Document ID: SEC-2005-0286-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2005-11-29T05:00Z

[Federal Register: November 29, 2005 (Volume 70, Number 228)]
[Notices]               
[Page 71583-71586]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no05-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52822; File No. SR-NYSE-2005-02]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendments Nos. 1, 2 and 3 
Thereto and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 4 to the Proposed Rule Change Relating to Exchange Rule 
607

November 22, 2005.

I. Introduction

    On January 4, 2005, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change amending Exchange Rule 607 concerning the 
procedures for the appointment of arbitrators to arbitration cases 
administered by the NYSE. On May 12, 2005, the NYSE filed Amendment No. 
1 to the proposed rule change (``Amendment No. 1'').\3\ On May 13, 
2005, the NYSE filed Amendment No. 2 to the proposed rule change 
(``Amendment No. 2).\4\ On June 16, 2005, the NYSE filed Amendment No. 
3 to the proposed rule change (Amendment No. 3).\5\ The proposed rule 
change was published for comment in the Federal Register on June 23, 
2005.\6\ The Commission received four comments on the proposal, as 
amended.\7\ On November 10, 2005, the

[[Page 71584]]

Exchange filed Amendment No. 4 to the proposed rule change (``Amendment 
No. 4''),\8\ and on November 14, 2005, the Exchange filed a response to 
the comment letters.\9\ This order approves the proposed rule change, 
as amended by Amendments Nos. 1, 2 and 3, grants accelerated approval 
to Amendment No. 4 to the proposed rule change, and solicits comments 
from interested persons on Amendment No. 4.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was filed and withdrawn by the NYSE on May 
12, 2005.
    \4\ See Amendment No. 2. Amendment No. 2 supplemented the 
initial filing.
    \5\ See Amendment No. 3. Amendment No. 3 supplemented the 
initial filing and modified certain statements in Amendment No. 2.
    \6\ See Exchange Act Release No. 51863 (June 16, 2005), 70 FR 
36451 (June 23, 2005) (the ``Notice'').
    \7\ See Letters from Robert S. Clemente, Of Counsel, Liddle and 
Robinson, to Jonathan G. Katz, dated February 3, 2005 and July 7, 
2005 (``Clemente Letters''); Letter from Rosemary J. Shockman, 
President, Public Investors Arbitration Bar Association, to Jonathan 
G. Katz, dated July 14, 2005 (``Shockman Letter''); and Letter from 
Richard P. Ryder, President, Securities Arbitration Commentator, 
Inc. to Jonathan G. Katz, dated July 15, 2005 (``Ryder Letter''). 
Mr. Clemente filed two letters in response to the filing, the first 
of which was received after filing of the proposed rule change but 
before publication in the Federal Register. Mr. Clemente submitted a 
second letter, similar to the first, after the proposed rule change 
was noticed in the Federal Register, and attached the first letter 
to the second.
    \8\ In Amendment No. 4, which supplemented the original filing, 
the Exchange amended the proposed rule text to respond to one of the 
commenters' concerns.
    \9\ See letter from Mary Yeager, Assistant Secretary, NYSE, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation, Commission, dated Nov. 14, 2005.
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II. Description of the Proposed Rule Change

A. Description of the Proposal

    The NYSE currently has several methods by which arbitrators are 
assigned to cases, including the traditional method pursuant to NYSE 
Rule 607 where NYSE staff appoints arbitrators to cases.
a. The Pilot Program
    On August 1, 2000, the NYSE implemented a two-year pilot program to 
allow parties, on a voluntary basis, to select arbitrators under three 
alternative methods (in addition to the traditional method).\10\ Upon 
expiration of the two-year pilot, the NYSE renewed the pilot for an 
additional two years, ending on July 31, 2004.\11\ The pilot was 
subsequently extended again until January 31, 2005,\12\ then July 31, 
2005,\13\ and ultimately was extended until November 30, 2005.\14\
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    \10\ The pilot program was implemented originally for a two-year 
period. Exchange Act Release No. 43214 (August 28, 2000), 65 FR 
53247 (September 1, 2000) (SR-NYSE-2000-34).
    \11\ See Exchange Act Release No. 46372 (August 16, 2002), 67 FR 
54521 (August 22, 2002) (SR-NYSE-2002-30).
    \12\ See Exchange Act Release No. 49915 (June 25, 2004), 69 FR 
39993 (July 1, 2004).
    \13\ See Exchange Act Release No. 51085 (Jan. 27, 2005), 70 FR 
5716 (Feb. 3, 2005), corrected at 70 FR 7143 (Feb. 10, 2005).
    \14\ See Exchange Act Release No. 52155 (Jul. 28, 2005), 70 FR 
44712 (Aug. 3, 2005) (SR-NYSE-2005-52).
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    The first alternative under the pilot program is the Random List 
Selection method, by which the parties are provided randomly-generated 
(as described below) lists of public- and securities-classified 
arbitrators. The parties have ten days to strike and rank the names on 
the lists. Based on mutual ranking of the lists, the highest-ranking 
arbitrators are invited to serve on the case. If a panel cannot be 
chosen from the first list, a second list is generated, with three 
potential arbitrators for each vacancy, and one peremptory challenge 
available to each party for each vacancy. Under the pilot program, if 
vacancies remain after the second list has been processed, arbitrators 
are then randomly assigned to serve, subject only to challenges for 
cause.
    The second alternative method under the pilot program is the 
Enhanced List Selection method, in which six public- and three 
securities-classified arbitrators are selected by NYSE staff, based on 
their qualifications and expertise. The lists are then sent to the 
parties. The parties have three strikes to use and are required to rank 
the arbitrators not stricken. Based on mutual ranking of the lists, the 
highest-ranking arbitrators are invited to serve on the case.
    Lastly, the pilot program permits parties, pursuant to mutual 
agreement, to choose arbitrators through any alternative method.
    Under the pilot program, the parties must all agree to use either 
the Random List Selection method, the Enhanced List Selection method or 
an ``alternative method.'' Absent such agreement, under the pilot 
program, the traditional method is used.
b. The Proposed Rule Change
    The proposed amendments to Rule 607 retain the traditional method 
of staff appointment of arbitrators as an option in the event a full 
panel cannot be appointed under Random List Selection or in the event 
that the customer or non-member does not elect to use the Random List 
Selection method. In addition, the proposed rule change modifies and 
makes permanent the Random List Selection method by specifying the 
number of arbitrators on each list (ten public arbitrators and five 
industry arbitrators) and limiting the number of strikes (four against 
the public arbitrators and two against the industry arbitrators). The 
proposed rule change also eliminates the second list of arbitrators. 
According to the NYSE, this will simplify and shorten the appointment 
process. The proposed rule change also specifies that for simplified 
arbitrations, the randomly generated list will contain the names of 
five arbitrators, against which each party will have two strikes. 
Further, the proposed rule change gives the customer or non-member the 
choice of using Random List Selection as the method to appoint 
arbitrators. If a claim includes a customer or a non-member, the 
election of the customer or non-member controls, and all parties' 
agreement to use list selection would no longer be required. Finally, 
because parties rarely requested Enhanced List Selection, the proposed 
rule change eliminates Enhanced List Selection as a method for 
selecting arbitrators, but permits parties to choose alternate methods 
of arbitrator selection pursuant to mutual agreement.
    The proposed rule change provides that a party can request an 
arbitrator's last three NYSE arbitration decisions, if any (the pilot 
program had provided that these decisions would be sent automatically). 
The proposed rule change also provides that any request for additional 
information must be made within the ten business days in which the 
parties must return the lists, and that this time period is applicable 
to all requests for additional information under NYSE Rule 607 as well 
as NYSE Rule 608, which governs notice of selection of arbitrators and 
requires, among other things, the Director of Arbitration to provide 
the parties with the names and employment histories of the arbitrators 
for the past ten years, and permits a party to request additional 
information concerning an arbitrator's background. Lastly, the proposed 
rule change provides that the NYSE will send lists of arbitrators to 
parties approximately thirty days after the last answer is filed with 
the Exchange.\15\
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    \15\ See Amendment No. 4.
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c. Comparison to SICA Rules
    The proposed amendments resemble the Uniform Code of Arbitration 
(``UCA'') developed by the Securities Industry Conference on 
Arbitration (``SICA'').\16\ Aside from word choice and punctuation, the 
principal differences between the NYSE's proposed rules and the SICA-
developed UCA are:
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    \16\ The NASD also has a rule that provides for the appointment 
of arbitrators by list selection. See NASD Rule 10308.
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     The NYSE retains the traditional method of staff 
appointment.
     The NYSE specifies the number of arbitrators on the lists.
     The NYSE limits the number of peremptory challenges.
     The NYSE eliminates a second list containing three names 
for each vacancy under the Random List Selection method.
     The NYSE does not send the two lists of public and 
industry arbitrators under the Random List Selection method unless and 
until the customer or non-member requests in writing the use of the 
Random List Selection method within 45 days from the date of filing of 
the statement of claim.
     The NYSE sets a ten business day period for the parties to 
return the lists to the director of arbitration.
     The NYSE sets a ten business day period for the parties to 
request

[[Page 71585]]

additional information about a potential arbitrator.
     The NYSE permits the parties to agree to extend the time 
period in which to return the lists.

B. Comment Summary and NYSE's Response

a. Comments Received
    The proposal was published for comment in the Federal Register on 
June 23, 2005.\17\
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    \17\ See note 6, supra.
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    We received four comments on the proposal.\18\ One commenter 
believed that the NYSE should withdraw or amend the proposal and that, 
in light of other amendments to Rule 607, the NYSE's proposed merger 
with Archipelago, and the NYSE's shift from a private to a public 
company, the NYSE should not submit any other amendments to its 
arbitration rules.\19\ One of the commenters stated that NYSE's 
arbitration system had many advantages over NASD's, including lower 
expenses and greater NYSE staff involvement, but was concerned that 
NYSE was not presently a reasonable alternative to NASD's arbitration 
system.\20\ This commenter believed that in order to improve the NYSE's 
system, the NYSE needed to (i) ``[e]mbrace list selection;'' (ii) 
``[p]rovide Arbitrator Award histories;'' (iii) ``[a]ppoint the Panel 
earlier in the case;'' \21\ and (iv) ``[g]ive equal encouragement to 
claims outside NYC.'' In this commenter's view, these changes would 
make the NYSE a more competitive arbitration forum.\22\
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    \18\ See note 7, supra.
    \19\ Clemente Letters.
    \20\ See Ryder Letter.
    \21\ The commenter favorably cited the NASD's system of 
involving arbitrators at the pleading stage in his comments. See 
Ryder Letter.
    \22\ Ryder Letter.
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    Two commenters, although they approved of certain aspects of the 
filing, such as the elimination of mutuality for list selection, 
generally criticized the proposed rule change.\23\ They expressed 
concern that the NYSE was not committed to creating a viable 
arbitration forum or an alternative to the NASD's arbitration 
system,\24\ that the Exchange limited the number of strikes against 
potential arbitrators on the list, and that the proposed rule change, 
including its diversion from SICA rules, was not adequately 
described.\25\ One commenter approved of the filing, but believed that 
the definition of a ``public arbitrator'' in the rule should be 
carefully examined to ensure that public arbitrators do not have ties 
to the securities industry.\26\ Another commenter also stated that the 
Exchange should address the classification of public arbitrators.\27\ 
One commenter was concerned about the procedures for informing parties 
of the disclosures that arbitrators were required to make on the 
grounds that these disclosures would not be made before the parties 
would have to exercise strikes. In this commenter's view, the parties 
might not learn potentially critical information about the arbitrators 
until after the arbitrators are appointed (at which time strikes are 
limited to ``for cause'').\28\
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    \23\ Ryder Letter, Clemente Letters.
    \24\ Ryder Letter.
    \25\ Clemente Letters.
    \26\ Shockman Letter.
    \27\ Clemente Letters.
    \28\ Clemente Letters.
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    In response to the Commission's specific request for comment on 
whether the Exchange should automatically send parties a potential 
arbitrator's prior three arbitration decisions, as provided in the 
pilot program, whether it should only send such decisions upon a 
party's request, and whether the Exchange should inform parties that 
prior arbitration decisions are available on its Web site, two 
commenters believed that the NYSE should list arbitrator awards on its 
Web site.\29\ One commenter believed that the administrative burden of 
sending the last three decisions was too high but believed that the 
NYSE should develop reports from its docket records that are similar to 
the NASD's reports.\30\ The other commenter believed that the Exchange 
should send the last three arbitration awards to the parties 
automatically.\31\
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    \29\ Clemente Letters, Ryder Letter.
    \30\ Ryder Letter.
    \31\ Clemente Letters.
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b. NYSE's Response to Comments
    The NYSE responded to the commenters' concerns by filing an 
amendment to the proposed rule text to require the Exchange to send out 
the lists of arbitrators to all parties approximately 30 days after the 
last answer is due.\32\ This addressed the concern that arbitrators 
should become involved in the process earlier, in order to allow the 
panel of arbitrators, rather than the NYSE staff, to administer the 
proceedings.\33\
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    \32\ See Amendment No. 4.
    \33\ See Ryder Letter.
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    The Exchange also submitted a letter response to the commenters. 
The Exchange stated that even though arbitrators still may be appointed 
pursuant to administrative appointment, it has ``embraced list 
selection'' \34\ by giving the public customer/non-member the ability 
to elect list selection without requiring the agreement of the member 
firm. The Exchange also indicated that it retained the traditional 
method of arbitrator selection as a convenience to public customers.
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    \34\ See supra note 22.
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    In addition, the NYSE observed that during the pilot program, it 
found that parties often struck all names on the first list, requiring 
distribution of a second list and delaying the process. The Exchange 
also found that the parties often exercised peremptory challenges on 
the arbitrators on the second list. The Exchange maintained that the 
limited number of strikes will result in careful review and ranking of 
potential arbitrators, leading to a streamlined list selection process. 
In response to concerns that the ``enhanced list'' method of arbitrator 
appointment was to be eliminated, the Exchange noted that the parties' 
ability under the proposed rule change to select any reasonable method 
of arbitrator appointment would allow them to use enhanced list 
selection. If the parties agree to use enhanced list selection, 
arbitrators would be appointed to a panel in the same manner as under 
the pilot program.
    In response to the question of whether the Exchange should provide 
parties with the ability to access arbitrators' awards and with hard 
copies of the arbitrators' last three awards, the Exchange noted that 
parties are advised that the arbitrators' awards are available on its 
Web site in the cover letter sent to the parties with the proposed 
names of the arbitrators. The Exchange also noted that the arbitrators' 
profiles provide information through which the parties can access all 
awards for each arbitrator on the NYSE Web site. The Exchange opined 
that it was inefficient to send out the last three awards 
automatically, and that the availability of the awards on the Web site 
would be sufficient to satisfy the parties' need for the awards. The 
Exchange also noted that it will continue to send out the last three 
awards to the extent that the parties request them, and that the 
Exchange will inform the parties of that option in the cover letter 
sent with the lists of arbitrators.
    In response to commenters' concerns with the classification of 
public arbitrators, the Exchange noted that it had filed a separate 
proposed rule change, NYSE-2005-43,\35\ addressing the question of when 
arbitrators should be classified as ``public.'' In response to

[[Page 71586]]

one commenter's concern with the timing of the disclosure of arbitrator 
conflicts, the Exchange noted that an arbitrator's duty to disclose 
conflicts pursuant to Rule 610 is a continuing duty, and additional 
information received by the Exchange pursuant to Rule 610 is 
immediately forwarded to the parties.
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    \35\ See Exchange Act Rel. No. 52314 (Aug. 22, 2005), 70 FR 
51104 (Aug. 29, 2005) (SR-NYSE-2005-43).
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III. 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 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-NYSE-2005-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NYSE-2005-02. 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 the NYSE. 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-NYSE-2005-02 and should be submitted on or before 
December 20, 2005.

IV. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with section 6(b) \36\ of the Act in general and 
section 6(b)(5) of the Act \37\ in particular, which require that the 
rules of the Exchange 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.\38\ The proposed rule change makes permanent the pilot 
program allowing for list selection of arbitrators, but does so with 
modifications that make it easier for customers to opt for list 
selection, while retaining the method of traditional arbitrator 
appointment as an alternative for parties. The proposed rule change 
institutes a system of selecting arbitrators that is comparable to the 
SICA's UCA and that of the NASD. Although commenters expressed concerns 
with various of the modifications between the pilot program and the 
amendments to NYSE Rule 607 put forth in the proposed rule change, 
including the elimination of the second list and the limitations on 
preemptive strikes, the Exchange described the way these provisions had 
operated during the Exchange's administration of the pilot program, and 
explained the ways in which these provisions had appeared to the 
Exchange to delay the arbitration process. In light of the Exchange's 
experience with the pilot program, the Exchange's decision to eliminate 
these provisions of the pilot program appears reasonable. The Exchange 
also explained that arbitrator's past awards are readily available to 
parties, and that the last three arbitrator award decisions will be 
sent to parties should they request it. The NYSE also amended its Rule 
607 in order to provide for a time period in which the lists of 
arbitrators should be sent to the parties that is the same as the 
NASD's requirement, creating consistency between the two systems.
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    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(5).
    \38\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    We believe that the proposed amendments to NYSE Rule 607 will 
provide the NYSE with a list selection mechanism for selecting 
arbitrators comparable to that of the NASD and SICA's UCA, and that the 
list selection process will give customers increased involvement in the 
selection of the arbitrators who will hear their claims, leading to 
increased investor confidence in the NYSE's arbitral selection system.
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.\39\ Amendment No. 4 provided a time period in 
which the NYSE would be required to provide the parties with lists of 
arbitrators. Setting a specific time for sending the lists of 
arbitrators to the parties will create consistency across the 
arbitration system in place at the NYSE. Further, the timing of the 
NYSE's sending of the lists to parties is identical to that of the 
NASD, thereby creating consistency between the two arbitration systems. 
The Commission finds that, given the benefits of having the Exchange 
set a specific time for sending out the lists of arbitrators, it is 
appropriate for the Exchange to amend the proposed rule text to reflect 
consistency in the involvement of arbitrators in the process. 
Accordingly, the Commission believes that accelerated approval of 
Amendment No. 4 is appropriate.
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    \39\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act 
\40\ that the proposed rule change (SR-NYSE-2005-02) be, and hereby is, 
approved.
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    \40\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6653 Filed 11-28-05; 8:45 am]

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