01-9147. Self-Regulatory Organizations; Order Approving Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Amendments to Rule 10301 of the Code of Arbitration Procedure To Prohibit Terminated, Suspended, Barred ...

April 6, 2001.

I. Introduction

On January 25, 2001, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), through its wholly owned subsidiary, NASD Dispute Resolution, Inc. (“NASD Dispute Resolution”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ^[1] and Rule 19b-4 thereunder,^[2] proposed a rule change to amend Rule 10301 of the Code of Arbitration of the NASD, to prohibit a firm that has been terminated, suspended, or barred from the NASD, or that is otherwise defunct, from enforcing a predispute arbitration agreement against a customer in the NASD arbitration forum. On February 15, 2001, NASD Dispute Resolution filed Amendment No. 1 to the proposal. On February 22, 2001, NASD Dispute Resolution filed Amendment No. 2 to the proposal.

The proposed rule change including Amendment Nos. 1 and 2, was published for comment in the Federal Register on March 5, 2001.^[3] No comments were received on the proposal. This order approves the proposal.

II. Description of the Proposal

NASD Dispute Resolution is proposing to amend Rule 10301 of the Code of Arbitration Procedure to prohibit a member whose membership has been terminated, suspended, cancelled or revoked, or has been expelled from the NASD, or that is otherwise defunct, from enforcing a predispute arbitration agreement against a customer in the NASD forum. The proposed rule change precludes a member whose membership has been terminated, suspended, cancelled or revoked, or has been expelled from the NASD, or that is otherwise defunct, from requiring a customer to arbitrate in the NASD forum under Rule 10301, unless the customer agrees in writing to arbitrate the claim in the NASD forum after the claim has arisen. As a corollary to this rule change, NASD Dispute Resolution stated in its Notice that it will advise customers making arbitration claims in the NASD forum against a member whose membership has been terminated, suspended, cancelled or revoked, or a member that has been expelled from the NASD, or that is otherwise defunct, of the member's status, so that the customers can decide whether to proceed in arbitration, to file their claim in court, or to take no action.

III. Discussions

After careful review, the Commission finds that the proposed rule changes is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.^[4] In particular, the Commission believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,^[5] 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.

The Commission believes that because terminated, suspended, barred or otherwise defunct firms have a significantly higher incidence of non-payment of arbitration awards than do active firms,^[6] the proposed rule change will protect investors and the general public by giving customer greater flexibility to seek remedies against such firms. The Commission believes that because of experience with non-payment by such firm, it is inappropriate to permit terminated or suspended members to require customers who have claims against them to arbitrate such claims in the NASD forum when an arbitration award may be unenforceable against the terminated or suspended member. In such cases, the Commission believes that even if customers have signed a predispute arbitration agreement, they should be able to seek relief in court before engaging in arbitration proceedings, where they could more directly avail themselves of any judicial remedies available under state law, including those that might prevent the dissipation of assets. The Commission notes that the NASD and other self-regulatory organizations that administer arbitration programs have concluded that other categories of claims, such as class action claims, should be resolved in court rather than through arbitration.^[7] The Commission believes that allowing customers to choose to go directly to seek relief may save them time and expense in cases against members who have been terminated or expelled and in which the dissipation of assets is a threat.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[8] that the proposed rule change (SR-NASD-01-08) is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[9]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  Securities Exchange Act Release No. 43998 (February 23, 2001), 66 FR 13362.

4.  In approving this rule proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

5.  15 U.S.C. 78 o (b)(6).

6.  See June 2000 General Account Office Report, Securities Arbitration: Actions Needed to Address Problem of Unpaid Awards.

7.  See e.g., NASD Rule 10301(d) and New York Stock Exchange Rule 600(f).

8.  15 U.S.C. 78s(b)(2).

9.  17 CFR 200.30-3(a)(12).