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Self Regulatory Organizations; International Securities Exchange LLC; Order Granting Approval to Proposed Rule Change and Amendments No. 1 and No. 2 by the International Securities Exchange LLC Relating to Its Arbitration Program

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Information about this document as published in the Federal Register.

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Start Preamble November 21, 2001.

I. Introduction

On November 20, 2000, the International Securities Exchange LLC (“ISE”) filed with the Securities and Exchange Commission (“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 make certain changes to its arbitration rules. These changes were intended to reflect and facilitate ISE's regulatory services agreement with NASD Regulation, Inc. (“NASDR”) pursuant to which, among other things, NASDR provides services related to arbitration proceedings to involving ISE members.[3] On March 5, 2001, the Exchange filed Amendment Start Printed Page 60231No. 1 to the proposed rule change,[4] and on July 16, 2001, the Exchange filed Amendment No. 2 to the proposed rule change.[5]

The proposed rule change was published for comment in the Federal Register on July 26, 2001.[6] The Commission received no comments on the proposal. This order approves the proposed rule change, as amended.

II. Description of the Proposal

In its proposed rule change, the ISE proposed amendments to Chapter 18, Arbitration, of the ISE Rules. Specifically, the ISE proposes to repeal Rules 1800 through 1835 and create new Rule 1800, which will state that the NASD Code of Arbitration, as the same may be in effect from time to time, shall govern Exchange arbitrations. The proposed rule also states that the Exchange shall retain jurisdiction over its members for failure to honor arbitration awards and any right, action or determination by the Exchange which it would otherwise be authorized to adopt, administer or enforce is in no way limited or precluded by incorporation of the NASD Code of Arbitration.

The Exchange has contracted with NASDR to perform arbitrations under ISE's rules. Accordingly, the Exchange proposes to eliminate all of the arbitration rules currently contained in Chapter 18 of the ISE Rules and incorporate the NASD Code of Arbitration by reference.[7] The proposed rule also specifies that potential violations of ISE rules identified during an arbitration hearing may be referred to the ISE for investigation, and that disciplinary action may be brought by the ISE as a result thereof. Finally, a member or person associated with a member will be subject to discipline by the ISE if it fails to honor an award made as a result of an arbitration initiated under ISE Rules.[8]

III. Discussion

After careful review, the Commission finds that implementation of the proposed rule change is consistent with the requirements of section 6 of the Act [9] and the rules and regulations thereunder applicable to a national securities exchange.[10] Specifically, the Commission believes that the proposal is consistent with section 6(b)(5) of the Act.[11] Section 6(b)(5) requires, among other things, that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to facilitate transactions in securities, to remove impediments to and perfect the mechanisms of a free and open market and a national market system, and, in general, to protect investors and the public interest.[12] Section 6(b)(5) also requires that those rules not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the Commission believes that the proposed rule change eliminating the ISE's arbitration program and referring cases to NASDR for arbitration will help protect investors and the public interest by ensuring that there is a fair arbitration forum available for all ISE arbitration claims.

The proposed rule change submitted by the ISE would eliminate all of the arbitration rules currently contained in Chapter 18 of the ISE Rules and create new ISE Rule 1800, essentially incorporating the NASD Code of Arbitration by reference, by stating that the NASD Code of Arbitration, as the same may be in effect from time to time, shall govern Exchange arbitrations. The Commission believes that it is consistent with the Act to allow NASDR to administer ISE arbitrations, as the ISE has made the business decision to enter into an agreement with NASDR to provide a forum for its arbitrations for a flat annual fee, rather than to absorb the ongoing costs and administrative burden of continuing to manage its own arbitrations.

Procedurally, the Commission believes that the proposed rule change should ensure that all arbitration cases otherwise subject to ISE's arbitration process will be administered under the NASDR arbitration program by virtue of ISE members being deemed “members” of the NASD for purposes of arbitrating any claims involving the securities business of any members of ISE, except for narrowly enumerated exceptions. The proposed rule change accomplishes this by subjecting ISE members to the NASD Code of Arbitration for “[a]ny dispute, claim or controversy arising out of or in connection with the business of any member of the Exchange, or arising out of the employment or termination of employment of associated person(s) with any member may be arbitrated under this Rule 1800 except that (1) a dispute, claim, or controversy alleging employment discrimination (including a sexual harassment claim) in violation of a statute may only be arbitrated if the parties have agreed to arbitrate it after the dispute arose; and (2) any type of dispute, claim, or controversy that is not permitted to be arbitrated under the NASD Code of Arbitration, such as class action claims, shall not be eligible for arbitration under this Rule 1800.”[13] In effect, the proposed rule change requires that ISE members abide by the NASD's Code of Arbitration as if they were members of the NASD for purposes of arbitration.

In addition, the Commission believes that the proposed rule change provides for enforcement of arbitration awards and discipline of members, as appropriate, in a manner consistent with the Act, because ISE will continue to have ultimate responsibility for the enforcement and disciplining of its members regarding arbitration. An ISE member's refusal to submit to arbitration pursuant to the NASD Code of Arbitration or failure to pay an arbitration award rendered pursuant to the NASD Code of Arbitration would constitute a violation of section (b) of new ISE Rule 1800, which subjects ISE members to NASD jurisdiction, as well as section (e) which reserves ISE's right to discipline its members.

As stated above, by virtue of ISE's agreement with NASDR to perform arbitrations for ISE members, as well as the proposed amendments to ISE's arbitration rules contained herein, the ISE proposes to incorporate by reference the NASD Code of Arbitration. Accordingly, the ISE has submitted to the Commission a letter requesting an Start Printed Page 60232exemption pursuant to Section 36 of the Act from the rule filing procedures of Section 19(b) of the Act and Rule 19b-4 thereunder,[14] with respect to the arbitration and margin rules of other self-regulatory organizations it has incorporated by reference, in accordance with the section 36 exemptive request filing procedures published by the Commission.[15] According to the ISE, the purpose of this request is to avoid having to file duplicative proposed rule changes with the Commission pursuant to section 19(b) and Rule 19b-4 each time the NASD changes its Code of Arbitration. In its letter, the ISE also represents that its proposed incorporations by reference are regulatory in nature and are intended to be a comprehensive integration of the relevant rules of the other exchange into the ISE rules, and that the ISE agrees to provide written notice to its members whenever the Commission publishes for comment a proposed rule change to the NASD Code of Arbitration.

IV. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Act,[16] that the proposed rule change (SR-ISE-00-17), as amended, is hereby approved.

Start Signature

For the Commission, by the Division of market Regulation, pursuant to delegated authority.[17]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  The Commission notes that although the regulatory services agreement at issue is between ISE and NASDR, the actual administration of arbitrations on behalf of ISE members pursuant to the agreement will be performed by a recently-created NASD subsidiary, NASD Dispute Resolution, which performs all arbitration and mediation services for NASD members.

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4.  See Letter from Katherine Simmons, Vice President and Associate General Counsel, ISE, to Nancy J. Sanow, Assistant Director, Division of Market Regulation, Commission, dated March 5, 2001 (“Amendment No. 1”). In Amendment No. 1, the ISE added paragraphs (a) and (b), which are jurisdictional provisions currently contained in ISE Rule 1800, to the proposed rule text.

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5.  See Letter from Jennifer M. Lamie, Assistant General Counsel, ISE, to Nancy J. Sanow, Assistant Director, Division of Market Regulation, Commission, dated July 16, 2001 (“Amendment No. 2”). Amendment No. 2 replaced the initial filing and Amendment No. 1 in their entirety. In Amendment No. 2, the ISE made minor changes to the order of the subsections under ISE rule 1800, amended the language of its proposed jurisdictional provisions, and added subsection (c), which governs predispute arbitration agreements.

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6.  See Securities Exchange Act Release No. 44572 (July 18, 2001), 66 FR 39069 (July 26, 2001).

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7.  The ISE represents that, as of this date, no cases have been opened under the Exchange's existing arbitration rules.

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8.  NASDR performs arbitrations for the Philadelphia Stock Exchange. See Securities Exchange Act Release No. 40517 (October 1, 1998), 63 FR 54177 (October 8, 1998). Because there have not been any arbitrations initiated under ISE rules, the proposed rule does not contain language found in the Phlx rules to address pending arbitrations.

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12.  In approving this rule, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

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13.  See proposed ISE Rule 1800(b) (“Jurisdiction”).

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14.  See Letter from Michael Simon, Senior Vice President and General Counsel, ISE, to Jonathan G. Katz, Secretary, Commission, dated October 29, 2001.

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15.  See Securities Exchange Act Release No. 39624 (February 5, 1998), 63 FR 8101 (February 18, 1998).

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[FR Doc. 01-29828 Filed 11-30-01; 8:45 am]

BILLING CODE 8010-01-M