existing or past service as a mediator, even if it has no connection
with the proceeding. The Commission asked whether the proposed rule
should be amended to reflect one or the other interpretation.
    Many commenters thought the proposed rule should require disclosure
of service as a mediator on any case, not just service that the
arbitrator thinks would affect his/her impartiality in a particular
proceeding.\105\ One commenter asserted an arbitrator's

ethical obligations would preclude a more constrained reading of the
rule.\106\
    In Amendment 5, NASD responded that it believes interpreting
Proposed Rule 12408(a)(4) to require disclosure of all existing or past
service as a mediator is too broad. NASD stated that some of the
arbitrators in NASD's forum have served as mediators for a significant
number of cases, and the list of cases could change frequently. NASD
believes that it would be unduly burdensome and of little value to
parties, and may result in a significant reduction in the arbitrator
roster, to require these arbitrators to disclose all of their existing
or past service as a mediator on any case. In Amendment 5, NASD stated
that it believes that arbitrators who serve as mediators should
disclose whether they have served as a mediator for any of the parties
in the case for which they have been selected. NASD also stated that it
plans to update its arbitrator disclosure forms to include a question
that will require arbitrators to provide this information.
---------------------------------------------------------------------------

    \105\ Boliver, Canning, Caruso, Estell, Evans, Greco,
Ilgenfritz, Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez,
Magary, Meissner, Miller, PACE, PIABA, Pounds, Rosenfield, Sadler,
Shewan, Stoltmann, Sutherland, and Willner.
    \106\ PACE.
---------------------------------------------------------------------------

    In Amendment 7, NASD determined to include the requirement to make
this disclosure in the proposed rule. NASD amended the proposed rule as
follows (new language in italics):
12408. Disclosures Required of Arbitrators
    (a) Before appointing arbitrators to a panel, the Director will
notify the arbitrators of the nature of the dispute and the identity of
the parties. Each potential arbitrator must make a reasonable effort to
learn of, and must disclose to the Director, any circumstances which
might preclude the arbitrator from rendering an objective and impartial
determination in the proceeding, including:
    (1) No change;
    (2) No change;
    (3) No change; and
    (4) Any existing or past service as a mediator for any of the
parties in the case for which the arbitrator has been selected.
    (b) No change.
    (c) No change.
* * * * *
    One commenter suggested that NASD's arbitrator disclosure
obligations should parallel those established by the California
Judicial Council, which require a prospective arbitrator to disclose,
among other things, all arbitrations in which he or she was a panelist,
which forums conducted the arbitrations, and whether any of the parties
or their counsel in the current proceeding were involved in any
proceeding in which the arbitrator was a panelist.\107\
---------------------------------------------------------------------------

    \107\ Canning.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that, apart from subparagraph (a)(4) of
Proposed Rule 12408, which was added to reflect approval of a proposed
rule change by the SEC on March 7, 2005,\108\ Proposed Rule 12408 does
not contain any substantive changes from Rules 10312(a), (b), (c), and
(e) of the current Code, and that therefore, this comment is outside
the scope of the rule filing.
---------------------------------------------------------------------------

    \108\ See Order Approving Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to a Proposal to
Adopt a New IM-10308 on Mediators Serving as Arbitrators, Securities
Exchange Act Rel. No. 51325 (Mar. 7, 2005), 70 FR 12522 (Mar. 14,
2005) (SR-NASD-2005-007).
---------------------------------------------------------------------------

BB. Proposed Rule 12409--Arbitrator Recusal

    Proposed Rule 12409 provides that any party may ask an arbitrator
to recuse himself or herself from the panel for good cause, and that
such requests are decided by the arbitrator who is the subject of the
recusal. One commenter asserted that parties have attempted to engage
in ``panel shopping'' by requesting the recusal of an arbitrator on the
grounds that an adverse ruling prior to the hearing on the merits
constituted good cause.\109\ This commenter suggested that NASD should
amend the rule to provide that a prior ruling adverse to the party
requesting recusal does not constitute good cause.
---------------------------------------------------------------------------

    \109\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that arbitrators are aware that some
parties may use recusal requests as a way to obtain a more favorable
panel. NASD believes that arbitrators have the discretion to determine
whether the party making the request has demonstrated good cause for
its request and does not believe it is appropriate to limit this
discretion. Therefore, NASD is not proposing to amend the rule at this
time.

CC. Proposed Rule 12410--Removal of Arbitrator by Director

    In pertinent part, Proposed Rule 12410 provides that the Director
will grant a party's request to remove an arbitrator if the arbitrator
``is biased, lacks impartiality, or has a direct or indirect interest
in the outcome of the arbitration,'' and that close questions regarding
challenges to an arbitrator by a customer will be resolved in favor of
the customer. One commenter asserted that the term ``indirect'' is
vague and should not be used in the rule.\110\ This commenter also
stated that the rule would create a ``double standard'' that lacks
justification and suggested revising the proposed rule to provide that
arbitrator challenges will be resolved in favor of the party making the
challenge.
---------------------------------------------------------------------------

    \110\ Id.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that because Proposed Rule 12410
does not change the substantive requirements of current Rules
10308(d)(1)-(3) and (f), and Rule 10312(d) of the current Code,
concerning arbitrator removal, these comments are outside the scope of
the rule filing.

DD. Proposed Rule 12411--Replacement of Arbitrators

    In pertinent part, Proposed Rule 12411 provides that, if an
arbitrator is removed or becomes otherwise unable or unwilling to
serve, the Director will appoint a replacement arbitrator, unless the
parties agree in writing to proceed with the two remaining arbitrators.
Rule 10308(d) of the current Code, on the other hand, provides that the
director ``shall provide the parties information'' concerning the
proposed replacement arbitrator, and the parties ``shall have the right
to object.'' One commenter, noting that Proposed Rule 12411 lacks the
notice requirement, expressed concern that the Director could replace
an arbitrator before the parties become aware of the vacancy.\111\
---------------------------------------------------------------------------

    \111\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD stated that Proposed Rule 12411 codifies
current practice in the forum, which NASD has determined is the most
efficient method for addressing arbitrator replacements. Currently, if
an arbitrator becomes unavailable and must be replaced, the parties
rarely agree to proceed with only the two remaining arbitrators. To
expedite the replacement process, NASD selects the replacement
arbitrator and notifies the parties of the replacement simultaneously.
NASD currently gives the parties five business days from the date of
the notice to accept the replacement or agree to proceed with the two
remaining arbitrators. This procedure would continue under Proposed
Rule 12411, except that the parties have an unlimited time to elect to
proceed with only the remaining arbitrators.\112\
---------------------------------------------------------------------------

    \112\ Parties may at any time stipulate to the removal of an
arbitrator, including a replacement arbitrator. Telephone
conversation among Jean Feeney, Vice President, NASD; Mignon
McLemore, Assistant Chief Counsel, NASD Dispute Resolution; and Gena
Lai, Special Counsel, Division of Market Regulation, SEC (Dec. 19,
2006).

---------------------------------------------------------------------------

EE. Proposed Rule 12500--Initial Prehearing Conferences; Proposed Rule
12501--Other Prehearing Conferences

    Proposed Rules 12500 and 12501 establish procedures for scheduling
initial and other prehearing conferences. Two commenters expressed
concern that, in contrast to the current Code, Proposed Rules 12500 and
12501 would not give the Director the authority to hold an initial
prehearing conference (``IPHC'') with the parties before the panel is
selected.\113\
---------------------------------------------------------------------------

    \113\ Canning and Feinberg.
---------------------------------------------------------------------------

     In Amendment 5, NASD agreed that the proposed rules would not
grant the Director the explicit authority to hold an IPHC before the
panel is selected. It also agreed that on rare occasions, parties may
need to request a prehearing conference before the panel is appointed
to resolve discovery disputes or to discuss jurisdictional issues.
Thus, NASD proposed to revise Proposed Rule 12501 to make this
authority explicit. Proposed Rule 12501 is amended as follows (new
language in italics):
12501. Other Prehearing Conferences
    (a) A prehearing conference may be scheduled upon the joint request
of the parties or at the discretion of the Director. The Director will
set the time and place of the prehearing conference and appoint a
person to preside.
    (b) No change.
    (c) No change.
* * * * *

FF. Proposed Rule 12503--Motions

    Proposed Rule 12503 establishes procedures to make and decide
motions or responses to motions.
1. Oral Motions
    One commenter contended that Proposed Rule 12503(a)(1) would allow
a party to make an oral motion on short notice and would allow the
panel to decide on motions without giving the opposing party an
adequate opportunity to respond.\114\ The commenter suggested that oral
motions should be limited to matters that could not have been
anticipated and that require immediate consideration. The commenter
also suggested that the party opposing the oral motion should be given
10 days to respond, unless there is good cause for deciding the motion
on a shorter timeframe.
---------------------------------------------------------------------------

    \114\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12503(a)(1)
requires a party to make an effort to resolve a matter with the other
parties before making a motion, and that both oral and written motions
must describe that effort. Therefore, the panel would be able to
consider these factors, and any objections, in ruling on a motion or in
deferring a decision to allow more time to respond.
2. Service Methods
    One commenter suggested that Proposed Rule 12503(a)(2) should allow
for some variation in service methods, rather than requiring all
parties to be served at the same time and in the same manner.\115\ NASD
responded that, based on current practice in the forum, NASD believes
the service requirements in Proposed Rule 12503(a)(2) are reasonable
because they would prevent a party from attempting to gain an advantage
in the proceeding by delaying service of a motion on some parties.
---------------------------------------------------------------------------

    \115\ Krosschell.
---------------------------------------------------------------------------

3. Panel Approval of Motions on Short Notice
    Two commenters opposed requiring panel approval in Proposed Rule
12503(a)(3) for motions filed within 20 days before the hearing.\116\
In their experience, motions are usually filed because of an emergency,
and requiring a panel to grant advance permission would reduce the time
for the panel to decide a motion. They suggested that parties should
not need permission to file a motion in arbitration, and that Proposed
Rule 12503(a)(4) should be amended to allow a party to submit
additional documents with a motion to amend a pleading to add a party.
---------------------------------------------------------------------------

    \116\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that, in order to prevent any
unnecessary delays to the start of a hearing, it believes the panel
should control events and procedures that occur close to that time. In
addition, NASD noted that Proposed Rule 12300 (Filing and Serving
Documents) allows for additional information to be submitted in
connection with amended pleadings.
4. Deadlines for Responses
    One commenter urged NASD to delete the provision in Proposed Rule
12503(b) requiring responses to written motions within 10 calendar days
of receipt.\117\ The commenter suggested that NASD continue with
current procedure, in which responses to motions are due after the
first IPHC. The commenter suggested that thereafter, deadlines to
respond to motions should be set by the panel at the prehearing
conference or otherwise.
---------------------------------------------------------------------------

    \117\ Krosschell.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that, if a party submits a motion
before the IPHC, NASD staff forwards it to the panel, along with any
responses that were voluntarily submitted by other parties. Based on
current practice in the forum, NASD believes Proposed Rule 12503(b)
would provide parties with adequate time to respond to written motions.
In addition, the parties and the panel have the ability to extend the
10-day timeframe under Proposed Rule 12207.
5. Motions Regarding Hearing Location
    Two commenters opposed giving the Director authority to decide
motions regarding hearing location, under Proposed Rule
12503(c)(2).\118\ In their view, the hearing location should always be
set where it would be most convenient for the customer, as indicated on
the customer's statement of claim. In Amendment 5, NASD responded that,
under the Customer Code, a party may request a convenient hearing
location, but there may be reasons that a party's request is not
granted. NASD believes the Director should have the authority to change
the hearing location before a panel is appointed.\119\
---------------------------------------------------------------------------

    \118\ Canning and Stolle.
    \119\ See also discussion concerning hearing locations in
Section 0, above.
---------------------------------------------------------------------------

6. Number of Arbitrators to Hear Motions
    One commenter, noting that Proposed Rule 12503(c)(3) would allow
the full panel to hear discovery motions only under certain
circumstances (e.g., at the request of a party or on the arbitrator's
initiative), contended that the full panel should be required to hear
and decide any discovery-related motion.\120\ In Amendment 5, NASD
responded that Proposed Rule 12503(c)(3) is based on current practice
in the forum and allows the parties or designated arbitrator to
determine which motions require consideration by the full panel.
Further, NASD believes the commenter's suggestion would increase the
costs of arbitration, since the parties would have to pay the
honorarium for two additional arbitrators.
---------------------------------------------------------------------------

    \120\ SIA.
---------------------------------------------------------------------------

    For the reasons stated above, NASD is not proposing to amend
Proposed Rule 12503 at this time.

GG. Proposed Rule 12504--Motions to Decide Claims Before a Hearing on
the Merits

    As published in the Customer Code Notice, Proposed Rule 12504
provided that, except in connection with time limits under arbitration,
motions to decide a claim before a hearing

(``dispositive motions'') ``are discouraged and may only be granted in
extraordinary circumstances.'' Most commenters criticized the proposed
rule. Some industry commenters argued that it would improperly
discourage dispositive motions and improperly impose an ``extraordinary
circumstances'' requirement.\121\ In their view, dispositive motions
could be appropriate in circumstances that are not extraordinary. One
industry commenter also contended that NASD should continue to allow
arbitrators to decide whether to grant dispositive motions on a case-
by-case basis, instead of codifying a limit on dispositive
motions.\122\ Moreover, this commenter argued that the lack of guidance
on the meaning of ``extraordinary circumstances'' would have a chilling
effect on the filing of dispositive motions and may expose respondents'
counsel to sanctions.\123\
---------------------------------------------------------------------------

    \121\ R. Davis, Schwab, and SIA.
    \122\ Schwab.
    \123\ Id.
---------------------------------------------------------------------------

    Investor representatives also criticized the proposed rule, but for
different reasons.\124\ Most of these commenters asserted that a party
has a fundamental right to a hearing in arbitration and that Proposed
Rule 12504 would eliminate this right. They also predicted that the
proposed rule would be a tool for abuse by defense counsel to delay the
arbitration process and would hinder claimants' attempts to have their
claims heard by an arbitration panel. In addition, they believed that
the proposed rule would cause claimants, who have already suffered
losses, to incur additional expense and delay in responding to these
motions. In their view, Proposed Rule 12504 would cause the use of
these motions to become more prevalent.
---------------------------------------------------------------------------

    \124\ Ball, Boliver, Brannan, Canning, Estell, Finer,
Ilgenfritz, Krosschell, Layne, Ledbetter, Lopez, Miller, Page,
Pounds, Schultz, Schultz 2, Shewan, Sonn, Speyer,
Steinberg, Stolle, Sutherland, Tepper, Williams, and Woska.
---------------------------------------------------------------------------

    Some commenters believed the proposed rule should be amended to
expressly safeguard the rights of the non-moving party, particularly an
investor who has suffered harm or loss.\125\ Another commenter also
supported the safeguards, while also stating that the rule should not
be included in the Customer Code.\126\
---------------------------------------------------------------------------

    \125\ PACE, PIABA, Lea, Josel, Evans, Komninos, Stoltmann,
Willner, Rosenfield, Lapidus, Lipner, Magary, and Eccleston. In
particular, they suggested that:
     All factual allegations made by the non-moving party
are to be taken as true for the purposes of the motion.
     The motion must be denied whenever credibility is at
issue, there are any facts in dispute, or the panel must make
factual findings against the non-moving party.
     If the non-moving party asserted that it can cure any
defect by filing an amended statement of claim, that party should be
given an opportunity to do so.
     The rule should clarify that arbitrators should not
apply a ``failure to state a claim'' standard, since claimants are
not required to plead legally cognizable claims.
    \126\ Schultz 2.
---------------------------------------------------------------------------

    Two commenters suggested that Proposed Rule 12504 should be amended
to require the costs incurred in opposing a dispositive motion to be
awarded against the firm immediately and automatically upon the denial
of a motion.\127\ In their view, the panel should not wait to include
costs in the final award, as the deterrent effect would be lost with a
delay in assessing penalties. NASD responded that Proposed Rule 12504
is not intended to change the current practice of assessing costs and
expenses of a hearing at the end of a case, in the award. Thus, NASD
stated that these comments are outside the scope of the rule filing.
---------------------------------------------------------------------------

    \127\ Canning and Lipner.
---------------------------------------------------------------------------

    Finally, another commenter suggested that a claimant should not
have to respond to a dispositive motion if it is frivolous or without
merit.\128\ This commenter also noted that the proposed rule does not
expressly state that the panel can deny leave to make such a motion,
and contended that by setting forth timeframes for briefing and
consideration, it implies that all motions will be considered. In
Amendment 5, NASD responded that it would revisit this issue when the
forum has some experience with the new motions practice rules.
---------------------------------------------------------------------------

    \128\ Ryder.
---------------------------------------------------------------------------

    Acknowledging the commenters' concerns, NASD stated that it had
considered the effects the proposed rule would have on public and
industry users of the forum. NASD noted, however, that the current Code
does not provide any guidance with respect to motions to dismiss, and
that arbitrator decisions in this area may lack uniformity. NASD stated
that, as motions to dismiss are filed more frequently, the proposed
rule is necessary to provide some uniform guidelines to arbitrators and
users of the forum concerning this practice. NASD believes that the
proposed rule would provide valuable guidance to parties and
arbitrators and make the administration of arbitrations more uniform
and transparent.
    NASD also agreed with commenters that the term ``extraordinary
circumstances'' should be explained to clarify when Proposed Rule 12504
would apply and that more guidance should be provided on the standards
to use when deciding a motion to dismiss. NASD stated that, in meeting
with various constituent groups of the arbitration forum, including
investor and industry representatives, it suggested amending the
proposed rule to provide that a panel may grant a motion to dismiss
before a hearing only if it determines that there are no material facts
in dispute or that there are no credibility determinations to be made.
NASD stated that none of the constituencies indicated that they would
support the suggested amendments, and that they were unable to reach a
consensus on any amendments to the proposed rule. As a compromise, NASD
suggested amending the narrative portion of the rule filing to explain
under what circumstances a motion to dismiss might be granted. NASD
stated that it believed the various constituencies supported this
compromise.
    Therefore, in Amendment 5, NASD proposed the following guidance:

    For purposes of this rule, if a party demonstrates affirmatively
the legal defenses of, for example, accord and satisfaction,
arbitration and award, settlement and release, or the running of an
applicable statute of repose, the panel may consider these defenses
to be extraordinary circumstances. In such cases, the panel may
dismiss the arbitration claim before a hearing on the merits if the
panel finds that there are no material facts in dispute concerning
the defense raised, and there are no determinations of credibility
to be made concerning the evidence presented.

    The Commission received 125 comment letters on Amendment 5. Most of
the commenters objected to NASD's proposed guidance. As a result, NASD
filed Amendment 6 to the proposed rule change, withdrawing Proposed
12504 and all references to the rule from the Customer Code.\129\ The
text of Amendment 6 is available on NASD's Web site: http://www.nasd.com/RulesRegulation/RuleFilings/2003RuleFilings/NASDW_009306?=802
.

---------------------------------------------------------------------------

    \129\ Proposed Rule 12504 has been re-filed as a separate
proposed rule change and published for public comment. See supra
note 23.
---------------------------------------------------------------------------

HH. Proposed Rule 12505--Cooperation of Parties in Discovery

    As published in the Customer Code Notice, Proposed Rule 12505
provides that the parties must cooperate to the fullest extent
practicable in the voluntary exchange of documents and information to
expedite the arbitration. One commenter contended that the proposed
rules should explicitly provide that the discovery procedures

are mandatory and suggested eliminating the word ``voluntary'' from
Proposed Rule 12505.\130\
    NASD agreed with this comment, stating that this change would help
to ensure that the parties understand the importance of complying with
the discovery process. The proposed rule change is amended as follows
(new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \130\ PACE.
---------------------------------------------------------------------------

12505. Cooperation of Parties in Discovery
    The parties must cooperate to the fullest extent practicable in the
[voluntary] exchange of documents and information to expedite the
arbitration.
* * * * *

II. Proposed Rule 12506--Document Production Lists

    Proposed Rule 12506 establishes procedures for producing or
objecting to document production requirements under the Discovery Guide
and the document production lists it contains (``Document Production
Lists''), as amended in the Customer Code.
1. ``Control''
    As published in the Customer Code Notice, Proposed Rule 12506(b)
provides that parties must produce to all other parties all documents
in their ``possession or control'' that are described in the applicable
Document Production Lists. Similarly, Proposed Rule 12514(a) (Exchange
of Documents and Witness Lists Before Hearing) provides that parties
must exchange certain materials in their ``possession or control'' that
they intend to use at the hearing that have not already been produced.
Several commenters argued that the term ``control'' should be deleted
from Proposed Rules 12506(b) and 12514(a), noting that the concept of
``control'' in the discovery context has been defined, through case
law, to include not only possession of the requested documents, but
also the legal right to obtain those documents.\131\ As a result, these
commenters contended that customers could incur increased costs to
comply with these proposed rules, or face sanctions if they are unable
to gain access to documents from third-parties or unable to do so in a
timely manner.
---------------------------------------------------------------------------

    \131\ Boliver, Canning, Estell, Evans, Feinberg, Ilgenfritz,
Josel, Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that the addition of the term
``control'' to Proposed Rules 12506(b) and 12514(a) is intended to
expand, not narrow, the range of documents that are to be produced in
discovery. NASD believes that under these proposed rules, it should be
easier for customers to gain access to documents held by third-parties
on behalf of respondents, because respondents would be required to
produce documents, regardless of where the documents are stored or
maintained. NASD believes that, under these proposed rules, the
customer would have more control in the discovery process. For these
reasons, NASD did not propose to amend Proposed Rules 12506(b) and
12514(a) in response to this issue. In Amendment 7, however, noting
additional comments submitted on this issue,\132\ NASD stated that it
is sensitive to customers' concerns regarding the costs they could
incur under the discovery process and amended Proposed Rule 12508 to
address this issue.\133\
---------------------------------------------------------------------------

    \132\ See supra note 21 and accompanying text.
    \133\ See Section 0, Proposed Rule 12508 (Objecting to
Discovery; Waiver of Objection), below.
---------------------------------------------------------------------------

2. Good Faith Standard
    Proposed Rules 12506(b)(1) and 12507(b)(1) provide that, in
response to a Document Production List requirement or a discovery
request, a party has the option of identifying and explaining the
reason that a particular document or piece of information cannot be
produced within the required time, and stating when the documents would
be produced (``delay provisions''). Several commenters asserted that
parties would abuse the delay provisions by setting a self-imposed
deadline with the purpose of impeding and delaying discovery.\134\ They
also noted that the proposed rules would not subject a party to
sanctions for using the delay provisions in bad faith, including
Proposed Rule 12511 (Discovery Sanctions).
---------------------------------------------------------------------------

    \134\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel,
Komninos, Lapidus, Lipner, Lea, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    NASD responded that it believes the expectation for parties to act
in good faith is implied in the discovery provisions of both the
current Code and the Customer Code. NASD agreed, however, that Proposed
Rules 12506(a) and 12507(b) of the Customer Code should be amended to
eliminate any ambiguity concerning the applicability of a ``good
faith'' standard. Therefore, NASD proposed in Amendment 5 to include an
explicit ``good faith'' standard so that frivolous delays, unreasonable
timeframes, or bad faith objections would be subject to sanctions.
Proposed Rule 12506 is amended as follows (new language in italics):
12506. Document Production Lists
    (a) No change.
    (b) Time for Responding to Document Production Lists
    (1) Unless the parties agree otherwise, within 60 days of the date
that the answer to the statement of claim is due, or, for parties added
by amendment or third-party claim, within 60 days of the date that
their answer is due, parties must either:
* * * * *
    (2) A party must act in good faith when complying with subparagraph
(1) of this rule. ``Good faith'' means that a party must use its best
efforts to produce all documents required or agreed to be produced. If
a document cannot be produced in the required time, a party must
establish a reasonable timeframe to produce the document.
    (c) No change.
* * * * *
3. Discovery Deadlines
    Proposed Rules 12506(b) and 12507(b) would extend the time to
produce documents from 30 days under the current Code to 60 days. Some
commenters viewed this as authorizing a delay of another month before
parties may initiate the process to compel discovery and suggested that
the standard timeframe for document exchange should remain 30
days.\135\ In Amendment 5, NASD responded that this extension of time
is intended to address concerns of many frequent users of the forum
that the current time frame is unrealistic and sometimes leads to
unnecessary disputes.
---------------------------------------------------------------------------

    \135\ Canning, Estell, Feinberg, Feldman, Komninos, and Stolle.
---------------------------------------------------------------------------

    Several commenters observed that because Proposed Rule 12506 would
require parties to produce documents required by the Document
Production Lists within 60 days of the date the answer to the statement
of claim is due, and Proposed Rule 12303 would provide that an answer
is due 45 days from the receipt of the statement of claim, respondents
would have 105 days to produce documents required by the Document
Production Lists.\136\ They argued that Proposed Rule 12506 should be
amended to require a party to provide substantial justification for the
failure to produce documents within 105 days, or face sanctions.
---------------------------------------------------------------------------

    \136\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that a party would face sanctions
for

failing to comply with the discovery provisions of the Customer Code
under Proposed Rule 12511, unless the panel determines that there is
substantial justification for the failure to comply. A party would have
to provide evidence of substantial justification for the panel to make
this determination. For the above reasons, NASD is not proposing to
amend these proposed rules at this time in response to these issues.
4. Discovery of Insurance Coverage
    Several commenters contended that the Document Production Lists
should be revised to require the production of information and
documents regarding insurance policies that might provide coverage on
the dispute.\137\ They stated that courts uniformly require production
of this information because it assists the parties in evaluating
settlement possibilities and aids in screening for conflicts. In
Amendment 5, NASD responded that Proposed Rule 12506(a) has not changed
the documents or information required under the current Document
Production Lists, and that therefore these comments are outside the
scope of the rule filing.
---------------------------------------------------------------------------

    \137\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltman, Sutherland, and Willner.
---------------------------------------------------------------------------

5. Standard by Which Documents are Discoverable
    One commenter believes that the documents on the Document
Production Lists should be automatically, not presumptively,
discoverable.\138\ This commenter also expressed the view that
brokerage firms do not have grounds to assert confidentiality of
compliance manuals and recommended amending the Customer Code to state
that the party asserting confidentiality has the burden of establishing
that the documents in question legitimately require confidential
treatment. In Amendment 5, NASD responded that, although this comment
is outside the scope of the rule filing, it would be considered when
NASD determines whether future amendments are warranted.
---------------------------------------------------------------------------

    \138\ PACE.
---------------------------------------------------------------------------

JJ. Proposed Rule 12507--Other Discovery Requests

    Proposed Rule 12507 establishes procedures for making and
responding to discovery requests for items that are not included in the
Document Production Lists. This and certain other discovery provisions
of the Customer Code would codify provisions of the current Discovery
Guide. Three commenters recommended also incorporating into the
Customer Code the provisions of the Discovery Guide concerning the
limited purpose of information requests, to discourage the use of
overly broad information requests that are the equivalent of
interrogatories.\139\
---------------------------------------------------------------------------

    \139\ PACE, PIABA, SIA.
---------------------------------------------------------------------------

    In light of these comments, NASD incorporated Section V of the
Discovery Guide into Proposed Rule 12507(a). In addition, as discussed
under Proposed Rule 12506, NASD included an express ``good faith''
standard in 12507(b).\140\ Proposed Rule 12507 is amended as follows
(new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \140\ See Section 0, above.
---------------------------------------------------------------------------

12507. Other Discovery Requests
    (a) Making Other Discovery Requests
    (1) Parties may also request additional documents or information
from any party by serving a written request directly on the party.
Requests for information are generally limited to identification of
individuals, entities, and time periods related to the dispute; such
requests should be reasonable in number and not require narrative
answers or fact finding. Standard interrogatories are generally not
permitted in arbitration.
    (2) [Such] Other discovery requests may be served:
    Remainder of subparagraph (2)--No change.
    (b) Responding to Other Discovery Requests
    (1) Unless the parties agree otherwise, within 60 days from the
date a discovery request other than the Document Production Lists is
received, the party receiving the request must either:
    Remainder of subparagraph (1)--No change.
    (2) A party must act in good faith when complying with subparagraph
(1) of this rule. ``Good faith'' means that a party must use its best
efforts to produce all documents or information required or agreed to
be produced. If a document or information cannot be produced in the
required time, a party must establish a reasonable timeframe to produce
the document or information.
* * * * *

KK. Proposed Rule 12508--Objecting to Discovery; Waiver of Objection

    Proposed Rule 12508(a) describes how a party may object to
producing a document required by the proposed Document Production Lists
or requested by a party. Proposed Rule 12508 requires a party to
specifically identify which documents or requested information the
party is objecting to and why. One commenter contended that the
proposed rule would impose a burden on the parties to locate and
identify the specific documents and information to which they are
objecting.\141\ This commenter suggested amending the proposed rule to
require an objecting party to specify only the request for documents or
information that it is objecting to and the reasons for its objection.
---------------------------------------------------------------------------

    \141\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it believes the provisions of
Proposed Rule 12508(a) are appropriate, and that allowing parties to
object to an entire document or information request would undermine the
purpose of the proposed rule, which is to require more specificity in
objections.
    Proposed Rule 12508(b) provides that any objection not made within
the required time is waived unless the panel determines that the party
had substantial justification for failing to make the objection within
the required time. One commenter contended that this provision would
unnecessarily require the parties to anticipate every possible
objection or face the penalty of waiver.\142\ In this commenter's view,
the proposed rule would encourage objections as a protective measure,
even though a party may be sanctioned under Proposed Rule 12511 for
frivolous objections. Stating that parties would need to balance the
risk of waiver against the risk of sanctions, this commenter suggested
deleting Proposed Rule 12508(b). In Amendment 5, NASD responded that
Proposed Rule 12508 is based on current practice in the forum, and that
it believes the provisions and intent of Proposed Rule 12508(b) are
clear.
---------------------------------------------------------------------------

    \142\ Id.
---------------------------------------------------------------------------

    For the above reasons, NASD is not proposing to amend the proposed
rule in connection with these issues at this time.
    In connection with commenters' concerns regarding the term
``control'' in Proposed Rules 12506 and 12514, discussed above,\143\
NASD amended Proposed Rule 12508 as follows (new language in italics):
---------------------------------------------------------------------------

    \143\ See Section 0, Proposed Rule 12506 (Document Production
Lists), above, and Section 0, Proposed Rule 12514 (Exchange of
Documents and Witness Lists Before Hearing), below.
---------------------------------------------------------------------------

12508. Objecting to Discovery; Waiver of Objection
    (a) No change.
    (b) No change.
    (c) In making any rulings on objections, arbitrators may consider
the relevance of documents or discovery

requests and the relevant costs and burdens to parties to produce this
information.

LL. Proposed Rule 12509--Motions to Compel Discovery

    Proposed Rule 12509 provides that a party may make a motion asking
the panel to order another party to produce documents or information if
the other party has: (1) Failed to comply with Proposed Rules 12506 or
12507; or (2) objected to the production of documents or information
under Proposed Rule 12508. Two commenters contended that the proposed
rule should include other reasons that a motion to compel may be filed,
such as a bad faith use of the delay provisions of Proposed Rules
12506(b) and 12507(b), which would allow parties to name self-imposed
deadlines for producing specified documents.\144\ These commenters
argued that a motion to compel may be warranted if the parties' reason
for using the delay provisions is in bad faith or the self-imposed
deadline is unreasonably long and expressed concern that this conduct
would not be subject to sanctions under Proposed Rule 12511.
---------------------------------------------------------------------------

    \144\ Feinberg and Canning. See Section 0, Proposed Rule 12506
(Document Production Lists), above, concerning delay provisions.
---------------------------------------------------------------------------

    As discussed in connection with Proposed 12506 and 12507, above,
NASD stated in Amendment 5 that the concept of ``good faith'' is
implied in the discovery provisions of the current Code and the
Customer Code, and proposed to amend those rules to explicitly include
a ``good faith'' standard for compliance. NASD believes the issues
raised concerning Proposed Rule 12509 would be addressed with these
proposed changes.
    Several commenters suggested that costs and attorneys fees be
assessed immediately against the losing party in a discovery motion
seeking the production of documents and information required by
Document Production Lists 1 and 2, absent a finding by the panel of
substantial justification.\145\ In Amendment 5, NASD responded that
motions to compel are issued to enforce compliance with the discovery
rules and are not meant to be punitive. It noted, however, that
arbitrators may impose a range of sanctions, as provided in Proposed
Rules 12212 and 12511, in appropriate circumstances.
---------------------------------------------------------------------------

    \145\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    For the reasons stated above, NASD is not proposing to amend
Proposed Rule 12509 at this time.

MM. Proposed Rule 12510--Depositions

    Proposed Rule 12510 provides that depositions are discouraged but
may be approved by the panel in very limited circumstances. Some
commenters contended that, when time is of the essence, the requirement
to receive arbitrator approval in advance could result in the loss of
testimony or evidence.\146\ They suggested that the proposed rule
should include a procedure that permits a deposition to be taken before
a panel is selected.
---------------------------------------------------------------------------

    \146\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it is sensitive to the
commenters' concerns and noted that the proposed rule would not prevent
parties from mutually agreeing to take the testimony of an ill or dying
witness before a panel has been selected. For this reason, NASD is not
proposing to amend Proposed Rule 12510 at this time.

NN. Proposed Rule 12511--Discovery Sanctions

    Under Proposed Rule 12511, a party would face sanctions for failing
to cooperate in the exchange of documents and information as required
under the Customer Code. Several commenters suggested that the proposed
rule also should permit sanctions if parties do not timely produce the
requisite documents from Document Production Lists 1 and 2 without good
cause.\147\ In Amendment 5, NASD responded that Proposed Rule 12511
specifically states that the panel may issue sanctions against any
party in accordance with Proposed Rule 12212(a) for failure to comply
with the discovery provisions of the Customer Code. It thus believes
the commenters' concern is sufficiently addressed under Proposed Rule
12511.
---------------------------------------------------------------------------

    \147\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    One commenter noted that Proposed Rule 12511 expands the scope of a
panel's authority beyond current practice by permitting arbitrators to
impose sanctions for violations of the Customer Code, rather than for
violations of panel orders only.\148\ In Amendment 5, NASD explained
that the purpose of this provision is to specify that the panel has the
authority to control all aspects of an arbitration, not just discovery,
and therefore must have the ability to enforce the rules of the forum
as well as its orders.
---------------------------------------------------------------------------

    \148\ SIA.
---------------------------------------------------------------------------

    Two commenters noted that a bad faith use of the delay provisions
in Proposed Rules 12506 and 12507 is not subject to sanctions under
Proposed Rule 12511 and suggested amending Proposed Rule 12511 to
address this issue.\149\ As previously discussed, NASD proposed in
Amendment 5 to amend Proposed Rules 12506 and 12507 to include
expressly a ``good faith'' standard for compliance. NASD believes the
issues raised concerning Proposed Rule 12511 will be addressed with the
proposed changes in Proposed Rules 12506 and 12507.
---------------------------------------------------------------------------

    \149\ Canning and Feinberg.
---------------------------------------------------------------------------

    For these reasons stated above, NASD is not proposing to amend
Proposed Rule 12511 at this time.

OO. Proposed Rule 12512--Subpoenas

    Proposed Rule 12512 provides that subpoenas may be issued ``as
provided by law.'' Similarly, Rule 10322 of the current Code provides,
``The arbitrators and any counsel of record to the proceeding shall
have the power of the subpoena process as provided by law.'' Seven
commenters contended that brokerage firms abusively issue overly broad
subpoenas to non-parties, while failing to provide notice of the
subpoena to claimants in a timely manner.\150\ These commenters stated
that claimants usually receive a copy of the subpoena only after the
subpoenaed party has produced the requested documents, thereby
eliminating the opportunity to make a meaningful objection. They argued
that parties should be allowed to object to the subpoena before it is
issued. Several commenters also suggested that the proposed rule should
state clearly that only arbitrators may issue subpoenas.\151\
---------------------------------------------------------------------------

    \150\ Canning, Feinberg, Greco, Layne, Miller, Stolle, and
Stoltmann.
    \151\ Canning, Feinberg, Greco, Layne, Stolle, Stoltman.
---------------------------------------------------------------------------

    In Amendment 5, NASD agreed that changes to the subpoena process
were needed and noted that it had separately filed proposed rule
changes relating to subpoenas.\152\ NASD stated that it intends to
incorporate any approved changes into the Customer Code.
---------------------------------------------------------------------------

    \152\ The Commission recently approved these proposed rule
changes. See 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, Securities Exchange Act Rel. No. 55038
(Jan. 3, 2007), 72 FR 1353 (Jan. 11, 2007) (SR-NASD-2005-079).
---------------------------------------------------------------------------

PP. Proposed Rule 12513--Authority of Panel to Direct Appearances of
Associated Person Witnesses and Production of Documents Without
Subpoenas

    Proposed Rule 12513 allows the panel to order the appearance of any
employee

or associated person of an NASD member without the use of subpoenas.
One commenter noted that Proposed Rules 12100(a) and (r) consider
former associated persons to be associated persons.\153\ In this
commenter's view, while Proposed Rule 12513 would permit a panel to
order a former associated person to attend an arbitration hearing, this
would be impractical because the panel would have no means to enforce
an order compelling that person's attendance. This commenter suggested
limiting the proposed rule to current associated persons and stated
that the attendance of former associated persons should be compelled by
subpoena only.
---------------------------------------------------------------------------

    \153\ SIA. See also Section 0, Proposed Rule 12100(a)
(Definition of Associated Person) and Proposed Rule 12100(r)
(Definition of Person Associated with a Member), above.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12100(r) is a
codification of current policy, under which, in the arbitration
context, NASD maintains jurisdiction over a former associated person
for events that occurred while the person was associated with a member
firm (or are related to the person's termination of employment with a
member firm). It also noted that such arbitrations would be subject to
any applicable statute of limitations and the six-year eligibility rule
under both the current Code and Proposed Rule 12206. With regard to
Proposed Rule 12513, NASD acknowledged that arbitrators have limited
means of requiring former associated persons to appear or produce
documents. Nevertheless, some former associated persons may cooperate
with these orders to facilitate resolution of the matter. If they do
not, they may be subject to a subpoena. Because Proposed Rule 12513 is
substantively the same as current policy, NASD is not proposing to
amend this proposed rule at this time.

QQ. Proposed Rule 12514--Exchange of Documents and Witness Lists Before
Hearing

    As published in the Customer Code Notice, Proposed Rule 12514(c)
provides that parties may not present at the hearing any documents or
other materials not already produced or any witnesses not already
identified at an earlier stage in the arbitration, unless the panel
determines that good cause exists for the earlier failure. Proposed
Rule 12514(c) also specifically states that the need to use documents
or call witnesses for rebuttal or impeachment purposes based on
developments during the hearing constitutes good cause.
1. ``Control''
    Proposed Rule 12514(a) (Documents and Other Materials) provides
that at least 20 days before the first scheduled hearing date, all
parties must provide all other parties with copies of all documents and
other materials in their possession or control that they intend to use
at the hearing that have not already been produced. Several commenters
objected to the use of the term ``control'' in Proposed Rule 12514(a)
and Proposed Rule 12506.\154\ NASD responded in Amendment 5 that it
believed the use of the term ``control'' would make it easier for
customers to gain access to documents held by third-parties on behalf
of respondents, because respondents would be required to produce
documents regardless of where the documents are stored or maintained.
In Amendment 7, NASD proposed to amend Proposed Rule 12508 to address
this issue.\155\
---------------------------------------------------------------------------

    \154\ Boliver, Canning, Estell, Evans, Feinberg, Ilgenfritz,
Josel, Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stolle, Stoltmann, Sutherland, and Willner.
    \155\ See Sections 0, Proposed Rule 12506 (Document Production
Lists), and 0, Proposed Rule 12508 (Objecting to Discovery; Waiver
of Objection), above.
---------------------------------------------------------------------------

2. Scope of ``Rebuttal''
    Several commenters suggested that, to avoid any misunderstanding of
what constitutes rebuttal, Proposed Rule 12514(c) should include
information currently contained in a form letter that NASD sends to the
parties advising them of the hearing date and location.\156\ This
information instructs parties that documents and lists of witnesses in
defense of a claim are not considered rebuttal and, therefore, must be
exchanged by the parties. In response to this comment, NASD agreed in
Amendment 5 to include this provision, noting that it would be
codifying current practice.\157\ The proposed rule is amended as
follows (new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \156\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
    \157\ NASD also proposed to amend Proposed Rule 12514(b) to
correct a grammatical error.
---------------------------------------------------------------------------

12514. Exchange of Documents and Witness Lists Before Hearing
    (a) Documents and Other Materials
    No change.
    (b) Witness Lists
    At least 20 days before the first scheduled hearing date, all
parties must provide each other party with the names and business
affiliations of all witnesses they intend to present at the hearing. At
the same time, [each party] all parties must file their witness lists
with the Director, with enough copies for each arbitrator.
    (c) Exclusion of Documents or Witnesses
    Parties may not present any documents or other materials not
produced and or any witnesses not identified in accordance with this
rule at the hearing, unless the panel determines that good cause exists
for the failure to produce the document or identify the witness. Good
cause includes the need to use documents or call witnesses for rebuttal
or impeachment purposes based on developments during the hearing.
Documents and lists of witnesses in defense of a claim are not
considered rebuttal or impeachment information and, therefore, must be
exchanged by the parties.
* * * * *
3. ``Good Cause''
    One commenter expressed concern that the exception allowing
documents not exchanged to be admitted for ``good cause'' would create
uncertainty that a panel would accept documents or witnesses not
produced or identified during the 20-day exchange during the
hearing.\158\ Similarly, two commenters expressed concern that the
phrase ``impeachment purposes based on developments during the
hearing'' is ambiguous, would create more uncertainty in the hearing
preparation process, and would be difficult for arbitrators to
apply.\159\ These commenters recommended retaining the ``good cause''
requirement, but replacing the standard of ``rebuttal or impeachment
purposes'' with the cross-examination standard from Rule 10321 of the
current Code.\160\ Another commenter objected to the provision in
Proposed Rule 12514(c) that would require parties to exchange documents
contemplated for use on cross-examination, stating that this disclosure
is antithetical to the concept of cross-examination because it would
give each party time to formulate responses.\161\ This commenter
suggested that the proposed rule should specifically except cross-
examination documents from the

20-day exchange, as under the current Code.
---------------------------------------------------------------------------

    \158\ Ryder.
    \159\ Canning and Feinberg.
    \160\ Canning and Feinberg. Current Rule 10321 (General
Provisions Governing Pre-Hearing Proceedings) provides in relevant
part that parties do not need to exchange documents or identify
witnesses ``which parties may use for cross-examination or
rebuttal.''
    \161\ Schwab.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that the proposed rule creates a
presumption that, at the hearing, parties may not present any documents
that were not exchanged or witnesses who were not identified within the
time provided by the proposed rule. NASD stated, however, that the
``good cause'' exception is intended to allow for the need to use
documents or call witnesses for rebuttal or impeachment purposes based
on developments at the hearing. NASD also stated that in developing
Proposed Rule 12514(c), it learned from some of its constituents that
parties have been abusing the ``cross examination'' exception of Rule
10321 of the current Code by inappropriately designating certain
documents as cross-examination documents. Subsequently, at the hearing,
parties allegedly ``surprised'' their opponents with these documents,
which limited the opponents' ability to effectively rebut their
significance. NASD stated that Proposed Rule 12514(c) is intended to
prevent this practice. For these reasons, NASD is not proposing to
amend the proposed rule at this time.
4. Other Comments
    Under the current and proposed Discovery Guides, if a party states
that no responsive information or documents exist in connection with a
discovery request, that party must make certain affirmations at the
request of the party seeking the discovery request. Specifically, the
responding party must: (1) State in writing that he/she conducted a
good faith search for the requested information or documents; (2)
describe the extent of the search; and (3) state that, based on the
search, no such information or documents exist. Two commenters asserted
that these affirmations are inadequate and suggested that they be
amended.\162\ NASD responded that the Customer Code is not changing the
affirmation provision in the Discovery Guide, and thus that this
comment is outside the scope of this rule filing.
---------------------------------------------------------------------------

    \162\ Canning and Feinberg.
---------------------------------------------------------------------------

    Two commenters asserted that Proposed Rule 12514 would cause
parties to provide more documents than they intend to use at the
hearing, thus limiting any meaningful analysis of the evidence that the
opposing parties actually intend to offer at the hearing.\163\ They
suggested that Proposed Rule 12514 should require parties to provide
notebooks of numbered exhibits with an index to opposing parties 20
days before hearing, and to the panel at the hearing.
---------------------------------------------------------------------------

    \163\ Canning and Layne.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12514 is meant to
provide general guidance on the exchange or documents and witness lists
before a hearing, and is substantively the same as Rule 10321(a) of the
current Code. Thus, it stated that these comments are outside the scope
of the rule filing.

RR. Proposed Rule 12600--Required Hearings

    As published in the Customer Code Notice, Proposed Rule 12600(c)
provides that if a hearing will be held, the Director will notify the
parties of the time and place of the hearing at least 10 days before
the hearing begins, unless the parties agree to a shorter time. The
Commission specifically solicited comment on whether parties need
notice of the hearing earlier than 10 days in advance. Several
commenters indicated that the proposed 10-day notice could be
insufficient.\164\ One commenter stated that such short notice might
cause a small investor to lose his or her counsel, as that counsel's
schedule might not allow an appearance for a hearing on 10 days'
notice, which in turn could mean that the investor could be forced to
proceed at the hearing without counsel.\165\ Other commenters suggested
that it would be difficult for parties and witnesses who are traveling
from out of town to make travel arrangements on 10 days' notice.\166\
In Amendment 5, NASD explained that the term ``place'' in Proposed Rule
12600(c) refers to the specific facility where the hearings will be
held, and that under current practice, parties normally are notified of
the city in which the hearing will take place prior to the IPHC.
Parties also generally agree to hearing dates at the IPHC. NASD stated
that it does not expect this practice to change under Proposed Rule
12600(c). In response to the comments and to ensure consistent
timeframes under the Customer Code, however, NASD is proposing to amend
Proposed Rule 12600(c) to increase the notice period from 10 to 20
days. The proposed rule change is amended as follows (new language in
italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \164\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PACE, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
    \165\ PACE.
    \166\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

12600. Required Hearings
    (a) No change.
    (b) No change.
    (c) The Director will notify the parties of the time and place at
least [10] 20 days before the hearing begins, unless the parties agree
to a shorter time.
* * * * *
    In addition, Proposed Rule 12600 provides that hearings will be
held, unless the arbitration is administered under the provisions under
the Customer Code applicable to simplified arbitrations or default
proceedings, the parties agree otherwise in writing, or the arbitration
has been settled, withdrawn, or dismissed. One commenter noted that
Proposed Rule 12600(a) would not include cases dismissed without a
hearing under Proposed Rule 12504 and suggested amending the proposed
rule to include this additional exception.\167\
---------------------------------------------------------------------------

    \167\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it believes the language and
intent of Proposed Rule 12600(a) are clear, and as a result, did not
propose to amend this rule. In Amendment 6, NASD withdrew Proposed Rule
12504 and all references to that rule from the Customer Code.\168\
Therefore, this comment is no longer applicable to this rule filing.
---------------------------------------------------------------------------

    \168\ Proposed Rule 12504 has since been re-filed as a separate
proposed rule change. See supra note 23.
---------------------------------------------------------------------------

SS. Proposed Rule 12601--Postponement of Hearings

    Proposed Rule 12601 governs the postponement of hearings and
provides, in relevant part, that a panel may not grant a motion to
postpone a hearing made within 10 days of the date that the hearing is
scheduled to begin, unless the panel determines that good cause exists.
    One commenter asserted that, at times, arbitrators have attempted
to ignore the agreement of the parties to postpone an arbitration and
compel parties to proceed.\169\ To eliminate this possibility, this
commenter suggested that the proposed rule should provide that a
hearing must be postponed by agreement of the parties and may be
postponed under the other listed circumstances. Another commenter noted
that Proposed Rule 12601(a) appears to give the parties the unfettered
right to postpone the hearing whenever they agree to do so, which would
contradict an arbitrator's duty to keep cases moving toward
resolution.\170\ This commenter suggested

incorporating some provisions from Rule 10319(c) of the current Code to
give the panel express control over the number of times a case may be
postponed and to eliminate repeat postponements.
---------------------------------------------------------------------------

    \169\ SIA.
    \170\ Elster. While this commenter's views pertained to Proposed
Rule 13601(a) of the Industry Code, his comments are relevant to the
Customer Code as well. See supra note 5.
---------------------------------------------------------------------------

    NASD responded that it believes the parties should have the
discretion to postpone a hearing if they mutually agree, to facilitate
settlement negotiations among the parties. NASD believes, however, that
the proposed postponement fees in the rule, which are non-refundable,
should serve as a deterrent to multiple postponements.\171\ Moreover,
Proposed Rule 12601(c) would allow a panel to dismiss an arbitration
without prejudice if the parties request or agree to more than two
postponements. In this situation, a party could re-file the claim,
subject to all applicable fees and costs under the Customer Code.
---------------------------------------------------------------------------

    \171\ Both Rule 10319(b) of the current Code and Proposed Rule
12601(b) require parties to pay a postponement fee equal to the
applicable hearing session fee if the party's postponement request
is granted. Under Rule 10319(b), a party would pay twice the hearing
session fee for each subsequent postponement, whereas under Proposed
Rule 12601(b), the fee would not increase for subsequent requests.
See Section 0, below.
---------------------------------------------------------------------------

    In light of these comments, however, NASD also amended Proposed
Rule 12601 to expressly distinguish between when a hearing may be
postponed and when a hearing must be postponed. NASD also added
paragraph (b)(2) to the rule, which includes provisions of a proposed
rule change that had been approved by the Commission, but were
inadvertently omitted from the last amendment to the Customer
Code.\172\ The proposed rule change is amended as follows (new language
in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \172\ See Order Approving Proposed Rule Change and Amendment
Nos. 1 and 2 Relating to the Adjournment of an Arbitration Hearing
Within Three Business Days of the First Scheduled Hearing Session,
Securities Exchange Act Rel. No. 49716 (May 17, 2004), 69 FR 29342
(May 21, 2004) (SR-NASD-2003-164).
---------------------------------------------------------------------------

12601. Postponement of Hearings
    (a) [When a Hearing May Be Postponed] Postponement of Hearings
    (1) When a Hearing Shall Be Postponed
    A hearing shall be postponed by agreement of the parties.
    (2) When a Hearing May Be Postponed
    A hearing may be postponed [only]:
     [By agreement of the parties;]
     By the Director, in extraordinary circumstances;
     By the panel, in its own discretion; or
     By the panel, upon motion of a party. The panel may not
grant a motion to postpone a hearing made within 10 days of the date
that the hearing is scheduled to begin, unless the panel determines
that good cause exists.
    (b) Postponement Fees
    (1) No change.
    (2) If a postponement request is made by one or more parties and
granted within three business days before a scheduled hearing session,
the party or parties making the request shall pay an additional fee of
$100 per arbitrator. If more than one party requests the postponement,
the arbitrators shall allocate the $100 per arbitrator fee among the
requesting parties. The arbitrators may allocate all or a portion of
the $100 per arbitrator fee to the non-requesting party or parties, if
the arbitrators determine that the non-requesting party or parties
caused or contributed to the need for the postponement. In the event
that a request results in the postponement of consecutively scheduled
hearing sessions, the additional fee will be assessed only for the
first of the consecutively scheduled hearing sessions. In the event
that an extraordinary circumstance prevents a party or parties from
making a timely postponement request, the arbitrators may use their
discretion to waive the fee, provided verification of such circumstance
is received.
    (3) No change.
    (c) No change.
* * * * *
    One commenter asked whether a motion for postponement outside of
the 10-day window under Proposed Rule 12601(a) would require a ``good
cause'' explanation.\173\ In Amendment 5, NASD explained that if a
party requests to postpone a hearing more than 10 days from the date
the hearing is scheduled to begin, it would not need to demonstrate
good cause. Rather, a panel may grant a party's request based solely on
the request, and the party would be required to pay any applicable
fees.
---------------------------------------------------------------------------

    \173\ Ryder.
---------------------------------------------------------------------------

TT. Proposed Rule 12602--Attendance at Hearings

    Proposed Rule 12602 provides that the parties and their
representatives are entitled to attend all hearings, and the panel will
decide who else may attend any or all of the hearings. Several
commenters viewed Proposed Rule 12602 as inconsistent with directions
given in the Securities Industry Conference on Arbitration Manual,
which creates a presumption for the attendance of expert witnesses and
an investor's representative.\174\ They suggested that the proposed
rule should expressly allow expert and other fact witnesses to attend
hearings.
---------------------------------------------------------------------------

    \174\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, and Sutherland.
---------------------------------------------------------------------------

    In Amendment 5, NASD agreed that expert witnesses should be allowed
to attend all hearings, but stated that the panel should have the
discretion to allow other persons to attend hearings (e.g., an
individual assisting an elderly or disabled party) or to bar someone
who may be disruptive to the proceeding.
    In response to comments, the proposed rule change is amended as
follows (new language in italics):
12602. Attendance at Hearings
    The parties and their representatives are entitled to attend all
hearings. Absent persuasive reasons to the contrary, expert witnesses
should be permitted to attend all hearings. The panel will decide who
else may attend any or all of the hearings.
* * * * *

UU. Proposed Rule 12607--Order of Presentation of Evidence and
Arguments

    Proposed Rule 12607 provides that while the claimant generally will
present its case, followed by the respondent's defense, the panel may
vary the order in which the hearing is conducted, as long as each party
is given a fair opportunity to present its case. Three commenters noted
that no other proposed rule addresses the order of the presentation of
evidence.\175\ They recommended that Proposed Rule 12607 should
expressly address opening statements and closing arguments, and clarify
that rebuttal testimony is allowed. Several commenters suggested that
Proposed Rule 12607 should give claimants the right to reserve any or
all of their closing argument for rebuttal, some noting that this would
be consistent with current practice and IM-10317 under the current
Code.\176\
---------------------------------------------------------------------------

    \175\ Canning, Feinberg, and Stoltmann.
    \176\ Boliver, Canning, Evans, Feinberg, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    NASD responded that it believes the panel has the authority to
control a hearing, which includes determining the order in which the
hearing is conducted. Consistent with that principle, Proposed Rule
12607 is intended to provide the panel with discretion to vary the
order in which the hearing is conducted, provided each

party is given a fair opportunity to present its case. For these
reasons, NASD is not proposing to amend this rule at this time.

VV. Proposed Rule 12700--Dismissal of Proceedings Prior to Award

    Proposed Rule 12700 lists the circumstances in which a panel may or
must dismiss an arbitration or claim prior to award. One commenter
stated that dismissals under Proposed Rule 12700(b) should be
classified as an award and put into writing pursuant to Proposed Rule
12904 (Awards).\177\ In this commenter's opinion, because dismissal
orders require a dispositive determination of the arbitrators and are
subject to vacatur challenges in court, they are legally ``awards.''
---------------------------------------------------------------------------

    \177\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it believes its proposed
definition of ``award'' under Proposed Rule 12100 addresses this
commenter's concern.\178\ Moreover, NASD explained that panels issue
awards under current practice if they determine that cases should be
dismissed, with or without prejudice. For these reasons, NASD is not
proposing to amend Proposed Rule 12700(b) at this time.
---------------------------------------------------------------------------

    \178\ See discussion in Section 0, Proposed Rule 12100(b)
(Definition of Award), above.
---------------------------------------------------------------------------

WW. Proposed Rule 12702--Withdrawal of Claims

    Proposed Rule 12702(a) provides that before a claim has been
answered by a party, the claimant may withdraw the claim against that
party with or without prejudice. Proposed Rule 12702(b) provides that
after a claim has been answered by a party, the claimant may only
withdraw the claim against that party with prejudice unless the panel
decides, or the parties agree, otherwise. In the Customer Code Notice,
the Commission asked whether Proposed Rule 12702(b) appropriately
addresses the concern of allowing claimants to withdraw claims without
prejudice, while protecting respondents from expending significant
resources to respond to a claim that is later withdrawn or having to
respond to the same claim multiple times.
    Several commenters opposed Proposed Rule 12702(b), contending that,
in their collective experiences, there are few instances in which a
claim had to be withdrawn after an answer was filed.\179\ These
commenters argued that, at the very least, the proposed rule should
provide arbitrators with the authority to decide whether a claim, if
withdrawn after an answer is filed, should be withdrawn with or without
prejudice.
---------------------------------------------------------------------------

    \179\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12702(b) is
intended to deter claimants' gamesmanship in withdrawing and refiling
claims in order to select a new panel. NASD noted that under Proposed
Rule 12702, if claimants have legitimate reasons to withdraw claims
without prejudice after the answer is filed, they may ask the
arbitrators to allow them to do so. NASD believes that this provision
is a reasonable accommodation of the competing interests in the forum
and declined to amend Proposed Rule 12702(b) at this time.

XX. Proposed Rule 12800--Simplified Arbitration

    Proposed Rule 12800 establishes procedures for simplified
arbitration, which are claims of $25,000 or less. While respondents
have only 20 days to answer a simplified arbitration claim under the
current Code, they would have 45 days to do so under the Customer Code,
consistent with cases submitted under regular arbitration. In the
Customer Code Notice, the Commission asked whether the proposed 45-day
deadline should be shortened in simplified cases to reflect the fact
that they are meant to take place more expeditiously than regular
cases.
    Several commenters opposed the proposed 45-day deadline, contending
that firms should be able to respond more quickly to small,
uncomplicated claims.\180\ Moreover, these commenters believe that the
longer deadline would diminish the benefits of simplified arbitrations
as a quick, inexpensive option for small investors. As an alternative,
several commenters suggested a 30 day deadline, similar to the
requirements in most state courts for the filing of an answer.\181\
---------------------------------------------------------------------------

    \180\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PACE, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
    \181\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it is sensitive to the
commenters' concerns, but noted that the 45-day deadline reflects
current practice in the forum. NASD stated that frequent users of the
forum and NASD staff report that parties routinely extend the deadlines
in simplified arbitration that are provided under Rule 10302 of the
current Code. Because parties so often extend existing deadlines, NASD
believes that Proposed Rule 12800 would simplify and streamline the
administration of simplified arbitrations without resulting in
additional delay.
    One commenter contended that, while the current Code permits a
claimant to reply to the respondent's answer, the Customer Code does
not explicitly authorize this practice.\182\ In this commenter's view,
because many claimants filing simplified arbitration claims are pro se,
the procedures controlling these arbitrations should be expressly
stated. This commenter suggested defining ``pleadings'' to clarify that
replies can be filed to respondents' answers in simplified arbitration.
This commenter also suggested providing that claimants have 10 days to
file such replies following the close of the discovery period.
---------------------------------------------------------------------------

    \182\ PACE.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that although it agrees that a
definition of ``pleadings'' should be included in the Customer Code,
(see Section 0, above) it does not agree with the suggestion that
claimants be given 10 days to file a reply following the close of the
discovery period. NASD explained that, because time limits under the
Customer Code are meant to be standardized, the proposed rule does not
include the special time limits or deadlines for simplified cases from
the current Code.
    One commenter objected that the only arbitrators eligible to hear
simplified arbitration cases are those included on the chairperson-
eligible arbitrator roster.\183\ In Amendment 5, NASD responded that,
because simplified arbitration cases are decided by only one
arbitrator, it believes the arbitrator should have had the experience
of sitting on prior cases. Proposed Rule 12800, however, would give
parties the option to select an arbitrator from a different roster if
they mutually agree.
---------------------------------------------------------------------------

    \183\ Caruso.
---------------------------------------------------------------------------

    For these reasons, NASD is not proposing to amend Proposed Rule
12800 at this time.

YY. Proposed Rule 12801--Default Proceedings

    Proposed Rule 12801 addresses the applicability of, and procedures
involved in, default proceedings. One commenter noted that default
proceedings under Rule 10314(e) of the current Code apply to defunct
firms only, and asserted that the reference to default proceedings in
Proposed Rule 12308, concerning failure to answer claims, would expand
the use of default proceedings to all respondents who fail

to answer, whether active or defunct.\184\ NASD explained that, like
Rule 10314(e) of the current Code, Proposed Rule 12801 would apply only
to a respondent within one of the following four categories: (1) A
member whose membership has been terminated, suspended, canceled, or
revoked; (2) a member that has been expelled from the NASD; (3) a
member that is otherwise defunct; or (4) or an associated person whose
registration is terminated, revoked, or suspended. Therefore, Proposed
Rule 12801 would not apply to active firms and would not change the
substantive requirements of the default procedures under the current
Code.
---------------------------------------------------------------------------

    \184\ Ryder.
---------------------------------------------------------------------------

    Two commenters suggested that Proposed Rule 12801 should: (1)
Permit default proceedings when a respondent (including current members
and associated persons with active registrations) has failed to file
both an answer and a uniform submission agreement; (2) limit the time a
party has to file the answer and uniform submission agreement; (3)
provide that, under the proposed default process, determinations should
be dispositive only in favor of the claimant; and (4) give movants the
opportunity to present the case in evidentiary hearing on any issues
not favorably ruled on.\185\
---------------------------------------------------------------------------

    \185\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12801 has not
changed the substantive requirements concerning default procedures in
Rule 10314(e) of the current Code, which requires claimants to present
a sufficient basis to support the granting of an award. It therefore
stated that this comment is outside the scope of the rule filing.

ZZ. Proposed Rule 12900--Fees Due When a Claim Is Filed

    Proposed Rule 12900 establishes filing fees due from each party
based on the amount in controversy. Several commenters contended that
industry members should pay the majority of the customer filing fee,
suggesting that the filing fee for public customers should be limited
to $200.\186\ In their view, while public customers should be subject
to the panel's allocation of fees in the award, they should not have to
incur undue expense at the outset to file a claim.
---------------------------------------------------------------------------

    \186\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, Page, PIABA, Pounds,
Rosenfield, Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    Another commenter suggested that the lack of an increase in fees
for claims above one million dollars seems to favor wealthier
claimants.\187\ This commenter indicated that the fee schedules could
be perceived as unfair because mid-level claimants appear to be
shouldering a disproportionate percentage of the forum fees. To shift
the cost burden to those who stand to benefit the most, while
eliminating the perception that the fee changes impact the middle-class
investor the most, this commenter suggested that NASD should amend
Proposed Rule 12900 to charge a fixed percentage as an additional fee
for any amounts claimed over one million dollars.
---------------------------------------------------------------------------

    \187\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that Proposed Rule 12900 made very
minimal changes to the fee schedules in Rule 10332 of the current Code,
and that the proposed changes would not result in an increase in the
total amount of fees paid by customers or associated persons when
filing a claim. As NASD explained, for claims of $30,000 to $50,000,
the customer's overall filing fees would decrease by $50, and for
claims of $1 million to $3 million, the customer's overall filing fees
would decrease by $100. NASD also stated that its fee schedules are
commensurate with the dollar amount of the claims filed and damages
requested. In its view, the proposed, simplified fee schedules would
make it easier for parties to understand the total amount due upon
filing. For these reasons, NASD is not proposing to amend Proposed
12900 at this time.
    One commenter expressed concern that the expense of arbitration
(i.e., filing fees) may prevent access to the forum and suggested that
NASD amend Proposed Rule 12900(d) to expressly disclose that fee
waivers may be granted to parties who can demonstrate financial
hardship.\188\ This commenter also stated that the proposed rule should
explain the practice and procedure for applying for fee waivers and
NASD's criteria for granting them. In Amendment 5, NASD responded that,
although this comment is beyond the scope of the rule filing, it would
consider the comment in considering whether future amendments are
warranted. In Amendment 7, NASD noted that the procedures to request a
filing fee waiver already are located on NASD's Web site in the Uniform
Forms Guide, at: http://www.nasd.com/web/groups/med_arb/documents/mediation_arbitration/nasdw_007954.pdf
.

---------------------------------------------------------------------------

    \188\ PACE.
---------------------------------------------------------------------------

AAA. Proposed Rule 12902--Hearing Session Fees, and Other Costs and
Expenses

    Proposed Rule 12902 establishes hearing session fees due from the
parties based on the amount in controversy. Several commenters noted
that, although Proposed Rule 12902 would require a party to pay one
fee, which includes the filing fee and the hearing session deposit fee,
it does not provide that any of the fee will be applied to any hearing
fees incurred.\189\ These commenters contended that a claimant would
pay for the first hearing session twice--once through the filing fee
and then again when the hearing session fees are assessed.
---------------------------------------------------------------------------

    \189\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    NASD responded that it did not intend to increase the fee for
submitting a claim to arbitration under the Customer Code and agreed
that clarification is needed. Thus, NASD proposed to amend Proposed
Rule 12902(b) to provide that an amount equal to one hearing session
fee would be deducted from the total amount of the hearing session fees
assessed against the party who paid the filing fee. The proposed rule
change is amended as follows (new language in italics):
12902. Hearing Session Fees, and Other Costs and Expenses
    (a) No change.
    (b) Payment of Hearing Session Fees
    (1) No change.
    (2) No change.
    (3) In the award, the amount of one hearing session fee will be
deducted from the total amount of hearing session fees assessed against
the party who paid the filing fee. If this amount is more than any
fees, costs, and expenses assessed against this party under the Code,
the balance will be refunded to the party.
    (c) No change.
    (d) No change.
* * * * *
    In Amendment 5, NASD also proposed to amend Proposed Rule 12902 to
address the issue of refund payments. NASD stated that it receives
numerous requests from non-parties to make refunds payable to the
attorneys or other non-parties that may have made payment on behalf of
named parties. Currently, when any money remains in a party's account
after all fees and charges are assessed, NASD's practice is to refund
the money directly to the party. Because parties themselves sign the
uniform submission agreement and

are liable for any fees or costs incurred under the current Code, NASD
believes it is inappropriate to issue refunds to anyone other than a
party. Therefore, NASD is proposing to codify its practice by adding a
new provision to Proposed Rule 12902. The proposed rule change is
amended as follows (new language in italics):
12902. Hearing Session Fees, and Other Costs and Expenses
* * * * *
    (e) Refund Payments
    Any refunds of fees or costs incurred under the Code will be paid
directly to the named parties, even if a non-party made a payment on
behalf of the named parties.
* * * * *

BBB. Proposed Rule 12904--Awards

    Proposed Rule 12904, in pertinent part, establishes the required
content of awards. One commenter suggested defining the term ``award''
under the Customer Code.\190\ In Amendment 5, NASD agreed with this
comment and included a definition of ``award.'' \191\ The same
commenter also stated that dismissal of an entire claim should be
considered an award. In Amendment 5, NASD agreed and stated that the
proposed definition of ``award'' under Proposed Rule 12100 addresses
this issue.
---------------------------------------------------------------------------

    \190\ Ryder.
    \191\ See Section 0, Proposed Rule 12100 (Definitions), above.
---------------------------------------------------------------------------

    Finally, this commenter noted that although Rule 10330 requires all
awards to be in writing and signed by a majority of the arbitrators,
parties nonetheless may agree to permit one arbitrator to sign a
stipulated award that directs expungement relief on behalf of the whole
panel. In this commenter's view, parties should not be allowed to have
one arbitrator sign a stipulated award on behalf of the entire panel,
even if the parties mutually agree.
    In Amendment 7, NASD explained that under current practice, which
would continue under the Customer Code, parties are not permitted to
agree to the appointment of selected arbitrators for the sole purpose
of entering a stipulated award.\192\ Moreover, parties may not agree to
having only one arbitrator of a three-member panel sign the stipulated
award. Stipulated awards, like awards issued after a hearing on the
merits, must be signed by a majority of the panel.\193\
---------------------------------------------------------------------------

    \192\ Telephone conversation between Mignon McLemore, Assistant
Chief Counsel, NASD Dispute Resolution, and Gena Lai, Special
Counsel, Division of Market Regulation, SEC (Sept. 15, 2006). In
Amendment 5, NASD responded that, under the current Code and
Customer Code, if the parties mutually agree for one arbitrator to
sign a stipulated award on behalf of the panel, the request should
be honored.
    \193\ See Proposed Rule 12904(a).
---------------------------------------------------------------------------

IV. Summary of Comments on the Industry Code as Amended by Amendments
1, 2, 3, and 4 and Description of Amendments 5, 6, and 7 to the
Industry Code

A. Summary of Comments on the Industry Code as Amended by Amendments 1,
2, 3, and 4

    NASD filed Amendment 5 to the Industry Code with the Commission on
May 4, 2005. Only one commenter specifically addressed the Industry
Code Notice.\194\ This commenter noted that Proposed Rule 13601(a)
appears to give the parties the unfettered right to postpone the
hearing whenever they agree to do so, which the commenter viewed as
contradicting an arbitrator's duty to keep the cases moving toward
resolution. The commenter suggested incorporating some provisions from
current Rule 10319(c) (Adjournments) to give the panel some express
control over the number of times a case may be postponed and to
eliminate repeat postponements. NASD's response to the commenter's
concerns is discussed above in Section 0, Proposed Rule 12601
(Postponement of Hearings). NASD amended Proposed Rule 13601 of the
Industry Code consistent with Proposed Rule 12601 of the Customer Code.
---------------------------------------------------------------------------

    \194\ See Elster, supra note 5.
---------------------------------------------------------------------------

B. Amendment 5 to the Industry Code

    As noted above, the Commission received 51 comments on the Customer
Code. While none of these comments specifically addressed the Industry
Code, because the two codes contain similar rules and procedures,
comments on the Customer Code were also relevant to the Industry Code.
Thus, NASD made corresponding amendments to both the Customer Code and
the Industry Code. Amendment 5 to the Industry Code also corrects
typographical, grammatical, and other technical errors. NASD requested
accelerated approval for the amendments to the Industry Code that were
not yet published. As with the Customer Code, this request applies to
the amendments filed after the Customer Code Notice.
    The table below shows which Industry Code and Customer Code rules
were similarly amended in Amendments 5 to each proposed code.

   Changes To Customer & Industry Codes as a Result of Comment Letters
------------------------------------------------------------------------
             Customer Code                        Industry Code
------------------------------------------------------------------------
12100--Definitions.....................  13100--Definitions.
12203--Denial of NASD Forum............  13203--Denial of NASD Forum.
12204--Class Action Claims.............  13204--Class Action Claims.
12213--Hearing Locations...............  13213--Hearing Locations.
12214--Payment of Arbitrators..........  13214--Payment of Arbitrators.
12301--Service on Associated Persons...  13301--Service on Associated
                                          Persons.
12309--Amending Pleadings..............  13309--Amending Pleadings.
12312--Multiple Claimants..............  13312--Multiple Claimants.
12313--Multiple Respondents............  13313--Multiple Respondents.
12400(b)--Arbitrator Rosters...........  13400(b)--Arbitrator Rosters.
12403--Generating and Sending Lists to   13403--Generating and Sending
 Parties.                                 Lists to Parties.
12404--Striking and Ranking Arbitrators  13404--Striking and Ranking
                                          Arbitrators.
12501--Other Prehearing Conferences....  13501--Other Prehearing
                                          Conferences.
12505--Cooperation of Parties in         13505--Cooperation of Parties
 Discovery.                               in Discovery.
12506(b)--Time for Responding to         ...............................
 Documents Production Lists.
12507(b)--Responding to Other Discovery  13507(b)--Responding to
 Requests.                                Discovery Requests.
12507(a)--Making Other Discovery         13506(a)--Discovery Requests.
 Requests.
12514(c)--Exclusions of Documents or     13514(c)--Exclusion of
 Witnesses.                               Documents or Witness.
12600--Required Hearings...............  13600--Required Hearings.

12601--Postponement of Hearings........  13601--Postponement of
                                          Hearings.
12602--Attendance at Hearings..........  13602--Attendance at Hearings.
12902(b)--Payment of Hearing Session     13902(b)--Payment of Hearing
 Fees.                                    Session Fees.
12902(e)--Refund Payments..............  13902(e)--Refund Payments.
------------------------------------------------------------------------

C. Amendment 6 to the Industry Code

    In Amendment 6 to the Industry Code, in response to commenters'
concerns regarding Proposed Rule 12504 (Motions to Decide Claims Before
a Hearing on the Merits) of the Customer Code, NASD withdrew Proposed
Rule 13504 (Motions to Decide Claims Before a Hearing on the Merits)
and all references to that rule.\195\
---------------------------------------------------------------------------

    \195\ See Section 0, Proposed Rule 12504 (Motions to Decide
Claims Before a Hearing on the Merits), above.
---------------------------------------------------------------------------

D. Amendment 7 to the Industry Code

    In Amendment 7 to the Industry Code, NASD made changes that
correspond to those in Amendment 7 to the Customer Code.\196\ NASD also
amended Proposed Rule 13800(c) (Simplified Arbitration) to provide that
no hearing will be held in simplified arbitrations of industry cases
unless the claimant requests a hearing. Previously, the rule
inaccurately provided that a customer could request a hearing under the
rule, although Proposed Rule 13800(c) does not apply to customer cases.
Proposed Rule 13800(c) is amended as follows (new language in italics;
deleted language in [brackets]):
---------------------------------------------------------------------------

    \196\ There were no changes corresponding to those for Proposed
Rule 12200 (concerning insurance business activities of a member),
however, because there is no corollary in the Industry Code.
---------------------------------------------------------------------------

13800. Simplified Arbitration
    (a)-(b) No change.
    (c) Hearings
    (1) No hearing will be held in arbitrations administered under this
rule unless the [customer] claimant requests a hearing.
    (2) No change.
    (d)-(f) No change.
* * * * *
    For the text of Amendments 5, 6, and 7 to the Industry Code,
including amendments to the narrative portion and exhibits of the
Industry Code filing, please see NASD's Web site at the following URL:
http://www.nasd.com/RulesRegulation/RuleFilings/2004RuleFilings/NASDW_009295
.

V. Discussion

    After careful review, the Commission finds that the proposed rule
changes (SR-NASD-2003-158 and SR-NASD-2004-011), as amended, are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\197\ In particular, the Commission finds that the
proposals, as amended, are consistent with the provisions of Section
15A(b)(6) of the Act,\198\ which requires, among other things, that the
rules of a national securities 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. The Commission finds that NASD's proposals, as
amended, are designed to protect investors and the public interest by
providing an accessible and clearly organized set of rules to
facilitate the resolution of disputes by users and administrators of
the arbitration forum. The revision of the current NASD rules into
plain English will make the process of arbitration more transparent and
more accessible to users of the forum, including those who may file
arbitration claims pro se. Moreover, the reorganization of the current
Code into three separate codes should minimize confusion as to which
rules apply to customer cases or industry cases and further improve the
transparency of the arbitration process, thereby improving the
efficiency with which cases are processed in the NASD dispute
resolution forum.\199\
---------------------------------------------------------------------------

    \197\ In approving this proposal, the Commission has considered
the proposed rules' impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
    \198\ 15 U.S.C. 78o-3(b)(6).
    \199\ The Commission already has approved the Mediation Code.
See supra note 8.
---------------------------------------------------------------------------

    Particular provisions of the Customer Code and Industry Code that
vary substantively from the current Code are discussed below.

A. Proposed Rules 12105 and 13105--Agreement of the Parties

    The current Code does not specifically address the parties'
modification of a provision of the current Code or a decision of the
Director or the panel by written agreement. Proposed Rules 12105(a) and
13105(a) of the Customer Code and Industry Code, respectively,
generally allow these modifications. Furthermore, Proposed Rules
12105(b) and 13105(b) provide that if the Director or the panel
determines that a named party is inactive in the arbitration or has
failed to respond after adequate notice has been given, the Director or
the panel may determine that the written agreement of that party is not
required while the party is inactive or not responsive. Proposed Rules
12105(b) and 13105(b) are designed to allow the active parties in an
arbitration to continue to exercise the control intended by Proposed
Rules 12105(a) and 13105(a), in the event that a party whose agreement
is needed is not participating in the arbitration or is otherwise
unresponsive. The Commission notes that NASD has clarified the meaning
of ``inactive party'' by amending Proposed Rules 12105(b) and 13105(b)
to provide examples of who an inactive party is in the rule text. As
amended, these proposed rules should improve the efficacy and
efficiency with which arbitration cases can proceed.

B. Proposed Rules 12203 and 13203--Use of the Forum

    Rule 10301(b) of the current Code allows the Director of
Arbitration to decline the use of the NASD arbitration forum only if
the ``dispute, claim, or controversy is not a proper subject matter for
arbitration,'' and only upon approval of the NAMC or its Executive
Committee. Proposed Rules 12203(a) and 13203(a) of the Customer Code
and Industry Code, respectively, provide that the Director ``may
decline to permit the use of the NASD arbitration forum if the Director
determines that, given the purposes of NASD and the intent of the Code,
the subject matter of the dispute is inappropriate, or that accepting
the matter would pose a risk to the health or safety of arbitrators,
staff, or parties or their representatives.'' Proposed Rules 12203 and
13203 are intended to give the Director the flexibility needed in
emergency situations. The proposed rules also would provide that this
authority may be exercised only by the Director or the President of
NASD Dispute Resolution and cannot be delegated.

    The Commission believes that the proposed rules should facilitate
excluding cases from the NASD arbitration forum that are beyond its
mandate, allowing it to focus on the cases that are appropriately in
the forum. This, in turn, should promote the efficacy and efficiency of
the arbitration forum in processing its claims. The Commission agrees
that in emergency situations, it is reasonable for the Director to have
the authority and flexibility to act quickly to protect the health and
safety of users and administrators of the forum. We note that this
authority, which cannot be delegated by the Director or President of
NASD Dispute Resolution, should be limited by application in only a
very narrow range of unusual circumstances.

C. Proposed Rules 12205 and 13205--Shareholder Derivative Actions

    The current Code does not specifically address whether shareholder
derivative actions may be arbitrated at NASD. NASD has stated that such
claims are not eligible for arbitration in it is forum because, by
definition, they involve corporate governance disputes that do not
arise out of, or in connection with, the business of a member firm or
an associated person. Nonetheless, the question arises from time to
time, occasionally after a claimant has filed a statement of claim.
Proposed Rules 12205 and 13205 of the Customer Code and Industry Code,
respectively, would provide that shareholder derivative actions are not
eligible for arbitration at NASD.
    The Commission believes that the inclusion of these proposed rules
should provide guidance to parties and obviate the need for parties to
expend resources in an attempt to arbitrate shareholder derivative
claims at NASD, thereby improving the efficiency of the arbitration
forum. Clarifying which cases may be heard in the Customer Code and
Industry Code is consistent with the purposes of the proposed rule
changes.

D. Proposed Rules 12207 and 13207--Extensions of Deadlines

    Rule 10314(b)(5) of the current Code provides that deadlines
established by the Code for filing or serving pleadings may be extended
by the Director, or with the consent of the initial claimant. It
further provides that extensions for filing an answer are disfavored
and will only be granted in extraordinary circumstances, but does not
provide guidance with respect to the extensions of other deadlines
established by the Code, the panel, or the Director. Proposed Rules
12207(a) and 13207(a) of the Customer Code and Industry Code,
respectively, provide that the parties, with written notification to
the Director, may agree in writing to extend or modify any deadline for
serving an answer, returning arbitrator or chairperson lists,
responding to motions, or exchanging documents or witness lists.
Proposed Rules 12207(b) and 13207(b) provide that the panel also may
extend or modify any of the specified deadlines, or any other deadline
set by the panel, either on its own initiative or upon motion of a
party. Finally, Proposed Rules 12207(c) and 13207(c) provide that the
Director may extend or modify any deadline set by the Customer Code or
Industry Code, respectively, for good cause, or by the panel in
extraordinary circumstances.
    The Commission believes that Proposed Rules 12207 and 13207 should
give parties more control over various aspects of the arbitration
process, subject to their mutual agreement. The proposed rules also
would give arbitrators and the Director more authority to manage the
arbitration process. We note that under Proposed Rules 12207(c) and
13207(c), respectively, the Director must satisfy a good cause standard
to extend a deadline established by the Customer Code or Industry Code,
or find that extraordinary circumstances exist to extend a deadline
established by the panel. By introducing more flexibility into the
arbitration process and providing parties, arbitrators, and the
Director with more authority to control the process, the proposed rules
should promote the efficacy and efficiency of the arbitration process
and forum.

E. Proposed Rules 12210 and 13210--Ex Parte Communications

    The current Code does not explicitly address ex parte
communications. Proposed Rules 12210 and 13210 in the Customer Code and
Industry Code, respectively, are intended to provide additional
guidance to arbitrators and parties and to further ensure the integrity
of the NASD arbitration process. Proposed Rules 12210 and 13210 would
expressly prohibit ex parte communications between parties and
arbitrators, except in accordance with Proposed Rules 12211 and 13211,
respectively.\200\ NASD stated that Proposed Rules 12210 and 13210 are
based on general ex parte rules applicable in court proceedings, and
current NASD practice, as reflected in the NASD Arbitrators' Manual,
other NASD arbitrator training materials, and materials provided to
parties, all of which advise against ex parte communications.
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    \200\ Proposed Rules 12211 and 13211 (Rule 10334 in the current
Code) allow direct communication between parties and arbitrators
subject to certain conditions. These conditions include the
representation of parties by counsel, an agreement to use direct
communication by all arbitrators and parties, an agreement regarding
the scope of the direct communication, and facsimile or e-mail
capability by all arbitrators and parties.
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    The Commission believes that the proposed rules should aid
arbitrators in maintaining neutrality and avoiding the appearance of
impropriety, thereby promoting the fairness of the arbitration process
and forum.

F. Proposed Rules 12212 and 13212--Sanctions

    Rule 10305(b) of the current Code, governing the dismissal of
proceedings, provides that the ``arbitrators may dismiss a claim,
defense, or proceeding with prejudice as a sanction for willful and
intentional material failure to comply with an order of the
arbitrator(s) if lesser sanctions have proven ineffective.'' In
addition, the current Discovery Guide states that ``[t]he panel has
wide discretion to address noncompliance with discovery orders.'' For
example, the panel may make an adverse inference against a party or
assess adjournment fees, forum fees, costs and expenses, and/or
attorneys' fees caused by noncompliance.''
    Proposed Rules 12212 and 13212 of the Customer Code and Industry
Code, respectively, would codify the sanctions available to arbitrators
that are described in the current Discovery Guide, and extend them
beyond the discovery context to apply to non-compliance with any
provision of the Customer Code or Industry Code, respectively, or order
of the panel or a single arbitrator authorized to act on behalf of the
panel. The rules also would allow a panel to dismiss a claim, defense,
or arbitration under the same conditions as they may currently,
although it would use the term ``prior,'' rather than ``lesser,''
sanctions, in order to avoid potential confusion regarding whether a
prior sanction was ``lesser'' or ``greater.''
    The Commission notes the authority of NASD arbitrators to impose
sanctions for violations of any provision of the Customer Code or the
Industry Code, rather than only for violations of orders of the panel,
as under the current Code. The Commission believes that this expanded
authority should help to promote just and equitable principles of
trade, and in general, to protect investors and the public interest by

deterring conduct that seeks to generate frivolous additional disputes
or hinder dispute resolution, and by clarifying that arbitrators have
the authority to ensure the fair and efficient administration of
arbitration proceedings when parties fail to comply with the Customer
Code or Industry Code or orders of the panel. The Commission also notes
that under the Customer Code and Industry Code, arbitrators would
continue to have the authority to make disciplinary referrals at the
end of arbitrations in connection with potential violations of NASD
rules.

G. Proposed Rules 12213 and 13213--Hearing Locations

    In relevant part, Rule 10315 of the current Code provides that the
Director shall determine the time and place of the first meeting of the
arbitration panel and the parties, whether that meeting is a pre-
hearing conference or a hearing, and shall notify the parties of the
time and place at least 15 business days before the meeting. The
arbitrators determine the time and place for all subsequent meetings,
whether the meetings are pre-hearing conferences, hearings, or any
other type of meetings, and give notice as the arbitrators may
determine. Proposed Rule 12213(a)(1) of the Customer Code provides that
the Director will select the hearing location for the arbitration, and
that generally, this selection will be the hearing location closest to
the customer's residence at the time of the events giving rise to the
dispute. Proposed Rule 13213(a)(1) of the Industry Code provides that
the Director generally will select the hearing location closest to
where the associated person was employed at the time the dispute
arose.\201\ Proposed Rules 12213(a)(2) and 13213(a)(2) also provide,
however, that before arbitrator lists are sent to the parties, the
parties may agree in writing to a hearing location other than the one
selected by the Director, and that the Director or panel may change the
hearing location upon a party's motion.
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    \201\ This standard would be interpreted to refer to the time of
the events giving rise to the dispute. Telephone conversation among
Jean Feeney, Vice President, NASD; Mignon McLemore, Assistant Chief
Counsel, NASD Dispute Resolution; and Gena Lai, Specia Counsel,
Division of Market Regualtion, SEC (Dec. 19, 2006).
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    NASD stated that Proposed Rules 12213 and 13213 codify current
practice and are intended to make the arbitration process more
transparent. The proposed rules also would give the Director discretion
to select another location that would be more appropriate or less
burdensome to the parties given the specific facts of the case.
    The Commission believes that the proposed rules should provide
useful guidance to the parties and thereby facilitate and improve the
transparency of the arbitration process. We also note that NASD
clarified in Amendments 5 to the Customer Code and Industry Code that
parties may appeal the Director's selection of hearing location to the
arbitration panel, once it is assembled.

H. Proposed Rules 12304, 12305, 13304 and 13305--Time to Answer
Counterclaims and Cross Claims

    Rule 10314 of the current Code provides that claimants have 10 days
to answer a counterclaim, and respondents have 45 days to answer a
cross claim. Proposed Rules 12304 and 13304 of the Customer Code and
Industry Code, respectively, would extend the time that a claimant has
to answer a counterclaim from 10 to 20 days from receipt of the
counterclaim. In addition, Proposed Rules 12305 and 13305 of the
Customer Code and Industry Code, respectively, would shorten the time
that a respondent has to answer a cross claim from 45 days to 20 days
from the date that the respondent's answer to the statement of claim is
due, or from the receipt of the cross claim.
    NASD stated that standardizing these time frames would give parties
who have already filed or served a pleading the same amount of time to
respond to subsequent pleadings, and would reduce unnecessary delay in
the proceeding.
    The Commission believes that standardizing the time frames within
which parties may answer counterclaims and cross claims is consistent
with the purpose of maintaining a transparent, efficient, and fair
arbitration forum.

I. Proposed Rules 12307 and 13307--Deficient Claims

    Under current NASD practice, if a claimant files a deficient, or
incomplete, claim, NASD will notify the claimant, and the claimant has
30 days to correct the deficiency. If the deficiency is not corrected
within that time, the claim is dismissed without prejudice. NASD stated
that this practice is consistent with SICA's published Arbitration
Procedures. The current Code, however, does not expressly address what
constitutes a deficiency, or explain the process for identifying and
correcting deficiencies.
    Proposed Rules 12307 and 13307 of the Customer Code and Industry
Code, respectively, would codify NASD's deficiency practice and provide
that the Director will not serve a deficient, or incomplete, claim.
They also would enumerate the most common types of deficiencies. The
proposed rules also would make clear that the same standards apply to
deficient counterclaims, cross claims, and third-party claims served
directly by parties, and would prohibit arbitrators from considering
such claims unless the deficiencies were corrected within the time
allowed.
    The Commission believes that, by including deficiency standards and
procedures in the Customer Code and Industry Code and clarifying the
information required in an initial statement of claim, the proposed
rules should help to reduce delay in NASD arbitrations by reducing the
number of deficient claims. They thus should improve the efficacy and
efficiency of the arbitration process and of the forum generally. We
note that NASD stated it would consider comments raised regarding
Proposed Rule 12307 when considering whether future amendments are
made.

J. Proposed Rules 12309 and 13309--Amending Pleadings to Add Parties

    Under Rule 10328 of the current Code, parties may amend their
pleadings at any time prior to the appointment of the arbitration panel
but must obtain approval of the arbitrators before amending a pleading
after panel appointment. If a party is added to an arbitration
proceeding before the Director has consolidated the other parties'
arbitrator rankings, the newly-added party may participate in the
arbitrator selection process. However, if a party amends a pleading to
add a new party to the proceeding between the time that the Director
consolidates the arbitrator rankings and the time the panel is
appointed, the newly-added party is not able to participate in the
arbitrator selection process, or to object to being added to the
arbitration.
    Proposed Rules 12309 and 13309 of the Customer Code and Industry
Code, respectively, would provide that no party may amend a pleading to
add a party between the time that ranked arbitrator lists are due to
the Director and the time the panel is appointed. Proposed Rules
12309(c) and 13309(c) would provide that the party to be added after
panel appointment must be given an opportunity to be heard before the
panel decides the motion to amend. This is intended to ensure that a
party added to an arbitration by amendment either will be able to
participate in the arbitrator selection process, or will have the
opportunity to object to being added to the proceeding.
    The Commission believes that the proposed rules should promote the

efficacy and efficiency of the arbitration process and of the forum
generally. We also note that the proposed rules explain the rights of a
party added to an NASD arbitration proceeding with respect to
arbitrator selection.

K. Proposed Rules 12310 and 13310--Time to Answer Amended Pleadings

    Rule 10328 of the current Code provides that parties have 10
business days to answer an amended pleading. Other rules in the current
Code refer to calendar days. In the interest of uniformity, Proposed
Rules 12100(j) and 13100(j) of the Customer Code and Industry Code,
respectively, define the term ``day'' to mean calendar day. To reflect
these definitions, Proposed Rules 12310 and 13310 would give parties 20
calendar days, rather than 10 business days, to respond to amended
pleadings. NASD stated that, although this represents a slight
extension of time, it is consistent with the time to respond to
counterclaims and cross claims under Proposed Rules 12304 and 12305
under the Customer Code and Proposed Rules 13304 and 13305 under the
Industry Code. NASD further stated that standardizing time frames is
part of NASD's plain English initiative, and 20 calendar days is an
appropriate time period for responding to amended pleadings.
    The Commission believes that standardizing the time frames for
answering amended pleadings is consistent with the purpose of
maintaining a transparent, efficient, and fair arbitration forum.

L. Proposed Rules 12400 and 13400--Neutral List Selection System and
Arbitrator Rosters

    Under the current Code, NASD maintains a roster of public and non-
public arbitrators. Whether a panel consists of public or non-public
arbitrators, and in what combination, depends on the amount in dispute,
and, in industry cases, the nature of the dispute. Once the panel is
appointed, the parties jointly select the chairperson from the panel,
or, if the parties do not agree, the Director appoints the highest-
ranked arbitrator on the panel to serve as chairperson.\202\ Although
NASD provides voluntary chairperson training to its arbitrators,
arbitrators who serve as chairpersons are not currently required to
have chairperson training, to have any particular experience, or to
meet any other specific criteria beyond the requirements for serving as
an arbitrator. NASD stated that, over the years, one of the most
frequent suggestions for improving the quality and efficiency of NASD
arbitrations is to ensure that chairpersons, who play a vital role in
the administration of cases, have some degree of arbitrator experience
and training.
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    \202\ NASD estimates that parties agree on a chairperson only
about 20% of the time. See supra note 3, Notice of Filing of
Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto to
Amend NASD Arbitration Rules for Customer Disputes, Securities
Exchange Act Rel. No. 51856, at n. 6, and Notice of Filing of
Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto to
Amend NASD Arbitration Rules for Industry Disputes, Securities
Exchange Act Rel. No. 51857, at n. 8.
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    Both the Customer Code and Industry Code would require NASD to
create and maintain a third roster of arbitrators who are qualified to
serve as chairpersons. Proposed Rule 12400 would provide that, to be
chair-qualified, an arbitrator would need to be a public arbitrator and
complete the NASD training program or have ``substantially equivalent
training or experience,'' and be either: (1) An attorney who has sat
through two SRO arbitration cases through the award stage; or (2) a
non-attorney who has sat through at least three such cases. Chairperson
eligibility requirements under Proposed Rule 13400 of the Industry Code
are the same as under the Proposed Rule 12400, except that chairpersons
in industry cases could be public or non-public, depending on the
nature of the claim.
    The Commission believes that these specified criteria balance the
need to have qualified and experienced chairpersons administer NASD
arbitration cases with the goal of allowing arbitrators of all
professional backgrounds to qualify as chairpersons. The proposed rules
should help to ensure that chairpersons, who play a vital role in the
administration of cases, have some degree of arbitrator experience and
training, which in turn should improve the administration of cases in
NASD's forum.

M. Proposed Rules 12401 and 13401--Number of Arbitrators

    Rule 10308(b) of the current Code provides that if the amount of a
claim is $25,000 or less, the arbitration panel consists of one
arbitrator, unless that arbitrator requests a three-arbitrator panel.
If the claim is more than $25,000 but not more than $50,000, the panel
consists of one arbitrator, unless either that arbitrator, or any party
in its initial pleading, requests a three-arbitrator panel. A claim of
more than $50,000 is heard by a three-arbitrator panel.
    Proposed Rules 12401 and 13401 of the Customer Code and Industry
Code, respectively, would eliminate the ability of a single arbitrator
to request a three-arbitrator panel for any claim of $50,000 or less.
Parties, however, could still request a three-arbitrator panel in cases
involving more than $25,000, but not more than $50,000. NASD stated
that the proposed change is intended to streamline the administration
of smaller claims and minimize the cost of pursuing small claims.
    The Commission believes that allowing only the parties to decide
whether additional arbitrators are needed in these smaller claims
should give the parties more control over the costs of this aspect of
arbitration. This, in turn, should improve the efficacy of the
arbitration process.

N. Proposed Rules 12403 and 13403--Generating and Sending Lists to the
Parties

    Rule 10308 of the current Code provides that if the panel will
consist of one arbitrator, NASD will send the parties one list of
public arbitrators, unless the parties agree otherwise. If the panel
will consist of three arbitrators, NASD will send the parties two
lists, one with the names of public arbitrators and one with the names
of non-public arbitrators. The lists of public and non-public
arbitrators are provided in a ratio of approximately two to one,
respectively, to the extent possible, based on the roster of available
arbitrators. The parties have an unlimited number of strikes. In
addition, parties may request that the lists include arbitrators with
particular, designated expertise.
    Proposed Rules 12403 and 13403 of the Customer Code and Industry
Code, respectively, would expand the number of arbitrators named on
each list, but limit the number of strikes that each party may
exercise. In addition, the proposed rules would eliminate the ability
of parties to unilaterally request arbitrators with particular
expertise, which NASD stated is an ongoing source of controversy, and
burdensome for NASD staff to administer.
    The Commission believes that expanding the lists, but limiting the