Document ID: SEC-2007-0963-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-07-17T04:00Z

[Federal Register: July 17, 2007 (Volume 72, Number 136)]
[Notices]               
[Page 39110-39112]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jy07-83]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56039; File No. SR-NASD-2007-021]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc., Notice of Filing of Proposed Rule Change To Amend the 
Definition of Public Arbitrator

July 10, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 12, 2007, 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 (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by NASD. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Dispute Resolution proposes to amend the Code of Arbitration 
Procedure for Customer Disputes (``Customer Code''), and the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code'') to 
amend the definition of public arbitrator to add an annual revenue 
limitation. The text of the proposed rule change is available at NASD, 
http://www.nasd.com, and the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD has taken numerous steps in recent years to ensure the 
integrity and neutrality of its arbitrator roster by addressing 
classification of arbitrators. For example, in August 2003, NASD 
proposed changes to Rules 10308 and 10312 of the Code of Arbitration 
Procedure (``Code'') to modify the definitions of public and non-public 
arbitrators to further prevent individuals with significant ties to the 
securities industry from serving as public arbitrators.\3\ The 2003 
proposal:
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    \3\ In July 2002, the SEC retained Professor Michael Perino to 
assess the adequacy of arbitrator disclosure requirements at NASD 
and at the New York Stock Exchange (NYSE). Professor Perino's report 
(Perino Report) concluded that undisclosed conflicts of interest 
were not a significant problem in arbitrations sponsored by self-
regulatory organizations (SROs), such as NASD and the NYSE. However, 
the Perino Report recommended several amendments to SRO arbitrator 
classification and disclosure rules that might ``provide additional 
assurance to investors that arbitrations are in fact neutral and 
fair.'' This proposal implemented the recommendations of the Perino 
Report and made several other related changes to the definitions of 
public and non-public arbitrators that were consistent with the 
Perino Report recommendations. The Perino Report is available at 
http://www.sec.gov/pdf/arbconflict.pdf.

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     Increased from three years to five years the period for 
transitioning from a non-public to public arbitrator after leaving the 
securities industry.
     Clarified that the term ``retired'' from the industry 
includes anyone who spent a substantial part of his or her career in 
the industry.
     Prohibited anyone who has been associated with the 
industry for at least 20 years from ever becoming a public arbitrator, 
regardless of how long ago the association ended.
     Excluded from the public arbitrator roster attorneys, 
accountants, or other professionals whose firms have derived 10 percent 
or more of their annual revenue in the previous two years from clients 
involved in securities-related activities.

The proposal was approved by the SEC on April 16, 2004, and became 
effective on July 19, 2004.\4\
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    \4\ See Securities Exchange Act Rel. No. 49573 (April 16, 2004), 
69 FR 21871 (April 22, 2004) (SR-NASD-2003-95) (approval order). The 
changes were announced in Notice to Members 04-49 (June 2004).
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    On July 22, 2005, NASD proposed a further amendment to Rule 10308 
of the Code relating to arbitrator classification to prevent 
individuals with certain indirect ties to the securities industry from 
serving as public arbitrators. Specifically, NASD proposed to amend the 
definition of public arbitrator to exclude individuals who work for, or 
are officers or directors of, an entity that controls, is controlled 
by, or is under common control with, a broker/dealer, or who have a 
spouse or immediate family member who works for, or is an officer or 
director of, an entity that is in such a control relationship with a 
broker/dealer. NASD also proposed to amend Rule 10308 to clarify that 
individuals registered through broker-dealers may not be public 
arbitrators, even if they are employed by a non-broker-dealer (such as 
a bank). This rule filing was approved by the SEC on October 16, 2006, 
and became effective on January 15, 2007.\5\
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    \5\ See Securities Exchange Act Rel. No. 54607 (Oct. 16, 2006), 
71 FR 62026 (Oct. 20, 2006) (SR-NASD-2005-094) (approval order). The 
changes were announced in Notice to Members 06-64 (November 2006).
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    Finally, during the time that the above changes were being made, 
NASD also had pending at the Commission a 2003 proposal to amend the 
Code to reorganize the rules into the Customer Code, the Industry Code, 
and a separate code for mediation. The final provisions of this 
proposal were approved by the Commission on January 24, 2007, and 
became effective on April 16, 2007.\6\

[[Page 39111]]

Several of the substantive changes to the Customer and Industry Codes 
will affect the classification of arbitrators\7\ and how they are 
selected for panels.\8\
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    \6\ See Securities Exchange Act Rel. No. 51856 (June 15, 2005), 
70 FR 36442 (June 23, 2005) (SR-NASD-2003-158) (notice); See 
Securities Exchange Act Rel. No. 51857 (June 15, 2005), 70 FR 36430 
(June 23, 2005) (SR-NASD-2004-011) (notice); and See Securities 
Exchange Act Rel. No. 51855 (June 15, 2005), 70 FR 36440 (June 23, 
2005) (SR-NASD-2004-013) (notice). The changes were announced in 
Notice to Members 07-07 (February 2007).
    \7\ NASD believes the new Codes have improved the arbitrator 
selection process by creating and maintaining a new roster of 
arbitrators who are qualified to serve as chairpersons. The chair 
roster will consist of more experienced arbitrators available on 
NASD's public arbitrator roster for all investor cases and for 
certain intra-industry cases. For other industry cases, the Code 
also creates a chair roster of experienced non-public arbitrators. 
See Rules 12400(b) and (c) of the Customer Code and Rules 13400(b) 
and (c) of Industry Code.
    \8\ The new Codes also change how arbitrator lists are generated 
and how arbitrators are selected for a panel. See Rules 12403 and 
12404 of the Customer Code and Rules 13403 and 13404 of the Industry 
Code.
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    Despite these many initiatives amending the arbitrator 
classification rules, some users of the forum continue to voice 
concerns about individuals serving as public arbitrators when they have 
business relationships with entities that derive income from broker-
dealers. The concern is that, for example, an arbitrator classified as 
public might work for a very large law firm that derived less than 10% 
of its annual revenue from broker-dealer clients, but still receives a 
large dollar amount of such revenue. The concern focused primarily on 
the law firm's defense of action (in arbitration or litigation) by 
customers of broker-dealers, and not on representing broker-dealers in 
underwriting or other activities. Therefore, those concerned with the 
amount of annual revenue recommended that there be an annual dollar 
limitation of $50,000 on revenue from broker-dealers relating to 
customer disputes with a brokerage firm or associated person concerning 
an investment account.
    NASD supports these recommendations and is, therefore, proposing to 
amend the definition of public arbitrator in Rule 12100(u) of the 
Customer Code and Rule 13100(u) of the Industry Code to add a provision 
that would prevent an attorney, accountant, or other professional from 
being classified as a public arbitrator, if the person's firm derived 
$50,000 or more in annual revenue in the past two years from 
professional services rendered to any persons or entities listed in 
Rule 12100(p)(1) of the Customer Code or Rule 13100(p)(1) of the 
Industry Code relating to any customer disputes concerning an 
investment account or transaction, including but not limited to, law 
firm fees, accounting firm fees, and consulting fees.\9\
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    \9\ Rule 12100(p) defines ``non-public arbitrator.'' Paragraph 
(1) of the rule states, in relevant part, that the term ``non-public 
arbitrator'' means a person who is otherwise qualified to serve as 
an arbitrator and is or, within the past five years, was: (A) 
Associated with, including registered through, a broker or a dealer 
(including a government securities broker or dealer or a municipal 
securities dealer); (B) registered under the Commodity Exchange Act; 
(C) a member of a commodities exchange or a registered futures 
association; or (D) associated with a person or firm registered 
under the Commodity Exchange Act. Rule 13100(p) is the same as Rule 
12100(p).
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    NASD believes the proposed amendment, in conjunction with the 
existing 10 percent revenue limitation,\10\ will further improve NASD's 
public arbitrator roster by ensuring that arbitrators whose firms 
receive a significant amount of compensation from any persons or 
entities associated with or engaged in the securities, commodities, or 
futures business are removed from the public roster.\11\
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    \10\ See supra note 4. Under the July 2004 amendments, a public 
arbitrator cannot be ``an attorney, accountant, or other 
professional whose firm derived 10 percent or more of its annual 
revenue in the past 2 years from any persons or entities listed in 
Rules 12100(p)(1) and 13100(p)(1) of the new Codes.''
    \11\ NASD will survey its public arbitrators to determine which 
arbitrators will be removed from the roster for appointment to new 
cases upon the effective date of the proposed rule.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which requires, among other 
things, that the Association's rules must 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. NASD believes that the proposed rule change 
will enhance investor confidence in the fairness and neutrality of 
NASD's arbitration forum, by providing further assurance to parties 
that persons who have a relationship with those who receive a 
significant amount of compensation from the securities industry are not 
able to serve as public arbitrators in NASD arbitrations.

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-2007-021 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-2007-021. 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

[[Page 39112]]

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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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-2007-021 and should be 
submitted on or before August 7, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-13747 Filed 7-16-07; 8:45 am]

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