MSRB NOTICE 2002-33 (OCTOBER 22, 2002)

SEC APPROVES AMENDMENT TO RULE G-35 TO DISCONTINUE MSRB ARBITRATION PROGRAM

The Securities and Exchange Commission (“SEC”) has approved an amendment to MSRB Rule G-35, on arbitration, to discontinue administration of the MSRB’s arbitration program, as well as the rescission of Rule A-16, on arbitration fees and deposits.[1]

The MSRB reminds dealers to review their arbitration agreements to ensure that they do not include the MSRB as an available arbitration forum.  The MSRB further 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.

SUMMARY OF AMENDMENT

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”).[2]  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,[3] 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.  The 1997 amendments further required that bank dealers abide by the NASD’s Code as if they were “members” of the NASD for purposes of arbitration.  However, the enforcement mechanism for bank dealers was not altered by the amendments; the bank regulatory agencies continue to be responsible for the inspection and enforcement of bank dealers’ municipal securities activities, including arbitration.[4]

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.”[5]  The MSRB further stated that, at such time, it would submit a filing to the SEC to delete Sections 1 through 37 of Rule G-35, and rescind Rule A-16, on arbitration fees and deposits.  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, on August 19, 2002, the MSRB submitted a filing to the SEC to delete Sections 1 through 37 of Rule G-35, on arbitration, and to rescind Rule A-16, on arbitration fees and deposits.[6]  The filing also incorporated by reference into Rule G-35 changes to the NASD’s Code.[7]  The SEC approved that filing on October 16, 2002.  Accordingly, the MSRB no longer administers an arbitration program.  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.  The MSRB also reminds dealers to review their arbitration agreements to ensure that such agreements do not include the MSRB as an available arbitration forum.

October 22, 2002

TEXT OF THE AMENDMENT [8]

Rule G-35. Arbitration

[Every broker, dealer and municipal securities shall be subject to the Arbitration Code set forth herein.

Arbitration Code]

Section 1 through Section 37.  Deleted.

[Section 38.]  Arbitration Involving Bank Dealers.

As of January 1, 1998, every bank dealer (as defined in rule D-8) shall be subject to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. (“NASD”) 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.  For purposes of this rule, each bank dealer shall be subject to, and shall abide by, the NASD’s Code of Arbitration Procedure, including any amendments thereto, as if the bank dealer were a “member” of the NASD.

Rule A-16. Arbitration Fees and Deposits  

Rescinded

[1] Securities Exchange Act Release No. 46666 (October 16, 2002).

[2] File No. SR-MSRB-97-04, approved in Securities Exchange Act Release No. 39378 (Dec. 1, 1997).

[3] 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.

[4] Thus, for example, a bank dealer’s refusal to submit to arbitration pursuant to the NASD’s Code, or a bank dealer’s failure to pay an arbitration award rendered pursuant to that Code, would constitute a violation of MSRB Rule G-35 since it is this rule that subjects bank dealers to the NASD’s Code.

[5] File No. SR-MSRB-97-04 at page 2.

[6] File No. SR-MSRB-2002-09.

[7] 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.

[8] Underlining indicates new language.