[Federal Register: February 2, 2005 (Volume 70, Number 21)]
[Notices]
[Page 5497-5499]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02fe05-125]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51083; File No. SR-NASD-2004-164]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 Thereto by National Association of Securities Dealers, Inc. Relating
to the Random Selection of Arbitrators by the Neutral List Selection
System
January 26, 2005.
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 October 28, 2004, the National Association of Securities Dealers,
Inc. (``NASD''), through its subsidiary, NASD Dispute Resolution, Inc.
(``NASD Dispute Resolution''), filed with the Securities and Exchange
Commission (``SEC'' or ``Commission''), the proposed rule change as
described in Items I and II, below, which Items have been prepared by
NASD. On January 5, 2005, NASD filed Amendment No. 1 to the proposed
rule change.\3\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and is
approving the proposal on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Mignon McLemore, NASD, to Catherine McGuire,
SEC (January 5, 2005).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
NASD Dispute Resolution proposes to amend Rule 10308 of the NASD
Code of Arbitration Procedure (``Code'') to change the method used by
the Neutral List Selection System (``NLSS'') \4\ to select arbitrators
from a rotational to a random selection function by incorporating the
random selection provision of the proposed Customer and Industry Code
revisions.\5\ Below is the text of the proposed rule change. Proposed
new language is in italics; proposed deletions are in [brackets].
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\4\ NLSS is the computer program NASD uses to select arbitrators
on a rotational basis. It has been in use since November 1998.
\5\ NASD Dispute Resolution has filed with the SEC a proposed
rule change to the Code to reorganize the current rules, simplify
the language, codify current practices, and implement several
substantive changes. The rule filing was submitted in three parts:
Customer Code, Industry Code, and Mediation Code. The Customer Code
was filed on October 15, 2003, and amended on January 3, 2005 and
January 19, 2005 (SR-NASD-2003-158); the Industry Code was filed on
January 16, 2004, and amended on February 26, 2004 and January 3,
2005 (SR-NASD-2004-011). The Mediation Code was filed on January 23,
2004, and amended on January 3, 2005 (SR-NASD-2004-013). It does not
contain any provisions concerning the NLSS. The three new codes will
replace the current Code in its entirety. The Code revision is
undergoing SEC staff review and has not yet been published for
comment.
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* * * * *
10308. Selection of Arbitrators
This Rule specifies how parties may select or reject arbitrators,
and who can be a public arbitrator.
(a) Unchanged.
(b) Composition of Arbitration Panel; Preparation of Lists for
Mailing to Parties
(1)-(3) Unchanged.
(4) Preparation of Lists.
(A) Except as provided in subparagraph (B) below, the Neutral List
Selection System shall generate the lists of public and non-public
arbitrators on a [rotating] random basis within a designated geographic
hearing site and shall exclude arbitrators based upon conflicts of
interest identified within the Neutral List Selection System database.
(B) Unchanged.
(5)-(6) Unchanged.
(c)-(f) Unchanged.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any
[[Page 5498]]
comments it received on the proposed rule change. The text of these
statements may be examined at the places specified in Item III below.
NASD has prepared summaries, set forth in Sections A, B, and C below,
of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASD Dispute Resolution is upgrading its computer technology, in
what is known as the Mediation and Arbitration Tracking and Retrieval
Interactive Case System (``MATRICS''), which will replace its two case
management systems: CRAFTIS \6\ and NLSS. NASD will implement MATRICS
in a series of releases, in which various functions from CRAFTIS and
NLSS will be adapted and programmed to operate within MATRICS.\7\ NASD
has determined that the NLSS components of MATRICS are ready to be
developed. Most functions of NLSS will be transferred to MATRICS.
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\6\ CRAFTIS is the legacy software application that NASD Dispute
Resolution uses to support its case administration function. It uses
an old technology platform and is not Web-based.
\7\ A new component for MATRICS, the Web-based arbitration claim
filing system, has already been developed and became effective on
August 5, 2004. Parties may access the online system at http://apps.nasd.com/mediation_&_arbitration/online_filing.asp.
The SEC
approved the final version of the system on June 16, 2004. See
Securities Exchange Act Rel. No. 49876 (June 16, 2004), 69 FR 35090
(June 23, 2004).
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As part of this computer technology upgrade, NASD has determined
that MATRICS should select arbitrators on a random basis, instead of a
rotational basis, like NLSS currently does. NASD is proposing to switch
from rotational to random for several reasons. First, other self-
regulatory organizations, governmental entities, and private
alternative dispute organizations select panels for their arbitration
cases by generating a random list of arbitrators. For example, the New
York Stock Exchange (NYSE) \8\ and the Society of Maritime Arbitrators
\9\ offer to the parties a random list selection procedure to select
panels to decide claims in their respective arbitration forums. The
California Department of Industrial Relations,\10\ the Federal
Mediation and Conciliation Service,\11\ and the Federal Emergency
Management Agency \12\ also use random list selection. Some state
courts that provide alternative dispute resolution services also use
random list selection to choose arbitrators for their hearings.\13\
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\8\ The SEC approved for immediate effectiveness a NYSE request
to extend its pilot program, the Voluntary Supplemental Procedures
for Selecting Arbitrators (``Voluntary Procedures''), which allows
parties to, among other things, select arbitrators using the Random
List Selection method. See Securities Exchange Act Rel. No. 49915
(June 25, 2004), 69 FR 39993 (July 1, 2004).
\9\ Society of Maritime Arbitrators, Inc., Recreational and
Small Commercial Vessel Salvage Arbitration (visited Sept. 29, 2004)
<http://www.smany.org/sma/salvrule.html>.
\10\ California Department of Industrial Relations, State
Mediation and Conciliation Services, How to Request an Arbitration
List (visited Sept. 1, 2004) < http://www.dir.ca.gov/csmcs/HowToRequestPanel.html
>.
\11\ Federal Mediation and Conciliation Service, Arbitration
FAQs (visited Sept. 1, 2004) < http://www.fmcs.gov/internet/faq.asp?categoryID=133#Q16532
>.
\12\ Federal Emergency Management Agency, Arbitration Guidelines
For The Cerro Grande Fires (visited Sept. 1, 2004) < http://www.fema.gov/cerrogrande/arbitration/guide.shtm
>.
\13\ See, e.g., U.S. Bankruptcy Court for the Middle District of
Tenn. (ADR Program); Nev. Sup. Ct. Arb. R. 6; and Minn. R. 5530.0900
(2004).
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Second, in order for a rotational system to operate effectively and
efficiently, a large amount of computer code is required to manage and
maintain the arbitrator rotation. According to NASD, a rotational
selection system works best if the data that the system uses to
generate the lists remain static. However, the data input into NLSS
changes frequently. For example, in the last two years, NASD Dispute
Resolution has added eight hearing locations, and, in that time, has
added approximately 1,000 new arbitrators to the database. Once these
changes to the data are input into NLSS, the rotational system attempts
to incorporate them when it generates new lists. Any attempt to modify
the computer code to accommodate these changes is time-consuming and
costly. Also, maintaining a selection system that is purely rotational
is cumbersome because additional code is needed to track the histories
of each selection to ensure that all arbitrators have an equal
opportunity to appear in the rotation, which directly affects list
selection.
Last, NASD understands that, under a random selection system, it is
possible for a particular arbitrator to be selected for consecutive
lists more frequently than another arbitrator. However, a statistical
comparison of one arbitrator's selection to another, using a large
sample of eligible arbitrators and lists generated, should show that
one arbitrator is not being selected for lists more frequently than any
other.\14\ While NASD acknowledges this anomaly in a random selection
system, NASD believes that the benefits of such a system, such as ease
of design, cost-efficient maintenance, and overall fairness of random
selection (as well as the increased perception of fairness) will
strengthen the operation of the forum.\15\
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\14\ In fact, the same comparative analysis conducted under a
rotational method should yield a statistically similar result.
\15\ NASD will hire an outside consultant to audit the random
selection system after it has been operational for one year and
independently verify that the random selection system is operating
as described in this proposed rule change. NASD will also keep
statistics on the arbitrators selected by the random selection
system who appear on an arbitrator list in order to monitor the
effectiveness of the random selection system. See supra note 3.
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NASD Dispute Resolution believes that the proposed rule change
ultimately will protect investors and benefit the public by providing
parties and arbitrators with an automated system, MATRICS, which will
help the forum operate more efficiently while maintaining the core goal
of providing arbitrators who have an equal probability of being listed
for service on any given list of proposed arbitrators. In an effort to
sustain the progress made on the MATRICS upgrades, NASD proposes to
amend Rule 10308(b)(4) with a delayed implementation date, so that the
developers can program this component for MATRICS using the random
selection method of generating arbitrator lists in order to be ready
when this phase of MATRICS becomes operational. NASD is, therefore,
requesting accelerated review and approval for this proposed rule
change to allow the programmers to begin creating the code, so that
they will remain on development schedule while the Commission is
reviewing the Code revisions.\16\ According to the technology
development plan, NASD is scheduled to complete the arbitrator
selection function of MATRICS in the third quarter of 2005. For the
developers to meet this goal, NASD must amend the rule now to introduce
the concept of random selection in order to provide the developers with
the lead-time necessary to create the software and implement it on the
MATRICS platform.\17\ While the software is being created, NLSS will
continue to generate lists of arbitrators on a rotating basis. Subject
to Commission approval of this rule, NASD will upgrade MATRICS with the
random selection function, phase out NLSS, and replace it with MATRICS.
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\16\ The proposed Customer Code and Industry Code revisions,
which have already been filed with the SEC, contain a random
selection provision. See supra note 4.
\17\ The alternative would result in duplicative effort and
wasted resources, because programmers would have to develop and
program MATRICS to select arbitrators under the current rules, and
then discard that programming and create new software once the Code
revision has been approved.
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[[Page 5499]]
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A of the Act,\18\ in general, and with Section
15A(b)(6) \19\ of the Act, in particular, in that the proposal is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest. NASD Dispute Resolution
believes that the proposed rule change ultimately will protect
investors and benefit the public by providing parties with an automated
system that will help the forum operate more efficiently.
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\18\ 15 U.S.C. 78o-3.
\19\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an E-mail to rule-comments@sec.gov. Please include
File Number SR-NASD-2004-164 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-NASD-2004-164. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than 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 Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
NASD. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NASD-2004-164 and should be submitted on or before February 22, 2005.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission has reviewed carefully the proposed rule change as
amended and finds that it is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to a national
securities association and, in particular, the requirements of Section
15A(b)(6) \20\ of the Act.\21\ Section 15A(b)(6) requires, among other
things, that the rules of a national securities association are
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest. The Commission believes that
the proposed rule change ultimately will protect investors and benefit
the public by providing parties with an automated case management
system that will help the NASD Dispute Resolution arbitration forum
operate more efficiently.\22\
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\20\ 15 U.S.C. 78o-3(b)(6).
\21\ The Commission has considered the proposed rule's impact on
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
\22\ See supra note 15.
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The Commission finds good cause for approving the proposed rule
change as amended prior to the thirtieth day after the publication of
notice of filing thereof in the Federal Register. Accelerated approval
will provide NASD Dispute Resolution with the certainty it needs to
upgrade its computer technology to select arbitrators on a random,
rather than a rotational, basis and to ultimately replace NLSS with
MATRICS.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NASD-2004-164) as amended be, and
hereby is, approved on an accelerated basis.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-397 Filed 2-1-05; 8:45 am]
BILLING CODE 8010-01-P