[Federal Register: January 31, 2007 (Volume 72, Number 20)]
[Notices]
[Page 4573-4609]
[DOCID:fr31ja07-124]

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Part III

Securities and Exchange Commission

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Self-Regulatory Organizations--Proposed Rule Changes: National
Association of Securities Dealers, Inc.; Notice

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55158 ; File Nos. SR-NASD-2003-158; SR-NASD-2004-011]

Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Amendments 1,
2, 3, and 4 To Amend NASD Arbitration Rules for Customer Disputes and
Notice of Filing and Order Granting Accelerated Approval of Amendments
5, 6, and 7 Thereto; Order Approving Proposed Rule Change and
Amendments 1, 2, 3, and 4 To Amend NASD Arbitration Rules for Industry
Disputes and Notice of Filing and Order Granting Accelerated Approval
of Amendments 5, 6, and 7 Thereto

January 24, 2007.

I. Introduction

    The National Association of Securities Dealers, Inc. (``NASD''),
through its wholly owned subsidiary, NASD Dispute Resolution, Inc.
(``NASD Dispute Resolution''), filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') proposed rule changes to amend
the NASD Code of Arbitration Procedure in connection with rules
applicable to customer disputes (``Customer Code'') and to industry
disputes (``Industry Code'') on October 15, 2003 and January 16, 2004,
respectively, pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ Amendments 1,
2, 3, and 4 to the Customer Code were filed with the Commission on
January 3, January 19, April 8, and June 10, 2005, respectively.
Amendments 1, 2, 3, and 4 to the Industry Code were filed with the
Commission on January 3, February 26, April 8, and June 10, 2005,
respectively. The Customer Code and Amendments 1, 2, 3, and 4 thereto
(``Customer Code Notice'') and the Industry Code and Amendments 1, 2,
3, and 4 thereto (``Industry Code Notice'') were published for comment
on June 23, 2005.\3\ The Commission received 51 comments \4\ in
response to the Customer Code Notice and one comment \5\ in response to
the Industry Code Notice, all of which are available on the
Commission's Internet Web site at (http://www.sec.gov/rules/sro.shtml).

On May 4, 2006, NASD filed Amendments 5 to the Customer Code and to the
Industry Code. The Commission received 125 comments following NASD's
posting of Amendment 5 to the Customer Code on its Web site.\6\ The
Commission did not

receive any comments in connection with Amendment 5 to the Industry
Code. NASD filed Amendments 6 to the Customer Code and Industry Code on
July 21, 2006 and Amendments 7 to Customer Code and Industry Code on
August 15, 2006. NASD requested accelerated approval in connection with
Amendments 5, 6, and 7.\7\ This Order approves the Customer Code and
Industry Code, as amended, accelerating approval of Amendments 5, 6,
and 7 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See 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 (Jun. 15,
2005), 70 FR 36442 (Jun. 23, 2005); 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 (Jun. 15, 2005), 70 FR 36430 (Jun. 23, 2005).
    \4\ See Letter from Norman B. Arnoff, Esq., dated Aug. 12, 2004
(``Arnoff''); Letter from Daniel A. Ball, Esq., Selzer Gurvitch
Rabin & Obecny, Chtd., dated Jul. 14, 2005; Letter from Gail E.
Boliver, Esq., Boliver Law Firm, dated Jul. 13, 2005 (``Boliver'');
Letter from Timothy A. Canning, Esq., Law Offices of Timothy A.
Canning, dated Jul. 14, 2005 (``Canning''); Letter from Steven B.
Caruso, Esq., Maddox Hargett & Caruso, P.C., dated Jul. 13, 2005
(``Caruso''); Letter from Rebecca C. Davis, Esq., Tate, Lazarini &
Beall, PLC, dated Jul. 14, 2005 (``R. Davis''); Letter from James J.
Eccleston, Esq., Shaheen, Novoselsky, Staat, Filipowski & Eccleston,
P.C., dated Jul. 14, 2005 (``Eccleston''); Letter from Barry D.
Estell, Esq., dated Jul. 14, 2005 (``Estell''); Letter from Jonathan
W. Evans, Esq., Jonathan W. Evans & Associates, dated Jul. 14, 2005
(``Evans''); Letter from Martin L. Feinberg, Esq., dated Jul. 13,
2005 (``Feinberg''); Letter from Jeffrey A. Feldman, Esq., dated
Jul. 11, 2005 (``Feldman''); Letter from Stuart Finer, Esq., dated
Jul. 15, 2005 (``Finer''); Letter from William A. Fynes, dated Jul.
13, 2005 (``Fynes''); Letter from W. Scott Greco, Esq., Greco and
Greco, P.C., dated Jun. 24, 2005 (``Greco''); Letter from Scott C.
Ilgenfritz, Esq., Johnson, Pope, Bokor, Ruppel, and Burns, LLP,
dated Jul. 14, 2005 (``Ilgenfritz''); Letter from James S. Jones,
Esq., dated Mar. 30, 2006 (``Jones''); Letter from Wayne M. Josel,
Esq., Kaufmann, Feiner, Yamin, Gilden, & Robbins LLP, dated Jul. 13,
2005 (``Josel''); Letter from Spiro T. Komninos, Esq., Komninos,
Fowkes & Farrugia Law Group, LLC, dated Jul. 14, 2005
(``Komninos''); Letter from Stephen Krosschell, Goodman & Nekvasil,
dated Jul. 14, 2005 (``Krosschell''); Letter from Cary S. Lapidus,
Esq., Law Offices of Cary S. Lapidus, dated Jul. 14, 2005
(``Lapidus''); Letter from Richard M. Layne, Esq., Layne & Lewis
LLP, dated Jul. 12, 2005 (``Layne''); Letter from Royal Lea, Esq.,
Bingham & Lea, P.C., dated Jul. 14, 2005 (``Lea''); Letter from Dale
Ledbetter, Adorno & Yoss, dated Jul. 14, 2005 (``Ledbetter'');
Letter from Prof. Seth E. Lipner, Zicklin School of Business,
Member/Deutsch & Lipner, dated Jul. 13, 2005 (``Lipner''); Letter
from Jorge A. Lopez, Esq., dated Jul. 21, 2005 (``Lopez''); Letter
from Angela H. Magary, Brickley, Sears & Sorett, dated Jul. 14, 2005
(``Magary''); Letter from Stuart D. Meissner, Esq., Law Offices of
Stuart D. Meissner LLC., dated Jul. 12, 2005 (``Meissner''); Letter
from John J. Miller, Esq., Law Office of John J. Miller, P.C., dated
Jul. 12, 2005 (``Miller''); Letter from Jill I. Gross and Barbara
Black, Directors, Pace Investor Rights Project, dated Jul. 14, 2005
(``PACE''); Letter from J. Boyd Page, Esq. and Samuel T. Brannan,
Esq., Page Perry, LLC, dated Jul. 14, 2005 (``Page''); Letter from
Rosemary J. Shockman, President, and Robert S. Banks, Jr., Executive
Vice President, President Elect, Public Investors Arbitration Bar
Association, dated Jul. 13, 2005 (``PIABA''); Letter from Rosemary
Shockman, President, Public Investors Arbitration Bar Association,
dated Aug. 2, 2005 (``PIABA 2''); Letter from Herbert E.
Pounds, Herbert E. Pounds, Jr., P.C., dated Jul. 14, 2005
(``Pounds''); Letter from M. Clay Ragsdale, Esq., Ragsdale LLC,
dated Jul. 14, 2005 (``Ragsdale''); Letter from Howard M.
Rosenfield, Esq., dated Jul. 14, 2005 (``Rosenfield''); Letter from
Richard P. Ryder, President, Securities Arbitration Commentator,
Inc., dated Jul. 21, 2005 (``Ryder''); Letter from J. Pat Sadler,
dated Jul. 13, 2005 (``Sadler''); Letter from Laurence S. Schultz,
Esq., Driggers, Schultz & Herbst PC, dated Jun. 8, 2005
(``Schultz''); Letter from Laurence S. Schultz, Esq., Driggers,
Schultz & Herbst, dated Jul. 14, 2005 (``Schultz 2'');
Letter from Scott R. Shewan, Esq., Born, Pape & Shewan LLP, dated
Jul. 14, 2005 (``Shewan''); Letter from Edward G. Turan, Esq.,
Chair, Arbitration and Litigation Committee, Securities Industry
Association, dated Jul. 13, 2005 (``SIA''); Letter from Jeff Sonn,
Esq., Sonn & Erez, dated Jul. 14, 2005 (``Sonn''); Letter from Debra
G. Speyer, Esq., Law Offices of Debra G. Speyer, dated Jul. 14, 2005
(``Speyer''); Letter from Arnold Y. Steinberg, P.C., dated Jul. 14,
2005 (``Steinberg''); Letter from Steven A. Stolle, Esq., Rohde &
Van Kampen PLLC, dated Jul. 8, 2005 (``Stolle''); Letter from Andrew
Stoltmann, Stoltmann Law Offices, P.C., dated Jul. 14, 2005
(``Stoltmann''); Letter from Mark A. Tepper, Esq., Mark A. Tepper,
P.A., dated Jul. 14, 2005 (``Tepper''); Letter from Richard A.
Karoly, Vice President and Senior Corporate Counsel, Schwab & Co.,
Inc., dated Jul. 14, 2005 (``Schwab''); Letter from John E.
Sutherland, Esq., Brickley, Sears & Sorett, dated Jul. 14, 2005
(``Sutherland''); Letter from Steele T. Williams, P.A., dated Jul.
15, 2005 (``Williams''); Letter from Michael J. Willner, Esq.,
Miller Faucher and Cafferty LLP, dated Jul. 16, 2005 (``Willner'');
Letter from A. Daniel Woska, Woska & Hayes, LLP, dated Jun. 15, 2005
(``Woska'').
    \5\ Letter from Marvin Elster, dated Jun. 30, 2005 (``Elster'').
    \6\ Letter from Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari,
dated May 16, 2006 (``Aidikoff''); Letter from Ronald M. Amato,
Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C., dated May
30, 2006 (``Amato''); Letter from Sarah G. Anderson, dated May 15,
2006 (``Anderson''); Letter from Anonymous, dated May 15, 2006
(``Anonymous''); Letter from Robert W. Anthony, dated May 16, 2006
(``Anthony''); Letter from John G. Appel, Jr., dated May 18, 2006
(``Appel''); Letter from Kurt Arbuckle, Kurt Arbuckle, P.C., dated
May 22, 2006 (``Arbuckle''); Letter from C.W. Austin, Jr., dated May
15, 2006 (``Austin''); Letter from Daniel E. Bacine, Barrack, Rodos
& Bacine, dated May 15, 2006 (``Bacine''); Letter from Bruce E.
Baldinger, Levine & Baldinger, LLC, dated May 16, 2006
(``Baldinger''); Letter from Scott I. Batterman, Esq., Clay Chapman
Crumpton Iwamura & Pulice, dated May 15, 2006 (``Batterman'');
Letter from Scot Bernstein, Law Offices of Scot Bernstein, dated May
26, 2006 (``Bernstein''); Letter from Brian P. Biggins, Esq., Brian
P. Biggins & Associates Co., L.P.A., dated May 15, 2006
(``Biggins''); Letter from Rob Bleecher, Esq., dated May 15, 2006
(``Bleecher''); Letter from Gail E. Boliver, Boliver Law Firm, dated
May 15, 2006 (``Boliver 2''); Letter from Sam Brannan, Page
Perry LLC, dated May 16, 2006 (``Brannan''); Letter from Steve
Buchwalter, Law Offices of Steve A. Buchwalter, P.C, dated May 15,
2006 (``Buchwalter''); Letter from John S. Burke, Higgins & Burke,
P.C, dated May 15, 2006 (``J. Burke''); Letter from Thomas F. Burke,
May 22, 2006 (``T. Burke''); Letter from Tim Canning, dated May 15,
2006 (``Canning 2''); Letter from Carl J. Carlson, Carlson
& Dennett, P.S., dated May 12, 2006 (``Carlson''); Letter from
Jeremy B. Chalmers, Mars, Mars and Chalmers, dated May 16, 2006
(``Chalmers''); Letter from Roger F. Claxton, Claxton & Hill, dated
May 15, 2006 (``Claxton''); Letter from Erwin Cohn, Cohn & Cohn,
dated May 16, 2006 (``Cohn''); Letter from Patrick A. Davis, P.A,
dated May 16, 2006 (``P. Davis''); Letter from William F. Davis,
dated May 15, 2006 (``W. Davis''); Letter from Adam Doner, dated May
16, 2006 (``Doner''); Letter from James J. Eccleston, Shaheen,
Novoselsky, Staat, Filipowski & Eccleston, dated May 16, 2006
(``Eccleston 2''); Letter from Richard Elliott, dated May
16, 2006 (``Elliot''); Letter from Barry D. Estell, dated May 15,
2006 (``Estell 2''); Letter from Barry D. Estell, Esq.,
dated May 16, 2006 (``Estell 3''); Letter from Jonathan W.
Evans, Esq., Jonathan W. Evans & Associates, dated May 15, 2006
(``Evans 2''); Letter from Allan J. Fedor, Esq., dated May
22, 2006 (``Fedor''); Letter from Martin L. Feinberg, dated May 15,
2006 (``Feinberg 2''); Letter from Teresa M. Gillis, Esq.,
Shustak & Partners, dated May 16, 2006 (``Gillis''); Letter from
Robert W. Goehring, Esq., dated May 15, 2006 (``Goehring''); Letter
from Eliot Goldstein, Esq., Law Offices of Eliot Goldstein LLP,
dated May 16, 2006 (``Goldstein''); Letter from Jan Graham, Graham
Law Offices, dated May 15, 2006 (``Graham''); Letter from W. Scott
Greco, Greco & Greco, P.C., dated May 15, 2006 (``Greco
2''); Letter from Brian M. Greenman, Esq., dated May 15,
2006 (``Greenman''); Letter from Randall R. Heiner, Heiner Law
Offices, dated May 15, 2006 (``Heiner''); Letter from Eric Hewko,
dated May 20, 2006 (``Hewko''); Letter from Charles C. Hunter, Esq.,
Woska & Hayes, LLP, dated May 23, 2006 (``Hunter''); Letter from
Scott C. Ilgenfritz, dated May 15, 2006 (``Ilgenfritz 2'');
Letter from Wayne M. Josel, Kaufmann, Feiner, Yamin, Gildin &
Robbins, LLP, dated May 15, 2006 (``Josel 2''); Letter from
Jeffrey B. Kaplan, Dimond Kaplan Rothstein, P.A., dated May 16, 2006
(``Kaplan''); Letter from James D. Keeney, dated May 15, 2006
(``Keeney''); Letter from T. Michael Kennedy, dated May 15, 2006
(``Kennedy''); Letter from Joseph C. Korsak, Esq., Law Office of
Joseph C. Korsak, dated May 15, 2006 (``Korsak''); Letter from
Richard M. Layne, Layne & Lewis LLP, dated May 13, 2006 (``Layne
2''); Letter from Royal Lea, Bingham & Lea, P.C., dated May
16, 2006 (``Lea 2''); Letter from Dale Ledbetter, Adorno &
Yoss, dated May 15, 2006 (``Ledbetter 2''); Letter from
Prof. Seth E. Lipner, Zicklin School of Business, Member/Deutsch &
Lipner, dated May 15, 2006 (``Lipner 2''); Letter from
Jorge A. Lopez, Esq., Jorge A. Lopez, P.A., dated May 15, 2006
(``Lopez 2''); Letter from Michael B. Lynch, Esq., Law
Offices of James Richard Hooper, PA, dated May 16, 2006 (``Lynch'');
Letter from Daniel I. MacIntyre, Esq., Shapiro Fussell, dated May
16, 2006 (``MacIntyre''); Letter from Angela H. Magary, Brickley,
Sears & Sorett, dated May 31, 2006 (``Magary 2''); Letter from
Jenice L. Malecki, Esq., Malecki Law, dated May 16, 2006
(``Malecki''); Letter from Emerson R. Marks, Jr., Emerson R. Marks,
Jr., P.L.C., dated May 15, 2006 (``Marks''); Letter from Thomas D.
Mauriello, Law Offices of Thomas D. Mauriello, dated May 15, 2006
(``Mauriello''); Letter from Steven M. McCauley, Esq., Charles C.
Mihalek, P.S.C, dated May 16, 2006 (``McCauley''); Letter from C.
David Mee, Esq., Ajamie LLP, dated May 15, 2006 (``Mee''); Letter
from Stuart Meissner, Esq., The Law Offices of Stuart D. Meissner
LLC., dated May 15, 2006 (``Meissner 2''); Letter from
David P. Meyer, Esq., David P. Meyer Associates, Co. LPA, dated May
16, 2006 (``D. Meyer''); Letter from Stephen P. Meyer, Esq., Meyer &
Ford, dated May 16, 2006 (``S. Meyer''); Letter from John Miller,
Law Office of John J. Miller, P.C., dated May 15, 2006 (``Miller
2''); Letter from Stephen David Murakami, Esq., Hooper &
Weiss, LLC, dated May 16, 2006 (``Murakami''); Letter from Bryan
Lantagne, Director, Massachusetts Securities Division, Chair, NASAA
Broker-Dealer Arbitration Project Group, dated Jul. 19, 2006
(``NASAA''); Letter from Mitchell Ostwald, Law Office of Mitchell
Ostwald, dated May 16, 2006 (``Ostwald''); Letter from Jill Gross
and Barbara Black, Directors, Pace Investor Rights Project, Jun. 6,
2006 (``PACE 2''); Letter from Boyd Page, Page Perry LLC, dated May
16, 2006 (``Page 2''); Steve Parker, Page Perry, LLC, dated
May 16, 2006 (``Parker''); Letter from Henry I. Pass, Esq., The Law
Offices of Henry Ian Pass, dated May 15, 2006 (``Pass''); Letter
from Joseph C. Peiffer, Correro Fishman Haygood Phelps, dated May
15, 2006 (``Peiffer''); Letter from Susan N. Perkins, dated May 16,
2006 (``Perkins''); Letter from Steven B. Caruso, President-Elect,
Public Investors Arbitration Bar Association, dated May 16, 2006
(``PIABA 3''); Letter from Robert S. Banks, Jr., President,
Public Investors Arbitration Bar Association, dated May 26, 2006
(``PIABA 4''); Letter from Robert C. Port, Esq., Cohen Goldstein
Port & Gottlieb, LLP, dated May 20, 2006 (``Port''); Letter from
Herbert Pounds, Herbert E. Pounds, Jr., P.C., dated May 15, 2006
(``Pounds 2''); Letter from Thomas Quarles, Jr., Esq.,
Devine, Millimet & Branch, P.A., dated May 16, 2006 (``Quarles'');
Letter from Adam T. Rabin, Esq., Dimond Kaplan & Rothstein, P.A,
dated May 16, 2006 (``Rabin''); Letter from Kirk Reasonover, Esq.,
Smith & Fawer, L.L.C., dated May 16, 2006 (``Reasonover''); Letter
from Robert H. Rex, Esq., Dickenson Murphy Rex & Sloan, dated May
15, 2006 (``Rex''); Letter from David E. Robbins, Kaufmann, Feiner,
Yamin, Gildin & Robbins LLP, dated May 29, 2006 (``Robbins'');
Letter from J. Pat Sadler, dated May 16, 2006 (``Sadler
2''); Letter from Jay H. Salamon, Hermann Cahn & Schneider
LLP, dated May 15, 2006 (``Salamon''); Letter from Robert K. Savage,
Esq., The Savage Law Firm, P.A., dated May 16, 2006 (``Savage'');
Letter from Martin Seiler, dated May 15, 2006 (``Seiler''); Letter
from Steven Sherman, Law Offices of Steven M. Sherman, dated May 15,
2006 (``Sherman''); Letter from Scott R. Shewan, Born, Pape & Shewan
LLP, dated May 15, 2006 (``Shewan 2''); Letter from
Rosemary J. Shockman, Shockman Law Office, dated May 16, 2006
(``Shockman''); Letter from Brian N. Smiley, Gard Smiley & Bishop
LLP, dated May 15, 2006 (``Smiley''); Letter from James A. Sigler,
dated May 15, 2006 (``Sigler''); Letter from Scott Silver, Esq.,
Blum & Silver, LLP, dated May 17, 2006 (``Silver''); Letter from
Donald A.W. Smith, Esq., dated May 17, 2006 (``Smith''); Letter from
Jeff Sonn, dated May 22, 2006 (``Sonn 2''); Letter from Ben
Stewart, dated May 16, 2006 (``Stewart''); Letter from Tracy Pride
Stoneman, Tracy Pride Stoneman, P.C., dated May 16, 2006
(``Stoneman''); Letter from Mark A. Tepper, Mark A. Tepper P.A.,
dated May 15, 2006 (``Tepper 2''); Letter from William P.
Torngren, dated May 15, 2006 (``Torngren''); Letter from Al Van
Kampen, Rohde & Van Kampen PLLC, dated May 15, 2006 (``Van
Kampen''); Letter from James V. Weixel, Jr., Weixel Law Office,
dated May 15, 2006 (``Weixel''); Letter from Michael J. Willner,
Esq., Miller Faucher and Cafferty LLP, dated May 15, 2006 (``Willner
2''); Letter from A. Daniel Woska, Esq., Woska & Hayes,
LLP, dated May 12, 2006 (``Woska 2''); Letter from Todd
Young, dated May 15, 2006 (``T. Young''); Letter from William B.
Young, Jr., Hooper Weiss, LLC, dated Florida, May 18, 2006 (``W.
Young''); Letter from Elizabeth Zeck, Esq., Willoughby & Hoefer,
P.A., dated May 16, 2006 (``Zeck''). In addition, the Commission
received 15 form letters from individuals that were substantially
similar (``Letter Type A'') and three other form letters (``Letter
Type B'').
    \7\ Because the Customer Code and Industry Code, as amended by
Amendments 1, 2, 3, and 4 to each code, already have been published
for comment, the request for accelerated approval applies only to
Amendments 5, 6, and 7 to each code.
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II. Purpose for and Description of the Proposal

A. Background

    NASD proposed to amend the NASD Code of Arbitration Procedure
(``current Code'') to simplify the rule language into plain English,
reorganize the rules, codify certain practices, and implement several
substantive changes. The current Code would be reorganized into three
separate procedural codes: The NASD Code of Arbitration Procedure for
Customer Disputes; the NASD Code of Arbitration Procedure for Industry
Disputes; and the NASD Code of Mediation Procedure.\8\ The three new
codes are intended to replace the current Code in its entirety.
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    \8\ The Mediation Code was filed separately with the Commission
as SR-NASD-2004-013. The Commission approved the Mediation Code on
October 31, 2005, and it became effective on January 30, 2006. See
Order Granting Approval to Proposed Rule Change and Amendments Nos.
1 and 2 Thereto, and Notice of Filing and Order Granting Accelerated
Approval to Amendment No. 3, to Amend NASD Rules for Mediation
Proceedings, Securities Exchange Act Rel. No. 52705 (Oct. 31, 2005),
70 FR 67525 (Nov. 7, 2005) (SR-NASD-2004-013).
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    This approval order pertains to the Customer Code and Industry
Code, the final texts of which are available on the NASD Web site at
http://www.nasd.com/web/[fxsp0]groups/med--arb/[fxsp0]documents/

mediation--arbitration/[fxsp0]nasdw--018335.pdf. Charts comparing the
current Code to the Customer Code and Industry Code are also available
at the URL above. Descriptions of the proposed rule changes, as amended
by Amendments 1, 2, 3, and 4, are contained in the Customer Code Notice
and Industry Code Notice \9\ and are also available at NASD's principal
office and at the Commission's Public Reference Room.
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    \9\ See supra n. 3.
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B. Purpose and Description

    In 1998, the SEC launched an initiative to encourage issuers and
self-regulatory organizations (``SROs'') to use ``plain English'' in
disclosure documents and other materials used by investors. Because the
current Code is used by investors, including investors who appear pro
se in the NASD forum, NASD undertook to rewrite the current Code in
``plain English.'' Over time, the goals of the plain English initiative
expanded beyond simplifying the language and sentence structure of the
rules in the Code to include:
     Reorganizing the current Code in a more logical, user-
friendly way, including creating separate codes for

customer and industry arbitrations, and for mediations; and
     Implementing several substantive rule changes, including
codifying several common practices, to provide more guidance to parties
and arbitrators, and to streamline the administration of arbitrations
in the NASD forum.
1. Plain English
    When it launched its ``plain English'' initiative in 1998, the SEC
published a ``Plain English Handbook'' to provide guidance to issuers
and SROs in drafting materials intended to be used by investors. The
SEC's Plain English Handbook recommended using shorter, more common
words; breaking long rules into shorter ones; using the active voice
whenever possible; and putting lists into easy-to-read formatting, such
as bullet points.
    NASD stated that, in revising the current Code, it implemented
these guidelines wherever possible. Throughout the Customer and
Industry Codes, NASD simplified language and eliminated unnecessarily
legalistic or arcane terminology. Long rules, such as current Rule
10308 (Selection of Arbitrators) and current Rule 10321 (General
Provisions Governing Pre-Hearing Proceedings), have been broken into
several shorter rules.\10\ Where appropriate, NASD has presented lists
in bullet point format and used active verbs.
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    \10\ For example, Rule 10308 of the current Code is contained in
Proposed Rules 12400-12406 for the Customer Code and 13400-13406 for
the Industry Code.
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    The Customer and Industry Codes also contain new definitions rules
(Proposed Rules 12100 and 13100, respectively) that define commonly
used terms applicable throughout the current Code.\11\ NASD believes
that a comprehensive definitions rule will make the Customer and
Industry Codes easier to understand and to use and will help eliminate
confusion about the meaning and scope of frequently used terms. It will
also allow NASD to use shorter phrases, or single words, in place of
longer phrases in its rules.\12\ This makes rules easier to read and
understand, without changing the meaning of the current Code.
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    \11\ Some rules in the current Code, such as Rule 10308, contain
definitions applicable to that rule only. However, there is no
general definitions rule that applies to the entire current Code.
    \12\ For example, the phrase ``dispute, claim, or controversy''
has been replaced by the word ``dispute,'' which has been defined in
Proposed Rules 12100 and 13100, respectively, to mean the longer
phrase.
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2. Reorganization
    One of the most frequent criticisms of the current Code is that it
is poorly organized. Parties, particularly infrequent users of the
forum, have difficulty finding the rules they are looking for, because
the organization of the rules is not clear. The confusion is compounded
because certain rules in the current Code apply only to customer cases,
some apply only to industry cases, and others apply to both types of
disputes. In addition, the current Code contains the NASD mediation
rules, even though many matters are submitted directly to mediation,
and do not arise out of an arbitration proceeding.
    To address these concerns, NASD proposed to divide the current Code
into three separate Codes: The Customer Code, the Industry Code, and
the Mediation Code.\13\ Although many of the rules in the Customer and
Industry Codes will be identical, NASD believes that maintaining
separate arbitration codes will eliminate confusion regarding which
rules are applicable to which types of disputes. NASD intends to
maintain electronic versions of each code on its Web site, http://www.nasd.com
, and will make paper copies available upon request.

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    \13\ As noted above, the Commission approved the Mediation Code
in October 2005. See supra note 8.
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    In keeping with the current NASD rule numbering system, each code
will be numbered in the thousands, and major sections will be numbered
in the hundreds. Individual rules within those sections will be
numbered in the tens (or ones, if necessary). The current method for
numbering and lettering paragraphs within individual rules will remain
unchanged. In particular, the Customer Code will use the Rule 12000
series, and the Industry Code will use the Rule 13000 series.\14\
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    \14\ Both of these series are currently unused. The Mediation
Code uses the Rule 14000 series. NASD will reserve the Rule 10000
series, which is currently used for NASD's dispute resolution rules,
for future use.
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    To make it easier to find specific rules, the Customer Code will be
divided into the following nine parts, which are intended to
approximate the chronological order of a typical arbitration:
     Part I (Rule 12100 et seq.) contains definitions, as well
as other rules relating to the organization and authority of the forum;
     Part II (Rule 12200 et seq.) contains general arbitration
rules, including what claims are subject to arbitration in the NASD
forum;
     Part III (Rule 12300 et seq.) contains rules explaining
how to initiate a claim, how to respond to a claim, how to amend
claims, and when claims may be combined and separated;
     Part IV (12400 et seq.) contains rules relating to the
appointment, authority and removal of arbitrators;
     Part V (Rules 12500 et seq.) contains rules governing the
prehearing process, including proposed new rules relating to motions
and discovery;
     Part VI (Rules 12600 et seq.) contains rules relating to
hearings;
     Part VII (Rules 12700 et seq.) contains rules relating to
the dismissal, withdrawal, or settlement of claims;
     Part VIII (Rules 12800 et seq.) contains rules relating to
simplified (small cases) arbitrations and default proceedings; and
     Part IX (Rules 12900 et seq.) contains rules relating to
fees and awards. The Industry Code will use the same divisions,
numbered under the 13000 series.
3. Description of Other Changes
    In addition to simplifying and reorganizing the current Code, the
Customer and Industry Codes include other changes that NASD states are
intended to make the NASD arbitration process as simple, uniform, and
transparent as possible. Some of these changes codify or clarify
current NASD practice. Others are intended to provide guidance to
parties, resolve open questions, or streamline or standardize the
administration of NASD arbitrations.
4. Relationship Between Proposed Customer Code and Industry Codes
    Although the Customer Code and Industry Code are similarly
organized and numbered, there are two main differences. First, some
rules in the current Code contain different provisions for customer and
industry disputes.\15\ For such rules, the Customer Code contains only
the provisions that relate to customer disputes, and the Industry Code
contains only the provisions that relate to industry cases.
---------------------------------------------------------------------------

    \15\ E.g., current Rule 10308 (Selection of Arbitrators)
requires that three-arbitrator panels in customer cases consist of a
majority of public arbitrators but provides that the composition of
the panel in industry disputes depends on the nature of the claim.
---------------------------------------------------------------------------

    Second, some rules in the current Code apply only to industry
disputes. These rules are included in the Industry Code but have no
counterpart in the Customer Code.\16\ NASD has not proposed any
substantive changes to

those parts of the current Code that are unique to industry cases.
---------------------------------------------------------------------------

    \16\ See, e.g., Rules 10210 and 10211 of the current Code,
governing statutory employment discrimination claims, and Rule 10335
of the current Code, governing injunctive relief.
---------------------------------------------------------------------------

III. Summary of Comments on the Customer Code as Amended by Amendments
1, 2, 3, and 4 Thereto and Description of Amendments 5, 6, and 7 to the
Customer Code \17\
---------------------------------------------------------------------------

    \17\ Section III discusses Amendments 5, 6, and 7 to the
Customer Code. Section IV, below, discusses Amendments 5, 6, and 7
to the Industry Code.
---------------------------------------------------------------------------

    As noted above, in Amendment 5 to the Customer Code, NASD responded
to comments on the Customer Code Notice,\18\ proposed additional rule
changes, most of which were in response to comments, and requested
accelerated approval of the Customer Code.\19\ After NASD filed
Amendment 5 with the Commission, the Commission received 125 additional
comments. Many of the comments centered on: (1) NASD's request for
accelerated approval; \20\ (2) provisions of Proposed Rules 12506
(Document Production Lists) and 12514 (Exchange of Documents and
Witness Lists Before Hearing), as published in the Customer Code
Notice, that concern the production during discovery of documents
within a party's ``control''; \21\ and (3) Proposed Rule 12504 (Motions
to Decide Claims Before a Hearing on the Merits), as amended by
Amendment 5.\22\ In response to these comments, NASD filed Amendment 6
to the Customer Code with the Commission on July 21, 2006, in which it
withdrew Proposed Rule 12504 (Motions to Decide Claims Before a Hearing
on the Merits) and all references thereto from the Customer Code.\23\
---------------------------------------------------------------------------

    \18\ See supra note 3.
    \19\ The request for accelerated approval applies to all
amendments filed after the Customer Code Notice, which are
Amendments 5, 6, and 7.
    \20\ See, e.g., Aidikoff, Appel, Arbuckle, Austin, Baldinger,
Baccine, Batterman, Bernstein, Biggins, Bleecher, Brannan,
Buchwalter, T. Burke, Canning 2, Chalmers, Claxton, Cohn,
P. Davis, Doner, Elliott, Evans 2, Feinberg 2,
Gillis, Goldstein, Graham, Greco 2, Greenman, Hewko,
Hunter, Kaplan, Keeney, Korsak, Lea 2, Levine, Lopez
2, Lynch, MacIntyre, Magary 2, Malecki, Marks,
McCauley, Mee, Meissner 2, Meyer, S. Meyer, Miller
2, Murakami, Ostwald, Page 2, Parker, Pass,
Peiffer, Perkins, PIABA 3, Port, Pounds 2,
Quarles, Rabin, Reasonver, Robbins, Sadler, Salamon, Savage, Seiler,
Sherman, Shewan 2, Shockman, Sigler, Silver, Smiley, Smith,
Sonn 2, Stewart, Stoneman, Van Kampen, W. Young.
    \21\ See, e.g., Eccleston 2, Fedor, Kaplan, Lipner
2, Page 2, Perkins, PIABA 4, Shockman,
Smiley.
    \22\ See e.g., Aidikoff, Brannan, Boliver 2, Carlson,
Fedor, Kaufman, Lantagne, Lipner, PACE 2, Page 2,
PIABA 3, PIABA 4, Robbins, Rothstein, Shockman,
Smiley, Sonn 2, Tepper 2.
    \23\ Proposed Rule 12504 has been re-filed as a separate
proposed rule change and published for public comment. See
Securities Exchange Act Rel. No. 54360 (Aug. 24, 2006), 71 FR 51879
(Aug. 31, 2006) (SR-NASD-2006-088).
---------------------------------------------------------------------------

    NASD filed Amendment 7 to the Customer Code with the Commission on
August 15, 2006. In this amendment, NASD further responded to comments
concerning Proposed Rules 12506 (Document Production Lists) and 12514
(Exchange of Documents and Witness Lists Before Hearing) by amending
Proposed Rule 12508 (Objecting to Discovery; Waiver of Objection). In
addition, NASD amended other proposed rules, provided additional
clarification concerning certain NASD practices and rules, and
responded to one comment submitted in response to Amendment 5 to the
Customer Code.
    A summary of comments received in connection with the Customer Code
Notice and NASD's responses, as well as a description of the amendments
to proposed rule text made in Amendments 5, 6, and 7 are included
below. References to Amendments 5, 6, or 7 in this Section 0 refer to
Amendments 5, 6, or 7 to the Customer Code only, unless otherwise
specified. For the text of Amendments 5, 6, and 7, please see the NASD
Web site at http://www.nasd.com/web/[fxsp0
]idcplg?IdcService=[fxsp0]SS--GET--[fxsp0]PAGE&ssDocName=NASDW--

[fxsp0]009306&=802.

A. General Comments

    In the Customer Code Notice, the Commission solicited comment on
the differences between provisions in the Customer Code and their
counterparts in the Uniform Code of Arbitration (``Uniform Code'')
developed by the Securities Industry Conference on Arbitration
(``SICA'').\24\ One commenter favored the Uniform Code provisions over
those of the Customer Code, stating that because NASD's arbitration
program operates from a position of dominance, it has abandoned the
premise of uniformity under which SICA operates.\25\
---------------------------------------------------------------------------

    \24\ SICA is a cooperative organization that is composed of
public members, as well as representatives of the SROs and the
Securities Industry Association. SICA works toward improving the
dispute resolution process by considering current issues, case law,
and policy in connection with arbitration, and amending the Uniform
Code in light of those considerations when appropriate. SROs have
often revised their own arbitration rules in accordance with changes
in the Uniform Code.
    \25\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it participates actively in
SICA and values the input of SICA participants. In some instances,
however, the nature and volume of NASD's caseload require NASD to adopt
rules either in advance of other SROs or that differ from other SROs'.
NASD also stated that to gather a wide range of ideas and information,
it regularly discusses rule proposals with the same constituencies
represented at SICA: Representatives of the investor and industry
communities, as well as arbitrators and mediators.

B. Proposed Rule 12100--Definitions

1. Definitions Added in Amendment 5
    As noted above, the Customer Code includes a comprehensive
definitions section. Two commenters suggested defining the term
``customer'' to help clarify jurisdictional and standing issues related
to arbitration.\26\ One commenter also suggested defining the term
``pleadings'' to assist pro se claimants to understand which documents
are required for their arbitration claims.\27\ Another commenter
suggested defining the term ``award'' to minimize the confusion
concerning what type of ruling by the panel constitutes an award.\28\
NASD proposed to define these terms in the Customer Code in Amendment
5.\29\ As amended, Proposed Rule 12100 would define an ``award'' in
paragraph (b) as ``a document stating the disposition of a case.''
Paragraph (i) would define a ``customer'' as not including a broker or
dealer. NASD noted that the definition of ``customer'' would be the
same as that found in the general definitions for NASD rules, Rule
0129(g). Paragraph (s) of the rule would define a ``pleading'' as ``a
statement describing a party's causes of action or defenses. Documents
that are considered pleadings are: a statement of claim, an answer, a
counterclaim, a cross claim, a third party claim, and any replies.''
---------------------------------------------------------------------------

    \26\ PACE and Ryder.
    \27\ PACE.
    \28\ Ryder.
    \29\ As a result of these new definitions, the remaining
definitions would be re-designated in alphabetical order.
---------------------------------------------------------------------------

2. Proposed Rule 12100(a)--Definition of Associated Person; Proposed
Rule 12100(r)--Definition of Person Associated With a Member
    Proposed Rules 12100(a) and 12100(r) provide that, for purposes of
the Customer Code, an associated person includes a person formerly
associated with a member. One commenter suggested that, consistent with
NASD By-Laws,\30\ the concept of a formerly associated person should be
limited to persons who have been associated within two years.\31\ This
commenter asserted that when read in conjunction with Proposed Rule
12200 (concerning mandatory arbitration), these definitions would
subject formerly associated persons to NASD Dispute Resolution's
jurisdiction in perpetuity. In the

commenter's view, no NASD by-laws or NASD Dispute Resolution rules
permit lifelong jurisdiction.
---------------------------------------------------------------------------

    \30\ See NASD By-Laws, Art. V, Sec. 4.
    \31\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that the two-year retention of
jurisdiction in Article V, Section 4 of NASD's By-Laws is for NASD
regulatory purposes and does not apply to arbitrations. In the
arbitration context, NASD maintains jurisdiction over a formerly
associated person for events that occurred while the person was
associated with a member firm (or related to the person's termination
of employment with a member firm, in the case of industry disputes).
NASD noted that such arbitrations would be subject to any applicable
statutes of limitation, as well as the six-year eligibility rule under
Proposed Rule 12206. NASD thus is not proposing to amend Proposed Rules
12100(a) and 12100(r).
3. Proposed Rule 12100(u)--Definition of Public Arbitrator; Proposed
Rule 12100(p)--Definition of Non-Public Arbitrator
    NASD proposed to define ``public arbitrator'' and ``non-public
arbitrator'' in the Customer Code the same way as in Rules 10308(a)(5)
and (a)(4), respectively, of the current Code. Twenty-three commenters
expressed concern with the definitions of public arbitrator and non-
public arbitrator.\32\ As a preliminary matter, they urged NASD to
change the term ``non-public arbitrator'' to ``industry arbitrator.''
In their view, the current terminology is not consistent with the goal
of rewriting the Customer Code in plain English. They suggested that
the term ``industry arbitrator'' would assist pro se parties or
inexperienced attorneys with no background in arbitration.
---------------------------------------------------------------------------

    \32\ Boliver, Canning, Caruso, Estell, Evans, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PIABA,
Pounds, Rosenfield, Sadler, Schultz 2, Shewan, Stoltmann,
Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that it has used the term ``non-public
arbitrator'' since the Commission approved the Neutral List Selection
System (``NLSS'') in 1998.\33\ NASD expressed the belief that users of
its forum understand the term, and thus did not agree that the term
should be changed.
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Rel. No. 40555, 63 FR 56670
(Oct. 22, 1998) (SR-NASD-1998-48).
---------------------------------------------------------------------------

    Commenters also suggested several changes to the definition of
``public arbitrator'' and objected to the inclusion of a non-public
arbitrator on three-person panels.\34\ In Amendment 5, NASD responded
that because it did not propose substantive amendments to these
provisions in the Customer Code, those suggestions are outside the
scope of the rule filing. The Commission notes that changes to the
definition of ``public arbitrator'' are addressed in a separate rule
filing.\35\
---------------------------------------------------------------------------

    \34\ Boliver, Canning, Caruso, Estell, Evans, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PIABA,
Pounds, Rosenfield, Sadler, Schultz 2, Shewan, Stoltmann,
Sutherland, and Willner.
    \35\ The Commission recently approved the rule changes proposed
in the rule filing. See Order Approving Proposed Rule Change and
Amendment No. 1 Thereto Relating to Amendments to the Classification
of Arbitrators Pursuant to Rule 10308 of the NASD Code of
Arbitration Procedure, Securities Exchange Act Rel. No. 54607 (Oct.
16, 2006), 71 FR 62026 (Oct. 20, 2006) (SR-NASD-2005-094); Notice of
Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating
to Amendments to the Classification of Arbitrators Pursuant to Rule
10308 of the NASD Code of Arbitration, Securities Exchange Act Rel.
No. 52332 (Aug. 24, 2005), 70 FR 51365 (Aug. 30, 2005) (SR-NASD-
2005-094).
---------------------------------------------------------------------------

C. Proposed Rule 12102--National Arbitration and Mediation Committee

    Proposed Rule 12102 includes the size and composition requirements
of the National Arbitration and Mediation Committee (``NAMC''). One
commenter noted that these requirements are not in the current
Code.\36\ NASD responded in Amendment 5 that Proposed Rule 12102 would
codify the requirements of the Plan of Allocation and Delegation of
Functions by NASD to Subsidiaries.\37\
---------------------------------------------------------------------------

    \36\ Ryder.
    \37\ See NASD Manual, Plan of Allocation and Delegation of
Functions by NASD to Subsidiaries, Part V(c)(1)(b); Securities
Exchange Act Rel. No. 37107 (Apr. 11, 1996) (SR-NASD-96-16).
---------------------------------------------------------------------------

D. Proposed Rule 12103--Director of Dispute Resolution

    Proposed Rule 12103 includes a delineation of the duties and
responsibilities of the Director of Dispute Resolution with respect to
the NAMC. One commenter noted that the proposed rule would change the
Director's relationship with the NAMC.\38\ Specifically, the current
Code provides that the Director ``shall be directly responsible to the
NAMC and shall report to it at periodic intervals established by the
Committee and at such other times as called upon by the Committee to do
so.'' The Customer Code provides that the Director ``shall consult with
the NAMC upon the NAMC's request.''
---------------------------------------------------------------------------

    \38\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that the proposed rule reflects current
practice. Pursuant to Article V, Section 5.1 of the NASD Dispute
Resolution By-Laws, the Director reports to the President of NASD
Dispute Resolution and, ultimately as an officer, to the NASD Dispute
Resolution Board. The Director meets with the NAMC, usually every
quarter, and updates the Committee on the state of the arbitration
forum. At this time, the Director receives feedback and suggestions on
arbitration rules and procedures from NAMC.
    Another commenter expressed concern regarding provisions in
Proposed Rule 12103 that would give the Director the authority to
delegate certain functions.\39\ In this commenter's experience,
arbitrators seek out the advice of NASD staff on certain issues, such
as subpoenas, discovery matters, and motions. This commenter believes
NASD staff should not provide opinions on such issues, but rather they
should be addressed to the panel and, if necessary, argued by the
parties.
---------------------------------------------------------------------------

    \39\ Magary.
---------------------------------------------------------------------------

    NASD responded in Amendment 5 that its current policy is for staff
to advise arbitrators on procedural matters, but not to provide
opinions on substantive issues. If arbitrators ask staff about
substantive matters, NASD staff suggest that the arbitrators ask the
parties to brief the issue so that the arbitrators can make a decision.
NASD stated that it would emphasize this policy when it trains its
staff on the Customer Code.

E. Proposed Rule 12104--Effect of Arbitration on NASD Regulatory
Activities

    Proposed Rule 12104 provides that submitting a dispute to
arbitration does not prevent NASD from taking additional regulatory
action, if warranted. The rule would allow any arbitrator to make
disciplinary referrals at the conclusion of an arbitration.
    One commenter suggested that the proposed rule also should
authorize regulatory sanctions for breaches of the procedural
requirements of the arbitration rules.\40\ In Amendment 5, NASD
responded that because Proposed Rule 12104 is substantially the same as
Rule 10105 of the current Code, the comment is outside the scope of the
rule filing.
---------------------------------------------------------------------------

    \40\ Ryder.
---------------------------------------------------------------------------

F. Proposed Rule 12105--Agreement of the Parties

    As published in the Customer Code Notice, Proposed Rule 12105(a)
would allow parties to modify a provision of the Code or a decision of
the Director or the panel by written agreement. Proposed Rule 12105(b)
provides 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. In
the Customer Code Notice, the Commission requested comment on whether
the term ``inactive'' is defined sufficiently.
    While one commenter thought the concept of an ``inactive'' party is
sufficiently clear,\41\ others suggested specifying that an
``inactive'' party is a party in default for failure to file a response
to a claim, counter-claim, or cross claim.\42\
---------------------------------------------------------------------------

    \41\ PACE.
    \42\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD stated that based on current practices in its
forum, the term ``inactive'' could apply to: (1) A party who answers
and then fails to respond to administrative matters or correspondence;
(2) a claimant who cannot be found, after the claimant's attorney
withdraws; or (3) a party who does not answer. In Amendment 7, NASD
proposed to include a non-exhaustive list inactive parties. Proposed
Rule 12105 is amended in Amendment 7 as follows (new language in
italics):
12105. Agreement of the Parties
    (a) No change.
    (b) 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. For purposes of this rule, an inactive
party could be, but is not limited to: (1) A party that does not
answer; (2) a party that answers and then fails to respond to
correspondence sent by the Director; (3) a party that answers and then
fails to respond to correspondence sent by the panel in cases involving
direct communication under Rule 12211; or (4) a party that does not
attend pre-hearing conferences.

G. Proposed Rule 12200--Arbitration Under an Arbitration Agreement or
the Rules of NASD

1. Insurance Business Exception
    Proposed Rule 12200 provides that parties must arbitrate a dispute
under the Customer Code if (1) A written agreement requires it or the
customer requests it; (2) the dispute is between a customer and a
member or associated person of a member; and (3) the dispute arises in
connection with the business activities of a member or associated
person, unless the claims involve the insurance business activities of
a member that is also an insurance company. Eighteen commenters argued
that the rule could be read to exclude variable annuity claims from
arbitration because some state statutes treat these products solely as
insurance products, not securities.\43\ In their view, the choice of
whether to arbitrate variable annuity claims against NASD members
should belong to the investor.
---------------------------------------------------------------------------

    \43\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that variable annuities are securities
and are not excluded from arbitration under the exception for disputes
involving the insurance business of a member that is also an insurance
company in current Rule 10101 (concerning matters eligible for
submission). According to NASD, no substantive change is intended in
Proposed Rule 12200.
2. Requests by the Customer to Arbitrate
    Under Proposed Rule 12200, parties must arbitrate if ``requested by
the customer,'' and if the other requirements of the rule are
satisfied. One commenter suggested inserting the words ``of the
member'' after the word ``customer'' in the proposed rule text.\44\
This commenter asserted that this change would eliminate attempts by
customers to demand arbitration of disputes against firms with which
the customer does not have an account or other relationship. Another
commenter opposed this suggestion because it could preclude ``selling
away'' claims (allegations that an associated person engaged in
securities activities outside his or her firm).\45\ This commenter
stated that substantial judicial precedent supports the right of a
customer to file a selling away claim against the brokerage firm that
employed such an associated person, even if the customer has no account
with that firm.
---------------------------------------------------------------------------

    \44\ SIA.
    \45\ Eccleston.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that adding the words ``of the
member'' after the word ``customer'' would inappropriately narrow the
scope of claims that are required to be arbitrated under the Customer
Code. Further, NASD noted that because Proposed Rule 12200 is
substantially the same as Rule 10301 of the current Code, the comment
is outside the scope of the rule filing.
3. ``Business Activities''
    Rule 10301(a) of the current Code provides that a dispute, claim,
or controversy arising in connection with the ``business of'' a member
or the ``activities of'' an associated person is eligible for
arbitration. In comparison, Proposed Rule 12200 would provide that
disputes arising from the ``business activities of the member or the
associated person'' must be arbitrated if the other conditions of the
rule are satisfied. One commenter suggested that this change could
alter the scope of disputes that members must arbitrate with customers,
as well as the scope of the exception for disputes involving
``insurance business activities'' of a member.\46\
---------------------------------------------------------------------------

    \46\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that Proposed Rule 12200 is
substantively the same as Rule 10301 of the current Code and is not
intended to change the scope of arbitrable disputes. NASD also proposed
deleting the insurance company exception from Proposed Rule 12200,
noting that it is included in Proposed Rule 12201.
    NASD reconsidered this decision in Amendment 7, and again proposed
to include the insurance business exception in Proposed Rule 12200.
Rule 10101 of the current Code provides that insurance disputes are not
eligible for arbitration,\47\ and Rules 10201 and 10301 of the current
Code delineate the eligible disputes that parties are required to
arbitrate. According to NASD, the proposed rules in the Customer Code
were rearranged to place the mandatory arbitration provision before the
elective arbitration provision in the Customer Code. Because of this
organization, NASD believes that clarity requires the insurance
exception to be included in both provisions.
---------------------------------------------------------------------------

    \47\ Rule 10101 provides, ``This Code of Arbitration Procedure
is prescribed and adopted pursuant to Article VII, Section 1(a)(iv)
of the By-Laws of the Association for the arbitration of any
dispute, claim, or controversy arising out of or in connection with
the business of any member of the Association, or arising out of the
employment or termination of employment of associated person(s) with
any member, with the exception of disputes involving the insurance
business of any member which is also an insurance company.''
---------------------------------------------------------------------------

    NASD also proposed to clarify in Amendment 7 that the term
``business activities of a member'' in Proposed Rule 12200 would
include ``selling away'' claims. Under the current Code, NASD accepts
cases brought by customers against associated persons in selling away
cases, and cases by customers against the associated person's member
firm if there is any allegation that the member was or

should have been involved in the events, such as an alleged failure to
supervise the associated person. As stated in Amendment 5, Proposed
Rule 12200 is not intended to change the scope of arbitrable disputes.
NASD reiterated in Amendment 7 that it would continue to accept these
types of cases under the Customer Code.

H. Proposed Rule 12201--Elective Arbitration

1. Business Activities
    The elective arbitration provision of Proposed Rule 12201, like the
mandatory arbitration provision of Proposed Rule 12200, describes the
scope of disputes that parties may choose to arbitrate, if the other
conditions of the rule are satisfied, as relating to the ``business
activities of a member or an associated person, except disputes
involving the insurance business activities of a member that is also an
insurance company.'' One commenter suggested that this phrasing, and in
particular the term ``business activities,'' could alter the scope of
disputes that parties could elect to arbitrate.\48\ This commenter
viewed the reference to ``business activities'' of an associated person
as a substantive change to the types of cases that parties may agree to
arbitrate, stating that the phrase implies a ``scope of employment''
construction. This commenter also noted that including the ``insurance
company'' exception in the elective arbitration rule implies that NASD
cannot entertain the arbitration of such disputes, even if all the
parties agree.
---------------------------------------------------------------------------

    \48\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD disagreed with the commenter, stating that
Proposed Rule 12201 is not intended to alter the scope of claims that
currently are eligible for voluntary arbitration under Rule 10101 of
the current Code. Thus, NASD did not propose to amend Proposed Rule
12201. (See also Section 0, regarding selling away claims.)
2. Disclosures Regarding Insurance
    Three commenters suggested that respondents should be required to
disclose ``the presence and amount of insurance, if applicable.'' \49\
These commenters stated that small brokerage firms that have insurance
are able to coerce small settlements by falsely claiming an inability
to pay. Two commenters also stated, ``[c]laimants, who are selecting
arbitrators (some of whom have insurance affilations) need to know
whether an insurance company lawyer is defending.'' \50\ In Amendment
5, NASD stated that because Proposed Rule 12201 is substantively the
same as Rule 10101 of the current Code, these comments are outside the
scope of the rule filing.
---------------------------------------------------------------------------

    \49\ Canning, Lipner, and Sutherland.
    \50\ Canning, Lipner.
---------------------------------------------------------------------------

I. Proposed Rule 12203--Denial of NASD Forum

    Rule 10301(b) of the current Code provides that the Director of
Arbitration, upon approval of the NAMC or its Executive Committee, may
decline to permit the use of the NASD arbitration forum if the
``dispute, claim, or controversy is not a proper subject matter for
arbitration.'' Proposed Rule 12203(a) would 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.'' To ensure
that the authority to deny the forum could not be delegated by the
Director, the rule would provide that only the Director or the
President of NASD Dispute Resolution may exercise the Director's
authority under the rule.
    One commenter suggested that the proposed rule should clarify that
if the Director or President denies the use of the forum, and if there
is no alternative forum specified in the arbitration agreement, a
customer can pursue his or her remedies in court.\51\ In Amendment 5,
NASD responded that it does not believe it is appropriate for NASD to
offer an opinion as to any other remedies that a party might be able to
pursue. Accordingly, NASD amended the title of the proposed rule to
read ``Denial of NASD Forum'' to avoid the suggestion that it is under
an obligation to refer a party to another forum.
---------------------------------------------------------------------------

    \51\ PACE.
---------------------------------------------------------------------------

    Another commenter expressed concern that the proposed rule would no
longer require the Director to obtain the approval of the NAMC or the
Executive Committee to deny access to the arbitration forum.\52\ In
Amendment 5, NASD stated that the proposed rule is intended to address
circumstances that may require immediate resolution, such as security
concerns and other unusual but serious situations, and in which the
Director needs flexibility. Noting that the proposed rule provides that
this authority may only be exercised by the Director or the President
of NASD Dispute Resolution, NASD did not propose an amendment to
Proposed Rule 12203 in connection with this comment.
---------------------------------------------------------------------------

    \52\ Ryder.
---------------------------------------------------------------------------

J. Proposed Rule 12204--Class Actions

    Rule 10301 of the current Code provides that a claim is not
eligible for arbitration at NASD if it is (1) submitted as a class
action, or (2) filed by a member or members of a putative or certified
class action, if the claim is encompassed by a putative or certified
class action filed in federal or state court, or is ordered by a court
for class-wide arbitration at an arbitral forum not sponsored by an
SRO. Such claims, however, may become eligible for arbitration at NASD
if a claimant demonstrates that he or she has elected not to
participate in the putative or certified class action or, if
applicable, has complied with any conditions for withdrawing from the
class prescribed by the court. Rule 10301 of the current Code also
provides that a panel of arbitrators may hear disputes concerning
whether a particular claim is encompassed by a putative or certified
class action. Alternatively, either party may elect to petition the
court with jurisdiction over the putative or certified class action to
resolve such disputes. As published in the Customer Code Notice,
Proposed Rule 12204 is intended to be substantively the same as Rule
10301.
    Eighteen commenters raised two interpretive issues with respect to
the class action rule under the current Code.\53\ First, they indicated
that respondents may argue that any claim involving a security that is
also the subject of a pending class action lawsuit is ineligible for
arbitration. In their experience, respondents have offered this
argument even though claims in the arbitration case are factually and
legally distinguishable from those in the class action. They also
stated that respondents that are not defendants in the class action may
make motions to dismiss, citing this argument.
---------------------------------------------------------------------------

    \53\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    Second, the commenters argued that, although the current Code
allows a party to opt out of the class action, it does not explain how
a party can demonstrate to NASD that he or she is not participating in
the class action, either before or after a class has been certified.
    In Amendment 5, NASD proposed to clarify in Proposed Rule 12204(b)
that only claims based on the same facts and law and that involve the
same

defendants as in a class action are not arbitrable. NASD also proposed
to clarify in Proposed Rule 12204(b) the procedure a party would use to
demonstrate to NASD that he or she is opting or has opted out of a
class action. In particular, NASD proposed to amend Proposed Rule 12204
as follows (new language in italics; deleted language in [brackets]):
12204. Class Action Claims
    (a) No change.
    (b) [No claim that is included] Any claim that is based upon the
same facts and law, and involves the same defendants as in a court-
certified class action or a putative class action, or that is ordered
by a court for class-wide arbitration at a forum not sponsored by a
self-regulatory organization, [will] shall not be arbitrated under the
Code, unless the party bringing the claim [shows] files with NASD one
of the following:
    (1) A copy of a notice filed with the court in which the class
action is pending that [it is not participating] the party will not
participate in the class action[,] or in any recovery that may result
from the class action, or has withdrawn from the class according to any
conditions set by the court[, if any]; or
    (2) a notice that the party will not participate in the class
action or in any recovery that may result from the class action.
    (c) No change.
    (d) No change.
* * * * *

K. Proposed Rule 12206--Time Limits

    Proposed Rule 12206 provides, in pertinent part, that claims are
not eligible for arbitration under the Customer Code when six years
have elapsed from the occurrence or event giving rise to the claim, and
that the panel will resolve any questions regarding the eligibility of
a claim. One commenter suggested eliminating the proposed rule.\54\ In
this commenter's view, the Customer Code should authorize the
arbitration panel to apply relevant statutes of limitation instead. In
Amendment 5, NASD responded that because Proposed Rule 12206 is
substantively the same as Rule 10304 of the current Code, this comment
is outside the scope of the rule filing.
---------------------------------------------------------------------------

    \54\ PACE.
---------------------------------------------------------------------------

    One commenter suggested that NASD amend the proposed rule to state
that it is not a statute of repose.\55\ In Amendment 5, NASD responded
that it believed the suggestion could make the proposed rule confusing
and therefore declined to amend the rule on this issue.
---------------------------------------------------------------------------

    \55\ Magary.
---------------------------------------------------------------------------

L. Proposed Rule 12207--Extension of Deadlines

    In relevant part, Proposed Rule 12207(c) provides that the Director
may extend or modify any deadline set by the Code for good cause, or by
the panel in extraordinary circumstances. Two commenters suggested that
the standard for extending deadlines for answering the statement of
claim should remain the same as under Rule 10314 of the current Code,
which provides that extensions of the time to answer are disfavored and
will not be granted by the Director except in extraordinary
circumstances.\56\ In their view, Proposed Rule 12207, when read
together with Proposed Rule 12303, would be less stringent than the
current standard.
---------------------------------------------------------------------------

    \56\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it believes that having a
single, uniform standard for extensions of deadlines by the Director
simplifies the Customer Code and is in the public interest. Such
extensions would not be automatic upon request but would require
respondents to demonstrate that they have good cause for seeking an
extension of time to answer the statement of claim.
    One commenter noted that the proposed rule would give the Director
authority to override a panel deadline.\57\ Even though this rule would
expressly limit this authority to extraordinary circumstances, the
commenter questioned the Director's need for this authority and for
overriding a case-specific ruling made by a panel.
---------------------------------------------------------------------------

    \57\ Ryder.
---------------------------------------------------------------------------

    NASD responded that the phrase ``extraordinary circumstances''
would encompass such unexpected and uncontrollable events as a weather-
related or security emergency. NASD noted that there have been
instances, such as hurricanes and terrorist attacks, when NASD Dispute
Resolution offices had to be evacuated, the offices of parties and
counsel were damaged, and hearings could not be held safely. NASD
believes that in such situations, the Director needs the authority to
postpone deadlines until order is restored. For the above reasons, NASD
is not proposing to amend Proposed Rule 12207 at this time.

M. Proposed Rule 12212--Sanctions

    Rule 10305(b) of the current Code (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 NASD Discovery
Guide (``Discovery Guide'') states that ``[t]he panel has wide
discretion to address noncompliance with discovery orders.'' Proposed
Rule 12212 would incorporate and codify these current sanctions
provisions and extend them beyond the discovery context to apply to
non-compliance with any provision of the Code, or order of the panel or
a single arbitrator authorized to act on behalf of the panel. NASD
stated that this rule change would encourage parties to comply with
both the Customer Code and orders of the panel, and would also clarify
the authority of arbitrators to ensure the fair and efficient
administration of arbitration proceedings when parties do not comply.
1. Procedural Guidance
    Two commenters stated that Proposed Rule 12212 grants broad
authority to the panel to impose sanctions without providing guidance
on how and when sanctions should be applied.\58\ One of these
commenters suggested that the lack of procedural and substantive
standards creates the risk that sanctions will become a routine part of
arbitration practice.\59\ This commenter urged NASD to, among other
things, require notice and an opportunity to be heard and eliminate the
panel's authority to sanction a party for failing to comply with any
provision of the Customer Code.
---------------------------------------------------------------------------

    \58\ Ragsdale and SIA.
    \59\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD explained that the panel has the authority to
control all aspects of an arbitration, and, therefore, must have the
ability to enforce the rules of the forum as well as its orders.
Therefore, the proposed rule specifically provides that the panel has
the authority to impose sanctions for violations of any provision of
the Customer Code. NASD believes that underscoring the panel's
authority will deter parties from violating the Customer Code and from
employing abusive tactics, which require considerable time and effort
to address. In turn, NASD believes reducing the incidence of violations
and abusive tactics will expedite arbitrations. NASD also stated that
it intends to provide guidance in arbitrator training materials on the
Customer Code on how and when this proposed rule should be applied.

2. Sanctions Between the Time a Claim Is Filed and the Time a Panel Is
Selected
    One commenter expressed support for Proposed Rule 12212 but noted
that no panel is available to enforce compliance with the provisions of
the Customer Code between the time a claim is filed and the time a
panel is selected.\60\ This commenter suggested amending the proposed
rule to provide explicit authority to a single arbitrator appointed
during this time, or the panel, once appointed, to sanction parties for
abusive or violative conduct that may occur during this time.
---------------------------------------------------------------------------

    \60\ PACE.
---------------------------------------------------------------------------

    In Amendment 5, NASD stated that Proposed Rule 12212 would give the
panel discretion to impose sanctions for any violations of the Customer
Code, regardless of when they occurred. For this reason, NASD is not
proposing to amend the proposed rule at this time.
3. Disciplinary Referrals
    One commenter suggested that Proposed Rule 12212 should emphasize
that a panel can make a disciplinary referral for a violation of NASD
rules that either occurred during an arbitration or is related to
conduct addressed as a claim in arbitration.\61\ In Amendment 5, NASD
explained that it intends to address the use of disciplinary referrals
in NASD arbitrator training materials on the Customer Code.
---------------------------------------------------------------------------

    \61\ Magary.
---------------------------------------------------------------------------

4. Other Comments
    One commenter noted that a party cannot appeal an abusive or
excessive ruling, and that arbitrators are not required to explain
their decision to impose sanctions.\62\ This commenter suggested
amending Proposed Rule 12212 to require forum fees to be assessed
against respondents, except when a claim is brought in bad faith. This
commenter also suggested requiring the panel to explain its findings if
it assesses fees against a party.
---------------------------------------------------------------------------

    \62\ Ragsdale.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that a panel's rulings cannot be
appealed under the Customer Code, and NASD is not proposing to create
an appellate process. NASD stated that parties may ask the arbitrators
to explain their imposition of sanctions in the award. It also noted
that, as under the Customer Code, parties may seek to vacate or modify
an award under the Customer Code on grounds provided by applicable
federal or state arbitration laws. Although sanctions are rarely
imposed, NASD intends to recommend in arbitrator training that
arbitrators provide a written explanation for any sanctions in the
award. Thus, NASD is not proposing to amend Proposed Rule 12212 at this
time.

N. Proposed Rule 12213--Hearing Locations

    Proposed Rule 12213 provides that the Director generally will
select the hearing location closest to the customer's residence at the
time of the events giving rise to the dispute. The proposed rule also
would clarify that before arbitrator lists are sent to the parties
under Rule 12403, the parties may agree in writing to a different
hearing location other than the one selected by the Director, and that
the Director may change the hearing location upon motion of a party.
    One commenter supported the proposed rule but expressed concerned
that a pro se customer might be discouraged from submitting an
arbitration claim because the customer could not afford to travel to a
distant hearing location.\63\ This commenter suggested that NASD amend
the proposed rule to clarify that a customer may request a more
convenient hearing location upon filing a claim.
---------------------------------------------------------------------------

    \63\ PACE.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that Proposed Rule 12213 is
substantively the same as Rule 10315 of the current Code and stated
that the commenter's suggested change may provide customers with the
false impression that their request will be the only factor used to
determine where the hearing is held. Currently, parties may request a
hearing location, and this request is considered along with other
factors in determining the hearing location for an arbitration. This
practice would not change under the Customer Code.
    NASD also noted that the panel, once appointed, would have the
authority to change the hearing location. Although this authority is
already included in Proposed Rule 12503(c)(2), NASD stated that it
would be logical to include this authority in Proposed Rule 12213, as
well. Therefore, NASD proposed to amend Proposed Rule 12213 as follows
(new language in italics):
12213. Hearing Locations
    (a) U.S. Hearing Location
    (1) No change.
    (2) No change.
    (3) No change.
    (4) After the panel is appointed, the panel may decide a motion
relating to changing the hearing location.
    (b) Foreign Hearing Location
    No change.
* * * * *

O. Proposed Rule 12300--Filing and Serving Documents; Proposed Rule
12302--Filing an Initial Statement of Claim

    Under the current Code, initial statements of claim are filed with
the Director and served on the other parties by the Director. This
procedure would be the same under Proposed Rules 12300 and 12302. Two
commenters suggested that the proposed rules should allow a claimant to
directly serve the respondent with the statement of claim and the
uniform submission agreement.\64\ In their view, this would be
especially helpful to a claimant when time is of the essence.
---------------------------------------------------------------------------

    \64\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that Proposed Rules 12300 and 12302 do
not change the current process for serving claims. It also explained
that it currently tries to serve claims as quickly as possible, and if
its staff is notified that a party is elderly or infirm, NASD will try
to expedite the process even further.\65\
---------------------------------------------------------------------------

    \65\ See Press Release, NASD, NASD Implements Expedited Dispute
Resolution Proceedings for Elderly or Seriously Ill Parties (Jun.
18, 2004), available at http://www.nasd.com/PressRoom/NewsReleases/2004NewsReleases/NASDW_002820
.

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

    One commenter suggested that NASD amend Proposed Rule 12302 to
state that the statement of claim is not required to plead legal causes
of action or legal theories.\66\ In Amendment 5, NASD responded that
because Proposed Rule 12302 is substantially the same as paragraphs (1)
and (2) of Rule 10314(a) of the current Code, the comment is outside
the scope of the rule filing.
---------------------------------------------------------------------------

    \66\ PACE.
---------------------------------------------------------------------------

P. Proposed Rule 12301--Service on Persons Currently Associated With a
Member

    Proposed Rule 12301 provides that service on an associated person
may be made either on the member or directly on the associated person.
If service is made on the member, the member would be required to serve
the associated person, even if the member would not be representing the
associated person in the arbitration. One commenter noted that the
proposed rule is not limited to use by the Director or to initial
pleadings.\67\ The commenter noted that Proposed Rule 12301 would allow
a claimant to serve all documents only on the member, which could cause
confusion if the member and associated person are separately
represented. It also would delay service on the

associated person. Thus, the commenter suggested amending the proposed
rule to apply only to service of initial pleadings, or only to the
Director for service of statements of claim.
---------------------------------------------------------------------------

    \67\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it did not intend to make any
substantive changes from the current Code, which permits (but does not
require) the Director to serve statements of claim on currently
employed associated persons through their firms when the associated
person and the firm are both respondents. NASD stated that in practice,
it rarely uses this form of service. NASD nonetheless proposed to
clarify the proposed rule to reflect current procedure and to specify
that only the Director may serve associated persons by serving the
member, and that this method of service may only be used for initial
statements of claim. Proposed Rule 12301, as amended in Amendment 5,
provides (new language in italics; deleted language in [brackets]):
12301. Service on Associated Persons [Currently Associated With a
Member]
    (a) [If a member and a person currently associated with the member
are named as respondents to the same arbitration,] The Director will
serve the initial statement of claim on [service on the person] an
associated person [with the member] directly at the person's
residential address or usual place of abode [may be made on the member
or directly on the associated person]. If service cannot be completed
at the person's residential address or usual place of abode, the
Director will serve the initial statement of claim on the associated
person at the person's business address.
    (b) If a member and a person currently associated with the member
are named as respondents to the same arbitration, and the Director
cannot complete service as provided in paragraph (a), then the Director
may serve the member with the initial statement of claim on behalf of
the associated person. If service is made on the member, the member
must serve the associated person, even if the member will not be
representing the associated person in the arbitration. If the member is
not representing the associated person in the arbitration, the member
must notify, and provide the associated person's current address to,
all parties and the Director.
* * * * *

Q. Proposed Rule 12307--Deficient Claims

    Proposed Rule 12307 provides that the Director will not serve any
claim that is deficient and lists the reasons that a claim may be
deficient. In the Customer Code Notice, the Commission specifically
asked for comment on whether any changes intended to be nonsubstantive
were actually substantive. In the event commenters identified
substantive changes, the Commission asked why they are substantive, how
they will affect the arbitration process or the rights of the parties,
and whether they are an improvement over the current Code.
    Several commenters stated that Proposed Rule 12307 represents a
substantive change and is biased in favor of respondents.\68\ They
explained that if claimants file a deficient claim, the arbitration
would be delayed until all deficiencies are corrected, and if the
respondent files a deficient answer the claims also would be delayed.
They suggested amending the rule to provide that deficient filings by
respondents shall not delay the service of the arbitrator list
selection materials, so as not to delay the case. Similarly, some
commenters suggested that NASD should not transmit a deficient answer
and gave as examples respondents' failure to submit a uniform
submission agreement, or filing of a one-page denial as an initial
answer, and subsequent submission of an amended answer.\69\ These
commenters also argued that there should be uniformity in application
of the proposed rule.
---------------------------------------------------------------------------

    \68\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary, PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
    \69\ Meissner.
---------------------------------------------------------------------------

    Two commenters expressed concern that the sanctions imposed on
respondents under Proposed Rule 12308 (Loss of Defenses Due to Untimely
or Incomplete Answer) are not the same as those imposed on claimants
for similar conduct.\70\ They noted that if a claimant fails to file a
uniform submission agreement, then NASD would consider the claim to be
deficient under Proposed Rule 12307, but if the respondent fails to
file a uniform submission agreement, the arbitration would proceed.
These commenters suggested that NASD amend Proposed Rule 12308 to
require respondents to submit a uniform submission agreement in a
timely manner. They also suggested that NASD not transmit the answer to
arbitrators unless the respondent files a uniform submission agreement,
and that respondents should be precluded from engaging in any
arbitration-related activity until they file the uniform submission
agreement.
---------------------------------------------------------------------------

    \70\ Canning and Feinberg.
---------------------------------------------------------------------------

    In Amendment 5, NASD confirmed that a deficient claim would not be
processed until the deficiencies are corrected, and that the same is
not true if a respondent's answer is deficient. NASD explained that it
does not have a mechanism to delay or prevent service of answers
because while it serves initial statements of claim, it does not serve
answers. NASD further responded that the proposed rule codifies current
deficiency practice. NASD noted that, nonetheless, a respondent could
lose the ability to assert any claims or defenses at the hearing under
Proposed Rule 12308 for an untimely or deficient answer and also could
be subject to sanctions under Proposed Rule 12212. Therefore, NASD is
not proposing to amend the proposed rule at this time based on these
comments but stated that it would consider them when determining
whether future amendments are warranted.

R. Proposed Rule 12308--Loss of Defenses Due to Untimely or Incomplete
Answer

    One commenter, citing the proposed definition of ``claim,'' stated
that Proposed Rule 12308(a) could impose a severe penalty, including
default proceedings under Proposed Rule 12801, for failure to answer
any allegation regardless of materiality, a party's ability to
investigate by the time the answer is due, or the ``boilerplate''
nature of the allegation.\71\
---------------------------------------------------------------------------

    \71\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that Proposed Rule 12308 is
substantially the same as Rule 10314(b)(2) of the current Code and that
the comments made on this issue are outside the scope of the rule
filing. In Amendment 7 NASD further explained that Rule 10314(b)(2)(C)
of the current Code, which is the basis for Proposed Rule 12308(a), is
meant to address the timeliness of the answer, rather than its
completeness. It stated that the other provisions of Rule
10314(b)(2)(C), addressing completeness, were included in Proposed Rule
12308(b). NASD also proposed in Amendment 7 to clarify that: (1) The
listed sanctions apply only if a party does not file an answer within
the time period specified in the Code; and (2) default proceedings
apply only if the other conditions of Proposed Rule 12801, such as a
member's expulsion from NASD, for example, are met. The proposed rule
is amended as follows (new language in italics; deleted language in
[brackets]):
12308. Loss of Defenses Due to Untimely or Incomplete Answer
    (a) If a party [fails to] does not answer [any claim] within the
time period

specified in the Code, the panel may, upon motion, bar that party from
presenting any defenses or facts at the hearing, unless the time to
answer was extended in accordance with the Code. The party may also be
subject to default proceedings under Rule 12801, if the conditions of
Rule 12801(a) apply.
    (b) No change.
* * * * *

S. Proposed Rule 12309--Amending Pleadings; Proposed Rule 12310--
Answering Amended Claims

    Rule 10314 of the current Code establishes the general procedures
for filing initial pleadings and answers. Rule 10328 of the current
Code pertains to amended pleadings and their responses. Two commenters
reported that under the current Code, respondents attempt to prevent
claimants from submitting a response to amended pleadings by alleging
that Rule 10314 only allows the claimant to reply to a counterclaim,
even though Rule 10328 of the current Code permits any party to submit
a response to any amended pleading, in accordance with Rule
10314(b).\72\ They suggested that NASD amend Proposed Rule 12310, which
pertains to answering amended claims, to clarify that all parties have
a right to file a response to any amended pleading, as currently
permitted by Rule 10328.
---------------------------------------------------------------------------

    \72\ Canning and Meissner.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it did not intend to change
current practice in the Customer Code. NASD explained that Rule 10314
neither prohibits nor permits the practice of responding to amended
pleadings.\73\ NASD proposed to revise Proposed Rule 12309 to clarify
that all parties have a right to file a response to any amended
pleading. The proposed rule would allow 20 days from the receipt of the
amended pleading for the service of the response, unless the panel
determines otherwise. NASD also proposed to clarify in Proposed Rule
12309(a)(1) that the service requirements of Proposed Rule 12300
(Filing and Serving Documents) also apply to Proposed Rule 12309. The
proposed rule change is amended as follows (new language in italics):
---------------------------------------------------------------------------

    \73\ Telephone conversation among Jean Feeney, Vice President,
NASD; Mignon McLemore, Assistant Chief Counsel, NASD Dispute
Resolution; Lourdes Gonzalez, Assistant Chief Counsel--Sales
Practices, Division of Market Regulation, SEC; and Gena Lai, Special
Counsel, Division of Market Regulation, SEC (Dec. 1, 2006).
---------------------------------------------------------------------------

12309. Amending Pleadings
    (a) Before Panel Appointment.
    Except as provided in paragraph (c), a party may amend a pleading
at any time before the panel has been appointed.
    (1) To amend a statement of claim that has been filed but not yet
served by the Director, the claimant must file the amended claim with
the Director, with additional copies for each arbitrator and each other
party. The Director will then serve the amended claim in accordance
with Rules 12300 and 12301.
    (2) No change.
    (b) No change.
    (c) No change.
    (d) Responding to an Amended Pleading.
    Any party may file a response to an amended pleading, provided the
response is filed and served within 20 days of receipt of the amended
pleading, unless the panel determines otherwise.
* * * * *

T. Proposed Rule 12310--Answering Amended Claims

    Proposed Rule 12310 establishes the procedural requirements for
answering amended claims. One commenter noted that the proposed rule
would give a respondent 20 days to answer an amended statement of claim
and suggested that NASD amend the proposed rule so that the 20-day
period would be calculated from the respondent's receipt of the amended
statement of claim.\74\
---------------------------------------------------------------------------

    \74\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that, as part of the initiative to
standardize time limits in the Customer Code, the time to answer an
amended claim was extended from 10 business days to 20 calendar days.
Thus, a respondent would have more time to respond to an amended claim
under the Customer Code than under the current Code. Therefore, NASD is
not proposing to amend the proposed rule at this time.

U. Proposed Rule 12312--Multiple Claimants; Proposed Rule 12313--
Multiple Respondents

    Proposed Rules 12312 and 12313 set forth standards by which parties
or claims may be joined in the same arbitration case. Proposed Rule
12312 provides that one or more parties may join multiple claims in the
same arbitration if the claims contain common questions of law and fact
and the claims: (1) Assert any right to relief jointly and severally;
or (2) arise out of the same transaction or occurrence, or series of
transactions or occurrences. Proposed Rule 12313 provides that one or
more parties may name one or more respondents in the same arbitration
if the claims contain any questions of law or fact common to all
respondents and the claims: (1) assert any right to relief jointly and
severally; or (2) arise out of the same transaction or occurrence, or
series of transactions or occurrences. Both proposed rules also provide
that the Director may separate claims into two or more cases and
establish procedures for parties to appeal the Director's action.
1. ``Joint and Several Relief''
    Two commenters compared Rule 10314(d) of the current Code and
Proposed Rules 12312 and 12313 to Rule 20 of the Federal Rules of Civil
Procedure (Permissive Joinder of Parties) (``FRCP Rule 20'').\75\ In
their view, Proposed Rules 12312 and 12313 do not track FRCP Rule 20
correctly. They explained that parties seeking to join claims or
respondents under FRCP Rule 20 must satisfy two criteria: (1) The
parties' claims must have arisen out of the same transaction or
occurrence or series of transactions or occurrences; and (2) the claims
must contain common questions of law or fact. Both commenters argued
that joint and several relief should not be an alternative to the
``same transaction or occurrence or series of transactions or
occurrences'' requirement, and therefore should be deleted from the
rule. They also stated that Proposed Rules 12312 and 12313
substantively change the joinder requirements for multiple parties
contained in Rule 10314(d).
---------------------------------------------------------------------------

    \75\ Krosschell and SIA. FRCP Rule 20 provides ``All persons may
join in one action as plaintiffs if they assert any right to relief
jointly, severally, or in the alternative in respect of or arising
out of the same transaction, occurrence, or series of transactions
or occurrences and if any question of law or fact common to all
these persons will arise in the action.''
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that the joinder requirements in
Proposed Rules 12312 and 12313 were not intended to differ in substance
from those in Rule 10314(d). In NASD's view, the reference to joint and
several relief in FRCP Rule 20 and Rule 10314(d) of the current Code is
an alternative requirement to the ``same transactions or occurrences''
requirement and is appropriately written in the alternative in the
proposed rules. Therefore, NASD did not propose changes to the proposed
rules on this issue.
2. Standards for Severing Claims
    Proposed Rule 12312(b) provides that after all responsive pleadings
have been served, claims joined together under paragraph (a) of the
rule may be separated into two or more arbitrations

by the Director before a panel is appointed, or by the panel after the
panel is appointed. One commenter argued that Proposed Rule 12312(b)
would give the Director unfettered discretion to sever claims, without
providing any standards for doing so.\76\ This commenter also contended
that severing claims could impose a financial hardship on some parties.
The commenter suggested that NASD amend the proposed rule to
incorporate the standards used to determine when to sever a claim.
---------------------------------------------------------------------------

    \76\ Magary.
---------------------------------------------------------------------------

    In Amendment 5, NASD explained that Proposed Rules 12312 and 12313
provide the standard for when cases may be joined. Conversely, cases
involving multiple claimants or multiple respondents that do not meet
these criteria may be severed. NASD explained that it did not intend to
change the current policy that the Director's decision to consolidate
claims is preliminary and may be reconsidered by the panel. The
Director's decision to sever claims also is preliminary. Accordingly,
in Amendment 5, NASD proposed to clarify the current procedure for
appealing the Director's decision to sever claims. Because there are at
least two surviving panels when the Director severs claims, multiple
panels could review the Director's decision, with potentially
conflicting results. To avoid inconsistent results and to expedite the
arbitration process, NASD currently forwards any motion to rejoin
severed claims to the panel on the lowest numbered case (i.e., the
panel from the first-filed claim in the matter that was severed) to
decide a motion to re-join the claims. In Amendment 5, NASD amended
Proposed Rules 12312(b) and 12313(b) as follows to codify current
practice (new language in italics):
12312. Multiple Claimants
    (a) No change.
    (b) After all responsive pleadings have been served, claims joined
together under paragraph (a) of this rule may be separated into two or
more arbitrations by the Director before a panel is appointed, or by
the panel after the panel is appointed. A party whose claims were
separated by the Director may make a motion to the panel in the lowest
numbered case to reconsider the Director's decision.
* * * * *
12313. Multiple Respondents
    (a) No change.
    (b) After all responsive pleadings have been served, claims joined
together under paragraph (a) of this rule may be separated into two or
more arbitrations by the Director before a panel is appointed, or by
the panel after the panel is appointed. A party whose claims were
separated by the Director may make a motion to the panel in the lowest
numbered case to reconsider the Director's decision.
* * * * *
3. Greater Panel Discretion to Join Claims
    One commenter expressed concern that the changes to Proposed Rule
12312 would prevent the joinder of claimants in certain situations,
which would result in added expense and repetitious hearings for the
parties.\77\ The commenter argued that the proposed rule should be
revised to give a panel more discretion to join claims if it would save
time and money and not be unreasonably prejudicial to the parties. In
Amendment 5, NASD responded that the joinder requirements in Proposed
Rules 12312 and 12313 were not intended to differ in substance from
those in Rule 10314(d), and that therefore this comment is outside the
scope of the rule filing.
---------------------------------------------------------------------------

    \77\ Greco.
---------------------------------------------------------------------------

V. Proposed Rule 12314--Combining Claims

    Proposed Rule 12314 provides that before ranked arbitrator lists
are due to the Director under Proposed Rule 12404(c), the Director may
combine separate but related claims into one arbitration. Once a panel
has been appointed, the panel may reconsider the Director's decision
upon motion of a party. One commenter expressed concern that the panel
would no longer have the authority to review the Director's decision to
sever or consolidate claims sua sponte.\78\ In this commenter's view,
the Director has preliminary authority to make rulings on these issues,
but the panel has plenary authority to review any such rulings.
---------------------------------------------------------------------------

    \78\ Ryder.
---------------------------------------------------------------------------

    In Amendment 5, NASD disagreed with the commenter and stated that,
under Rule 10314(d) of the current Code and current practice, panels
review these rulings upon a motion of a party.

W. Proposed Rule 12400--Neutral List Selection System and Arbitrator
Rosters

1. Proposed Rule 12400(a)--Neutral List Selection System
    Nineteen commenters suggested that NASD hire a neutral third-party,
not connected to NASD or the securities industry, to conduct an annual
audit of NLSS \79\ and make the results of the audit publicly available
on NASD's Web site.\80\
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    \79\ NLSS is the computer program NASD Dispute Resolution uses
to appoint arbitrators. NASD Dispute Resolution is upgrading its
computer technology platform, in what is known as the MATRICS
Computer Project. MATRICS stands for Mediation and Arbitration
Tracking and Retrieval Interactive Case System. MATRICS will replace
two legacy case management systems, NLSS and CRAFTIS, the software
application that NASD Dispute Resolution uses to support its case
administration functions.
    \80\ Boliver, Canning, Estell, 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 committed to ensuring
that its list selection system operates as described in the Customer
Code. Thus, NASD stated that it plans to hire an independent auditor to
conduct an initial audit of the system and will make public the results
of the audit. NASD stated that thereafter, it will conduct audits on an
as-needed basis.
2. Proposed Rule 12400(b)--Arbitrator Rosters
    As published in the Customer Code Notice, Proposed Rule 12400(b)
provides that NASD will maintain three separate arbitrator rosters: One
of public arbitrators who may serve as a chairperson of a panel
(``chair-qualified''), one of public arbitrators not eligible to serve
as a chairperson (``non-chair public''), and one of non-public
arbitrators. Lists would be generated from these rosters and sent to
the parties so that the parties may select their arbitrators. Chair-
qualified public arbitrators would not be included in the non-chair
public roster. The Commission solicited comment on whether this
approach would limit the pool of arbitrators available to serve on
panels, particularly in regions where relatively few arbitrators are
available, and whether chair-qualified arbitrators should be permitted
to serve in a non-chair capacity, as well.
    Twenty-three commenters stated that excluding chair-qualified
arbitrators from the non-chair public arbitrator roster would decrease
the pool of experienced, knowledgeable public arbitrators, particularly
in regions of the country where the size of the arbitrator pool is
already limited.\81\ Many of these commenters also asserted that
arbitration panels selected under this approach would have less overall

experience and expertise than current panels, which would be bad for
all parties.
---------------------------------------------------------------------------

    \81\ Boliver, Canning, Evans, Feldman, Ilgenfritz, Josel,
Komninos, Lapidus, Lea, Lipner, Lopez, Magary, Miller, PACE, PIABA,
Pounds, Rosenfield, Schwab, Shewan, Stolle, Stoltmann, Sutherland,
and Willner.
---------------------------------------------------------------------------

    Eighteen commenters stated that the proposed rule would create a
class of ``professional'' arbitrators who would strive for the
appearance of fairness to both sides by issuing more compromise
awards.\82\ In Amendment 5, NASD disagreed, stating that the random
selection function of the list selection system would allow the full
use of the entire arbitrator pool. NASD also noted that all arbitrators
take an oath in which they affirm their neutrality and ability to
decide a matter fairly, and that NASD expects all arbitrators to adhere
to these basic principles, regardless of their classification.
---------------------------------------------------------------------------

    \82\ Boliver, Canning, Evans, Ilgenfritz, Josel, Komninos,
Lapidus, Lea, Lipner, Lopez, Magary PIABA, Pounds, Rosenfield,
Shewan, Stoltmann, Sutherland, and Willner.
---------------------------------------------------------------------------

    NASD further stated in Amendment 5 that it believes chair-qualified
arbitrators should be included in the non-chair public roster, as well
as in the chair-qualified roster. Therefore, it proposed to amend
Proposed Rule 12400(b) to adopt this approach.\83\ NASD also clarified
that its list selection software would be programmed so that no
arbitrator's name would appear on both the chair-qualified and non-
chair public lists sent to the parties for arbitrator selection in a
particular case. NASD believes this approach would provide users of the
forum with access to the most experienced public arbitrators.
---------------------------------------------------------------------------

    \83\ NASD also proposed to amend the title of Proposed Rule
12400(b) to correct a typographical error.
---------------------------------------------------------------------------

    The proposed rule, as amended in Amendment 5, is as follows (new
language in italics; deleted language in [brackets]):
12400. Neutral List Selection System and Arbitrator Rosters
    (a) Neutral List Selection System
    No change.
    (b) Arbitrator[s] Rosters
    NASD maintains the following roster of arbitrators:
     A roster of non-public arbitrators as defined in Rule
12100(n);
     A roster of public arbitrators as defined in Rule
12100(r); and
     A roster of arbitrators who are eligible to serve as
chairperson of a panel as described in paragraph (c). Arbitrators who
are eligible to serve as chairperson will also be included in the
roster of public arbitrators, but will only appear on one list in a
case.
* * * * *
    Subsequent to the filing of Amendment 5 with the Commission, one
commenter expressed opposition to NASD's proposal to include chair-
qualified arbitrators with non-chair public arbitrators on the non-
chair public roster.\84\ This commenter included statistical models in
support of his position that chair-qualified arbitrators would be
selected more frequently than non-chair public arbitrators. This
commenter also asserted that chair-qualified arbitrators would become
``professional'' arbitrators.
---------------------------------------------------------------------------

    \84\ See Bernstein.
---------------------------------------------------------------------------

    In Amendment 7, NASD declined to comment on the statistical
analysis provided by the commenter, stating that the hypothesized
outcome was speculative. NASD explained that it believes having
arbitrators with the most experience serving more frequently on panels
would be in the public interest. Moreover, NASD stated that the
proposed standards to become eligible to serve as chair-qualified
arbitrators are reasonable and necessary to provide investors with
access to well-qualified arbitrators. NASD believes this proposal will
enhance the efficiency of the arbitration process. Therefore, NASD
declined to amend the proposed rule on this issue.
    Subsequent to Amendment 7, this commenter submitted a second letter
reiterating his arguments and providing additional information.\85\ The
Commission staff obtained data from NASD relating to the number of
arbitrators at each NASD hearing location, including the number of
arbitrators who are classified as ``public'' under the definition found
in rule 10308(a)(5) of the current Code, and who would be classified as
chair-qualified under Proposed Rule 12100(u) of the Customer Code.\86\
Applying the formulas provided in the letter, the Commission staff
determined that NASD's proposal to include chair-qualified arbitrators
with non-chair public arbitrators in the non-chair public roster would
not in all circumstances increase the frequency of chair-qualified
arbitrators being appointed to panels. Moreover, even assuming that the
odds would increase in certain circumstances, the staff could not find
empirical evidence to indicate that the increased odds would result in
bias in the NASD arbitration forum or otherwise outweigh the benefit of
the increased training and experience among arbitrators.
---------------------------------------------------------------------------

    \85\ See Letter from Scot D. Bernstein, Esq. and C. Thomas Mason
III, Esq., dated Oct. 20, 2006.
    \86\ See Letter from Linda D. Fienberg, President, NASD Dispute
Resolution, to Catherine McGuire, Chief Counsel, Division of Market
Regulation, SEC, dated Nov. 9, 2006.
---------------------------------------------------------------------------

3. Proposed Rule 12400(c)--Eligibility for Chairperson Roster
    To be chair-qualified, Proposed Rule 12400(c) would require an
arbitrator to 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. Twenty-five commenters opposed the creation of the chair-
qualified roster and questioned the eligibility requirements.\87\ One
commenter supported the concept of the chair-qualified roster but
criticized the eligibility requirements.\88\ Commenters' key concerns
were that: (1) The term ``substantially equivalent training or
experience'' is not defined and allows for subjective interpretation,
which could lead to inexperienced persons serving as chairs; (2) the
chair roster would create a class of ``professional arbitrators'' who
would strive for the appearance of fairness to both sides by issuing
more compromise awards; \89\ and (3) a law degree and litigation
experience are better predictors of chair qualification than serving as
an arbitrator on two or three cases.
---------------------------------------------------------------------------

    \87\ Boliver, Canning, Caruso, Estell, Evans, Greco, Ilgenfritz,
Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary,
Meissner, Miller, PIABA, Pounds, Rosenfield, Sadler, Shewan,
Stoltmann, Sutherland, and Willner.
    \88\ PACE.
    \89\ See NASD's response to comments regarding professional
arbitrators in Section 0, Proposed Rule 12400(b) (Arbitrator
Rosters), above.
---------------------------------------------------------------------------

    In Amendment 5, NASD stated that it believes that the term
``substantially equivalent training or experience'' was defined
sufficiently in the narrative portion of its rule filing. In
particular, the rule filing states that ``substantially equivalent
training or experience would include service as a judge or
administrative hearing officer, chairperson training offered by another
recognized dispute resolution forum, or the like.'' NASD also noted
that other factors, such as peer, party, and staff evaluations and a
willingness to serve as chair, would be used in determining whether an
arbitrator should be added to the chair roster. It stated that while
these standards would require the use of judgment, the Commission
oversees NASD for its compliance with its own rules. NASD also stated
that it does not plan to grandfather any current arbitrators solely
because they may have served as chairs on previous panels.

    In addition, NASD stated that it believes the requirement that an
arbitrator serve on at least three arbitrations through award to be
eligible for the chair roster is an objective standard that is easily
measured,\90\ though not easy to meet. NASD stated that of the
arbitration cases filed in the past four years, approximately 22% went
to hearing.\91\ NASD believes that the experience and training gained
in the time it takes to serve on three hearings through award should
qualify an arbitrator to serve as a chair, even without legal training
or experience.
---------------------------------------------------------------------------

    \90\ Similarly, the requirements that the chair have a law
degree and be a member of the Bar are also objective standards,
subject only to verification.
    \91\ NASD stated that this average is based on data on NASD's
Web site under Dispute Resolution Statistics, How Arbitration Cases
Close (visited Apr. 13, 2006) at http://www.nasd.com/web/[fxsp0
]idcplg?IdcService=SS--[fxsp0]GET--

PAGE&nodeId=516&[fxsp0]ssSourceNodeId=12.
---------------------------------------------------------------------------

    For the reasons stated above, NASD is not proposing to amend the
proposed rule change in connection with these issues.

X. Proposed Rule 12401--Number of Arbitrators

    As published in the Customer Code Notice, Proposed Rule 12401
provides that in cases involving claims of more than $25,000 but not
more than $50,000, the panel will consist of one arbitrator, unless any
party requests a panel of three arbitrators. One commenter suggested
that NASD amend the proposed rule to increase the limit for a single
arbitrator panel to $150,000 or more.\92\ In this commenter's view, the
current limitation of $25,000 is antiquated, and there is no empirical
evidence to suggest that a single arbitrator cannot decide a claim
involving a larger amount in dispute. In Amendment 5, NASD responded
that, although this comment is beyond the scope of the rule filing, it
would consider it when determining whether future amendments are
warranted.
---------------------------------------------------------------------------

    \92\ Caruso.
---------------------------------------------------------------------------

    In Amendment 7, NASD amended Proposed Rule 12401(b) to require that
the request for a three-arbitrator panel be made in a party's initial
pleading. NASD stated that proposed change would codify current
practice in the forum.\93\ The proposed rule is amended as follows (new
language in italics):
---------------------------------------------------------------------------

    \93\ See Rule 10308(b)(1)(A)(ii) of the current Code.
---------------------------------------------------------------------------

12401. Number of Arbitrators
    (a) Claims of $25,000 or Less
    No change.
    (b) Claims of More Than $25,000 Up To $50,000
    If the amount of a claim is more than $25,000 but not more than
$50,000, exclusive of interest and expenses, the panel will consist of
one arbitrator unless any party requests a panel of three arbitrators
in its initial pleading.
    (c) Claims of More Than $50,000; Unspecified or Non-Monetary Claims
    No change.
* * * * *

Y. Proposed Rule 12403--Generating and Sending Lists to Parties;
Proposed Rule 12404--Striking and Ranking Arbitrators

    Under the current Code, NLSS provides the parties with a list of
five names for a single arbitrator customer case, and one list of ten
public arbitrators and one list of five non-public arbitrators for a
three-arbitrator case.\94\ Once the parties receive the lists, they
begin the process of selecting the members of their panel by striking
arbitrators from each list and ranking the remaining ones.
---------------------------------------------------------------------------

    \94\ The Commission approved NASD's generating lists of only
three names per arbitrator slot in the smaller hearing locations.
See Order Granting Approval to Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval to Amendment Nos. 3
and 4 to Proposed Rule Change by the National Association of
Securities Dealers, Inc. Relating to the Selection of Arbitrators in
Arbitrations Involving Public Customers, Securities Exchange Act
Rel. No. 40555, 63 FR 56670, 56673 (Oct. 22, 1998) (SR-NASD-98-48).
---------------------------------------------------------------------------

1. Reducing Need for Extended Lists
    Currently, the parties have an unlimited number of strikes, which
they may exercise for any reason. This often results in so many strikes
by both sides that an insufficient number of names remain on the list
to fill a panel. When this happens, NLSS must generate additional names
in the appropriate public/non-public categories and ``extend'' the list
to fill the panel. Parties have often expressed concern with extended
lists because the parties may not exercise additional strikes and can
only challenge the inclusion of ``extended list'' arbitrators for
cause.
    As published in the Customer Code Notice, Proposed Rule 12403
increases the number of arbitrators on each list and limits the number
of strikes that the parties may exercise. NASD intended this change to
increase the likelihood that more names from the initial lists would
remain after the striking process. In cases involving three-member
panels, NASD proposed that seven arbitrators from each arbitrator
roster (chair-qualified, non-chair public, and non-public) would be
selected at random to generate the lists to be sent to the parties.
Each separately represented party could strike up to five of the seven
arbitrators on each list for any reason, but two names would remain on
each list.
    Some commenters found the proposed procedures to be an improvement
over the current system, but noted that entire lists could still be
stricken.\95\ For example, if a claimant strikes arbitrators one
through five from a seven-name list and a respondent strikes
arbitrators three through seven, then the parties collectively will
have stricken the entire list. Thus, these commenters believed the
likelihood that NASD would need to extend lists would remain high.
Commenters suggested amending the rule to provide that if all the
arbitrators are stricken from a list, a subsequent list would be
generated, accompanied by a limited number of strikes. Commenters also
noted that if each party only ranks two arbitrators from the list,
there is a likelihood for ties in the rankings by claimants and
respondents.\96\
---------------------------------------------------------------------------

    \95\ Boliver, Canning, Caruso, Estell, Evans, Greco, Ilgenfritz,
Josel, Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary,
Meissner, Miller, Pounds, Rosenfield, Sadler, Shewan, Stoltmann,
Sutherland, and Willner.
    \96\ Id.
---------------------------------------------------------------------------

    In Amendment 5, NASD proposed to increase the number of arbitrators
on each list to eight, and to allow each separately represented party
to exercise only four strikes. By increasing the number of arbitrators
and reducing the number of strikes per list, NASD believes there is a
greater likelihood that arbitrators from each initial list would remain
on the list after the parties exercise their strikes and the lists are
consolidated.\97\ This, in turn, should reduce the likelihood that
extended lists would be necessary, thus providing parties with more
control in the arbitrator selection process. In addition, in light of
the comments concerning Proposed Rule 12400(b), NASD is proposing to
amend Proposed Rule 12403 to clarify that chair-qualified arbitrators
also would be included in the roster of non-chair public arbitrators,
but would only appear on one list in a particular case. The proposed
rule change is amended as

follows (new language in italics; deleted language in [brackets]):
---------------------------------------------------------------------------

    \97\ NLSS will select randomly one name at a time for each list
(i.e., chair-qualified, non-chair public, non-public), and list the
names in the order in which they were selected. The first arbitrator
selected would be Arbitrator 1; the second would be
Arbitrator 2, etc. After the parties have made their
selections and the lists have been consolidated, in the unlikely
event of a tie among arbitrators, NLSS will break the tie based on
the order in which the arbitrators were initially placed on the
list. So, for example, if Arbitrators 3 and 5 are ``tied'' after the
non-chair public lists are consolidated, NLSS will select Arbitrator
3 for the non-chair public position.
---------------------------------------------------------------------------

12403. Generating and Sending Lists to the Parties
    (a) Generating Lists
    (1) If the panel consists of one arbitrator, the Neutral List
Selection System will generate a list of [seven] eight public
arbitrators from the NASD's chairperson roster.
    (2) If the panel consists of three arbitrators, the Neutral List
Selection System will generate:
     A list of [seven] eight arbitrators from the NASD's non-
public arbitrator roster;
     A list of [seven] eight arbitrators from the NASD's public
arbitrator roster; and
     A list of [seven] eight public arbitrators from the NASD's
chairperson roster.
    (3) If the panel consists of three arbitrators, the Neutral List
Selection System will generate the chairperson list first. Chair-
qualified arbitrators who were not selected for the chairperson list
will be eligible for selection on the public list. An individual
arbitrator cannot appear on both the chairperson list and the public
list for the same case.
    (4) No change.
    (b) Sending Lists to Parties
    No change.
* * * * *
12404. Striking and Ranking Arbitrators
    (a) Each separately represented party may strike up to [five] four
of the arbitrators from each list for any reason by crossing through
the names of the arbitrators. [Two] At least four names must remain on
each list.
    (b) No change.
    (c) No change.
* * * * *
2. Pre-Screening for Conflicts
    One commenter suggested that Proposed Rule 12404 should include a
procedure for replacing arbitrators who have disqualifying conflicts
before the parties are required to submit their rankings.\98\
---------------------------------------------------------------------------

    \98\ SIA.
---------------------------------------------------------------------------

    In Amendment 5, NASD responded that it intends to implement a new
computer platform, MATRICS,\99\ which would be programmed to check for
certain conflicts before the lists are sent to the parties. For
example, MATRICS would eliminate from a list any arbitrator who is
currently employed by a firm that is a party to the case. MATRICS would
also eliminate any arbitrator with a securities account at a firm that
is a party to the case. In these instances, parties would not have to
use a strike to eliminate an arbitrator with such conflicts.
---------------------------------------------------------------------------

    \99\ See supra note 79.
---------------------------------------------------------------------------

Z. Proposed Rule 12406--Appointment of Arbitrators; Discretion to
Appoint Arbitrators Not on List

    Proposed Rule 12406 provides that each three-arbitrator panel will
consist of a non-public arbitrator, a chair-qualified public
arbitrator, and a non-chair public arbitrator. Many commenters opposed
the inclusion of a non-public arbitrator on three-person panels.\100\
In Amendment 5, NASD noted that because Proposed Rule 12406 would not
change the substantive requirements in Rule 10308(c)(4) of the current
Code concerning arbitrator appointments, the comments are outside the
scope of the rule filing. NASD also noted that it proposed changes to
the definition of ``public arbitrator'' in a separate rule filing.\101\
In addition, NASD stated that in approving the NLSS, the Commission
found that NASD had created reasonable procedures for implementing the
list selection process, which it determined should give investors and
other parties more input into the selection of the arbitration panel,
and were consistent with the Exchange Act.\102\ Finally, NASD indicated
that independent studies performed on the NASD arbitration forum do not
show bias on the part of industry arbitrators.\103\ For these reasons,
NASD is not proposing to amend the proposed rule at this time.
---------------------------------------------------------------------------

    \100\ See, e.g., Boliver, Canning, Caruso, Estell, Evans, Fynes,
Greco, Ilgenfritz, Jones, Josel, Komninos, Lapidus, Layne, Lea,
Lipner, Lopez, Magary, Meissner, Miller, PIABA, Pounds, Rosenfield,
Sadler, Shewan, Stoltmann, Sutherland, and Willner.
    \101\ These proposed rule changes were recently approved by the
Commission. See supra note 35.
    \102\ See Order Granting Approval to Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 3 and 4 to Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to the Selection of
Arbitrators in Arbitrations Involving Public Customers, supra note
94.
    \103\ See Industry Arbitration Award Survey, Securities
Arbitration Commentator, Volume 2005, No. 4 (May 2005); U.S. General
Accounting Office, Securities Arbitration: How Investors Fare, GAO/
GGD 92-74 (May 11, 1992); E-mail from Mignon McLemore, Assistant
Chief Counsel, NASD Dispute Resolution, to Gena Lai, Special
Counsel, Division of Market Regulation, SEC, dated Dec. 1, 2006.
---------------------------------------------------------------------------

    In the Customer Code Notice, the Commission noted that under
Proposed Rules 12406 (Appointment of Arbitrators; Discretion to Appoint
Arbitrators Not on List), 12410 (Removal of Arbitrator by Director),
and 12411 (Replacement of Arbitrators), parties to an arbitration would
not be given a peremptory strike for arbitrators appointed from an
extended list. The Commission specifically asked for commenters' views
on which is the better alternative when the Uniform Code differs from
the proposed NASD rules with respect to appointment of arbitrators by
the Director.
    Many commenters stated that allowing a peremptory strike when an
arbitrator is appointed from an extended list would be preferable.\104\
In their view, the proposed requirements for the removal of an
arbitrator would be overly restrictive and unlikely to provide
assurances of impartiality to an investor regarding an arbitrator whom
he or she had no voice in selecting.
---------------------------------------------------------------------------

    \104\ Boliver, Canning, Caruso, Evans, Greco, Ilgenfritz, Josel,
Komninos, Lapidus, Layne, Lea, Lipner, Lopez, Magary, Meissner,
Miller, PACE, PIABA, Pounds, Rosenfield, Shewan, Stoltmann,
Sutherland, and Willner.
---------------------------------------------------------------------------

    In Amendment 5, NASD noted that because Proposed Rule 12410 has not
changed the substantive requirements concerning arbitrator removal in
Rules 10308(d)(1)-(3) and (f), and Rule 10312(d) of the current Code,
the comments are outside the scope of the rule filing. NASD also
believes that the changes proposed to Proposed Rules 12403 and 12404 in
Amendment 5 would minimize the need for extended lists. Therefore, NASD
is not proposing to allow peremptory strikes when the list is extended.

AA. Proposed Rule 12408--Disclosures Required of Arbitrators

    As published in the Customer Code Notice, Proposed Rule 12408(a)
provides, in relevant part, that arbitrators must disclose ``any
existing or past service as a mediator.'' In the Customer Code Notice,
the Commission indicated that Proposed Rule 12408(a)(4) could be
interpreted as either requiring arbitrators to disclose (1) only any
service as a mediator that might preclude the arbitrator from rendering
an objective and impartial determination in the proceeding, or (2) any