[Federal Register Volume 69, Number 89 (Friday, May 7, 2004)]
[Notices]
[Pages 25652-25654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10398]
[[Page 25652]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49636; File No. SR-NASD-2003-69]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc.
Regarding Failure To Pay Arbitration Awards
April 30, 2004.
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 April 7, 2003, the National Association of Securities Dealers, Inc.
(``NASD'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') a proposed rule change as described in Items I, II,
and III below, which Items have been prepared by NASD. On March 5,
2004, NASD filed Amendment No. 1 to the proposed rule change.\3\ 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 Kosha K. Dalal, Assistant General Counsel,
NASD, to Katherine A. England, Assistant Director, Division of
Market Regulation, Commission, dated March 5, 2004.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to (1) amend Article V, Section 4 of the NASD By-
Laws to permit NASD to suspend for failure to pay an arbitration award
or settlement, for a period of two years after the award is entered,
former associated persons who terminated their registration before the
award was entered; and (2) amend Article VI, Section 3 of the NASD By-
Laws to clarify that NASD may suspend the association, and not just the
registration, of any person who fails to pay an arbitration award.
Below is the text of the proposed rule change. Proposed new language is
in italics; proposed deletions are in [brackets].
* * * * *
Article V
REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS
* * * * *
Retention of Jurisdiction
Sec. 4.(a) A person whose association with a member has been
terminated and is no longer associated with any member of [the] NASD or
a person whose registration has been revoked or canceled shall continue
to be subject to the filing of a complaint under the NASD Rules [of the
Association] based upon conduct [which] that commenced prior to the
termination, revocation, or cancellation or upon such person's failure,
while subject to [the] NASD's jurisdiction as provided herein, to
provide information requested by [the] NASD pursuant to the NASD Rules
[of the Association], but any such complaint shall be filed within:
[(a)](i) two years after the effective date of termination of
registration pursuant to Section 3, provided, however that any
amendment to a notice of termination filed pursuant to Section 3(b)
that is filed within two years of the original notice [which] that
discloses that such person may have engaged in conduct actionable under
any applicable statute, rule, or regulation shall operate to recommence
the running of the two-year period under this subsection;
[(b)](ii) two years after the effective date of revocation or
cancellation of registration pursuant to the NASD Rules [of the
Association]; or
[(c)](iii) in the case of an unregistered person, [within] two
years after the date upon which such person ceased to be associated
with the member.
(b) A person whose association with a member has been terminated
and is no longer associated with any member of NASD shall continue to
be subject to a proceeding to suspend, consistent with Article VI,
Section 3 of the By-Laws, his or her ability to associate with a member
based on such person's failure to comply with an arbitration award or a
written and executed settlement agreement obtained in connection with
an arbitration or mediation submitted for disposition pursuant to the
NASD Rules, provided that such proceeding is instituted within two
years after the date of entry of such award or settlement.
* * * * *
Article VI
DUES, ASSESSMENTS, AND OTHER CHARGES
* * * * *
Suspension or Cancellation [of Membership or Registration
Sec. 3.(a) [The] NASD after 15 days notice in writing, may suspend
or cancel the membership of any member or the registration of any
person in arrears in the payment of any fees, dues, assessments, or
other charges or for failure to furnish any information or reports
requested pursuant to Section 2 [, or for failure to comply with an
award of arbitrators properly rendered pursuant to the Rules of the
Association, where a timely motion to vacate or modify such award has
not been made pursuant to applicable law or where such a motion has
been denied, or for failure to comply with a written and executed
settlement agreement obtained in connection with an arbitration or
mediation submitted for disposition pursuant to the Rules of the
Association].
(b) NASD after 15 days notice in writing, may suspend or cancel the
membership of any member or suspend from association with any member
any person, for failure to comply with an award of arbitrators properly
rendered pursuant to the NASD Rules, where a timely motion to vacate or
modify such award has not been made pursuant to applicable law or where
such a motion has been denied, or for failure to comply with a written
and executed settlement agreement obtained in connection with an
arbitration or mediation submitted for disposition pursuant to the NASD
Rules.
* * * * *
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 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 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
Amendment Regarding Former Associated Persons Who Fail To Pay
Arbitration Awards
Article VI, Section 3 of the NASD By-Laws (Dues, Assessments and
Other Charges) allows NASD to seek suspensions or cancellations for
failure to comply with an award or settlement agreement relating to an
arbitration or mediation.\4\ If a person becomes subject to an
arbitration award or enters into a
[[Page 25653]]
settlement agreement in arbitration while associated with a member,
then terminates his or her association with the member before paying
the arbitration award or settlement, NASD may bring an action against
that former associated person based on his or her failure to pay. Such
actions are permissible because Article V, Section 4 of the NASD By-
Laws (Retention of Jurisdiction) provides that a person whose
association with a member has terminated continues to be subject to
NASD proceedings based on conduct that began before the termination,
provided such proceeding is brought within two years after the
termination. The word ``termination'' as used in Article V, Section 4
shall mean the following: (1) When applied to associated persons who
are registered with NASD, that time when a Form U5 with respect to such
person is filed with NASD; or (2) when applied to associated persons
who are not registered with NASD, that time when such person ceases to
be associated with a member, regardless of whether, in the case of (1)
or (2), such termination is voluntary or involuntary, or with or
without cause.
In 1998, the NASD Board of Governors directed the Office of Hearing
Officers to dismiss, for lack of jurisdiction, a proceeding alleging
failure to pay an arbitration award against a person who terminated his
association after the arbitration proceeding commenced but before an
arbitration award was entered against him.\5\ The Board held that
because the conduct underlying the proceeding (i.e. the failure to pay
an arbitration award) did not begin until after the person's
association terminated, NASD did not have jurisdiction over the person
under Article V, Section 4 of NASD By-Laws.
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\4\ The Rule 9510 Series describes the process by which NASD may
suspend or cancel the membership of any member or the registration
of any person for failure to pay an arbitration award or settlement
agreement executed in connection with an arbitration or medication
occurring under NASD Rules.
\5\ See Department of Enforcement v. Jonathan Winston, Non-
Summary Proceeding No. ARB980006 (Office of Hearing Officers,
December 15, 1998).
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NASD is concerned that a person associated with a member will
terminate his or her association with the member once aware that an
arbitration award may be entered against him or her in order to avoid
sanction by NASD for failure to pay any award or settlement agreement
resulting from the proceeding. Accordingly, the proposed rule change
provides that for the limited purpose of instituting proceedings for
failure to pay arbitration awards or settlements, NASD retains, for a
period of two years after the entry of the award or settlement,
jurisdiction to impose suspensions against former associated persons if
the award or settlement resulted from a claim submitted for arbitration
or mediation pursuant to the NASD Rules. Suspending these persons will
prevent them from re-entering the industry until the award is paid.
Proposed Subsection 4(b) does not limit in any manner the authority of
NASD to act pursuant to Subsection 4(a).
Amendment Regarding Sanctions Against Associated Persons Who Fail To
Pay Arbitration Awards
The Rule 9510 Series, which provides a procedural framework for
actions taken pursuant to Article VI, Section 3 of the NASD By-Laws,
states that NASD may seek a suspension or cancellation for failure to
comply with an award or settlement agreement relating to an arbitration
or mediation pursuant to Article VI, Section 3 of the NASD By-Laws.
Article VI, Section 3 specifies that NASD may suspend or cancel the
registration of any person for failure to comply with arbitration
awards or settlements. Persons suspended from registration with NASD
for failing to pay arbitration awards arguably may seek to associate
with member firms in unregistered capacities. NASD proposes amending
Article VI, Section 3 of the NASD By-Laws to clarify that NASD may
suspend any person from associating with a member in any capacity for
failure of such person to comply with an arbitration award or
settlement.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\6\ which requires, among
other things, that NASD 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. Specifically, the proposed rule change strengthens
NASD's ability to prevent persons who fail to honor securities-related
arbitration awards from seeking to re-enter the securities business,
and clarifies that persons who fail to honor such awards may be
suspended from associating with NASD members in any capacity.
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\6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
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. NASD issued
Notice to Members 03-04 on January 10, 2003 soliciting its members to
vote on the proposed rule change. NASD members approved the proposed
rule change by vote completed on February 10, 2003.
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 the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic comments:
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-NASD-2003-69.
Paper comments:
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-NASD-2003-69. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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
[[Page 25654]]
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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such filing also will be available for inspection and copying at the
principal office of the NASD. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NASD-2003-69 and should be submitted on or before May
28, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-10398 Filed 5-6-04; 8:45 am]
BILLING CODE 8010-01-P