[Federal Register Volume 67, Number 76 (Friday, April 19, 2002)]
[Notices]
[Pages 19464-19467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9586]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45746; File No. SR-NASD-97-44]


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
5 and 7 to a Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Regarding the Eligibility of Claims for 
Arbitration

April 12, 2002.

    On June 24, 1997, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly owned subsidiaries NASD Regulation, 
Inc. (``NASD Regulation'') and NASD Dispute Resolution, Inc. (``NASD 
Dispute Resolution''),\1\ filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\2\ and Rule 
19b-4 thereunder \3\ to amend NASD Rules 10304, 10307, and 10324 of the 
NASD's Code of Arbitration Procedure (``Code''). Notice of the proposed 
rule change and Amendment Nos. 1, 2, 3, and 4 thereto was published for 
comment in the Federal Register on January 6, 1998.\4\ The NASD filed 
Amendment Nos. 5, 6, and 7 to the proposal on March 20, 1998; September 
30, 1999; and March 15, 2002, respectively.\5\ The Commission is 
publishing this notice of Amendment Nos. 5 and 7 to solicit comments on 
proposed rule change, as amended, from interested persons. To date, the 
Commission has received ten comments on the proposal.\6\
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    \1\ The original rule filing and Amendment Nos. 1 to 6 were 
filed by the NASD through NASD Regulation, of which the Office of 
Dispute Resolution (``ODR'') was a part before July 9, 2000. On that 
date, ODR became a separate, wholly owned subsidiary of the NASD, 
known as NASD Dispute Resolution, Inc. The NASD filed Amendment No. 
7 through NASD Dispute Resolution.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 39487 (December 23, 
1997), 63 FR 588.
    \5\ See letter to Katherine A. England, Division of Market 
Regulation (``Division''), Commission, from John M. Ramsey, Vice 
President and Deputy General Counsel, NASD Regulation, dated March 
18, 1998 (``Amendment No. 5''); letter to Richard C. Strasser, 
Division, Commission dated September 27, 1999 (``Amendment No. 6''); 
letter to Florence Harmon, Division, Commission, from Laura Gansler, 
Counsel, NASD Dispute Resolution, dated March 15, 2002 (``Amendment 
No. 7''). As explained in Section III infra, the Commission is not 
seeking comment on Amendment No. 6 because it has been superceded by 
Amendment No. 7.
    \6\ See letter to Margaret McFarland, Deputy Secretary, 
Commission, from Seth E. Lipner, Deutsch & Lipner, dated December 
11, 1997; letter to Commission from Donald G. McGrath, Falk & 
Siemer, dated December 29, 1997; letter to Jonathan G. Katz, 
Secretary, Commission, from Scot D. Bernstein, dated January 22, 
1998; letter to Jonathan G. Katz, Secretary, Commission, from 
William J. Fitzpatrick, dated January 23, 1998; letter to Jonathan 
G. Katz, Secretary, Commission, from Paul Dubow, Chairman, 
Arbitration Subcommittee, Securities Industry Association (``SIA''), 
dated January 27, 1997; letter to Jonathan G. Katz, Secretary, 
Commission, from Morton Levy, dated January 27, 1998; letter from 
Philip M. Aidikoff, President, Public Investors Arbitration Bar 
Association, to Linda Feinberg, President, NASD Dispute Resolution, 
dated March 8, 2002; e-mail to Catherine McGuire and Robert Love, 
Division, Commission, from C. Thomas Mason, dated March 20, 2002; e-
mail to Catherine McGuire, Division, Commission, from Jerry Stanley, 
dated March 20, 2002; e-mail to Catherine McGuire and Robert Love, 
Division, Commission, from Joel A. Goodman, et al., dated March 22, 
2002.
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I. Text of Proposed Rule Change

    The NASD has proposed amendments to the provisions of the Code that 
govern the eligibility of claims. The proposed rule change, as amended, 
is set forth below. The base text is taken from the proposed rule 
change that the Commission published for comment in 1998. Additional 
language proposed by the NASD in Amendment No. 5 is italicized; 
language deleted by Amendment No. 5 is in brackets.

10304. Time Limit on Eligibility of Claims for Arbitration; Procedures 
for Determining Eligibility Under This Rule

    This rule describes when a claim must be filed in order to be 
eligible for arbitration, how and when parties may challenge the 
eligibility of claims, and the Director's role in determining 
eligibility.
    (a) Claims eligible for arbitration and the Director's role in 
determining the eligibility of claims.
    (1) Any filed claim is eligible for arbitration unless the Director 
decides it is ineligible. The Director may decide a claim is ineligible 
only if:
    (A) A party that is responding to a claim, the responding party, 
asks the Director to decide that the claim is ineligible; and

[[Page 19465]]

    (B) The Director determines that the claim is based on an 
occurrence or event that took place 6 years or more before the claim 
was filed.
    (2) The 6 year eligibility period in paragraph (a)(1)(B) will be 
extended only for the length of time that a claim is pending in court. 
(The eligibility period will not be extended during any period in which 
a responding party fraudulently concealed facts from the claimant.)
    (b) Procedures for challenging eligibility and new time periods for 
answering and delivering documents.
    (1) If a responding party wants the Director to decide whether a 
claim is ineligible:
    (A) A responding party must serve a written request on the Director 
and all the other parties to the arbitration; and
    (B) A responding party must serve the written request no later than 
30 days after the responding party was served the Statement of Claim. 
(Rule 10314(c) explains how to serve a document.)
    (2) To oppose the written request, a party must serve a written 
response on the Director and all the parties. This written response 
must be served no later than 14 days after the party was served the 
written request.
    (3) The Director will try to determine eligibility issues within 30 
days of receiving the written request. The Director will serve the 
decision on all the parties.
    (4) The Director's determination is final. No party to the 
arbitration may seek review of the determination in any forum, in an 
action to vacate the arbitration award, or in any other proceeding.
    (5) If a claimant amends a Statement of Claim filed in arbitration, 
a responding party may challenge the eligibility of any new claim in 
the amended Statement of Claim.
    (6) The parties do not have to file an answer or any other 
documents until 45 days after the Director serves the decision on 
eligibility.
    (c) Challenges to eligibility when a claimant files a claim or 
claims in court.
    (1) If a court orders a claim to arbitration at the request of the 
responding party, then the responding party may not challenge the 
claim's eligibility in arbitration.
    (2) The responding party may challenge the eligibility of a claim 
in arbitration that a claimant initially filed in court when:
    (A) The court orders the claim to arbitration and the responding 
party did not request the order, or
    (B) The claimant moves the claim from court to arbitration without 
a court order.
    (d) Determinations of eligibility and statutes of limitation.
    (1) All statutes of limitation [or any other time limitations that 
may apply to a claim] are extended from the time a Statement of Claim 
is filed until 45 days after the Director serves a decision on 
eligibility or the Association no longer has jurisdiction over a claim, 
whichever is later. The parties agree that they will not assert a 
statute of limitations defense in court that is inconsistent with this 
subparagraph.
    (2) The Director's determination that a claim is eligible or 
ineligible does not determine whether a claim was filed later than the 
time allowed by a statute of limitations. The parties may still assert 
to the arbitrators or the court that has jurisdiction over a claim any 
statute of limitations defense that applies to a claim.
    (3) A claimant may pursue a claim in court even if a court or the 
Director determines the claim is ineligible for arbitration.
    (e) Consolidation of eligible and ineligible claims. If the 
Director decides that one or more of the claims is not eligible for 
arbitration, a customer claimant may:
    (1) Pursue all of the claims included in the Statement of Claim in 
court; or
    (2) Pursue the eligible claims in arbitration and the ineligible 
claims in court.
    (f) Definitions.
    (1) ``Claim''--For purposes of this Rule, the term ``claim'' means 
any dispute or controversy described in a Statement of Claim or answer, 
including Counter-claims, Cross-claims, and Third-party claims, for 
which the claimant is seeking any form of relief, damages or other 
remedy.
    (2) ``Occurrence or event''--For purposes of this Rule, the term 
``occurrence or event'' means:
    (A) The date of the transaction upon which the claim is based; or,
    (B) If the claim does not arise from a transaction, the date of the 
occurrence of the act or omission upon which the claim is based.
* * * * *

10307. Reserved

* * * * *

10324. Interpretation of Provisions of Code and Enforcement of 
Arbitrator Rulings

    The arbitrators may interpret and apply the provisions of this Code 
and take appropriate action to obtain compliance with any ruling that 
they make, except as provided in other provisions of this Code. The 
interpretations and actions of the arbitrators to obtain compliance 
shall be final and binding upon the parties.
* * * * *

III. Amendment Nos. 5, 6, and 7 \7\
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    \7\ These amendments may be viewed on the website of NASD 
Dispute Resolution. See http://www.nasdadr.com/rule_filings_index.asp#97-44.
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    In Amendment No. 5, the NASD responded to comments on the proposal 
and made two minor revisions to the proposed rule text in response to 
points raised by one commenter. First, the NASD amended proposed NASD 
Rule 10304(d)(1), which is largely a recodification of current NASD 
Rule 10307(a), by deleting the words ``or any other time limitations 
that may apply to a claim.'' The NASD explained, however, that it 
intended for the term ``statute of limitations'' to be read broadly to 
include all time limitations that might apply to a claim under 
applicable law. Second, in proposed NASD Rule 10304(f)(1), the NASD 
revised the definition of ``claim'' by inserting the words ``or 
answer'' following ``Statement of Claim.''
    In Amendment No. 6, the NASD stated that the effective date of the 
proposed rule change would be 120 days after the Commission had taken 
final action on the last of three related rule filings: SR-NASD-97-44 
(the present proposal), SR-NASD-97-47,\8\ and SR-NASD-98-74.\9\ The 
NASD stated that, to avoid multiple amendments of customer account 
agreements as a result of these three

[[Page 19466]]

proposed rule changes, all of them should take effect at the same time, 
and that the effective date of the rules should provide enough time for 
member firms to replace their customer agreements.
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    \8\ See Securities Exchange Act Release No. 39371 (November 26, 
1997), 62 FR 64428 (December 5, 1997) (amendments to the Code 
relating to punitive damages).
    \9\ See Securities Exchange Act Release No. 42160 (November 19, 
1997), 64 FR 66681 (November 29, 1999). SR-NASD-98-74 would, in 
relevant part, amend NASD Rule 3110(f) governing the use of 
predispute arbitration agreements with customers to coincide with 
the proposed amendments to NASD Rule 10304. First, it would amend 
the language that NASD members are required to place in predispute 
arbitration contracts to acknowledge that, under the rules of the 
arbitration forum, parties may sue each other in court for certain 
claims. See proposed amendments to NASD Rule 3110(f)(1)(A) and (F). 
SR-NASD-98-74 also would prohibit NASD members from including in any 
predispute arbitration agreement any condition that ``limits the 
ability of a party to file any claim in court permitted to be filed 
in court under the rules of the forums in which a claim may be filed 
under the agreement.'' This provision would incorporate within 
parties' arbitration agreements the ability to litigate claims that 
the Director had determined to be ineligible for arbitration (along 
with otherwise eligible claims) under the bifurcation provision of 
proposed NASD Rule 10304(e). See proposed amendments to NASD Rule 
3110(f)(4)(iii). Finally, SR-NASD-98-74 would incorporate within 
parties' agreements the proposed change in NASD Rule 10304(c) that 
would require members to arbitrate all claims included in a 
complaint that a member had asked a court to compel to arbitration, 
even if any of those claims were over six years old. See proposed 
amendment to NASD Rule 3110(f)(5).
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    In Amendment No. 7, the NASD again revised the proposed effective 
date. The NASD has now stated that it would de-link the effective date 
of this proposed rule change from the two others. The NASD also stated 
that it would announce the effective date of the proposed rule change 
in a Notice to Members following final action by the Commission, and 
that the effective date would be at least 30 days after publication of 
a Notice to Members.\10\ Because Amendment No. 7 supercedes Amendment 
No. 6, the Commission is not soliciting comment on the latter.
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    \10\ NASD Dispute Resolution also stated that NASD Regulation 
would file a similar amendment with respect to SR-NASD-98-74.
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, as amended, including 
whether the proposal is consistent with the Act. In particular, the 
Commission is soliciting comment on the issues highlighted below:
    Existing NASD Rule 10304 does not provide guidance regarding who 
makes the determination of eligibility, when such determinations should 
be made, and under what procedures.\11\ This has resulted in protracted 
and expensive litigation proceedings. The proposed rule is based on the 
current rule, continuing with the basic premise that claims older than 
six years are not appropriate for arbitration. The proposed rule change 
states that it would address defects in the existing rule, in part, by 
narrowing the outright ban on older cases (because the ban would not be 
enforced unless a responding party raised the provision within the time 
established by the rule), and by appointing the Director to decide 
whether the Statement of Claim asserts that claims are within the six-
year time limitation. Proposed NASD Rule 10304(b)(4) would provide that 
the Director's decision regarding the eligibility of a claim is final, 
and that no party to the arbitration may seek review of the 
determination in any forum, in an action to vacate the arbitration 
award, or in any other proceeding. Decisions on eligibility that have 
been made by arbitrators have been subject to motions to vacate under 
the Federal Arbitration Act.\12\ Under the proposed rule change 
eligibility determinations would no longer be subject to such motions. 
Given this background:
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    \11\ Currently, Rule 10324 provides, in part, that the 
arbitrators shall be empowered to interpret and determine the 
applicability of all provisions under the Code and that such 
interpretations are binding on the parties. The Commission believes 
that this rule is a clear indication that arbitrators should apply 
Rule 10304, and some courts have agreed with that conclusion. Other 
courts, however, disagree.
    \12\See 9 U.S.C. 10.
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    1. Should the proposed rule explicitly provide for additional 
review of the Director's determination on eligibility, for example, to 
the NASD Dispute Resolution Board of Governors?
    2. In the absence of review of particular eligibility 
determinations under the proposed rule, does NASD Dispute Resolution 
governance and oversight by the Commission provide sufficient assurance 
of the integrity of eligibility determinations?
    Broker-dealers are compelled by existing NASD Rule 10301(a) to 
arbitrate certain customer claims upon demand. NASD member firms 
generally require customers, in their account opening documents, to 
agree that disputes must be arbitrated. Under proposed NASD Rule 
10304(d)(3), ``[a] claimant may pursue a claim in court even if a court 
or the Director determines the claim is ineligible for arbitration.'' 
Further, proposed NASD Rule 10304(e) would allow a claimant to 
consolidate eligible and ineligible claims in court, or to bifurcate 
the claims, pursuing some in arbitration or others in court. In a 
companion filing, the NASD has proposed to amend NASD Rule 3110(f) 
governing the use of predispute arbitration agreements with customers 
to implement the changes to NASD Rule 10304 proposed in the present 
filing.\13\ In light of the above:
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    \13\ See supra note 9.
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    3. Is it reasonable for the NASD to permit its members to restrict 
the availability of the NASD's arbitration forum for a claim based on 
an occurrence or event that took place six years or more before the 
claim was filed when the possible consequences include: (a) The 
bifurcation of a particular customer's claims into court and 
arbitration proceedings; (b) the resolution of all of a particular 
customer's claims in court proceedings rather than through arbitration; 
and (c) the clear rejection of the ``election of remedies'' doctrine, 
providing claimants with the ability to pursue a claim based on an 
occurrence or event that took place six years or more before the claim 
was filed in a court with jurisdiction over a claim?
    4. Is it reasonable for claims based upon state or common law that 
are based on an occurrence or event that took place six years or more 
before the claim was filed to be directed to courts with jurisdiction 
over the law that gave rise to the claim?
    5. Would proposed NASD Rules 10304(d)(3) and 10304(e), taken 
together with the amended arbitration agreements required under the 
proposed changes to NASD Rule 3110(f), be sufficient to convince courts 
that the parties have agreed to allow certain claims to be pursued in 
court, even if the Director had found them ineligible for arbitration?
    The proposed rule change carries forward the principle from 
existing NASD Rule 10304 that claims older than six years will 
generally be ineligible for arbitration. Under proposed NASD Rule 
10304(a)(1)(B), the Director may find a claim ineligible if the claim 
were based on an ``event or occurrence that took place 6 years or more 
before the claim was filed.'' Under proposed NASD Rule 10304(f)(2), an 
``occurrence or event'' would mean, ``if the claim does not arise from 
a transaction, the date of the occurrence of the act or omission upon 
which the claim is based.'' \14\
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    \14\ Proposed NASD Rule 10304(a)(2) would state: ``The 
eligibility period will not be extended during any period in which a 
responding party fraudulently concealed facts from the claimant.''
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    6. Does this definition of ``occurrence or event'' require more 
specificity?
    7. Is the language of the proposed rule change sufficiently clear 
to allow the Director to determine that a claim is eligible when the 
allegations that form the basis of the claim occurred within the six-
year time limitation if they are related to a transaction that occurred 
more than six years ago?
    Statutes of limitations for claims under the federal securities 
laws generally require that a plaintiff commence its action within one 
year after the discovery of the facts that constitute the violation and 
within three years after the occurrence of such violation.\15\ Proposed 
NASD Rule 10304(d)(1) would provide: ``All statutes of limitation are 
extended from the time a Statement of Claim is filed until 45 days 
after the Director serves a decision

[[Page 19467]]

on eligibility or the Association no longer has jurisdiction over a 
claim, whichever is later. The parties agree that they will not assert 
a statute of limitations defense in court that is inconsistent with 
this subparagraph.''\16\
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    \15\ See, e.g., section 9(e) of the Act, 15 U.S.C. 78i(e); 
section 18(c) of the Act, 15 U.S.C. 78r(c); section 13 of the 
Securities Act of 1933, 15 U.S.C. 77m; Lampf, Pleva, Lipkind, Prupis 
& Petigrow v. Gilbertson, 501 U.S. 350 (1991) (adopting Section 9(e) 
limitation period for claims implied under Section 10(b) of the Act, 
15 U.S.C. 78j(b)). But see, e.g., Section 16(b) of the Act, 15 
U.S.C. 78p(b) (claims for disgorgement of unlawful profits must be 
brought within two years after the date such profit was realized); 
Section 20A(b)(4) of the Act, 15 U.S.C. 78t-1 (private action based 
on liability to contemporaneous traders for insider trading must be 
brought within five years after the date of the last transaction 
that is the subject of the violation).
    \16\ Current NASD Rule 10307(a) provides: ``Where permitted by 
applicable law, the time limitations which would otherwise run or 
accrue for the institution of legal proceedings shall be tolled 
where a duly executed Submission Agreement is filed by the 
Claimant(s). The tolling shall continue for such period as the 
Association shall retain jurisdiction upon the matter submitted.'' 
This provision would be replaced by proposed NASD Rule 10304(d)(1).
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    8. Do proposed NASD Rule 10304(d)(1) and the proposed amendments to 
NASD Rule 3110(f) provide reasonable assurances to the parties 
regarding the possibility that a statute of limitations could expire 
during the period of time in which the Director is making an 
eligibility determination?
    9. Should proposed NASD Rule 10304 be amended to provide that a 
claimant may request an expedited determination of eligibility where 
the claimant has concerns regarding the possible expiration of a 
statute of limitations?
* * * * *
    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD. All 2 
submissions should refer to File No. SR-NASD-97-44 and should be 
submitted by May 10, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9586 Filed 4-18-02; 8:45 am]
BILLING CODE 8010-01-P