond to a claim that is later withdrawn or having to 
respond to the same claim multiple times.
    Several commenters opposed Proposed Rule 12702(b), contending that, 
in their collective experiences, there are few instances in which a 
claim had to be withdrawn after an answer was filed.\179\ These 
commenters argued that, at the very least, the proposed rule should 
provide arbitrators with the authority to decide whether a claim, if 
withdrawn after an answer is filed, should be withdrawn with or without 
prejudice.
---------------------------------------------------------------------------

    \179\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12702(b) is 
intended to deter claimants' gamesmanship in withdrawing and refiling 
claims in order to select a new panel. NASD noted that under Proposed 
Rule 12702, if claimants have legitimate reasons to withdraw claims 
without prejudice after the answer is filed, they may ask the 
arbitrators to allow them to do so. NASD believes that this provision 
is a reasonable accommodation of the competing interests in the forum 
and declined to amend Proposed Rule 12702(b) at this time.

XX. Proposed Rule 12800--Simplified Arbitration

    Proposed Rule 12800 establishes procedures for simplified 
arbitration, which are claims of $25,000 or less. While respondents 
have only 20 days to answer a simplified arbitration claim under the 
current Code, they would have 45 days to do so under the Customer Code, 
consistent with cases submitted under regular arbitration. In the 
Customer Code Notice, the Commission asked whether the proposed 45-day 
deadline should be shortened in simplified cases to reflect the fact 
that they are meant to take place more expeditiously than regular 
cases.
    Several commenters opposed the proposed 45-day deadline, contending 
that firms should be able to respond more quickly to small, 
uncomplicated claims.\180\ Moreover, these commenters believe that the 
longer deadline would diminish the benefits of simplified arbitrations 
as a quick, inexpensive option for small investors. As an alternative, 
several commenters suggested a 30 day deadline, similar to the 
requirements in most state courts for the filing of an answer.\181\
---------------------------------------------------------------------------

    \180\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PACE, PIABA, Pounds, 
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
    \181\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it is sensitive to the 
commenters' concerns, but noted that the 45-day deadline reflects 
current practice in the forum. NASD stated that frequent users of the 
forum and NASD staff report that parties routinely extend the deadlines 
in simplified arbitration that are provided under Rule 10302 of the 
current Code. Because parties so often extend existing deadlines, NASD 
believes that Proposed Rule 12800 would simplify and streamline the 
administration of simplified arbitrations without resulting in 
additional delay.
    One commenter contended that, while the current Code permits a 
claimant to reply to the respondent's answer, the Customer Code does 
not explicitly authorize this practice.\182\ In this commenter's view, 
because many claimants filing simplified arbitration claims are pro se, 
the procedures controlling these arbitrations should be expressly 
stated. This commenter suggested defining ``pleadings'' to clarify that 
replies can be filed to respondents' answers in simplified arbitration. 
This commenter also suggested providing that claimants have 10 days to 
file such replies following the close of the discovery period.
---------------------------------------------------------------------------

    \182\ PACE.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that although it agrees that a 
definition of ``pleadings'' should be included in the Customer Code, 
(see Section 0, above) it does not agree with the suggestion that 
claimants be given 10 days to file a reply following the close of the 
discovery period. NASD explained that, because time limits under the 
Customer Code are meant to be standardized, the proposed rule does not 
include the special time limits or deadlines for simplified cases from 
the current Code.
    One commenter objected that the only arbitrators eligible to hear 
simplified arbitration cases are those included on the chairperson-
eligible arbitrator roster.\183\ In Amendment 5, NASD responded that, 
because simplified arbitration cases are decided by only one 
arbitrator, it believes the arbitrator should have had the experience 
of sitting on prior cases. Proposed Rule 12800, however, would give 
parties the option to select an arbitrator from a different roster if 
they mutually agree.
---------------------------------------------------------------------------

    \183\ Caruso.
---------------------------------------------------------------------------

    For these reasons, NASD is not proposing to amend Proposed Rule 
12800 at this time.

YY. Proposed Rule 12801--Default Proceedings

    Proposed Rule 12801 addresses the applicability of, and procedures 
involved in, default proceedings. One commenter noted that default 
proceedings under Rule 10314(e) of the current Code apply to defunct 
firms only, and asserted that the reference to default proceedings in 
Proposed Rule 12308, concerning failure to answer claims, would expand 
the use of default proceedings to all respondents who fail

[[Page 4599]]

to answer, whether active or defunct.\184\ NASD explained that, like 
Rule 10314(e) of the current Code, Proposed Rule 12801 would apply only 
to a respondent within one of the following four categories: (1) A 
member whose membership has been terminated, suspended, canceled, or 
revoked; (2) a member that has been expelled from the NASD; (3) a 
member that is otherwise defunct; or (4) or an associated person whose 
registration is terminated, revoked, or suspended. Therefore, Proposed 
Rule 12801 would not apply to active firms and would not change the 
substantive requirements of the default procedures under the current 
Code.
---------------------------------------------------------------------------

    \184\ Ryder.
---------------------------------------------------------------------------

    Two commenters suggested that Proposed Rule 12801 should: (1) 
Permit default proceedings when a respondent (including current members 
and associated persons with active registrations) has failed to file 
both an answer and a uniform submission agreement; (2) limit the time a 
party has to file the answer and uniform submission agreement; (3) 
provide that, under the proposed default process, determinations should 
be dispositive only in favor of the claimant; and (4) give movants the 
opportunity to present the case in evidentiary hearing on any issues 
not favorably ruled on.\185\
---------------------------------------------------------------------------

    \185\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12801 has not 
changed the substantive requirements concerning default procedures in 
Rule 10314(e) of the current Code, which requires claimants to present 
a sufficient basis to support the granting of an award. It therefore 
stated that this comment is outside the scope of the rule filing.

ZZ. Proposed Rule 12900--Fees Due When a Claim Is Filed

    Proposed Rule 12900 establishes filing fees due from each party 
based on the amount in controversy. Several commenters contended that 
industry members should pay the majority of the customer filing fee, 
suggesting that the filing fee for public customers should be limited 
to $200.\186\ In their view, while public customers should be subject 
to the panel's allocation of fees in the award, they should not have to 
incur undue expense at the outset to file a claim.
---------------------------------------------------------------------------

    \186\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds, 
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    Another commenter suggested that the lack of an increase in fees 
for claims above one million dollars seems to favor wealthier 
claimants.\187\ This commenter indicated that the fee schedules could 
be perceived as unfair because mid-level claimants appear to be 
shouldering a disproportionate percentage of the forum fees. To shift 
the cost burden to those who stand to benefit the most, while 
eliminating the perception that the fee changes impact the middle-class 
investor the most, this commenter suggested that NASD should amend 
Proposed Rule 12900 to charge a fixed percentage as an additional fee 
for any amounts claimed over one million dollars.
---------------------------------------------------------------------------

    \187\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12900 made very 
minimal changes to the fee schedules in Rule 10332 of the current Code, 
and that the proposed changes would not result in an increase in the 
total amount of fees paid by customers or associated persons when 
filing a claim. As NASD explained, for claims of $30,000 to $50,000, 
the customer's overall filing fees would decrease by $50, and for 
claims of $1 million to $3 million, the customer's overall filing fees 
would decrease by $100. NASD also stated that its fee schedules are 
commensurate with the dollar amount of the claims filed and damages 
requested. In its view, the proposed, simplified fee schedules would 
make it easier for parties to understand the total amount due upon 
filing. For these reasons, NASD is not proposing to amend Proposed 
12900 at this time.
    One commenter expressed concern that the expense of arbitration 
(i.e., filing fees) may prevent access to the forum and suggested that 
NASD amend Proposed Rule 12900(d) to expressly disclose that fee 
waivers may be granted to parties who can demonstrate financial 
hardship.\188\ This commenter also stated that the proposed rule should 
explain the practice and procedure for applying for fee waivers and 
NASD's criteria for granting them. In Amendment 5, NASD responded that, 
although this comment is beyond the scope of the rule filing, it would 
consider the comment in considering whether future amendments are 
warranted. In Amendment 7, NASD noted that the procedures to request a 
filing fee waiver already are located on NASD's Web site in the Uniform 
Forms Guide, at: http://www.nasd.com/web/groups/med_arb/documents/mediation_arbitration/nasdw_007954.pdf
.

---------------------------------------------------------------------------

    \188\ PACE.
---------------------------------------------------------------------------

AAA. Proposed Rule 12902--Hearing Session Fees, and Other Costs and 
Expenses

    Proposed Rule 12902 establishes hearing session fees due from the 
parties based on the amount in controversy. Several commenters noted 
that, although Proposed Rule 12902 would require a party to pay one 
fee, which includes the filing fee and the hearing session deposit fee, 
it does not provide that any of the fee will be applied to any hearing 
fees incurred.\189\ These commenters contended that a claimant would 
pay for the first hearing session twice--once through the filing fee 
and then again when the hearing session fees are assessed.
---------------------------------------------------------------------------

    \189\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    NASD responded that it did not intend to increase the fee for 
submitting a claim to arbitration under the Customer Code and agreed 
that clarification is needed. Thus, NASD proposed to amend Proposed 
Rule 12902(b) to provide that an amount equal to one hearing session 
fee would be deducted from the total amount of the hearing session fees 
assessed against the party who paid the filing fee. The proposed rule 
change is amended as follows (new language in italics):
12902. Hearing Session Fees, and Other Costs and Expenses
    (a) No change.
    (b) Payment of Hearing Session Fees
    (1) No change.
    (2) No change.
    (3) In the award, the amount of one hearing session fee will be 
deducted from the total amount of hearing session fees assessed against 
the party who paid the filing fee. If this amount is more than any 
fees, costs, and expenses assessed against this party under the Code, 
the balance will be refunded to the party.
    (c) No change.
    (d) No change.
* * * * *
    In Amendment 5, NASD also proposed to amend Proposed Rule 12902 to 
address the issue of refund payments. NASD stated that it receives 
numerous requests from non-parties to make refunds payable to the 
attorneys or other non-parties that may have made payment on behalf of 
named parties. Currently, when any money remains in a party's account 
after all fees and charges are assessed, NASD's practice is to refund 
the money directly to the party. Because parties themselves sign the 
uniform submission agreement and

[[Page 4600]]

are liable for any fees or costs incurred under the current Code, NASD 
believes it is inappropriate to issue refunds to anyone other than a 
party. Therefore, NASD is proposing to codify its practice by adding a 
new provision to Proposed Rule 12902. The proposed rule change is 
amended as follows (new language in italics):
12902. Hearing Session Fees, and Other Costs and Expenses
* * * * *
    (e) Refund Payments
    Any refunds of fees or costs incurred under the Code will be paid 
directly to the named parties, even if a non-party made a payment on 
behalf of the named parties.
* * * * *

BBB. Proposed Rule 12904--Awards

    Proposed Rule 12904, in pertinent part, establishes the required 
content of awards. One commenter suggested defining the term ``award'' 
under the Customer Code.\190\ In Amendment 5, NASD agreed with this 
comment and included a definition of ``award.'' \191\ The same 
commenter also stated that dismissal of an entire claim should be 
considered an award. In Amendment 5, NASD agreed and stated that the 
proposed definition of ``award'' under Proposed Rule 12100 addresses 
this issue.
---------------------------------------------------------------------------

    \190\ Ryder.
    \191\ See Section 0, Proposed Rule 12100 (Definitions), above.
---------------------------------------------------------------------------

    Finally, this commenter noted that although Rule 10330 requires all 
awards to be in writing and signed by a majority of the arbitrators, 
parties nonetheless may agree to permit one arbitrator to sign a 
stipulated award that directs expungement relief on behalf of the whole 
panel. In this commenter's view, parties should not be allowed to have 
one arbitrator sign a stipulated award on behalf of the entire panel, 
even if the parties mutually agree.
    In Amendment 7, NASD explained that under current practice, which 
would continue under the Customer Code, parties are not permitted to 
agree to the appointment of selected arbitrators for the sole purpose 
of entering a stipulated award.\192\ Moreover, parties may not agree to 
having only one arbitrator of a three-member panel sign the stipulated 
award. Stipulated awards, like awards issued after a hearing on the 
merits, must be signed by a majority of the panel.\193\
---------------------------------------------------------------------------

    \192\ Telephone conversation between Mignon McLemore, Assistant 
Chief Counsel, NASD Dispute Resolution, and Gena Lai, Special 
Counsel, Division of Market Regulation, SEC (Sept. 15, 2006). In 
Amendment 5, NASD responded that, under the current Code and 
Customer Code, if the parties mutually agree for one arbitrator to 
sign a stipulated award on behalf of the panel, the request should 
be honored.
    \193\ See Proposed Rule 12904(a).
---------------------------------------------------------------------------

IV. Summary of Comments on the Industry Code as Amended by Amendments 
1, 2, 3, and 4 and Description of Amendments 5, 6, and 7 to the 
Industry Code

A. Summary of Comments on the Industry Code as Amended by Amendments 1, 
2, 3, and 4

    NASD filed Amendment 5 to the Industry Code with the Commission on 
May 4, 2005. Only one commenter specifically addressed the Industry 
Code Notice.\194\ This commenter noted that Proposed Rule 13601(a) 
appears to give the parties the unfettered right to postpone the 
hearing whenever they agree to do so, which the commenter viewed as 
contradicting an arbitrator's duty to keep the cases moving toward 
resolution. The commenter suggested incorporating some provisions from 
current Rule 10319(c) (Adjournments) to give the panel some express 
control over the number of times a case may be postponed and to 
eliminate repeat postponements. NASD's response to the commenter's 
concerns is discussed above in Section 0, Proposed Rule 12601 
(Postponement of Hearings). NASD amended Proposed Rule 13601 of the 
Industry Code consistent with Proposed Rule 12601 of the Customer Code.
---------------------------------------------------------------------------

    \194\ See Elster, supra note 5.
---------------------------------------------------------------------------

B. Amendment 5 to the Industry Code

    As noted above, the Commission received 51 comments on the Customer 
Code. While none of these comments specifically addressed the Industry 
Code, because the two codes contain similar rules and procedures, 
comments on the Customer Code were also relevant to the Industry Code. 
Thus, NASD made corresponding amendments to both the Customer Code and 
the Industry Code. Amendment 5 to the Industry Code also corrects 
typographical, grammatical, and other technical errors. NASD requested 
accelerated approval for the amendments to the Industry Code that were 
not yet published. As with the Customer Code, this request applies to 
the amendments filed after the Customer Code Notice.
    The table below shows which Industry Code and Customer Code rules 
were similarly amended in Amendments 5 to each proposed code.

   Changes To Customer & Industry Codes as a Result of Comment Letters
------------------------------------------------------------------------
             Customer Code                        Industry Code
------------------------------------------------------------------------
12100--Definitions.....................  13100--Definitions.
12203--Denial of NASD Forum............  13203--Denial of NASD Forum.
12204--Class Action Claims.............  13204--Class Action Claims.
12213--Hearing Locations...............  13213--Hearing Locations.
12214--Payment of Arbitrators..........  13214--Payment of Arbitrators.
12301--Service on Associated Persons...  13301--Service on Associated
                                          Persons.
12309--Amending Pleadings..............  13309--Amending Pleadings.
12312--Multiple Claimants..............  13312--Multiple Claimants.
12313--Multiple Respondents............  13313--Multiple Respondents.
12400(b)--Arbitrator Rosters...........  13400(b)--Arbitrator Rosters.
12403--Generating and Sending Lists to   13403--Generating and Sending
 Parties.                                 Lists to Parties.
12404--Striking and Ranking Arbitrators  13404--Striking and Ranking
                                          Arbitrators.
12501--Other Prehearing Conferences....  13501--Other Prehearing
                                          Conferences.
12505--Cooperation of Parties in         13505--Cooperation of Parties
 Discovery.                               in Discovery.
12506(b)--Time for Responding to         ...............................
 Documents Production Lists.
12507(b)--Responding to Other Discovery  13507(b)--Responding to
 Requests.                                Discovery Requests.
12507(a)--Making Other Discovery         13506(a)--Discovery Requests.
 Requests.
12514(c)--Exclusions of Documents or     13514(c)--Exclusion of
 Witnesses.                               Documents or Witness.
12600--Required Hearings...............  13600--Required Hearings.

[[Page 4601]]

12601--Postponement of Hearings........  13601--Postponement of
                                          Hearings.
12602--Attendance at Hearings..........  13602--Attendance at Hearings.
12902(b)--Payment of Hearing Session     13902(b)--Payment of Hearing
 Fees.                                    Session Fees.
12902(e)--Refund Payments..............  13902(e)--Refund Payments.
------------------------------------------------------------------------

C. Amendment 6 to the Industry Code

    In Amendment 6 to the Industry Code, in response to commenters' 
concerns regarding Proposed Rule 12504 (Motions to Decide Claims Before 
a Hearing on the Merits) of the Customer Code, NASD withdrew Proposed 
Rule 13504 (Motions to Decide Claims Before a Hearing on the Merits) 
and all references to that rule.\195\
---------------------------------------------------------------------------

    \195\ See Section 0, Proposed Rule 12504 (Motions to Decide 
Claims Before a Hearing on the Merits), above.
---------------------------------------------------------------------------

D. Amendment 7 to the Industry Code

    In Amendment 7 to the Industry Code, NASD made changes that 
correspond to those in Amendment 7 to the Customer Code.\196\ NASD also 
amended Proposed Rule 13800(c) (Simplified Arbitration) to provide that 
no hearing will be held in simplified arbitrations of industry cases 
unless the claimant requests a hearing. Previously, the rule 
inaccurately provided that a customer could request a hearing under the 
rule, although Proposed Rule 13800(c) does not apply to customer cases. 
Proposed Rule 13800(c) is amended as follows (new language in italics; 
deleted language in [brackets]):
---------------------------------------------------------------------------

    \196\ There were no changes corresponding to those for Proposed 
Rule 12200 (concerning insurance business activities of a member), 
however, because there is no corollary in the Industry Code.
---------------------------------------------------------------------------

13800. Simplified Arbitration
    (a)-(b) No change.
    (c) Hearings
    (1) No hearing will be held in arbitrations administered under this 
rule unless the [customer] claimant requests a hearing.
    (2) No change.
    (d)-(f) No change.
* * * * *
    For the text of Amendments 5, 6, and 7 to the Industry Code, 
including amendments to the narrative portion and exhibits of the 
Industry Code filing, please see NASD's Web site at the following URL: 
http://www.nasd.com/RulesRegulation/RuleFilings/2004RuleFilings/NASDW_009295
.

V. Discussion

    After careful review, the Commission finds that the proposed rule 
changes (SR-NASD-2003-158 and SR-NASD-2004-011), as amended, are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\197\ In particular, the Commission finds that the 
proposals, as amended, are consistent with the provisions of Section 
15A(b)(6) of the Act,\198\ which requires, among other things, that the 
rules of a national securities association be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. The Commission finds that NASD's proposals, as 
amended, are designed to protect investors and the public interest by 
providing an accessible and clearly organized set of rules to 
facilitate the resolution of disputes by users and administrators of 
the arbitration forum. The revision of the current NASD rules into 
plain English will make the process of arbitration more transparent and 
more accessible to users of the forum, including those who may file 
arbitration claims pro se. Moreover, the reorganization of the current 
Code into three separate codes should minimize confusion as to which 
rules apply to customer cases or industry cases and further improve the 
transparency of the arbitration process, thereby improving the 
efficiency with which cases are processed in the NASD dispute 
resolution forum.\199\
---------------------------------------------------------------------------

    \197\ In approving this proposal, the Commission has considered 
the proposed rules' impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \198\ 15 U.S.C. 78o-3(b)(6).
    \199\ The Commission already has approved the Mediation Code. 
See supra note 8.
---------------------------------------------------------------------------

    Particular provisions of the Customer Code and Industry Code that 
vary substantively from the current Code are discussed below.

A. Proposed Rules 12105 and 13105--Agreement of the Parties

    The current Code does not specifically address the parties' 
modification of a provision of the current Code or a decision of the 
Director or the panel by written agreement. Proposed Rules 12105(a) and 
13105(a) of the Customer Code and Industry Code, respectively, 
generally allow these modifications. Furthermore, Proposed Rules 
12105(b) and 13105(b) provide that if the Director or the panel 
determines that a named party is inactive in the arbitration or has 
failed to respond after adequate notice has been given, the Director or 
the panel may determine that the written agreement of that party is not 
required while the party is inactive or not responsive. Proposed Rules 
12105(b) and 13105(b) are designed to allow the active parties in an 
arbitration to continue to exercise the control intended by Proposed 
Rules 12105(a) and 13105(a), in the event that a party whose agreement 
is needed is not participating in the arbitration or is otherwise 
unresponsive. The Commission notes that NASD has clarified the meaning 
of ``inactive party'' by amending Proposed Rules 12105(b) and 13105(b) 
to provide examples of who an inactive party is in the rule text. As 
amended, these proposed rules should improve the efficacy and 
efficiency with which arbitration cases can proceed.

B. Proposed Rules 12203 and 13203--Use of the Forum

    Rule 10301(b) of the current Code allows the Director of 
Arbitration to decline the use of the NASD arbitration forum only if 
the ``dispute, claim, or controversy is not a proper subject matter for 
arbitration,'' and only upon approval of the NAMC or its Executive 
Committee. Proposed Rules 12203(a) and 13203(a) of the Customer Code 
and Industry Code, respectively, provide that the Director ``may 
decline to permit the use of the NASD arbitration forum if the Director 
determines that, given the purposes of NASD and the intent of the Code, 
the subject matter of the dispute is inappropriate, or that accepting 
the matter would pose a risk to the health or safety of arbitrators, 
staff, or parties or their representatives.'' Proposed Rules 12203 and 
13203 are intended to give the Director the flexibility needed in 
emergency situations. The proposed rules also would provide that this 
authority may be exercised only by the Director or the President of 
NASD Dispute Resolution and cannot be delegated.

[[Page 4602]]

    The Commission believes that the proposed rules should facilitate 
excluding cases from the NASD arbitration forum that are beyond its 
mandate, allowing it to focus on the cases that are appropriately in 
the forum. This, in turn, should promote the efficacy and efficiency of 
the arbitration forum in processing its claims. The Commission agrees 
that in emergency situations, it is reasonable for the Director to have 
the authority and flexibility to act quickly to protect the health and 
safety of users and administrators of the forum. We note that this 
authority, which cannot be delegated by the Director or President of 
NASD Dispute Resolution, should be limited by application in only a 
very narrow range of unusual circumstances.

C. Proposed Rules 12205 and 13205--Shareholder Derivative Actions

    The current Code does not specifically address whether shareholder 
derivative actions may be arbitrated at NASD. NASD has stated that such 
claims are not eligible for arbitration in it is forum because, by 
definition, they involve corporate governance disputes that do not 
arise out of, or in connection with, the business of a member firm or 
an associated person. Nonetheless, the question arises from time to 
time, occasionally after a claimant has filed a statement of claim. 
Proposed Rules 12205 and 13205 of the Customer Code and Industry Code, 
respectively, would provide that shareholder derivative actions are not 
eligible for arbitration at NASD.
    The Commission believes that the inclusion of these proposed rules 
should provide guidance to parties and obviate the need for parties to 
expend resources in an attempt to arbitrate shareholder derivative 
claims at NASD, thereby improving the efficiency of the arbitration 
forum. Clarifying which cases may be heard in the Customer Code and 
Industry Code is consistent with the purposes of the proposed rule 
changes.

D. Proposed Rules 12207 and 13207--Extensions of Deadlines

    Rule 10314(b)(5) of the current Code provides that deadlines 
established by the Code for filing or serving pleadings may be extended 
by the Director, or with the consent of the initial claimant. It 
further provides that extensions for filing an answer are disfavored 
and will only be granted in extraordinary circumstances, but does not 
provide guidance with respect to the extensions of other deadlines 
established by the Code, the panel, or the Director. Proposed Rules 
12207(a) and 13207(a) of the Customer Code and Industry Code, 
respectively, provide that the parties, with written notification to 
the Director, may agree in writing to extend or modify any deadline for 
serving an answer, returning arbitrator or chairperson lists, 
responding to motions, or exchanging documents or witness lists. 
Proposed Rules 12207(b) and 13207(b) provide that the panel also may 
extend or modify any of the specified deadlines, or any other deadline 
set by the panel, either on its own initiative or upon motion of a 
party. Finally, Proposed Rules 12207(c) and 13207(c) provide that the 
Director may extend or modify any deadline set by the Customer Code or 
Industry Code, respectively, for good cause, or by the panel in 
extraordinary circumstances.
    The Commission believes that Proposed Rules 12207 and 13207 should 
give parties more control over various aspects of the arbitration 
process, subject to their mutual agreement. The proposed rules also 
would give arbitrators and the Director more authority to manage the 
arbitration process. We note that under Proposed Rules 12207(c) and 
13207(c), respectively, the Director must satisfy a good cause standard 
to extend a deadline established by the Customer Code or Industry Code, 
or find that extraordinary circumstances exist to extend a deadline 
established by the panel. By introducing more flexibility into the 
arbitration process and providing parties, arbitrators, and the 
Director with more authority to control the process, the proposed rules 
should promote the efficacy and efficiency of the arbitration process 
and forum.

E. Proposed Rules 12210 and 13210--Ex Parte Communications

    The current Code does not explicitly address ex parte 
communications. Proposed Rules 12210 and 13210 in the Customer Code and 
Industry Code, respectively, are intended to provide additional 
guidance to arbitrators and parties and to further ensure the integrity 
of the NASD arbitration process. Proposed Rules 12210 and 13210 would 
expressly prohibit ex parte communications between parties and 
arbitrators, except in accordance with Proposed Rules 12211 and 13211, 
respectively.\200\ NASD stated that Proposed Rules 12210 and 13210 are 
based on general ex parte rules applicable in court proceedings, and 
current NASD practice, as reflected in the NASD Arbitrators' Manual, 
other NASD arbitrator training materials, and materials provided to 
parties, all of which advise against ex parte communications.
---------------------------------------------------------------------------

    \200\ Proposed Rules 12211 and 13211 (Rule 10334 in the current 
Code) allow direct communication between parties and arbitrators 
subject to certain conditions. These conditions include the 
representation of parties by counsel, an agreement to use direct 
communication by all arbitrators and parties, an agreement regarding 
the scope of the direct communication, and facsimile or e-mail 
capability by all arbitrators and parties.
---------------------------------------------------------------------------

    The Commission believes that the proposed rules should aid 
arbitrators in maintaining neutrality and avoiding the appearance of 
impropriety, thereby promoting the fairness of the arbitration process 
and forum.

F. Proposed Rules 12212 and 13212--Sanctions

    Rule 10305(b) of the current Code, governing the dismissal of 
proceedings, provides that the ``arbitrators may dismiss a claim, 
defense, or proceeding with prejudice as a sanction for willful and 
intentional material failure to comply with an order of the 
arbitrator(s) if lesser sanctions have proven ineffective.'' In 
addition, the current Discovery Guide states that ``[t]he panel has 
wide discretion to address noncompliance with discovery orders.'' For 
example, the panel may make an adverse inference against a party or 
assess adjournment fees, forum fees, costs and expenses, and/or 
attorneys' fees caused by noncompliance.''
    Proposed Rules 12212 and 13212 of the Customer Code and Industry 
Code, respectively, would codify the sanctions available to arbitrators 
that are described in the current Discovery Guide, and extend them 
beyond the discovery context to apply to non-compliance with any 
provision of the Customer Code or Industry Code, respectively, or order 
of the panel or a single arbitrator authorized to act on behalf of the 
panel. The rules also would allow a panel to dismiss a claim, defense, 
or arbitration under the same conditions as they may currently, 
although it would use the term ``prior,'' rather than ``lesser,'' 
sanctions, in order to avoid potential confusion regarding whether a 
prior sanction was ``lesser'' or ``greater.''
    The Commission notes the authority of NASD arbitrators to impose 
sanctions for violations of any provision of the Customer Code or the 
Industry Code, rather than only for violations of orders of the panel, 
as under the current Code. The Commission believes that this expanded 
authority should help to promote just and equitable principles of 
trade, and in general, to protect investors and the public interest by

[[Page 4603]]

deterring conduct that seeks to generate frivolous additional disputes 
or hinder dispute resolution, and by clarifying that arbitrators have 
the authority to ensure the fair and efficient administration of 
arbitration proceedings when parties fail to comply with the Customer 
Code or Industry Code or orders of the panel. The Commission also notes 
that under the Customer Code and Industry Code, arbitrators would 
continue to have the authority to make disciplinary referrals at the 
end of arbitrations in connection with potential violations of NASD 
rules.

G. Proposed Rules 12213 and 13213--Hearing Locations

    In relevant part, Rule 10315 of the current Code provides that the 
Director shall determine the time and place of the first meeting of the 
arbitration panel and the parties, whether that meeting is a pre-
hearing conference or a hearing, and shall notify the parties of the 
time and place at least 15 business days before the meeting. The 
arbitrators determine the time and place for all subsequent meetings, 
whether the meetings are pre-hearing conferences, hearings, or any 
other type of meetings, and give notice as the arbitrators may 
determine. Proposed Rule 12213(a)(1) of the Customer Code provides that 
the Director will select the hearing location for the arbitration, and 
that generally, this selection will be the hearing location closest to 
the customer's residence at the time of the events giving rise to the 
dispute. Proposed Rule 13213(a)(1) of the Industry Code provides that 
the Director generally will select the hearing location closest to 
where the associated person was employed at the time the dispute 
arose.\201\ Proposed Rules 12213(a)(2) and 13213(a)(2) also provide, 
however, that before arbitrator lists are sent to the parties, the 
parties may agree in writing to a hearing location other than the one 
selected by the Director, and that the Director or panel may change the 
hearing location upon a party's motion.
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    \201\ This standard would be interpreted to refer to the time of 
the events giving rise to the dispute. Telephone conversation among 
Jean Feeney, Vice President, NASD; Mignon McLemore, Assistant Chief 
Counsel, NASD Dispute Resolution; and Gena Lai, Specia Counsel, 
Division of Market Regualtion, SEC (Dec. 19, 2006).
---------------------------------------------------------------------------

    NASD stated that Proposed Rules 12213 and 13213 codify current 
practice and are intended to make the arbitration process more 
transparent. The proposed rules also would give the Director discretion 
to select another location that would be more appropriate or less 
burdensome to the parties given the specific facts of the case.
    The Commission believes that the proposed rules should provide 
useful guidance to the parties and thereby facilitate and improve the 
transparency of the arbitration process. We also note that NASD 
clarified in Amendments 5 to the Customer Code and Industry Code that 
parties may appeal the Director's selection of hearing location to the 
arbitration panel, once it is assembled.

H. Proposed Rules 12304, 12305, 13304 and 13305--Time to Answer 
Counterclaims and Cross Claims

    Rule 10314 of the current Code provides that claimants have 10 days 
to answer a counterclaim, and respondents have 45 days to answer a 
cross claim. Proposed Rules 12304 and 13304 of the Customer Code and 
Industry Code, respectively, would extend the time that a claimant has 
to answer a counterclaim from 10 to 20 days from receipt of the 
counterclaim. In addition, Proposed Rules 12305 and 13305 of the 
Customer Code and Industry Code, respectively, would shorten the time 
that a respondent has to answer a cross claim from 45 days to 20 days 
from the date that the respondent's answer to the statement of claim is 
due, or from the receipt of the cross claim.
    NASD stated that standardizing these time frames would give parties 
who have already filed or served a pleading the same amount of time to 
respond to subsequent pleadings, and would reduce unnecessary delay in 
the proceeding.
    The Commission believes that standardizing the time frames within 
which parties may answer counterclaims and cross claims is consistent 
with the purpose of maintaining a transparent, efficient, and fair 
arbitration forum.

I. Proposed Rules 12307 and 13307--Deficient Claims

    Under current NASD practice, if a claimant files a deficient, or 
incomplete, claim, NASD will notify the claimant, and the claimant has 
30 days to correct the deficiency. If the deficiency is not corrected 
within that time, the claim is dismissed without prejudice. NASD stated 
that this practice is consistent with SICA's published Arbitration 
Procedures. The current Code, however, does not expressly address what 
constitutes a deficiency, or explain the process for identifying and 
correcting deficiencies.
    Proposed Rules 12307 and 13307 of the Customer Code and Industry 
Code, respectively, would codify NASD's deficiency practice and provide 
that the Director will not serve a deficient, or incomplete, claim. 
They also would enumerate the most common types of deficiencies. The 
proposed rules also would make clear that the same standards apply to 
deficient counterclaims, cross claims, and third-party claims served 
directly by parties, and would prohibit arbitrators from considering 
such claims unless the deficiencies were corrected within the time 
allowed.
    The Commission believes that, by including deficiency standards and 
procedures in the Customer Code and Industry Code and clarifying the 
information required in an initial statement of claim, the proposed 
rules should help to reduce delay in NASD arbitrations by reducing the 
number of deficient claims. They thus should improve the efficacy and 
efficiency of the arbitration process and of the forum generally. We 
note that NASD stated it would consider comments raised regarding 
Proposed Rule 12307 when considering whether future amendments are 
made.

J. Proposed Rules 12309 and 13309--Amending Pleadings to Add Parties

    Under Rule 10328 of the current Code, parties may amend their 
pleadings at any time prior to the appointment of the arbitration panel 
but must obtain approval of the arbitrators before amending a pleading 
after panel appointment. If a party is added to an arbitration 
proceeding before the Director has consolidated the other parties' 
arbitrator rankings, the newly-added party may participate in the 
arbitrator selection process. However, if a party amends a pleading to 
add a new party to the proceeding between the time that the Director 
consolidates the arbitrator rankings and the time the panel is 
appointed, the newly-added party is not able to participate in the 
arbitrator selection process, or to object to being added to the 
arbitration.
    Proposed Rules 12309 and 13309 of the Customer Code and Industry 
Code, respectively, would provide that no party may amend a pleading to 
add a party between the time that ranked arbitrator lists are due to 
the Director and the time the panel is appointed. Proposed Rules 
12309(c) and 13309(c) would provide that the party to be added after 
panel appointment must be given an opportunity to be heard before the 
panel decides the motion to amend. This is intended to ensure that a 
party added to an arbitration by amendment either will be able to 
participate in the arbitrator selection process, or will have the 
opportunity to object to being added to the proceeding.
    The Commission believes that the proposed rules should promote the

[[Page 4604]]

efficacy and efficiency of the arbitration process and of the forum 
generally. We also note that the proposed rules explain the rights of a 
party added to an NASD arbitration proceeding with respect to 
arbitrator selection.

K. Proposed Rules 12310 and 13310--Time to Answer Amended Pleadings

    Rule 10328 of the current Code provides that parties have 10 
business days to answer an amended pleading. Other rules in the current 
Code refer to calendar days. In the interest of uniformity, Proposed 
Rules 12100(j) and 13100(j) of the Customer Code and Industry Code, 
respectively, define the term ``day'' to mean calendar day. To reflect 
these definitions, Proposed Rules 12310 and 13310 would give parties 20 
calendar days, rather than 10 business days, to respond to amended 
pleadings. NASD stated that, although this represents a slight 
extension of time, it is consistent with the time to respond to 
counterclaims and cross claims under Proposed Rules 12304 and 12305 
under the Customer Code and Proposed Rules 13304 and 13305 under the 
Industry Code. NASD further stated that standardizing time frames is 
part of NASD's plain English initiative, and 20 calendar days is an 
appropriate time period for responding to amended pleadings.
    The Commission believes that standardizing the time frames for 
answering amended pleadings is consistent with the purpose of 
maintaining a transparent, efficient, and fair arbitration forum.

L. Proposed Rules 12400 and 13400--Neutral List Selection System and 
Arbitrator Rosters

    Under the current Code, NASD maintains a roster of public and non-
public arbitrators. Whether a panel consists of public or non-public 
arbitrators, and in what combination, depends on the amount in dispute, 
and, in industry cases, the nature of the dispute. Once the panel is 
appointed, the parties jointly select the chairperson from the panel, 
or, if the parties do not agree, the Director appoints the highest-
ranked arbitrator on the panel to serve as chairperson.\202\ Although 
NASD provides voluntary chairperson training to its arbitrators, 
arbitrators who serve as chairpersons are not currently required to 
have chairperson training, to have any particular experience, or to 
meet any other specific criteria beyond the requirements for serving as 
an arbitrator. NASD stated that, over the years, one of the most 
frequent suggestions for improving the quality and efficiency of NASD 
arbitrations is to ensure that chairpersons, who play a vital role in 
the administration of cases, have some degree of arbitrator experience 
and training.
---------------------------------------------------------------------------

    \202\ NASD estimates that parties agree on a chairperson only 
about 20% of the time. See supra note 3, Notice of Filing of 
Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto to 
Amend NASD Arbitration Rules for Customer Disputes, Securities 
Exchange Act Rel. No. 51856, at n. 6, and Notice of Filing of 
Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto to 
Amend NASD Arbitration Rules for Industry Disputes, Securities 
Exchange Act Rel. No. 51857, at n. 8.
---------------------------------------------------------------------------

    Both the Customer Code and Industry Code would require NASD to 
create and maintain a third roster of arbitrators who are qualified to 
serve as chairpersons. Proposed Rule 12400 would provide that, to be 
chair-qualified, an arbitrator would need to be a public arbitrator and 
complete the NASD training program or have ``substantially equivalent 
training or experience,'' and be either: (1) An attorney who has sat 
through two SRO arbitration cases through the award stage; or (2) a 
non-attorney who has sat through at least three such cases. Chairperson 
eligibility requirements under Proposed Rule 13400 of the Industry Code 
are the same as under the Proposed Rule 12400, except that chairpersons 
in industry cases could be public or non-public, depending on the 
nature of the claim.
    The Commission believes that these specified criteria balance the 
need to have qualified and experienced chairpersons administer NASD 
arbitration cases with the goal of allowing arbitrators of all 
professional backgrounds to qualify as chairpersons. The proposed rules 
should help to ensure that chairpersons, who play a vital role in the 
administration of cases, have some degree of arbitrator experience and 
training, which in turn should improve the administration of cases in 
NASD's forum.

M. Proposed Rules 12401 and 13401--Number of Arbitrators

    Rule 10308(b) of the current Code provides that if the amount of a 
claim is $25,000 or less, the arbitration panel consists of one 
arbitrator, unless that arbitrator requests a three-arbitrator panel. 
If the claim is more than $25,000 but not more than $50,000, the panel 
consists of one arbitrator, unless either that arbitrator, or any party 
in its initial pleading, requests a three-arbitrator panel. A claim of 
more than $50,000 is heard by a three-arbitrator panel.
    Proposed Rules 12401 and 13401 of the Customer Code and Industry 
Code, respectively, would eliminate the ability of a single arbitrator 
to request a three-arbitrator panel for any claim of $50,000 or less. 
Parties, however, could still request a three-arbitrator panel in cases 
involving more than $25,000, but not more than $50,000. NASD stated 
that the proposed change is intended to streamline the administration 
of smaller claims and minimize the cost of pursuing small claims.
    The Commission believes that allowing only the parties to decide 
whether additional arbitrators are needed in these smaller claims 
should give the parties more control over the costs of this aspect of 
arbitration. This, in turn, should improve the efficacy of the 
arbitration process.

N. Proposed Rules 12403 and 13403--Generating and Sending Lists to the 
Parties

    Rule 10308 of the current Code provides that if the panel will 
consist of one arbitrator, NASD will send the parties one list of 
public arbitrators, unless the parties agree otherwise. If the panel 
will consist of three arbitrators, NASD will send the parties two 
lists, one with the names of public arbitrators and one with the names 
of non-public arbitrators. The lists of public and non-public 
arbitrators are provided in a ratio of approximately two to one, 
respectively, to the extent possible, based on the roster of available 
arbitrators. The parties have an unlimited number of strikes. In 
addition, parties may request that the lists include arbitrators with 
particular, designated expertise.
    Proposed Rules 12403 and 13403 of the Customer Code and Industry 
Code, respectively, would expand the number of arbitrators named on 
each list, but limit the number of strikes that each party may 
exercise. In addition, the proposed rules would eliminate the ability 
of parties to unilaterally request arbitrators with particular 
expertise, which NASD stated is an ongoing source of controversy, and 
burdensome for NASD staff to administer.
    The Commission believes that expanding the lists, but limiting the 
number of strikes each party may exercise, should expedite panel 
appointment and reduce the likelihood that the Director will have to 
appoint an arbitrator who was not on the original lists sent to 
parties. The Commission notes that in Amendments 5 to the Customer Code 
and Industry Code, NASD proposed additional changes to the list 
selection procedures to further reduce the likelihood that extended 
lists would be needed. NASD also explained changes in the list 
selection software that would check for certain arbitrator conflicts 
before lists are sent to

[[Page 4605]]

parties.\203\ Taken as a whole, these changes should improve the 
efficacy and efficiency of the arbitration process and of the forum 
generally.
---------------------------------------------------------------------------

    \203\ For example, MATRICS would exclude from the lists sent to 
the parties arbitrators who are family members, employees, clients, 
or shareholders of a party, or have an account with, have initiated 
legal action against, or performed legal services for a party.
---------------------------------------------------------------------------

O. Proposed Rules 12406 and 13406--Appointment of Arbitrators

    While the current Code is silent on when arbitrators are appointed, 
it can be the subject of questions. NASD stated that Proposed Rules 
12406(d) and 13406(d) under the Customer Code and Industry Code, 
respectively, would clarify that the appointment of arbitrators occurs 
when the Director sends notice to the parties of the names of the 
arbitrators on the panel. In addition, consistent with the purpose of 
reorganizing the current Code, the arbitrator oath requirement that is 
in Rule 10327 of the current Code would be included in Proposed Rules 
12406 and 13406.
    The Commission believes that these proposed rules should improve 
the clarity of the arbitration rules and promote the efficacy and 
efficiency of the arbitration process and forum generally.

P. Proposed Rules 12409 and 13409--Arbitrator Recusal

    The current Code does not address arbitrator recusal. To provide 
guidance to parties, Proposed Rules 12409 and 13409 of the Customer 
Code and Industry Code, respectively, would provide that any party may 
ask an arbitrator to recuse himself or herself from the panel for good 
cause. The proposed rule would also clarify procedures for seeking an 
arbitrator's recusal.
    The Commission believes that, in clarifying the procedures for 
seeking an arbitrator's recusal, the proposed rules promote the 
efficacy and efficiency of the arbitration process and forum.

Q. Proposed Rules 12411 and 13411--Replacement of Arbitrators

    Under the current Code, the provisions regarding the replacement of 
arbitrators are contained in several different sections, and contain 
numerous cross-references to other rules. Proposed Rules 12411 and 
13411 of the Customer Code and Industry Code, respectively, consolidate 
the various current rules, but contain no substantive changes, with two 
exceptions. Under Rule 10313 of the current Code, if an arbitrator is 
disqualified or becomes otherwise unable or unwilling to serve after 
the first pre-hearing conference or the first hearing begins, whichever 
is earlier, but before the award is issued, the parties may elect to 
proceed with the remaining arbitrators by notifying the Director within 
five business days of their being notified of the vacancy. Under 
Proposed Rules 12411 and 13411 of the Customer Code and Industry Code, 
respectively, the parties may agree to proceed with only the remaining 
arbitrators regardless of when the vacancy occurs.\204\
---------------------------------------------------------------------------

    \204\ In addition, parties may stipulate to the removal of an 
arbitrator, including a replacement arbitrator, at any time. 
Telephone conversation among Jean Feeney, Vice President, NASD; 
Mignon McLemore, Assistant Chief Counsel, NASD Dispute Resolution; 
and Gena Lai, Special Counsel, Division of Market Regulation, SEC 
(Dec. 19, 2006).
---------------------------------------------------------------------------

    The Commission believes that, by allowing for more flexibility in 
the arbitration process and giving parties more control in arbitrator 
selection, the proposed rules should improve the efficacy and 
efficiency of the arbitration process and of the forum generally. We 
also note that NASD has explained that parties would be informed of the 
vacancy and their options simultaneously.

R. Proposed Rules 12414 and 13414--Determinations of Arbitration Panel

    Rule 10325 of the current Code provides that all rulings and 
determinations of the panel must be made by a majority of the 
arbitrators. Proposed Rules 12414 and 13414 of the Customer Code and 
Industry Code, respectively, provide that all rulings and 
determinations of the panel must be made by a majority of the 
arbitrators, unless the parties agree, or unless the Customer Code or 
Industry Code, respectively, or applicable law, provides otherwise. The 
proposed rules reflect that under the Customer Code or Industry Code, 
and applicable law, some decisions of the panel may be made by a single 
member of a three-arbitrator panel.\205\ Also, applicable law may 
permit a single arbitrator to issue a subpoena. The Commission notes, 
however, that an award must contain the signature of a majority of the 
panel, notwithstanding the agreement of the parties.\206\
---------------------------------------------------------------------------

    \205\ For example, Proposed Rules 12503 and 13503 provide that 
some motions may be decided by a single arbitrator.
    \206\ See Section 0, Proposed Rule 12904 (Awards).
---------------------------------------------------------------------------

    The Commission believes that, by allowing for more flexibility in 
the arbitration process and by clarifying that arbitrators must make 
determinations in accordance with applicable law, the proposed rules 
promotes the efficacy and efficiency of the arbitration process and of 
the forum generally.

S. Proposed Rules 12500 and 13500--Initial Prehearing Conferences

    Since the adoption of the current Discovery Guide in 1999, IPHCs 
have become standard practice in NASD arbitrations. The IPHC gives the 
panel and the parties an opportunity to organize the management of the 
case, set a discovery cut-off date, identify and establish a schedule 
for potential motions, schedule hearing dates, determine whether 
mediation is desirable, and resolve many other preliminary issues. NASD 
stated that users of the forum have found the IPHC to be a valuable 
tool in managing the administration of arbitrations. Proposed Rules 
12500 and 13500 of the Customer Code and Industry Code, respectively, 
would codify the portion of the current Discovery Guide relating to 
IPHCs.
    The Commission believes that codifying the provisions in the 
current Discovery Guide concerning IPHCs should streamline the 
administration of arbitrations and clarify the purposes and procedures 
of IPHCs. Thus, the proposed rules should promote the efficacy and 
efficiency of arbitration proceedings and of the forum generally.

T. Proposed Rules 12502 and 13502--Recording Prehearing Conferences

    The current Code is silent with respect to whether and under what 
circumstances a prehearing conference will be tape-recorded. Proposed 
Rules 12502 and 13502 of the Customer Code and Industry Code, 
respectively, would provide that prehearing conferences are generally 
not tape-recorded as a matter of course, but that a panel may decide to 
tape-record a prehearing conference on its own initiative, or at the 
request of a party.
    The Commission believes that the proposed rules would inform 
parties that the option to tape-record a prehearing conference is 
available and provide useful guidance to parties and arbitrators 
regarding when and under what circumstances prehearing conferences may 
be tape-recorded. Thus, the proposed rules should promote the efficacy 
and efficiency of arbitration proceedings and of the forum generally.

U. Proposed Rules 12503 and 13503--Motions

    Although motions are increasingly common in arbitration, the 
current Code does not refer to motions or provide any guidance with 
respect to motions practice. As a result, NASD stated that motions 
practice lacks uniformity, and

[[Page 4606]]

that both parties and arbitrators are often unsure how motions should 
be made, responded to, or decided. Proposed Rules 12503 and 13503 of 
the Customer Code and Industry Code, respectively, would establish 
procedures and deadlines for making, responding to, and deciding 
motions.
    The Commission believes that the proposed rules would provide 
standardized guidance to parties concerning a frequent practice in 
arbitration, while balancing the goal of maintaining the informal 
nature of arbitration. This is consistent with the purpose of providing 
an accessible, user-friendly set of rules to users and administrators 
of the arbitration forum and of improving the efficacy and efficiency 
of the arbitration forum. Infrequent users of the arbitration forum in 
particular should benefit from being informed that motions practice may 
be a part of arbitration, and what procedures may be involved.
    In light of concerns expressed by commenters, the Commission 
expects NASD to monitor the effects of these rules on the efficacy and 
efficiency of the arbitration forum, including any increases in 
hearings scheduled as a result of motions, the length of time in which 
cases are resolved, or costs to the customer, in an ongoing effort to 
determine whether future amendments may be warranted.

V. Proposed Rules 12505-12511 and 13505-13511--Discovery

    The current Discovery Guide establishes guidelines for discovery, 
rather than mandatory procedures. As a result, NASD stated that a 
frequent comment made by users of the NASD forum, particularly with 
respect to customer cases, is that discovery procedures are routinely 
ignored, resulting in significant delay and the frequent need for 
arbitrator intervention in the discovery process.
    Proposed Rules 12505-12511 of the Customer Code would codify the 
discovery procedures outlined in the current Discovery Guide, with some 
changes designed to minimize the number of discovery disputes in NASD 
arbitrations. The Customer Code would not contain the Document 
Production Lists, which would remain in the Discovery Guide, but would 
make clear that either producing or objecting to documents on 
applicable lists, as well as other documents requested by parties, is 
mandatory. Proposed Rules 13505-13511 of the Industry Code would 
contain similar changes, providing specific guidance about how to make 
and respond to discovery requests, and clarifying that compliance with 
the discovery provisions of the Industry Code is mandatory.
    The proposed rules would also extend the time that parties have to 
respond from 30 to 60 days. In addition, Proposed Rules 12512 and 13512 
would codify the sanctions provisions of the Discovery Guide, and 
clarify the authority of arbitrators to sanction parties for non-
compliance with discovery rules or orders of the panel.
    The Commission believes that codifying the discovery procedures 
outlined in the Discovery Guide and the authority of arbitrators to 
impose sanctions for violating those procedures should encourage 
parties to comply with their discovery obligations, thereby minimizing 
discovery disputes and allowing cases to proceed as expeditiously as 
possible. Thus, the proposed rules should improve the efficacy and 
efficiency of the arbitration process and of the forum generally.

W. Proposed Rules 12512 and 13512--Subpoenas

    Rule 10322 of the current Code provides that arbitrators and any 
counsel of record to a proceeding shall have the power of the subpoena 
process as provided by law, and that all parties must be given a copy 
of a subpoena upon its issuance. The rule also provides that parties 
shall produce documents and make witnesses available to each other to 
the fullest extent possible without resort to the subpoena process.
    Proposed Rules 12512 and 13512 of the Customer Code and Industry 
Code, respectively, are substantially similar to Rule 10322, but also 
would require a party issuing a subpoena to send copies to all other 
parties at the same time and in the same manner as the party that was 
issued the subpoena.
    The Commission believes that the proposed rules should help ensure 
that all parties receive notice of a subpoena in a timely manner. Thus, 
they should improve the efficacy and efficiency of the arbitration 
process and of the forum generally. We note that NASD acknowledged 
commenters' concerns and noted that a separate rule filing, recently 
approved by the Commission, addresses additional changes to the 
subpoena process.\207\

X. Proposed Rules 12514 and 13514--Exchange of Documents and Witness 
Lists

    Rule 10321 of the current Code provides that, at least 20 calendar 
days before the first scheduled hearing date, all parties must serve on 
each other copies of the documents in their possession and identify the 
witnesses that they intend to present at the hearing. The arbitrators 
may exclude from the arbitration any documents not exchanged or 
witnesses not identified as part of this exchange. Parties need not 
exchange copies of documents or identify witnesses that may be used for 
cross-examination or rebuttal, however.
    Proposed Rules 12514 and 13514 would provide that parties would 
only need to exchange the documents or identify the witnesses that they 
intend to present at the hearing that were not already exchanged or 
identified, e.g., through the discovery process. The proposed rules 
would create a presumption that parties could not present any documents 
not exchanged or call any witnesses not identified within the time 
provided by the rules, unless the panel determines that good cause 
exists. The proposed rules specifically provide that good cause 
includes the need to use documents or call witnesses for rebuttal or 
impeachment purposes based on developments at the hearing.
    The Commission believes that the proposed rules, by minimizing the 
volume of documents and amount of information that parties must 
exchange before a hearing, should improve the efficiency of the 
arbitration process. We particularly note that in Amendments 5 to the 
Customer Code and Industry Code, NASD clarified the meaning of 
``rebuttal or impeachment purposes.''

Y. Proposed Rules 12601 and 13601--Postponements

    Rule 10319 of the current Code provides that the arbitrator(s) may, 
in their discretion, adjourn any hearing either upon their own 
initiative or upon the request of any party to the arbitration. 
Proposed Rules 12601 and 13601 of the Customer Code and Industry Code, 
respectively, would provide that a panel may not grant requests to 
postpone a hearing that are made within 10 days of a scheduled hearing 
session unless the panel determines that good cause exists. NASD stated 
that these provisions are intended to reduce the number of last-minute 
requests for postponements, a practice that many users of the forum 
believe results in unnecessary delay and unfairness to parties. The 
proposed

[[Page 4607]]

rules also would codify applicable postponement fees. Under the 
Proposed Rule 12601(b), however, the postponement fee would no longer 
double for a subsequent postponement request by the same party, as 
under the current Code. According to NASD, this change is intended to 
avoid the confusion that may result when one party requesting a 
postponement has made a previous request, but another party requesting 
the same postponement has not. Instead, parties would pay the same 
amount per postponement request.
---------------------------------------------------------------------------

    \207\ See Order Approving Proposed Rule Change and Amendment 
Nos. 1, 2, and 3 Thereto and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 4 to Revise Rule 10322 of the 
NASD Code of Arbitration Procedure Pertaining to Subpoenas and the 
Power to Direct Appearances, supra note 152.
---------------------------------------------------------------------------

    The Commission believes that the proposed rules strike a balance 
between providing parties with the flexibility to postpone hearings, 
while discouraging parties from abusing this flexibility by requiring 
good cause for last-minute postponements. The proposed rules also 
reasonably address potential confusion in the way postponement fees are 
imposed and respond to the unnecessary delay and potential unfairness 
that last-minute postponements may cause.

Z. Proposed Rules 12702 and 13702--Withdrawal of Claims

    The current Code does not contain any guidance with respect to 
withdrawing claims. According to NASD, this occasionally causes 
confusion, particularly with respect to the consequences of withdrawing 
a claim at a particular stage in an arbitration. To provide guidance to 
parties, Proposed Rules 12702 and 13702 of the Customer Code and 
Industry Code, respectively, would provide that before a claim has been 
answered by a party, a claimant may withdraw the claim against that 
party with or without prejudice. However, after a claim has been 
answered by a party, a claimant may only withdraw its claim against 
that party with prejudice, unless the panel decides, or the claimant 
and that party agree, otherwise.
    In the Customer Code Notice and Industry Code Notice, the 
Commission solicited comment on whether Proposed Rules 12702 and 13702 
of the Customer Code and Industry Code, respectively, appropriately 
address the concern of allowing claimants to withdraw claims without 
prejudice, while protecting respondents from expending significant 
resources to respond to a claim that is later withdrawn or having to 
respond to the same claim multiple times. Several commenters stated 
that Proposed Rule 12702(b) has no corollary in any court's civil 
procedure rules.\208\ These commenters suggested that Proposed Rule 
12702 should give arbitrators the authority to decide whether a claim, 
if withdrawn after an answer is filed, should be withdrawn with or 
without prejudice.
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    \208\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos, 
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield, 
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    The Commission notes that Proposed Rules 12702(b) and 13702(b) 
would provide arbitrators with the authority suggested by the 
commenters and also allow a claim to be withdrawn without prejudice 
after an answer is filed if the parties mutually agree. The Commission 
believes that the rationale for the proposed rules would deter the 
withdrawal and refiling of claims in order to select a new panel, and 
are a reasonable accommodation of the competing interests in the forum.

AA. Proposed Rules 12800 and 13800--Simplified Arbitration

    Rule 10302 of the current Code includes the provisions that apply 
to simplified arbitrations. Some of these provisions repeat procedures 
that also apply to regular cases, while others, such as deadlines for 
pleadings, are particular to simplified cases. Proposed Rules 12800 and 
13800 of the Customer Code and Industry Code, respectively, would be 
streamlined, by including only those provisions that are unique to 
simplified cases. The proposed rules also would harmonize the deadlines 
for pleadings in simplified cases with those in regular cases. NASD 
stated that frequent users of the forum report that the deadlines in 
simplified cases are routinely extended under the current rule. To 
provide better guidance to parties, NASD stated that the Customer and 
Industry Codes should reflect that, in practice, the time to answer in 
simplified cases is typically the same as it is in regular cases. 
Therefore, as in regular cases, requests for extensions would now be 
governed by Proposed Rules 12207 or 13207 (Extension of Deadlines), as 
appropriate, which would provide that deadlines set by the Customer 
Code or Industry Code, as appropriate, may be extended by the Director 
for good cause. In simplified cases, the Director would consider the 
expedited nature of simplified cases in determining whether good cause 
existed.
    In addition, Proposed Rules 12800 and 13800 would address the 
selection and use of a single arbitrator and when a three-arbitrator 
panel would be required, and would eliminate the ability of the single 
arbitrator to require a hearing, but still allow the customer to 
request a hearing. Furthermore, the arbitrator would no longer have the 
option of dismissing without prejudice a counterclaim or other 
responsive pleading that increased the amount in dispute above the 
simplified case threshold. If a pleading increased the amount in 
dispute above the threshold, the case would be administered under the 
regular provisions of the Code.
    The Commission believes that these changes should make the 
simplified arbitration process easier for parties to understand, and 
should streamline and simplify the administration of small claims in 
the NASD forum. The proposed rules thus should promote the efficacy and 
efficiency of the arbitration process and of the forum generally, for 
simplified cases.

BB. Proposed Rules 12900-12903 and 13900-13903--Fees

    NASD stated that a frequent criticism of the current Code is that 
the fee schedules are difficult to understand, particularly with 
respect to what claimants must pay at the time of filing. To address 
this issue, and to make the fee schedules easier to read, the fee 
schedules in Proposed Rules 12900-12903 and Proposed Rules 13900-13903 
of the Customer Code and Industry Code, respectively, vary from those 
of the current Code in two significant ways.
    First, the filing fee and the hearing session deposit--two separate 
fees due at filing--have been combined into one single fee that is paid 
when a claim is filed. With two exceptions, described below, the 
amounts paid by claimants would not change. Although what is now the 
refundable hearing session deposit would no longer be paid separately, 
an amount equal to the current hearing session deposit or a portion 
thereof may be refunded if NASD receives notice that the case has been 
settled more than 10 calendar days prior to the hearing on the merits. 
The consolidation of the filing fee and the hearing session deposit is 
intended to make it easier for claimants to understand how much they 
have to pay when they file a claim and what, if any, portion of that 
fee may be refunded.
    Second, the filing fee schedule has been simplified. Currently, 
there are 14 separate fee brackets in the filing fee schedule for 
claimants. The proposed changes would result in little change to the 
total amount of fees paid by claimants when filing a claim. In 
particular, a claimant's overall filing fees would decrease by $50 for 
claims of $30,000 to $50,000, and would increase by $100 for claims of 
$1 million to $3 million. The member filing

[[Page 4608]]

fee schedule includes corresponding changes.
    The Commission believes that the proposed changes will simplify the 
fee schedule, eliminate three repetitive high-end brackets, and align 
the brackets in the filing fee schedule with the brackets in the member 
filing fee and surcharge schedules. Taken as a whole, the proposed 
rules should make the fee schedules easier to understand and therefore 
make the arbitration process more transparent. The Commission finds 
that these proposed changes are consistent with Section 15A(b)(5) \209\ 
of the Act, which requires that a national securities association have 
rules that provide for the equitable allocation of reasonable dues, 
fees, and other charges among its members and other persons using its 
facilities. In addition, the Commission finds that these proposed 
changes are consistent with Section 15A(b)(6),\210\ which provide, 
among other things, that the rules of a national securities association 
may not be designed to permit unfair discrimination between customers, 
issuers, brokers or dealers, to fix minimum profits, or to impose any 
schedule or fix rates of commissions, allowances, discounts, or other 
fees to be charged by its members.
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    \209\ 15 U.S.C. 78o-3(b)(5).
    \210\ 15 U.S.C. 78o-3(b)(6).
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VI. Amendments 5, 6, and 7 to the Customer Code and Amendments 5, 6, 
and 7 to the Industry Code

    The Commission finds that the proposed changes in Amendments 5, 6, 
and 7 to the Customer Code and Amendments 5, 6, and 7 to the Industry 
Code are consistent with the Act and, in particular, are designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. The Commission finds that the 
proposed changes are designed to accomplish these ends by providing a 
user-friendly, reorganized set of rules that make the arbitration 
process more transparent and by clarifying certain aspects and 
procedures of arbitration in the NASD forum.\211\
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    \211\ In approving these amendments, the Commission has 
considered the amendments' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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A. Amendment 5 to the Customer Code and Amendment 5 to the Industry 
Code

    The Commission finds good cause for approving Amendment 5 to the 
Customer Code and Amendment 5 to the Industry Code prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register. The Commission believes that NASD's responses and 
proposed changes in Amendment 5 to the Customer Code and Amendment 5 to 
the Industry Code, as summarized in Sections 0 and 0, above, reasonably 
address concerns expressed in comments submitted in connection with the 
Customer Code and Industry Code. The changes proposed in Amendment 5 to 
the Customer Code and Amendment 5 to the Industry Code provide 
clarification and do not significantly alter the Customer Code and 
Industry Code, as amended by Amendments 1, 2, 3, and 4 of each 
respective code, which were subject to a full notice and comment 
period.
    In connection with the Customer Code, commenters suggested various 
substantive changes relative to current practices or policies 
established under the current Code. NASD stated that many of these 
comments were beyond the scope of the rule filing, the principal 
purposes of which were stated in the Customer Code Notice as: (1) 
Revising the current Code into plain English; (2) reorganizing the 
current Code into more logical, user-friendly sections, including 
creating separate codes for customer and industry arbitrations and for 
mediations; and (3) implementing specific substantive rule changes, 
including codifying several common practices to provide more guidance 
to parties and arbitrators, and streamlining the administration of 
arbitrations in the NASD forum.\212\ The Commission finds NASD's 
determination that these comments are beyond the scope of the rule 
filing to be reasonable because they suggest substantive changes from 
the current Code that were not intended to be addressed by this rule 
filing. Thus, the Commission finds NASD's determination not to amend 
the proposed rule changes in connection with these comments at this 
time also to be reasonable. We note that NASD has committed to consider 
some of these comments in determining whether future amendments are 
warranted, as indicated in Section 0.
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    \212\ See comments relating to Proposed Rule 12100(n)--
Definition of Public Arbitrator/Proposed Rule 12100(r)--Definition 
of Non-Public Arbitrator (Section 0); Proposed Rule 12200--
Arbitration Under an Arbitration Agreement or the Rules of NASD 
(Section 0); Proposed Rule 12101--Elective Arbitration (Section 0); 
Proposed Rule 12206--Time Limits (Section 0); Proposed Rule 12300--
Filing and Serving Documents/Proposed Rule 12302--Filing an Initial 
Statement of Claim (Section 0); Proposed Rule 12307--Deficient 
Claims/Proposed Rule 12308--Loss of Defenses Due to Untimely or 
Incomplete Answer (Section 0); Proposed Rule 12312--Multiple 
Claimants/Proposed Rule 12313 Multiple Respondents (Section 0); 
Proposed Rule 12401--Number of Arbitrators (Section 0); Proposed 
Rule 12406--Appointment of Arbitrators; Discretion to Appoint 
Arbitrators Not on List (Section 0); Proposed Rule 12408--
Disclosures Required of Arbitrators (Section 0); Proposed Rule 
12410--Removal of Arbitrator by Director (Section 0); Proposed Rule 
12506--Document Production Lists (Sections 0, 0); Proposed Rule 
12514--Exchange of Documents and Witness Lists Before Hearing 
(Section 0); Proposed Rule 12801--Default Proceedings (Section 0); 
Proposed Rule 12900--Fees Due When a Claim is Filed (Section 0).
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    For all the foregoing reasons and the overall importance of the 
proposed rules, the Commission finds good cause for granting 
accelerated approval to Amendments 5 to the Customer Code and Industry 
Code, and finds that these amendments are consistent with Section 
19(b)(2) of the Act.

B. Amendment 6 to the Customer Code and Amendment 6 to the Industry 
Code

    The Commission finds good cause for approving Amendment 6 to the 
Customer Code and Amendment 6 to the Industry Code prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register. In these amendments, NASD responded to concerns 
raised by commenters in connection with Amendment 5 to the Customer 
Code, which has not previously been published by the Commission for 
public comment but nonetheless was the subject of 125 comments after it 
was made public by NASD. These commenters' concerns centered on 
Proposed Rule 12504, summarized in Section 0, above. In Amendment 6 to 
the Customer Code and Amendment 6 to the Industry Code, respectively, 
NASD withdrew Proposed Rule 12504 and all references thereto from the 
Customer Code, and withdrew Proposed Rule 13504 and all references 
thereto from the Industry Code.\213\
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    \213\ Proposed Rule 12504 has been re-filed as a separate 
proposed rule change and published for public comment. See supra 
note 23.
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    The Commission finds that NASD's withdrawal of Proposed Rules 12504 
and 13504 from the proposed rule changes is a reasonable response to 
commenters' concerns that will allow the present proposed rule changes 
to proceed while providing NASD with time to consider concerns relating 
to dispositive motions separately. For all the foregoing reasons and 
the overall importance of the proposed rules, the Commission finds good 
cause for granting accelerated approval to Amendment 6 to the Customer 
Code and Amendment 6 to the Industry Code, and finds that they are 
consistent with Section 19(b)(2) of the Act.

C. Amendment 7 to the Customer Code and Amendment 7 to the Industry 
Code

    The Commission finds good cause for approving Amendment 7 to the

[[Page 4609]]

Customer Code and Amendment 7 to the Industry Code prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register. In these amendments, NASD makes further 
clarifications to the proposed rule changes and responds to certain 
comments, as described in Sections 0 and 0, above. The Commission 
believes that NASD's responses and proposed changes in these amendments 
reasonably address commenters' concerns. The Commission believes the 
changes proposed in Amendment 7 to the Customer Code and Amendment 7 to 
the Industry Code provide clarification and do not significantly alter 
the Customer Code and Industry Code, as amended by Amendments 1, 2, 3, 
and 4 of each code, which were subject to a full notice and comment 
period. For all the foregoing reasons and the overall importance of the 
proposed rules, the Commission finds good cause for granting 
accelerated approval to Amendment 7 to the Customer Code and Amendment 
7 to the Industry Code, and finds that they are consistent with Section 
19(b)(2) of the Act.

VII. Text of Amendments 5, 6, and 7 to the Customer Code

    For the text of Amendment 5, 6, and 7 to the Customer Code, as well 
as amendments to the narrative portion and the exhibits of the Customer 
Code filing, please see NASD's Web site at the following URL: http://www.nasd.com/
[fxsp0]RulesRegulation/RuleFilings/[fxsp0]2003RuleFilings/

NASDW--009306?=802.

VIII. Text of Amendments 5, 6, and 7 to the Industry Code

    For the text of Amendments 5, 6, and 7 to the Industry Code, as 
well as amendments to the narrative portion and exhibits of the 
Industry Code filing, please see NASD's Web site at the following URL: 
http://www.nasd.com/RulesRegulation/[fxsp0]RuleFilings/2004RuleFilings/

[fxsp0]NASDW--009295.

IX. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendments 5, 6, 
and 7 to the Customer Code and Amendments 5, 6, and 7 to the Industry 
Code are 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 rule-comments@sec.gov. Please include 

File Number SR-NASD-2003-158 or SR-NASD-2004-011, as appropriate, on 
the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2003-158 or SR-
NASD-2004-011, as appropriate. The 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 changes that are filed with the Commission, and all 
written communications relating to the proposed rule changes 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 Section, 100 F Street, NE., Washington, DC 20549. Copies of 
such filing will also be available for inspection and copying at the 
principal office of NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to SR-NASD-2003-
158 or SR-NASD-2004-011, as appropriate, and should be submitted on or 
before February 21, 2007.

X. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\214\ that the proposed rule changes (SR-NASD-2003-158 and SR-NASD-
2004-011), as amended, be, and hereby are, approved.
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    \214\ 15 U.S.C. 78s(b)(2).
    \215\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\215\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-1382 Filed 1-30-07; 8:45 am]

BILLING CODE 8011-01-P