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Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of the Proposed Rule Change Relating to Arbitration

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Information about this document as published in the Federal Register.

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Start Preamble October 16, 2002.

On August 19, 2002, pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),[1] and Rule 19b-4 thereunder,[2] the Municipal Securities Rulemaking Board (“Board” or “MSRB”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) a proposed rule change (File No. SR-MSRB-2002-09). The proposed rule change relates to MSRB Rule G-35, on arbitration.

The Commission published the proposed rule change for comment in the Federal Register, September 9, 2002.[3] The Commission did not receive any comment letters relating to the forgoing proposed rule change.

I. Description of the Proposed Rule Change

In 1997, the MSRB amended Rule G-35, on arbitration, to provide that it would not accept any new arbitration claims filed on or after January 1, 1998 (the “1997 amendments”).[4] The MSRB noted that any customer or securities dealer with a claim, dispute or controversy against a broker, dealer or municipal securities dealer (“dealer”) involving its municipal securities activities may submit that claim to the arbitration forum of any self-regulatory organization (“SRO”) of which the dealer is a member, including the National Association of Securities Dealers, Inc. (“NASD”). Bank dealers, however, are unique in that they are subject to the MSRB's rules but are not members of any other SRO. Thus, it was necessary to provide an alternative arbitration forum for claims involving the municipal securities activities of bank dealers. The 1997 amendments accomplished this by providing that as of January 1, 1998 every bank dealer, as defined in Rule D-8,[5] shall be subject to the NASD's Code of Arbitration Procedure (the “NASD's Code”) for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. Furthermore, the 1997 amendments required that bank dealers abide by the NASD's Code as if they were “members” of the NASD for purposes of arbitration.

At the time of the 1997 amendments, the MSRB stated that it would “continue to operate its program in order to administer its current, open cases and any new claims received prior to January 1, 1998, but will discontinue administering its arbitration program when all such cases have been closed.”[6] The MSRB further stated that, at such time, it would submit a filing to the Commission to delete sections 1 through 37 of Rule G-35, and rescind Rule A-16, on arbitration fees and deposits.[7] On May 14, 2002, the MSRB transferred its final, open arbitration case to the NASD. There are no further arbitration cases pending before the MSRB. Accordingly, the MSRB submitted the proposed rule change to delete sections 1 through 37 of Rule G-35, on arbitration, and to rescind Rule A-16, on arbitration fees and deposits. The proposed rule change also incorporates by reference into Rule G-35 changes to the NASD's Code.[8] The MSRB notes that any customer or securities dealer with a claim, dispute or controversy against a bank dealer involving its municipal securities activities may continue to submit that claim to the NASD's arbitration program.

As noted in the 1997 amendments, the MSRB deems it no longer appropriate to administer an arbitration program. All non-bank dealers engaged in municipal securities activities are members of the NASD, and the NASD's arbitration program is available to those dealers and their customers for any claim, dispute or controversy arising out of, or in connection with, the municipal securities activities of such dealers. The MSRB believes that the proposed rule change provides for the protection of investors and the public interest including those investors who wish to Start Printed Page 65164pursue arbitration claims against bank dealers in connection with their municipal securities activities by ensuring that there is an arbitration forum available (i.e., the NASD arbitration program) for such claims.

II. Summary of Comments

The Commission did not receive any comment letters addressing the MSRB's proposed rule change.

III. Discussion

The Commission must approve a proposed MSRB rule change if the Commission finds that the proposal is consistent with the requirements set forth under the Act and the rules and regulations thereunder, which govern the MSRB.[9] The language of Section 15B(b)(2)(C) of the Act requires that the MSRB's rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principals of trade, to foster cooperation and coordination with persons engaged in regulating, 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 in municipal securities, and, in general, to protect investors and the public interest.[10]

The MSRB does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act since it would continue to subject bank dealers to the NASD's Code of Arbitration Procedure in connection with their municipal securities activities. Non-bank dealers already are subject to the NASD's Code by virtue of being NASD members.

After careful review, the Commission finds that the MSRB's proposed rule change relating to Rule G-35, on arbitration, meets the requisite statutory standard. The Commission believes that this proposed rule change is consistent with the requirements of the Act, and the rules and regulations thereunder. In addition, the Commission finds that the proposed rule is consistent with the requirements of section 15B(b)(2)(C) of the Act, as set forth above.

IV. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Exchange Act,[11] that the proposed rule change (File No. SR-MSRB-2002-09) be and hereby is, approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[12]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Release No. 34-46440 (August 30, 2002), 67 FR 57255.

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4.  File No. SR-MSRB-1997-04, approved in Release No. 34-39378 (Dec. 1, 1997).

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5.  Rule D-8 defines “bank dealer” to mean a municipal securities dealer which is a bank or a separately identifiable department or division of a bank as defined in Rule G-1.

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6.  File No. SR-MSRB-1997-04 at page 2.

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7.  Id. at page 3.

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8.  In April 2002, at the request of the SEC's Division of Market Regulation, the MSRB requested that, pursuant to section 36 of the Act and Rule 0-12 thereunder, the SEC grant an exemption from the requirements of section 19(b) of the Act and Rule 19b-4 thereunder to allow the MSRB to incorporate by reference into Rule G-35 any changes to the NASD's Code without requiring that the MSRB submit a separate filing for each such change. See letter from Diane G. Klinke, General Counsel, MSRB, to Jonathan G. Katz, Secretary, SEC, dated April 4, 2002.

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

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10.  15 U.S.C. 78o-4(b)(2)(C).

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[FR Doc. 02-26887 Filed 10-22-02; 8:45 am]

BILLING CODE 8010-01-P