SEC Approves Code of Procedure Amendments That Permit the NASD to Institute Summary Revocation Proceedings For Failing to Pay an Arbitration Award

Executive Summary

On January 26, 1993, the Securities and Exchange Commission (SEC) approved an amendment to Article VI, Section 3 of the NASD By-Laws that permits the NASD to institute revocation proceedings against any member or associated person that fails to pay an arbitration award rendered by an NASD panel if a timely motion to vacate or modify the award has either not been filed or has been denied. The text of the amendment follows this Notice.

Background

In recent years, disciplinary actions involving failure to pay arbitration awards have congested the disciplinary dockets of the NASD's District Business Conduct Committees. Accordingly, the NASD has amended the By-Laws to permit initiation of revocation proceedings against members and associated persons that fail to pay arbitration awards rendered by an NASD arbitration panel.¹ The amendment took effect when the SEC approved it on January 26, 1993.

Currently, the NASD's Code of Arbitration Procedure contains a Resolution of the Board of Governors (Resolution) (paragraph 3744, page 3726 of the NASD Manual) that says failure to pay an arbitration award properly rendered by any one of several arbitration forums may be deemed "conduct inconsistent with just and equitable principles of trade and a violation of Article III, Section 1 of the Rules of Fair Practice" of the NASD. The Resolution contemplates a disciplinary action against a member firm or associated person for failing to pay an arbitration award rendered by the NASD; another self-regulatory organization administering the Securities Industry Conference on Arbitration's Uniform Code; or the American Arbitration Association.

The NASD routinely brings disciplinary action for failing to pay arbitration awards when such violations are discovered through referrals from the NASD's Arbitration Department or other NASD departments; through referrals from other self-regulatory organizations; through routine or non-routine investigations; or through customer complaints. In 1991, the Arbitration Department referred 122 cases to the NASD's district offices for investigation of failure to pay an arbitration award rendered in the NASD's arbitration forum. In 1990, the Arbitration Department referred 82 such cases.

The amendment permits the NASD to employ its revocation procedures under Article VI of the Code of Procedure if a member or associated person fails to pay an arbitration award rendered by an NASD arbitration panel where a timely motion to vacate or modify the arbitration award has either not been filed or has been denied. Under Article VI of the Code of Procedure, the NASD will notify the member or associated person at least 15 days before the effectiveness of the proposed revocation. The member or associated person may file a written request for a hearing that must be received by the NASD before the expiration of the 15-day notice period. In the event a hearing is requested, a hearing panel designated by the NASD will hear the matter. Any decision rendered by such a hearing panel will constitute final NASD action and any revocation will be effective on a date established by the panel.

While Article VI, Section 3 of the Code of Procedure provides that a respondent in such a hearing is entitled to present "any relevant matter," the arbitration proceeding and award which formed the basis for the revocation proceeding will not be subject to review or collateral attack. Such review or collateral attack may only be had pursuant to a timely motion to vacate or modify the arbitration award in accordance with applicable law made before a court of competent jurisdiction. Therefore, the only relevant matters before a panel in a revocation proceeding will be to determine if the award was validly issued pursuant to the rules of the arbitration forum and if it has been paid. The existence of a settlement agreement between the parties to the arbitration proceeding calling for the payment of the award, provided the agreement is not in default, may be relevant to the issue of payment in such a proceeding.

Questions concerning this Notice may be directed to the NASD's Arbitration Department at (212) 480-4881.

¹ The proposed amendment was published for member vote in Notice to Members 92-1 (January 1992).

Amendment to Article VI, Section 3 of the NASD By-Laws

(Note: New text is underlined; deleted text is bracketed.)

Suspension of Cancellation of Membership or Registration [for Non-Payment of Dues]

Sec. 3. The Corporation after fifteen (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 of this Article, or for failure to comply with an award of arbitrators properly rendered pursuant to Section 41 of the Code of Arbitration Procedure, 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.