EXECUTIVE SUMMARY

	 The Emergency Planning and Community Right-to-Know Act (EPCRA), also
known as Title III of the Superfund Amendments and Reauthorization Act
of 1986 (SARA), created a broad range of emergency response planning and
reporting requirements for manufacturers, processors, and users of toxic
chemicals in the United States.  Under section 313 of EPCRA, certain
facilities are required to submit annual reports to the United States
Environmental Protection Agency (EPA) and to States on their release(s),
transfer(s), and waste management activities for certain toxic chemicals
if they are manufactured, processed, or otherwise used above thresholds
amounts.  In addition, the Pollution Prevention Act (PPA) of 1990
requires these same facilities to report prevention, recycling, and
other waste management information for these same chemicals.  EPA
maintains the data collected under EPCRA section 313 and the PPA in a
database known as the Toxics Release Inventory (TRI).1

	Since the inception of the TRI Program, EPA has implemented measures to
reduce the reporting burden on the regulated universe of facilities, and
make TRI reporting as user friendly as possible.  These measures include
compliance assistance activities, such as industry-specific guidance and
annual training workshops.  EPA also reduced the time spent completing
the required TRI forms by developing the Toxics Release Inventory–Made
Easy (TRI-ME) software and adding the Form A certification.  In July
2005, EPA finalized the TRI Reporting Forms Modification Rule (70 FR
3991, July 12, 2005) that included general options for reducing the
time, cost, and complexity of the reporting requirements imposed on
facilities.  (EPA refers to this rulemaking as the “Phase 1” burden
reduction rulemaking.)

	EPA is adding options for streamlining TRI reporting.  The purpose of
this rule is to provide additional burden reduction options without
significantly compromising the quality of toxic chemical release data
and of other waste management information.  This additional set of
burden reduction options will be referred to hereafter as the “Phase
2” burden reduction rulemaking.

ES.1	CHANGES TO THE TRI REPORTING REQUIREMENTS

	As described above, EPA has implemented a number of burden reduction
measures. To build upon these efforts, EPA conducted a TRI Stakeholder
Dialogue between Fall 2002 and early 2004.  During this dialogue,
improvements to the TRI reporting process were identified and a number
of burden reduction options associated with TRI reporting were explored.
 After reviewing these improvements and reporting options, EPA has
decided to divide the burden reduction effort into phases: Phase 1)
relatively simple modifications to the reporting forms and Phase 2) new
and expanded eligibility for Form A. This economic analysis reflects the
costs and impacts of the Phase 2 burden reduction rulemaking.  EPA is
adopting the following two options that it believes may reduce reporting
burden for TRI facilities:

New Eligibility for Form A: PBT Chemicals -- allows a facility reporting
on PBT chemicals, except dioxin and dioxin-like compounds, with zero
disposal or other releases to use Form A, provided they meet the
1,000,000 pound alternate reporting threshold and have 500 pounds or
less of total other waste management quantities.  (Sections 8.2 – 8.8)

Expanded Eligibility for Form A: Non-PBT Chemicals -- allows a facility
reporting on Non-PBT chemicals with an annual reportable amount (ARA)
(Sections 8.1 – 8.8) of 5,000 lbs or less and 2,000 lbs or less of
disposal or other releases to use Form A, provided they meet the
1,000,000 pound alternate reporting threshold.

The definition of ARA has changed from the proposed rule.  In the
proposal, ARA was defined as Sections 8.1 to 8.8 for PBTs, and as
Sections 8.1 to 8.7 for non-PBTs.  Under the final rule, Section 8.8 has
been added to the definition of non-PBTs, so that the definitions are
consistent for all chemicals.  In addition, in consideration of the
value of TRI information that would otherwise be lost, the Agency
modified the proposal to restrict releases (as reported in Sections 5
and 6, Section 8.1 and Section 8.8) under the non-PBT option to 2,000
lbs.

ES.2	ESTIMATED REPORTING ACTIVITY

	The rule will affect only those forms (and the facilities that file
them) that meet the criteria associated with each option. EPA is
finalizing a combination of the two options.  These options do not
overlap as one applies only to non-PBT chemicals while the other applies
only to PBT chemicals. Note that there may be new facilities filing to
TRI for the first time that may experience burden reduction due to the
rule.  Without information on their reportable chemicals and amounts,
however, it is not possible to determine the option for which they would
qualify and they are thus not accounted for in this analysis.  Table
ES-1 summarizes the number of affected facilities and forms when the
options are combined.

In addition, as a result of the changes in the definition of the ARA
described above, a limited number of facilities currently eligible to
report non-PBT chemicals using the Form A may lose eligibility under the
final rule.  The forms that may lose eligibility are those for which
total production related waste reported is less than or equal to 500
pounds, but for which total production related and non-production
related waste is greater than 5,000 pounds or total production related
and non-production related disposal and other releases are greater than
2,000 pounds.  A discussion of the forms that may no longer be eligible
to report using a Form A and associated burden and impacts is presented
in Chapter Six.

TABLE ES-1

UNIVERSE OF AFFECTED FACILITIES AND FORMS

BY OPTION

	New Eligibility for Form A: PBT Chemicals Option	Expanded Eligibility
for Form A: Non-PBT Chemicals Optiona	Combined Options

Total Number of Affected Facilities	1,796	5,317	6,670

Total Number of Affected Forms	2,360	9,501	11,861

a The number of affected non-PBT forms in this analysis does not include
the non-PBT Form Rs that are currently likely eligible for Form A based
on an ARA (currently defined as the sum of Sections 8.1-8.7) of less
than or equal to 500 pounds.

Note: In this analysis, all TRI data are summed at the facility-chemical
level.

Source: Frozen RY2004 TRI data.

ES.3	BURDEN AND COST SAVINGS POTENTIALLY ASSOCIATED WITH THE RULE

As shown in Table ES-2 the total potential national burden savings
estimated for the combined options is 123,404 hours for TRI reporters
submitting first and subsequent year reports.  First year TRI reporters
have greater form calculation and completion burden than subsequent year
TRI reporters because of a variety of factors including the absence of
prior year calculations and lack of familiarity with chemical use and
management at the reporting facility.  Approximately 96 percent of all
TRI reports are subsequent year reports.   Table ES-2 also shows an
estimated total national cost savings of $5,925,208 in the first and
subsequent years when the options are combined.  EPA notes that
approximately 50 percent of non-PBT chemical reports that currently
appear to qualify for Form A under the 500 lb Annual Reportable Amount
(ARA) threshold are still reported on Form R.  These may be facilities
that exceed the 1,000,000 alternate manufacture, processing or otherwise
use threshold, or they may choose to report on Form R for some other
reason (e.g., minimal burden reduction from use of Form A, desire to be
seen as “good environmental stewards”).  EPA assumes that,
similarly, not all newly eligible facilities under today’s rule will
choose to use Form A, and that the actual burden reduction and impacts
of the rule will thus be less than the potential estimates presented
below.

TABLE ES-2

ANNUAL BURDEN AND COST SAVINGS

	New Eligibility for Form A:

PBT Chemicals Option	Expanded Eligibility for Form A:

Non-PBT Chemicals Optiona	Combined Options

Number of Affected Facilities	1,796	5,317	6,670

Number of Affected Forms	2,360	9,501	11,861

Average Annual Burden Savings in the First and Subsequent Years of the
Rule (Hours)

Form Completion - non-PBT chemicals	N/A	67,922	67,922

Form Completion - PBT chemicals	31,760	N/A	31,760

Recordkeeping/Mailing 	4,720	19,002	23,722

Total	36,480	86,924	123,404

Average Annual Cost Savings in the First and Subsequent Years of the
Rule

Form Completion - non-PBT chemicals	N/A	$3,335,628	$3,335,628

Form Completion - PBT chemicals	$1,560,140	N/A	$1,560,140

Recordkeeping/Mailing 	$204,829	$824,611	$1,029,440

Total	$1,764,969	$4,160,239	$5,925,208

a The number of affected facilities and  forms in this analysis does not
include the non-PBT Form Rs that are currently likely eligible for Form
A based on an ARA of less than or equal to 500 pounds.

The number of facilities cannot be summed across form types because some
facilities filed both PBT and non-PBT forms.

Source: Frozen RY2004 TRI data and Wage Rates from the U.S. Department
of Labor (see Chapter 2).

ES.4	BENEFITS OF THE RULE

	EPA believes that the changes addressed in this rulemaking will reduce
reporting burden and save resources for regulated entities without
significantly compromising the usefulness of TRI information to the
public.  Estimated savings are reported above.   In addition, the rule
will provide incentives to reduce or eliminate releases (especially for
PBT chemicals) and encourage source reduction.  While EPA believes this
benefit could be significant, EPA is not able to quantitatively estimate
the volume of releases that would be eliminated, or other waste
management activities replaced by source reduction, due to lack of data.

ES.5  IMPACTS OF THE RULE ON REPORTING

Under the New Eligibility for Form A: PBT Chemicals Option, only reports
with zero pounds disposed or otherwise released would be eligible for
Form A reporting.  Therefore, no data would no longer be reported on
disposal or other releases.  Information would not be reported, however,
regarding the use(s) of the chemical (i.e., was the chemical
manufactured, processed, or otherwise used), the maximum amount of the
chemical on site at any time during the calendar year, and the
production ratio.  Examples of additional information that would not be
reported on Form R includes information on recycling small amounts of
lead and lead compounds and mercury and mercury compounds and
information on recycling, energy recovery, or treatment of PACs,
including benzo(g,h,i)perylene, and other organic chemicals.  For this
information, however, the Form A provides a range (zero to 500 lbs)
estimate of the ARA.  In total, less than 0.01 percent of total
production related waste and 0.01 percent total non-production related
waste (Table ES-3) would no longer be reported on Form R as a result of
this option, even if all eligible facilities used Form A.  Since it is
unlikely that this will happen, the actual impacts will likely be even
smaller.  In addition, Table ES-4 shows that for the majority of
chemicals (95%) less than 10% of their total production related waste
may no longer be reported on Form R.  For 91% of chemicals, less than
10% of their total non-production related waste may no longer be
reported on Form R.

TABLE ES-3

PERCENTAGE OF TOTAL RELEASES AND OTHER WASTE MANAGEMENT POUNDS NOT
REPORTED DUE TO NEW AND EXPANDED FORM A ELIGIBILITY

	Total Releases Not Reported	Total Production Related Waste Not Reported
Total Non-Production Related Waste Not Reported

	Lbs 	Percentage	Lbs 	Percentage	Lbs	Percentage

New Eligibility for Form A: PBT Chemicals Option	0	0.00%	83,129	0.01%
283	0.01%

Expanded Eligibility for Form A: Non-PBT Chemicals Option	5,713,104
0.14%	16,052,663	0.06%	83,832	0.48%

	The Expanded Eligibility for Form A: Non-PBT Chemicals Option extends
the existing alternate reporting threshold from 500 pounds to 5,000
pounds, including quantities reported to Section 8.8 (non-production
related waste) for reports with less than or equal to 2,000 pounds of
on- and off-site disposal and other releases. For forms qualifying under
this option, specific release and other waste management information
will no longer be reported on Form R as well as information regarding
the use(s) of the chemical (i.e. was the chemical manufactured,
processed, or otherwise used), the maximum amount of the chemical on
site at any time during the calendar year, and the production ratio. To
evaluate the extent of data that may no longer be reported on Form R,
EPA examined the volume of total releases, total production related
waste, total non-production related waste and total combined production
and non-production related waste that are currently reported on Form Rs
that would qualify for this option.   In total, approximately 0.14% of
total releases, 0.06% of total production related waste and 0.48% of
total non-production related waste may no longer be reported on Form R
(Table ES-3).  At the chemical-specific level, Table ES-5 shows that for
the majority of chemicals (82%), less than 10% of their total releases
may no longer be reported on Form R.  For 5% of chemicals, between 50%
and 99% of their releases pounds may no longer be reported on Form R and
for 6% of chemicals, 100% of their release pounds may no longer be
reported on Form R.  Table ES-5 shows similar results for total
production related waste. Specifically, for 91% of chemicals, less than
10% of their total production related waste may no longer be reported on
Form R.  For 6% of chemicals, 100% of their total production related
waste pounds may no longer be reported on Form R.  For 95% of chemicals,
less than 10% of their total non-production related waste may no longer
be reported on Form R.  For 1% of chemicals, 100% of their total
non-production related waste pounds may no longer be reported on Form R.
 Those chemicals for which a large share of releases and/or production
related waste may not be reported on Form R are those with relatively
few Form Rs and/or relatively small quantities per form (see Table A-3
in Appendix A for chemicals where 100% of total releases may not be
reported).  EPA again emphasizes that Form A serves as a range report of
0 to 2,000 lbs for the release information and 0 to 5,000 lbs for the
total waste management information no longer reported on Form R.  This
range is wider than for PBT chemicals because of the broader eligibility
requirements.

	Extending the alternate reporting threshold will also affect the
distribution of TRI reporting at the community level.  EPA evaluated the
impact of this option on local communities using a postal zip code
analysis. As shown in Table ES-6, under the final rule, 47% of all zip
codes with Form R reports would have at least one Form R eligible for
Form A reporting and 6% of zip codes would have all current Form Rs
eligible for Form A reporting.  As can also be seen from the table,
those zip codes where all Form Rs would be eligible tend to have only a
small number of Form Rs to start.

TABLE ES-4

PERCENT OF CHEMICALS WITHIN VARIOUS RANGES OF RELEASES AND OTHER WASTE
MANAGEMENT THAT WOULD BE ELIGIBLE FOR FORM A REPORTING

(PBT OPTION)

Percent of Pounds Eligible for Form A Reporting	Total Releases

(Sections 5&6)	Total Production Related Waste

(Sections 8.1-8.7)	Non-Production Related Waste

(Section 8.8)	Total Waste

(Sections 8.1-8.8)

100% of pounds	0%	0%	0%	0%

99 - 50% of pounds	0%	0%	0%	0%

49 - 10% of pounds	0%	5%	9%	5%

9 - >0% of pounds	0%	65%	45%	65%

0% of pounds	100%	30%	45%	30%

Note:  Percentages above do not always add to 100% due to rounding.

TABLE ES-5

PERCENT OF CHEMICALS WITHIN VARIOUS RANGES OF RELEASES AND OTHER WASTE
MANAGEMENT THAT WOULD BE ELIGIBLE FOR FORM A REPORTING

(NON-PBT OPTION)

Percent of Pounds Eligible for Form A Reporting	Total Releases

(Sections 5&6)	Total Production Related Waste

(Sections 8.1-8.7)	Non-Production Related Waste

(Section 8.8)	Total Waste

(Sections 8.1-8.8)

100% of pounds	6%	6%	1%	6%

99 - 50% of pounds	5%	0%	2%	0%

49 - 10% of pounds	8%	3%	3%	3%

9 - >0% of pounds	44%	56%	12%	56%

0% of pounds	38%	35%	83%	35%

Note:  Percentages above do not always add to 100% due to rounding.

TABLE ES-6

ZIP CODES ELIGIBLE FOR FORM A REPORTING

(PBT AND NON-PBT OPTIONS)

 	Number of Zip Codes	Percent of Total Zip Codes Containing Form Rs
Average Number of Form Rs per Zip Code

Zip codes with at least one Form R newly eligible for Form A	4,246	47.4%
13.55

Zip codes with all Form Rs newly eligible for Form A	557	6.2%	2.04

Note: Based on the RY2004 Frozen TRI data, there are 8,961 five-digit
zip codes with TRI Form R data.

Source: Frozen RY2004 TRI data.

ES.6  REDUCED FORM A ELIGIBILITY FOR NON-PBTS

In response to comments on the proposed rule, the definition of the ARA
(e.g. the eligibility criteria for use of Form A) for both PBTs and
non-PBTs is now defined as the sum of Sections 8.1-8.8, as opposed to
Sections 8.1-8.7 as it is currently defined for non-PBTs.  As a result
of this change, a limited number of facilities previously eligible to
use Form A for non-PBT chemicals will lose eligibility under the final
rule and would, therefore, experience an increase in reporting burden.
Forms that may lose eligibility are those for which total production
related waste is less than or equal to 500 pounds, but for which total
production related and non-production related waste is greater than
5,000 pounds or total production related and non-production related
disposal and other releases are greater than 2,000 pounds.  The exact
number of newly ineligible Form As and affected facilities cannot be
calculated because waste management and one-time release quantities are
unknown for current Form A users.  However, a reasonable estimate can be
made if it is assumed that the approximately 10,000 Form Rs that appear
to be eligible for Form A at the 500-pound ARA are representative of the
approximately 11,000 Form As currently filed under the 500-pound ARA.

EPA estimated that approximately 95 Form As filed by 63 facilities will
be newly ineligible as a result of the final rule.  Table ES-7 shows the
national burden and cost estimates for first and subsequent year
reporters associated with newly ineligible Form As.  The table shows an
estimated total potential burden increase of 869 hours and total cost
increase of $41,598 as a result of the rule.

TABLE ES-7

ANNUAL BURDEN AND COSTS

	New Ineligibility for Form A: Non-PBT Chemicals Option

Number of Affected Facilities	63

Number of Affected Forms	95

Average Annual Burden Increase in the First and Subsequent Years of the
Rule (Hours)

Form Completion - non-PBT chemicals	679

Recordkeeping/Mailing 	190

Total	869

Average Annual Burden Cost Increase in the First and Subsequent Years of
the Rule

Form Completion - non-PBT chemicals	$33,353

Recordkeeping/Mailing 	$8,245

Total	$41,598

Source: Frozen RY2004 TRI data and Wage Rates from the U.S. Department
of Labor (see Chapter 2).

To evaluate the potential data gain, EPA examined the volume of total
production related waste and total non-production related waste that
would be newly reported under the rule.  Since Form A does not provide
specific waste management quantities, pounds associated with Form As
that may become newly ineligible as a result of today’s rule were
extrapolated using data from Form Rs that appear to be eligible for Form
A at the 500-pound ARA. In total, EPA estimates that less than 0.00003%
of total production related waste would be newly reported as a result of
new ineligibility for Form A under the non-PBT option.  However, there
would be an estimated 20% increase in total non-production related waste
newly reported.

TABLE ES-8

POUNDS AND PERCENTAGE OF TOTAL PRODUCTION RELATED AND NON-PRODUCTION
RELATED WASTE POUNDS NEWLY REPORTED

	Total Production Related Waste Newly Reported	Total Non-Production
Related Waste Newly Reported

	Lbs 	Percentage	Lbs 	Percentage

New Ineligibility for Form A: Non-PBT Chemicals Option	8,276	0.00003%
3,514,380	20.3%

Source: Frozen RY2004 TRI data

	1   The term EPCRA section 313 properly refers to only the statutory
requirements, while the term TRI properly refers to the database where
the information collected under section 313 and under section 6607 of
the PPA is stored.  However, the terms have often been used
interchangeably by the public to refer to the statute, the regulatory
requirements, the reporting form, the database, and EPA's program to
manage the data.  In deference to common usage, the terms EPCRA section
313 and TRI are sometimes used interchangeably in this report where
doing so will make the report simpler and easier to read.

 Non-PBTs are already qualified to certify on a Form A in lieu of
completing a Form R if they meet applicable criteria.

ES-  PAGE  1

***September 22, 2006***


[Federal Register: October 20, 2006 (Volume 71, Number 203)]
[Notices]
[Page 62026-62029]
[DOCID:fr20oc06-100]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54607; File No. SR-NASD-2005-094]

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

October 16, 2006.

I. Introduction

    On June 17, 2005, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend NASD Rule 10308 relating
to the classification of arbitrators as non-public or public.\3\ On
August 5, 2005, NASD filed amendment No. 1 to the proposed rule.\4\ The
proposed rule change, as amended, was published for comment in the
Federal Register on August 30, 2005,\5\ and the Commission received 65
comments on the proposal.\6\

The majority of commenters are lawyers that represent investors in
arbitrations. This order approves the proposed rule change as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On September 6, 2006, the Commission approved similar
amendments to NYSE Rule 607 (SR-NYSE-2005-43) (the ``NYSE Rule
Change''), which also governs securities industry and public
arbitrators. The NYSE Rule Change will become effective on Dec. 13,
2006, which is 90 days after the Commission's approval order was
published in the Federal Register. See Exchange Act Release No.
54407 (Sept. 6, 2006), 71 FR 54102 (Sept. 13, 2006).
    \4\ The amendment clarified the rule's text and purpose, and
revised the effective date of the rule. NASD will announce the
effective date of the proposed rule change in a Notice to Members to
be published no later than 30 days following Commission approval.
The effective date will be no later than 60 days following
publication of the Notice to Members announcing Commission approval.
    \5\ See Exchange Act Release No. 52332 (Aug. 24, 2005), 70 FR
51395 (Aug. 30, 2005) (the ``Notice'').
    \6\ Richard H. Levenstein, Kramer, Sopko & Levenstein, P.A.,
Feb. 1, 2006 (``Levenstein''); Les Greenberg, Law Offices of Les
Greenberg, Oct. 9 2005 (``Greenberg''); Bradford D. Kaufman,
Greenberg Traurig, Oct. 7, 2005 (``Kaufman''); Jonathan L. Hochman,
Schindler Cohen & Hochman LLP, Sept. 30, 2005 (``Hochman'');
Jonathan W. Evans, Jonathan W. Evans and Associates, Sept. 21, 2005
(``Evans''); Scot Bernstein, Sept. 21, 2005 (``Bernstein''); John W.
Barnes, Sept. 21, 2005 (``Barnes''); L. Jerome Stanley, Sept. 20,
2005 (``Stanley''); Dale Ledbetter, Ardorno & Yoss, Sept. 20, 2005
(``Ledbetter''); Randall R. Heiner, Sept. 20, 2005 (``Heiner''); Sam
T. Brannan, Page Perry, LLC, Sept. 20, 2005 (``Brannan''); Jason R.
Doss, Page Perry, LLC, Sept. 20, 2005 (``Doss''); William B.
Langenbacher, Sept. 20, 2005 (``Langenbacher''); Steve Parker, Page
Perry, LLC, Sept. 20, 2005 (``Parker''); Jeffrey D. Pederson, Sept.
20, 2005 (``Pederson''); Martin Seiler, Sept. 20, 2005 (``Seiler'');
Brian Greenman, Sept. 20, 2005 (``Greenman''); Teresa M. Gillis,
Shustak Jalil & Heller, Sept. 20, 2005 (``Gillis''); William F.
Davis, Sept. 20, 2005 (``Davis''); David Harrison, Spivak &
Harrison, Sept. 20, 2005 (``Harrison''); Susan N. Perkins, Sept. 20,
2005 (``Perkins''); Mitchell S. Ostwald, Law Offices of Mitchell S.
Ostwald, Sept. 20, 2005 (``Ostwald''); Scot D. Bernstein, Law
Offices of Scot D. Bernstein, Sept. 20, 2005 (``Bernstein'');
William F. Galvin, Commonwealth of Massachusetts, Sept. 20, 2005
(``Galvin''); William P. Torngren, Law Offices of William P.
Torngren, Sept. 20, 2005 (``Torngren''); Charles C. Mihalek and
Steven M. McCauley, Charles C. Mihalek, P.S.C., Sept. 20, 2005
(``Mihalek''); Timothy A. Canning, Sept. 20, 2005 (``Canning'');
Laurance M. Landsman, Block & Landsman, Sept. 20, 2005
(``Landsman''); Steven J. Gard, Gard Smiley Bishop & Dovin LLP,
Sept. 20, 2005 (``Gard''); Scott L. Silver, Blum & Silver, P.A.,
Sept. 20, 2005 (``Silver''); G. Mark Brewer, Brewer Carlson, LLP,
Sept. 20, 2005 (``Brewer''); John D. Hudson, Sept. 20, 2005
(``Hudson''); Joel A. Goodman, Kalju Nekvasil, Steven Krosschell,
and Jennifer Newsom, Goodman & Nekvasil, P.A., Sept. 20, 2005
(``Goodman''); Jill I. Gross, Barbara Black, and Per Jebsen, Pace
Investor Rights Project, Sept. 20, 2005 (``Gross''); Royal B. Lea,
III, Bingham & Lea, and Randall A. Pulman, Pulman, Bresnahan &
Pullen, LLP, Sept. 19, 2005 (``Lea''); Richard P. Ryder, Securities
Arbitration Commentator, Inc., Sept. 19, 2005 (``Ryder''); Alan C.
Friedberg, Pendelton, Friedberg, Wilson & Hennessey, P.C., Sept. 19,
2005 (``Friedberg''); Robert K. Savage, Savage Law Firm, P.A., Sept.
19, 2005 (``Savage''); Michael Chasen, Sept. 19, 2005 (``Chasen'');
Adam S. Doner, Sept. 19, 2005 (``Doner''); Jan Graham, Graham Law
Offices, Sept. 19, 2005 (``Graham''); Frederick W. Rosenberg, Sept.
19, 2005 (``Rosenberg''); Debra G. Speyer, Law Offices of Debra G.
Speyer, Sept. 19, 2005 (``Speyer''); Andrew Stoltmann, Stoltmann Law
Offices, P.C., Sept. 19, 2005 (``Stoltmann''); Al Van Kampen, Rohde
& Van Kampen PLLC, Sept. 19, 2005 (``Van Kampen''); Elliott
Goldstein, Sept. 19, 2005 (``Goldstein''); W. Scott Greco, Greco &
Greco, P.C., Sept. 18, 2005 (``Greco''); Barry D. Estell, Sept. 18,
2005 (``Estell''); Charles W. Austin, Jr., C. W. Austin, Jr. P.C.,
Sept. 17, 2005 (``Austin''); Robert C. Port, Cohen Goldstein Port &
Gottlieb, LLP, Sept. 16, 2005 (``Port''); Kurt Arbuckle, Sept. 16,
2005 (``Arbuckle''); Bill Fynes, Sept. 15, 2005 (``Fynes''); Jeffrey
A. Feldman, Sept. 15, 2005 (``Feldman''); Jay H. Salamon, Hermann,
Cahn & Schneider LLP, Sept. 14, 2005 (``Salamon''); Steven B.
Caruso, Maddox Hargett & Caruso, P.C., Sept. 14, 2005 (``Caruso'');
Jorge A. Lopez, Law Offices of Jorge A. Lopez, P.A., Sept. 14, 2005
(``Lopez''); Michael J. Willner, Miller Faucher And Cafferty LLP,
Sept. 13, 2005 (``Willner''); Jeffrey S. Kruske, Law Offices of
Jeffrey S. Kruske, P.A., Sept. 13, 2005 (``Kruske''); Richard M.
Layne, Layne Lewis, LLP, Sept. 13, 2005 (``Layne''); John Miller,
Law Offices of John J. Miller, P.C., Sept. 13, 2005 (``Miller''),
Herb Pounds, Sept. 13, 2005 (``Pounds''); Laurence S. Schultz,
Driggers, Schultz & Herbst, Sept. 12, 2005 (``Schultz''); Rosemary
J. Shockman, Public Investors Arbitration Bar Association, Sept. 9,
2005 (``PIABA''); Seth E. Lipner, Baruch College and Deutsch &
Lipner, Sept. 8, 2005 (``Lipner''); and Scott I. Batterman, Clay
Chapman Crumpton Iwamura and Pulice, Aug. 30, 2005 (``Batterman'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The purpose of the proposed rule change is to amend the arbitrator
classification criteria in Rule 10308 of the NASD Code of Arbitration
Procedure (``Code'') to ensure that individuals with significant ties
to the securities industry may not serve as public arbitrators in NASD
arbitrations.
    The Code classifies arbitrators as public or non-public. When
investors have a dispute with member firms or associated persons in
NASD arbitration that involves claims of no more than $50,000, they are
entitled to have their cases heard by a panel consisting of one public
arbitrator or, if the dispute involves a claim of more than $50,000, a
panel consisting of two public arbitrators and one non-public
arbitrator.\7\
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    \7\ NASD Rule 10308(b)(1). The panel composition for intra-
industry disputes (not involving any parties who are investors) is
governed by NASD Rule 10202. Depending on the nature of the dispute,
intra-industry panels may consist of all public arbitrators, all
non-public arbitrators, or a majority of public arbitrators. The
arbitrator classification provisions of NASD Rule 10308 apply to all
such panels.
---------------------------------------------------------------------------

    Under current NASD Rule 10308(a)(4), a person is classified as a
non-public arbitrator if he or she:
    (A) Is, or within the past 5 years, was:
    (i) Associated with a broker or a dealer (including a government
securities broker or dealer or a municipal securities dealer);
    (ii) Registered under the Commodity Exchange Act;
    (iii) A member of a commodities exchange or a registered futures
association; or
    (iv) Associated with a person or firm registered under the
Commodity Exchange Act;
    (B) Is retired from, or spent a substantial part of a career,
engaging in any of the business activities listed in subparagraph
(4)(A);
    (C) Is an attorney, accountant, or other professional who has
devoted 20 percent or more of his or her professional work, in the last
two years, to clients who are engaged in any of the business activities
listed in subparagraph (4)(A); or
    (D) Is an employee of a bank or other financial institution and
effects transactions in securities, including government or municipal
securities, and commodities futures or options or supervises or
monitors the compliance with the securities and commodities laws of
employees who engage in such activities.
    Current NASD Rule 10308(a)(5) sets forth the criteria for public
arbitrators. In particular, a person is allowed to serve as a public
arbitrator if he or she is not engaged in the conduct described in
paragraphs (A) through (D) of NASD Rule 10308(a)(4), was not engaged in
that conduct for 20 or more years, is not an investment adviser, and is
not ``an attorney, accountant, or other professional whose firm derived
10 percent or more of its annual revenue in the past 2 years from any
persons or entities listed in paragraph (a)(4)(A).'' \8\ The current
rule also excludes the spouse or an immediate family member of a person
engaged in the conduct described in paragraphs (A) through (D) of NASD
Rule 10308(a)(4) from serving as a public arbitrator.\9\
---------------------------------------------------------------------------

    \8\ NASD Rule 10308(a)(5)(A)(i)-(iv).
    \9\ NASD Rule 10308(a)(5)(A)(v).
---------------------------------------------------------------------------

    In order to ensure that individuals with significant ties to the
securities industry may not serve as public arbitrators in NASD
arbitrations, NASD proposed to amend the definition of public
arbitrator to exclude individuals who work for, or are officers or
directors of, an entity that controls, is controlled by, or is under
common control with a partnership, corporation, or other organization
that is engaged in the securities business.\10\ The amendment also
applies to individuals who have a spouse or immediate family member who
works for, or is an officer or director of, an entity that is in such a
control relationship with a partnership, corporation, or other
organization that is engaged in the securities business, such as a
broker-dealer. Under the current rule, such individuals may be
considered public arbitrators. For example, a person who works for a
real estate firm that is under common control with, and perhaps shares
the same corporate name of, a broker-dealer may be classified as a
public arbitrator under current rules. Because investors may view such
an arbitrator as not truly ``public,'' NASD proposed to revise the
definition of public arbitrator as described above.
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    \10\ For purposes of this rule, the term ``control'' has the
same meaning that it has for purposes of Form BD, which broker-
dealers use to register with NASD and to make periodic updates.
Specifically, control is defined as:
    The power, directly or indirectly, to direct the management or
policies of a company, whether through ownership of securities, by
contract, or otherwise. Any person that (i) is a director, general
partner or officer exercising executive responsibility (or having
similar status or functions); (ii) directly or indirectly has the
right to vote 25% or more of a class of a voting security or has the
power to sell or direct the sale of 25% or more of a class of voting
securities; or (iii) in the case of a partnership, has the right to
receive upon dissolution, or has contributed, 25% or more of the
capital, is presumed to control that company.
    See Uniform Application for Broker-Dealer Registration (Form
BD).
---------------------------------------------------------------------------

    In addition, NASD proposed to revise the definition of non-public
arbitrator to clarify that persons who are registered with a broker-
dealer may not be classified as public arbitrators. Under current
rules, arbitrators who are associated with a broker or dealer are
considered non-public. In the financial services industry, it is not
uncommon for a person to be employed by one company (such as a bank or
insurance company) and to be registered to sell securities through
another company (such as an affiliated broker-dealer). NASD believes
that there may be some uncertainty among arbitrators who work for
entities in a control relationship with a broker-dealer as to whether
they are associated with a broker-dealer for purposes of NASD Rule
10308, even though they are registered with the broker-dealer. Because
the definition of ``person associated with a member'' in the NASD By-
Laws includes persons who are registered with a broker-dealer,
regardless of their status as employees, such persons are considered
non-public arbitrators. Therefore, NASD proposes to amend the
definition of non-public arbitrator to specifically include anyone
registered with a broker-dealer.\11\
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    \11\ For purposes of NASD Rule 10308(a)(4)(A)(i), the term
``including'' is expanding or illustrative, not exclusive or
limiting. The use of the term ``including but not limited to'' in
NASD Rule 10321(d) of the Code is not intended to create a negative
implication regarding the use of ``including'' without the term
``but not limited to'' in NASD Rule 10308(a)(4)(A)(i) or other
provisions of the Code.

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III. Summary of Comments

    The Commission received 65 comments on the proposal.\12\ Several
commenters believed that the changes proposed were laudatory.\13\ Many
viewed the proposed amendments as insufficient to address what they
considered to be an arbitration process that is unfair to investors.
Their concerns generally centered in three areas: (1) The inclusion of
any non-public arbitrators on arbitration panels; (2) the criteria for
qualifying as a non-public or public arbitrator; and (3) the desire to
harmonize NASD and NYSE rules on this issue.\14\
---------------------------------------------------------------------------

    \12\ See footnote 6.
    \13\ See, e.g., Barnes, Chasen, Gross, Kaufman, Lipner, PIABA,
Pounds, and Rosenberg.
    \14\ Many of these comments also applied to the NYSE Rule Change
and were also addressed by the NYSE. See Letter from Mary Yeager,
Assistant Secretary, NYSE, to Katherine A. England, Assistant
Director, SEC, dated June 5, 2006, available at: http://www.sec.gov/rules/sro/nyse/nyse200543/myeager060506.pdf
.

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Inclusion of Non-Public Arbitrators

    The majority of commenters expressed the view that the mandatory
inclusion of arbitrators who are involved in the securities industry on
arbitration panels creates an unfair burden for investors seeking
redress, and stated that arbitration panels should be comprised only of
individuals with no ties to the securities industry.\15\ A number of
commenters maintained that the mandatory inclusion of non-public
arbitrators creates a perception that the process is unfair and biased
against investors,\16\ and some suggested eliminating the non-public
arbitrator.\17\
---------------------------------------------------------------------------

    \15\ See, e.g., Arbuckle, Austin, Barnes, Bernstein, Brewer,
Canning, Caruso, Chasen, Davis, Doner, Doss, Estell, Evans, Feldman,
Friedberg, Fynes, Gard, Gillis, Goldstein, Goodman, Graham, Greco,
Greenman, Harrison, Heiner, Hudson, Kampen, Kruske, Landsman,
Langenbacher, Layne, Lea, Ledbetter, Levenstein, Lipner, Lopez,
Mihalek, Miller, Ostwald, Parker, Pederson, Perkins, PIABA, Port,
Pounds, Salamon, Savage, Schultz, Seiler, Silver, Stoltmann,
Torngren, and Willner.
    \16\  See, e.g., Galvin, Gillis, Greco, Greenberg, Harrison,
Heiner, Lopez, Salamon, Torngren, and Willner.
    \17\ See, e.g., Davis, Harrison, Ostwald, and Torngren.
---------------------------------------------------------------------------

    Two commenters stated that any required securities industry
expertise should come from expert testimony, thereby negating the need
for a non-public arbitrator on a panel.\18\ Another commenter opined
that non-public arbitrators face pressure from their firms to prevent
or to reduce damage awards against the securities industry.\19\ One
commenter stated that overturning the factual findings of an
arbitration panel on appeal is significantly more difficult than
overturning the factual findings of a jury, and thus it is critical to
establish the objectivity of panel members by removing the non-public
arbitrator.\20\ Another commenter stated that arbitration should be
voluntary because, in his view, non-public arbitrators are inherently
biased.\21\
---------------------------------------------------------------------------

    \18\ Brannan and Lopez.
    \19\ Feldman.
    \20\ Pederson.
    \21\ Mihalek.
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Criteria for Non-Public and Public Arbitrators

    Several commenters also stated that the proposed rule change would
neither adequately preclude persons with ties, either directly or
through their firms, to the securities industry from meeting the
definition of public arbitrator, nor would it thoroughly include such
people within the definition of non-public arbitrator.\22\ In
particular, commenters criticized two existing provisions in the
current Rule. First, they commented that current NASD Rule
10308(a)(4)(C) defines a non-public arbitrator to include any attorney,
accountant, or other professional who has devoted 20 percent or more of
his or her professional work, in the last two years, to brokerage or
commodity firms or their associated persons. Second, they noted that
current NASD Rule 10308(a)(5)(A)(iv) provides that an attorney,
accountant, or other professional whose firm derived 10 percent or more
of its annual revenue in the past two years from brokerage or commodity
firms or their associated persons is precluded from being a public
arbitrator.
---------------------------------------------------------------------------

    \22\ See, e.g., Caruso, Evans, Galvin, Lipner, Lopez, and PIABA.
---------------------------------------------------------------------------

    One commenter stated that the definition of non-public arbitrator
should be amended to remove the 20 percent threshold and instead
include all attorneys, accountants or other professionals who have
devoted ``any'' work to the securities industry.\23\ Another opined
that both the 20 percent and 10 percent limitations are too liberal and
they fail to address the conflicts these professionals are subject
to.\24\ In this commenter's view, public arbitrators should have no
role in representing securities or commodities firms.
---------------------------------------------------------------------------

    \23\ Caruso. The commenter noted that the preclusion should
apply to individuals that have represented clients in the securities
industry for the last 5 years. NASD Rule 10308(a)(4)(C) currently
applies only to activities in the last two years.
    \24\ Galvin.
---------------------------------------------------------------------------

    One commenter stated that the 10 percent threshold ``is arbitrary
and has no practical or legal significance.'' \25\ The commenter stated
that large law firms may represent securities industry clients that
generate millions of dollars in fees, but still may not exceed 10
percent of the firm's revenues. It further stated that ``an attorney
who represents industry clients which comprise less than 10 percent of
the firm's annual revenue in the past two years, has the same
obligation, commitment and duty of loyalty to the client as does the
attorney with clients who equal or exceed the 10 percent limit.'' \26\
Another commenter stated that ``an attorney whose firm represents any
securities industry clients is inescapably subject to the securities
industry influence regardless of the percentage of industry business.''
\27\ This commenter remarked that even firms with a small percentage of
securities industry business would like to have more.
---------------------------------------------------------------------------

    \25\ PIABA.
    \26\ Id.
    \27\ Bernstein.
---------------------------------------------------------------------------

    Some commenters recommended eliminating the 10 percent threshold
and, as a result, excluding from the definition of public arbitrator
all attorneys, accountants or other professionals whose firms have
derived any revenue from the securities industry in the last two
years.\28\ Two commenters opined that, at a minimum, NASD should remove
all defense lawyers who represent the securities industry from the pool
of public arbitrators.\29\
---------------------------------------------------------------------------

    \28\ Evans, Bernstein, PIABA, and Schultz.
    \29\ Feldman and Lipner.
---------------------------------------------------------------------------

Harmonizing NYSE and NASD Rules

    One commenter expressed concern that the proposed rule change would
``differ significantly'' from the Uniform Code of Arbitration (``UCA'')
classification rule, and stated that NASD's proposed rule change and
the NYSE Rule Change should have been ``brought to the Commission with
the same text after being vetted by SICA'' (the Securities Industry
Conference on Arbitration).\30\ In this commenter's view, the
Commission should compel NASD and the NYSE to develop ``identical
solutions'' to this issue.\31\
---------------------------------------------------------------------------

    \30\ Ryder.
    \31\ Id. In particular, this commenter highlighted the
differences in relatives who would be considered an ``immediate
family member'' under each rule. The NASD proposal would exclude
immediate family members of all control-related parties from serving
as public arbitrators, while the NYSE Rule Change excluded only
immediate family members of associated persons. The NASD proposal
also would include step-relatives, while the NYSE Rule Change did
not. Finally, the NASD proposal does not include in-laws within the
definition of control-related parties, while the NYSE Rule Change
did not.

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IV. NASD Response to Comments

    As a preliminary matter, NASD stated that suggestions that non-
public arbitrators should be eliminated from arbitration panels were
beyond the scope of the rule filing, which applies to the
classification of arbitrators and not the composition of arbitration
panels.\32\
---------------------------------------------------------------------------

    \32\ See letter from John D. Nachmann, Counsel, NASD, to Lourdes
Gonzalez, Assistant Chief Counsel--Sales Practices, SEC, dated Aug.
23, 2006, available at: http://www.sec.gov/rules/sro/nasd/nasd2005094/nasd2005094-65.pdf
.

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

    NASD also stated that the current definitions of non-public
arbitrator and public arbitrator, in conjunction with the proposed rule
change, will properly exclude individuals with significant ties to the
securities industry from being classified as public arbitrators.\33\ It
stressed that the proposed rule change eliminates from the definition
of public arbitrator both persons with ``actual bias'' and those
``perceived as being biased.'' NASD noted that its rules already
prohibit professionals from serving as public arbitrators if they have
devoted 20 percent or more of their work in the last two years to
securities industry clients. It also stated that it has taken the
additional step in the current rule to exclude from the definition of
public arbitrator professionals whose firm derived 10 percent or more
of its annual revenue in the past two years from securities industry
clients.\34\
---------------------------------------------------------------------------

    \33\ Id.
    \34\ Id. NASD noted that its rules already prohibit the
following individuals from serving as public arbitrators: (1) Anyone
associated with securities industry during the past five years, (2)
anyone who has spent 20 or more years in the securities industry,
and (3) anyone who is the spouse or immediate family member of a
person who is associated with the securities industry. NASD Rules
10308(a)(4)-(5).
---------------------------------------------------------------------------

    NASD further commented that it is not necessary for its rules with
respect to the classification of arbitrators to be identical to those
of the NYSE, and noted existing differences, such as the 10 percent
threshold for certain professionals, between its rules and the NYSE
rule.\35\ Regarding the proposed amendment to prohibit certain family
members or relatives of certain family members who work for a
controlled entity from serving as public arbitrators, NASD stated that
it drafted this proposal to ensure that individuals with significant
ties to the securities industry do not serve as public arbitrators.\36\
---------------------------------------------------------------------------

    \35\ Similar to the current NASD Rule 10308(a)(4)(C), NYSE Rule
607(A)(2)(iv) defines an industry arbitrator to include any
attorney, accountant or other professional who has devoted 20
percent or more of his or her work to securities industry clients
within the last two years.
    \36\ Id.
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V. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the provisions of Section
15A(b)(6) \37\ of the Act, which require, among other things, NASD's
rules to be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest.\38\
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78o-3(b)(6).
    \38\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change will promote
the public interest by limiting certain people who have ties to the
securities industry from serving as public arbitrators. In particular,
by expanding the list of entities controlled by companies engaged in
the securities business, the rule will further limit the industry ties
the public arbitrator may have. The inclusion of immediate family
members within the list of controlled parties who may not be public
arbitrators should have a similar result.\39\ In addition, reminding
persons registered with broker-dealers that they are associated persons
of a broker-dealer should further assist in the correct classification
of these persons as non-public arbitrators.\40\
---------------------------------------------------------------------------

    \39\ Section 19(b)(2) of the Act requires the Commission to
approve a proposed rule change if it finds that the proposed rule
change is consistent with the requirements of the Act, and the
applicable rules and regulations thereunder. This standard does not
require NASD rules to be identical to rules adopted by the NYSE or
by SICA.
    \40\ The Commission notes that persons employed by a broker-
dealer (other than in a clerical or ministerial capacity) are
associated persons of a broker-dealer as defined in Section 3(a)(18)
of the Act.
---------------------------------------------------------------------------

    The Commission appreciates the comments suggesting the elimination
of non-public arbitrators, and the further restriction on persons who
have any ties to the securities industry from serving as public
arbitrators. While these comments are beyond the scope of this rule
filing, they raise important questions regarding the arbitration
process. We understand that SICA is actively considering proposals from
its membership regarding these issues. We note that NASD has stated
that it will review any rule regarding panel composition that SICA
adopts to the UCA, and that it is considering further amendments to the
definitions of public arbitrator and non-public arbitrator.\41\
---------------------------------------------------------------------------

    \41\ Telephone conversation between John D. Nachmann, Counsel,
NASD, and Michael Hershaft, Special Counsel, SEC (Oct. 3, 2006).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\42\ that the proposed rule change, as amended (SR-NASD-2005-094), be,
and hereby is, approved.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-17563 Filed 10-19-06; 8:45 am]

BILLING CODE 8011-01-P