Mail Vote—NASD Solicits Member Vote On Measures To Discipline Members And Registered Persons For Failing To Honor Arbitration And Mediation Settlement Agreements; Last Voting Date: June 15, 1995

Executive Summary

The NASD invites members to vote on a proposed amendment to 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. The NASD is proposing to adopt these amendments, along with amendments to the Resolution of the Board of Governors—Failure to Act Under Provisions of Code of Arbitration Procedure (Resolution) to make a failure to honor a written and executed settlement agreement obtained in connection with an arbitration or mediation conducted under the auspices of a self-regulatory organization (SRO) a violation of Article III, Section 1 of the NASD Rules of Fair Practice. By doing this, the NASD is giving settlement agreements the same force and effect as arbitration awards. The last voting date is June 15, 1995. The text of the proposed amendment follows this Notice.

Background

The NASD is proposing to amend the Resolution to make a failure to honor a written and executed settlement agreement obtained in connection with an arbitration or mediation conducted under the auspices of a self-regulatory organization a violation of Article HI, Section 1 of the Rules of Fair Practice, and to amend Article VI, Section 3 of the 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.

Because only amendments to the By-Laws are required to be approved by the membership, the Board is not seeking member vote on the proposed amendment to the Resolution. The proposed amendments to the Resolution are discussed in this Notice for the membership's information.

Enforcing Settlement Agreements

In connection with the administration of its arbitration program, the NASD has noted that many disputes or claims for damages submitted to arbitration before the NASD, another SRO forum or the American Arbitration Association (AAA), are settled before a hearing on the merits. In addition, the NASD is developing a mediation program where parties will be participating in a process that is intended to increase the number of claims that are settled before a hearing.¹

The NASD has noted that occasionally parties fail to comply with settlement agreements reached in connection with arbitration proceedings. These settlements may have been reached just before 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 party fails to honor the agreement.

The NASD is concerned that these observed failures to honor settlement agreements impose substantial added costs on the parties in the form of delayed recoveries, actions to enforce the agreements, and additional fees connected with short-notice cancelation of hearings. The NASD 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 parties are able to derail the resolution of a dispute with impunity by walking away from a settlement agreement.

The Resolution states that "it may be deemed ... a violation of Article in, Section 1 of the Rules of Fair Practice ... to ... fail to honor an [arbitration] award ...." The Resolution was adopted in 1973 and has been used to discipline members who fail to pay an arbitration award unless they have moved to vacate the award.² The Resolution applies to awards rendered in NASD arbitrations, as well as arbitrations sponsored by other SROs and the AAA.

The Board believes that the failure 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 to honor a written and executed settlement agreement actionable as a violation of Article III, Section 1 of the Rules of Fair Practice. By limiting the amendment to "written" and "executed" settlement agreements, the NASD will not be entertaining arguments that a party "agreed to settle" a case but refused to execute a document reducing the agreement to writing.

Use Of Summary Suspension/ Cancelation Procedures

In 1993 the NASD amended Article VI, Section 3 of the By-Laws to specify that a membership or registration can be suspended or canceled on 15-day s' notice for failing to honor an arbitration award rendered in an NASD arbitration. This summary proceeding was limited to awards in NASD-sponsored proceedings because the NASD's oversight of the arbitration process provided greater assurance about the awards to be enforced in such proceedings.

The Board believes that the failure to honor settlement agreements entered into in connection with an arbitration proceeding or mediation sponsored by the NASD should be subject to the same summary suspension/cancelation 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 canceled on 15-days' notice for failing to honor a settlement agreement obtained in connection with an NASD arbitration. Because amendments to the By-Laws require the approval of the membership, the Association is asking the membership to approve the proposed amendments to the By-Laws as set forth below.

The NASD recognizes that even with a written and executed settlement agreement there may arise disputes concerning the terms of the agreement or whether performance under the agreement has occurred as agreed. In such cases, it is expected that the responding party will request a hearing as provided in the procedures specified in Article VI of the Code of Procedure and defend against the allegation of failure to honor a settlement agreement by stating that there exists a dispute over the terms or performance of the agreement. The hearing panel can resolve the dispute or, if the responding party has sought relief from the agreement in court, defer to the courts for a decision. A party aggrieved by a decision of the panel in such a matter can appeal the decision to the SEC as a final action of the NASD.

Request For Vote

The NASD Board of Governors believes the proposed amendments will enhance customer confidence in the arbitration process by providing a mechanism to force parties to honor their settlement agreements. Please mark the attached ballot according to your convictions and mail it in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than June 15, 1995.

Questions regarding this Notice may be directed to Elliott R. Curzon, Senior Attorney, Office of General Counsel, at (202) 728–8451.

¹ The NASD will be proposing a rule change to the SEC, for its approval, relating to the establishment of a mediation program in the near future.

² Section 41 of the NASD Code of Arbitration Procedure requires awards to be paid within 30 days. In addition, under the Federal Arbitration Act and many state statutes, a motion to vacate must be filed within 90 days after the award is rendered.

For Member Vote

Text Of Proposed Amendment To Article VI Of The By-Laws

(Note: New text is underlined; deletions are in brackets.)

Article VI

Dues, Assessments and Other Charges

Sec. 1 No change. Sec. 2 No change.

Suspension or Cancellation of Membership or Registration

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[.], or for failure to comply with a written and executed settlement agreement obtained in connection with an arbitration or mediation held under the auspices of the Corporation.

For The Members' Information

Text Of Proposed Amendment To The Resolution Of The Board Of Governors—Failure To Act Under Provisions Of Code Of Arbitration Procedure

(Note: New text is underlined; deletions are in brackets.)

Resolution of the Board of Governors—

Failure to Act Under Provisions of Code of Arbitration Procedure

It 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 for a member or a person associated with a member to: (1) fail to submit a dispute for arbitration under the NASD Code of Arbitration Procedure as required by that Code[, to]: (2) fail to appear or to produce any document in his possession or control as directed pursuant to provisions of the NASD Code of Arbitration Procedure[, or]: (3) fail to honor an award [of arbitrators properly rendered pursuant to the Uniform Code of Arbitration], or comply with a written and executed settlement agreement, obtained in connection with an arbitration held under the auspices of the National Association of Securities Dealers, Inc., the New York, American, Boston, Cincinnati, [Midwest] Chicago. Pacific, or Philadelphia Stock Exchanges, the Chicago Board Options Exchange, the Municipal Securities Rulemaking Board, or pursuant to the rules applicable to the arbitration of securities disputes before the American Arbitration Association where timely motion has not been made to vacate or modify such award pursuant to applicable law[.] or (4) fail to comply with a written and executed settlement agreement, obtained in connection with a mediation held under the auspices of the National Association of Securities Dealers. Inc.