[Federal Register Volume 67, Number 84 (Wednesday, May 1, 2002)]
[Notices]
[Pages 21789-21792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10716]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45818; File No. SR-NASD-2002-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Situations in Which a Suspended, Terminated, or Otherwise Defunct 
Member or Associated Person Fails To Answer or Participate in an 
Arbitration Proceeding

April 24, 2002.
    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 February 1, 2002, 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 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by NASD Dispute 
Resolution. 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.
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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 10314 of the 
NASD Code of Arbitration Procedure (``Code'') to provide default 
procedures for situations in which a suspended, terminated, or 
otherwise defunct member or associated person fails to answer or 
participate in an arbitration proceeding, and the claimant nevertheless 
elects to pursue arbitration. Below is the text of the proposed rule 
change. Proposed new language is in italics.
* * * * *

[[Page 21790]]

Code of Arbitration Procedure

10314. Initiation of Proceedings
    Except as otherwise provided herein, an arbitration proceeding 
under this Code shall be instituted as follows:
    (a) Statement of Claim
    Unchanged.
    (b) Answer--Defenses, Counterclaims, and/or Cross-Claims
    (1) Unchanged.
    (2) (A)-(B) Unchanged.
    (C) A Respondent, Responding Claimant, Cross-Claimant, Cross-
Respondent, or Third-Party Respondent who fails to file an Answer 
within 45 calendar days from receipt of service of a Claim, unless the 
time to answer has been extended pursuant to subparagraph (5), below, 
may, in the discretion of the arbitrators, be barred from presenting 
any matter, arguments, or defenses at the hearing. Such a party may 
also be subject to default procedures as provided in paragraph (e) 
below.
    (3)-(4) Unchanged.
    (5) Unchanged.
    (c)-(d)
    Unchanged.
    (e) Default Procedures
    (1) A Respondent, Cross-Respondent, or Third-Party Respondent that 
fails to file an Answer within 45 calendar days from receipt of service 
of a Claim, unless the time to answer has been extended pursuant to 
paragraph (b)(5), may be subject to default procedures, as provided in 
this paragraph, if it is:
    (A) a member whose membership has been terminated, suspended, 
canceled, or revoked;
    (B) a member that has been expelled from the NASD;
    (C) a member that is otherwise defunct; or
    (D) an associated person whose registration is terminated, revoked, 
or suspended.
    (2) If all Claimants elect to use these default procedures, the 
Claimant(s) shall notify the Director in writing and shall send a copy 
of such notification to all other parties at the same time and in the 
same manner as the notification was sent to the Director.
    (3) If the case meets the requirements for proceeding under default 
procedures, the Director shall notify all parties.
    (4) The Director shall appoint a single arbitrator pursuant to Rule 
10308 to consider the Statement of Claim and other documents presented 
by the Claimant(s). The arbitrator may request additional information 
from the Claimant(s) before rendering an award. No hearing shall be 
held, and the default award shall have no effect on any non-defaulting 
party.
    (5) The Claimant(s) may not amend the claim to increase the relief 
requested after the Director has notified the parties that the claim 
will proceed under default procedures.
    (6) An arbitrator may not make an award based solely on the non-
appearance of a party. The party who appears must present a sufficient 
basis to support the making of an award in that party's favor. The 
arbitrator may not award damages in an amount greater than the damages 
requested in the Statement of Claim, and may not award any other relief 
that was not requested in the Statement of Claim.
    (7) If the Respondent files an Answer after the Director has 
notified the parties that the claim will proceed under default 
procedures but before an award has been rendered, the proceedings under 
this paragraph shall be terminated and the case will proceed under the 
regular procedures.
* * * * *

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
    NASD Dispute Resolution proposes to amend Rule 10314 of the Code to 
provide default procedures for situations in which a suspended, 
terminated, or otherwise defunct member or associated person 
(collectively referred to in this rule filing as ``defunct'') fails to 
answer or participate in an arbitration proceeding, and the claimant 
nevertheless elects to pursue arbitration. The procedures are designed 
to make it easier for claimants to obtain an award against a defunct 
party, which award can then be enforced in court.
    The United States General Accounting Office (``GAO'') issued a 
report in June 2000 expressing concern over the number of unpaid 
arbitration awards issued in connection with arbitration proceedings in 
the securities industry arbitration forums, and making several 
recommendations for improvements.\3\ The GAO Report observed that most 
of the unpaid awards resulted from broker/dealers that were no longer 
in business.\4\ In a letter to the GAO on May 25, 2000, the NASD 
committed to undertake several initiatives to address the issue of 
unpaid awards.\5\ The NASD Dispute Resolution believes that the 
proposed rule change will complete its implementation of all 
initiatives.
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    \3\ The report is entitled, ``Securities Arbitration: Actions 
Needed to Address Problem of Unpaid Awards,'' Report No. GAO/GGD-00-
115 (June 15, 2000) (``GAO Report''). The report is available online 
at www.gao.gov.
    \4\ See the GAO Report at page 8.
    \5\ The letter is reprinted in the GAO Report at page 66.
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    The GAO initiatives are listed below with a description as to the 
actions already taken. The last item is the proposed rule change.
    Require member firms and associated persons to notify NASD Dispute 
Resolution when they have satisfied an award.
    NASD Dispute Resolution issued Notice to Members 00-55, effective 
September 18, 2000, which requires members to certify that they have 
paid or otherwise complied with an award against them or their 
associated persons within 30 days after service of the award. Beginning 
September 18, 2000, NASD Dispute Resolution has been sending two new 
letters when awards are served. One letter is sent only to members and 
associated persons against whom an award has been rendered. It requires 
members to inform NASD Dispute Resolution whether they or their 
associated persons have paid awards against them. Associated persons 
who have changed members since the complaint was filed are required to 
notify NASD Dispute Resolution directly.\6\ NASD Dispute Resolution 
begins the suspension process if the 30-day period has passed and there 
has been no notice that the member or associated person has paid the 
award.
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    \6\ The respondent may also provide a justification for non-
payment: for example, that the parties have agreed to installment 
payments; that the award has been modified or vacated by a court; 
that a motion to vacate or modify the award has been timely filed 
with a court of competent jurisdiction and such motion has not been 
denied by that court; that there is a pending bankruptcy petition; 
or that the award has been discharged in bankruptcy.
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    Request in the award service letter that claimants notify NASD 
Dispute Resolution if the award has not been paid within an established 
number of days of service.
    Notice to Members 00-55 also invites claimants to inform NASD 
Dispute

[[Page 21791]]

Resolution if their awards against members or associated persons have 
not been paid, so that the non-summary suspension process can begin. 
The second letter implemented on September 18, 2000 is sent to all 
parties with service of their award. It restates the requirement to pay 
awards within 30 days of service, and requests parties who have 
prevailed against a member or associated person to inform NASD Dispute 
Resolution if their award has not been paid.
    Propose to the NASD Board and to the Commission a rule amendment 
that a firm that has been terminated, suspended, or barred from the 
NASD, or that is otherwise defunct, cannot enforce a predispute 
arbitration agreement against a customer in the NASD forum.
    The Boards of NASD Dispute Resolution and the NASD approved this 
proposal at their meetings on December 6 and 7, 2000. The Commission 
approved the rule change on April 6, 2001.\7\ Notice to Members 01-29, 
announcing the Commission's approval, was published on May 10, 2001, 
and the rule change was effective for all claims served on or after 
June 11, 2001.
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    \7\ Securities Exchange Act Release No. 44158 (April 6, 2001), 
66 FR 19267 (April 13, 2001) (File No. SR-NASD-01-08).
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    Advise claimants in writing of the status of a firm or associated 
person (e.g., terminated, out of business, bankrupt) so they can 
evaluate whether to continue with arbitration.
    This procedure was implemented on June 11, 2001, in connection with 
the previous item.
    Propose to the NASD Board and to the Commission a rule amendment to 
provide streamlined default proceedings where the terminated or defunct 
member or associated person does not answer or appear, but the claimant 
affirmatively elects to pursue arbitration.
    This is the present proposed rule change. It would provide an 
expedited default procedure for certain cases in which a respondent is 
an associated person whose registration is terminated, revoked, or 
suspended; a member whose membership has been terminated, suspended, 
canceled, or revoked; a member that has been expelled from the NASD; or 
a member that is otherwise defunct. If a defunct respondent fails to 
answer the claim in a timely manner, the claimant may elect to proceed 
under optional default procedures as to that respondent. If there are 
several claimants, all must agree to use default procedures. The 
default procedures may be used against one or more defunct respondents 
while the rest of the initial arbitration proceeds against any 
remaining respondents.\8\
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    \8\ If a case is to be bifurcated and handled under two 
different procedures, regular and default, each proceeding will be 
assigned a separate case number to avoid confusion. Proposed NASD 
Rule 10314(e) provides that the default award will have no effect on 
any non-defaulting party.
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    If the claimant opts to use default procedures, the case will 
proceed with a single arbitrator without a hearing. Under the default 
procedures, the arbitrator will make an award based upon the Statement 
of Claim and any other material submitted by the claimant. The 
arbitrator may request additional information from the claimant before 
rendering an award. In keeping with the streamlined nature of the 
procedures, neither the claimant nor the single arbitrator will have 
the option to ask that two additional arbitrators be appointed to 
decide the case (as is sometimes done in other single-arbitrator 
cases).
    The procedures have several provisions to safeguard the integrity 
of the process and discourage abuses:
     The claimant may not amend the claim to increase the 
relief requested after the staff has notified the parties that the 
claim will proceed under default procedures.
     An arbitrator may not make an award based solely on the 
non-appearance of a party. The party who appears must present a 
sufficient basis to support the making of an award in that party's 
favor.
     The arbitrator may not award damages in an amount greater 
than the damages requested in the Statement of Claim, and may not award 
any other relief that was not requested in the Statement of Claim.
    The proposed rule provides, however, that the default award will 
have no effect on the non-defaulting parties. The proposed rule would 
apply to all types of claimants, whether they are customers, associated 
persons, or member firm claimants, that are bringing a claim against a 
suspended or terminated member or associated person. In line with the 
GAO's recommendations, the proposal is designed to make it easier to 
obtain an award against any defunct member or associated person.
    Finally, if a respondent thought to be defunct belatedly files an 
answer or otherwise begins to participate after the staff has notified 
the parties that the claim will proceed under default procedures but 
before an award has been rendered, the default procedures will be 
suspended, and the case will proceed under the regular procedures.
2 Statutory Basis
    NASD Dispute Resolution believes that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act \9\ 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. NASD Dispute Resolution believes that the 
proposed rule change will protect investors and the public interest by 
making it faster and less expensive for investors and other claimants 
to obtain awards against defunct members and associated persons, which 
awards can then be enforced in court and through the NASD suspension 
process, while containing several provisions to safeguard the integrity 
of the process and discourage abuses.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Dispute Resolution does not believe that the proposed rule 
change will impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 NASD Dispute Resolution 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 the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the

[[Page 21792]]

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 File No. SR-NASD-2002-15 and should be 
submitted by May 22, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10716 Filed 4-30-02; 8:45 am]
BILLING CODE 8010-01-P