

[Federal Register: August 22, 2006 (Volume 71, Number 162)]
[Notices]               
[Page 48961-48963]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22au06-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54320; File No. SR-NYSE-2005-18]

 
 Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendments No. 1 and 2 Thereto 
Regarding NYSE Rule 619 To Clarify That Failure To Appear or Produce 
Documents in Arbitration May Be Deemed Conduct Inconsistent With Just 
and Equitable Principles of Trade

August 15, 2006.

I. Introduction

    On February 17, 2005, the New York Stock Exchange, Inc. (``NYSE'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 amend Rule 619 to clarify that 
it may be deemed conduct or proceeding inconsistent with just and 
equitable principles of trade for purposes of NYSE Rule 476(a)(6) for a 
member, member

[[Page 48962]]

organization, allied member, approved person, registered or non-
registered employee of a member or member organization or person 
otherwise subject to the jurisdiction of the Exchange (each, a 
``responsible party'') to fail to appear or fail to produce any 
document in its possession or control as directed pursuant to 
applicable provisions of the NYSE Arbitration Rules. On July 27, 2005, 
the Exchange filed Amendment No. 1 to the proposed rule change.\3\ On 
February 15, 2006, the Exchange filed Amendment No. 2 to the proposed 
rule change.\4\ The proposed rule change was published for comment in 
the Federal Register on April 11, 2006.\5\ The Commission received five 
comment letters on the proposal.\6\ This order approves the proposed 
rule change as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, which replaced the original filing, the 
Exchange clarified that Rule 619 also applies to a ``person 
otherwise subject to the jurisdiction of the Exchange.''
    \4\ Amendment No. 2, which replaced the first amended rule 
filing, conformed the proposed rule to reflect the list of persons 
subject to disciplinary action under NYSE Rule 476.
    \5\ See Exchange Act Release No. 53599 (Apr. 4, 2006), 71 FR 
18401 (Apr. 11, 2006).
    \6\ See E-mail from David Plimpton, Plimpton & Esposito, to 
rule-comments@sec.gov, dated April 27, 2006 (``Plimpton''); letter 

from Robert S. Banks, Jr., Public Investors Arbitration Bar 
Association, dated April 25, 2006 (``PIABA''); E-mail from A. Daniel 
Woska, A. Daniel Woska & Associates, P.C., to rule-comments@sec.gov, 
dated April 23, 2006 (``Woska''); E-mail from Les Greenberg, Law 
Offices of Les Greenberg, to rule-comments@sec.gov, dated April 20, 
2006 (``Greenberg''); letter from Steven B. Caruso, Maddox Hargett 
Caruso, P.C., dated April 11, 2006 (``Caruso'').
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II. Description of the Proposal

    NYSE Rule 476 allows disciplinary sanctions to be imposed upon a 
responsible party who is adjudged guilty of certain enumerated 
offenses, including ``conduct or proceeding inconsistent with just and 
equitable principles of trade.'' The proposal would amend Rule 619 to 
clarify that it may be deemed conduct or proceeding inconsistent with 
just and equitable principles of trade for purposes of NYSE Rule 
476(a)(6) for a responsible party to fail to appear or fail to produce 
any document in its possession or control as directed pursuant to 
provisions of the NYSE Arbitration Rules.
    The Exchange is aware of allegations that member organizations have 
not fulfilled their discovery obligations as prescribed by NYSE 
Arbitration Rules. The NYSE believes that the express authority for the 
NYSE to bring a disciplinary action under NYSE Rule 476(a)(6) will 
improve the efficacy of the arbitration process by facilitating the 
Exchange's ability to ensure more fully and forcefully the cooperation 
of a responsible party who is a party to an arbitration proceeding. By 
explicitly providing that the failure to appear or to produce documents 
in one's possession or control may be deemed conduct or proceeding 
inconsistent with just and equitable principles of trade, the NYSE 
believes that the proposed amendment would provide the Exchange with a 
clear mechanism to pursue disciplinary action pursuant to NYSE Rule 476 
in response to such conduct.

III. Summary of Comments

    The Commission received five comment letters on the proposal.\7\ 
Commenters generally supported the proposal.\8\ As discussed below, 
however, some raised concerns with certain aspects of it.
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    \7\ See id.
    \8\ For example, one commenter supported the proposed rule 
because, in the commenter's view, members that violate discovery 
rules do not regard their conduct as serious unless sanctions are 
imposed. PIABA. See also Woska.
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    Proposed Rule 619(h) states in relevant part that ``[i]t may be 
deemed conduct or proceeding inconsistent with just and equitable 
principles of trade for purposes of Rule 476(a)(6) [for a responsible 
party] to fail to appear or to produce any document in their possession 
or control as directed pursuant to provisions of the NYSE Arbitration 
Rules.'' (Emphasis added.) One commenter stated that the emphasized 
language could be misconstrued to require the prior direction or an 
order of an arbitration panel before the NYSE could charge the party 
with a violation of Rule 476.\9\ The commenter also suggested that the 
proposed rule be amended to clarify that it does not affect an 
arbitrator's current authority under Rules 604 (dismissal of 
proceedings) and 621 (enforcement of rulings).\10\
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    \9\ See Caruso.
    \10\ Id. Two commenters stated that arbitrators need to better 
enforce existing procedures, particularly Rule 604(b), which allows 
an arbitrator to impose sanctions against a party that willfully and 
intentionally fails to comply with an arbitrator's order if lesser 
sanctions have proven ineffective. Greenberg and PIABA.
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    Two commenters believed that the proposed rule does not adequately 
address what the commenters' view are ongoing problems with arbitrator 
conflicts of interest.\11\ One of these commenters stated that a 
securities arbitrator may be reluctant to impose sanctions on a party 
for fear that the party may not select the arbitrator to serve on 
future NYSE arbitration panels.\12\
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    \11\ See Greenberg (stating that monetary sanctions on attorneys 
might be a more effective deterrent) and Plimpton (questioning 
whether NYSE arbitrators are independent enough to take action to 
curb discovery abuse).
    \12\ See Greenberg. To address concerns about arbitrator 
reluctance to sanction a party, the commenter suggested that the 
proposal require arbitrators to refer all contested discovery orders 
to NYSE.
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IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the Act and, in particular, with 
Section 6(b)(5) of the Act, which requires, among other things, that 
the NYSE'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.\13\ The 
Commission also finds that the proposal is consistent with Section 
6(b)(6) \14\ of the Act, which requires, among other things, that the 
rules of an exchange provide that members and persons associated with 
its members be appropriately disciplined for violating the Act, the 
rules or regulations under the Act, or the rules of the exchange.
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(6).
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    In particular, the Commission believes that by expressly 
authorizing the NYSE to bring an action against a member under Rule 476 
for failing to appear or to produce any document in its possession or 
control in an arbitration proceeding, the proposal will enable NYSE to 
appropriately discipline such members. Moreover, the Commission 
believes the proposed rule could reduce discovery abuses by alerting 
parties to the importance of complying with NYSE Rule 619.
    One commenter stated that the proposal could be misconstrued to 
require an order of an arbitration panel before NYSE could charge a 
party with violating Rule 476.\15\ NYSE staff confirms that the 
proposed rule does not require an arbitration panel to issue an order 
before the NYSE could bring an action under Rule 476. Indeed, the 
proposal does not require any action from the arbitration panel before 
the NYSE may bring such an action. Moreover, the proposal authorizes 
the NYSE to bring an action under Rule 476 against a party during an 
arbitration proceeding if the NYSE believes such action is 
warranted.\16\
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    \15\ Caruso.
    \16\ Telephone conversation between Karen Kupersmith, Director 
of Arbitration, NYSE, and Richard Strasser, Attorney Fellow, SEC 
(Aug. 1, 2006). The commenter also suggested that the proposed rule 
be amended to clarify that it does not affect the power of an 
arbitrator to impose sanctions under Rules 604 (dismissal of 
proceedings) and 621 (enforcement of rulings). In the telephone call 
referenced above, NYSE staff stated that nothing in the proposal is 
intended to affect arbitrators' current authority under existing 
NYSE arbitration rules.

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[[Page 48963]]

    Some commenters raised broader concerns about arbitrator conflicts 
of interest and the need for arbitrators to better enforce existing 
arbitration procedures.\17\ The Commission believes these comments are 
beyond the scope of the current proposal.
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    \17\ See, e.g., Greenberg and Plimpton.
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\18\ that the proposed rule change (SR-NYSE-2005-18), as amended, be, 
and hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).

Nancy M. Morris,
Secretary.
[FR Doc. E6-13811 Filed 8-21-06; 8:45 am]

BILLING CODE 8010-01-P
