[Federal Register Volume 60, Number 159 (Thursday, August 17, 1995)]
[Notices]
[Pages 42930-42931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20403]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36088; File No. SR-NASD-95-20]
Self-Regulatory Organizations; Order Approving 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
August 10, 1995.
On June 9, 1995, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ a
proposed rule relating to the failure to honor settlement agreements
obtained in connection with an arbitration or mediation.\2\ The
Commission published notice of the proposed rule change in the Federal
Register on June 20, 1995.\3\ The Commission received one comment in
response to the notice.\4\ The Commission has reviewed the comment
received, and for the reasons discussed below, approves the proposed
rule change.
\1\ 15 U.S.C. 78s(b)(1).
\2\ The NASD originally submitted the proposed rule change on
May 10, 1995. The NASD subsequently submitted two minor technical
amendments, and one amendment reporting the final count of votes
cast by members in favor of the rule change. The text of these
amendments 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; and Letter from Frank J. Formica, NASD,
to Mark P. Barracca, Branch Chief, Division of Market Regulations,
SEC (July 13, 1995).
\3\ Securities Exchange Act Release No. 35847 (June 14, 1995),
60 FR 32190.
\4\ Letter from Paul J. Dubow, Chairman, Arbitration
Subcommittee of the Litigation Section, Securities Industry
Association (``SIA'') to Secretary, SEC (July 11, 1995).
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I. Description
The amendments to the Resolution of the Board of Governors--Failure
to Act Under Provisions of Code of Arbitration Procedure
(``Resolution'') makes clear that the following acts constitute 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 rule change
also amends 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. Discussion
The Commission agrees with the NASD's judgment that the failure by
a member or associated person to honor a settlement agreement entered
into in connection with an arbitration proceeding or a NASD mediation
should have the same consequences as the failure to pay an arbitration
award.\5\ The Commission is concerned that a failure by a NASD 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 agreements where parties fail
to honor settlement agreements and additional fees connected with
short-notice cancellation of hearing. The NASD reports that is
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 credibility of the arbitration process will
suffer if NASD members and their associated persons delay the
resolution of a dispute by failing to honor a settlement agreement.
\5\ The Resolution, adopted in 1973, 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] * * *.'' This Resolution applies to
awards rendered in NASD sponsored arbitration, as well as
arbitration sponsored by the American Arbitration Association
(``AAA'') and other SROs.
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This rule change amends the Resolution to clarify that the failure
by a member or associated person to honor a written and executed
settlement agreement is 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.
In its comments,\6\ the SIA argues against adoption of the rule
because: (1) The NASD has not established a problem exists with respect
to failing to honor settlement agreements that warrants a rule change;
(2) it is not balanced or even-handed in that there are no provisions
in the rule that could be used to sanction non-members who fail to
honor a written settlement agreement; and (3) it proposes to impose
sanctions for failure to honor settlement agreements in connection with
arbitrations held at other forums. The Commission finds the SIA's
arguments unpersuasive.
\6\ See note 4, supra.
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With respect to the SIA's first comment, the NASD, in its response
to the SIA, points out that while the problem of failure to honor a
settlement agreement may not be a pervasive problems, it is nonetheless
a problem that needs to be addressed.\7\ This rule addresses the
problem before it becomes more serious.
\7\ Letter from Elliott R. Curzon, Assistant General Counsel,
NASD, to Mark P. Barracca, Branch Chief, SEC (July 19, 1995) (NASD
``response'').
The SIA's second comment describes the rule as not balanced because
it fails
[[Page 42931]]
to provide for sanctions against non-members who fail to honor
settlement agreements. This argument fails to take the NASD's
jurisdictional limitations into account. The NASD is not in a position
to pass rules governing non-members. Additionally, NASD members and
associated persons have an obligation to ``observe high standards of
commercial honor'' under Article III, Section 1 of the NASD's Rules of
Fair Practice, and honoring settlement agreements is a component of
commercial honor. Furthermore, NASD members and associated persons are
afforded procedural protection under NASD rules during the adjudication
of these matters.
With respect to the SIA's final comment, the Commission notes that
the rule change does not provide for the use of the NASD's suspension
or revocation proceedings where the settlement is not obtained in
connection with NASD arbitration. As indicated in the NASD's response,
where a party to an arbitration conducted in another forum complains to
the NASD that a member or an associated person failed to honor a
settlement agreement, the complaint would be investigated in the same
manner as any other customer complaint pursuant to the NASD's
disciplinary process. The NASD reports that such an investigation would
include obtaining copies of the records of the arbitration proceeding
from the other forum and determining if there are any facts that would
demonstrate that disciplinary action is warranted. If a member or
associated person is deemed to have violated a settlement agreement, a
formal complaint will be issued and the member or associated person
will be entitled to a hearing before a panel of a District Business
Conduct Committee and be afforded a right to appeal any adverse
decision to the National Business Conduct Committee, the SEC and the
courts. See NASD Code of Procedure. In short, the rule will provide for
greater investor protection without reducing any procedural rights NASD
members and associated persons have under the rules.
The Commission believes that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act.\8\ Requiring
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 methods and eliminate
the unfair impact and waste of resources experienced by the public,
other litigants and the arbitration/mediation forum that result from
the failure to honor a settlement agreement.
\8\ 15 U.S.C. 78o-3.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-NASD-95-20 be, and hereby is,
approved. The effective date of this rule change will be announced by
the NASD in a Notice to Members to be published no more than 45 days
after SEC approval, provided, however, that the effective date will be
no more than 60 days following publication of the Notice to Members
announcing SEC approval.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20403 Filed 8-16-95; 8:45 am]
BILLING CODE 8010-01-M
