Document ID: SEC-2007-0042-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-01-11T05:00Z

[Federal Register: January 11, 2007 (Volume 72, Number 7)]
[Notices]               
[Page 1353-1356]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11ja07-71]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55038; File No. SR-NASD-2005-079]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; 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

January 3, 2007.

I. Introduction

    On June 17, 2005, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to revise Rule 10322 of the 
NASD Code of Arbitration Procedure (the ``Code''), which pertains to 
subpoenas and the power to direct appearances. On July 13, 2005, the 
Commission published for comment the proposed rule change in the 
Federal Register.\3\ The Commission received twelve comments on the 
proposal.\4\ On March 29, 2006, May 12, 2006, and July 7, 2006, NASD 
submitted Amendment Nos. 1, 2, and 3, respectively, to the proposed 
rule change. The Commission published the proposed rule change, as 
amended, for comment in the Federal Register on July 18, 2006.\5\ The 
Commission received twenty-six comment letters on the proposal, as 
amended.\6\ On November 30, 2006, NASD submitted Amendment No. 4 to the 
proposed rule change.\7\ This notice and order solicits comments from 
interested persons on Amendment No. 4 and approves the proposal, as 
amended, on an accelerated basis. The text of the proposed rule change 
is available at http://www.nasd.com, at the principal offices of NASD, and at 

the Commission's Public Reference Room.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51981 (July 6, 
2005), 70 FR 40411 (July 13, 2005).
    \4\ Comment letters were submitted by Richard Skora, dated July 
12, 2005; Seth E. Lipner, Deutsch & Lipner, dated July 13, 2005; 
Steve Buchwalter, Law Offices of Steve A. Buchwalter, P.C., dated 
July 13, 2005; Steven B. Caruso, Maddox Hargett & Caruso, P.C., 
dated July 19, 2005; Dennis M. Pape, dated July 20, 2005; Al Van 
Kampen, Rohde & Van Kampen PLLC, dated July 25, 2005; Phil Cutler, 
Cutler Nylander & Hayton, dated August 1, 2005; Avery B. Goodman, 
A.B. Goodman Law Firm, Ltd., dated August 1, 2005 and August 2, 
2005; Jill Gross, Director, Barbara Black, Director, and Richard 
Downey, Student Intern, Pace Investor Rights Project, dated August 
2, 2005; Tim Canning, dated August 3, 2005; and Rosemary J. 
Shockman, President, Public Investors Arbitration Bar Association, 
dated August 4, 2005.
    \5\ See Securities Exchange Act Release No. 54134 (July 12, 
2006), 71 FR 40762 (July 18, 2006).
    \6\ Comment letters were submitted by Gary M. Berne, Stoll Stoll 
Berne Lokting & Shlachter P.C., dated April 13, 2006 (``Berne''); 
Robert S. Banks, Jr., President, Public Investors Arbitration Bar 
Association, dated April 28, 2006 (``PIABA 1''); Bryan Lantagne, 
Chair, Broker-Dealer Arbitration Project Group, North American 
Securities Administrators Association, Inc., dated May 1, 2006 
(``NASAA''); Martin L. Feinberg, dated May 5, 2006 (``Feinberg 1''); 
Seth E. Lipner, Deutsch Lipner, dated July 17, 2006 (``Lipner 1''); 
Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari, dated July 19, 2006 
(``Aidikoff''); Martin L. Feinberg, dated July 19, 2006 (``Feinberg 
2''); Thomas C. Wagner, VanDeusen & Wagner LLC, dated July 19, 2006 
(``Wagner 1''); Steven B. Caruso, Maddox Hargett Caruso, P.C., dated 
July 21, 2006 (``Caruso''); Joseph C. Korsak, dated July 21, 2006 
(``Korsak''); Herbert E. Pounds, Jr., dated July 21, 2006 
(``Pounds''); John Miller, dated July 21, 2006 (``Miller''); Richard 
M. Layne, Layne Lewis LLP, dated July 21, 2006 (``Layne''); Sarah G. 
Anderson, dated July 21, 2006 (``Anderson''); Jay Salamon, dated 
July 21, 2006 (``Salamon''); Steph D. M [sic], dated July 21, 2006 
(``Steph M''); Thomas C. Wagner, VanDeusen Wagner LLC, dated July 
21, 2006 (``Wagner 2''); W. Scott Greco, Greco & Greco, P.C., dated 
July 21, 2006 (``Greco''); Carl J. Carlson, Carlson & Dennett, P.S., 
dated July 24, 2006 (``Carlson''); Laurence S. Schultz, Driggers, 
Schultz & Herbst, P.C., dated July 28, 2006 (``Schultz''); Ryan P. 
Smith, Vice President, Wachovia Securities, dated August 7, 2006 
(``Wachovia''); Robert S. Banks, Jr., President, Public Investors 
Arbitration Bar Association, dated August 14, 2006 (``PIABA 2''); 
Jim Parker, Johnson, Rial & Parker, P.C., dated September 7, 2006 
(``Parker''); Alan S. Brodherson, Law Offices of Alan S. Brodherson, 
dated November 20, 2006 (``Brodherson''); Seth E. Lipner, Deutsch 
Lipner, dated December 6, 2006 (``Lipner 2''); and Steven B. Caruso, 
President, Public Investors Arbitration Bar Association, dated 
December 7, 2006 (``PIABA 3'').
    \7\ The PIABA 3 and Lipner 2 letters were received by the 
Commission after the submission of Amendment No. 4 by NASD. Both 
commenters noted NASD's submission of Amendment No. 4 and 
recommended expedited approval of the proposal, with one commenter 
stating ``the proposed revisions will both protect public investors 
and represent a significant step toward reducing the discovery 
abuses that permeate the arbitration process.'' (PIABA 3).

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[[Page 1354]]

II. Description of the Proposed Rule Change

    In the initial rule filing, NASD proposed to revise Rule 10322 of 
the Code to provide for a 10-day notice requirement before a party 
issues a subpoena to a non-party for pre-hearing discovery.\8\ In 
addition, NASD proposed clarifying the requirements regarding the 
service of subpoenas by specifying that a party that issues a subpoena 
must serve a copy of the subpoena to all parties and the entity 
receiving the subpoena on the same day.
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    \8\ See infra note 3.
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    In Amendment No. 1, NASD proposed to allow only arbitrators to 
issue subpoenas for both parties and non-parties, whether for discovery 
or for appearance at a hearing. In Amendment No. 2, NASD clarified the 
process for issuing a subpoena to both parties and non-parties. In 
Amendment No. 3, NASD clarified that, in most cases, a public 
arbitrator will rule on all motions requesting a subpoena.\9\
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    \9\ See infra note 5.
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    In Amendment No. 4, NASD responded to comments on Amendment Nos. 1, 
2, and 3 and amended the proposed rule change to authorize the 
arbitration panel to determine the amount of costs incurred as a result 
of subpoenaed documents and by whom such costs should be borne. NASD 
also amended the proposed rule change to provide that the party 
requesting the subpoena may respond to objections within 10 calendar 
days of receipt of the objections. In addition, NASD clarified that 
certain references to days are references to calendar days.

III. Summary of Comments Received and NASD Response

    In Amendment No. 4, NASD responded to comments on the amended 
proposal.

Who Should Pay for Subpoenaed Documents

    NASD noted that more than half of the comments discussed which 
party should be responsible for the costs associated with the 
production of documents obtained in response to a subpoena.\10\ 
Specifically, NASD stated that commenters: (1) Expressed the view that 
the proposal would inappropriately require a party requesting documents 
from another party to be responsible for the costs associated with the 
document production, (2) argued that the costs associated with the 
production of any documents, including subpoenaed documents, should be 
determined and assessed by the panel in its award, (3) stated that 
treating subpoenaed documents differently from other discovery-related 
documents could lead to gamesmanship, confusion, and delay in the 
discovery process, and (4) indicated that this aspect of the proposal 
would pose a considerable burden on public customers and could prevent 
them from adequately preparing their cases if they are unable to 
reimburse the other party for copies of subpoenaed documents.
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    \10\ See Anderson, Carlson, Caruso, Feinberg 1 and 2, Greco, 
Korsak, Layne, Miller, PIABA 2, Pounds, Salamon, Schultz, Steph M, 
and Wagner 2.
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    NASD agreed that the panel should have the authority to determine 
the amount of costs incurred as a result of subpoenaed documents and by 
whom such costs should be borne. Therefore, NASD proposed in Amendment 
No. 4 to delete the following sentence from proposed Rule 10322(e): 
``The party requesting the documents shall be responsible for the 
reasonable costs associated with the production of the copies.'' NASD 
noted that because Rules 10205(c) and 10332(c) of the Code already 
provide arbitrators with authority to make cost determinations, it is 
NASD's belief that this issue does not need to be further addressed by 
the proposal.

Whether Counsel Should be Able to Issue Subpoenas

    NASD noted that four commenters objected to the proposal to limit 
the power to issue subpoenas to arbitrators.\11\ Specifically, NASD 
stated commenters: (1) Noted that they had not experienced any 
significant problems with the current rule (which also allows counsel 
of record to issue subpoenas as provided by law), and stated that there 
was no reason to revise the rule, (2) expressed the view that limiting 
to arbitrators the authority to issue subpoenas would result in 
additional delays, costs, and gamesmanship in the discovery process, 
and (3) speculated that arbitrators who tire of counsel making numerous 
requests for subpoenas may capriciously deny the issuance of a subpoena 
merely to limit the amount of time spent on discovery issues.
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    \11\ See Berne, Brodherson, Parker, and Wachovia.
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    NASD disagreed with these comments, stating it believes that 
providing arbitrators with greater control over the issuance of 
subpoenas will help to protect investors, associated persons, and other 
parties from abuse in the discovery process. NASD also stated that the 
establishment of a uniform, nationwide rule will reduce potential 
confusion for parties and their counsel regarding whether they have the 
ability to issue subpoenas, minimize gamesmanship in the subpoena 
process, and make the rule easier to administer.

Which Arbitrators Should Have Authority to Decide Subpoena Requests

    NASD noted that two commenters (1) stated that only public 
arbitrators should have the authority to decide subpoena requests and 
that non-public arbitrators should not be involved in resolving 
discovery issues in those cases where one of the parties is a public 
customer, and (2) suggested that, at the very least, a non-public 
arbitrator should be able to decide a subpoena request only if all 
parties agree.\12\
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    \12\ See NASAA and PIABA 1.
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    NASD stated that the rule, as proposed, is in accordance with the 
suggestions made by these commenters and affirmed that the arbitrator 
ruling on a motion requesting a subpoena will be a public arbitrator 
unless a customer previously consented to a non-standard panel 
composition.\13\
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    \13\  See Rule 10308(b)(1).
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Necessity of Motions for Subpoenas

    NASD noted that two commenters asserted that parties should not be 
required to include a motion as part of a subpoena request, and 
indicated that this would add unnecessary complexity and delay to the 
discovery process.\14\ NASD disagreed, stating it believes that 
requiring a motion would not place a significant burden on parties and 
may provide a benefit to the panel.
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    \14\ See Berne and PIABA 1.
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Automatic Exchange of Subpoenaed Documents

    NASD noted that two commenters suggested revising the proposal to 
require or allow for the automatic exchange of documents received in 
response to all subpoenas.\15\ NASD disagreed, stating that another 
party may not want such documents or may not wish to be potentially 
responsible for the costs associated with the production of such 
documents. NASD also noted that the proposal does not limit the ability 
of the parties to agree to automatically exchange all documents 
received in response to subpoenas.
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    \15\ See Feinberg 1 and 2, and Salamon.
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Time Frame for Ruling on Subpoena Requests

    NASD noted that one commenter suggested revising the proposal to 
require the panel to rule on all subpoena motions within 10 days to 
ensure that parties are able to conduct discovery in a timely and 
orderly manner.\16\ NASD

[[Page 1355]]

disagreed, stating that the proposal would require the panel to rule 
promptly on a motion for a subpoena. NASD also indicated it does not 
believe that it is appropriate to establish a specific time frame 
within which the panel must rule on a subpoena request, particularly 
because there may be occasions when a panel will need to consider 
several complex motions at the same time.
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    \16\ See Wachovia letter.
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Clarifications to the Proposed Rule Change
    NASD noted that two commenters suggested clarifying revisions to 
proposed Rule 10322(c).\17\ One commenter stated that the rule is 
potentially ambiguous regarding the time frame during which an 
arbitrator should rule on the issuance and scope of a subpoena.\18\ In 
this commenter's view the proposal could be read to mean that an 
arbitrator is required to rule promptly and not consider any objections 
that have been raised to a subpoena. The other commenter suggested 
that, to avoid confusion, the rule should contain a time period within 
which a party must respond to any objections to its proposed 
subpoena.\19\ This commenter also suggested amending paragraphs (c) and 
(e) of proposed Rule 10322 to clarify whether the time periods in those 
paragraphs are based on calendar or business days.
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    \17\ See Caruso and Feinberg 2.
    \18\ See Feinberg 2.
    \19\ See Caruso.
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    To reduce any potential ambiguities in the rule, NASD proposed in 
Amendment No. 4 to amend the proposed rule change to provide that the 
party that requested the subpoena may respond to objections within 10 
calendar days of receipt of the objections and to clarify certain 
references to days are references to calendar days.\20\
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    \20\ NASD also noted that the pending revisions to the NASD Code 
of Arbitration Procedure for Customer Disputes and the NASD Code of 
Arbitration Procedure for Industry Disputes would clarify that the 
term ``day'' means calendar day, except as otherwise provided. See 
Securities Exchange Act Release Nos. 51856 (June 15, 2005) (SR-NASD-
2003-158), 70 FR 36442 (June 23, 2005) and 51857 (June 15, 2005) 
(SR-NASD-2004-011), 70 FR 36430 (June 23, 2005).
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Conforming the Proposal with the Federal Arbitration Act

    NASD noted that one commenter stated that the proposed rule should 
be revised to conform to the Federal Arbitration Act (FAA), which the 
commenter states requires a majority of the arbitrators to sign a 
subpoena.\21\ NASD responded that because the proposal would allow only 
arbitrators to issue subpoenas, it would provide non-parties with more 
protection than current Rule 103222. NASD also stated it believes that 
subpoenas issued by a single arbitrator are valid and noted that it has 
received few, if any, complaints regarding the validity of such 
subpoenas from participants in the NASD forum.
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    \21\ See Feinberg 1 and 2.
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    NASD also noted that commenter expressed the view that the 
proposal, under the FAA, is unwieldy with respect to the service of 
subpoenas. The commenter stated that the FAA provides that an 
arbitration subpoena ``shall be served in the same manner as subpoenas 
to appear and testify before the court.'' The commenter asserted that 
federal courts have interpreted this provision to require the personal 
service of an arbitral subpoena. Consequently, the commenter contended 
that, under the FAA, the proposal would require personal service of all 
subpoenas issued in NASD's forum.
    In response, NASD pointed out that before a party may participate 
in NASD's arbitral forum, it must submit a Uniform Submission Agreement 
in which the party agrees to abide by the Code.\22\ NASD stated that 
under the Code, service can be effectuated by a variety of methods, 
including mail, overnight mail service, hand delivery, and 
facsimile.\23\ Citing Volt Information Sciences, Inc. v. Board of 
Trustees of Leland Stanford Junior University, 489 U.S. 468 (1989), 
NASD also noted that the Supreme Court has found that the FAA does not 
prevent the enforcement of arbitration agreements that contain 
different rules than those set forth in the FAA. NASD indicated it 
believes that service under the proposal can be accomplished by any of 
the various methods provided for in the Code rather than personal 
service exclusively.
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    \22\ The Uniform Submission Agreement provides, ``The 
undersigned parties hereby submit the present matter in controversy, 
as set forth in the attached statement of claim, answers, and all 
related counterclaims and/or third-party claims which may be 
asserted, to arbitration in accordance with the Constitution, By-
Laws, Rules, Regulations, and/or Code of Arbitration Procedure of 
the sponsoring organization.''
    \23\ See NASD Rule 10314(c).
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Issues Beyond the Scope of the Proposed Rule Change

    Finally, NASD noted that two commenters raised issues that are 
beyond the scope of the proposed rule change. One commenter expressed 
views related to the composition of arbitration panels and the 
definition of public arbitrator.\24\ The other commenter suggested 
revisions to the Code regarding the time period within which a panel 
must be appointed.\25\
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    \24\ See NASAA.
    \25\ See Wachovia.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
is consistent with the Exchange 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 e-mail to rule-comments@sec.gov. Please include File 

Number SR-NASD-2005-079 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-2005-079. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will 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 File Number 
SR-NASD-2005-079 and should be submitted on or before February 1, 2007.

V. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is

[[Page 1356]]

consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to NASD, and in particular, with the 
requirements of Section 15A(b)(6) \26\ of the Exchange Act.\27\ Section 
15A(b)(6) requires, among other things, that NASD's rules 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 believes that the 
proposed rule change is designed to accomplish these ends by permitting 
only arbitrators to issues subpoenas and by making the arbitration 
subpoena process more orderly and efficient.
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    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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Accelerated Approval of Amendment No. 4

    The Commission finds good cause for approving Amendment No. 4 to 
the proposed rule change prior to the thirtieth day after the amendment 
is published for comment in the Federal Register pursuant to Section 
19(b)(2) of the Act. Amendment No. 4 amends the proposed rule change to 
authorize the arbitration panel to determine the amount of costs 
incurred as a result of subpoenaed documents and by whom such costs 
should be borne. Amendment No. 4 also provides that the party that 
requested the subpoena may respond to objections within 10 calendar 
days of receipt of the objections. In addition, Amendment No. 4 amends 
the proposed rule change to clarify that certain references to days are 
references to calendar days. The Commission anticipates that these 
changes will provide for greater clarity with respect to the subpoena 
process and will provide for a more equitable allocation of costs 
concerning subpoena documents. Accordingly, the Commission finds that 
accelerated approval of Amendment No. 4 is appropriate.

VI. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change, as amended (SR-NASD-2005-079), 
be, and hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-207 Filed 1-10-07; 8:45 am]

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