[Federal Register Volume 74, Number 95 (Tuesday, May 19, 2009)]
[Notices]
[Pages 23462-23464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-11608]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59906; File No. SR-FINRA-2009-013]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change To 
Amend the Tolling Provisions in Rules 12206 and 13206 of the Codes of 
Arbitration Procedure for Customer and Industry Disputes

May 12, 2009.
    On March 11, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) 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''),\1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on April 7, 2009.\3\ The Commission received five 
comments on the proposed rule change.\4\ This order approves the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59672 (April 1, 
2009), 74 FR 15806 (April 7, 2009).
    \4\ See letters from: (1) Seth E. Lipner, Professor of Law, 
Zicklin School of Business, Baruch College, dated April 3, 2009 
(``Lipner letter''); (2) Joseph M. Licare, St. John's University 
School of Law, Securities Arbitration Clinic, to Elizabeth M. 
Murphy, Secretary, Commission, dated April 28, 2009 (``Securities 
Arbitration Clinic letter''); (3) Brian N. Smiley, Esquire, 
President, Public Investors Arbitration Bar Association, to 
Elizabeth M. Murphy, Secretary, Commission, dated April 28, 2009 
(``PIABA letter''); (4) Steven B. Caruso, Maddox Hargett & Caruso, 
P.C., dated April 29, 2009 (``Caruso letter''); and 5) Scot 
Bernstein, dated May 1, 2009 (``Bernstein letter'').
---------------------------------------------------------------------------

I. Description of the Proposed Rule Change

    FINRA proposed to amend the tolling provisions in Rules 12206 and 
13206 of the Code of Arbitration Procedure for Customer Disputes 
(``Customer Code'') and for Industry Disputes (``Industry Code''), 
respectively, to clarify that the rules toll the applicable statutes of 
limitation when a person files an arbitration claim with FINRA.
    Currently, Rule 12206, the ``eligibility rule,'' provides that, 
``no claim shall be eligible for submission to arbitration under the 
Code where six years have elapsed from the occurrence or event giving 
rise to the claim.'' \5\ The eligibility rule does not extend 
applicable statutes of limitation, but Rule 12206(c) does provide that, 
``where permitted by applicable law, when a claimant files a statement 
of claim in arbitration, any time limits for the filing of the claim in 
court will be tolled while FINRA retains jurisdiction of the claim.'' 
\6\ This means that, where permitted by applicable law, state statutes 
of limitation will be tolled (i.e., temporarily suspended) when a 
person files an arbitration claim with FINRA.
---------------------------------------------------------------------------

    \5\ FINRA describes the eligibility rule using the rule number 
from the Customer Code for simplicity. However, the proposal also 
applies to the identical eligibility rule of the Industry Code. See 
Rule 13206.
    \6\ See also Rule 13206(c) of the Industry Code.
---------------------------------------------------------------------------

    For many years, FINRA has interpreted the rule to mean that any 
applicable statutes of limitation would be tolled in all cases when a 
person files an arbitration claim with FINRA. In Friedman v. Wheat 
First Securities, Inc., however, the court found that the phrase 
``where permitted by applicable law,'' means that state or federal law, 
as applicable, must permit tolling expressly, or the period will not be 
tolled.\7\ In light of the court's interpretation of the phrase and the 
negative effect it could have on investors' arbitration claims, FINRA 
proposed to remove the phrase, ``where permitted by applicable law,'' 
from Rules 12206(c) and 13206(c) to make tolling automatic as part of 
the arbitration agreement.
---------------------------------------------------------------------------

    \7\ 64 F. Supp. 2d 338 (S.D.N.Y. 1999). The case involved claims 
under Section 10(b) of the Act.
---------------------------------------------------------------------------

    The Friedman court granted the defendant's request to dismiss the 
plaintiff's complaint on statute of limitations grounds. In arguing 
against dismissal, the plaintiff sought to rely on old Rule 10307(a) 
\8\ of the Code of Arbitration Procedure, which was updated and is 
currently designated as Rules 12206(c) and 13206(c) of the Customer 
Code and Industry Code, respectively, to support his position that

[[Page 23463]]

filing an arbitration claim tolls the applicable statute of 
limitations.\9\ The court determined, however, that the language of old 
Rule 10307(a) does not toll the statute of limitations unless such 
tolling is ``permitted by applicable law.'' \10\ After further 
analysis, the court found that no federal or state statute tolled the 
applicable statute of limitations and granted the defendant's dismissal 
request.\11\
---------------------------------------------------------------------------

    \8\ Rule 10307(a) (Tolling of Time Limitation(s) for the 
Institution of Legal Proceedings and Extension of Time Limitation(s) 
for Submission to Arbitration) states in relevant part that:
    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.
    \9\ 64 F. Supp. 2d at 343.
    \10\ Id.
    \11\ Id. at 347.
---------------------------------------------------------------------------

    Other courts have reached the same conclusion in interpreting old 
Rule 10307(a) and the phrase ``where permitted by law.'' In Individual 
Securities v. Ross,\12\ the plaintiff, in appealing a judgment of a New 
York district court that dismissed the complaint as time-barred, 
claimed that the statute of limitations was tolled while his matter was 
in arbitration with then-NASD.\13\ The court cited old Rule 10307(a) 
and noted that the ``where permitted by law'' language referred to the 
applicable law in New York, which prevented tolling of the limitations 
period.\14\ In Rampersad v. Deutsche Bank Securities, Inc.,\15\ the 
court, citing Friedman, determined that, used in a similar context, the 
phrase meant that federal law, not state law, governs the availability 
of tolling the limitations period in a Section 10(b) cause of 
action.\16\
---------------------------------------------------------------------------

    \12\ 1998 U.S. App. Lexis 12618.
    \13\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to FINRA in connection with the 
consolidation of the member firm regulatory functions of NASD and 
NYSE Regulation, Inc. See Securities Exchange Act Release No. 56146 
(July 26, 2007), 72 FR 42190 (August 1, 2007) (SR-NASD-2007-053).
    \14\ Id.
    \15\ 2004 U.S. Dist. Lexis 5031. The case also involved claims 
under Section 10(b) of the Securities Exchange Act of 1934.
    \16\ Id. In this case, the plaintiff filed an arbitration claim 
against the defendants at the New York Stock Exchange, Inc. 
(``NYSE''). The plaintiff argued that the limitations period should 
have been tolled under New York law for the period during which the 
arbitration was pending, and cited NYSE Rule 606(a), which is 
similar to old Rule 10307(a), and states in pertinent part:
    Where permitted by law, the time limitation(s) which would 
otherwise run or accrue for the institution of legal proceedings, 
shall be tolled when a duly executed Submission Agreement is filed 
by the claimants.
---------------------------------------------------------------------------

    FINRA is concerned that courts may begin citing this interpretation 
to dismiss claims that would otherwise be permitted under the 
eligibility rule.\17\ FINRA does not believe this outcome would be 
consistent with the original intent of the tolling provision or of 
amendments to the eligibility rule that allow customers to take their 
claims to court if their claims are dismissed in arbitration on 
eligibility grounds.\18\ Rather, FINRA believes that, in such a 
situation, the rule should be read to provide that a firm or associated 
person has implicitly agreed to suspend any statute of limitations 
defense for the time period that the matter was in FINRA's 
jurisdiction. Amending the eligibility rule is intended to make this 
clear.
---------------------------------------------------------------------------

    \17\ The rule states that ``dismissal of a claim under this rule 
does not prohibit a party from pursuing the claim in court. By 
filing a motion to dismiss a claim under this rule, the moving party 
agrees that if the panel dismisses a claim under this rule, the non-
moving party may withdraw any remaining related claims without 
prejudice and may pursue all of the claims in court.'' See also Rule 
13206(b).
    \18\ See Securities Exchange Act Release No. 50714 (November 22, 
2004), 69 FR 69971 (December 1, 2004) (SR-NASD-2001-101).
---------------------------------------------------------------------------

    Moreover, FINRA is concerned that the Friedman interpretation could 
limit or foreclose customers' access to other judicial forums to 
address their disputes, which would be an unfair result. Most brokerage 
firms require customers to arbitrate their disputes, a process that can 
take more than a year. Customers may be disadvantaged in a subsequent 
court proceeding if the panel dismisses the arbitration case on 
eligibility grounds and the statute of limitations is not tolled for 
the period of time that the customers were in arbitration. In addition 
to being an unfair result, FINRA believes this would undermine the 
intent of the eligibility rule, which gives customers the option of 
taking their claims to court when a case is dismissed on eligibility 
grounds.
    Therefore, FINRA proposed to delete the phrase ``where permitted by 
applicable law'' from Rules 12206(c) and 13206(c). FINRA noted that the 
Friedman interpretation suggests that, but for the phrase, the rule 
would be read as an explicit agreement between the parties to toll the 
statute of limitations period.\19\ FINRA stated that it believes that 
the proposed rule change would leave the parties in the same position 
in court as they were at the start of the arbitration with regard to 
any statutes of limitation: the time period before the claim was filed 
in arbitration would not be extended by the proposed changes, but 
applicable statutes of limitation would not run while the matter was in 
arbitration.
---------------------------------------------------------------------------

    \19\ Friedman, 64 F. Supp. 2d 338, 343 n.4 (1999). The court 
indicates that it likely would accept the amended language as 
representing an agreement of the parties:
    The precise meaning of Rule 10307(a) is not entirely clear. If 
the phrase ``where permitted by applicable law'' did not precede the 
remainder of the paragraph, the rule would simply be read as an 
explicit agreement between the parties to toll the limitations 
period, regardless of what the applicable state or federal tolling 
principles provide. However, by including the phrase the drafters 
seemed to limit tolling to situations in which tolling is expressly 
permitted by applicable law, thereby making an explicit agreement 
between the parties unnecessary.
---------------------------------------------------------------------------

II. Summary of Comments

    The Commission received five comments in response to the proposed 
rule change, all of which supported the proposal.\20\ One commenter 
stated that FINRA has proposed equitable amendments and should be 
commended for its thoughtful treatment of the tolling issues, and that 
the Commission should approve the amendments as written and without 
delay.\21\ Another commenter noted that an automatic tolling of the 
applicable statute of limitations, if any, will protect the public 
interest and preserve fairness in the arbitration process.\22\
---------------------------------------------------------------------------

    \20\ Supra note 4.
    \21\ See PIABA letter. One commenter, while supporting the 
proposed rule change, suggested that the words ``and for thirty days 
thereafter'' should be added to the proposed rule amendment so that 
the final sentence of Rule 13206(c) would read: ``* * * any time 
limits for the filing of the claim in court will be tolled while 
FINRA retains jurisdiction of the claim and for thirty days 
thereafter.'' See Bernstein letter. FINRA declined to make that 
change, stating that it believes the suggested amendment to the 
proposed rule change would contradict the rule, as currently 
drafted, by extending applicable statutes of limitations by 30 days. 
The proposed rule change was intended to clarify FINRA's 
interpretation of Rule 12206(c) that any applicable statute of 
limitations would be tolled in all cases when a person files an 
arbitration claim with FINRA. However, FINRA did not intend to 
extend the tolling protection beyond the completion of the 
arbitration case. For these reasons, FINRA declines to amend the 
proposal as suggested. Email from Mignon McLemore, FINRA (May 12, 
2009).
    \22\ See Caruso letter. See also the Securities Arbitration 
Clinic letter (the proposed changes will ensure that the intent of 
the rule is respected), and the Lipner letter (investors who submit 
to arbitration should benefit for the tolling of the statute of 
limitations in the event that the claim is non-arbitrable and must 
later be heard in court).
---------------------------------------------------------------------------

III. Discussion and Findings

    After careful review of the proposed rule change, the Commission 
finds that the proposed rule change is consistent with the rules and 
regulations thereunder that are applicable to a national securities 
association \23\\\ and in particular, with Section 15A(b)(6) of the 
Act,\24\ in that it is designed to promote just and equitable 
principles of trade, facilitate transactions in securities, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest. The Commission believes that the proposal is consistent with 
Section

[[Page 23464]]

15A(b)(6) of the Act because the proposed rule change will preserve 
fairness in the arbitration process by ensuring that investors maintain 
their right to have their claims heard in court if their arbitration 
cases are dismissed on eligibility grounds by tolling the applicable 
statutes of limitation while their disputes are in arbitration.
---------------------------------------------------------------------------

    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 17c(f).
    \24\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-FINRA-2009-013) be, and hereby is, 
approved.\25\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-11608 Filed 5-18-09; 8:45 am]
BILLING CODE 8010-01-P