[Federal Register Volume 59, Number 147 (Tuesday, August 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18736]
[[Page Unknown]]
[Federal Register: August 2, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34442; File No. SR-NASD-93-51]
Self-Regulatory Organizations; Notice of Filing of Amended
Proposed Rule Change by National Association of Securities Dealers,
Inc. Relating to the Eligibility of Disputes for Arbitration
July 26, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 15,
1994, the National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
NASD.\1\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\The NASD originally filed the proposed rule change on
September 21, 1993.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend Part I, Section 3, and Part III,
Section 15 of the Code of Arbitration Procedure (``Code'') to permit
the Director to delegate the duties and responsibilities of the
Director and to permit the Director of Arbitration to make final
determinations regarding the eligibility of claims for arbitration
under the Code. Below is the text of the proposed rule change. Proposed
new language is italicized; proposed deletions are in brackets.
Code of Arbitration Procedure
Director of Arbitration
Sec. 3. The Board of Governors of the Association shall appoint a
Director of Arbitration (hereinafter ``Director'') who shall be charged
with the performance of all administrative duties and functions in
connection with matters submitted for arbitration pursuant to this
Code. The Director [He] shall be directly responsible to the National
Arbitration Committee and shall report to it at periodic intervals
established by the Committee and at such other times as called upon by
the Committee to do so. The duties and functions of the Director may be
delegated as appropriate by the Director. In the event of the
incapacitation, resignation, removal, or other permanent or indefinite
inability of the Director to perform the duties and responsibilities of
the Director, the President or an Executive Vice President of the
Association may appoint an interim Director.
* * * * *
[Time Limitation on Submission] Eligibility
Sec. 15 (a) No dispute, claim or controversy shall be eligible for
submission to arbitration under this Code where six (6) years have
elapsed from the occurrence or event giving rise to the [act or]
dispute, claim or controversy. This section shall not extend or limit
applicable statutes of limitations [nor shall it apply to any case
which is directed to arbitration by a court of competent jurisdiction].
(b) After the filing of a statement of claim, counterclaim, cross-
claim or third-party claim (hereinafter ``claim'') pursuant to Section
13 or 25 of the Code, the Director of Arbitration shall determine if
the claim is eligible for submission to arbitration by determining if
the claim alleges that less than six (6) years have elapsed between the
occurrence or event giving rise to the dispute, claim or controversy
and filing of the claim. If the claim does not state clearly, that less
than six (6) years have elapsed between the occurrence or event giving
rise to the dispute, claim or controversy and filing, the Director may
ask the claimant to modify the claim, within a time period set by the
Director, to so state. The Director will determine the eligibility of
the claim for submission to arbitration either on the basis of the
claim as stated in the original claim or, if modified, on the basis of
the modified claim.
(c) Following service of a claim, but prior to the earlier of (1)
the date the parties are notified of the appointment of the arbitrators
pursuant to Sections 13 or 19 of the Code, or (2) the date the Director
appoints an arbitrator to consider prehearing issues pursuant to
Section 32(e) of the Code, a responding party disputing the eligibility
of a claim shall, along with, or after, submitting an executed Uniform
Submission Agreement and any fees or deposits required under the Code,
submit a notice of objection to the Director of Arbitration supported
by statements of fact and documentary evidence asserting that more than
six (6) years have elapsed between the occurrence or event giving rise
to the dispute, claim or controversy and filing. The claimant and any
other party may respond to the notice of objection within the time
period set by the Director. The Director shall promptly determine on
the basis of the written record only, after considering any responses
timely submitted, if the claim is eligible for submission to
arbitration by determining if the disputing party's objections and
assertions regarding eligibility:
(i) contradict the allegations in the claim relating to
eligibility;
(ii) are supported by documentary evidence; and,
(iii) are not contradicted by other allegations which, if true,
would prevail.
(d) Any determination by the Director pursuant to subparagraph (b)
or (c) is final.
(e) Any determination by the Director pursuant to subparagraph (b)
or (c) that a claim is ineligible:
(i) shall not limit the right of any party to offer evidence
concerning the event or occurrence which was the basis of the
eligibility determination at any other stage of the proceeding on the
claim for any purpose other than contesting the eligibility of the
claim determined to be ineligible;
(ii) shall not bar a claimant from bringing the claim before a
judicial forum, notwithstanding any existing predispute arbitration
agreement;
(iii) shall not affect the rights and remedies of the claimant with
respect to such claim, notwithstanding any existing predispute
arbitration agreement; and,
(iv) shall mean that the limitation period on eligibility set forth
in Subsection (a) shall continue to run as though the claim had never
been filed.
(f) Any determination by the Director relating to eligibility shall
set forth in writing the occurrence or event that was the basis for the
determination.
(g) No party shall seek to enforce any agreement to arbitrate if
the claim has been determined to be ineligible under this Section.
* * * * *
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 NASD 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 NASD 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
Amendment to Section 3 of the Code
The current provisions of Section 3 of the Code provide for the
appointment of a Director of Arbitration by the NASD Board of Governors
to perform all administrative duties and functions in connection with
matters submitted to the NASD for arbitration. The Director has, on
occasion, found it necessary to delegate certain functions of the
Director to other senior management employees of the NASD's Arbitration
Department, especially as a result of the significant growth in the
Department's staff and workload. The NASD believes this delegation
power is inherent in the authority of the Director to manage the
functions of the NASD's Arbitration Department. Nevertheless, the NASD
is proposing to amend Section 3 of the Code to expressly provide for
such delegation.
The proposed rule change to Section 3 provides that the duties and
functions of the Director may be delegated as appropriate by the
Director. Further, in the event that the Director has been
incapacitated, resigned, removed or has been permanently or
indefinitely disabled from the performance of the duties and functions
of the Director, the proposed rule change provides that the President
of the Association or an Executive Vice President may appoint an
interim Director to perform the functions and responsibilities of the
Director.
The purpose of this rule change is to clarify the lines of
authority and delegation powers of the Director under the Code. The
amendment also specifies that the power to delegate functions resides
with the Director unless circumstances occur which render the Director
permanently or indefinitely unable to perform the duties and functions
of the Director.
Amendment to Section 15 of the Code
The current provisions of Section 15 of the Code specify that
claims or controversies are not eligible for submission to arbitration
where 6 years have elapsed from the occurrence or event giving rise to
the matter. Section 15 does not specify the party responsible for
determining whether 6 years have elapsed from the occurrence or event
giving rise to the matter. As a result, there have been conflicting
decisions over who possesses such authority; the Director, the courts
or arbitrators. In addition, the current provisions of Section 15 do
not provide a procedure for a respondent to challenge the eligibility
of a claim, and there is no requirement that the event or occurrence
establishing the eligibility of a claim be identified.
Express Grant of Authority to Director to Determine Eligibility
The NASD is proposing to amend Section 15 to add six new
subsections giving the Director the authority to determine whether the
claim alleges that less than six (6) years have elapsed between the
occurrence or event giving rise to the dispute, claim or controversy
and filing of the claim. Under the proposed rule change the Director's
eligibility determination will be final and will not be subject to
review by the arbitrators under Section 35 of the Code. Further, by
placing the authority to make final eligibility determinations, as a
matter of the contract to arbitrate, in the hands of the Director, the
proposed rule change is intended to foreclose attempts by parties to an
arbitration to seek different eligibility rulings from the courts or
arbitrators. The NASD believes that this amendment is consistent with
recent court decisions on the question of arbitrability. It is beyond
dispute that, unless the parties have agreed otherwise, the courts, not
the arbitrators, determine if a contract to arbitrate exists between
the parties. See AT&T Technologies, Inc. v. Communications Workers of
America, 475 U.S. 643, 649 (1986). Thus, unless the parties have agreed
otherwise, the courts determine the scope of the agreement to
arbitrate, including whether a matter is eligible for arbitration on
subject matter, timeliness or other grounds. Id. (emphasis added). The
NASD expressly intends that the proposed amendment to Section 15 will
constitute the agreement of the parties to have the issue of
eligibility decided by the Director of Arbitration.
Arbitration agreements are contractual obligations which are
governed by general principles of contract interpretation. Haviland v.
Goldman Sachs & Co., 736 F.Supp. 507 (S.D.N.Y. 1990); Nilson v.
Prudential-Bache Securities, 761 F.Supp. 279 (S.D.N.Y. 1991).
Therefore, unless the purpose or provisions of the agreement to
arbitrate run counter to the Federal Arbitration Act or public policy,
parties may agree to any terms they desire (See, e.g., Apollo Computer,
Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989) (``Parties may . . .
agree to allow the arbitrator to decide both whether a particular
dispute is arbitrable as well as the merits of the dispute.''), and the
courts must give effect to such freely negotiated terms. See Snyder v.
Smith, 736 F.2d 409, 419 (7th Cir. 1984).
Because Section 15 does not specify who has the authority to
determine if a claim is eligible for submission to arbitration, the
courts have construed that term of the agreement and have routinely
held that it is a question of fact relating to the scope of the
agreement to arbitrate and that such questions of fact are for the
courts to decide. See, e.g., Edward D. Jones & Co. v. Sorrells, 957
F.2d 509, 514 (7th Cir. 1992), citing as controlling, AT&T, supra, at
649. The NASD, however, is expressly intending that under amended
Section 15 the Director will make eligibility determinations; the
effect of the amendment being that the parties to an agreement to
arbitrate before the NASD will have agreed that the Director alone will
determine if the claim is eligible for submission to arbitration before
the NASD.
In addition, current Section 15, entitled ``Time Limitation on
Eligibility,'' is proposed to be retitled ``Eligibility'' and
renumbered Subsection 15(a). The language of current Section 15
(proposed new Subsection 15(a)) is also being amended to eliminate the
provision that states that the six year eligibility limitation does not
apply to cases directed to arbitration by a court. Therefore, a court
order directing the parties to arbitration is not a determination that
the matter is eligible for arbitration under the rules of the NASD.
These changes are intended to further clarify the distinction between
issues related to eligibility, which the forum is entitled to control,
and statutes of limitations, which are governed by applicable law. The
relationship is discussed in more detail below.
Determination of Eligibility Upon Filing of a Claim
New Subsection 15(b) provides that when a claim is filed pursuant
to Section 13 or 25 of the Code (i.e., when the Statement of Claim,
Uniform Submission Agreement, each properly executed, and required fees
have been received by the Arbitration Department and the Statement of
Claim is ready to be served), the Director of Abritration will examine
each claim for relief to determine if it alleges less than six (6)
years have elapsed between the occurrence or event giving rise to the
dispute, claim or controversy and filing of the claim. For example, if
a claim seeks recovery of the purchase price of an investment on the
basis of misstatements or lack of suitability at the time of purchase,
and the purchase occurred nine (9) years before the claim was filed, it
will be ineligible for arbitration. If, however, the same claim seeks
recovery for loss of the value of the investment on the basis of
misstatements or omissions which caused the claimant to refrain from
selling the investment, and the misstatements or omissions occurred
five (5) years ago, the claim will be eligible for arbitration.\2\
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\2\See infra discussion concerning bifurcation of claims. The
proposed rule change will not permit an otherwise ineligible claim
to become eligible through the allegation of fraudulent concealment
and equitable tolling. In the example cited above, for instance, if
the claimant alleged that the respondent made a series of
misstatements dating back nine (9) years to the original
transaction, the claim would be eligible for arbitration only to the
extent that recovery was sought or could be had for misstatements
made within six (6) years of filing. While the NASD would not
necessarily ask the claimant to clarify the claim, the eligibility
determination, which would be part of the record upon submission to
the arbitrators, would advise the parties and the arbitrators of the
limitation on the claims submitted for arbitration.
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In each example, the Director of Arbitration will not be making
eligibility determinations on the basis of subjective evaluations of
whether the eligibility of the claim is proven, but, rather, solely on
an objective determination of whether the claim has stated that the
occurrence or event giving rise to the claim took place within six (6)
years.\3\
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\3\The NASD notes, and assumes that claimants and respondents
are aware, that bad faith allegations of fraud, or other facts,
designed to establish or defeat the eligibility of a claim, would be
counterproductive. If the eligibility of a claim were established
or, for those claims in which a portion of the initial claims were
determined to be ineligible, defeated as a result of such bad faith
allegations and the nature of the allegations was discovered by the
arbitrators prior to the award, such conduct may affect the
arbitrators' determination of credibility issues in the case, or of
the nature and amount of the remedies and relief awarded. The NASD
notes further that any such bad faith allegations by a member or
associated person may result in a referral of the matter for
disciplinary investigation and action as conduct inconsistent with
just and equitable principles of trade in violation of Article III,
Section 1 of the Rules of Fair Practice.
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In addition, proposed Subsection 15(b) provides that if the
Statement of Claim fails to clearly state that less than six (6) years
have elapsed between the occurrence or event giving rise to the
dispute, claim or controversy and filing, the Director may ask the
claimant to modify the Statement of Claim to do so.\4\ The time limit
for a response will be set in communications with the claimant. If the
claimant fails or refuses to respond, the Director of Arbitration will
determine the eligibility of the claim for submission to arbitration on
the basis of the Statement of Claim then on file. Thus, while the
Director will give the claimant a chance to correct any deficiencies to
permit the claimant to establish the eligibility of the claim, the
opportunity will not be open-ended.
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\4\See supra n. 2.
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Determination of Disputed Eligibility
Proposed new Subsection 15(c) provides that a responding party,
after service of the Statement of Claim, but prior to the date the
parties are notified of the appointment of the arbitrators for the
hearing or the appointment of an arbitrator to consider prehearing
issues, may file a notice of objection to dispute the determination of
the Director of Arbitration that the Statement of Claim alleges that
less than six (6) years have elapsed between the event or occurrence
giving rise to the dispute, claim or controversy giving rise to the
claim and filing. The notice must be supported by statements of fact
and documentary evidence and may only be submitted along with or after
the responding party submits an executed Uniform Submission Agreement
and pays any fees or deposits required under the Code.\5\
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\5\By conditioning the submission of a notice of objection on
the submission of a Uniform Submission Agreement and appropriate
fees, the NASD avoids expending resources making eligibility
determinations for parties that have not complied with the
requirements of the Code or paid for the use of the forum. The NASD
does not believe that a party disputing the eligibility of a claim
should be able to have its objection considered if it has no
intention of participating in the arbitration of the claim without
engaging in collateral litigation. By insisting on the submission of
an executed Uniform Submission Agreement, the NASD and the other
parties to the matter should be able to defend against any such
collateral litigation by asserting that the objecting party agreed
to be bound by the provisions of the Code, one of which (Section 15)
grants the Director the exclusive authority to determine the
eligibility of a claim.
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Following submission of the notice of objection, the Director of
Arbitration must notify the other parties that one of the responding
parties has disputed the eligibility of the claim.\6\ The Director will
then permit the claimant and any other party to respond to the
allegations of the responding party with respect to eligibility within
such time period as the Director of Arbitration establishes in
communications with the parties.
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\6\The Director's notification to the parties of the eligibility
dispute and the time limitation for a response does not relieve the
parties of the obligation under other provisions of the Code to
serve the other parties with copies of pleadings and submissions.
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After considering the written record only, and any responses timely
submitted, the Director will determine if the disputing party's
allegations with respect to eligibility: (1) contradict the allegations
in the Statement of Claim relating to eligibility; (2) are supported by
documentary evidence; and (3) are not contradicted by other allegations
which, if true, would prevail over the contradictory allegations of the
disputing responding party. If the Director makes affirmative
determinations on all of these matters, the claim will be ineligible.
For example, if in the scenario cited above, the claimant had
stated that the transaction had occurred within five (5) years of
filing, that would have been enough to make it eligible. If the
respondent objected and in turn asserted as a statement of fact, in
contradiction of the claimant's allegation, that the transaction had
occurred nine (9) years before filing and attached a copy of the
claimant's account statement in support of the allegation, the claimant
would have to come forward with an allegation further disputing the
account statement in order to prevent a determination that the claim is
ineligible. An allegation that the account statement is fraudulent
would be sufficient to overcome the disputing party's allegation, as
would production of an account statement supporting the transaction
date alleged by the claimant.\7\ Therefore, the proposed rule
establishes a presumption in favor of the eligibility of a claim which
can only be overcome by an undisputed showing to the contrary.\8\
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\7\See supra n. 3.
\8\See supra n. 2/.
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Proposed Subsection 15(f) requires the Director's determination be
in writing and set forth the occurrence or event that is the basis for
the eligibility determination.
Finality and Effect of an Eligibility Determination
Proposed Subsections 15(d) and (e) resolve several issues relating
to eligibility determinations. First, under proposed subsection 15(d)
any determination by the Director will be final. This provision is
intended to foreclose relitigation of eligibility before the
arbitrators. Because the terms of the proposed rule provide that the
Director will determine if a claim is eligible for submission to
arbitration, the finality of the determination precludes an arbitrator
from revisiting the issue under any circumstances.\9\
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\9\The NASD recognizes that new facts relevant to an eligibility
determination could arise through an amendment to the claim pursuant
to Section 39(b) of the Code, which requires the consent of the
arbitrators before an amendment to the pleadings is permitted.
because the NASD intends that the determination of eligibility will
occur before a matter is submitted to the arbitrators, an amendment
to the claim permitted by the arbitrators under Section 39(b) would
not reopen the eligibility issue for the arbitrators or for anyone
else to decide.
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Second, a determination that a claim is ineligible will not: (1)
limit the right of any party to offer evidence concerning the event or
occurrence which was the basis of the eligibility determination at any
other stage of the proceeding on the claim for any purpose other than
contesting the eligibility of the claim determined to be ineligible;
(2) bar a claimant from bringing the substantive claim before a
judicial forum, notwithstanding the fact that the parties have an
arbitration agreement; or (3) affect the rights and remedies of the
claimant with respect to such claim provided by applicable law. The
eligibility rule never was intended to serve as an election of remedy
provision that would eviscerate any surviving causes of action under
applicable law after six years have elapsed. The intent of this
proposed provision is to ensure that the effect of the eligibility
determination is limited solely to the issue of access to the NASD's
arbitration forum.
Finally, proposed Subsection (e)(iv) provides that if a claim is
ineligible for arbitration, the limitation period on eligibility set
forth in Subsection (a) shall continue to run as though the claim had
never been filed. This is a relation back provision that is intended to
prevent the filing of an ineligible claim from tolling the running of
the eligibility provision while the NASD determines that the claim is
ineligible. Thus, for example, if a claim is filed and the claimant
fails to modify the claim pursuant to the Director's request under
Subsection (b), or the claimant fails to overcome the respondent's
notice of objection under Subsection (c), the Director may determine
that the claim is ineligible. If the claimant later resubmits the claim
pleading facts showing the claim would have been eligible when it was
originally submitted, but the time period has subsequently run, the
claim will not be eligible.
Avoidance of Vexatious Litigation
Proposed new Subsection 15(g) prohibits parties from seeking to
enforce an agreement to arbitrate a claim which has been determined to
be ineligible for arbitration by the NASD. This provision is intended
to prevent collateral attacks and vexatious litigation over eligibility
determinations. Its effect is to bar a respondent (or a claimant) from
seeking a court order either to compel the NASD to accept the case for
arbitration, or to compel a claimant (or respondent) into arbitration
in another forum, after the Director has determined the claim to be
ineligible. Thus, members would be prohibited from moving to compel
arbitration before the American Arbitration Association (``AAA'') or
another self regulatory organization (``SRO''), for instance, if AAA or
the SRO is an alternative forum choice in arbitration agreements, after
the NASD's Director of Arbitration has declared the claim to be
ineligible for arbitration before the NASD. Under this provision
members could be subject to disciplinary action for seeking to enforce
an agreement to arbitrate.
Relationship of Eligibility to Statute of Limitations Defenses
As discussed above with respect to tolling, the NASD intends that
the proposed rule change will sharpen the distinction between
eligibility and statutes of limitation. The Director's determination
that a claim is eligible for arbitration has no effect on whether a
relevant statute of limitations operates as a defense to a claim.
For example, a claim which is based on an event which occurred five
years ago would be eligible for arbitration; however, if the claim were
based on a private right of action under Section 10(b) of the
Securities Exchange Act of 1934, the respondent could still plead the 1
year/3 year statute of limitations on such actions as a defense before
the arbitrators. Similarly, if the claim were based on an event which
occurred seven (7) years ago, and which was based on a breach of
fiduciary duty for which tolling might apply under applicable state
law, the fact that it was ineligible for arbitration would not affect
the ability of the claimant to bring the claim for relief in court and
to assert equitable tolling as a counterdefense to the respondent's
statute of limitations defense. Thus, the Director's eligibility
determination will not affect the substantive claim or defenses.
Finally, the NASD is aware that under New York law, which is often
applicable to an arbitration or to one or more parties to a proceeding,
a respondent in an arbitration case must file an application for an
order enjoining the arbitration of a claim on statute of limitations
grounds within twenty days of service of the claim in order to preserve
any statute of limitations defense for use in a subsequent court
proceeding. The filing of such an application will have no effect on
the Director's eligibility determination; if the claim is eligible, the
respondent can raise his statute of limitations defense before the
arbitrator, if it is ineligible, he can raise the defense in court.
The NASD intends to make the proposed amendments to Section 15
applicable to all claims filed after the effective date of the
amendments without regard to when the cause of action accrued or arose,
or the timing of the event or occurrence giving rise to the dispute.
The NASD will advise its members that the proposed amendment will apply
retroactively to all claims brought after the effective date of the
amendment. The NASD will also advise its members and associated persons
that they have expressly agreed that under the NASD's rules all
agreements currently in effect are subject to the amendment to the
Code. Although one court has recently held that amendments to the Code
do not apply to claims which have already accrued to require
arbitration of the claim,\10\ the NASD believes that case was a
decision about the scope of the agreement to arbitrate--i.e., whether
the parties had agreed to arbitrate the particular claim--a subject
which courts have virtually always held is for the courts to
decide.\11\
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\10\Kresock v. Bankers Trust Company, 21 F. 3d 176, 179 (2d Cir.
1994) (``Kresock'').
\11\The court stated that the parties could not have agreed to
arbitrate the claim in issue in the Kresock case thereby rejecting
the NASD's assertion, supported by the NASD's rule filing on the
amendment in issue, that the amendment was merely a codification of
existing interpretations of the Code. Moreover, the amendments to
the Code at issue in Kresock, according to the court, did not
purport to apply retroactively.
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The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act in that the proposed
rule change will protect investors and the public interest by
facilitating the arbitration process through expeditious resolution of
eligibility issues arising under Section 15 of the Code by authorizing
the Director to determine whether a claim or controversy occurred less
than 6 years prior to filing in the event eligibility is disputed by a
responding party. Moreover, in order to protect investors and the
public interest by avoiding disruptions and uncertainty about the
authority to act under the Code, the NASD is proposing to amend Section
3 of the Code to permit the duties and functions of the Director to be
delegated by the Director or the Executive Vice President, Member
Services.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The original proposed rule change was published for comment by the
SEC on October 26, 1993 in Securities Exchange Act Release No. 33108.
The SEC received three comment letters in response.\12\ In addition,
the SEC, in letters dated January 31, 1994\13\ and February 4,
1994,\14\ requested responses from the NASD on certain issues raised by
the commenters and on other questions related to the proposed rule
change.
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\12\Letter from Gregory L. Wilmes, Esq., Briol & Wilmes, to
Jonathan G. Katz, Secretary, Commission (November 17, 1993)
(``Wilmes''); Letter from Michael E. Friedman, Esq. to Jonathan Katz
(December 3, 1993) (``Friedman''); Letter from Harry S. Miller,
Esq., Shafner & Gilleran, to Jonathan Katz (January 27, 1994)
(``Miller'').
\13\Letter from Ethan D. Corey, Staff Attorney, Over-the-Counter
Regulation, Commission to Suzanne E. Rothwell, Associate General
Counsel, NASD (January 31, 1994).
\14\Letter from Ethan D. Corey, Staff Attorney, Over-the-Counter
Regulation, Commission to Elliott R. Curzon, Senior Attorney, NASD
(February 4, 1994).
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Responses to SEC Questions and Comments
With respect to the first question in the SEC's January 31, 1994
letter, and those of two of the commenters, relating to the perception
that the proposed rule change would permit the Arbitration Department
staff to exercise ``significant case-related [discretion on]
eligibility determination[s],'' the NASD responds in two parts. First,
any arbitration forum has the inherent right to limit access to its
forum in order to preserve and direct resources to the disposition of
cases in the manner it deems most efficient. The Code currently limits
access to the forum to those cases where the dispute, claim or
controversy occurred within six years of submission of the claim.
Second, the Arbitration Department currently determines the eligibility
of a claim for arbitration as a matter of the sufficiency of the
allegations in a statement of claim. The Department examines the
statement of claim to determine if it alleges events or occurrences on
which the claim is based and which, on their face, are within six years
of the filing of the claim. If it does, the claim is eligible for
arbitration. If the respondent contests the eligibility of a claim, the
issue is currently resolved by the courts or the arbitrators, depending
on where the respondent pursued resolution of the issue.
The proposed rule change brings the issue of eligibility, both as a
threshold matter and with respect to disputes among the parties over
eligibility, within the authority of the Director of Arbitration to
decide. The threshold test will remain the sufficiency of the
allegations in a claim. Sufficiency in this context does not require
the claimant to sustain the burden of proof of eligibility to any
level, it is merely an inquiry into whether the claim on its face
states when the events or occurrences giving rise to the claim
occurred. If the facts alleged in a claim are ambiguous or are not
sufficient on their face to determine if a claim is eligible for
arbitration, the staff will advise the claimant and request
modification of the statement of claim. If the claimant does not modify
the statement of claim to permit a determination of eligibility, the
Director will determine if the claim is eligible on the basis of the
claim as stated.\15\ If the modification discloses facts which show
that the claim is ineligible, it will be rejected as ineligible. The
inquiry to be made by the Director in these instances is objective and
goes to the existence of statements of facts in the claim, not
subjective weighing of evidence.
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\15\A statement of claim will generally be regarded as
insufficient to determine eligibility if it cannot be determined
from its plain language whether any part of the claim is based on
occurrences or events less than six (6) years old. As stated above,
if it appears that some part of the claim is based on occurrences or
events less than six (6) years old, those portions may be submitted
to arbitration. See supra n. 1, and discussion of bifurcation infra.
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Under the proposed rule change, in the event a respondent disputes
the facts alleged by the claimant as supporting the eligibility of the
claim following the threshold determination that the claim is eligible,
the respondent carries a heavy burden of showing that the timing of the
events or occurrences giving rise to the claim are other than those
alleged by the claimant. In the absence of proof that is not subject to
reasonable dispute that the claim is ineligible, the Director will
presume that the claim is eligible.
Paragraph 2(a) of the Commission's January 31, 1994 letter
identified a distinction between then-proposed Subsections 15(a) and
15(b) in that the latter sets forth a procedure for determining
eligibility, while the former does not. The NASD agrees with the
Commission's concerns and has amended the proposed rule change pursuant
to Amendment No. 1 to clarify the procedures. Amendment No. 1 also
addresses the concern set forth in paragraph 2(b) of the January 31,
1994, letter about the effect of a threshold determination of
eligibility on the claimant's right to seek a judicial remedy.
With respect to the question in paragraph 3 of the January 31, 1994
letter, the proposed rule contemplates that eligibility will be
determined prior to the appointment of the arbitrators, whether as a
threshold matter only, as a result of a challenge by a respondent or
both. The NASD believes that the amendments described herein
contemplate that eligibility determinations made by the Director are
final and that such determinations resolve the question of whether a
claim can be submitted to arbitration. Once submitted, the issue cannot
be revisited.\16\ Disputes over eligibility must be raised and resolved
within the context of the process described in proposed new Section 15,
or they are waived. The NASD does not believe an amendment is required
to address this issue.
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\16\The NASD recognizes that new facts relevant to an
eligibility determination could arise through an amendment to the
claim pursuant to Section 39(b) of the Code, which requires the
consent of the arbitrators before an amendment to the pleadings is
permitted. Because the NASD intends that the determination of
eligibility will occur before a matter is submitted to the
arbitrators, an amendment to the claim permitted by the arbitrators
under Section 39(b) would not reopen the eligibility issue for the
arbitrators or for anyone else to decide.
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Responses to Commenters
With respect to the arguments of the commenters that the proposed
rule change contradicts the holdings of various courts on the issue of
eligibility determinations,\17\ the NASD does not agree. Arbitration is
a creature of contract, AT&T Technologies, supra, and it is for the
parties, through the choice of a forum, to determine the terms of the
contract. See, e.g., U.S. Steelworkers v. Warrior Gulf Navigation Co.,
363 U.S. 574 (1960). There is, therefore, no impediment erected by the
courts which would prevent the NASD from adopting a rule which permits
the Director of Arbitration to decide issues affecting access to the
NASD's arbitration forum. further, the proposed rule, by its terms,
does not affect the substance of a claim--an eligibility determination
by the Director does not bar a party from asserting the claim in court.
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\17\Wilmes, Friedman.
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Another commenter asserted that under the proposed rule the
Director of Arbitration would be conducting fact-finding hearings to
determine eligibility.\18\ The proposed rule will not produce such a
result. As discussed in more detail above, eligibility will be
determined as a matter of the sufficiency of the allegations in a
statement of claim, not as a subjective decision regarding disputed
facts.
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\18\Friedman.
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Finally, a third commenter\19\ raised four issues: (1) whether the
time limit for filing a claim under the proposed eligibility rule can
be tolled; (2) whether the proposed rule will permit the Director of
Arbitration to bifurcate claims by declining to take jurisdiction over
ineligible portions of a claim; (3) how bifurcated claims will proceed;
and (4) whether it is fair to bar a party from seeking to enforce an
agreement to arbitrate where the claim has been ruled ineligible.
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\19\Miller.
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On the first issue, the courts have said that the time limits in an
eligibility rule such as Section 15 of the Code are contractual, they
do not operate like a statute of limitations, and, therefore, they are
generally not subject to tolling. See, e.g., AT&T Technologies, supra;
Paine Webber Inc. v. Hofmann, 984 F.2d 1372 (3d Cir. 1993). The NASD
has not applied tolling to eligibility issues historically, and does
not plan to apply tolling under the proposed rule.\20\ Contrary to the
assertion of the commenter, application of the eligibility limit
without tolling will not deprive investors of their right to recourse.
An ineligible claimant will retain his right to seek relief in the
courts to the same extent as it existed prior to filing the claim in
arbitration.
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\20\Section 18(b) of the Code provides that the six year
limitation on submission to arbitration provided under Section 15 of
the Code is tolled for so long as a court of competent jurisdiction
retains jurisdiction over the matter. This provision is a
contractual tolling provision which prevents the eligibility limit
from running under the narrow circumstance specified. Equitable
tolling, by contrast, is a creature of the equitable powers of the
courts to the effect that the fraud or dilatory conduct of the
defendant should not be permitted to result in the lapse of time for
bringing a cause of action. As stated above, the eligibility
limitation addresses only the access of parties to the NASD's forum,
not the merits of the claim, defenses thereto or the ability of a
claimant to pursue his claim in court.
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On the second issue, also raised in the February 4, 1994 letter
from the SEC, the proposed rule change will require bifurcation of
claims to the extent claims which are based on events or occurrences
more than six years prior to the filing of the claim will be ineligible
for arbitration. Thus, where a statement of claim sets forth events or
occurrences as the basis for claims for relief, those which occurred
less than six years ago will be eligible for arbitration, while the
claimant would be required to pursue his remedies in court for claims
based on events or occurrences more than six years old. In the NASD's
view, bifurcation is an acceptable result in such cases. See Pompano-
Windy City Partners v. Bear Stearns & Co., 698 F.Supp. 504 (S.D.N.Y.
1988), citing Dean Witter Reynolds v. Byrd, 470 U.S. 213, 225 (1985)
(White, J. concurring).
With respect to the third issue, the NASD takes no position on how
such bifurcated claims should proceed. The NASD's Arbitration
Department manages its docket without regard to issues facing
participants in other forums. To the extent a court permits or requires
the ineligible portion of a bifurcated matter to proceed, it is
entirely within its power to do so.
Finally, on the fourth issue, it is not only fair, but essential
for public arbitration claimants, for the proposed rule change to bar
parties from seeking to enforce an agreement to arbitrate where the
claim has been determined to be ineligible. For example, if a claim is
ruled ineligible, the proposed rule will bar the respondent from
seeking an order from a court compelling the arbitration of the case.
This will relieve the claimant of defending against such collateral
attacks on the eligibility determination while pursuing his remedies in
court, a situation which would be vexatious and expensive for
claimants.
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 self-regulatory organization 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
The NASD's proposed rule change addresses an important issue
increasingly common in arbitration proceedings, namely, the use of
contentious litigation tactics to determine whether claims are eligible
for arbitration under NASD rules. Interested persons are invited to
submit written data, views, and arguments concerning the foregoing. The
Commission requests that, in addition to any general comments
concerning whether the proposed rule change is consistent with Section
15A(b)(6) of the Act, commentators address the following:
1. The proposed rule change would permit respondents to challenge
the eligibility of a claim at any time before the parties are notified
of the appointment of the arbitrators for the hearing or the
appointment of an arbitrator to consider prehearing issues. Should
respondents be required to raise their objections at an earlier point
in the process, for instance, not later than the time by which they
file their answer to the Statement of Claim?
2. The proposed rule change is based upon a rule approved by the
Securities Industry Conference on Arbitration (``SICA'') at its regular
meeting on April 21, 1993. The form of the rule approved by SICA
provided, in pertinent part:
(c) A determination by the Director of Arbitration pursuant to
subparagraph (b) that a claim is ineligible shall not constitute a
bar to asserting the underlying claim in a judicial forum. With
respect to any such ineligible claims, the parties will have
available to them the rights and remedies provided by applicable
law, notwithstanding, any (i) existing predispute arbitration
agreement or (ii) decisions on eligibility. No party shall seek to
enforce any agreement to arbitrate where the claim has been
determined to be ineligible under this section.
Do the pertinent provisions of proposed sections 15(d) and 15(e)
differ substantively from the rule approved by SICA? If not, does the
proposed rule change set forth the consequences of a determination of
ineligibility in a manner that will be more readily understandable to
all parties, including pro se claimants, than the form of the rule
approved by SICA?
3. The Commission understands that proposed Section 15(e)(iv) is
intended to address claims that are filed with the NASD more than once.
For those claims that previously have been submitted, and have been
determined to be ineligible under Section 15, there would be no tolling
of time periods for purposes of the eligibility rule with respect to
the time period during which the NASD previously considered the claim.
Accordingly, a claimant who resubmits a matter in revised form a second
time would have to calculate the eligibility time period from the date
of occurrence or event giving rise to the dispute. Is this
understanding fairly implied from Section 15(e)(iv)?
Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549. 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 NASD. All
submissions should refer to File Number SR-NASD-93-51 and should be
submitted by August 23, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18736 Filed 8-1-94; 8:45 am]
BILLING CODE 8010-01-M