[Federal Register Volume 60, Number 118 (Tuesday, June 20, 1995)]
[Notices]
[Pages 32190-32191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14979]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35847; File No. SR-NASD-95-20]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the Failure to Honor Settlement Agreements Obtained in Connection With
an Arbitration or Mediation
June 14, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 9,
1995, the National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which items have been prepared by the
NASD.\1\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
\1\ The NASD originally submitted the proposed rule change on
May 10, 1995. The NASD subsequently submitted two minor technical
amendments, the text of which may be examined in the Commission's
Public Reference Room. See Letters from Suzanne E. Rothwell,
Associate General Counsel, NASD, to Mark P. Barracca, Branch Chief,
Division of Market Regulation, SEC (May 16, 1995 and June 9, 1995).
This notice reflects those amendments.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend the Resolution of the Board of
Governors--Failure to Act Under Provisions of Code of Arbitration
Procedure (``Resolution'') to make the following acts a violation of
Article III, Section 1 of the Rules of Fair Practice: (a) A failure to
honor a written and executed settlement agreement obtained in
connection with an arbitration conducted under the auspices of a Self-
Regulatory Organization (``SRO''); and (b) a failure to honor a written
and executed settlement agreement obtained in connection with a
mediation conducted under the auspices of the NASD. The instant filing
also proposes to amend Article VI, Section 3 of the NASD By-Laws to
permit the NASD to suspend or cancel the membership or registration of
a member or associated person for failing to honor a written and
executed settlement agreement obtained in connection with an
arbitration or mediation conducted under the auspices of the NASD.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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. The 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. Enforcing Settlement Agreements
In connection with the administration of its arbitration program
the NASD states that many disputes or claims for damages submitted to
arbitration before the NASD, or another SRO forum or the American
Arbitration Association (``AAA''), are settled prior to a hearing on
the merits. In addition, the NASD is currently developing a mediation
program, to be administered in connection with the arbitration program,
where parties will be participating in a process that the NASD believes
will increase the number of claims that are settled prior to a
hearing.\2\
\2\ The NASD has separately submitted a proposed rule change
relating to the establishment of a Mediation Program. See Securities
Exchange Act Release No. 35830 (June 9, 1995).
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The NASD also notes that occasionally members and persons
associated with members fail to comply with settlement agreements
reached in connection with arbitration proceedings. These settlements
may have been reached prior to the hearing on the matter and, as a
result, the hearing is canceled only to be rescheduled following a
party's failure to honor the settlement. In other cases, matters are
settled and claims withdrawn only to be refiled later after a member or
associated person fails to honor the agreement.
The NASD is concerned that a failure by a member or associated
person to honor a settlement agreement imposes substantial added costs
on the prevailing party or parties in the form of delayed recoveries,
actions to enforce the agreements and additional fees connected with
short-notice cancellation of hearings. The NASD's Arbitration
Department also incurs additional costs in rescheduling hearings, and
on occasion has had to appoint new arbitrators to hear a matter. In
addition, the NASD believes that the credibility of the arbitration
process suffers if members and their associated persons are able to
delay the resolution of a dispute by failing to honor a settlement
agreement.
The Resolution states that ``it may be deemed * * * a violation of
Article III, Section 1 of the Rules of Fair Practice for a member or
person associated with a member to * * * fail to honor an [arbitration]
award * * *.'' The Resolution was adopted in 1973 and has been used to
discipline members and associated persons who fail to pay an
arbitration award unless they have moved to vacate the award.\3\ The
Resolution applies to awards rendered in NASD arbitrations, as well as
arbitrations sponsored by other SROs and the AAA.
\3\ Under the Federal Arbitration Act and many state statutes
such a motion to vacate must be filed within 90 days after the award
is rendered.
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The NASD believes that the failure by a member or associated person
to honor a settlement agreement entered into in connection with an
arbitration proceeding or a mediation should have the same consequences
as the failure to pay an arbitration award. Therefore, the NASD is
proposing to amend the Resolution to make the failure by a member or
associated person to honor a written and executed settlement
[[Page 32191]] agreement actionable as a violation of Article III,
Section 1 of the Rules of Fair Practice. The amendment is limited to
settlement agreements that have been reduced to writing and have been
executed. The amendment, therefore, will not encompass unexecuted
settlements.
2. Use of Revocation Procedures
In 1993, the NASD amended Article VI, Section 3 of the By-laws to
specify that a membership or registration could be suspended or
cancelled on fifteen (15) days notice for failing to honor an
arbitration award rendered in an NASD arbitration. The use of such an
expedited or ``revocation'' proceeding was limited to awards in NASD
sponsored proceedings because the NASD's oversight of the arbitration
process provided greater assurance about the awards that would be
enforced in such proceedings.\4\
\4\ Revocation proceedings initiated under Article VI, Section 3
of the By-Laws are conducted pursuant to Article VI of the NASD's
Code of Procedure. As such they are subject to review by a hearing
panel upon request of the member or associated person. The use of
Article VI of the Code of Procedure for such proceedings was
initiated in connection with the NASD's adoption of an amendment to
Article VI, Section 3 of the By-Laws relating to failure to pay
arbitration awards. See, SR-NASD-91-73, approved by the SEC in
Securities Exchange Act Release No. 31763 (January 28, 1993).
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The NASD believes that the failure by a member or an associated
person of a member to honor settlement agreements entered into in
connection with an arbitration proceeding or mediation sponsored by the
NASD should be subject to the same revocation proceedings as are
arbitration awards. Accordingly, the NASD is also proposing to amend
Article VI, Section 3 of the By-Laws to specify that membership or
registration can be suspended or cancelled on fifteen (15) days notice
for failing to honor a settlement agreement obtained in connection with
an NASD arbitration or mediation. The action of the NASD under Article
VI, Section 3 of the By-Laws with respect to failure to honor
settlement agreements will be conducted as a revocation proceeding
pursuant to the provisions of Article VI of the Code of Procedure,
which provides an opportunity for review of the NASD's action upon
written request of the member or associated person.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act \5\ in that forcing
members or associated persons of a member to abide by settlement
agreements entered into in compromise of a dispute pending in
arbitration or mediation will enhance the effectiveness of arbitration
and mediation as alternative dispute resolution forums and eliminate
the unfair impact and waste of resources experienced by the public,
other litigants and the arbitration/mediation forum that results from
the failure to honor a settlement agreement.
\5\ 15 U.S.C. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The 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.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 number SR-NASD-95-20 and
should be submitted by July 11, 1995.
For the Commission, by the Division of Market Regulations,
pursuant to delegated authority.\6\
\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14979 Filed 6-19-95; 8:45 am]
BILLING CODE 8010-01-M