Self-Regulatory Organizations; Notice of Filing of Amended Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to the Eligibility of Disputes for Arbitration

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34442; File No. SR-NASD-93-51]

Self-Regulatory Organizations; Notice of Filing of Amended

Proposed Rule Change by National Association of Securities Dealers,

Inc. Relating to the Eligibility of Disputes for Arbitration

July 26, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 15,

1994, the National Association of Securities Dealers, Inc. (``NASD'' or

``Association'') filed with the Securities and Exchange Commission

(``SEC'' or ``Commission'') the proposed rule change as described in

Items I, II, and III below, which Items have been prepared by the

NASD.\1\ The Commission is publishing this notice to solicit comments

on the proposed rule change from interested persons.

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\1\The NASD originally filed the proposed rule change on

September 21, 1993.

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The NASD is proposing to amend Part I, Section 3, and Part III,

Section 15 of the Code of Arbitration Procedure (``Code'') to permit

the Director to delegate the duties and responsibilities of the

Director and to permit the Director of Arbitration to make final

determinations regarding the eligibility of claims for arbitration

under the Code. Below is the text of the proposed rule change. Proposed

new language is italicized; proposed deletions are in brackets.

Code of Arbitration Procedure

Director of Arbitration

Sec. 3. The Board of Governors of the Association shall appoint a

Director of Arbitration (hereinafter ``Director'') who shall be charged

with the performance of all administrative duties and functions in

connection with matters submitted for arbitration pursuant to this

Code. The Director [He] shall be directly responsible to the National

Arbitration Committee and shall report to it at periodic intervals

established by the Committee and at such other times as called upon by

the Committee to do so. The duties and functions of the Director may be

delegated as appropriate by the Director. In the event of the

incapacitation, resignation, removal, or other permanent or indefinite

inability of the Director to perform the duties and responsibilities of

the Director, the President or an Executive Vice President of the

Association may appoint an interim Director.

* * * * *

[Time Limitation on Submission] Eligibility

Sec. 15 (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. This section shall not extend or limit

applicable statutes of limitations [nor shall it apply to any case

which is directed to arbitration by a court of competent jurisdiction].

(b) After the filing of a statement of claim, counterclaim, cross-

claim or third-party claim (hereinafter ``claim'') pursuant to Section

13 or 25 of the Code, the Director of Arbitration shall determine if

the claim is eligible for submission to arbitration by determining if

the claim alleges that less than six (6) years have elapsed between the

occurrence or event giving rise to the dispute, claim or controversy

and filing of the claim. If the claim does not state clearly, that less

than six (6) years have elapsed between the occurrence or event giving

rise to the dispute, claim or controversy and filing, the Director may

ask the claimant to modify the claim, within a time period set by the

Director, to so state. The Director will determine the eligibility of

the claim for submission to arbitration either on the basis of the

claim as stated in the original claim or, if modified, on the basis of

the modified claim.

(c) Following service of a claim, but prior to the earlier of (1)

the date the parties are notified of the appointment of the arbitrators

pursuant to Sections 13 or 19 of the Code, or (2) the date the Director

appoints an arbitrator to consider prehearing issues pursuant to

Section 32(e) of the Code, a responding party disputing the eligibility

of a claim shall, along with, or after, submitting an executed Uniform

Submission Agreement and any fees or deposits required under the Code,

submit a notice of objection to the Director of Arbitration supported

by statements of fact and documentary evidence asserting that more than

six (6) years have elapsed between the occurrence or event giving rise

to the dispute, claim or controversy and filing. The claimant and any

other party may respond to the notice of objection within the time

period set by the Director. The Director shall promptly determine on

the basis of the written record only, after considering any responses

timely submitted, if the claim is eligible for submission to

arbitration by determining if the disputing party's objections and

assertions regarding eligibility:

(i) contradict the allegations in the claim relating to

eligibility;

(ii) are supported by documentary evidence; and,

(iii) are not contradicted by other allegations which, if true,

would prevail.

(d) Any determination by the Director pursuant to subparagraph (b)

or (c) is final.

(e) Any determination by the Director pursuant to subparagraph (b)

or (c) that a claim is ineligible:

(i) shall not limit the right of any party to offer evidence

concerning the event or occurrence which was the basis of the

eligibility determination at any other stage of the proceeding on the

claim for any purpose other than contesting the eligibility of the

claim determined to be ineligible;

(ii) shall not bar a claimant from bringing the claim before a

judicial forum, notwithstanding any existing predispute arbitration

agreement;

(iii) shall not affect the rights and remedies of the claimant with

respect to such claim, notwithstanding any existing predispute

arbitration agreement; and,

(iv) shall mean that the limitation period on eligibility set forth

in Subsection (a) shall continue to run as though the claim had never

been filed.

(f) Any determination by the Director relating to eligibility shall

set forth in writing the occurrence or event that was the basis for the

determination.

(g) No party shall seek to enforce any agreement to arbitrate if

the claim has been determined to be ineligible under this Section.

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the 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. The 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

Amendment to Section 3 of the Code

The current provisions of Section 3 of the Code provide for the

appointment of a Director of Arbitration by the NASD Board of Governors

to perform all administrative duties and functions in connection with

matters submitted to the NASD for arbitration. The Director has, on

occasion, found it necessary to delegate certain functions of the

Director to other senior management employees of the NASD's Arbitration

Department, especially as a result of the significant growth in the

Department's staff and workload. The NASD believes this delegation

power is inherent in the authority of the Director to manage the

functions of the NASD's Arbitration Department. Nevertheless, the NASD

is proposing to amend Section 3 of the Code to expressly provide for

such delegation.

The proposed rule change to Section 3 provides that the duties and

functions of the Director may be delegated as appropriate by the

Director. Further, in the event that the Director has been

incapacitated, resigned, removed or has been permanently or

indefinitely disabled from the performance of the duties and functions

of the Director, the proposed rule change provides that the President

of the Association or an Executive Vice President may appoint an

interim Director to perform the functions and responsibilities of the

Director.

The purpose of this rule change is to clarify the lines of

authority and delegation powers of the Director under the Code. The

amendment also specifies that the power to delegate functions resides

with the Director unless circumstances occur which render the Director

permanently or indefinitely unable to perform the duties and functions

of the Director.

Amendment to Section 15 of the Code

The current provisions of Section 15 of the Code specify that

claims or controversies are not eligible for submission to arbitration

where 6 years have elapsed from the occurrence or event giving rise to

the matter. Section 15 does not specify the party responsible for

determining whether 6 years have elapsed from the occurrence or event

giving rise to the matter. As a result, there have been conflicting

decisions over who possesses such authority; the Director, the courts

or arbitrators. In addition, the current provisions of Section 15 do

not provide a procedure for a respondent to challenge the eligibility

of a claim, and there is no requirement that the event or occurrence

establishing the eligibility of a claim be identified.

Express Grant of Authority to Director to Determine Eligibility

The NASD is proposing to amend Section 15 to add six new

subsections giving the Director the authority to determine whether the

claim alleges that less than six (6) years have elapsed between the

occurrence or event giving rise to the dispute, claim or controversy

and filing of the claim. Under the proposed rule change the Director's

eligibility determination will be final and will not be subject to

review by the arbitrators under Section 35 of the Code. Further, by

placing the authority to make final eligibility determinations, as a

matter of the contract to arbitrate, in the hands of the Director, the

proposed rule change is intended to foreclose attempts by parties to an

arbitration to seek different eligibility rulings from the courts or

arbitrators. The NASD believes that this amendment is consistent with

recent court decisions on the question of arbitrability. It is beyond

dispute that, unless the parties have agreed otherwise, the courts, not

the arbitrators, determine if a contract to arbitrate exists between

the parties. See AT&T Technologies, Inc. v. Communications Workers of

America, 475 U.S. 643, 649 (1986). Thus, unless the parties have agreed

otherwise, the courts determine the scope of the agreement to

arbitrate, including whether a matter is eligible for arbitration on

subject matter, timeliness or other grounds. Id. (emphasis added). The

NASD expressly intends that the proposed amendment to Section 15 will

constitute the agreement of the parties to have the issue of

eligibility decided by the Director of Arbitration.

Arbitration agreements are contractual obligations which are

governed by general principles of contract interpretation. Haviland v.

Goldman Sachs & Co., 736 F.Supp. 507 (S.D.N.Y. 1990); Nilson v.

Prudential-Bache Securities, 761 F.Supp. 279 (S.D.N.Y. 1991).

Therefore, unless the purpose or provisions of the agreement to

arbitrate run counter to the Federal Arbitration Act or public policy,

parties may agree to any terms they desire (See, e.g., Apollo Computer,

Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989) (``Parties may . . .

agree to allow the arbitrator to decide both whether a particular

dispute is arbitrable as well as the merits of the dispute.''), and the

courts must give effect to such freely negotiated terms. See Snyder v.

Smith, 736 F.2d 409, 419 (7th Cir. 1984).

Because Section 15 does not specify who has the authority to

determine if a claim is eligible for submission to arbitration, the

courts have construed that term of the agreement and have routinely

held that it is a question of fact relating to the scope of the

agreement to arbitrate and that such questions of fact are for the

courts to decide. See, e.g., Edward D. Jones & Co. v. Sorrells, 957

F.2d 509, 514 (7th Cir. 1992), citing as controlling, AT&T, supra, at

649. The NASD, however, is expressly intending that under amended

Section 15 the Director will make eligibility determinations; the

effect of the amendment being that the parties to an agreement to

arbitrate before the NASD will have agreed that the Director alone will

determine if the claim is eligible for submission to arbitration before

the NASD.

In addition, current Section 15, entitled ``Time Limitation on

Eligibility,'' is proposed to be retitled ``Eligibility'' and

renumbered Subsection 15(a). The language of current Section 15

(proposed new Subsection 15(a)) is also being amended to eliminate the

provision that states that the six year eligibility limitation does not

apply to cases directed to arbitration by a court. Therefore, a court

order directing the parties to arbitration is not a determination that

the matter is eligible for arbitration under the rules of the NASD.

These changes are intended to further clarify the distinction between

issues related to eligibility, which the forum is entitled to control,

and statutes of limitations, which are governed by applicable law. The

relationship is discussed in more detail below.

Determination of Eligibility Upon Filing of a Claim

New Subsection 15(b) provides that when a claim is filed pursuant

to Section 13 or 25 of the Code (i.e., when the Statement of Claim,

Uniform Submission Agreement, each properly executed, and required fees

have been received by the Arbitration Department and the Statement of

Claim is ready to be served), the Director of Abritration will examine

each claim for relief to determine if it alleges less than six (6)

years have elapsed between the occurrence or event giving rise to the

dispute, claim or controversy and filing of the claim. For example, if

a claim seeks recovery of the purchase price of an investment on the

basis of misstatements or lack of suitability at the time of purchase,

and the purchase occurred nine (9) years before the claim was filed, it

will be ineligible for arbitration. If, however, the same claim seeks

recovery for loss of the value of the investment on the basis of

misstatements or omissions which caused the claimant to refrain from

selling the investment, and the misstatements or omissions occurred

five (5) years ago, the claim will be eligible for arbitration.\2\

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\2\See infra discussion concerning bifurcation of claims. The

proposed rule change will not permit an otherwise ineligible claim

to become eligible through the allegation of fraudulent concealment

and equitable tolling. In the example cited above, for instance, if

the claimant alleged that the respondent made a series of

misstatements dating back nine (9) years to the original

transaction, the claim would be eligible for arbitration only to the

extent that recovery was sought or could be had for misstatements

made within six (6) years of filing. While the NASD would not

necessarily ask the claimant to clarify the claim, the eligibility

determination, which would be part of the record upon submission to

the arbitrators, would advise the parties and the arbitrators of the

limitation on the claims submitted for arbitration.

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In each example, the Director of Arbitration will not be making

eligibility determinations on the basis of subjective evaluations of

whether the eligibility of the claim is proven, but, rather, solely on

an objective determination of whether the claim has stated that the

occurrence or event giving rise to the claim took place within six (6)

years.\3\

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\3\The NASD notes, and assumes that claimants and respondents

are aware, that bad faith allegations of fraud, or other facts,

designed to establish or defeat the eligibility of a claim, would be

counterproductive. If the eligibility of a claim were established

or, for those claims in which a portion of the initial claims were

determined to be ineligible, defeated as a result of such bad faith

allegations and the nature of the allegations was discovered by the

arbitrators prior to the award, such conduct may affect the

arbitrators' determination of credibility issues in the case, or of

the nature and amount of the remedies and relief awarded. The NASD

notes further that any such bad faith allegations by a member or

associated person may result in a referral of the matter for

disciplinary investigation and action as conduct inconsistent with

just and equitable principles of trade in violation of Article III,

Section 1 of the Rules of Fair Practice.

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In addition, proposed Subsection 15(b) provides that if the

Statement of Claim fails to clearly state that less than six (6) years

have elapsed between the occurrence or event giving rise to the

dispute, claim or controversy and filing, the Director may ask the

claimant to modify the Statement of Claim to do so.\4\ The time limit

for a response will be set in communications with the claimant. If the

claimant fails or refuses to respond, the Director of Arbitration will

determine the eligibility of the claim for submission to arbitration on

the basis of the Statement of Claim then on file. Thus, while the

Director will give the claimant a chance to correct any deficiencies to

permit the claimant to establish the eligibility of the claim, the

opportunity will not be open-ended.

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\4\See supra n. 2.

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Determination of Disputed Eligibility

Proposed new Subsection 15(c) provides that a responding party,

after service of the Statement of Claim, but prior to the date the

parties are notified of the appointment of the arbitrators for the

hearing or the appointment of an arbitrator to consider prehearing

issues, may file a notice of objection to dispute the determination of

the Director of Arbitration that the Statement of Claim alleges that

less than six (6) years have elapsed between the event or occurrence

giving rise to the dispute, claim or controversy giving rise to the

claim and filing. The notice must be supported by statements of fact

and documentary evidence and may only be submitted along with or after

the responding party submits an executed Uniform Submission Agreement

and pays any fees or deposits required under the Code.\5\

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\5\By conditioning the submission of a notice of objection on

the submission of a Uniform Submission Agreement and appropriate

fees, the NASD avoids expending resources making eligibility

determinations for parties that have not complied with the

requirements of the Code or paid for the use of the forum. The NASD

does not believe that a party disputing the eligibility of a claim

should be able to have its objection considered if it has no

intention of participating in the arbitration of the claim without

engaging in collateral litigation. By insisting on the submission of

an executed Uniform Submission Agreement, the NASD and the other

parties to the matter should be able to defend against any such

collateral litigation by asserting that the objecting party agreed

to be bound by the provisions of the Code, one of which (Section 15)

grants the Director the exclusive authority to determine the

eligibility of a claim.

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Following submission of the notice of objection, the Director of

Arbitration must notify the other parties that one of the responding

parties has disputed the eligibility of the claim.\6\ The Director will

then permit the claimant and any other party to respond to the

allegations of the responding party with respect to eligibility within

such time period as the Director of Arbitration establishes in

communications with the parties.

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\6\The Director's notification to the parties of the eligibility

dispute and the time limitation for a response does not relieve the

parties of the obligation under other provisions of the Code to

serve the other parties with copies of pleadings and submissions.

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After considering the written record only, and any responses timely

submitted, the Director will determine if the disputing party's

allegations with respect to eligibility: (1) contradict the allegations

in the Statement of Claim relating to eligibility; (2) are supported by

documentary evidence; and (3) are not contradicted by other allegations

which, if true, would prevail over the contradictory allegations of the

disputing responding party. If the Director makes affirmative

determinations on all of these matters, the claim will be ineligible.

For example, if in the scenario cited above, the claimant had

stated that the transaction had occurred within five (5) years of

filing, that would have been enough to make it eligible. If the

respondent objected and in turn asserted as a statement of fact, in

contradiction of the claimant's allegation, that the transaction had

occurred nine (9) years before filing and attached a copy of the

claimant's account statement in support of the allegation, the claimant

would have to come forward with an allegation further disputing the

account statement in order to prevent a determination that the claim is

ineligible. An allegation that the account statement is fraudulent

would be sufficient to overcome the disputing party's allegation, as

would production of an account statement supporting the transaction

date alleged by the claimant.\7\ Therefore, the proposed rule

establishes a presumption in favor of the eligibility of a claim which

can only be overcome by an undisputed showing to the contrary.\8\

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\7\See supra n. 3.

\8\See supra n. 2/.

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Proposed Subsection 15(f) requires the Director's determination be

in writing and set forth the occurrence or event that is the basis for

the eligibility determination.

Finality and Effect of an Eligibility Determination

Proposed Subsections 15(d) and (e) resolve several issues relating

to eligibility determinations. First, under proposed subsection 15(d)

any determination by the Director will be final. This provision is

intended to foreclose relitigation of eligibility before the

arbitrators. Because the terms of the proposed rule provide that the

Director will determine if a claim is eligible for submission to

arbitration, the finality of the determination precludes an arbitrator

from revisiting the issue under any circumstances.\9\

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\9\The NASD recognizes that new facts relevant to an eligibility

determination could arise through an amendment to the claim pursuant

to Section 39(b) of the Code, which requires the consent of the

arbitrators before an amendment to the pleadings is permitted.

because the NASD intends that the determination of eligibility will

occur before a matter is submitted to the arbitrators, an amendment

to the claim permitted by the arbitrators under Section 39(b) would

not reopen the eligibility issue for the arbitrators or for anyone

else to decide.

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Second, a determination that a claim is ineligible will not: (1)

limit the right of any party to offer evidence concerning the event or

occurrence which was the basis of the eligibility determination at any

other stage of the proceeding on the claim for any purpose other than

contesting the eligibility of the claim determined to be ineligible;

(2) bar a claimant from bringing the substantive claim before a

judicial forum, notwithstanding the fact that the parties have an

arbitration agreement; or (3) affect the rights and remedies of the

claimant with respect to such claim provided by applicable law. The

eligibility rule never was intended to serve as an election of remedy

provision that would eviscerate any surviving causes of action under

applicable law after six years have elapsed. The intent of this

proposed provision is to ensure that the effect of the eligibility

determination is limited solely to the issue of access to the NASD's

arbitration forum.

Finally, proposed Subsection (e)(iv) provides that if a claim is

ineligible for arbitration, the limitation period on eligibility set

forth in Subsection (a) shall continue to run as though the claim had

never been filed. This is a relation back provision that is intended to

prevent the filing of an ineligible claim from tolling the running of

the eligibility provision while the NASD determines that the claim is

ineligible. Thus, for example, if a claim is filed and the claimant

fails to modify the claim pursuant to the Director's request under

Subsection (b), or the claimant fails to overcome the respondent's

notice of objection under Subsection (c), the Director may determine

that the claim is ineligible. If the claimant later resubmits the claim

pleading facts showing the claim would have been eligible when it was

originally submitted, but the time period has subsequently run, the

claim will not be eligible.

Avoidance of Vexatious Litigation

Proposed new Subsection 15(g) prohibits parties from seeking to

enforce an agreement to arbitrate a claim which has been determined to

be ineligible for arbitration by the NASD. This provision is intended

to prevent collateral attacks and vexatious litigation over eligibility

determinations. Its effect is to bar a respondent (or a claimant) from

seeking a court order either to compel the NASD to accept the case for

arbitration, or to compel a claimant (or respondent) into arbitration

in another forum, after the Director has determined the claim to be

ineligible. Thus, members would be prohibited from moving to compel

arbitration before the American Arbitration Association (``AAA'') or

another self regulatory organization (``SRO''), for instance, if AAA or

the SRO is an alternative forum choice in arbitration agreements, after

the NASD's Director of Arbitration has declared the claim to be

ineligible for arbitration before the NASD. Under this provision

members could be subject to disciplinary action for seeking to enforce

an agreement to arbitrate.

Relationship of Eligibility to Statute of Limitations Defenses

As discussed above with respect to tolling, the NASD intends that

the proposed rule change will sharpen the distinction between

eligibility and statutes of limitation. The Director's determination

that a claim is eligible for arbitration has no effect on whether a

relevant statute of limitations operates as a defense to a claim.

For example, a claim which is based on an event which occurred five

years ago would be eligible for arbitration; however, if the claim were

based on a private right of action under Section 10(b) of the

Securities Exchange Act of 1934, the respondent could still plead the 1

year/3 year statute of limitations on such actions as a defense before

the arbitrators. Similarly, if the claim were based on an event which

occurred seven (7) years ago, and which was based on a breach of

fiduciary duty for which tolling might apply under applicable state

law, the fact that it was ineligible for arbitration would not affect

the ability of the claimant to bring the claim for relief in court and

to assert equitable tolling as a counterdefense to the respondent's

statute of limitations defense. Thus, the Director's eligibility

determination will not affect the substantive claim or defenses.

Finally, the NASD is aware that under New York law, which is often

applicable to an arbitration or to one or more parties to a proceeding,

a respondent in an arbitration case must file an application for an

order enjoining the arbitration of a claim on statute of limitations

grounds within twenty days of service of the claim in order to preserve

any statute of limitations defense for use in a subsequent court

proceeding. The filing of such an application will have no effect on

the Director's eligibility determination; if the claim is eligible, the

respondent can raise his statute of limitations defense before the

arbitrator, if it is ineligible, he can raise the defense in court.

The NASD intends to make the proposed amendments to Section 15

applicable to all claims filed after the effective date of the

amendments without regard to when the cause of action accrued or arose,

or the timing of the event or occurrence giving rise to the dispute.

The NASD will advise its members that the proposed amendment will apply

retroactively to all claims brought after the effective date of the

amendment. The NASD will also advise its members and associated persons

that they have expressly agreed that under the NASD's rules all

agreements currently in effect are subject to the amendment to the

Code. Although one court has recently held that amendments to the Code

do not apply to claims which have already accrued to require

arbitration of the claim,\10\ the NASD believes that case was a

decision about the scope of the agreement to arbitrate--i.e., whether

the parties had agreed to arbitrate the particular claim--a subject

which courts have virtually always held is for the courts to

decide.\11\

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\10\Kresock v. Bankers Trust Company, 21 F. 3d 176, 179 (2d Cir.

1994) (``Kresock'').

\11\The court stated that the parties could not have agreed to

arbitrate the claim in issue in the Kresock case thereby rejecting

the NASD's assertion, supported by the NASD's rule filing on the

amendment in issue, that the amendment was merely a codification of

existing interpretations of the Code. Moreover, the amendments to

the Code at issue in Kresock, according to the court, did not

purport to apply retroactively.

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The NASD believes that the proposed rule change is consistent with

the provisions of Section 15A(b)(6) of the Act in that the proposed

rule change will protect investors and the public interest by

facilitating the arbitration process through expeditious resolution of

eligibility issues arising under Section 15 of the Code by authorizing

the Director to determine whether a claim or controversy occurred less

than 6 years prior to filing in the event eligibility is disputed by a

responding party. Moreover, in order to protect investors and the

public interest by avoiding disruptions and uncertainty about the

authority to act under the Code, the NASD is proposing to amend Section

3 of the Code to permit the duties and functions of the Director to be

delegated by the Director or the Executive Vice President, Member

Services.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The 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, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

The original proposed rule change was published for comment by the

SEC on October 26, 1993 in Securities Exchange Act Release No. 33108.

The SEC received three comment letters in response.\12\ In addition,

the SEC, in letters dated January 31, 1994\13\ and February 4,

1994,\14\ requested responses from the NASD on certain issues raised by

the commenters and on other questions related to the proposed rule

change.

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\12\Letter from Gregory L. Wilmes, Esq., Briol & Wilmes, to

Jonathan G. Katz, Secretary, Commission (November 17, 1993)

(``Wilmes''); Letter from Michael E. Friedman, Esq. to Jonathan Katz

(December 3, 1993) (``Friedman''); Letter from Harry S. Miller,

Esq., Shafner & Gilleran, to Jonathan Katz (January 27, 1994)

(``Miller'').

\13\Letter from Ethan D. Corey, Staff Attorney, Over-the-Counter

Regulation, Commission to Suzanne E. Rothwell, Associate General

Counsel, NASD (January 31, 1994).

\14\Letter from Ethan D. Corey, Staff Attorney, Over-the-Counter

Regulation, Commission to Elliott R. Curzon, Senior Attorney, NASD

(February 4, 1994).

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Responses to SEC Questions and Comments

With respect to the first question in the SEC's January 31, 1994

letter, and those of two of the commenters, relating to the perception

that the proposed rule change would permit the Arbitration Department

staff to exercise ``significant case-related [discretion on]

eligibility determination[s],'' the NASD responds in two parts. First,

any arbitration forum has the inherent right to limit access to its

forum in order to preserve and direct resources to the disposition of

cases in the manner it deems most efficient. The Code currently limits

access to the forum to those cases where the dispute, claim or

controversy occurred within six years of submission of the claim.

Second, the Arbitration Department currently determines the eligibility

of a claim for arbitration as a matter of the sufficiency of the

allegations in a statement of claim. The Department examines the

statement of claim to determine if it alleges events or occurrences on

which the claim is based and which, on their face, are within six years

of the filing of the claim. If it does, the claim is eligible for

arbitration. If the respondent contests the eligibility of a claim, the

issue is currently resolved by the courts or the arbitrators, depending

on where the respondent pursued resolution of the issue.

The proposed rule change brings the issue of eligibility, both as a

threshold matter and with respect to disputes among the parties over

eligibility, within the authority of the Director of Arbitration to

decide. The threshold test will remain the sufficiency of the

allegations in a claim. Sufficiency in this context does not require

the claimant to sustain the burden of proof of eligibility to any

level, it is merely an inquiry into whether the claim on its face

states when the events or occurrences giving rise to the claim

occurred. If the facts alleged in a claim are ambiguous or are not

sufficient on their face to determine if a claim is eligible for

arbitration, the staff will advise the claimant and request

modification of the statement of claim. If the claimant does not modify

the statement of claim to permit a determination of eligibility, the

Director will determine if the claim is eligible on the basis of the

claim as stated.\15\ If the modification discloses facts which show

that the claim is ineligible, it will be rejected as ineligible. The

inquiry to be made by the Director in these instances is objective and

goes to the existence of statements of facts in the claim, not

subjective weighing of evidence.

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\15\A statement of claim will generally be regarded as

insufficient to determine eligibility if it cannot be determined

from its plain language whether any part of the claim is based on

occurrences or events less than six (6) years old. As stated above,

if it appears that some part of the claim is based on occurrences or

events less than six (6) years old, those portions may be submitted

to arbitration. See supra n. 1, and discussion of bifurcation infra.

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Under the proposed rule change, in the event a respondent disputes

the facts alleged by the claimant as supporting the eligibility of the

claim following the threshold determination that the claim is eligible,

the respondent carries a heavy burden of showing that the timing of the

events or occurrences giving rise to the claim are other than those

alleged by the claimant. In the absence of proof that is not subject to

reasonable dispute that the claim is ineligible, the Director will

presume that the claim is eligible.

Paragraph 2(a) of the Commission's January 31, 1994 letter

identified a distinction between then-proposed Subsections 15(a) and

15(b) in that the latter sets forth a procedure for determining

eligibility, while the former does not. The NASD agrees with the

Commission's concerns and has amended the proposed rule change pursuant

to Amendment No. 1 to clarify the procedures. Amendment No. 1 also

addresses the concern set forth in paragraph 2(b) of the January 31,

1994, letter about the effect of a threshold determination of

eligibility on the claimant's right to seek a judicial remedy.

With respect to the question in paragraph 3 of the January 31, 1994

letter, the proposed rule contemplates that eligibility will be

determined prior to the appointment of the arbitrators, whether as a

threshold matter only, as a result of a challenge by a respondent or

both. The NASD believes that the amendments described herein

contemplate that eligibility determinations made by the Director are

final and that such determinations resolve the question of whether a

claim can be submitted to arbitration. Once submitted, the issue cannot

be revisited.\16\ Disputes over eligibility must be raised and resolved

within the context of the process described in proposed new Section 15,

or they are waived. The NASD does not believe an amendment is required

to address this issue.

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\16\The NASD recognizes that new facts relevant to an

eligibility determination could arise through an amendment to the

claim pursuant to Section 39(b) of the Code, which requires the

consent of the arbitrators before an amendment to the pleadings is

permitted. Because the NASD intends that the determination of

eligibility will occur before a matter is submitted to the

arbitrators, an amendment to the claim permitted by the arbitrators

under Section 39(b) would not reopen the eligibility issue for the

arbitrators or for anyone else to decide.

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Responses to Commenters

With respect to the arguments of the commenters that the proposed

rule change contradicts the holdings of various courts on the issue of

eligibility determinations,\17\ the NASD does not agree. Arbitration is

a creature of contract, AT&T Technologies, supra, and it is for the

parties, through the choice of a forum, to determine the terms of the

contract. See, e.g., U.S. Steelworkers v. Warrior Gulf Navigation Co.,

363 U.S. 574 (1960). There is, therefore, no impediment erected by the

courts which would prevent the NASD from adopting a rule which permits

the Director of Arbitration to decide issues affecting access to the

NASD's arbitration forum. further, the proposed rule, by its terms,

does not affect the substance of a claim--an eligibility determination

by the Director does not bar a party from asserting the claim in court.

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\17\Wilmes, Friedman.

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Another commenter asserted that under the proposed rule the

Director of Arbitration would be conducting fact-finding hearings to

determine eligibility.\18\ The proposed rule will not produce such a

result. As discussed in more detail above, eligibility will be

determined as a matter of the sufficiency of the allegations in a

statement of claim, not as a subjective decision regarding disputed

facts.

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\18\Friedman.

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Finally, a third commenter\19\ raised four issues: (1) whether the

time limit for filing a claim under the proposed eligibility rule can

be tolled; (2) whether the proposed rule will permit the Director of

Arbitration to bifurcate claims by declining to take jurisdiction over

ineligible portions of a claim; (3) how bifurcated claims will proceed;

and (4) whether it is fair to bar a party from seeking to enforce an

agreement to arbitrate where the claim has been ruled ineligible.

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\19\Miller.

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On the first issue, the courts have said that the time limits in an

eligibility rule such as Section 15 of the Code are contractual, they

do not operate like a statute of limitations, and, therefore, they are

generally not subject to tolling. See, e.g., AT&T Technologies, supra;

Paine Webber Inc. v. Hofmann, 984 F.2d 1372 (3d Cir. 1993). The NASD

has not applied tolling to eligibility issues historically, and does

not plan to apply tolling under the proposed rule.\20\ Contrary to the

assertion of the commenter, application of the eligibility limit

without tolling will not deprive investors of their right to recourse.

An ineligible claimant will retain his right to seek relief in the

courts to the same extent as it existed prior to filing the claim in

arbitration.

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\20\Section 18(b) of the Code provides that the six year

limitation on submission to arbitration provided under Section 15 of

the Code is tolled for so long as a court of competent jurisdiction

retains jurisdiction over the matter. This provision is a

contractual tolling provision which prevents the eligibility limit

from running under the narrow circumstance specified. Equitable

tolling, by contrast, is a creature of the equitable powers of the

courts to the effect that the fraud or dilatory conduct of the

defendant should not be permitted to result in the lapse of time for

bringing a cause of action. As stated above, the eligibility

limitation addresses only the access of parties to the NASD's forum,

not the merits of the claim, defenses thereto or the ability of a

claimant to pursue his claim in court.

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On the second issue, also raised in the February 4, 1994 letter

from the SEC, the proposed rule change will require bifurcation of

claims to the extent claims which are based on events or occurrences

more than six years prior to the filing of the claim will be ineligible

for arbitration. Thus, where a statement of claim sets forth events or

occurrences as the basis for claims for relief, those which occurred

less than six years ago will be eligible for arbitration, while the

claimant would be required to pursue his remedies in court for claims

based on events or occurrences more than six years old. In the NASD's

view, bifurcation is an acceptable result in such cases. See Pompano-

Windy City Partners v. Bear Stearns & Co., 698 F.Supp. 504 (S.D.N.Y.

1988), citing Dean Witter Reynolds v. Byrd, 470 U.S. 213, 225 (1985)

(White, J. concurring).

With respect to the third issue, the NASD takes no position on how

such bifurcated claims should proceed. The NASD's Arbitration

Department manages its docket without regard to issues facing

participants in other forums. To the extent a court permits or requires

the ineligible portion of a bifurcated matter to proceed, it is

entirely within its power to do so.

Finally, on the fourth issue, it is not only fair, but essential

for public arbitration claimants, for the proposed rule change to bar

parties from seeking to enforce an agreement to arbitrate where the

claim has been determined to be ineligible. For example, if a claim is

ruled ineligible, the proposed rule will bar the respondent from

seeking an order from a court compelling the arbitration of the case.

This will relieve the claimant of defending against such collateral

attacks on the eligibility determination while pursuing his remedies in

court, a situation which would be vexatious and expensive for

claimants.

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.

IV. Solicitation of Comments

The NASD's proposed rule change addresses an important issue

increasingly common in arbitration proceedings, namely, the use of

contentious litigation tactics to determine whether claims are eligible

for arbitration under NASD rules. Interested persons are invited to

submit written data, views, and arguments concerning the foregoing. The

Commission requests that, in addition to any general comments

concerning whether the proposed rule change is consistent with Section

15A(b)(6) of the Act, commentators address the following:

1. The proposed rule change would permit respondents to challenge

the eligibility of a claim at any time before the parties are notified

of the appointment of the arbitrators for the hearing or the

appointment of an arbitrator to consider prehearing issues. Should

respondents be required to raise their objections at an earlier point

in the process, for instance, not later than the time by which they

file their answer to the Statement of Claim?

2. The proposed rule change is based upon a rule approved by the

Securities Industry Conference on Arbitration (``SICA'') at its regular

meeting on April 21, 1993. The form of the rule approved by SICA

provided, in pertinent part:

(c) A determination by the Director of Arbitration pursuant to

subparagraph (b) that a claim is ineligible shall not constitute a

bar to asserting the underlying claim in a judicial forum. With

respect to any such ineligible claims, the parties will have

available to them the rights and remedies provided by applicable

law, notwithstanding, any (i) existing predispute arbitration

agreement or (ii) decisions on eligibility. No party shall seek to

enforce any agreement to arbitrate where the claim has been

determined to be ineligible under this section.

Do the pertinent provisions of proposed sections 15(d) and 15(e)

differ substantively from the rule approved by SICA? If not, does the

proposed rule change set forth the consequences of a determination of

ineligibility in a manner that will be more readily understandable to

all parties, including pro se claimants, than the form of the rule

approved by SICA?

3. The Commission understands that proposed Section 15(e)(iv) is

intended to address claims that are filed with the NASD more than once.

For those claims that previously have been submitted, and have been

determined to be ineligible under Section 15, there would be no tolling

of time periods for purposes of the eligibility rule with respect to

the time period during which the NASD previously considered the claim.

Accordingly, a claimant who resubmits a matter in revised form a second

time would have to calculate the eligibility time period from the date

of occurrence or event giving rise to the dispute. Is this

understanding fairly implied from Section 15(e)(iv)?

Persons making written submissions should file six copies thereof

with the Secretary, Securities and Exchange Commission, 450 Fifth

Street, NW., Washington, DC 20549. 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. 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 Number SR-NASD-93-51 and should be

submitted by August 23, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-18736 Filed 8-1-94; 8:45 am]

BILLING CODE 8010-01-M