Document ID: SEC-2006-1180-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations: New York Stock Exchange LLC
Posted Date: 2006-09-13T04:00Z

[Federal Register: September 13, 2006 (Volume 71, Number 177)]
[Notices]               
[Page 54102-54104]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13se06-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54407; File No. SR-NYSE-2005-43]

 
Self-Regulatory Organizations; New York Stock Exchange LLC.; 
Order Approving Proposed Rule Change and Amendment No. 1 Thereto to 
Rule 607 Relating to the Classification of Arbitrators as Public or 
Industry

September 6, 2006.

I. Introduction

    On June 17, 2005, the New York Stock Exchange, Inc. (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 to amend Rule 607 relating to the 
classification of arbitrators as public or industry. On August 4, 2005, 
the Exchange filed Amendment No. 1 to the proposed rule change.\3\ In 
this amendment, the Exchange stated that the rule change will become 
effective 90 days following the publication of this order in the 
Federal Register. The NYSE will update and reclassify arbitrators 
during this time period. The proposed rule change was published for 
comment in the Federal Register on August 29, 2005,\4\ and the 
Commission received 38 comments on the proposal.\5\ The majority of 
commenters are lawyers that represent investors in arbitrations. This 
order approves the proposed rule change as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, which supplemented the original filing, 
the Exchange modified the implementation date for the proposed rule 
change and clarified certain aspects of the filing.
    \4\ See Exchange Act Release No. 52314 (Aug. 22, 2005), 70 FR 
51104 (Aug. 29, 2005).
    \5\ Several commenters filed letters regarding the amendments to 
Exchange Rule 607 in connection with the proposed change to NASD 
Rule 10308 (NASD 2005-094), which also governs non-public/industry 
and public arbitrators. The NYSE and the Commission have identified 
letters in response to both rule filings that address the proposed 
changes to NYSE Rule 607.
    See letters from Bradford D. Kaufman, Esq., Greenberg Traurig, 
dated Oct. 7, 2005 (``Kaufman''); Jonathan W. Evans, Esq., Jonathan 
W. Evans & Associates, dated Sept. 21, 2005 (``Evans''); L. Jerome 
Stanley, dated Sept. 20, 2005 (``Stanley''); Thomas D. Mauriello, 
Law Offices of Thomas D. Mauriello, dated Sept. 20, 2005 
(``Mauriello''); William P. Torngren, Law Offices of William P. 
Torngren, dated Sept. 20, 2005 (``Torngren''); Jason R. Doss, Page 
Perry, LLC, dated Sept. 20, 2005 (``Doss''); Brian M. Greenman, 
Esq., dated Sept. 20, 2005 (``Greenman''); Teresa M. Gillis, 
Shustak, Jalil & Heller, dated Sept. 20, 2005 (``Gillis''); Susan N. 
Perkins, Esq., dated Sept. 20, 2005 (``Perkins''); Charles C. 
Mihalek, Esq. and Steven M. McCauley, Esq., Charles Mihalek, P.S.C., 
dated Sept. 20, 2005 (``Mihalek''); Steven J. Gard, Esq., Gard, 
Smiley, Bishop & Dovin LLP, dated Sept. 20, 2005 (``Gard''); Scott 
L. Silver, Blum & Silver, LLP., dated Sept. 20, 2005 (``Silver''); 
Mitchell S. Ostwald, Esq., Law Offices of Mitchell S. Ostwald, dated 
Sept. 20, 2005 (``Ostwald''); Joel A. Goodman, Esq., Goodman & 
Nekvasil, P.A., dated Sept. 20, 2005 (``Goodman''); Alan C. 
Friedberg, Pendleton, Friedberg, Wilson & Hennessey, P.C., dated 
Sept. 19, 2005 (``Friedberg''); Debra G. Speyer, Law Offices of 
Debra G. Speyer, dated Sept. 19, 2005 (``Speyer''); Harvey H. 
Eckart, Eckart & Leonetti, P.A., dated Sept. 19, 2005 (``Eckart''); 
G. Mark Brewer, Esq., Brewer Carlson, LLP, dated Sept. 19, 2005 
(``Brewer''); Steve A. Buchwalter, first letter dated Sept. 19, 2005 
and second letter dated Sept. 13, 2005 (``Buckwalter''); Royal B. 
Lea, III, Esq., Bingham & Lea, and Randall A. Pulman, Esq., Pulman, 
Bresnahan & Pullen, LLP, dated Sept. 19, 2005 (``Lea''); Richard P. 
Ryder, Securities Arbitration Commentator, Inc., dated Sept. 19, 
2005 (``Ryder''); Eliot Goldstein, Esq., dated Sept. 19, 2005 
(``Goldstein''); Philip M. Aidikoff, Aidikoff & Uhl, dated Sept. 16, 
2005 (``Aidikoff''); Bruce E. Baldinger, Esq., Baldinger & Levine, 
L.L.C., dated Sept. 16, 2005 (``Baldinger''); Henry D. Fellows, Jr., 
Fellows Johnson & La Briola, LLP, dated Sept. 16, 2005 
(``Fellows''); Rosemary J. Shockman, Public Investors Arbitration 
Bar Association, dated Sept. 15, 2005 (``PIABA''); James D. Keeney, 
dated Sept. 15, 2005 (``Keeney''); Bill Fynes, dated Sept. 15, 2005 
(``Fynes''); Jay A. Salamon, Hermann, Cahn & Schneider LLP, dated 
Sept. 14, 2005 (``Salamon''); Jorge A. Lopez, Esq., Law Offices of 
Jorge A. Lopez, P.A., dated Sept. 14, 2005 (``Lopez''); Steven B. 
Caruso, Esq., Maddox Hargett & Caruso, P.C., dated Sept. 14, 2005 
(``Caruso''); Scott C. Ilgenfritz, dated Sept. 14, 2005 
(``Ilgenfritz''); Tracey Pride Stoneman, Tracey Pride Stoneman, 
P.C., dated Sept. 14, 2005 (``Stoneman''); Michael J. Willner, 
Miller Faucher and Cafferty LLP, dated Sept. 13, 2005 (``Willner''); 
Richard M. Layne, Layne & Lewis, LLP, dated Sept. 13, 2005 
(``Layne''); Michael Knoll, Esq., Law Offices of Michael Knoll, 
dated Sept. 13, 2005 (``Knoll''); John J. Miller, Law Offices of 
John J. Miller, P.C., dated Sept. 13, 2005 (``Miller''); and Seth E. 
Lipner, Professor of Law, Zicklin School of Business Baruch College 
and Member, Deutsch & Lipner, dated Sept. 8, 2005 (``Lipner'').
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II. Description of the Proposal

    Arbitration panels for disputes involving customers or non-members 
in which the damages are alleged to exceed $25,000 are comprised of 
three arbitrators: Two public arbitrators and one from the securities 
industry. A customer or non-member also may request at least a majority 
of arbitrators from the securities industry.
    Exchange Rule 607(a)(2) currently classifies an arbitrator as from 
the securities industry if he or she: (1) Is, or within the past five 
years was, associated with certain entities related to the securities 
industry (or retired from, or spent a substantial part of his or her 
career with such an entity); (2) is an attorney or other professional 
who devoted 20 percent or more of his or her work effort to securities 
industry clients within the past two years; or (3) is registered under 
the Commodity Exchange Act, or is a member of a registered futures 
association or any commodity exchange or is associated with any such 
person.
    Exchange Rule 607(a)(3) currently classifies an arbitrator who is 
not from the securities industry as a public arbitrator. However, a 
person cannot be classified as a public arbitrator if he or she has a 
spouse or household member who is associated with certain entities 
related to the securities industry.
    The NYSE is concerned that some arbitrators currently classified as 
public have affiliations with entities that have securities industry 
ties such as banks, insurance companies, mutual funds, holding 
companies and asset management firms. In an effort to enhance investor 
confidence in the NYSE arbitration forum, and in order to further 
ensure that persons serving as public arbitrators do not have ties to 
the securities industry or related firms, the Exchange proposed to 
amend Rule 607.

[[Page 54103]]

    The proposed amendments would: (1) Expand the list of entities 
engaged in the securities business by adding certain membership 
categories not previously specifically mentioned (but, nevertheless, 
contemplated by the current rule), and by adding a catch-all for any 
``other organization engaged in the securities business;'' \6\ (2) 
preclude any individual who is associated with any entity that 
controls, is controlled by, or is under common control with an entity 
on the expanded list from being classified as a public arbitrator; and 
(3) preclude any individual from being classified as a public 
arbitrator who has an immediate family member associated with an entity 
on the expanded list. The amendment would also define which persons are 
included within the term ``immediate family member.''
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    \6\ These organizations would include any entity engaging in 
securities transactions, including banks and other financial 
institutions. Telephone conversation among Karen Kupersmith, 
Director of Arbitration, NYSE; Lourdes Gonzalez, Assistant Chief 
Counsel--Sales Practices, SEC; and Michael Hershaft, Special 
Counsel, SEC (July 26, 2006).
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    In order to ensure the integrity of the classification of public 
arbitrators, the Exchange will update and reclassify arbitrators in 
compliance with the amended rule if approved.

III. Summary of Comments

    The Commission received 38 letters on the proposal.\7\ Several 
commenters believed that the changes proposed were laudatory.\8\ Many, 
nonetheless, viewed the proposed amendments as insufficient to address 
what they considered as an arbitration process that is unfair to 
investors. Their concern generally centered in three areas: (1) The 
inclusion of any industry arbitrators on arbitration panels; (2) the 
criteria for qualifying as a public arbitrator; and (3) the desire to 
harmonize NYSE and NASD rules on this issue.\9\
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    \7\ See footnote 5.
    \8\ See, e.g., Ilgenfritz, Stoneman, Buchwalter, Willner, and 
PIABA.
    \9\ See Ryder.
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Inclusion of Industry Arbitrators

    The majority of commenters expressed the view that the mandatory 
inclusion of arbitrators from the securities industry on arbitration 
panels creates an unfair burden for investors seeking redress, and 
stated that arbitration panels should be comprised only of individuals 
with no ties to the securities industry.\10\ A number of commenters 
maintained that the mandatory inclusion of securities industry 
arbitrators creates a perception, rightly or wrongly, that the process 
is unfair and biased against investors. Their suggestion was to 
eliminate the securities industry arbitrator.\11\ One commenter opined 
that, in cases where special expertise is important, the securities 
industry arbitrator becomes a de facto expert witness, providing the 
public arbitrators with his or her opinion in secret, and depriving 
investors of due process because they and their counsel would have 
notice of or a chance to rebut the opinion.\12\
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    \10\ See, e.g., Willner, Caruso, Knoll, PIABA, Ilgenfritz, 
Buchwalter, Mauriello, Torngren, Aidikoff, Doss, Brewer, Lea, 
Speyer, Keeney, Stanley, Layne, Baldinger, Eckart, and Fellows.
    \11\ See, e.g., Torngren and Lewis.
    \12\ See Willner.
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Criteria for Public Arbitrators

    Several commenters also stated that the proposed rule change would 
not adequately preclude persons with ties to the securities industry 
from meeting the definition of public arbitrator.\13\ Currently, Rule 
607(a)(2)(iv) permits an attorney, accountant or other professional to 
serve as a public arbitrator if that person has devoted less than 20 
percent of his or her work to securities industry clients within the 
last two years.\14\
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    \13\ See, e.g., Evans, Caruso, Lipner and Lopez.
    \14\ Several commenters explicitly or implicitly cited to NASD 
Rule 10308(a)(5)(A)(iv), which prohibits an attorney, accountant or 
other professional whose firm derived 10 percent or more of its 
annual revenue in the past two years from securities activities 
instead of the NYSE limitation. See, e.g., PIABA, Stoneman, 
Buchwalter, Salamon, and Keeney.
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    Some commenters favored amending the definition of public 
arbitrator to exclude all attorneys, accountants or other professionals 
who have represented the securities industry.\15\ One commenter stated 
that arbitrators with industry ties have an ``inherent bias'' in favor 
of the industry, and noted that the rule currently allows persons with 
industry bias, such as an attorney with ties to the securities 
industry, to serve on panels ``under the guise of being public.'' \16\ 
Another commenter maintained that attorneys with industry ties who 
serve as public arbitrators would have a vested interest in keeping 
monetary awards low.\17\
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    \15\ See, e.g., Evans and Caruso.
    \16\ See Lopez.
    \17\ See Lipner.
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Harmonizing NYSE and NASD Rules

    One commenter expressed concern that the proposed rule change would 
``differ significantly'' from the Uniform Code of Arbitration (``UCA'') 
classification rule, and stated that the NYSE rule change and NASD's 
proposal to amend its rule on the same subject should have been 
``brought to the Commission with the same text after being vetted by 
[the Securities Industry Conference on Arbitration (``SICA'')].'' \18\ 
In this commenter's view, the SEC should ``at least compel'' the NYSE 
and NASD to develop ``identical solutions'' to this issue.\19\
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    \18\ See Ryder.
    \19\ Id. In particular, this highlighted the differences in who 
would be considered an ``immediate family member'' under each rule. 
While the NYSE rule would exclude immediate family members of 
associated persons, the NASD rule would exclude immediate family 
members of all control-related parties. In addition, the NYSE 
definition of immediate family member would include in-laws, while 
the NASD definition would not. Moreover, the NASD include step-
relatives, while the NYSE rule would not. Finally, while the NYSE 
definition of ``control'' would not extend to the immediate family 
of the ``control-related parties,'' the NASD's definition would.
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IV. NYSE Response to Comments

    Responding to commenters' concerns, the NYSE noted that securities 
industry arbitrators add value to the arbitration process.\20\ It also 
stated that, as the administrator of a neutral forum, it believes 
public investors, non-members and members should have input into 
procedures by which arbitrators are appointed. Moreover, NYSE is a 
member of SICA, and it will continue to consider any rule changes 
regarding panel compositions that SICA may adopt to the UCA.
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    \20\ See Letter from Mary Yeager, NYSE, to Katherine A. England, 
SEC, dated June 5, 2006 (``Yeager'').
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    The NYSE also stated that the 20 percent limitation on the 
securities activities of public arbitrators allows individuals that 
have minimal ties to the securities industry to serve as arbitrators. 
In its view a complete bar on professionals with any ties to the 
securities industry could also prohibit professionals who primarily 
represent public investors from serving on arbitration panels.
    Acknowledging commenters' concerns regarding ties public 
arbitrators have to the securities industry, the NYSE also indicated 
that it will review the definition of public arbitrator to address 
persons whose firms receive a percentage of revenue derived from 
securities industry clients. NYSE stated that it will propose a 
separate rule amendment to prohibit certain individuals from serving as 
public arbitrators if their firms receive a certain percentage of 
revenue from securities industry clients, which would be similar to the 
current restrictions in NASD Rule 10308.
    In addressing the specific differences between its proposed rule 
change and the rule change proposed by NASD, the NYSE stated that it 
defined ``immediate family'' and ``control'' to ensure that

[[Page 54104]]

people with perceived ties to the securities industry would not be 
defined as public arbitrators, while avoiding eliminating from the 
arbitrator pool individuals with minimal ties to the securities 
industry.
    Finally, the NYSE stated that alternatives to panel composition and 
the method by which arbitrators are classified are beyond the scope of 
this rule filing. It therefore declined to address these issues at this 
time.\21\ The NYSE also stated that it is prepared to discuss those 
issues at the appropriate time.\22\
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    \21\ Id.
    \22\ Id.
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V. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the Act and, in particular, with 
section 6(b)(5) of the Act, which requires, among other things, that 
the NYSE'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.\23\
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    \23\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change will promote 
the public interest by limiting certain people who have ties to the 
securities industry from serving as public arbitrators. In particular, 
by expanding the list of entities engaged in the securities business 
and companies they control, the rule will further limit the industry 
ties the public arbitrator may have. The new definition of ``immediate 
family member'' should have a similar result.\24\
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    \24\ Section 19(b)(2) of the Act requires the Commission to 
approve a proposed rule change if it finds that the proposed rule 
change is consistent with the requirements of the Act, and the 
applicable rules and regulations thereunder. This standard does not 
require the NYSE, NASD or SICA rules to be identical.
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    The Commission appreciates the comments suggesting the elimination 
of securities industry arbitrators, and the further restriction on 
persons who have any ties to the securities industry from serving as 
public arbitrators. While these comments are beyond the scope of this 
rule filing, they raise important questions regarding the arbitration 
process. We understand that SICA is actively considering proposals from 
its membership regarding these issues. We note that the NYSE has stated 
it will review any rule regarding panel composition that SICA adopts to 
the UCA, and that it will propose a separate amendment further limiting 
the definition of public arbitrator.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\25\ that the proposed rule change (SR-NYSE-2005-43), as amended, be, 
and hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-15187 Filed 9-12-06; 8:45 am]

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