02-18225. Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Exchange, Inc., To Revise the Process for Designating Arbitrators for Member-to-Member Disputes

July 11, 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 May 30, 2002, the Pacific Exchange, Inc. (“PCX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The PCX proposes to amend PCX Rule 12.8(e) to revise the process for designating arbitrators for member-to-member disputes. Text in brackets indicates material to be deleted, and text in italics indicates material to be added.

* * * * *

Pacific Exchange, Inc., Rules of The Board of Governors

Rule 12

Arbitration

Designation of [Number of] Arbitrators

Rule 12.8(a)-(d)—No change.

(e) Member Controversies. [(1)] In all arbitration matters not involving public customers[,] and where the matter in controversy involves an amount that is $30,000 or less (exclusive of interest and costs), the Director of Arbitration [shall] will appoint an arbitration panel composed of one securities industry arbitrator unless the parties request and mutually agree to the appointment of a public arbitrator [assign the matter to a panel consisting of members of the Arbitration Committee]. If the amount involved in the controversy exceeds $30,000 (exclusive of interest and costs), the Director of Arbitration will appoint an arbitration panel composed of three or five arbitrators from the securities industry unless the parties request and mutually agree to a different panel composition. [Such] [m]M embers of the arbitration panel will [shall] not be affiliated with any of the parties to the controversy or have any interest in the matter to be heard. [For controversies involving an amount of $10,000 or less, the panel shall consist of one (1) member. For all other controversies, the panel shall consist of three (3) members.]

Commentary:

.01—No change.

(f)—No change.

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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. The text of these statements may be examined at the places specified in Item IV below. The PCX 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

The current PCX rules divide arbitration claims between matters involving public customers (“Public Controversies”) and matters not involving public customers (“Member Controversies”). Public Controversies are addressed in PCX Rules 12.8(a) and (b), which provide for one arbitrator where the matter in controversy does not exceed $30,000 and for three to five arbitrators where the matter exceeds $30,000. Arbitrators for Public Controversies are selected by the Director of Arbitration who appoints a panel from the existing pool of arbitrators of the Exchange.^[3] Member Controversies are covered by Rule 12.8(e), which provides for a panel consisting of one Arbitration Committee member for controversies involving an amount of $10,000 or less, and a panel of three Arbitration Committee members for all other controversies.

The proposed rule would provide a new selection process for Member Controversies. Specifically, the proposed rule would eliminate the current reference to the Arbitration Committee in Rule 12.8(e) and provide for the Director of Arbitration to appoint a panel from the same existing pool of arbitrators that the Exchange currently uses for Public Controversies. Also, the proposed rule would state that if the matter in controversy involves an amount that is $30,000 or less (exclusive of interest and costs), the Director of Arbitration would appoint an arbitration panel composed of one securities industry arbitrator, unless the parties request and mutually agree to the appointment of a public arbitrator. However, if the amount involved in the controversy exceeds $30,000 (exclusive of interest and costs), the Director of Arbitration would appoint an arbitration panel composed of three or five arbitrators from the securities industry unless the parties request and mutually agree to a different panel composition.

A “securities industry arbitrator” is currently defined as a person: associated with a member, or broker/dealer, government securities broker, government securities dealer, municipal securities dealer or registered investment advisor; or who has been associated with any of these entities within the past three years; or who is retired from any of these entities; or who is an attorney, accountant or other professional who devoted twenty percent or more professional work effort to securities industry clients within the last two years.^[4] An arbitrator who is not from the securities industry is deemed a public arbitrator.^[5] Public arbitrators may not have a spouse or other member of the household who is a person associated with a registered broker dealer, municipal securities dealer, government securities broker, government securities dealer or investment advisor.^[6] Members of an arbitration panel will not be affiliated with any of the parties to the controversy or have any interest in the matter to be heard.^[7]

PCX believes that the proposed rule change would simplify the PCX arbitrator selection process for Member Controversies by coordinating the rule with existing rules on Public Controversies. The proposed rule would provide this uniformity by raising the amount in controversy from $10,000 to $30,000 as the threshold in determining whether the controversy would be heard by at least three arbitrators. This proposed threshold would be consistent with PCX Rules for Public Controversies. The proposed rule would also provide for a consistent source of arbitrators by using the same arbitrator list for the selection of arbitrators for both Public and Member Controversies.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act ^[8] in general, and furthers the objectives of Section 6(b)(5) of the Act ^[9] in particular, because it is designed 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, and to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in the 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

No written comments were solicited or received with respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will:

(A) By order approve such proposed rule change, or

(A) Institute proceedings to determine whether the proposed rule change should be disapproved.

IV. 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. 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-2002-33 and should be submitted by August 9, 2002.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[10]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  The Exchange's Director of Arbitration maintains a list of arbitrators who are qualified approved applicants.

4.  See PCX Rule 12.8(c).

5.  See PCX Rule 12.8(d).

6.  See PCX Rule 12.8(d).

7.  See PCX Rule 12.8(e).

8.  15 U.S.C. 78f(b).

9.  15 U.S.C. 78f(b)(5).

¹⁰ 17 CFR 200.30-3(a)(12).