Federal Register / Vol. 69, No. 230 / Wednesday, December 1, 2004 / Notices 69971

8 15 U.S.C. 78s(b)(2).

9 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Release No. 34–48225 (July 7, 2002), 68 FR 

45299 (August 1, 2003).

4See 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’’).

5See 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’’).

6See 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’’).

7 537 U.S. 79 (Dec. 10, 2002).

8See Release No. 34–50713.

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act,8 that the 

proposed rule change (File No. SR–

CBOE–2004–25), as amended, be, and it 

hereby is, approved.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.9

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. E4–3407 Filed 11–30–04; 8:45 am] 

BILLING CODE 8010–01–P

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.

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.

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.

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

69972 Federal Register / Vol. 69, No. 230 / Wednesday, December 1, 2004 / Notices 

9See note 4, supra.

10See PIABA Letter.

11 Id.

12See 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.

13See Keeney Letter.

14 Id.

15See Amendment No. 1

16See Keeney Letter.

17Mr. 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. 18See Schwab Letter.

19See Amendment No. 1.

20See Amendment No. 1.

21See Schwab Letter.

22See Amendment No. 1.

23See A.G. Edwards Letter.

24See Amendment No. 1; Amendment No. 2.

25 ID.

26See Pounds Letter.

27See Second Keeney Letter and Second PIABA 

Letter.

28See Sheperd Letter.

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.

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

Mr. Keeney objected to the proposed 

rule change, arguing that the current sixyear 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

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

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

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

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 

Federal Register / Vol. 69, No. 230 / Wednesday, December 1, 2004 / Notices 69973

33See supra n. 8.

34 Id.

35The Commission further notes that both rule 

filings and amendments thereto have been available 

since their respective filing dates on 

www.nasdadr.com.

36 15 U.S.C. 78s(b)(2).

37CFR 200.30–3(a)(12).

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

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.

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

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 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include file 

Number SR–NASD–2003–101 on the 

subject line. 

Paper Comments 

• 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.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.37

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–26460 Filed 11–30–04; 8:45 am] 

BILLING CODE 8010–01–M