[Federal Register Volume 60, Number 118 (Tuesday, June 20, 1995)]
[Notices]
[Pages 32190-32191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14979]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35847; File No. SR-NASD-95-20]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
the Failure to Honor Settlement Agreements Obtained in Connection With 
an Arbitration or Mediation

June 14, 1995.
    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 June 9, 
1995, 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.

    \1\ The NASD originally submitted the proposed rule change on 
May 10, 1995. The NASD subsequently submitted two minor technical 
amendments, the text of which may be examined in the Commission's 
Public Reference Room. See Letters from Suzanne E. Rothwell, 
Associate General Counsel, NASD, to Mark P. Barracca, Branch Chief, 
Division of Market Regulation, SEC (May 16, 1995 and June 9, 1995). 
This notice reflects those amendments.
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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 the Resolution of the Board of 
Governors--Failure to Act Under Provisions of Code of Arbitration 
Procedure (``Resolution'') to make the following acts a violation of 
Article III, Section 1 of the Rules of Fair Practice: (a) A failure to 
honor a written and executed settlement agreement obtained in 
connection with an arbitration conducted under the auspices of a Self-
Regulatory Organization (``SRO''); and (b) a failure to honor a written 
and executed settlement agreement obtained in connection with a 
mediation conducted under the auspices of the NASD. The instant filing 
also proposes to amend Article VI, Section 3 of the NASD By-Laws to 
permit the NASD to suspend or cancel the membership or registration of 
a member or associated person for failing to honor a written and 
executed settlement agreement obtained in connection with an 
arbitration or mediation conducted under the auspices of the NASD.

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

1. Enforcing Settlement Agreements
    In connection with the administration of its arbitration program 
the NASD states that many disputes or claims for damages submitted to 
arbitration before the NASD, or another SRO forum or the American 
Arbitration Association (``AAA''), are settled prior to a hearing on 
the merits. In addition, the NASD is currently developing a mediation 
program, to be administered in connection with the arbitration program, 
where parties will be participating in a process that the NASD believes 
will increase the number of claims that are settled prior to a 
hearing.\2\

    \2\ The NASD has separately submitted a proposed rule change 
relating to the establishment of a Mediation Program. See Securities 
Exchange Act Release No. 35830 (June 9, 1995).
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    The NASD also notes that occasionally members and persons 
associated with members fail to comply with settlement agreements 
reached in connection with arbitration proceedings. These settlements 
may have been reached prior to the hearing on the matter and, as a 
result, the hearing is canceled only to be rescheduled following a 
party's failure to honor the settlement. In other cases, matters are 
settled and claims withdrawn only to be refiled later after a member or 
associated person fails to honor the agreement.
    The NASD is concerned that a failure by a member or associated 
person to honor a settlement agreement imposes substantial added costs 
on the prevailing party or parties in the form of delayed recoveries, 
actions to enforce the agreements and additional fees connected with 
short-notice cancellation of hearings. The NASD's Arbitration 
Department also incurs additional costs in rescheduling hearings, and 
on occasion has had to appoint new arbitrators to hear a matter. In 
addition, the NASD believes that the credibility of the arbitration 
process suffers if members and their associated persons are able to 
delay the resolution of a dispute by failing to honor a settlement 
agreement.
    The Resolution states that ``it may be deemed * * * a violation of 
Article III, Section 1 of the Rules of Fair Practice for a member or 
person associated with a member to * * * fail to honor an [arbitration] 
award * * *.'' The Resolution was adopted in 1973 and has been used to 
discipline members and associated persons who fail to pay an 
arbitration award unless they have moved to vacate the award.\3\ The 
Resolution applies to awards rendered in NASD arbitrations, as well as 
arbitrations sponsored by other SROs and the AAA.

    \3\ Under the Federal Arbitration Act and many state statutes 
such a motion to vacate must be filed within 90 days after the award 
is rendered.
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    The NASD believes that the failure by a member or associated person 
to honor a settlement agreement entered into in connection with an 
arbitration proceeding or a mediation should have the same consequences 
as the failure to pay an arbitration award. Therefore, the NASD is 
proposing to amend the Resolution to make the failure by a member or 
associated person to honor a written and executed settlement 
[[Page 32191]] agreement actionable as a violation of Article III, 
Section 1 of the Rules of Fair Practice. The amendment is limited to 
settlement agreements that have been reduced to writing and have been 
executed. The amendment, therefore, will not encompass unexecuted 
settlements.
2. Use of Revocation Procedures
    In 1993, the NASD amended Article VI, Section 3 of the By-laws to 
specify that a membership or registration could be suspended or 
cancelled on fifteen (15) days notice for failing to honor an 
arbitration award rendered in an NASD arbitration. The use of such an 
expedited or ``revocation'' proceeding was limited to awards in NASD 
sponsored proceedings because the NASD's oversight of the arbitration 
process provided greater assurance about the awards that would be 
enforced in such proceedings.\4\

    \4\ Revocation proceedings initiated under Article VI, Section 3 
of the By-Laws are conducted pursuant to Article VI of the NASD's 
Code of Procedure. As such they are subject to review by a hearing 
panel upon request of the member or associated person. The use of 
Article VI of the Code of Procedure for such proceedings was 
initiated in connection with the NASD's adoption of an amendment to 
Article VI, Section 3 of the By-Laws relating to failure to pay 
arbitration awards. See, SR-NASD-91-73, approved by the SEC in 
Securities Exchange Act Release No. 31763 (January 28, 1993).
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    The NASD believes that the failure by a member or an associated 
person of a member to honor settlement agreements entered into in 
connection with an arbitration proceeding or mediation sponsored by the 
NASD should be subject to the same revocation proceedings as are 
arbitration awards. Accordingly, the NASD is also proposing to amend 
Article VI, Section 3 of the By-Laws to specify that membership or 
registration can be suspended or cancelled on fifteen (15) days notice 
for failing to honor a settlement agreement obtained in connection with 
an NASD arbitration or mediation. The action of the NASD under Article 
VI, Section 3 of the By-Laws with respect to failure to honor 
settlement agreements will be conducted as a revocation proceeding 
pursuant to the provisions of Article VI of the Code of Procedure, 
which provides an opportunity for review of the NASD's action upon 
written request of the member or associated person.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act \5\ in that forcing 
members or associated persons of a member to abide by settlement 
agreements entered into in compromise of a dispute pending in 
arbitration or mediation will enhance the effectiveness of arbitration 
and mediation as alternative dispute resolution forums and eliminate 
the unfair impact and waste of resources experienced by the public, 
other litigants and the arbitration/mediation forum that results from 
the failure to honor a settlement agreement.

    \5\ 15 U.S.C. 78o-3.
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(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

    Written comments were neither solicited nor received.

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

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 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-95-20 and 
should be submitted by July 11, 1995.

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\6\

    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14979 Filed 6-19-95; 8:45 am]
BILLING CODE 8010-01-M