[Federal Register Volume 68, Number 148 (Friday, August 1, 2003)]
[Notices]
[Pages 45299-45300]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19557]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48225; File No. SR-NASD-2003-101]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Time Limits for Submission of Claims in Arbitration

July 25, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 19, 2003, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly-owned subsidiary, 
NASD Dispute Resolution, Inc. (``NASD Dispute Resolution'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II and III below, which Items have 
been prepared by NASD. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend the Rule 10304 of the NASD Code of 
Arbitration Procedure governing time limits for submission of claims in 
arbitration. Below is the text of the proposed rule change. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *
10000. Code of Arbitration Procedure
* * * * *
Rule 10304. Time Limitation Upon Submission
    (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. The panel will resolve any questions regarding 
the eligibility of a claim under this Rule. [This Rule shall not extend 
applicable statutes of limitations, nor shall it apply to any case 
which is directed to arbitration by a court of competent jurisdiction.]
    (b) Dismissal of a claim under this Rule does not prohibit a party 
from pursuing the claim in court. By requesting dismissal of a claim 
under this Rule, the requesting party agrees that if the panel 
dismisses a claim under the Rule, the party that filed the dismissed 
claim may withdraw any remaining related claims without prejudice and 
may pursue all of the claims in court.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. 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

1. Purpose
    Rule 10304 of the NASD Code of Arbitration Procedure (``Code'') 
provides that a claim is ineligible for arbitration in the NASD forum 
if six or more years have elapsed from the occurrence or event giving 
rise to the claim. The rule does not provide expressly whether the 
eligibility of a claim is determined by arbitrators or by the courts. 
Under current NASD practice, arbitrators resolve questions concerning 
whether a particular claim

[[Page 45300]]

falls within the six year time limit. However, this issue has generated 
a significant amount of collateral litigation, with a number of courts 
ruling that, in absence of more specific guidance from NASD, courts 
should determine the eligibility of a claim under the rule. Collateral 
litigation over the eligibility rule has been expensive and time-
consuming, and has caused uncertainty and confusion among forum users.
    In December 2002, the United States Supreme Court ruled in Howsam 
v. Dean Witter Reynolds, Inc.,\3\ that the issue of whether a claim is 
time-barred under Rule 10304 is presumptively a matter for arbitrators 
to decide. To conform the Code to the Court's ruling, and to provide 
additional notice and guidance to parties on this issue, NASD proposes 
to amend Rule 10304 to state explicitly that eligibility determinations 
are made by the arbitrators.
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    \3\ 537 U.S. 79 (Dec. 10, 2002).
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    Rulings that claims are ineligible under Rule 10304 have also 
generated significant collateral litigation. Some courts, relying on 
the election of remedies doctrine, have held that claims ineligible in 
arbitration may not be litigated in court. To make express that, under 
NASD rules, the ineligibility of a claim under Rule 10304 is not 
intended to prevent a party from filing the claim in court, NASD 
proposes to further amend Rule 10304 to make clear that dismissal of a 
claim on eligibility grounds is without prejudice to the parties' 
judicial rights and remedies.
    In addition, the current eligibility rule provides that the rule 
does not apply to claims ordered to arbitration by a court. This 
provision is now inconsistent with the Supreme Court's decision in 
Howsam that eligibility is an issue for the arbitrators, and not the 
courts, to resolve, as the effect of the provision would be that the 
eligibility rule could not be applied either by the court or the 
arbitrators to any claims compelled to arbitration by a court. 
Therefore, NASD proposes to delete this provision from Rule 10304.
    Finally, because this provision was intended to protect parties 
from having to litigate related claims in two forums at the same time, 
NASD also proposes to amend Rule 10304 to provide that by requesting 
dismissal of a claim on eligibility grounds in the NASD forum, the 
requesting party is agreeing that the claimant may withdraw all related 
claims without prejudice and may pursue all of the claims in court. 
This provision will provide significant protection against involuntary 
bifurcation of claims, but will continue to allow arbitrators to decide 
questions of eligibility under the Rule.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\4\ which requires, among 
other things, that the Association's rules must be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. NASD believes that, by clarifying the scope 
and application of Rule 10304, the proposed rule change will reduce the 
cost and delay caused by collateral litigation, and streamline the 
administration of arbitrations in NASD's forum.
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    \4\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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 the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 at 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 No. SR-NASD-2003-101 and 
should be submitted by August 26, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-19557 Filed 7-31-03; 8:45 am]
BILLING CODE 8010-01-P