[Federal Register Volume 60, Number 159 (Thursday, August 17, 1995)]
[Notices]
[Pages 42930-42931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20403]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36088; File No. SR-NASD-95-20]


Self-Regulatory Organizations; Order Approving 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

August 10, 1995.
    On June 9, 1995, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ a 
proposed rule relating to the failure to honor settlement agreements 
obtained in connection with an arbitration or mediation.\2\ The 
Commission published notice of the proposed rule change in the Federal 
Register on June 20, 1995.\3\ The Commission received one comment in 
response to the notice.\4\ The Commission has reviewed the comment 
received, and for the reasons discussed below, approves the proposed 
rule change.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The NASD originally submitted the proposed rule change on 
May 10, 1995. The NASD subsequently submitted two minor technical 
amendments, and one amendment reporting the final count of votes 
cast by members in favor of the rule change. The text of these 
amendments 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; and Letter from Frank J. Formica, NASD, 
to Mark P. Barracca, Branch Chief, Division of Market Regulations, 
SEC (July 13, 1995).
    \3\ Securities Exchange Act Release No. 35847 (June 14, 1995), 
60 FR 32190.
    \4\ Letter from Paul J. Dubow, Chairman, Arbitration 
Subcommittee of the Litigation Section, Securities Industry 
Association (``SIA'') to Secretary, SEC (July 11, 1995).
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I. Description

    The amendments to the Resolution of the Board of Governors--Failure 
to Act Under Provisions of Code of Arbitration Procedure 
(``Resolution'') makes clear that the following acts constitute 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 rule change 
also amends 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. Discussion

    The Commission agrees with the NASD's judgment that the failure by 
a member or associated person to honor a settlement agreement entered 
into in connection with an arbitration proceeding or a NASD mediation 
should have the same consequences as the failure to pay an arbitration 
award.\5\ The Commission is concerned that a failure by a NASD 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 agreements where parties fail 
to honor settlement agreements and additional fees connected with 
short-notice cancellation of hearing. The NASD reports that is 
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 credibility of the arbitration process will 
suffer if NASD members and their associated persons delay the 
resolution of a dispute by failing to honor a settlement agreement.

    \5\ The Resolution, adopted in 1973, 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] * * *.'' This Resolution applies to 
awards rendered in NASD sponsored arbitration, as well as 
arbitration sponsored by the American Arbitration Association 
(``AAA'') and other SROs.
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    This rule change amends the Resolution to clarify that the failure 
by a member or associated person to honor a written and executed 
settlement agreement is 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.
    In its comments,\6\ the SIA argues against adoption of the rule 
because: (1) The NASD has not established a problem exists with respect 
to failing to honor settlement agreements that warrants a rule change; 
(2) it is not balanced or even-handed in that there are no provisions 
in the rule that could be used to sanction non-members who fail to 
honor a written settlement agreement; and (3) it proposes to impose 
sanctions for failure to honor settlement agreements in connection with 
arbitrations held at other forums. The Commission finds the SIA's 
arguments unpersuasive.

    \6\ See note 4, supra.
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    With respect to the SIA's first comment, the NASD, in its response 
to the SIA, points out that while the problem of failure to honor a 
settlement agreement may not be a pervasive problems, it is nonetheless 
a problem that needs to be addressed.\7\ This rule addresses the 
problem before it becomes more serious.

    \7\ Letter from Elliott R. Curzon, Assistant General Counsel, 
NASD, to Mark P. Barracca, Branch Chief, SEC (July 19, 1995) (NASD 
``response'').
    The SIA's second comment describes the rule as not balanced because 
it fails 

[[Page 42931]]
to provide for sanctions against non-members who fail to honor 
settlement agreements. This argument fails to take the NASD's 
jurisdictional limitations into account. The NASD is not in a position 
to pass rules governing non-members. Additionally, NASD members and 
associated persons have an obligation to ``observe high standards of 
commercial honor'' under Article III, Section 1 of the NASD's Rules of 
Fair Practice, and honoring settlement agreements is a component of 
commercial honor. Furthermore, NASD members and associated persons are 
afforded procedural protection under NASD rules during the adjudication 
of these matters.
    With respect to the SIA's final comment, the Commission notes that 
the rule change does not provide for the use of the NASD's suspension 
or revocation proceedings where the settlement is not obtained in 
connection with NASD arbitration. As indicated in the NASD's response, 
where a party to an arbitration conducted in another forum complains to 
the NASD that a member or an associated person failed to honor a 
settlement agreement, the complaint would be investigated in the same 
manner as any other customer complaint pursuant to the NASD's 
disciplinary process. The NASD reports that such an investigation would 
include obtaining copies of the records of the arbitration proceeding 
from the other forum and determining if there are any facts that would 
demonstrate that disciplinary action is warranted. If a member or 
associated person is deemed to have violated a settlement agreement, a 
formal complaint will be issued and the member or associated person 
will be entitled to a hearing before a panel of a District Business 
Conduct Committee and be afforded a right to appeal any adverse 
decision to the National Business Conduct Committee, the SEC and the 
courts. See NASD Code of Procedure. In short, the rule will provide for 
greater investor protection without reducing any procedural rights NASD 
members and associated persons have under the rules.
    The Commission believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act.\8\ Requiring 
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 methods and eliminate 
the unfair impact and waste of resources experienced by the public, 
other litigants and the arbitration/mediation forum that result from 
the failure to honor a settlement agreement.

    \8\ 15 U.S.C. 78o-3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-95-20 be, and hereby is, 
approved. The effective date of this rule change will be announced by 
the NASD in a Notice to Members to be published no more than 45 days 
after SEC approval, provided, however, that the effective date will be 
no more than 60 days following publication of the Notice to Members 
announcing SEC approval.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20403 Filed 8-16-95; 8:45 am]
BILLING CODE 8010-01-M