[Federal Register: November 29, 2002 (Volume 67, Number 230)]
[Notices]
[Page 71224-71226]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no02-157]
[[Page 71224]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46881; File No. SR-PCX-2002-71]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Pacific
Exchange, Inc. To Require Industry Parties in Arbitration To Waive
Application of Contested California Arbitrator Disclosure Standards,
Upon the Request of Customers and Associated Persons With Claims of
Statutory Employment Discrimination, for a Six-Month Pilot Period
November 21, 2002.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 7, 2002, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons. For the reasons
described below, the Commission is granting accelerated approval to the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
PCX and PCX Equities, Inc. (``PCXE'') are proposing a rule change
to amend their rules to require industry parties in arbitration to
waive application of contested California arbitrator disclosure
standards upon the request of customers or, in industry cases, upon the
request of associated persons with claims of statutory employment
discrimination, for a six-month pilot period from November 21, 2002 to
May 22, 2003.\3\ Below is the text of the proposed rule change.
Proposed new language is italicized, deleted text is in [brackets].
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\3\ Telephone conversation between Betsy James, Assistant
General Counsel, PCX, and Andrew Shipe, Special Counsel, Division of
Market Regulation, SEC, November 21, 2002.
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* * * * *
Rules of the Board of Governors of the Pacific Exchange, Inc.
Rule 12 Arbitration
Matters Subject to Arbitration
Rule 12.1(a)-(g)--No change.
Commentary:
.01--No change.
.02--It may be deemed conduct inconsistent with just and equitable
principles of trade for a member, a member organization or a person
associated with a member or member organization to fail to submit to
arbitration on demand under the provisions of this Rule[,]; or to fail
to waive the California Rules of Court, Division VI of the Appendix,
entitled ``Ethics Standards for Neutral Arbitrators in Contractual
Arbitration'' (the ``California Standards''), if all the parties in the
case who are customers have waived application of the California
Standards in that case; or to fail to waive the California Standards if
all associated persons with a claim alleging employment discrimination,
including a sexual harassment claim, in violation of a statute have
waived application of the California Standards in that case; or to fail
to appear or to provide any document in his or its possession or
control as directed pursuant to the provisions of this Rule; or to fail
to honor an award of arbitrators properly rendered pursuant to the
provisions of this Rule where a timely motion has not been made to
vacate or modify such award pursuant to applicable law.
.03--No change.
* * * * *
PCX Equities, Inc.
Rule 12 Arbitration
Matters Subject to Arbitration
Rule 12.1--No change.
Rule 12.2 (a)-(g)--No change.
(h) It may be deemed conduct inconsistent with just and equitable
principles of trade for an ETP Holder or a person associated with an
ETP Holder to fail to submit to arbitration on demand under the
provisions of this Rule[,]; or to fail to waive the California Rules of
Court, Division VI of the Appendix, entitled ``Ethics Standards for
Neutral Arbitrators in Contractual Arbitration'' (the ``California
Standards''), if all the parties in the case who are customers have
waived application of the California Standards in that case; or to fail
to waive the California Standards if all associated persons with a
claim alleging employment discrimination, including a sexual harassment
claim, in violation of a statute have waived application of the
California Standards in that case; or to fail to appear or to provide
any document in his or her or its possession or control as directed
pursuant to the provisions of this Rule or to fail to honor an award of
arbitrators properly rendered pursuant to the provisions of this Rule
where a timely motion has not been made to vacate or modify such award
pursuant to applicable law.
(i)-(j)--No change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the PCX included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change.\4\ The
text of these statements may be examined at the places specified in
Item III below. PCX has prepared summaries, set forth in sections A, B
and C below, of the most significant aspects of such statements.
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\4\ The discussion in this section represents the Exchange's
views on the situation in California and does not in any way
represent a Commission position on this issue.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange states that it makes every effort to provide investors
who bring their claims to PCX with a fair, efficient, and economical
arbitration forum. In July 2002, the California Rules of Court,
Division VI of the Appendix, entitled, ``Ethics Standards of Neutral
Arbitrations in Contractual Arbitration'' (the ``California
Standards'') became effective (further described below). Prior to the
enactment of the California Standards, the Exchange states that it,
along with the National Association of Securities Dealers, Inc.
(``NASD'') and the New York Stock Exchange (``NYSE'', and collectively
with PCX and NASD, the ``Exchanges''), made several efforts to raise
their concerns about the California Standards with the California
Judicial Council and Legislative staff. The Exchange states that these
attempts did not meet with any success, and the California Standards
became effective without addressing the Exchanges' concerns. Since
then, PCX has been attempting to develop an appropriate process by
which it can appoint arbitrators in California.
NASD and NYSE filed a joint complaint in federal court for
declaratory relief (the ``Complaint'') in which they contend that the
California Standards cannot lawfully be applied to NASD and NYSE,
because the California Standards are preempted by federal law
[[Page 71225]]
and are inapplicable to self-regulatory organizations (``SROs'') under
state law.\5\ On September 18, 2002, the Commission moved to appear in
the case as a friend of the court and submitted a brief in which it
contended that the California Standards conflict with and thus are
preempted by the Commission's regulation of SRO arbitration under the
Act and by the Federal Arbitration Act.\6\ On November 12, 2002, the
district court dismissed the case on the ground that the defendants
were immune from suit under the Eleventh Amendment of the Constitution.
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\5\ See Motion for Declaratory Judgment, NASD Dispute
Resolution, Inc. and New York Stock Exchange, Inc., v. Judicial
Council of California, filed in the United States District Court for
the Northern District of California, No. C 02 3486 SBA (July 22,
2002), available on the NASD Web site at: www.nasdadr.com/pdf-text/072202
--ca--complaint.pdf.
\6\ See Brief of the Securities and Exchange Commission, Amicus
Curiae, in Support of Plaintiffs' Motion for Declaratory Judgment,
NASD Dispute Resolution, Inc. and New York Stock Exchange, Inc., v.
Judicial Council of California. The brief is available on the
Commission Web site at: www.sec.gov/litigation/briefs/nasddispute.pdf
.
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While waiting for the court's guidance on this issue, NASD and NYSE
announced that they were temporarily postponing the appointment of
arbitrators for new arbitrations in California. While PCX has not
joined in the Complaint to date, PCX concurs with NASD's and NYSE's
position in this matter, as well as the Commission's as set forth in
its friend of the court brief, and believes that the court's decision
could be applicable to PCX also. PCX has therefore been reluctant to
appoint arbitrators pending the court's decision.
On September 5, 2002, Harvey L. Pitt, Chairman of the Commission,
sent a letter to NASD and NYSE requesting them to explore ways to
expedite processing of arbitration claims involving California
parties.\7\ In response, NASD proposed the implementation of a six-
month amendment to its rules, requiring all parties that are member
firms or associated persons to waive the California Standards if all
the parties in the case who are customers or associated persons with a
statutory employment discrimination claim have waived the California
Standards in that case. This Rule Filing was published in the Federal
Register on October 3, 2002, and the Commission granted accelerated
approval.\8\ In the interest of continuing to provide investors with an
arbitral forum in California, and of being responsive to the
Commission's desire that the Exchanges offer some alternatives to
parties pending resolution of the applicability of the California
Standards to the Exchanges, PCX proposes an amendment to its Rules
substantially similar to NASD's.
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\7\ See letter from Chairman Pitt to Robert R. Glauber, Chairman
and CEO of NASD, and Richard Grasso, Chairman and CEO of NYSE, dated
September 5, 2002.
\8\ See Securities Exchange Act Release No. 34-46562 (September
26, 2002), 67 FR 62085 (SR-NASD-2002-126).
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Background Regarding the California Standards
The California Standards became effective July 1, 2002. They are
intended to address potential conflicts of interest that could exist in
private arbitration forums. The Exchanges' arbitration forums, however,
are part of a federal regulatory system overseen on a uniform basis by
the Commission. The conflicts that the California Standards are
designed to address do not exist in the Exchanges' arbitration forums,
which are highly regulated dispute resolution programs. The Commission
Staff sent a letter on July 1, 2002, requesting that the arbitration
programs administered by the SROs be exempted from the California
Standards.
The California Standards place excessive and unnecessary disclosure
burdens on persons who would serve on PCX arbitration panels and who
already must meet PCX's stringent disclosure requirements. The
extensive record-keeping requirements, and the potential liability for
even inadvertent violations of the California Standards, led PCX to
conclude that if PCX were required to implement the California
Standards, PCX arbitrations would be more time consuming, more costly,
and there would be less arbitrators willing to be members of PCX's
arbitrator pool. The California Standards would permit a party to
require the removal of an arbitrator for disclosing even an immaterial
relationship. An arbitrator's inadvertent failure to disclose even an
immaterial relationship could also result in the removal of the
arbitrator, or the vacatur of an award. The alternative dispute
resolution administrator would no longer have the power to decide
contested challenges to arbitrators under the California Standards.
Instead, the parties would have unilateral authority to require removal
of arbitrators based on disclosures under the California Standards,
whether the disclosures were material or not.
NASD and NYSE filed extensive comments when the California
Standards were proposed in February 2002, and followed up with meetings
with the Judicial Council and Legislative staff, some of which PCX also
attended. PCX also filed a letter with the Judicial Council concurring
with the positions taken by NASD and NYSE and objecting to the
application of the California Standards to PCX's arbitration program.
Despite this, the California Standards were implemented without
addressing the basic concerns of the Exchanges. NYSE and NASD formally
announced in July 2002, that they were postponing appointment of
arbitrators in California until this matter was resolved. PCX has been
attempting to determine how it can panel arbitrations in this
environment. PCX is concerned that any attempt to seat arbitrators
pursuant to the California Standards would result in: (a) the potential
for limitless objections to arbitrators based on potentially immaterial
disclosures required under the California Standards, (b) unacceptable
risk of liability to arbitrators and PCX, (c) the likelihood that PCX's
arbitrator pool would decrease dramatically due to the costs associated
with the required record-keeping and the risk of liability, and (d) an
overall increase in the cost of arbitrations to the parties due to all
of these factors.
Proposed Rule Change
PCX states that it has a strong desire to accommodate parties to
arbitration in California in this uncertain environment. PCX reviewed
NASD's proposed rule change that would require industry parties to
waive the California Standards in all cases in which all the parties in
the case who are customers (or in industry cases, who are associated
persons with claims of statutory employment discrimination) agree to
waive the application of the California Standards. PCX states that
implementation of a similar rule change would be an acceptable
temporary way to allow PCX to continue to provide arbitration, pending
a more permanent solution. Pursuant to the waiver permitted by this
Rule change, the matter would proceed under the existing PCX
Arbitration Rules, which already contain extensive disclosure
requirements and provisions for challenging arbitrators with potential
conflicts of interest.
Once the proposed rule filing is effective, PCX will notify
investors and associated persons with claims of statutory employment
discrimination, giving them the option of waiving the California
Standards and providing them with waiver forms. PCX staff will also
speak with investors and other
[[Page 71226]]
parties to explain this process, and will endeavor to provide
additional information on its website.
At the same time, PCX will notify industry parties in all pending
California cases that they must waive the California Standards if the
investor agrees to a waiver (or associated person, in the circumstances
described above). Industry parties in such cases will be required to
execute waiver agreements. However, their failure to do so will not
stop the cases from moving forward.\9\ An industry party's failure to
sign the waiver as required by the proposed rule change will be
referred for disciplinary action.
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\9\ In these situations, PCX will treat the industry parties as
having waived the California standards. Telephone conversation
between Peter Bloom, Director of Policy Development, PCX, and Andrew
Shipe, Division of Market Regulation, SEC, November 21, 2002.
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If all parties waive the California Standards as permitted by the
proposed Rule change, PCX will immediately commence the arbitrator
appointment process using the PCX Rules regarding arbitrator
disclosures, and not the California Standards.
PCX requests that this Rule change become effective immediately,
for a six-month pilot period. If the outcome of NASD's and NYSE's
lawsuit is that the California Standards do not apply to SROs, the
waivers will no longer be necessary. Cases that had already been
empanelled pursuant to a waiver would continue to conclusion with the
existing panel. If the lawsuit has not concluded by the expiration of
the initial six-month period, PCX may request an extension.
2. Statutory Basis
PCX believes that this proposal is consistent with section 6(b)
\10\ of the Act, in general, and furthers the objectives of section
6(b)(5),\11\ in particular, in that it is designed to facilitate
transactions in securities; to prevent fraudulent and manipulative acts
and practices; to promote just and equitable principles of trade; to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities; to remove impediments to and
perfect the mechanism of a free and open market and a national market
system; and in general, to protect investors and the public interest.
PCX believes that expediting the appointment of arbitrators under the
proposed waiver, at the request of customers and associated persons
with claims of statutory employment discrimination, will allow those
parties to exercise their contractual rights to proceed in arbitration
in California, notwithstanding the confusion and uncertainty caused by
the California Standards.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
PCX does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of
the submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for inspection and copying in the Commission's
Public Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the PCX. All
submissions should refer to File No. SR-PCX-2002-71 and should be
submitted by December 20, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, the requirements of section 6 of the Act.\12\
Specifically, the Commission finds that the proposal is consistent with
section 6(b)(5) of the Act, which requires that the rules of a national
securities exchange be designed to promote just and equitable
principles of trade, as well as to remove impediments to and perfect
the mechanism of a free and open market, and, in general, to protect
investors and the public interest.\13\ The Commission further finds
good cause for approving the proposed rule change prior to the 30th day
after the date of publication of notice thereof in the Federal
Register. Accelerated approval is necessary to protect investors in
that the rules are designed to help address the backlog of cases
created by the confusion over the new California Standards, are
designed to provide them with a mechanism to help resolve their
disputes with broker-dealers in a more expedited manner, and are
designed to help ensure the certainty and finality of arbitration
awards. Additionally, the proposed rule change will become effective as
a pilot program for six months, from November 21, 2002 to May 22, 2003,
during which time the Commission and the Exchange will monitor the
status of the previously discussed litigation.
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\12\ In approving the proposal, the Commission has considered
the rule's impact on efficiency, competition, and capital formation.
15 U.S.C. 78c(f).
\13\ 15 U.S.C. 78f(b)(5).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-PCX-2002-71) is hereby
approved on an accelerated basis through May 22, 2003.
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\14\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30197 Filed 11-27-02; 8:45 am]
BILLING CODE 8010-01-P