[Federal Register Volume 66, Number 43 (Monday, March 5, 2001)]
[Notices]
[Pages 13362-13364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5250]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43998; File No. SR-NASD-01-08]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Amendments to Rule 10301 of the Code of Arbitration Procedure To 
Prohibit Terminated, Suspended, Barred or Otherwise Defunct Firms From 
Enforcing Predispute Arbitration Agreements in the NASD Arbitration 
Forum

February 23, 2001.
    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 
on January 25, 2001, 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 (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and

[[Page 13363]]

III below, which Items have been prepared by NASD Dispute Resolution, 
On February 15, 2001, NASD Dispute Resolution filed Amendment No. 1 to 
the proposal.\3\ On February 22, 2001, NASD Dispute Resolution filed 
Amendment No. 2 to the proposal.\4\ 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.
    \3\ See letter from Laura Leedy Gansler, Counsel, NASD Dispute 
Resolution, to Florence Harmon, Senior Special Counsel, Division of 
Market Regulation (``Division''), Commission, dated February 14, 
2001 (``Amendment No. 1''). In Amendment No. 1, NASD Dispute 
Resolution made changes to the description of the rule change to 
more accurately describe its purpose.
    \4\ See letter from Laura Leedy Gansler, Counsel, NASD Dispute 
Resolution, to Florence Harmon, Senior Special Counsel, Division, 
Commission, dated February 21, 2001 (``Amendment No. 2''). In 
Amendment No. 2, NASD Dispute Resolution made further changes to the 
description of the rule change to more accurately describe its 
purpose.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Dispute Resolution is proposing to amend Rule 10301 of the 
Code of Arbitration of the NASD, to prohibit a firm that has been 
terminated, suspended, or barred from the NASD, or that is otherwise 
defunct, from enforcing a predispute arbitration agreement against a 
customer in the NASD arbitration forum. Below is the text of the 
proposed rule change. Proposed new language is in italics.
* * * * *

10301. Required Submission

    (a) Any dispute, claim, or controversy eligible for submission 
under the Rule 10100 Series between a customer and an active member 
and/or associated person arising in connection with the business of 
such member or in connection with the activities of such associated 
persons shall be arbitrated under this Code, as provided by any duly 
executed and enforceable written agreement or upon the demand of the 
customer. A claim involving a member in the following categories shall 
be ineligible for submission to arbitration under the Code unless the 
customer agrees in writing to arbitrate the claim after it has arisen:
    1.  A member whose membership is terminated, suspended, canceled, 
or revoked;
    2. A member that has been expelled from the NASD; or
    3. A member that is otherwise defunct.
    (b)-(d) Unchanged.
* * * * *

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

    In its filing with the Commission, NASD Dispute Resolution 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. NASD Dispute Resolution 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
    In October 1998, the Government Accounting Office (``GAO'') 
undertook a study of the securities industry arbitration process, 
focusing on the number of unpaid arbitration awards. In its report, 
Securities Arbitrations: Actions Needed to Address Problem of Unpaid 
Awards (``GAO Report''), the GAO found that a significant percentage of 
the awards favorable to customers that were issued in 1998 were unpaid. 
The majority of unpaid awards involved arbitration cases against firms 
that the NASD had terminated from membership for serious violations of 
the federal securities laws and NASD rules, or that had filed for 
bankruptcy. In fact, investors collect their awards in well over 90 
percent of the NASD cases involving active firms.
    The GAO noted that the NASD takes aggressive action to address 
complaints about nonpayment of awards. However, in response to the 
recommendations in the GAO Report, NASD Dispute Resolution has taken 
the following additional steps to track and address non-payment. In 
NASD Notice to Members 00-55, published August 10, 2000, NASD Dispute 
Resolution introduced a new system of monitoring and tracking 
compliance with arbitration awards by members and associated persons. 
On September 18, 2000, NASD Dispute Resolution began asking Claimants 
to notify it if a member or associated person has not paid the 
arbitration award within 30 calendar days of receipt of the award. In 
addition, member firms are now required to notify NASD Dispute 
Resolution in writing within 30 days of receipt of an award that they 
or their associated persons have paid or otherwise complied with the 
award, or to identify a valid basis for non-payment. NASD Dispute 
Resolution has agreed to provide the Commission with quarterly reports 
on the results of this process. These steps will enable the NASD to 
institute suspension proceedings promptly when appropriate, and will 
prevent unnecessary regulatory effort in cases in which the award is 
the subject of a pending motion to vacate or there is another valid 
basis for non-payment.
    Even in light of NASD Dispute Resolution's vigorous efforts to 
ensure payment of awards, the GAO Report highlighted the fact that 
customers in arbitration cases involving terminated or suspended 
members face a significantly higher risk of non-payment than in cases 
involving active members. While non-payment of awards by terminated or 
suspended members is beyond the control of NASD Dispute Resolution, 
NASD Dispute Resolution recognizes that it may be inappropriate to 
permit terminated or suspended members to require customers who have 
claims against them to arbitrate such claims in the NASD forum when an 
arbitration award may be unenforceable against the terminated or 
suspended member. In such cases, NASD Dispute Resolution believes that 
even customers who have signed a predispute arbitration agreement 
should be able to seek relief in court, where they could more directly 
avail themselves of any judicial remedies available under state law, 
including those that might prevent the dissipation of assets. Due to 
the time required for the appointment of arbitrators, and the delay 
inherent in the process of converting an arbitration award into an 
enforceable judgment, the ability to go directly to court to seek 
relief may save customers precious time in cases in which the 
dissipation of assets is a threat.
    Therefore, NASD Dispute Resolution is proposing to amend Rule 10301 
of the Code of Arbitration Procedure to prohibit a firm that has been 
terminated, suspended, or expelled from the NASD, or that is otherwise 
defunct, from enforcing a predispute arbitration agreement against a 
customer in the NASD forum. As a corollary to this rule change, NASD 
Dispute Resolution will advise customers making claims against a 
terminated or suspended member of the member's status, so that the 
customers can decide whether to proceed in arbitration, to file their 
claim in court, or to take no action.
    The proposed rule change precludes terminated, suspended, barred, 
or otherwise defunct members from requiring a customer to arbitrate in 
the NASD forum under Rule 10301, unless the customer agrees in writing 
to arbitrate the claim in the NASD forum

[[Page 13364]]

after the claim has arisen. The proposed rule change is similar to Rule 
10301(d) of the Code of Arbitration Procedure, which provides that 
class actions are ineligible for arbitration in the NASD forum. It is 
also similar in principle to New York Stock Exchange (``NYSE'') Rule 
600(f), which makes employment discrimination claims ineligible for 
arbitration in the NYSE forum unless the parties agree to arbitrate 
after the claim has arisen.
2. Statutory Basis
    NASD Dispute Resolution believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\5\ 
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. Because terminated, 
suspended, barred or otherwise defunct firms have a significantly 
higher incidence of non-payment of arbitration awards than do active 
firms, NASD Dispute Resolution believes that the proposed rule change 
will protect investors and the general public by giving customers 
greater flexibility to seek remedies against such firms.

B. Self-Regulatory Organization's Statement on Burden on Competition
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    \5\ 15 U.S.C. 78o(b)(6).
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    NASD Dispute Resolution 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, including whether it is consistent 
with the Act. Persons making written submissions should file six copies 
thereof with the Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. 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 the file number in the caption above and 
should be submitted by March 26, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-5250 Filed 3-2-01; 8:45 am]
BILLING CODE 8010-01-M