Document ID: SEC-2005-0204-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-11-07T05:00Z

[Federal Register: November 7, 2005 (Volume 70, Number 214)]
[Notices]               
[Page 67525-67527]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07no05-114]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52705; File No. SR-NASD-2004-013

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

October 31, 2005.

I. Introduction

    On January 23, 2004, the National Association of Securities 
Dealers, Inc. (``NASD''), through its wholly-owned subsidiary, NASD 
Dispute Resolution, Inc., 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 to simplify the language of the 
mediation portion of the NASD Code of Arbitration Procedure (``Code'') 
and to reorganize those provisions into a separate code for mediations 
(``Mediation Code'').\3\

[[Page 67526]]

Amendments Nos. 1 and 2 were filed on January 3, 2005 and April 8, 
2005, respectively.\4\ Notice of filing of the proposed rule change and 
Amendments Nos. 1 and 2 were published for comment on June 23, 2005.\5\ 
The Commission received one comment letter on the proposal.\6\ NASD has 
filed Amendment No. 3 to change the numbering of the proposed Mediation 
Code and to make other non-substantive revisions, in order to 
facilitate approval of the proposed rule change \7\ prior to the 
approval of the two other rule filings relating to the revision and 
reorganization of the Code. This order approves the proposed rule 
change and Amendments Nos. 1 and 2 thereto, and issues notice of and 
grants accelerated approval to Amendment No. 3.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ As explained in more detail below, the proposed Mediation 
Code is one of three NASD rule proposals that, taken together, would 
simplify the language of and reorganize the Code. See also 
Securities Exchange Act Rel. No. 51856 (June 15, 2005); 70 FR 36442 
(June 23, 2005) (proposing to revise and create a separate code for 
NASD arbitration rules pertaining to customer disputes (``Customer 
Code'')); Securities Exchange Act Rel. No. 51857 (June 15, 2005); 70 
FR 36430 (June 23, 2005) (proposing to revise and create a separate 
code for NASD arbitration rules pertaining to industry disputes 
(``Industry Code'')).
    \4\ Amendment No. 1 deleted a provision that was inadvertently 
included in the initial rule filing. This provision pertained to a 
mediator's disqualification as an expert in any pending or future 
proceeding related to the subject matter of the mediation, and the 
unavailability of the mediator's documents in such a proceeding. 
Amendment No. 2 made certain conforming changes also proposed in the 
other rule filings relating to the revision and reorganization of 
the Code. Specifically, it added references in the definitions rule 
to NASD's By-laws and clarified the definition of ``quorum'' for 
purposes of meetings of the National Arbitration and Mediation 
Committee, consistent with the Plan of Allocation and Delegation of 
Functions by NASD to Subsidiaries.
    \5\ See Securities Exchange Act Rel. No. 51855 (June 15, 2005); 
70 FR 36440 (June 23, 2005).
    \6\ See letter to Jonathan G. Katz, Secretary, Commission, from 
Pace Investor Rights Project, by Jill I. Gross and Barbara Black, 
dated July 14, 2005 (``Pace Letter'').
    \7\ NASD has requested accelerated approval for Amendment No. 3. 
Telephone Conversation with Mignon McLemore, Assistant Chief 
Counsel, NASD Dispute Resolution, Inc. (Oct. 19, 2005).
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II. Description of the Proposed Rule Change

A. Description of the Proposed Rule Change

    This rule filing is part of a comprehensive plan to simplify and 
reorganize NASD's dispute resolution rules. NASD has proposed to 
rewrite the Code using plain English, in accordance with the 
Commission's plain English guidelines. In addition, it has proposed to 
reorganize the Code in a more logical, user-friendly way by, among 
other things, creating two separate codes for customer and industry 
arbitrations, and one for mediations. Once approved, the three new 
codes will replace the current NASD Code in its entirety.
    Although NASD is proposing to implement several substantive rule 
changes to its arbitration rules, as described in the Customer Code and 
Industry Code rule filings,\8\ NASD believes it has not proposed any 
substantive changes to the current rules governing mediations, apart 
from adding a definitions rule. The text of the proposed Mediation 
Code, including the technical changes proposed in Amendment No. 3, is 
available on the NASD Web site at http://www.nasd.com/ web/

idcplg?IdcService= SS--GET--PAGE&ssDocName= NASDW--
009003&ssSourceNodeId= 801.
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    \8\ See supra note 3.
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1. Reorganization
    NASD believes that maintaining three separate codes will make it 
easier for parties to find the rules that apply to their disputes. NASD 
will maintain electronic versions of each code on its Web site, http://www.nasd.com
, and will make paper copies available upon request.

    In keeping with the current NASD rule numbering system, each of the 
three codes 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. The Customer Code will use the Rule 12000 
series, the Industry Code will use the Rule 13000 series, and the 
Mediation Code ultimately will use the Rule 14000 series, all of which 
are currently unused. NASD intends to reserve the Rule 10000 series, 
which is currently used for NASD's dispute resolution rules, for future 
use.
2. Proposed Definitions Rule
    The Mediation Code will include a comprehensive definitions rule 
that will define terms used throughout the Mediation Code. NASD 
believes that this rule will provide useful clarification for parties 
and mediators.
3. No Substantive Changes
    NASD believes that, with the exception of adding a definitions 
rule, the Mediation Code will not include any substantive changes to 
NASD's current rules governing mediations.

B. Amendment No. 3

    Originally, NASD anticipated that the proposed Mediation Code would 
be approved at the same time as the Customer Code and Industry Code. 
Therefore, NASD proposed numbering the Mediation Code using the 14000 
series. However, in order to facilitate approving the proposed 
Mediation Code before the Customer Code and Industry Code, NASD 
proposes in Amendment No. 3 to change its numbering and to make other 
non-substantive changes, such that it is consistent with the current 
Code. NASD intends to propose to renumber the approved Mediation Code 
as the 14000 series when the Customer Code and Industry Code are 
approved and become effective.
    Specifically, the changes proposed in Amendment No. 3 are as 
follows:
     The current NASD mediation rules, current Rules 10401-
10407 of the Code, would be deleted in their entirety. They would be 
replaced by Rules 14100-14109 of the proposed Mediation Code, which 
would be renumbered as Rules 10401-10410, to remain consistent with the 
numbering in the current Code. NASD intends to propose to renumber the 
Mediation Code in the NASD Manual as the 14000 Series when the Customer 
Code and Industry Code are approved by the Commission.\9\
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    \9\ The Commission notes that approval of the proposed Mediation 
Code does not predispose the Commission to approving the proposed 
rule changes relating to the Customer Code or Industry Code.
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     Proposed Rule 10401(g) of the Mediation Code defines 
``NASD Customer Code.'' This paragraph would be reserved until the 
Customer Code is approved. NASD intends to propose to reinsert the 
definition into the Mediation Code at that time.
     Proposed Rule 10401(h) of the Mediation Code defines 
``NASD Industry Code.'' This paragraph would be reserved until the 
Industry Code is approved. NASD intends to propose to reinsert the 
definition into the Mediation Code at that time.
     In proposed Rule 10405(b), the phrase ``NASD Code of 
Arbitration Procedure'' would replace ``NASD Customer Code'' or ``NASD 
Industry Code.'' NASD intends to propose to reinsert those terms when 
the Customer Code and Industry Code are approved.
     In proposed Rule 10406(b), the term ``adjournment'' would 
replace the term ``postponement,'' consistent with the current Code. 
NASD intends to propose to change the term back to ``postponement'' 
when the Customer Code and Industry Code are approved.
     In proposed Rule 10407(c), references to ``Rule 10312(a), 
(b), and (c) of the NASD Code of Arbitration Procedure'' would replace 
references to ``NASD Customer Code Rule 12408'' or ``NASD Industry Code 
Rule 13408.'' NASD intends to propose to change the reference back to 
``NASD Customer Code Rule 12408'' or ``NASD Industry Code Rule 13408,'' 
as appropriate, when the Customer and Industry Codes are

[[Page 67527]]

approved. These cross references pertain to disclosures mediators are 
required to make in connection with interests, relationships, or 
circumstances which might influence their objectivity and impartiality.

C. Comment Summary

    The Commission received one comment letter on the proposed 
Mediation Code, in which the Pace Investor Rights Project endorsed the 
proposed rule change because it preserves the existing NASD mediation 
system, while allowing individual investors to better understand the 
mediation rules through plain English.\10\ Pace generally supports the 
mediation of securities disputes and cites Professor Jill Gross for her 
conclusion in a forthcoming article that mediation is fair to the 
individual investor because it maximizes party control over the process 
and offers procedural justice at relatively low cost, among other 
things.\11\
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    \10\ Pace Letter.
    \11\ Id.
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III. Discussion and Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association \12\ and, in particular, the requirements of 
Section 15A of the Act \13\ and the rules and regulations thereunder. 
The Commission finds that the proposed rule change, as amended, is 
consistent with Section 15A(b)(6) of the Act,\14\ which requires, among 
other things, that the rules of an 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.\15\ The Commission believes that proposed rule 
change, as amended, accomplishes these goals by improving the 
readability, accessibility, and therefore usability of procedures that 
establish an alternative, voluntary, and potentially low-cost forum for 
dispute resolution in the securities industry.
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    \12\ 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).
    \13\ 15 U.S.C. 78o-3.
    \14\ 15 U.S.C. 78o-3(b)(6).
    \15\ Id.
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    The Commission believes that there is good cause for approving 
Amendment No. 3 prior to the 30th day after publication in the Federal 
Register. The proposed rule change and Amendments Nos. 1 and 2 thereto 
previously have been published for comment and have been available on 
NASD's Web site since their filing with the Commission. Amendment No. 3 
proposes non-substantive, technical changes to the proposed rule 
change, consistent with the current Code, in order to facilitate 
approval of the proposed Mediation Code. Accelerated approval of 
Amendment No. 3 will allow parties to more quickly utilize the 
reorganized and revised Mediation Code. Based on the above, the 
Commission finds good cause, consistent with Section 15A(b)(6) and 
Section 19(b)(2) of the Act, for approving Amendment No. 3 prior to the 
30th day after the date of publication of notice of filing thereof in 
the Federal Register.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether it 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 an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2004-013 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-NASD-2004-013. 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 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 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-2004-013 and should be submitted on or 
before November 28, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. E5-6140 Filed 11-4-05; 8:45 am]

BILLING CODE 8010-01-P