[Federal Register Volume 74, Number 65 (Tuesday, April 7, 2009)]
[Notices]
[Pages 15806-15808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-7773]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59672; File No. SR-FINRA-2009-013]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing 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

April 1, 2009.
    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 
Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/a 
National Association of Securities Dealers, Inc. (``NASD'')) filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') on 
March 11, 2009, the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by FINRA. 
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

    FINRA Dispute Resolution is proposing 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.
    Below is the text of the proposed rule change. Proposed deletions 
are in brackets.
* * * * *
12206. Time Limits
    (a)-(b) No change.
(c) Effect of Rule on Time Limits for Filing Claim in Court
    The rule does not extend applicable statutes of limitations; 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. However, 
[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.
    (d) No change.
* * * * *
13206. Time Limits
    (a)-(b) No change.
(c) Effect of Rule on Time Limits for Filing Claim in Court
    The rule does not extend applicable statutes of limitations; 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. However, 
[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.
    (d) No change.
* * * * *

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

    In its filing with the Commission, FINRA 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. FINRA 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
    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.'' \3\ 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.'' 
\4\ 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.
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    \3\ 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.
    \4\ See also Rule 13206(c) of the Industry Code.
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    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.\5\ In light of the court's interpretation of the phrase and the 
negative effect it could have on investors' arbitration claims, FINRA 
is proposing 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.
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    \5\ 64 F. Supp. 2d 338 (S.D.N.Y. 1999). The case involved claims 
under Section 10(b) of the Securities Exchange Act of 1934.
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    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) 
\6\ of the Code of

[[Page 15807]]

Arbitration Procedure, which was updated and is currently designated as 
Rules 12206(c) and 13206(c), to support his position that filing an 
arbitration claim tolls the applicable statute of limitations.\7\ 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.'' \8\ 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.\9\
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    \6\ 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.
    \7\ 64 F. Supp. 2d at 343.
    \8\ Id.
    \9\ Id. at 347.
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    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,\10\ 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.\11\ 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.\12\ In Rampersad v. Deutsche Bank Securities, Inc.,\13\ 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.\14\
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    \10\ 1998 U.S. App. Lexis 12618.
    \11\ 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 Rel. No. 56146 
(July 26, 2007), 72 FR 42190 (August 1, 2007) (SR-NASD-2007-053).
    \12\ Id.
    \13\ 2004 U.S. Dist. Lexis 5031. The case also involved claims 
under Section 10(b) of the Securities Exchange Act of 1934.
    \14\ 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 applicable 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 Claimant(s).
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    FINRA is concerned that courts may begin citing this interpretation 
to dismiss claims filed in court, as would otherwise be permitted under 
the eligibility rule.\15\ 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.\16\ 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, as proposed, would make 
this clear.
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    \15\ 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).
    \16\ See Securities Exchange Act Rel. No. 50714 (November 22, 
2004), 69 FR 69971 (December 1, 2004) (SR-NASD-2001-101).
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    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 is proposing to delete the phrase ``where 
permitted by applicable law'' from Rules 12206(c) and 13206(c). FINRA 
notes 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.\17\ FINRA 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.
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    \17\ 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.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\18\ 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. The proposed rule change is consistent with 
FINRA's statutory obligations under the Act to protect investors and 
the public interest because the proposal would preserve fairness in the 
arbitration process by ensuring that investors maintain their right to 
have their claims heard in court by tolling the applicable statutes of 
limitation while the dispute is in arbitration.
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    \18\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA 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, as amended.

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 by FINRA.

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

[[Page 15808]]

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. 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#a1d3d4cdc48cc2ceccccc4cfd5d2e1d2c4c28fc6ced7"><span class="__cf_email__" data-cfemail="2d5f584148004e4240404843595e6d5e484e034a425b">[email protected]</span></a>. Please include 
File Number SR-FINRA-2009-013 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2009-013. 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/rules/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 Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. 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 the File 
Number SR-FINRA-2009-013 and should be submitted on or before April 28, 
2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-7773 Filed 4-6-09; 8:45 am]
BILLING CODE 8010-01-P


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