[Federal Register Volume 66, Number 72 (Friday, April 13, 2001)]
[Notices]
[Pages 19267-19268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9147]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44158; File No. SR-NASD-01-08]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the 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

April 6, 2001.

I. Introduction

    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''), pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed a rule 
change 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. 
On February 15, 2001, NASD Dispute Resolution filed Amendment No. 1 to 
the proposal. On February 22, 2001, NASD Dispute Resolution filed 
Amendment No. 2 to the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change including Amendment Nos. 1 and 2, was 
published for comment in the Federal Register on March 5, 2001.\3\ No 
comments were received on the proposal. This order approves the 
proposal.
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    \3\ Securities Exchange Act Release No. 43998 (February 23, 
2001), 66 FR 13362.
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II. Description of the Proposal

    NASD Dispute Resolution is proposing to amend Rule 10301 of the 
Code of Arbitration Procedure to prohibit a member whose membership has 
been terminated, suspended, cancelled or revoked, or has been expelled 
from the NASD, or that is otherwise defunct, from enforcing a 
predispute arbitration agreement against a customer in the NASD forum. 
The proposed rule change precludes a member whose membership has been 
terminated, suspended, cancelled or revoked, or has been expelled from 
the NASD, or that is otherwise defunct, 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 after the 
claim has arisen. As a corollary to this rule change, NASD Dispute 
Resolution stated in its Notice that it will advise customers making 
arbitration claims in the NASD forum against a member whose membership 
has been terminated, suspended, cancelled or revoked, or a member that 
has been expelled from the NASD, or that is otherwise defunct, 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.

III. Discussions

    After careful review, the Commission finds that the proposed rule 
changes is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
association.\4\ In particular, the Commission 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 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.
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    \4\ In approving this rule proposal, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \5\ 15 U.S.C. 78o(b)(6).
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    The Commission believes that because terminated, suspended, barred 
or otherwise defunct firms have a significantly higher incidence of 
non-payment of arbitration awards than do active firms,\6\ the proposed 
rule change will protect investors and the general public by giving 
customer greater flexibility to seek remedies against such firms. The 
Commission believes that because of experience with non-payment by such 
firm, it is 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, the 
Commission believes that even if customers have signed a predispute 
arbitration agreement, they should be able to seek relief in court 
before engaging in arbitration proceedings, where they could more 
directly avail themselves of any judicial remedies available under 
state law, including those that might prevent the dissipation of 
assets. The Commission notes that the NASD and other self-regulatory 
organizations that administer arbitration programs have concluded that 
other categories of claims, such as class action claims, should be 
resolved in court rather than through arbitration.\7\ The Commission 
believes that allowing customers to choose to go directly to seek 
relief may save them time and expense in cases against members who have 
been terminated or expelled and in which the dissipation of assets is a 
threat.
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    \6\ See June 2000 General Account Office Report, Securities 
Arbitration: Actions Needed to Address Problem of Unpaid Awards.
    \7\ See e.g., NASD Rule 10301(d) and New York Stock Exchange 
Rule 600(f).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the

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proposed rule change (SR-NASD-01-08) is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-9147 Filed 4-12-01; 8:45 am]
BILLING CODE 8010-01-M