[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

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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