02-530. Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the National Association of Securities Dealers, Inc. Relating to Service of Process for Arbitration

January 3, 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 August 28, 2001, the National Association of Securities Dealers, Inc. (“NASD”), through its wholly owned subsidiary, NASD Dispute Resolution, Inc. (“NASD Dispute Resolution”) 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 NASD Dispute Resolution. NASD Dispute Resolution submitted Amendment No. 1 to the proposed rule change on December 7, 2001.^[3] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

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

NASD Dispute Resolution is proposing to add a new rule to the NASD Code of Arbitration Procedure to give claimants who are represented by counsel the option of serving initial arbitration claims on respondents directly, rather than having NASD Dispute Resolution staff serve those respondents. Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in brackets.

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103xx.^[4] Optional Direct Service by Claimant

(a) General

A Claimant who is represented by counsel may serve a Respondent directly instead of initiating the Claim in the manner provided by Rule 10314(a). Claimant shall serve the following documents upon any Respondent that Claimant chooses to serve directly: a Statement of Claim specifying the relevant facts and the remedies sought, together with the documents in support of the Claim, the Uniform Submission Agreement, and a copy of NASD Form XYZ.^[5]

(b) Manner of Service

Service may be made under this Rule in the manner provided for service of demands for arbitration under the law of the jurisdiction in which the Respondent is being served.

(c) Additional Mailing

(1) No later than one business day following service on the first Respondent to be served under this Rule, Claimant shall mail a copy of the Statement of Claim to all Respondents together with information stating which Respondents were served in accordance with this Rule.

(2) If any Respondent is a member, the mailing shall be addressed “Attention Legal and Compliance Department” and sent to the main office of the member. The outside of the envelope shall state: “Important Legal Documents Enclosed.”

(d) Filing with the Association

Within twenty (20) days of service on the last Respondent whom Claimant serves under this Rule, Claimant must file with the Director of Arbitration;

(1) An affidavit of service on each Respondent served;

(2) The names of any additional Respondents whom Claimant wants the Association to serve;

(3) An affidavit of mailing in accordance with paragraph (c);

(4) An executed Submission Agreement;

(5) A Statement of Claim of the controversy in dispute, together with the documents in support of the Claim, in the form in which it was served on Respondent(s);

(6) The required deposit; and

(7) Sufficient additional copies of the Submission Agreement, the Statement of Claim and supporting documents for each party that has not been served directly and for each arbitrator.

(e) Time to Answer

When filing under paragraph (d) is complete and any deficiencies have been resolved, the Association shall acknowledge that fact in writing to all parties. All time periods that are measured from receipt of the Statement of Claim or service of a Claim under Rule 10314(b) shall commence upon receipt of such written notification from the Association.

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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, NASD Dispute Resolution 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. NASD Dispute Resolution 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 proposes an optional procedure to allow arbitration claimants who are represented by counsel the choice of serving respondents directly. The proposed rule could be used to serve some respondents and not other respondents in a given case, as claimant chooses. NASD Dispute Resolution staff would serve any remaining respondents as usual. The National Arbitration and Mediation Committee of NASD Dispute Resolution recommended adoption of the proposed rule in response to suggestions from some frequent users of the NASD Dispute Resolution arbitration forum who normally represent claimants and requested an optional direct service process.

As background, the current procedure is for all initial claims to be served by NASD Dispute Resolution.^[6] After resolving any deficiencies, such as missing or unsigned documents or improper fees, NASD Dispute Resolution serves all respondents at the same time. Respondents then have 45 calendar days from receipt of the claim in which to answer.

NASD Dispute Resolution believes that the proposed rule contains several safeguards to ensure that the direct service option would result in proper service. For the protection of claimants whose awards might later be challenged because of improper service, use of the proposed rule is limited to parties that are represented by counsel, who would be familiar with applicable law concerning service of demands for arbitration. To avoid any detriment where there is a delay in serving all respondents, the proposed rule requires a notice to all respondents immediately after the first respondent has been served directly. To forestall the possibility that a member firm may not be aware of service on a remote branch office, the proposed rule requires the claimant, no later than one business day following service on the first respondent to be served under the proposed rule, to provide all respondents with the Statement of Claim and information indicating which respondents were served in accordance with this rule. Such information is to be sent to the main office of a member firm, addressed to the Legal and Compliance Department, in an envelope marked on the outside to indicate its importance. Finally, to avoid having different or uncertain due dates for answers, the time to answer would not begin to run until NASD Dispute Resolution notified all parties of the due date, as described below.

Following direct service on all respondents to be served directly, claimants must file the claim and submission agreement, affidavits of service and mailing, other related documents, and the proper fees with NASD Dispute Resolution. If claimants wish NASD Dispute Resolution to serve any remaining respondents, they must provide that information as well. The NASD Dispute Resolution staff would review such submissions for any deficiencies, as at present. Once any deficiencies have been resolved, NASD Dispute Resolution would notify the parties and the time to answer would begin to run. Details of the proposed rule are set forth below.

Highlights of Proposed Rule

Proposed paragraph (a) states that claimants who are represented by counsel may elect to serve any respondent directly. Claimants are not required to use this rule, nor are they required to use the rule for all respondents in a particular case. For example, claimants may be willing to serve an active member firm respondent directly, but may be unsure of how to find and serve a particular associated person respondent. In such a case, NASD Dispute Resolution would serve the associated person as it does now.

Along with the Statement of Claim specifying the relevant facts and the remedies sought, claimants must serve any documents in support of the claim, the Uniform Submission Agreement, and a copy of a standard cover letter explaining the process in simple terms (temporarily referred to as “NASD Form XYZ” in the proposed rule). That cover letter would indicate to the respondent being directly that: (i) the respondent need to file an answer to the claim at this time, and (ii) the arbitration claim is not reportable to the Central Registration Depository (CRD) by respondents who are associated persons until NASD Dispute Resolution notifies the respondent in writing as provided in paragraph (e) of the proposed rule. The proposed cover letter would be made available to claimants and would be posted on the NASD Dispute Resolution Web site.

Proposed paragraph (b) provides that claimants exercising the option of directly serving respondents must serve the claim in the manner provided for service of demands for arbitration under the law of the state or other jurisdiction in which the respondent is being served. NASD Dispute Resolution would not be providing advice to claimants on such legal requirements; as noted above, this procedure is only available to parties who are represented by counsel.

Proposed paragraph (c)(1) requires the claimant to mail a copy of the Statement of Claim to all respondents together with information stating which respondents were served in accordance with the proposed rule, and to do this no later than one business day following service on the first respondent to be served under the rule.

Paragraph (c)(2) requires that mailings addressed to respondents who are members must be addressed to the Legal and Compliance Department of the firm, sent to the main office, and state on the envelope: “Important Legal Documents Enclosed.” This would alert the member firm immediately, and will reduce the chance that service would be made on the wrong office.

Proposed paragraph (d) provides that claimant must file the enumerated documents, including affidavits of service, with the Director of Arbitration within 20 days of service on the last respondent whom claimant serves under the proposed rule. Proposed paragraph (e) provides that time periods measured from receipt of the Statement of Claim or service of a claim under Rule 10314(b) would commence upon receipt of written notification from the Association. The claim would not be considered officially filed until deficiencies have been resolved, as in the current procedure. When the filing is complete, the staff would acknowledge that fact in writing, and the time to answer would begin for all respondents. This prevents the confusion that would occur if the time to answer began to run when each respondent was served.

b. Statutory Basis

NASD Dispute Resolution believes that the proposed rule change, as amended, is consistent with the provisions of Section 15A(b)(6) of the Act,^[7] which requires, among other things, that the Association's rules be 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 will protect investors and the public interest by giving claimants the option of serving claims directly and by providing specific procedures to ensure that service is accomplished properly.

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

NASD Dispute Resolution does not believe that the proposed rule change, as amended, will result in 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 were not solicited or received.

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 NASD Dispute Resolution consents, the Commission will:

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

(B) 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 proposal, as amended, 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 the filing will also be available for inspection and copying at the principal office of the NASD. All submissions should refer to the File No. SR-NASD-2001-55 and should be submitted by January 30, 2002.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[8]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  Letter from Jean I. Feeney, Chief Counsel, NASD Dispute Resolution, to Florence Harmon, Assistant Director, Division of Market Regulation, Commission, dated December 7, 2001 (“Amendment No. 1”). Amendment No. 1 makes certain technical changes to the proposed rule language. Amendment No. 1 also clarifies that the phrase “the law of the jurisdiction in which the Respondent is being served” in paragraph (b) of the proposed Rule 103xx refers to state rather than federal law, and could encompass the laws of the District of Columbia. Finally, Amendment No. 1 states that NASD Dispute Resolution will provide NASD Form XYZ to the Commission prior to the Commission's approval of the proposed rule change.

4.  A rule number will be assigned prior to implementation of the proposed rule change.

5.  This form will explain the direct service process. It will be drafted and assigned an official number prior to implementation of the proposed rule change.

6.  NASD 10314(a) sets forth the process for initiating a proceeding. Under NASD Rules 10314(b) and (c), and 10328(a), the parties already serve directly any counterclaims, cross-claims, third-party claims, or amended pleadings.

7.  15 U.S.C. 78 o-3(b)(6).

8.  17 CFR 200.30-3(a)(12).