[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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

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