[Federal Register Volume 69, Number 230 (Wednesday, December 1, 2004)]
[Notices]
[Pages 69971-69973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26460]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50714; File No. SR-NASD-2003-101]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change, and 
Notice of Filing and Order Granting Accelerated Approval to Amendments 
No. 1 and 2 Thereto Relating to Time Limits for Submission of Claims in 
Arbitration

November 22, 2004.

I. Introduction

    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''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Rule 10304 of the NASD Code of 
Arbitration Procedure (``Code'') to clarify, among other effects of the 
rule, that arbitration eligibility determinations are made by 
arbitrators.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on August 1, 2003.\3\ The Commission received eight comment 
letters on the proposal.\4\ On September 23, 2003, NASD filed a 
response to the comment letters received as of that date and Amendment 
No. 1 to the proposed rule change.\5\ On February 3, 2004, NASD filed 
Amendment No. 2 to the proposed rule change.\6\ This order approves the 
proposed rule change, and issues notice of and grants accelerated 
approval to Amendments No. 1 and No. 2.
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    \3\ See Release No. 34-48225 (July 7, 2002), 68 FR 45299 (August 
1, 2003).
    \4\ See letters to Jonathan G. Katz, Secretary, Commission, from 
J. Pat Sadler, President, Public Investors Arbitration Bar 
Association, dated August 18, 2003 (``PIABA Letter''); Stephen G. 
Sneeringer, Senior Vice President and Counsel, A.G. Edwards & Sons, 
Inc., dated August 22, 2003 (``A.G. Edwards Letter''); Gregory M. 
Scanlon, Vice President & Senior Corporate Counsel, Charles Schwab & 
Co., Inc., dated August 26, 2003 (``Schwab Letter''); Herbert E. 
Pounds, Jr., Law Offices of Herbert E. Pounds, Jr., P.C., dated 
November 1, 2004 (``Pounds Letter''); James D. Keeney, P.A., dated 
November 8, 2004 (``Second Keeney Letter''); William S. Sheperd, 
Sheperd Smith & Edwards, L.L.P., dated November 10, 2004 (``Sheperd 
Letter'') Rosemary J. Shockman, President, Public Investors 
Arbitration Bar Association, dated November 1, 2004 (``Second PIABA 
Letter''); and letter from James D. Keeney, P.A., to Mr. Robert 
Love, Division of Market Regulation (``Division''), Commission, 
dated July 17, 2003 (``Keeney Letter'').
    \5\ See Letter from Laura Gansler, Counsel, NASD Dispute 
Resolution, Inc., to Florence Harmon, Senior Special Counsel, 
Division, Commission, dated September 23, 2003, available at http://www.nasdadr.com/rule_filings_index03.asp#03-101 (``Amendment No. 
1'').
    \6\ See Letter from Laura Gansler, Counsel, NASD Dispute 
Resolution, Inc., to Catherine McGuire, Chief Counsel, Division, 
Commission, dated February 3, 2004, available at http://www.nasdadr.com/rule_filings_index03.asp#03-101 (``Amendment No. 
2'').
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II. Description of the Proposal

A. Text of the Proposed Rule Change

    NASD proposes to amend its rules governing arbitration to clarify 
and limit the effect of its six-year time limitation for the submission 
of claims. Below is the text of the proposed rule change. Proposed new 
language is italicized and proposed deletions are in [brackets].
* * * * *
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 of dispute, 
claim, or controversy. The panel will resolve any questions regarding 
the eligibility of a claim under this Rule.
    (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.
    (c) 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.] ; nor shall the six-year time limit 
on the submission of claims apply to any claim that is directed to 
arbitration by a court of competent jurisdiction upon request of a 
member or associated person.
* * * * *

B. Description of the Proposed Rule Change

    NASD has proposed to amend Rule 10304 of the Code to clarify 
certain of its effects, particularly in light of the ruling of the 
United States Supreme Court in Howsam vs. Dean Witter Reynolds, Inc.\7\ 
In Howsam, the Court held that the issue of whether a claim is 
ineligible for arbitration under Rule 10304 of the Code is 
presumptively a matter for arbitrators to decide. Rule 10304 of the 
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. Rule 10304 of the Code, however, currently 
does not state expressly whether the eligibility of a claim is 
determined by arbitrators or by the courts. In its proposal, NASD 
explained that under current NASD practice, arbitrators resolve 
questions concerning whether a particular claim falls with the six-year 
time limit, but noted that the issue has generated a significant amount 
of collateral litigation with differing results, leading to uncertainty 
and confusion among forum users until the Supreme Court's decision in 
Howsam.
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    \7\ 537 U.S. 79 (Dec. 10, 2002).
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    NASD therefore has proposed several amendments to Rule 10304 of the 
Code. First, NASD proposes to amend Rule 10304 of the Code to state 
explicitly that eligibility determinations are made by the arbitrators. 
Second, NASD proposes to amend the provision in the current eligibility 
rule to provide that the rule does not apply to claims ordered to 
arbitration by a court at a member's or associated person's request. 
Finally, NASD proposes to amend Rule 10304 of the Code to provide that 
by requesting dismissal of a claim on eligibility grounds in the NASD 
forum, the requesting party is agreeing that the party that filed the 
dismissed claim may withdraw all related claims without prejudice and 
may pursue all of the claims in court. Moreover, by a companion rule 
filing being approved today, Rule 10304 of the Code and all other NASD 
arbitration rules would be incorporated into predispute arbitration 
agreements governing arbitrations proceedings that take place in NASD 
forums.\8\
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    \8\ See Release No. 34-50713.

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[[Page 69972]]

III. Summary of Comments and NASD's Response

    The Commission received eight comments on the proposal.\9\ PIABA 
generally supported the proposed rule change as ``far superior to the 
rule in its present form,'' although PIABA would prefer elimination of 
Rule 10304 of the Code.\10\ PIABA suggested amending the rule, however, 
to provide that motions to dismiss a claim under the rule be filed 
within 30 days of appointment of an arbitration panels.\11\ NASD 
responded that arbitrators, rather than the Code, should set deadlines 
for raising and responding to eligibility challenges on a case-by-case 
basis, generally in Initial Prehearing Conferences, given the varying 
complexity of cases.\12\
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    \9\ See note 4, supra.
    \10\ See PIABA Letter.
    \11\ Id.
    \12\ See Amendment No. 1. Due to a misplaced bracket in the 
original filing, NASD deleted the entire last sentence of Rule 
10304(a) of the Code. Rather, NASD had intended to delete only the 
following text: ``nor shall it apply to any case which is directed 
to arbitration by a court of competent jurisdiction.'' NASD 
corrected this typographical error in Amendment No. 1. In Amendment 
No. 2, this text was moved to Rule 10304(c) and further amended in 
response to certain comments.
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    Mr. Keeney objected to the proposed rule change, arguing that the 
current six-year eligibility rule should be eliminated entirely, on the 
basis that it is ``hostile to investors.'' \13\ Mr. Keeney also took 
issue with the proposed amendment to allow parties whose claims are 
dismissed under Rule 10304 of the Code to withdraw any remaining 
related claims and pursue them in court, claiming that this provision 
forces claimants to choose between bifurcating or abandoning older 
claims, or pursuing the entire case in court.\14\ NASD responded to 
these concerns, disagreeing that the rule is ``hostile to investors'' 
and, in contrast, stated that the purpose of the rule is to provide 
claimants with more choices with respect to where they can pursue 
related claims, a result that is in the best interest of investors.\15\ 
Finally, Mr. Keeney objected to the elimination of the provision in 
Rule 10304 of the Code that the rule would not apply to claims ordered 
to arbitration by a court, on the basis that this would allow industry 
parties to ``whipsaw'' claimants between court and arbitration.\16\ In 
response, NASD is proposing to amend the exemption, rather than delete 
it, to provide that the six-year time limit would not apply to claims 
ordered to arbitration by a court at a member's or associated person's 
request.\17\
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    \13\ See Keeney Letter.
    \14\ Id.
    \15\ See Amendment No. 1
    \16\ See Keeney Letter.
    \17\ Mr. Keeney's concern also would be addressed in part by SR-
NASD-98-74, approved today in Release No. 34-50713, which would 
amend NASD Rule 3110 so that a predispute arbitration agreement 
would prohibit members from seeking to compel arbitration of some 
but not all of a customer's court-filed claims, thus preventing 
members from forcing customers to litigate in two forums. NASD Rule 
3110 also explicitly incorporates the rules of the arbitration forum 
in which the claim is filed into the predispute arbitration 
agreement. See supra n. 8.
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    Schwab also opposed the proposed rule change. Schwab contended that 
the anti-bifurcation provision would encourage claimants intentionally 
to include ineligible claims in their Statement of Claim, resulting in 
respondents having to choose between arbitrating stale claims, or 
seeking dismissal of an older claim based on eligibility while having 
to litigate remaining claims in court.\18\ NASD acknowledged that there 
was a theoretical potential for abuse of this provision, but responded 
that the benefits of eliminating the issue of claimants being forced to 
bifurcate claims (as under the current rule) outweighs this 
concern.\19\ NASD also noted that the anti-bifurcation provision 
applies to related claims, and rejected Schwab's assertion that the 
term ``related claims'' should be defined in the rule, maintaining that 
this determination is most properly made by arbitrators on a case-by-
case basis.\20\ In addition, Schwab noted that Rule 10304 of the Code 
does not expressly state that only a respondent may request dismissal 
of a claim based on eligibility, leading to the possibility that a 
claimant could request such a dismissal to pursue related claims in 
court.\21\ NASD responded that this is not a practical concern because 
the rule change is not intended to apply to parties who move to dismiss 
their own claims.\22\
    A.G. Edwards objected to the elimination of the portion of Rule 
10304(a) of the Code that states that ``This Rule shall not extend 
applicable statutes of limitations. * * *''\23\ NASD responded by 
explaining that this comment resulted from a typographical error in the 
originally filed proposed rule change. NASD had intended to leave this 
phrase in Rule 10304(a) of the Code, while deleting only the text that 
followed: ``nor shall it apply to any case which is directed to 
arbitration by a court of competent jurisdiction.'' A misplaced bracket 
made it appear as though NASD intended to delete the entire 
sentence.\24\ NASD has corrected this error in Amendment No. 1 and, in 
Amendment No. 2, further amended this provision in response to Mr. 
Keeney's comments, as discussed above.\25\
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    \18\ See Schwab Letter.
    \19\ See Amendment No. 1.
    \20\ See Amendment No. 1.
    \21\ See Schwab Letter.
    \22\ See Amendment No. 1.
    \23\ See A.G. Edwards Letter.
    \24\ See Amendment No. 1; Amendment No. 2.
    \25\ ID.
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    Mr. Pounds, while not supportive of every aspect of the rule 
change, urged approval of the rule as soon as possible to prevent 
claimants from ending up without a forum in which to bring their 
claims.\26\ In second comment letters, Mr. Keeney and PIABA urged a 
prompt resolution of this rule filing.\27\ Mr. Sheperd similarly urged 
a prompt resolution of this rule filing.\28\
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    \26\ See Pounds Letter.
    \27\ See Second Keeney Letter and Second PIABA Letter.
    \28\ See Sheperd Letter.
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IV. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association \29\ and, in particular, the requirements of 
section 15A of the Act \30\ and the rules and regulations thereunder. 
The Commission finds specifically, that the proposed rule change, as 
amended, is consistent with section 15A(b)(6) of the Act,\31\ which 
requires, among other things, that the rules of an association 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.\32\
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    \29\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formations. 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78o-3.
    \31\ 15 U.SC. 78o-3(b)(6).
    \32\ Id.
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    The Commission believes that the proposed rule is an appropriate 
response to the U.S. Supreme Court's holding in Howsam and clarifies 
Rule 10304 of the Code in a manner consistent with the Act. The 
specific amendments to Rule 10304 of the Code proposed by NASD--that 
questions of eligibility are to be resolved by the arbitration panel, 
that dismissal under the rule will not preclude later claims in court, 
and that respondents may not force claimants to bifurcate their claims 
under the rule--provide needed guidance to parties arbitrating disputes 
in the NASD's forum. The Commission believes that these amendments will

[[Page 69973]]

provide certainty, reduce the cost and delay caused by collateral 
litigation, and streamline the NASD arbitration process.
    Further, the Commission has carefully considered the suggestions 
and concerns submitted by commenters and has concluded that NASD has 
responded appropriately to them. In response to PIABA's suggestion for 
a 30-day deadline to file a motion to dismiss under Rule 10304 of the 
Code, the Commission finds consistent with the Act the NASD's position 
that arbitrators, rather than the Code, should set deadlines for 
raising and responding to eligibility challenges on a case-by-case 
basis.
    The Commission also finds consistent with the Act the NASD's 
position allowing parties whose claims are dismissed under Rule 10304 
of the Code to withdraw any remaining related claims and to pursue all 
of the claims in court. Both Mr. Keeney and Schwab have objected to 
this provision of Rule 10304 of the Code for different reasons. Mr. 
Keeney has asserted that this provision would force claimants to choose 
between bifurcating or abandoning older claims, or pursuing the entire 
case in court. Schwab has asserted that this provision may result in 
respondents having to choose between arbitrating stale claims, or 
seeking dismissal of an older claim based on eligibility while having 
to litigate remaining claims in court. While claimants would have to 
address statute of limitations issues if their claims are ineligible 
for arbitration, and respondents would have to address possible 
bifurcation if they request dismissal under Rule 10304 of the Code, the 
Commission finds that Rule 10304 of the Code, as proposed, is 
consistent with the Act. The Commission observes that the term 
``related claims'' is intended to be interpreted broadly, given the 
purposes of the rule and the parallel language in a companion rule 
filing approved today.\33\
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    \33\ See supra n. 8.
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    The Commission also finds that the proposed amendment of the Rule's 
provision that the six year time limit does not pertain to claims 
ordered to arbitration by a court at a member's or associated person's 
request is consistent with the Act. The provision limits the potential 
litigation strategies that could impede the resolution of disputes and 
would address the concern that industry parties could force claimants 
to litigate in two forums. Moreover, the Commission also notes that 
pursuant to the companion filing approved today, the specific 
requirements of this and other provisions of the Code explicitly would 
be incorporated into the parties' predispute arbitration agreement.\34\ 
and would be given effect under applicable law.
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    \34\ Id.
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    The Commission finds good cause for accelerating approval of 
Amendment Nos. 1 and 2 prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. Amendment No. 1 
merely corrects a typographical error. Amendment No. 2, as noted above, 
amends Rule 10304(c), so that concerns of claimants or industry parties 
abusing Rule 10304, as amended, are addressed appropriately. 
Furthermore, concurrent approval of Amendment Nos. 1 and 2 will enable 
NASD to announce promptly the final rules, in conjunction with those 
being approved today in the companion filing, which changes would 
incorporate Rule 10304, as amended, into any predispute arbitration 
agreement governing proceedings held in a NASD forum. Concurrent 
approval of Amendment Nos. 1 and 2 and SR-NASD-2003-101 with the 
companion rule filing will lessen member confusion as to the final 
requirements of both rule filings, allow their effective dates to be 
the same, and thereby permit members to make the necessary changes to 
comply with them in a timely fashion.\35\
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    \35\ The Commission further notes that both rule filings and 
amendments thereto have been available since their respective filing 
dates on www.nasdadr.com.
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V. 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#7e0c0b121b531d1113131b100a0d3e0d1b1d50191108"><span class="__cf_email__" data-cfemail="fc8e899099d19f9391919992888fbc8f999fd29b938a">[email protected]</span></a>. Please include 
file Number SR-NASD-2003-101 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submission should refer to file Number SR-NASD-2003-101. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rule/sro.shtml). 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 Pubic Reference Section, 450 Fifth 
Street, NW., Washington DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASD-2003-101 and should be submitted on or before December 22, 2004.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\36\ that the proposed rule change (File No. SR-NASD-2003-101) be, 
and it hereby is, approved and Amendment Nos. 1 and 2 are approved on 
an accelerated basis.
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    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\37\
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    \37\ CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-26460 Filed 11-30-04; 8:45 am]
BILLING CODE 8010-01-M


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