Can A Defunct Firm Enforce An Arbitration Agreement?

Defunct firms can no longer enforce arbitration agreements

Among the initiatives NASD has taken in response to the GAO’s 2000 Report on unpaid Awards is a new rule closing its arbitration forum to defunct members.

The new rule, an amendment to NASD Rule 10301, was approved by the SEC in April (SAA 01-17). It prohibits a broker-dealer “whose membership has been terminated, suspended, canceled, or revoked, or that has been expelled from the NASD, or that is otherwise defunct, from enforcing a predispute arbitration agreement against a customer in the NASD forum, unless the customer agrees to arbitration in writing after the claim has arisen.”

Notice to Members 01-29, which issued earlier this month, explains that, as part of the implementation of this new Rule, NASD-DR will institute a procedure whereby customers are notified, prior to service of their claims, if a Respondent firm falls into one of the enumerated statuses (stati??). If so, the customers may elect “to proceed in arbitration, to file their claim in court, or to take no action.”

The rule change will apply to all claims served on or after June 11, 2001. (ed: Query about this new rule — “defunct,” according to American Heritage Dictionary, means “[h]aving ceased to exist or live.” Broadly defined, that could include any NASD member that files a BD-W. Might not customers with claims against NASD-only firms that have been acquired, for instance, be able to avoid arbitration through this Rule’s exception? The big firms would be unaffected, as the NYSE forum will likely be an alternate choice in the pre-dispute agreement.)

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.